Direct Foreign Investment in Chile

Abstract

Chile is one of the most vibrant economies in the South American region that has managed to attract the highest number of direct foreign investments since the turn of the century. The country is famed for its strong economic policies and free trade policies that entice multinational corporations from Europe, the United States, and Asia to expand their operations there. Direct foreign investment in Chile has had both positive and negative impacts, especially with regard to revenue collection. Economic experts argue that the power of foreign investors is pushing the country to change its monetary policies in a bid to maintain their interests.

Economic risks

Chile has established it’s self as one of the emerging global economies with a huge potential for attracting numerous investors. It has one of the most conducive business environments in South America, mainly because of its highly demanding mining sector (Zechner, 2009). Some of the things that most foreign companies consider before investing in the country are its history with regard to issues such as corruption, vulnerability to terrorism, and promotion of human rights. Reports indicate that the amount of direct foreign investment being channeled to the country’s economy has escalated a lot since the turn of the century (Kline, 2006). However, the ability of a country to attract foreign investors often carries a number of economic risks that can overshadow the benefits of economic growth if they are not managed effectively. One of the notable risks is change of economic policies. According to experts, foreign investors are very powerful with regard to influencing their host nation to change their policies touching on issues such as taxation, as well as monitoring and evaluation in order to maintain their interest (Corbridge, 2010).

The second notable economic risk for Chile is loss of the competitive advantage on the global market. Economic experts argue that the ability of emerging economies such as China to invest in Chile will lead to the latter loosing its power to influence the global market (Corbridge, 2010). Although the country has managed to achieve prolonged economic stability through various successive governments, it would be very hard for Chile to rise to the helm of economic supremacy in South America if the amount of direct foreign investment is not regulated. Another possible risk is reduction of in the number of exports and an increase in the amount of imports coming from its trade partners (Campbell, 2010). This would cast a dark cloud over the country’s economic growth because over 60% of Chile’s gross domestic product depends on its principal exports.

Recommendations for expansion

One of the best ways of that Chile can effectively expand its direct foreign investment is by regulating the economic freedom accorded to foreign companies, building stronger economic institutions in order to increase competitiveness, as well as creating better strategies for promoting transparency and accountability (Campbell, 2010). In addition, the country should develop stronger economic policies.

Summary

Investments by foreign companies have both positive and negative impacts on Chile’s economy. Most of the multinational companies that have expanded their operations to Chile got their motivation from the country’s huge market potential and the need to increase their revenue. One of the incentives that attract foreign investors to Chile is a free and highly competitive business environment backed by free trade agreements. Some of the notable disadvantages of foreign countries investing in Chile include high taxation and high cost of labor because most people are not trained. Other barriers that multinational companies seeking to expand their operations to Chile might face include strong ethical and environmental protection regulations, as well as the possible threat of political instability owing to the fact that the county’s democracy is yet to reach good stability levels. Chile has conducted very little research, thus meaning that the multinationals are likely to incur more costs from conducting their own research.

References

Campbell, D. (2010). International Protection of Foreign Investment. New York: Juris Publishing.

Corbridge, S. (2010). Development: Critical Concepts in the Social Sciences. California: Taylor & Francis.

Kline, J.M. (2006). Foreign Investment Strategies in Restructuring Economies: Learning from Corporate Experiences in Chile. New York: ABC-CLIO.

Zechner, C. (2009). Expanding NAFTA: Economic Effects on Chile of Free Trade with the United States. New York: Cengage Learning.