Latin America needs better logistics infrastructure, deeper regional integration and stronger rule of law to become key player in global value chains

Washington, October 28, 2014.- Latin American countries could significantly boost their exports and diversify into more sophisticated products if they take steps to become reliable partners in global value chains -a strategy that can develop the local industry without requiring countries to build entire supply chains at home- according to a new study by the Inter-American Development Bank (IDB).

The study, “Synchronized Factories: Latin American and the Caribbean in the Era of Global Value Chains,” reveals that very few countries in the region are taking advantage of the benefits that the international organization of production offers, such as transfers of know-how and technology that global manufacturers frequently share with suppliers in developing countries.

Their ability to participate in global value chains is hampered because the region ranks well below Europe and Asia in logistics capabilities, including physical infrastructure such as seaports and airports as well as information and communication technology (ICT) that are vital for the lean production methods favored by major international manufacturers.

Additionally, Latin America and the Caribbean lag other regions in the reduction of regulatory obstacles and in the adoption of free trade agreements that would streamline and lower the cost of international business transactions. While the average European country’s exports include some 39% of their value in inputs from other nations, for example, in Latin America, this figure is just 22%.

“The emergence of global value chains gives developing countries the opportunity to enter new areas of business without having to master every step in the production of a final good,” said Juan Blyde, the IDB’s Lead Integration and Trade Economist and coordinator of the study. “But to take full advantage of this phenomenon, it’s vital to improve transport and logistics infrastructure and the ease of doing business”.

The study reveals that:

- If Latin America and the Caribbean can upgrade transportation and logistics to levels comparable to the European Union, the region could attract 20% more foreign direct investment (FDI) associated with value chains.

- Countries that share deep regional integration agreements with partner countries tend to attract 12% more in FDI related to value chains than countries without such agreements.

- Improving the rule of law would make countries more attractive to international firms wishing to base part of their production in Latin America, where it takes 733 days to enforce a contract, compared to an average of 398 days in Asia.

The book examines case studies of companies in the aeronautics, automotive, software and agri-food industries of Brazil, Chile, Colombia, Costa Rica and Mexico that managed to join global supply chains and makes policy recommendations on how governments and businesses can foster other such linkages.

“Synchronized Factories: Latin America and the Caribbean in the Era of Global Value Chains” is the IDB’s Integration and Trade sector’s annual flagship publication on the reduction of trade costs in the region.