(Credit: Dario Gaona/iStock by Getty Images)
By strengthening technology absorption, logistics, and the business environment, the region can increase the trade and productivity benefits of foreign investment
November 9, 2026/IMFBlog
By Nicolás Gómez-Parra, Eric Huang, Robin Koepke
Latin America and the Caribbean attracts substantial foreign direct investment, but this inflow does not benefit the domestic economies as much as in other parts of the world. If it had a comparable impact, the region’s exports could be up to 20 percent higher.
In 2024, the value of existing FDI in the region was about $3 trillion, or 44 percent of its gross domestic product, compared with 25 percent in emerging Asia and 21 percent in emerging Europe. Yet trade accounts for about 52 percent of the region’s gross domestic product, compared with 65 percent in those peers.
Our new Regional Economic Outlook for the Americas examines why sizable foreign investment has not generated stronger export gains for Latin America and the Caribbean compared to other emerging markets. Our analysis points to weaker domestic capability as an important reason why foreign investment does not translate into larger trade and productivity gains.
Multinational companies bring capital, technology, know-how, and access to foreign markets, but realizing these benefits depends on the environment in which firms operate and their capacity to absorb them. Where that capacity is weak, the region captures less of the potential trade and productivity gains from foreign investment, and ultimately less of the improvement in living standards they bring.
The investment-export nexus
Foreign investment and trade typically reinforce each other. Foreign firms can expand export capacity, bring technology and managerial expertise, and connect local suppliers to international production networks. They can also increase demand for imported inputs. Strong export performance, in turn, can attract further investment by signaling a competitive production base and reliable access to foreign markets.
Our analysis of detailed bilateral data finds that, in other comparable regions, a 10 percent increase in FDI is followed by a 1 to 2 percent increase in exports and imports within the same sector and with the investor’s home country. In Latin America and the Caribbean, however, those links are weaker and much harder to detect. The export link remains weaker even when we include exports to other countries and spillovers across sectors.
The analysis suggests that Latin America and Caribbean’s exports could be up to 20 percent higher if the effect of foreign investment on trade was the same as in peer economies — without any increase in investment or change in the sectors receiving it. This is an illustrative benchmark, rather than a forecast of the gains from specific reforms.
Manufacturing shows the largest gap in the export response to outside investment, and the greatest potential export gains from closing it. This is the sector where foreign investment typically has the strongest links to export production and global value chains.
One explanation for the weaker export response could be that many foreign manufacturers are focused on domestic markets. In the region, foreign manufacturers typically sell about 81 percent of their output domestically, compared with 48 percent in Southeast Asia. But this domestic orientation may itself reflect constraints on productivity and export competitiveness that make serving the local market more attractive than using the country as an export platform.
Strengthening the domestic ecosystem
Our analysis points to the domestic market’s capacity to absorb technology and know-how as the leading explanation for the region’s weaker investment-export nexus. Matching peer economies in this area would significantly boost the region’s performance.
Domestic capabilities are critical for investment’s export potential to materialize. Foreign investment generates larger export gains when domestic firms are able to adopt the multinationals’ technology and know-how and tap into the foreign company’s market connections. Reliable supplier networks, efficient logistics, skilled workers, access to finance, and effective institutions help local businesses meet multinational standards and participate in global value chains. Efficient logistics also matter: even productive firms may struggle to export when transport costs are high, customs procedures are slow, or infrastructure is unreliable.
Opening the gate to larger gains
Stronger domestic capabilities must be complemented by lower barriers to trade and investment. Unpredictable regulations, restrictions on cross-border capital flows, and costly imported inputs can discourage foreign investment and make exporting more difficult. Clearer rules, greater financial openness and macroeconomic stability, easier access to imported inputs and machinery, and more effective use of trade agreements can help firms join international production networks.
Experience in the region illustrates the potential gains. In Peru, lower tariffs on imported machinery and intermediate inputs led to higher productivity and greater participation in global value chains. In El Salvador, streamlined electronic border procedures substantially increased trade flows when using the new system. And Costa Rica shows how deeper trade integration and investment promotion can help attract export-oriented, technology-intensive FDI.
As global supply chains shift, Latin America and the Caribbean may have new opportunities to attract export-oriented investment. The impact of that investment can be maximized by having the right conditions on the ground to receive it. By strengthening domestic capabilities and reducing barriers to trade and investment, the region can deepen links between multinational firms and local suppliers, expand export opportunities, and increase the productivity benefits of foreign investment.