Why Mexico's drug violence doesn't deter foreign direct investment

Recent reports indicate foreign companies are not feeling the effects of the violence in Mexico and Central America, likely due to the difficulty of extorting multinational corporations.

Despite a surge in drug-related violence in the Central America and Mexico, foreign direct investment in the region does not seem to have been seriously affected.

Bank of America published a report recently stating that its operations in Mexico were not significantly affected by the violence in the country, and in doing so joined the ranks of a number of large multinational corporations to remain relatively unscathed. Recently, Nestle S.A. also issued a statement claiming that it had noticed “no significant change” in relation to the security of its goods or vehicles in Mexico.

The announcements come just two months after the Mexican government published a report showing that foreign direct investment (FDI) has actually increased slightly in the past few years. FDI totaled $31 billion from 2006 to 2010, up from $30 billion in the previous period. Interestingly, the report found that investment in the country’s seven most violent states is higher than before the “drug war” began in 2006.

While the fact that investment in Mexico has been unaffected by the surge in criminal activity may come as a surprise to some, it is not an isolated trend. In fact, the latest data from the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) suggests that foreign direct investment has increased in drug-ridden Central America as well. Although the subcontinent has seen a significant rise in drug trafficking accompanied by murder rates making it one of the most dangerous regions in the world, the average FDI went up 16 percent from 2009 to 2010. Every country but El Salvador reported growth in FDI last year.

Meanwhile, the “big three” countries involved in cocaine production (Colombia, Peru, and Bolivia) saw no major falls in FDI, with only Colombia registering a drop (five percent) compared to the year before. The only other country in South America that saw a reduction in FDI in 2010 was Ecuador, and this was more likely influenced by President Rafael Correa’s veiled threats at nationalizing private oil firms last year.

All of this suggests that despite the terror caused by drug violence, foreign investment continues to pour into the region. While Latin American governments would like to chalk this up to increased security measures for foreign companies, it is more likely due to the difficulties associated with extorting large multinational corporations. As InSight Crime has documented, extortion of local grocers, restaurants, and bus drivers is a fairly common phenomenon in Latin America. However, forcing a large, foreign company that is headquartered outside of the region to pay “protection fees” is a different business entirely. Extortion depends on the ability to demonstrate the negative consequences of not paying, and because foreign multinationals generally hire contractors, the necessary leverage is often simply not there.

Unfortunately, this can sometimes result in the "outsourcing" of risk to these contractors. In Colombia, for example, the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia - FARC) have recently stepped up kidnapping of oil workers in the country. In August, oil contractors registered three targets against energy employees, all allegedly carried out because of a failure to pay extortion fees. Alarmingly, the number of oil workers kidnapped so far this year in the country stands at 38, a testament to rebels' heightened campaign.

That foreign investment continues to pour into Mexico and Colombia, where large tracts of territory cannot be considered properly secured by the state, is one indication of the value of each country's resources. This includes oil, African palm, and gold in Colombia; and industrial (read: cheap) labor in Mexico. If security conditions reach the point that multinational operations are significantly impacted, the inevitable response will be the government's reprioritization of security goals. This is already happening somewhat in Colombia, where the state has made oil-rich departments like Meta the prime receivers of US aid, at the expense of other crime-addled areas like the Pacific coast.

In some ways it is unfortunate that foreign investment is used as a prime indicator for just how "bad" things are inside a country, security-wise. The real question is whether Latin America can continue to integrate with the world economy, and at the same time improve security for all citizens, not just those in economic hotspots.

--- Geoffrey Ramsey is a writer for Insight – Organized Crime in the Americas, which provides research, analysis, and investigation of the criminal world throughout the region. Find all of his research here.