Reinvestment in the Dominican Republic: The Hidden Engine Behind Foreign Direct Investment

by | Aug 17, 2024 | FDI Latin America

Miguel Collado, Executive Vice President of the Regional Center for Economic Strategies (CREES), urges the promotion of new projects. Foreign direct investment (FDI) in the Dominican Republic has been a critical pillar for the growth of sectors such as tourism and manufacturing. The substantial FDI inflows have driven the local economy and positioned it as one of the leading economies in Latin America and the Caribbean. This growth is a testament to the potential and future of these sectors in the Dominican Republic.

The Caribbean nation stands out in the region regarding receiving these capital flows. As a result, in 2023, the Dominican Republic achieved a significant milestone with record FDI flows arriving, totaling US$4.39 billion, representing a 7% increase compared to the previous year. This impressive performance surpassed the US$3.5 billion in the previous year. Despite the ‘milestone’ in the substantial amount of money, last year, the number of new projects decreased to 26, several initiatives that mobilized US$1.839 billion, just over half (52%) of the value reported in 2022, when 30 initiatives backed by foreign direct investment were recorded.

Among the most prominent sectors, renewable energy led the project announcements in the country, with six projects valued at over US$700 million combined, representing 43% of the total. Also noteworthy are two projects in the hotel and tourism sector, both led by Spanish companies, with a combined estimated value of around US$420 million.

Reinvestment in the Dominican Republic

When discussing FDI, the general idea is that ‘foreign currency enters’ the local economy. However, of the more than US$32.184 billion in foreign investments recorded in the last decade, 45.8% is reinvestment in the Dominican Republic’s profits. This significant figure speaks volumes about investors’ confidence in the country, underscoring their integral role in the economy’s growth. ‘We consider it very relevant to note that not all that is recorded as FDI is new capital entering the economy,’ states the Regional Center for Sustainable Economic Strategies (CREES). ‘Consequently, it is not foreign currency entering the economy’s flow through its exchange market,’ it adds.

A report from the Economic Commission for Latin America and the Caribbean (ECLAC) indicates that in the region, in 2023, profit reinvestment in the Dominican Republic showed a 15% growth, while capital contributions and inter-company loans experienced decreases of 22% and 36%, respectively, compared to the previous year. As a result, reinvestment of profits became the component with the highest participation in FDI inflows in Latin America and the Caribbean, accounting for almost half of all revenues. Given the growing accumulation of FDI, the upward trend in reinvestment in the Dominican Republic makes sense. In some countries, it is also explained by regulations that incentivize or mandate the reinvestment of profits.

ECLAC’s publication explains that, in the specific case of investment incentives, where they are available, no analyzed country has differential treatment between national and foreign investments. However, in the particular case of the Dominican Republic, it was mentioned that national investors are requesting access to an accelerated mechanism available to international investors.

The Executive Vice President of CREES, Miguel Collado di Franco, told elDinero, “As a country, we want more foreign direct investment in the form of new projects, not necessarily as reinvestment in the Dominican Republic. New projects are needed to grow and create more jobs, generating higher incomes and prosperity.” Of the US$4.39 billion recorded last year as foreign direct investment (FDI) by the authorities, around 39% was reinvestment. Only US$3.281 billion was new capital entering the Dominican Republic. “This is not something that should be surprising. Observing the five-year series, higher percentages of reinvestment can be seen in recent periods. It is also important to note that this occurs in other countries,” CREES notes.

Authorities

This reality is shared by Ismail Ersahin, Executive Director of the World Association of Investment Promotion Agencies (WAIPA), and Marcial Smester, Investment Director at the Dominican Republic Export and Investment Center (ProDominicana). Ersahin explained to elDinero that globally, the predominant trend in FDI is reinvestment, meaning that companies already established in a country decide to expand their operations instead of new foreign investments. “Most companies that are already established find it easier to continue growing in the local economy, as they already know the market, have trained labor, and have a favorable environment for continued investment,” added Smester, who also mentioned that while foreign direct investments decreased by 10% this year globally, there is an increase in Greenfield investments, those made in new projects or expansions from scratch.

