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Characterization and Determinants of Foreign Direct Investment in El Salvador

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The Central Reserve Bank through the Network of Researchers of the Central Reserve Bank (REDIBACEN) presented the results about the research "Characterization and Determinants of Foreign Direct Investment in El Salvador". This study seeks to characterize foreign direct investment (FDI) in El Salvador depends on the origin of inputs and the destination of sales, and to know what internal factors have been determinants of their entry and permanence.

 

In El Salvador, the evidence of the first foreign companies is registered during the period from 1960 to 1980, mainly of industrial origins such as Kimberly Clark, Bayer S. A, McCormick, and AVX. The privatizations of the electricity, telephone, and sales of local banks of the years following 1995 raised the flows of the net foreign direct investment. And, from the decade of the 2000s, the net FDI grew again because of the entry of the international banking industry and the consolidation of the industrial sector.

 

The results of the study showed that the share of exports of FDI companies increased in the period from 2005 to 2017, from 59% to 64%, ending in 2017 with US$3, 713.1 million. In addition, exports of intermediate and capital goods show participation in global value chains. Representing the intermediate goods 16.6% in the category of low-tech manufactures and capital goods while they represent 78.4% in the category of high-tech manufacturers. For its part, imports of FDI companies have shown stable behavior in the period of 2005-2017, from 51.2% to 50.1%.

 

On the other hand, it was stated that horizontal FDI, where all production and all inputs are sold and obtained locally, stands out with higher investment amounts (US$3, 699.2 million) and 130 companies in 2017. Vertical FDI, where all inputs come from the parent company and part of the production is sold locally, presents the highest companies’ stock (US$43.4 million) and flows (US$30.9 million). The FDI of the export platform generates the highest proportion of formal employment with 45,148 workers. Here, all inputs come from the parent company and all production is exported. In addition, the types of FDI seeking efficiency are the largest value-added generators.

 

As for the type of FDI, most companies prefer the creation of a wholly owned subsidiary as a form of entry. The results have shown evidence of the existence of a greater presence of FDI in search of a market, where it stands out the national, the American, and the regional markets. In addition, the technological level of the subsidiaries in El Salvador evidence the transfer of technology from the parent company, in the form of equipment, facilities, and processes.

 

At the level of all FDI companies, the main motivations for direct investment are the search for lower rent and financing costs, the expansion of product range in other markets, and the search for lower international costs of transportation and communications.

 

Some main relevant factors at a country level for FDI companies are opportunities in the sector of activity, attractiveness, tax incentives, modernization and qualification of human capital, dollarization, and strategic location.

 

International trade, employment, paid salaries, and the national market for goods and services demonstrate the importance of FDI in the country. The main motivations of FDI are related to the interest in the local and regional market and the search for cost efficiency. Therefore, it is necessary to retake the country's economic development objectives and identify opportunities, for the planning and implementation of key actions to determine which sectors and companies can contribute to achieving such objectives.

Actualizado 05/28/2019
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