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LEFT BEHIND

While foreign direct investment net inflows into Latin America have increased substantially in recent years, Venezuela has been unable attract overseas capital at the same pace as its neighbors.

Demonstrators stand next to a bus burns near a protest against Venezuela's President Nicolas Maduro's government in Caracas, Venezuela, May 13, 2017.

Demonstrators stand next to a bus burns near a protest against Venezuela's President Nicolas Maduro's government in Caracas, Venezuela, May 13, 2017.


In Venezuela, the country with the largest proven oil reserves according to OPEC, investors are growing weary of the unstable economic and political situation. The scarcity of raw materials, as well as sustained threats of foreign asset confiscation by the government, have created a toxic environment for investment.

On April 19, US giant General Motors announced a cessation of its Venezuela operations, the day after the Maduro Administration seized the company's assembly plant in Valencia. The city is a vital economic hub for the nation and is home to some of the leading industries and manufacturing firms present in Venezuela.

Production at the GM plant had been on hold since 2014 because of a shortage of parts. This represented a constant inconvenience not only for GM but for the Venezuelan economy in general since global oil prices began dropping in 2014.

The economy has remained stagnant with a mounting budget deficit, while Venezuelans and companies face rampant shortages. In 2016, Bridgestone sold its assets to a local investor, and Coca-Cola stopped production for some days in 2016 because of a lack of sugar.

The Chavez and Maduro governments also relied heavily on hydrocarbons to finance their generous social programs, establishing a system of price controls which subsidized most products that Venezuelans consume on a daily basis.

As a result, FDI net inflows have been volatile and have barely increased since 1999 when Chavez won 56.2% of votes in a contentious election. In that year total FDI in Venezuela stood at USD2.89 billion, higher than that of neighbors Colombia and Panama.

By 2015, however, this figure had risen to just USD3.76 billion, according to World Bank data. This 24% increase pales in comparison to Colombia's 12-fold and Panama's eight-fold increase in FDI over the same period.

This surge of investment to Colombia is largely due to the success of peace talks with the various guerrilla groups active within its national territory.

Foreign investors began eyeing the alluring Colombian market as the country became more secure, and focused largely on its hydrocarbon resources. Oil production skyrocketed from 600,000 barrels a day in 1999 to over 1 million in 2016 as a result, according to the National Hydrocarbon Association (ANH).

As for Panama, FDI into the Central American nation has skyrocketed. While FDI only reached about USD775.6 million in 1999, it surpassed USD5 billion in 2016. One of the key reasons for this was the introduction of the “Sede de Empresas Multinacionales" (SEM) license, legislation passed in the mid 2000s to encourage foreign firms to establish their regional headquarters in the country. According to the most recent estimates there are 134 multinationals currently registered under this law.

With a business-friendly tax regime and immigration controls, tailored for multinationals and their expatriate labor preferences, Panama has become the country of choice for international firms operating in Latin America.

Additionally, Panama's geostrategic location has played a crucial role in attracting businesses. A large proportion of FDI attracted by the country is linked to the Panama Canal expansion project which doubled the capacity of the 77km waterway.

It is worth mentioning that FDI into South America also increased by about 49% over this 16-year period, and that the spread of this investment is far more diversified today than in the late 1990s. While Brazil and Argentina accounted for almost 76% of all the foreign investment in 1999, these two nations received about 60% in 2015.

The scale of this FDI growth shows just how much Venezuela has lost out, despite its unrivalled hydrocarbons assets, while the fact that investors have become so reluctant to commit to its economy proves that steadiness and reliability go much further to ensuring consistent capital inflows than great resource wealth.

If Venezuela is to realize the full potential of its oil industry, protecting foreign property and strengthening legal and regulatory frameworks is an obvious priority.


 

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