Foreign direct investments in Peru

IiTz.i; TIOlihT i A L FOR :Z DT,PJ;CTOiTP I 3-i4.:2 1' _ Econonic Departr3ent ERM1 24 FOREIGI. DIY-.CT I fl2 .T;, I1jJ Foreign Investmernts PRzE?AiAED BY: Jean Villecliaise October 28, 1948  Foreign Direct Investments in Peru Summary and Conclusions Value and Chlaracter of Foreign Direct Investments I. Introduction II. Foreign Direct Investments by ;ationalities British capital Aiaerican investrnents Italian direct investments Germiian settlers Japanese coJoniy French investments South Aiiierican capital III. Forei3n Direct Investments in the Wiain Branclies of the Peruvian Lconomy Tirdn- industry Petroleum Transportation Public utilities Agriculture Iianufacturing industries IV Trade BanPs Insurance compcnies IV. Foreign Direct investmenits in tlhe Dalance of Pay.ments Incomes earned, remitted and rs-invested Government Econonic Policy and Regulations affecting Foreign Enterprrses I. Rights of Foreigners To Acquire Property and To Do Business in Peru II. Labor Regulations III. Taxation IV. Regulation of Capital Imports V. Competition viith Government-owned Co2.panies Governmient monopolies Goverrnment-controlled corporations Specialized governnent-owned ba4ccs  STAOUARY AND CONCLUSIONS Foreign direct investments, totaling approximately 9250 million have been relatively more extensive in Peru than in any other South American country. British capital vras the first to enter the country and still represents some p125 million,, while American capital (,100 or 110 million) is the most active. Italian, German, French, Chinese, Japanese, and, more recently, South American investments have also played a role in Peru's economic development, wvithout representing more than Q30 or 'h40 million altogether at the present time. Foreign capital controls the bulk of the mining industry, with the exception of gold mining, the whole petroleum industry, over 65%1 of the railways, the larger part of the shipping companies and of the airlines, most of the power and electric plants, the totality of the telephone system and of outside telegraphic service, 20% of the sugar production (over 50% before the wvar), 80% of the cotton textile mrills, most of the food, chemical, pharmaceutical, lumber and paper plants, three of the nihle commercial banks (and probably a fourth one, the largest in the country), practically all of the insurance business, large financial firms, and the largest part of Peru's foreign trade through a few large foreign-owvned export-import firms. The majority of these holdings is concentrated in the hands of a few corporations, mainlyt Cerro de Pasco (U.S,), International Petroleum Co. (U,S ), Ii Grace and Co. (U.SO), Peruvian Corporation (British), and TAiilne and Co, (British). Profits of foreign enterprises in Peru have been very high - -with the noticeable exception of the railways. They have probably yielded higher returns than in most other Latin American countriesO A decrease has taken place since the war which, added to political and legal troubles, accounts for some capital outflow during the years 1940-i945. However, in 1946 and 1947 a srmall inflow of foreign canital has been observed& Peruvian legislation is very liberal towards foreigners and foreign companies, who enjoy, on the whole, the same rights to property and to do business as the Peruvian citizen, However, foreigners ex- ploiting mineral and petroleum deposits in Peru may not invoke their status as foreigners and Peruvian courts and authorities have exclusive jurisdiction over any question or controversy arising on that subject. Taxation is not very heavy in Peru and import and export duties are not higher than in most South American countries but do hamaper mining, and some other export industries. Balance of payments difficulties led to the establishment of ex- change controls for the first tine in 1945, Foreign companies seem to experience increasing difficulties in sending their remittances abroad, Because of the exchange problem, a decree was issued on December 13, 1947 which provided that new incoming capital, converted into soles at the official (and unfavorable) exchange rate, would be guaranteed the possi- bility of yearly remittance of income abroad, also at the official rate,  totaling not less than 10% per arnum of the capital imported. The decree does not seem to have been applied up to the present time, foreign capi- tal preferring to take advantage of the free rate of exchange. Wlith the exception of some state monopolies, the Peruvian Govern- ment has not tried to compete -ith foreign capital and has intervened less in the economic life than most governments of Latin American countries, Howvever, a few government-controlled corporations and specialized banks have been set up in recent years. The most important of them is the "Peruviarn Santa Corpbrationfl which has undertaken mainly the building of electric and powver plants. In 1939 the Peruvian Government took over a small petroleum coT:.pany. In 19h8 a government petroleurm agency was set up, apparently not so much to undertake petroleum exploitation as to contract vwith private companies desiring to start exploratory wvork. But the petroleum auestion is still uncertain, the private companies wishing mainly to work on the basis of a general petroleium law instead of having to contract with a governr..ent agency whose lega-2lty has not even been ascertained. Although private foreign inves-tments have been relatively m.ore im- portant in Peru than in the other Latin American countries, they seem to be less menaced there than in most of the Latin renublics, There has been up to now, no significant trend towards socialization in Peru and, furtliermore, the movement toward the national-ization of industry did not develop as it has in most of Peru?s neighbors, Contrary