Foreign Direct Investment

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free zones attracted investment from the United States, Canada, Europe, and Latin American countries from 2008 to 2018 has amounted more than US$97 million, establishing over 45 companies that employ more than 10,000 people.⁴⁹ The service export value exceeds US$152.5 million, where 80 percent of the services are provided in English. On the whole, the textile and garment industry in the free trade zones of the country remains to be the main exporter, but the Nicaraguan government continues to actively strive for investment in key industries such as auto parts, footwear, disposable medical supplies, and outsourcing centers.

2.4. Foreign Direct Investment

Nicaragua has abundant labor and low wages, and is relatively safe in terms of crime among the Central American countries. The Nicaraguan government encourages foreign investment through the adoption of trade policies, such as the signing of free trade agreements to make use of regional alliances with major trading partners and neighboring countries under its market economy and to help businesses and manufacturing companies enter its market to gain competitive advantages.

From 2012 to 2016, during President Ortega‘s third term, the FDI that has flown into the country were investing more in free trade zones for exports in vehicle wiring, farmed shrimp, tobacco, carton and other industries, to make full use of the cheap labor and tax incentives.

The Nicaraguan government adopted open and transparent legal procedures and non-discriminatory treatment laws and regulations to assist enterprises compete openly and fairly, break trade barriers, improve intellectual property rights regulations, gain access to

49 PRONicaragua. ―Invest in Outsourcing Services.‖ PRONicaragua Investments, 2018, http://pronicaragua.gob.ni/en/investment-opportunities/48-outsourcing-services/

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government procurement, and expand investment controls to engage in business exchanges in order to help the economic development of the country.

In recent years, the influx of FDI, according to the Economic Commission for Latin America and the Caribbean (ECLAL), in the Central American countries has experienced an upswing of 9.4 percent compared to previous year, attracting a total of US$12.798 billion in FDI in 2018 (see table 10). Nicaragua, however, due to the socio-political and economic crisis in 2018, has affected businesses and prompted some foreign investments to withdraw from the country, where it managed to maintain US$359 million. The country experienced a 53.5 percent contraction in influx of FDI compared to previous year, where it drew in US$772 million. Most of these exchanges were made via the free trade zones in Nicaragua or tax exemptions granted by the CNZF to maintain and attract foreign investments.

Table 10. Central America: FDI inflows, by recipient country and region, 2012 - 2018 (in millions of US dollars and percentage variations)

Country 2012 2013 2014 2015 2016 2017 2018 Change ratio 2017-18 (%) Costa Rica 2 696 3 205 3 242 2 956 2 620 2 856 2 764 -3.2

El Salvador 466 179 306 396 348 889 840 -5.5

Guatemala 1 245 1 295 1 389 1 221 1 185 1 170 1 032 -11.8 Honduras 1 059 1 060 1 417 1 204 1 139 1 186 1 226 3.4

Nicaragua 768 816 884 950 899 772 359 -53.5

Panama 2 980 3 943 4 459 5 058 5 585 4 826 6 578 36.3 Central

America 9 213 10 498 11 697 11 784 11 776 11 698 12 798 9.4 Source: ECLAL.⁵⁰

50 Foreign Direct Investment in Latin America and the Caribbean (2019). Retrieved June 2020.

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In the past decade, the highest amount of FDI drawn into Nicaragua was in 2014 and 2015 that brought US$884 million and US$950 million, respectively (see table 10 above), averaging above 7.5 percent growth in FDI inflows. The strategy of attracting foreign investments under Ortega was to ensure that businesses and manufacturers could enjoy the reduced or lower income taxes and exemption of value added tax and tariffs in its free zones that were only available in Nicaragua when compared to its neighboring countries in Central America. However, the impact of 2018 social and political crisis rendered its competitive edge of attracting and sustaining foreign investments, effectively ranking Nicaragua to the least attractive investment location after El Salvador in Central America. The foreign investments that decided to keep investing in the country stayed because of the ongoing preferential treatment and protection of the income tax exemptions approved by the CNZF, so the advantages of staying in anticipation for the recovery of the economy in the upcoming years far exceed the benefits of an early withdrawal.

The Nicaraguan government maintained a competitive edge to attract foreign investment into its borders through the implementation of free trade zones. Most of the capitals were invested in the free zones where tax exemption for imports and exports were granted to the zone or outside the zone. The ratified Law No. 915 enabled the promotion of investments, exports, and facilitation of foreign trade through PRONicaragua as a decentralized entity declared by the National Assembly starting October 2015.⁵¹ The preferential treatment of the free trade zones may also be enjoyed by businesses and manufacturers, no matter within or outside the zones, as long as they qualify for and obtain the official authorization of the

http://repositorio.cepal.org/bitstream/handle/11362/44698/10/S1900447_en.pdf

51 Law No. 915. Published in La Gaceta, Official Gazette No. 196 of October 16, 2015. Retrieved in April 2020.

http://legislacion.asamblea.gob.ni/Normaweb.nsf/($All)/7CF0656F37BB92CB06257EDC007D7FD2?OpenDoc ument

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National Free Zone Commission (CNZF) to enjoy the income tax exemption on profits earned within the first 10 years with an additional option to extend for another 10 years at a reduced 60 percent income tax exemption,⁵² as per Law No. 917 approved subsequently.

