U.S. Direct Investment in South America's Andean Common Market

ID-76-88: Published: Jun 7, 1977. Publicly Released: Jun 7, 1977.

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Through investment incentives, such as favorable tax policies and investment insurance, the government has sought to encourage the flow of U.S. direct investment to developing countries. U.S. policy has been to encourage economic integration mechanisms, such as common markets, one of these being the Andean Common Market (ANCOM), whose principal objective is to develop the Andean area.

The foreign investment code adopted by ANCOM was intended as an investment incentive by providing a uniform set of rules within member countries, but its exception and escape clauses allow members to vary the rules as necessary. Chile, however, could not work within the structure and withdrew, which introduced uncertainties that the U.S. investor must consider. Trade and U.S. economic assistance ties remain strong between the United States and the Andean countries, but U.S. direct investment is diminishing, due to expropriation, divestment, and unfavorable reaction to Andean investment restrictions. Manufacturing and service types of investments predominate because of the possibility of natural resources investments being expropriated. Adequate data were not available for an indepth assessment of tax preferences as inducements. U.S. firms continue to have an impact on Andean countries, but private capital diminished, causing a need for more borrowing. U.S. firms provide jobs at high wages, and do not, necessarily, purchase materials from U.S. sources. Technology transfer is hindered by safeguards and other impediments. The largest percentage of U.S. investment will probably continue to be in mining and high-technology manufacturing areas. Other foreign investors have received Andean acceptance because of their willingness to engage in joint ventures and to provide more favorable financing.

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