Foreign Direct Investment in Brics

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 established

Ores and metals exports (percentage of merchandize exports) -- the export of ores was inconsistent throughput the considered period, which could have turned investors' attention away from this field

Ores and metals imports (percentage of merchandize imports) -- the situation is similar to the previous one in the meaning that the fluctuating values could have translated into reduced stability within the system, and this could have turned investors away

3. Foreign Direct Investments in Russia

The evolution of FDIs in Russia can be divided into three distinct time periods: 1996-1999, 1999-2002 and 2002-2006. Throughout the first period, foreign direct investments registered a steady growth from 0.65% of the GDP to 1.68%. Throughout the following period, they significantly decreased to 1.00%. Finally, in the third period, direct investments registered increases and by 2006, they would represent nearly 3% in the country's gross domestic product. For the overall period, the trend was an ascendant one.

FDIs and the Indicators of Institutions

VOICE -- with a value of -0.5687, the freedom of the Russian population to choose their own leaders and speak their minds remains limited; nevertheless, it has not managed to discourage foreign investments

POLSTAB -- of a -0.8474, the political stability remains a delicate issue within the Russian Federation, but neither this has discouraged investments

GOVEFF -- the quality of the public services remains low (-0.4038), but in spite of it however, FDIs grew

REGQUAL -- the regulatory quality has also registered negative values, -0.4369, meaning that the government's ability to implement legislation in support of private sector development is still low

RULE -- following the trend set by the previous indicators of institutions, the rule of law also registers negative values (-0.8813), meaning that law has yet to be properly enforced and respected within the country.

CCORR -- control of corruption was also negative (-0.8372), but not even this has managed to discourage FDIs

GOV -- overall, the quality of governance within Russia is negative (-0.6726)

FDII and GGDPPC -- despite the negative values of the previous indicators of institutions, net inflows of FDIs and the annual growth per capita in GDP have both retrieved positive values (1.6605 for FDII and 4.5646 for GGDPPC)

FDIs and the Related Variables

Electric power consumption -- at the beginning of the period considered, the consumption of electronic power suffered reductions, but maintained a sustained trend of growth since 1999; this constitutes for an incentive for investment as it proves the Russian ability to support a technical infrastructure

Electricity production -- the evolution of this index was similar to that of the previous one, with the specification however that the production also suffered a slight decrease in 2002; the growth in electricity production has managed to attract more investments

Population (total) -- the population of Russia has gradually decreased; it is possible that the figure attracted more investors, but studies have shown that the impact of the population onto FDI inflows is insignificant

Internet users (out of 100 individuals) -- without any exception, the number of internet users has increased from one year to the next -- from 0.27 in 1996 to 18 in 2006 -- and this indicator has also managed to attract more foreign direct investments

Paved roads (percentage of total roads) -- the data on the paved roads is not available for all years, yet, they reveal a major increase from 67% in 1998 to 80% in 2006; this also translates in an improved infrastructure, which has sustained investments and attracted foreigners

Exports of goods and services (percentage of GDP) -- the evolution of the exports was a fluctuating one, but their percentage in the gross domestic product increased from 26% in 1999 to 33% in 2006; the lowest was registered in 1997 with 24% and the peak was achieved in 2000, with 44%; generally, the growth in exports has attracted investments

Imports of goods and services (percentage of GDP) -- imports have also fluctuated along the years, but their values in 1996 and 2006 are similar; the lowest value was reached in 2006, and the highest one was in 1999; the relative stability in imports has also contributed to the attraction of more foreign investments

Ores and metals exports (percentage of merchandize exports) -- the export of ores has only registered increases in 1997 and 1998, after which it drastically decreased; the peak value was achieved in 1998, with 16%, and the lowest was reached in 2006, with 7%; this could have constituted for a discouragement of foreign investments

Ores and metals imports (percentage of merchandize imports) -- imports of ores have varied, with the lowest value in 2006 (2%) and the highest in 2000 (6%); decreases in ores imports could be perceived as an incentive to FDIs

4. Foreign Direct Investments in India

The general trend in foreign direct investments in India has been an ascendant one. They commenced at 0.62% in the country's gross domestic product and ended the analyzed period (1996-2006) with 1.90% in the GDP. The lowest point was reached in 1999, when FDIs only accounted for 0.48% in the national product. Another period of decline was met throughout the time frame 2003-2005, but the analyzed period ended in the highest values.

