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The free-market economic policies adopted by the four core MERCOSUR countries (i.e., Argentina, Brazil, Paraguay, and Uruguay) in the 1990’s contributed to liberalized foreign investment regimes, deregulation, and the privatization of state-owned enterprises and helped to make the sub-region a magnet for foreign direct investment.

The expanded market provided by MERCOSUR has provided an additional important incentive, since it allows companies new to the region as well as those already established to focus investment in manufacturing and service facilities in the country or countries which provide them with the most competitive advantages and use it as a springboard to serve all the rest.

Between 1997 and 1999 alone, an estimated U.S.$ 40 billion dollars is said to have flowed into the MERCOSUR countries or six percent of all global foreign direct investment flows (up from 1.4 percent during the 1980’s). Interestingly, 1999 marked the first year since 1986 that foreign direct investment in Latin America surpassed that of Asia, with just under U.S.$ 100 billion flowing into the region.

At the start of the 1990’s most foreign capital that flowed into the MERCOSUR region was in response to the privatization of state-owned enterprises. In Brazil this process did not commence until the middle of the decade, when the MERCOSUR countries as a whole also experienced an increase in investment earmarked for the construction of new factories. Since the end of the 1990’s, foreign direct investment flowing into the bigger MERCOSUR countries has been heavily directed to mergers and/or the acquisition of private sector firms, particularly of service providers.

One of the most exciting phenomena associated with the MERCOSUR process has been the explosion in cross border investment by regionally owned companies. A study prepared by I.P.E.A. in Argentina and the U.N.’s Economic Commission for Latin America and the Caribbean (E.C.L.A.C.) found that the period from 1990 to 1998 saw the creation of over 240 Argentine-Brazilian joint ventures. Prior to the 1990’s cross-border investment was practically non-existent. Much of this phenomenon reflects a restructuring by national economic groups as they seek to specialize in certain core activities and reduce risk levels by diversifying their holdings geographically. In the specific case of Uruguay, cross-border direct investment from within the Southern Cone was responsible for 25 percent of the country’s foreign direct investment flows between 1990 and 1998, while it reached 50 percent in Paraguay.

During the 1990’s the Chileans invested over U.S$ 5 billion in Argentina, making that country the largest destination for Chilean foreign direct investment in the world and (at certain times during that decade) converting the Chileans into the second largest direct investors in Argentina after the United States. Much of the initial Chilean investment in the early 1990’s was in response to Argentine privatization efforts, particularly in the area of basic services. The Chileans were especially active in the purchase of small and medium sized utility companies that were overlooked by U.S. and European companies. Since then, the Chileans have expanded their investment reach into other areas of the Argentine economy, including the retail industry, banking, mining, pharmaceuticals, and agro-industrial pursuits.

With the adoption of the Real Plan in 1994 and the ensuing economic stability and increased market liberalization in Brazil, the Chileans also became very active in the Brazilian market in the second half of the 1990’s. Chilean investors initially participated heavily in the privatization of Brazil’s energy sector but have now begun to focus on industrial pursuits. In recent years Chilean foreign direct investment in the MERCOSUR has been almost evenly divided between the creation and expansion of new subsidiaries as of the merger or acquisition of existing entities, contrasting it with the bulk of foreign direct investment from Europe and North America (which is heavily focused on merger and acquisition activities).