Foreign Direct Investment In Brazil

For a country to achieve economic growth and sustained development; factors of production must be available and combined such that they realize optimal production in the economy, political atmosphere should create an enabling environment that promote economic activities and infrastructure such as transportation and communication should be available to ensure low cost of production and accessibility to the market. One major limitation in developing countries is lack of one or more factors of production and/or poor utilization of available resources.

Capital and technology are some of the major obstacles that inhibit production and growth in many developing countries (Economist. com, 2008 & Jains, 2006). In light of globalization and internationalization of trade, foreign direct investment (FDI) is acting as one of the most significant drivers towards development in many economies by stimulating growth especially in developing countries. One developing economy that is a beneficiary of FDI is Brazil.

From 1994 to date Brazil being a developing nation has implemented policies that are geared towards attracting foreign investors as a source of capital formation which strengthens their balance of payment position and acts as investment, transfer of technology to domestic country hence increase output/input ratio hence income, increased competitiveness of the country hence boost foreign earnings and create employment (Motta Veiga, 2004 & Jains, 2006).

This paper is a discussion that explains the fluctuation of FDI in Brazil from 1990 to 2007 in attempt highlight the reasons and determinants that increase or decrease the rate of capital inflow in an economy through foreign direct investment. FDI in Brazil 1990 – 2007: Trend analysis. Prior to 1988, Brazil as an economy had suffered due to military regime which inhibited free trade and generally all aspects of economic growth in the country.

In 1988, a civilian president was democratically elected and this paved way for laying structures and policy that facilitated the jump starting of the economy since resources were redirected towards agricultural and industrial growth and economic development. (Spillan & Ziemnovicw, 2005). However, in early 1990’s Brazil was still marred with inherited economic problems from the past with inflation being close to 3000%, high unemployment, high taxes and a tight fiscal policy that made the country unattractive for foreign investment among other socio-economic problems (Economist.

com, 2008) However, despite its economic problems in early 90’s, certain fundamental factors made Brazil one of the most potential economies that could benefit from FDI. Firstly, Brazil’s natural resource base is vast from agriculture to minerals and has a relatively lower cost of labour; these features made the economy ideal for multinational enterprises since they could produce cheaply and hence giving Brazil competitive advantage over United States and Europe.

Secondly, Brazil is a large economy with over 180 million citizens who can provide market and labour, therefore, in light of the ailing domestic industries, MNE’s could easily penetrate the market and produce cheaply and efficiently to capture the market share. Lastly, the country is strategically placed geographically with a big shoreline and several ports. Therefore, MNE’s from other countries could use Brazil as a hub where they can penetrate the South American market and move raw materials and finished products to Europe, North America and Africa (Tevin & Mixon, 2004 & Jains, 2006).

From 1990 to 1994, the amount of investment inflow in Brazil was less that 1% of GDP. (Statistics on FDI, 2008) Given the features above, Brazil’s major problem or factor that led to it being unattractive to foreigners despite its potential was economic instability and unfavorable atmosphere that was majorly instigated by political leadership and economic performance in the country for example high inflationary levels (3000%) made both domestic and foreign investor shy away from this economy due to uncertainty and high risks involved.

Secondly, under the military regime, there were harsh laws that restrained foreign investors in Brazil thus making it more difficult and unattractive. (Spillan & Ziemnovicw, 2005 & Jains, 2006). In 1994 to 2000 FDI increased consistently from 0. 4% to 5. 08% as measured by FDI/GDP ratio (Statistics on FDI, 2008). The upward increase in FDI in Brazil was triggered by the above mentioned factors plus change in political regime and government policy.

In 1994, President Cardoso was elected and in his term implemented policy geared towards growth and development of the country, under his rule, inflation was drastically reduced and generally stability was attained relative to the preceding period with the country recording growth in the period. Secondly and more importantly, the president reviewed laws inhibiting foreign direct investment and gave foreign company’s equal opportunities in competing for tenders, government financial support among other legal restrictions.

In addition, the president initiated privatization programs which led to better management of otherwise rundown state owned enterprises. This moves led to the perception that Brazil political atmosphere favored foreign investors. For example, according to Spillan & Ziemnovicw 2005) “As a result, foreign companies began to gather around Brazil and in 1994, the nation managed to attract a record $2. 2 billion in FDI”- and the positive trend continued for the whole decade. In 2002, Brazil hit a record 33.

5 billion to become the number three nation after USA and China. – “This was good news indicating that now Brazil’s factors of endowment were attractive to world companies” However, from 2000 to 2003 there was a sharp decrease of FDI, from 5. 08% to 1. 83% of the GDP. Subsequently, FDI rose dismally to 2. 71% and then fell to 1. 7% in 2005 and to 2006. This can be attributed to several factors both external and domestic: Firstly, external factors include the financial crisis in January 1999 and the world inflationary tendency until 2002.

In 1999 devaluation of the Brazil’s currency in light of the crisis lead to panic and erosion of market confidence. For example, the 90 – day debt payment strategy adopted by president Cardoso to avoid strict measures from IMF (see Langley & Bolling 1999) led to fears among investors triggering capital outflow of $1 billion within days, in January alone, 7 to 8 billion USD was moved out of the country due to speculation and fears among investors.

Furthermore, given the level of globalization and emergence of other potential economy in Asia and Africa, foreign investors have several options or economy to choose fro therefore Brazil was at a loss to regain investor confidence and return to the level of FDI it previously recorded. Secondly, Brazil being a developing country is facing some challenges that inhibit or are unattractive to foreign investors.

Change in presidency and policies led to uncertainty, though president Lula (who succeeded President Cardoso) won back the market confidence, he failed to fulfill some of the pledges thus investors are still shy to invest in the country. Brazil has had a problem with infrastructure. According to Spillan and Ziemnovicw, (2005) of the 1. 5 million kilometers of road only 11% was tarmac ked, in addition little or no effort has been done to improve major public goods and the government still spends a huge some in meeting recurrent non developmental expenses.

In addition, taxes are still high at 36% which is almost double that of Argentina its major competitor for foreign investors, poverty and unemployment are also high thus making (Jains, 2006 & Langley & Bolling 1999). Conclusion. Despite the negative factors that make Brazil unattractive to foreign investors, Brazil remains the most popular country in relation to FDI in South America, its strategic location, size, market potential, resource endowment and availability of cheap labor are some of the factors that have led to increase of FDI to the country.

From 1994 to 2002 Brazil became one of the most attractive nations to investors mainly due to economic stability and good governance. However, to sustain this trend and consequently economic development, policy makers need to invest in infrastructure and other developmental objective so as to create an enabling environment for business hence become more attractive for investors and consequently achieve sustained economic growth and development.

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Accessed 14th July 2008 from http://www. iisd. org/pdf/2004/investment_country_report_brazil. pdf Spillan, J. & Ziemnowicz, C. (2005). Foreign Direct Investment and globalization in Brazil. Accessed 4th July from http://faculty. concord. edu/chrisz/M-AIB-05/PDFs/08BrazilFDIGlobalization. pdf Tevino, L. & Mixon, Franklin, G. (2004). “Strategic factors affecting foreign direct investment decisions by multi national enterprises in Latin America. ” Journal of world business. Vol. 39(1) pp. 233 – 243. Statistics on FDI and the operations in TNC’s (2008) Accessed 4th July from http://www. unctad. org/sections/dite_fdistat/docs/wid_cp_br_en. pdf