Interview with Javier Santiso

Javier Santiso is Director of the OECD Development Centre

1) What should Latin America do to capture a significant share of China long term financing opportunity?

First, before regarding Chinese FDI to Latin America, it is important to identify if the two regions compete for FDI. As specified elsewhere, the evidence of FDI competition between Latin America and China is not straightforward . Although competing in the same sectors as China can increase the likelihood of FDI competition (e.g. Mexico or Colombia), this is not the most significant factor explaining FDI flows. Latin America should focus on other factors for attracting Chinese investment in the region.

Second, it is important to notice that Latin America and China differ significantly in their FDI-attraction strategies. Whereas in China the wide availability of capital, coupled with very high productivity growth levels explain FDI attraction, Latin America’s main interest for investors continue to be higher returns and natural resource availability. Moreover, macroeconomic and institutional stability have proven important for attracting FDI, in Latin America or elsewhere. In spite of these factors, the core of Chinese FDI invested abroad goes to commodity sectors.

If Latin America wants to avoid the resource specialization and attract Chinese FDI in the region with positive repercussions, it will need new, adapted strategies. So far, the region has based its strategy in horizontal incentives, such as financial openness, deregulation and privatization. These goals are necessary but insufficient. Other countries have had better experiences with more active policies: FDI orientation towards long-term objectives, technology-transfer strategies where FDI induces spill-overs and human resource training (ECLAC 2006, OECD 2007). Most Asian investment in the region has focused on a small group of firms in specific sectors: natural resources, and to some extent textiles and electronics. More active policies on the host countries need to be introduced. The role of governments is crucial, and has shown important results with the ratification of special agreements with China in recent years. Further steps need to be taken to identify other synergies between the regions, and avoiding overspecialization for Latin America.

2) What capabilities do fast-growing Latin American companies need to make better use of Chinese capital and strategic investments in order to support their expansion projects?

As stressed in our work, China offers not only a wake-up call, but an opportunity for integration to Latin American firms. To make better use of Chinese capital and forge strategic investments in the region, Latin American firms need to capitalise on their comparative advantages (i.e. proximity to key markets) and the maximization of existing networks that facilitate market penetration.

A number of successful examples have been exposed here regarding business strategies in Latin America to induce industrial synergies with China. In the basic and natural resources Industries, companies like CVRD, Aracruz, Gerdau and Codelco have consolidated themselves as sector leaders and their expansion is by now taking place. In other sectors, where the comparative advantage is not so clear, there are also some remarkable examples. Three main strategies for firms were identified to take advantage of China’s upsurge . A first strategy is based on upstream value chain integration. This is illustrated by Betametch, an IT and hardware Brazilian company, showing the potential for integrating more closely with Chinese firms. The company has become an innovation hub in the region, using China’s unique capacity to design and produce technology products and focusing on capturing more downstream value.

A second strategy consists of a focus on high value-added niche to achieve global scale. A good example is the Colombian home building firm Corona, which has integrated China’s unbeatable low-cost base into its value-chain and focused on innovations and scale in regional markets.

A third strategy is based on a preference for product segments with high volatility of demand and high customization needs, to exploit geographical advantage.  Koramsa, from Guatemala, is an example of firm adaptation to the new industrial landscape depicted by Chinese entry in the textile industry. The firm decided to focus on higher value-added garments in smaller badges with shorter lead times. A similar experience is pointed up by Jabil Circuits, a Mexican contract manufacturer of electronics products

Finally, besides flexibility and focus, business leaders have to think regionally, to exploit regional market networks and cultural advantages. A culture of collaboration and a greater variety of contracts to formalize relationships (i.e. joint ventures) with China and executed post-merger integrations can be very valuable in the future.