South-Western College Publishing - Economics  
Venturing into Latin America
Subject Foreign Investment
Topic Developing and Transitional Economies
Key Words Productivity, Investment
News Story

Productivity is the key to development in developing countries. Labor productivity can be increased in a number of ways including an increase in the amount of capital that labor works with. Developing countries have had difficulty attracting foreign investment, but that may change. Venture capitalist firms, which typically look for opportunities in places like Silicon Valley, have started searching Latin America for investment opportunities. While some of these investment firms seek investment opportunities in agriculture others look for growth prospects in high technology firms and Internet-related companies in Latin America.

Latin America's stock markets are antiquated and burdened with excessive regulations that make it difficult to trade in securities. As a consequence, some investors try to avoid local exchanges and list their companies on U.S. exchanges, thereby denying the country of some of the economic benefit associated with the investment. Many investors see the evolution of Latin America's capital markets as the key to the success of venture capital investing.

There are difficulties in adopting U.S. business practices to Latin America. Some Latin American entrepreneurs are not used to the paperwork and legal detail needed to culminate a deal. Latin American economies are not as stable as the U.S. economy. The boom and bust experience makes many U.S. investors wary of investing in a Latin American company that is young and inexperienced.

The traditional venture-capital model is for the venture-capital firm to provide seed capital to small companies that eventually go public. The seed capital is exchanged for a minority stake in the company. The venture-capital firm may then provide direction and advice to the firm.

(Updated February 1, 1999)

Questions
1. Describe the problems that developing countries generally experience.
2. What is the relationship between labor productivity and the amount of capital per worker? What happens to labor productivity when the amount of capital per worker is increased?
3. "What are some other measures that could be adopted to assist productivity growth in developing countries?
Source Simon Romero, "Where the Risk Is Riskier Yet," The New York Times, December 16, 1999.

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