to the situ-- ation in most South American countries, the labor group has pu-t itself on record as favoring further foreign investments wthile the conservative element now in power has blocked foreign capital in at least one instance. The chief significence of this may be that violent anti--foreign agitation is not widespread. Strikes and labor have hampered the work of foreign co!panies some- what. In addition, Peruvian landowners have been lamen.ting a shortage of labor, partly because available workers were attracted bv the higher pay- offered by the large foreign enterprises, but chiefly because far.u labcr, which comes to the large plantations chiefly from small farms in the hills, has been receiving imore for its own produce and has not been inclined to work harder to make more money whlen they had the necessizies of life writh- out the additional effort, Opportunities are reported to be various and tempting for private capital in Peru. The only question is whether the existing large foreign companies (a large part of production in Peru is in the hands of a few big enterprises) do not constitute monopolies almost prohibiting any new- comer in their fields,  VALUE Au D CKF-ACTM COF FC:ZIGIT_ZECT Ii V.. 7-TS I. Introduction Foreign influence has probably been more extensive in Peru than in any other 'South unerican couintry. At one time, for example, the tax syJs- tem itself was farmed to forei-n enterprises and, during the ttwenties, the navy, army and police were trained and administered by maissions from the U.S., France and Spain respectively. Foreign capital entered. Peru after 1090, particularly betwieen 1910 and 1930. The main characteristic of these foreign investments is their concentration in the hands of a fewt long-established American and British comnanies. They are engaged primarily in copper mining, petrolew-n pro- duction and the operation of railroads, textile mills and some large tracling establishm-ents. There is no recent estimate of the value of foreign direct invest- ments in Peru, with the e,-caPtion of Azmrican and British investments, 'out it is doubtful that, at the present time, their total value is over b250 or 260 million, approximately %0225 million of wihich represents British and American investments. II. Foreirn Direct Investments b._ ijtionalities British capital wras almost without cor.mpetition ir Pcru wutil the enc1 of the last century and still represents the largest part of the forei-,n direct investments there. The South A,mericcan Journial 1/ estimated British direct investments in Peru in 1947 at 922,3O0,000 Ether sources give estimates of T30 nilIlion &' (around U.S. `120 million) in 19,44 and of 9_1'30 rAllion in 1946 2', wh1 ch are probably closer to the realityr. The bulk of British investm-ents cons' Sts of the Peruvian Corporation, w1hich ac- counted for L20.4 million of the total of 19474 4/ The ne,xt largest British enterprise is iilne and Co. which has large manufacturing interests and controls the second largest Peruvian oil company. American invetments, although starting in the second half of the 19th Century, did not become sizeable before 1900-1910. They have been estimated at S)35 million in 1914, ,24 million in 1929, $O71 million in 1943 and $67 million in 194.6. J (U.S. Department of Commlerce estim1ates.) 2/ April 17, 1948, p. 200. 2" "Perul, published in 1944 by the Department of Cverseas Trade, London. / ;imber, Albert W., Latir jn aerican Industriallzation, p. 37. 4/ South Amzerican Journal, April 17, 1948, p. 200. S/ The figures given for 1943 and 1946 do not include s$21 million re- appraisal surplus entered in the accounts of the Cerro de Pasco Corporation starting wfith 1943 Oloodyrfs Industrial_2:47). The drop between the 1929 ead 1943 figuzres is partially accounted for by $15.6 million Faid by the Cerro de Pasco Corporation as dividends out of capital surplus and $Q14 million of U,S. securities held by the same corporation in 1929 wrhich are not included in the later estimates (see 14oodvts Industrials 1935 ).  -2- A figure of $100 or 110 million could be proposed as cloner to the reJl value of kmerican inves' zments (for the reasons given in Footnocte 5. The value of 1xi.erican enterprises in Peru by economic groups is given as of 1943, as follows: Table 1 Aierican Direct Investments in Peru. by Economic Group (in millions of dollars) lianufacturing 5.5 Public utilities 7.9 Petroleum 10.9 Trade ancT finiance 3.2 Minin- anc smelting 29.1 lIiscellaneous 1.2 Agriculture 13.4 Total 71.2 Source: "American-owmed Assets in Zoreirn Countries"., U.S. Treasury Department, 1943. Ainepican direct investinents are largely conceintrated in tlhree lar:e co:-apanies: the Cerro de Pasco Corporation, which is by far the leading mining enterprise in Peru, the Internation.l PeItrolerii Co., wrhich accounts for S0, of the Peruvian oil production, and W. R. Grace & Co,, which hcs large interests in the agricultural, mcaufacturing, transportation and trade fields. Italian direct investments were valued betwneen 'z40 and 4p50 million in 1925, including the largest co-zmercial ban': in Peru, and the largest electric company. Italians were also among the first to establish te-:tile and flour mills and it is an Italian, F.G. Piaggio, who is considered as the father of the Peruvian oil industry. W (lie probably Criled tbe eirst successful oil wrell in .outh LVaerica.) German settlers have been very active in Peru mainly in tlhe agri- cultural, ban1ing anc. merchandising fields. In 1925, Germanmm inves-iments were valued at (p22 million, of wrhich one single agricultural estate ac- counted for ;15 million. The Jananese have the largest fooreign colony. 25 ,000 peroons in 1946, including 7,000 who have become Peruviani citizenas. L/ Their total invest- ments have been valued at >12.5 million