INDUSTRY & BUSINESS
Chemical investors eye developing nations Payoffs could be high and long-term growth enormous, particularly in Latin America Desperately in need of foreign investment, less-developed nations may soon find the U.S. chemical industry casting more steppingstones in their direction. With direct investments, the chemical industry has already built mighty bridges to highly industrialized western Europe, Japan, and Canada. Although investors must be selective in the developing countries, payoffs could be high and prospects for long-term growth could be enormous. Ernst Keller, managing director of Àdela (an acronym for Atlantic Community Development for Latin America), takes the position that opportunities are now so ripe in the less-developed countries, particularly Latin America, that they offer greater longterm incentives than western Europe for private investors. Commenting on the need for foreign investments, Mr. Keller says, "Government aid programs alone can't do the job." Outside of Latin America, the direct investment in less-developed nations by U.S. chemical companies is not large. From 1962 to 1966, net capital outflows of the chemical and allied products industry to Latin America totaled $338 million, according to the Commerce Department. This compares, not too unfavorably, with the $680 million this industry was exporting in net capital to Europe during the same period. On the other hand, capital flows by the chemical and allied products industry to Africa, for example, was minuscule, totaling only $8.2 million. A number of U.S. chemical firms are quite active in Latin America. Du Pont estimates that 19% of its investment in foreign affiliates was in Latin America at the end of 1966. Firms such as W. R. Grace, Monsanto, Union Carbide, and Dow Chemical are also well represented south of the border. The other low-income areas of the world—Africa, Oceania, and Asia (excepting Japan)—have not attracted sizable U.S chemical investments. For instance, Du Pont has no manufacturing facilities in Africa or Asia outside Japan; neither Monsanto nor Dow has anything in Africa. Allied Chemical's largest single foreign investment is in Iran, with that country's National Petrochemical Co. Grace has 15 plants in Africa, Oceania, the Mideast, South 28 C&EN OCT. 30, 1967
Asia, and Japan. But their combined sales accounted for only about $25 million out of total company sales of more than $1 billion in 1965. PPG Industries operates a rutile mining plant in Sierra Leone, West Africa. Union Carbide, too, has mining operations in Africa and Thailand and battery plants in Kenya, Ghana, and India. In addition, Carbide has a polyethylene film plant in Ghana and a polyethylene and chemicals plant in India. It is not difficult to list reasons why the chemical giants have not invested more in the less-developed countries of the world. A chemical industry is one of the last to develop in the industrialization of a country. Its plants need to be large to be economical. But the major drawback to investing in low-income countries is the lack of a sizable internal market. Those plants that are justified on the basis that 50% or more of their output will be exported face the possibility that prevailing political winds may shift and that neighboring countries may raise tariffs to block imports. According to one private analyst, "Anyone interested in investing in central Africa must forget saber rattling." But the African countries are not so unstable as the headlines of revolution and political upheavals lead one to believe, he adds. An economist for a New York bank chimes in, "In many cases it is not what the less-developed countries in Africa do but what they don't do." The U.S. businessman becomes discouraged quickly before mountains of red tape, indifference, and actual harassment combined with the trials of living in a country where, for example, electricity may be turned off 16 hours a day. Company treasurers are all too familiar with stories of foreign operations in countries where inflation was runaway and prices for goods were government controlled. Add to these concerns the fact that the less-developed countries have no capital markets and little immediate prospect for internal capital generation of any significant amount. Thus the ability to sell equity to local interests is limited. Free entrance and exit of capital is also a problem in many countries. Too, the cost of construction is likely to be higher in the developing
MI DA's Sears Promising future in Africa
countries despite their cheap labor. To build a pharmaceutical or chemical plant in central Africa may take 1.5 times the investment required for a similar plant in the U.S. In addition, many less-developed countries insist on joint ventures with foreign firms and even controlling interest. Indeed, progress has been slow, even discouraging. Per capita food production in the less-developed countries is lower now than in the late thirties, and it has been declining in the past several years, according to Martin M. Rosen, executive vice president of International Finance Corp., an affiliate of the World Bank. Also, the nations which can least afford it face the greatest population explosion. About two thirds of the world's population lives in low-income countries. By the year 2000, this proportion will have risen to about 80%. And the share of world trade for less-devel-
oped countries is actually dropping. Even World Bank president George Woods warns, "If the volume of development finance does not grow, and if there is no improvement in the terms, development aid will simply eat itself up. Service on past official debt, including both interest and amortization, already offsets two thirds of the official flows of capital to the developing countries."
