Introduction
Over the past seven years, there has been a surge in foreign direct investment (FDI) inflows into the Chilean economy. In 2015, the cumulative volume injected into the economy was USD 20 billion. As the most appealing investment destination economy, the country is just second to Brazil. The most notable statistic is that FDI is tied to mining operations and hence has an erratic spread in the economy (Guimon, Klerkx, & de Saint Pierre, 2016).
Favorable Investment Environment in Chile
Chile's government has economic reforms that are appealing to investors because they are focused on the principles of openness and non-discrimination against foreign investors. Another fundamental strength of the country is its richness in natural resources, a strong macro-economic system, the potential to grow, juridical security, high infrastructural quality, and low levels of risk. Indeed, in the 2017 Doing Business Report, Chile is ranked 57th out of 190 countries.
Importance of FDI in Chile
Chile is also ranked the fifth among the economies that are open to foreign investment and imports in the world. After Brazil, the United States is the second largest investor. The government of Chile has some measures in place to either motivate or restrict the flow of FDI. Most significantly, the government has simplified the investment policy (Guimon, et al., 2016). From a fiscal perspective, the income tax for companies of foreign investors has been moderated as well as a guarantee to access the foreign exchange market, which includes remittance of profits and capital for free (Gallagher, & Chudnovsky, 2009).
Investment Promotion Measures
The Innovation Policy Platform offers investors a range of solutions to encourage investment. The benefit of such a program is the creation of the "Simplified Limited Company" which allows foreign investors to start a business in the country without having a local partner. The government also created a new strategy to promote and attract foreign investment in 2016 that included the formation of a promotion agency called "InvestChile." The agency helps foreign companies to prospect, install and engage other stakeholders in the country with the aim of simplifying the investment procedures. The government has laid emphasis on the mining industry, tourism, technology, food industry, and energy and logistics as the priority areas for overseas companies to invest in. A 2016 investment law exempts investments of at least $5 million from VAT tax on imports of capital products totaling up to the first 5 million dollars. This exemption is applicable to the projects in the forestry, mining, telecommunications, industrial, infrastructure, and R&D (Guimon, et al., 2016).
Challenges and Concerns
While there are huge incentives for foreigners to invest in the Americas, some reviews of the impacts of such investments have revealed that they have fallen short of spurring economic growth on a broad base in the region. There have been agitations for the governments to establish policies that enhance the national firms’ capabilities to compete and stimulate economic development (Agosin, & Machado, 2005). It has been argued that the measures the Chilean government has taken to promote and attract foreign investment have altered the way in which disputes are settled. While it has been left for states to settle trade disputes amongst themselves, the new system has developed an investor-state conflict resolution mechanism where an overseas firm can sue a local government without the oversight of the host government (Bishop, Crawford, & Reisman, 2005). Such agreements have not yielded much economic growth because the FDI has not crowded in total investment in the country (Agosin, & Machado, 2005).
Concerns and Environmental Impact
The FDI has been accused of failing to generate spillovers and backward linkages that enable countries to develop (Agosin, 1995). Besides, they stand the risk of crowding out domestic firms by wiping them out. Other concerns include the suggestions that they have performed poorly in the environmental performance front. There has been no suggestion that while the companies transfer their environmental laws to Chile; they do not necessarily comply with the local laws (Alvarez, & Robertson, 2004). There is no evidence to suggest that the multinationals are greening their processes (Esty, & Gentry, 1997). There has been an observed tendency for the newly elected governments in Latin America to rethink FDI as just a means to sustainable development as opposed to being an end in its own.
References
Agosin, M. (1995). Foreign direct investment in Latin America. Inter-Amer Development Bank.
Agosin, M. R., & Machado, R. (2005). Foreign investment in developing countries: does it crowd in domestic investment?. Oxford Development Studies, 33(2), 149-162.
Alvarez, R., & Robertson, R. (2004). Exposure to foreign markets and plant-level innovation: evidence from Chile and Mexico. The Journal of International Trade & Economic Development, 13(1), 57-87.
Bishop, R. D., Crawford, J., & Reisman, W. M. (2005). Foreign investment disputes: cases, materials, and commentary. Kluwer Law International.
Esty, D., & Gentry, B. (1997). Foreign investment, globalisation and environment. Globalization and the Environment.
Gallagher, K., & Chudnovsky, D. (2009). Rethinking foreign investment for sustainable development: lessons for Latin America. Anthem Press.
Moran, T. H. (2014). Multinational corporations and the politics of dependence: Copper in Chile. Princeton University Press.
Guimon, J., Klerkx, L. W. A., & de Saint Pierre, T. (2016). How to bring global R&D into Latin America: Lessons from Chile. Issues in Science and Technology, 32(2), 17-19.