“This trend offers a significant opportunity for the coming year, in which we might see a rebound in foreign direct investment in the Dominican Republic,” he assured. Experts also agreed that facilitating a favorable environment is crucial to attracting reinvestment and new investments. Simplifying procedures, ensuring economic stability, and creating appropriate incentives are determining factors for companies to continue trusting the country as a safe and profitable destination for their capital. Ersahin emphasized that a long-term vision is essential for any investor: “A US$100 million investment is not made to withdraw in two years. It is about building a solid structure, creating jobs, and fostering economic growth for the company and the country.”

Economy

According to ECLAC data, FDI was responsible for 47% of the Dominican Republic’s GDP in 2023, totaling more than US$57.649 billion since 2001. However, Collado Di Franco believes it is more important to measure the contribution of these funds annually rather than the cumulative total over time. “It is important to note that while the registration of foreign direct investment has increased by 71.5% since 2020, as a percentage of the product, the change has not been very significant in the last three years,” he noted. In 2022 and 2023, the ratio remained between 3.5% and 3.6%. “It must be considered that in 2023, the GDP of the Dominican Republic grew below the average, impacting the increase in the ratio,” he added.

The Dominican Republic must create a favorable business environment to attract more foreign direct investment and generate significant change. CREES explains that this involves implementing structural reforms that reduce costs and establish fair rules for all participants, regardless of the size of their ventures. Key areas that Collado Di Franco believes need improvement include the tax system, the labor market, the energy sector, the hydrocarbons market, state bureaucracy, and the speed of resolving legal conflicts.

“Without these reforms, the country will continue to maintain the ‘status quo,’ and foreign direct investment will not significantly impact employment and income in various economic sectors.” In this sense, it becomes a priority to continue creating favorable conditions for reinvestment in the Dominican Republic, but more so for attracting new capital.

Dynamics in Latin America and the Caribbean

Looking at data from Latin America and the Caribbean, Argentina experienced a significant increase in foreign direct investment (FDI), rising from US$15.201 billion in 2022 to US$23.866 billion in 2023, representing a notable 57% increase and the highest value recorded since 1999. However, ECLAC clarifies that this increase is affected by capital movement restrictions, leading to significant inflows in inter-company loans and profit reinvestment. Chile also saw an increase in FDI, from US$18.237 billion in 2022 to US$21.738 billion in 2023, representing a 19.2% increase. With almost 9% of the region’s FDI inflows, Colombia maintained a similar level of FDI in 2023 compared to 2022.

The Caribbean saw a 27.6% increase in 2023 compared to the previous year, mainly due to increased inflows to Guyana and the Dominican Republic. In the case of Guyana, FDI inflows showed a significant increase (63.8%) and reached US$7.198 billion in 2023. This increase can be primarily attributed to the growing activity in the oil sector. The country has emerged as one of the new oil producers in the region, attracting considerable FDI inflows in recent years.

The Dominican Republic, for its part, experienced a 7.1% increase in FDI inflows in 2023, reaching US$4.39 billion. The services sector was the primary recipient of these investments, accounting for 78% of the total and experiencing a 10% growth. The manufacturing sector ranked second, with a 16% share and a 13% growth.

Investments in the Region

In 2023, Latin America and the Caribbean received US$184.304 billion in foreign direct investment (FDI). According to ECLAC data, this figure is 9.9% lower than in 2022, although it remains above the last decade’s average. With this decline, the share of FDI inflows in the region’s gross domestic product (GDP) also decreased, representing 2.8% in 2023. Despite this, the region’s inflows accounted for 14% of the global total in 2023, a share higher than the average of the 2010s (11%).

Reinvestment in the Dominican Republic has become a pivotal factor in sustaining the nation’s economic growth, particularly in foreign direct investment (FDI). In 2023, the Dominican Republic achieved record FDI inflows of US$4.39 billion, a 7% increase from the previous year. However, a significant portion of this investment—around 39%—came from reinvestment in the Dominican Republic, highlighting the confidence of existing investors rather than new entrants. While this reinvestment in the Dominican Republic supports economic stability, experts like Miguel Collado of CREES emphasize the need for new projects to drive job creation and income growth. Structural reforms are essential to creating a favorable business environment that attracts reinvestment and new capital. Despite the rise in reinvestment, the Dominican Republic stands out in the region, with substantial FDI contributions, particularly in the renewable energy and services sectors.