Adela's Keller Opportunities now ripe
There are some bright spots. Awareness is growing that less-developed countries must attract private investment and modernize their food production capabilities. Private investment groups are an answer. Since January 1965, Adela has committed $40 million of private capital in 65 projects in 18 Latin American countries. Adela strives for the most economic impact for the least funds. Mr. Keller estimates that the $40 million in seed money Adela has placed generated projects whose total worth is $400 million. Adela is composed of 150 private companies throughout the world that subscribe capital. It operates to make a profit but primarily takes equity positions in new or young companies where a relatively long payout period is expected. From the U.S., Dow and Du Pont are shareholders in Adela. Other chemical firms that have pur-
chased stock in Adela are Imperial Chemical Industries of the U.K., Farbwerke Hoechst, A.G., and Metalgesellschaft, A.G., of West Germany. New groups such as Mid-America International Development Association (MIDA) will also channel private investment funds to developing countries. MIDA's goal is to underwrite about $10 million in investments in Africa annually, according to Gerald Sears of Glore Forgan, Wm. R. Staats, Inc., one of the four Chicago investment banks that formed MIDA. (The others are A. G. Becker & Co., Inc., William Blair & Co., and First Chicago International Finance Corp.) MIDA was able to arrange an agreement recently between the government of Ghana and Abbott Laboratories to produce pharmaceuticals at Accra. Abbott, which contributed $630,000 in cash to the project, will hold a 4 5 % interest and the government of Ghana 5 5 % in the pharmaceutical venture. For its services, MIDA receives an investment banker's commission and a small equity position. The expenses of operating overseas offices in Africa are paid by the U.S. Agency for International Development (AID). There are a number of advantages to investing in less-developed countries. Extended risk insurance, available from the U.S. Government, can cover losses ranging from expropriation, war, revolution, and insurrection to guarantees of convertibility and repatriation of capital. Business risks insurance, exclusive of fraud, is also available in some overseas areas. Local currency loans are also available through AID. These are local currencies owed to the U.S. Government which can be loaned to U.S. businessmen. Other advantages are: • Direct investments in less-developed countries fall outside the Commerce Department's guidelines which aim at stemming the flow of dollars from the U.S. • Labor is plentiful and low cost. • Strategic raw materials are plentiful. There are reasons for cautious optimism. Gerald Sears of MIDA sees a promising future in Africa for private investment. "Production has always followed low-cost labor areas," he points out. For Latin America, Adela's Ernst Keller is confident. "Latin America will be the next continent to develop," he predicts. "The formation of the Central American Common Market, Latin American Free Trade Association, and the so-called Pacific Club means that we will see the development of strong chemical and petrochemical industries in Latin America," he adds.
Reprints from Chemical & Engineering
News Keeping broadly informed challenges every person today. If you missed these features from recent issues of C&EN, you can still get copies by filling in the coupon at the bottom of the page.
The Trade Association: The Chemical Industry's Multi-tongued Voice David M. Kiefer, C&EN Feb. 6, 1967, 17 pp. 50 i Chemical industry's trade associations act to head off government attempts to overregulate drugs, pollution, and tariff cuts. 02067
International Symposium Free Radicals Dr. Aaron J. Ihde University of Wisconsin Oct. 3, 1966, 17 pp. 50^
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Free radical symposium honors Gomberg, discoverer of triphenylmethyl, first organic free radical. 10036
Food Additives Howard J. Sanders, C&EN Oct. 10 and Oct. 17, 1966, 30 pp. Makers of food additives are keeping their eyes on the spectacular growth of new foods and the shifting moods of regulation-minded Washington. 10106
Coordination Chemistry and Homogeneous Catalysis Dr. Jack Halpern University of Chicago Oct. 31, 1966, 7 pp. 50^ Homogeneous catalysis attracts interest both for the novel chemistry it reveals and for its potential practical applications. 10316
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