Furthermore, the revised Decree No. 46-91 on the same month,⁵³ provided total tax exemption on payment for several imports, such as its mechanical equipment, materials, spare parts, samples, molds, and accessories, as well as raw materials and components, investment of required vehicles, supplies and packaging materials, and other related items that are not available in Nicaragua and required for the operation of businesses in the free zone areas. Not to mention, exemptions from capital tax and stamp duties, selective consumption tax, value-added tax, export taxes on locally made products, real estate transfer tax, local tax, and capital gains tax on the left behind immovable property when businesses close their operations in the free zones sectors.

Nicaragua relations with China

In addition to attracting foreign direct investment, Nicaragua actively promotes economic and trade relations large economies, such as China. In 2012 and 2013, enterprises and investors from China continued to visit and to investigate the investment environment and opportunities of the country, getting hold of a number of specific cooperation projects with the government.

Among them, President Daniel Ortega approved the construction projects of two satellites and a canal to a Chinese satellite manufacturer and a Chinese businessman, respectively.

52 Law of Free Export Zones. Law No. 917, approved on October 8, 2015 Retrieved May 2020.

http://legislacion.asamblea.gob.ni/normaweb.nsf/b92aaea87dac762406257265005d21f7/3e290e9879e2c7ea062 57edc007d7ff6

53 Law of Reform to Decree No. 46-91, ―Industrial Free Zones For Exports‖. October 8, 2015.

http://legislacion.asamblea.gob.ni/Diariodebate.nsf/76ed72912dd57e570625698c00773f5d/3f238d8827e2deb80 6257f08006f1b3e#

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The China Great Wall Industry Corporation (CGWIC), a subsidiary of the state-owned China Aerospace Science and Technology Corporation, signed a contract in October 2012 to build two satellites for telecommunication,⁵⁴ for a cost amounting to US$345 million financed by the CGWIC via loans from Chinese commercial banks.⁵⁵ The telecommunication satellites, akin to the satellite project built by the same entity in Venezuela,⁵⁶ would provide modern and efficient access to telecommunications, high-speed Internet, distribution of health-related and education-related services and information, and other services in Nicaragua, especially in the remote areas. Nicaragua would become the first country in Central America to have satellites that may cover beyond its borders and be applied for data collection with the permission of its neighboring countries to collaborate and work on improving the overall development at a regional level. The potential roles of these satellites include strengthening local and regional development, assisting poverty reduction, improving disaster management and emergency responses by monitoring the environmental, rural and urban, and crop yield estimation data from space (Acevedo, 2010).

The Hong Kong Nicaragua Canal Development Investment Company (HKND Group), a subsidiary of the Xinwei Technology Group in China led by Wang Jing, the Chinese businessman, signed an agreement in June 2013 to build the Nicaragua Canal. The Nicaraguan government approved a bill that granted the HKND Group a total of 100-year franchise, 50 years to finance, manage, and construct the canal, plus another 50 years to operate it, threatening the expropriation of lands from the locals surrounding the proposed construction sites. The idea of the building a canal in Nicaragua can be traced back since the 1800s and

54 Nicaraguan Nicasat-1 satellite already has an international license. Retrieved February 2020.

https://www.laprensa.com.ni/2017/11/02/nacionales/2324460-satelite-nicasat-1-ya-licencia-internacional

55 ―Nicaragua Commissioned a Telecommunications Satellite from China for US$346 Million.‖ Latam Satelital, 19 Nov. 2015. Retrieved in March 2020. latamsatelital.com/nicaragua-satelites-2017/

56 ―China and Venezuela: Agreement for New Earth Observation Satellite.‖ UN Office for Outer Space Affairs, Satnews Daily, 22 July 2014, Retrieved March 2020.

www.un-spider.org/news-and-events/news/china-and-venezuela-agreement-new-earth-observation-satellite.

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1900s when several initiatives, such as a railway or waterway that connect the Atlantic with the Pacific, have been suggested in Nicaragua. However, due to the Chinese stock market crash in 2015, Wang‘s initial wealth of US$10.2 billion has dropped to US$1.1 billion, and could not help finance the US$50 billion Nicaragua Canal megaproject.⁵⁷ On June 14, 2019, six years after granting concession to the Chinese businessman to build the canal, in accordance with the clause 15.2 in Law 840 states that ―given the impossibility of achieving the financial closure of the project within seventy-two months (six years), the Government or the corresponding sponsor will have the right to terminate the concession for such project‖.⁵⁸ In addition, according to multiple media sources,⁵⁹ the HKND Group has abandoned the project, which is reflected on its lack of publicity surrounding the topic when asked by Bloomberg and its unreachable website.