Thesis on "Foreign Direct Investment in BRIC Brazil Russia India China"

Thesis 15 pages (4051 words) Sources: 1 Style: MLA

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Foreign Direct Investment in BRICs (Brazil, Russia, India, China)

Foreign Direct Investment in BRICs -- Brazil, Russia, India and China

Introduction to Foreign Direct Investments

Today's buzzword is crisis, referring to the economic crisis which emerged within the United States of America to quickly expand to the other global regions. Yesterday's buzzword however was that of globalization, or the process by which the cultural, political, economic and technological values transcend boundaries from one region to the others and influence them. Within the fields of economics, globalization has primarily revolved around the opening of borders in favor of free trade within the international market. This free trade included not only the free circulation of merchandise, but also the free circulation of resources, labor force and capitals. Directly pegged to the liberalization of capitals are foreign direct investments. Investopedia defines FDI as "an investment abroad, usually where the company being invested in is controlled by the foreign corporation."

The foreign direct investments differ from the indirect ones in the meaning that the first category of investments is made in physical structures, such as a building, machinery or equipments, whereas the latter category revolves around portfolio acquisitions. FDIs reveal a wide series of benefits for both sides of the equation. On the one hand, for the country, or company, making the investment, it means increased access to new resources (including labor force, technologies or skills), larger markets or even promises of financial gains. On the other hand, FDIs for the host country materialize in better access to new capitals, new technologies, skills or managerial abilities, all which contribute to the overall economic development within the respective state (Graham and Spaulding).

The aim of this paper is to assess the evolution of foreign direct investment throughout the decade from 1996 to 2006 for four countries -- Brazil, Russia, India and China.

2. Foreign Direct Investments in Brazil

The table below reveals the trend in foreign direct investments within Brazil throughout the time period from 1996 to 2006, as percentage in the country's total gross domestic product.

A simple look at the chart shows that the FDIs in Brazil have followed anything but a stable trend. The evolution can be divided into four distinct time zones: 1996-1999, 1999-2000, 2000-2003 and 2003-2006. Throughout the first time period, foreign direct investments in the South African country increased from 1% to nearly 5% -- the largest growth in the studied period. Throughout the second period, FDIs would peak, coming to total up more than 5% in the country's gross domestic product. The following period was market by a dramatic decrease and the FDIs summed up less than 2% in the country's GDP. Finally, starting with 2003, an increase was again obvious and the investments came to be worth slightly less than 3% of the GDP, but were then again met with downfalls. A fifth and final period could be considered the one starting from 2005, when a stagnation in foreign direct investments in Brazil is noticeable. Yet, it is difficult to consider this period study-worthy on its own, since one does not know the future evolution and is as such difficult to understand this stagnation -- it could be the beginning of a new decrease, the milestone in a new increase, or a simple stagnation. Overall however, it can be concluded that the trend in FDIs across Brazil has been a descendant one.

Having assessed the evolution of FDI, it is now necessary to peg it to various indicators within the country's economy in order to identify the existence of a potential relationship.

FDIs and the Indicators of Institutions

The indicators of institutions are presented as the average for the eleven years within the considered time frame and their evolution is linked to the overall descendant trend of foreign direct investments.

VOICE -- generally, the voice and accountability index is directly related to the state of the economy; in this case, the Brazilian VOICE of 0.3061 translates in the fact that, based on economic improvements, the populations' freedom to select their leaders and to express themselves has generally increased; the negative trend in the FDIs has not generated harmful effects upon VOICE

POLSTAB -- the negative value of the political stability index (-0.1713) points to a potentially direct connection between a stable political climate and foreign investments. Theory in fact has shown that a stable political environment attracts FDIs. In the case of Brazil then, it can be argued that the decreasing trend in FDIs could be associated with poor political performances.

GOVEFF -- this index has also registered a negative value (-0.0638), meaning that the quality of the public services, the political ability to develop and implement the adequate legislation, alongside with the credibility of the government have decreased and they can be as such linked to the decreasing trend of FDIs in the meaning that a low GOVEFF index can represents a negative point in the foreigners' investment decision

REGQUAL -- the regulatory quality registers a positive value (0.2256), implying as such that the ability of the government to develop and implement legislation in support of private sector development has increased throughout 1996-2006; yet, this factor was unable to comply with its task of attracting more investors

RULE -- the negative rule of law (-0.3326) means that the country is still facing difficulties in ensuring that all participants to the political, economic and social system obey the law; this often translates into a reduced capability to attract investors, which has in fact been the case for Brazil

CCORR -- similar to RULE, the control of corruption has registered a negative value (-0.0984), a feature which also contributed to a low level of attraction to invest in Brazil

GOV -- despite the previous negative indexes, the governance in the South African country has managed to remain positive (0.0230); this should have attracted more foreign direct investments, which it did at times, but the growth was unsustainable

FDII -- the positive value of 2.6919 indicates that the net inflows of foreign direct investments has increased

GGDPPC -- FDIs increase national production and despite the overall descendant trend, it would appear that the investments were made in an efficient manner which materialized in an increasing GDP per capita annual growth of 1.3901

FDIs and the Related Variables

Electric power consumption -- generally increased throughout the entire period, with the exception of 2001, when it decreased. The commonly ascendant trend in the consumption of electric power should have materialized in an increased attractiveness for the foreign investors as it means that the country is able to support a developed technological infrastructure. However, other negative influences were stronger and the FDI trend continued to decline.

Electricity production -- similar to the consumption, the production of electricity has maintained an ascendant trend, with the exception of fiscal year 2001, when it decreased. Other things being equal, the figures should have attracted more FDIs as they point to a growing energy stability within Brazil.

Population (total) -- the population growth figures have maintained a constantly ascendant trend. The impact of population growth onto FDIs depends on the nature of the activity conducted and the side taken by each investor. For an automobile manufacturer, it could be attractive as it means an increased labor force; to an environmentalist however, it could mean increased consumption of the earth's natural resources; generally however, the population's growth has an insignificant impact upon foreign direct investments (Alfaro, Chanda, Kalemli-Ozcan and Sayek)

Internet users (out of 100 individuals) -- the statistics referring to the number of internet users reveal the largest growth rates -- they have increased from 0.45 in 1996 to 31.17 in 2006. A study conducted by Changkyu Choi in 2002 concluded that whenever the number of internet users increases by ten percent, the inflows from foreign direct investments increases by two percent. Considering that the number of internet users in Brazil increased by 6826%, the inflows from FDIs should have increased from 1996 though 2006 by 1365%, which in fact was not the case. This means that either the study was incorrect, or that Brazil makes for an exception.

Paved roads (percentage of total roads) -- the paved roads are another incentive for FDIs as they are sought out by potential investors; the situation of the paved roads in Brazil has suffered tremendous losses throughout the first period of the considered decade and the data for the second half is not available; this means that the poor roads infrastructure may constitute for a good reason as to why FDIs have decreased

Exports of goods and services (percentage of GDP) -- this value has also revealed a significant increase and constitutes an incentive for FDIs, but has not managed to sustain its attractiveness

Imports of goods and services (percentage of GDP) -- the evolution of the imports has been a fluctuating one and a given trend has not been maintained for more than two years; a relationship between these figures and the FDIs in Brazil cannot be… READ MORE

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