FDIs and the Indicators of Institutions

VOICE -- voice and accountability averaged a positive 0.3236, meaning that the freedom of the population to elect the government and to speak its minds increased and this contributed to the attraction of more investors

POLSTAB -- political stability was on the other hand negative (-0.9311), but it did not discourage investors

GOVEFF -- the efficiency of the government was also reduced (-0.1089) but neither did this alienate the foreigners

REGQUAL -- like the previous two indicators, the regulatory quality has also registered a negative average value across 1996-2006 (-0.2326) but in spite of this, investments still increased

RULE -- the power of the legislation remains increased (0.1075), meaning that the population and the economic agents obey the law -- this constitutes for a great advantage in favor of foreign direct investments

CCORR -- despite the growth in rule of law, the battle against corruption remains tight and the control is fairly reduced (-0.3332); FDI inflows were however not discouraged by it

GOV -- overall, the efficiency of the governance process remains low in India

FDII and GGDPPC -- despite the fact that most of the indicators of institutions presented above retrieved negative values for the period considered, the net inflows of FDI and the annual growth in income per capita have retrieved positive values (0.9293 for FDII and 5.3941 for GGDPPC); this means that the country is able to attract investors through means other than the quality of governance

FDIs and the Related Variables

Electric power consumption -- increased throughout the entire period, at lower rates throughout the first half and with larger growth rates throughout the second half; it means that FDIs were stimulated through the existence of a technological infrastructure

Electricity production -- increased throughout all the years, without any exception; this also managed to attract more investors, who were encouraged by the country's endeavors towards energy stability and self-sufficiency

Population (total) -- the figures following 2003 are not available, but a look at the population statistics in the previous years shows annual increases -- the total population in 1996's India was of 948 million, to increase to 1,064 million by 2003; India is internationally recognized for its abundance of human resource and it is possible that the increase in population stimulated investments; however, it is also possible that this index did not generate any impact on FDIs

Internet users (out of 100 individuals) -- the number of internet users has also increased, but at a slower rate than those in Brazil and Russia; in 1999, out of 100 Indians, 0.04 were using the internet, by 2006, there were nearly 7 individuals using the world wide web; this must have also positively impacted foreign direct investments as they sent a message that a technical infrastructure could be constructed

Paved roads (percentage of total roads) -- the situation of the paved roads is more dramatic in the meaning that it suffered demises -- from the 54% paved roads India had in 1996, by 2002, the numbers were only indicating 47% (the data following 2003 is not available); generally, this would translate into reduced interest from foreign investors

Exports of goods and services (percentage of GDP) -- the exports of products and services have generally increased, with the exception of 2001, when they decreased; throughout the entire period, exports have more than doubled -- they accounted for 10% in the GDP in 1996 and 22% by 2006; overall, the growth in exports implies production sustainability, which attracted more inflows of foreign investments

Imports of goods and services (percentage of GDP) -- imports have generally increased, again with the exception of 2001; their total percentage in the GDP has more than doubled (increased from 11% to 25%); in terms of the FDIs, the import growth could imply a greater purchasing power on the part of the population and in this understanding, it could have stimulated foreign investments

Ores and metals exports (percentage of merchandize exports) -- decreased in 1997 and 1998, but overall, maintained an ascendant trend and increased from 3% in 1996 to 8% in 2006; this also represented motivation of investors

Ores and metals imports (percentage of merchandize imports) -- investments within the ores industry are generally allowed to reach 100% financing from FDI (Ministry of Mines, Government of India), meaning then that growing exports should stimulate FDIs and growing imports should discourage it; throughout the period however, imports have registered decreases, constituting for yet another incentive for FDIs.

5. Foreign Direct Investments in China

In terms of the FDI evolution, China is similar to Brazil in the meaning that both countries have registered a downward trend. The highest value of foreign direct investments in China has been registered at the commencement of the studied time frame, when the investments accounted for 4.69% in the country's gross domestic product. They then gradually decreased to 3.20% by 2000, after which a period of slow increase followed. By 2003 however, the FDI inflows were again declining. 2005 saw a new wave of growths, but 2006 ended with reduced FDIs which accounted for less than 3% in the national product (2.93%). The chart below reveals this evolution:

FDIs and the Indicators of Institutions

VOICE -- with a negative value of -1.4558, the VOICE indicator shows that the freedom of the Chinese people has not improved; this would have contributed to the decision of investors to not come to the eastern Asian country

POLSTAB -- political stability has yet to reach a positive state and its current negative value of -0.2282 has alienated foreign investors

GOVEFF -- the reduced ability of the government to provide quality public services (-0.0093) has also reduced the attractiveness of China in the eyes of foreign investors

REGQUAL -- the ability of the Chinese officials to implement the adequate legislations in support of private sector development (-0.2250) constituted another reason as to why foreign investors did not select China as a destination for their money