Ecuador, like many developing countries, aims at increasing the role of foreign, direct investment (FDI) in its development not only through attracting more FDI but also through benefiting from it more in terms of technology, employment, exports, skills and, in general, competitiveness. To achieve this, Ecuador, in concert with other member countries of the Community of the Andean Nations (CAN), liberalized FDI policies in the early 1990s. In addition, it opened up its economy to international trade, reformed its tax and fiscal systems and tried to initiate a privatization programme.
As shown in chapter I, foreign investors responded to these changes. FDI inflows into Ecuador tripled between 1992 and 1994 and subsequently doubled between 1996 and 1998. In the second half of the 1990s they were, on average, 80 per cent higher than in the first half. However, by the end of the decade, Ecuador ran into the worst political, economic and social crisis in its history. Inflation peaked at 100 per cent in 1998 and GDP dropped by 7 per cent in 1999. Given the scale of the crisis, FDI inflows showed surprising resilience. Though they fell from a peak level of 5.830 million in 1998, they stayed at a relatively high level of $636 million in 1999 and 5.680 million in 2000.
Even before the crisis, both quantity and quality of FDI was much below Ecuador's needs. Financial and investment needs of Ecuador increased vastly because of the growing budget deficit, external debt crisis and the El Niño disaster. On the other hand, private sources of external financing such as bank loans dried up and FDI inflows fell. Also, the qualitative impact of FDI in terms of technology, exports or linkages is very limited because most of the investments went into one industry ? petroleum ? which, because of its nature and local conditions, does not have many linkages with, and spillovers into, the local economy.
Ecuador's FDI performance has also been below its potential. Inflows grew at a slower pace than those into Latin America and at a much slower pace than those into neighbouring Andean countries. This cannot be explained by the small size of the Ecuadorian economy. Bolivia, a country with a market of only half the size of Ecuador and a much lower per capita income, increased its average inflows in the 1990s more than two and a half times faster than Ecuador, and received by 1999 inflows almost a quarter higher than those achieved by Ecuador in its peak year (1998).
Chapter II analyses Ecuador’s FDI potential. The country has indeed many attractions to foreign, investors which, with appropriate policies, can be turned into opportunities. Firstly, it has abundant natural resources, including non?renewable resources such as oil and unexplored minerals and renewable resources such as bananas, flowers, fishing and the biological resources of its vast rain forest. Ecuador's climate makes many of these resources particularly attractive, permitting several crops per year as well as a high quality of many of its agricultural or fishing products. Secondly, its labour force has been competitive, with wage?productivity ratios comparing favourably with those of neighbouring countries. Thirdly, Ecuador has a free and sometimes preferential access to large regional and international markets including the Andean countries, Mercosur, the United States and European Union for many of its export products. Finally, based on this access and the country's comparative advantages, in the 1990s Ecuador has been able to develop a number of commodity?based export industries with FDI potential.
The greatest immediate potential, apart from the oil industry, however, exists in the services sector and especially in the infrastructure service industries such as telecommunications, power generation and distribution and air transportation. Foreign investors' participation in privatization programmes in these industries has periodically fuelled FDI inflows into a number of Latin American countries. Slow pace and limited scope of Ecuador's privatization programme has left FDI potential untapped. The impact of privatization programmes on FDI is not limited to the initial value of assets purchased by foreign investors. Typically, these investors undertake post?privatization sequential investment, the value of which often far exceeds that of the initial purchase. In addition, the improvement of infrastructure services resulting from specific foreign investment projects leads to the improvement of investment conditions in general, thus stimulating FDI in other sectors and industries. Also other areas of infrastructure such as roads, railways and water supplies have potential for the participation of foreign investors in the form of concessions. Other service industries with considerable FDI potential include tourism and the banking industry.
Chapter III deals with policies and actions needed to realise the country's considerable FDI potential. Successive Ecuadorian governments have taken a number of steps in this direction. Government's efforts intensified recently in the face of the economic crisis. According to an FDI promotion programme prepared in 1999, inflows should reach $1 billion in 2003 and grow thereafter at an annual rate of 15 per cent. Achieving these objectives is possible if the path to reforms continues unimpeded. However, FDI will have to be much more diversified, flowing not only into the petroleum industry but also other sectors including manufacturing and services. Furthermore, qualitative contributions of FDI, particularly to export promotion, technology transfer and human resource development should improve. Priorities should be given to attracting investment in the export industries and to improving the infrastructure necessary to foster international trade. Furthermore, FDI should help a restructuring process aimed at modernizing the existing export driven production and improving its competitiveness as well as facilitating the integration of foreign investments into the local economy.