Foreign Direct Investment in China and Brazil - Case Study Example

Name Course Professor Date of submission Foreign Direct Investment in China and Brazil. Abstract The progress made by developing countries such as China and Brazil in terms economic growth is one of the most vivid discussion in the current century. Arguably, Foreign Direct Investment impacts the economic growth of a country positively and therefore, it is an important determinant of a country’s economic growth. To that end, the assessment of factors which affect Foreign Direct Investment is regarded as a very important step as far as economic policies that promote economic growth is concerned. This particular study will therefore exhaustively review the history of inflows of Foreign Direct Investment in developing countries like China and Brazil. In addition, it will also make an analysis of the trends, and patterns, perspectives of policies, growth and productivity, and distribution of sectors in China and Brazil. 1. Introduction Background and Purpose of study According to International Monetary Fund, Foreign Direct Investment (FDI) is conventionally defined as a measure to assess a country’s level of direct investment with regard to foreign investment (Xu, 2013, 110). Similarly, Foreign Direct Investment is conventionally used to estimate the level of a country’s attractiveness to potential investors. Furthermore, FDI is a cross border or rather foreign investment where an individual in a native economy exercises direct control over the management of a business enterprise in another economy. With the current trends of globalization, countries like China and Brazil have invested a lot of efforts towards the attraction of Foreign Direct Investment out of the belief that its presence helps to benefits local firms. This has also been due to the fact that the source of technological advancement for most of the developing economies is globally boosted through the initiative of FDI. The latter is the key factor of growth in Brazil and China for several decades that have past. Based on the economic scale, FDI has tested positive for growth in the two countries and various scholars like Lee asserts that Foreign Direct Investment is a crucial tool for the transfer of technology. Henceforth, it significantly contributes towards economic growth as opposed to domestic investment. According to Laura’s study, after exhaustively analysing the aspects of Foreign Direct Investment like economic growth and financial markets, it shows that FDI plays a very important role towards the contribution of economic growth (Xu, 2013, 114). Relatively, its role as a significant trade engine through international value chains and by the crucial need to boost the global economy by creating employment opportunities and promoting knowledge through the increment of investment flows, has enhanced its relevance as a powerful tool for growth and development. To that end, China and Brazil have been internationally placed among the most dominant economies by the year 2050. However, in 2012 China had witnessed an economic recession consequently experiencing negative effects of FDI due to it sharp decrease to 9.5 billion dollars by the end of 2012 representing the biggest slip of 7.5% as opposed to other years (Xu, 2013, 118). On the other hand, contrary to case of China, with the Olympic games and the FIFA world cup being hosted in Brazil once after every 10 years, Foreign Direct Investment has significantly been on the increase over the years. Notably, China’s FDI program was prohibited in the late nineteenth century as parts of its opening up and reform policy. However, FDI has managed to perform well by positively impacting the investment environment through gradual liberalization of the restrictions. Interestingly, China has risen to become the biggest recipient of Foreign Direct Investment in the current category of developing countries with its FDI net inflows increasing from 0.3% in the late nineteenth century to 4% in 2014% as percentage of China’ Gross Domestic Product. Figuratively speaking, China’s FDI interms of net values has increased from $58 million in the late nineteenth century to $124 billion in 2014 as opposed to Brazil’s FDI net value increase from $1911 million to $67 billion accounting to half of China’s net inflows (Xu, 2013, 120). Although the two countries are recognized as the top emerging market economies, from the historical perspective, China and Brazil are completely experiencing different policies of Foreign Direct Investment. Therefore, the ultimate aim of this study is to examine both China and Brazil’s Foreign Direct Investment inflows and since China has only been able to open up economic policies since the late nineteenth century, the study shall basically omit the stage of import substituting industrialization and only examine the era of neo-liberalism. In addition to this, the study will also focus on the perspective of contemporary policy, distribution of sectors, trends and patterns as well as growth and productivity. 2. Literature Review History of FDI Brazil was able to gain a privilege among the Latin American countries following their independence (Xu, 2013, 125). During this time, Brazil was able to experience a significant growth in the exportation of coffee as result of state immigration of labour frontier into Sao Paulo. Brazilian trade was financed by the British based foreign investments flow in the mid nineteenth century which was majorly export oriented at the time while foreign investors had dominated shipping and trading. Later in the mid nineteenth century, FDI in Brazil was majorly concentrated within the railroads and subsequently on public utilities with the main source of foreign investment being the British based foreign investors. On the other hand, trade for China was basically organized on a planned economy and coordinated by domestic policies. However, trade policies have since been shaped with early investments from Taiwan and Hong Kong dominating the Foreign Domestic Investment inflows and most of them happened to have flowed to China’s special economic zones (Zhuhai, Shenzhen, Shantou and Xiamen) which are China’s major source of FDI (Xu, 2013,129). Growth and Productivity of FDI Inflows Majority of literatures tend to explain on how productivity and economic development has been positively driven by Foreign Direct Investment (Xu, 2013, 134). However, several stages in the development of China and Brazil’s economy discouraged participation of foreign investment thereby impeding the progress of development. In the early twentieth century, the Brazilian service sector acquired more shares of Foreign Direct Investment inflows as opposed to the limited value added growth in manufacturing. Notably, giving an explanation for the rationales of foreign investment is hard due to the process of privatization that was undertaken by Brazil during the time. During the late nineteenth century, Brazil’s Gross Domestic product decreased due to low Foreign Direct Investment caused by fiscal pressure that led to the depreciation of the currency. In China, Mathew and Ramasamy’s indicates that a long lasting relationship existed between FDI inflow and wages between the late nineteenth century and 2010. Although for the provinces in the coastal regions, this relationship tends to appear subtler. The analysis reveals that productivity is positively impacted by FDI. Trends and Patterns of FDI Inflows Apparently, the bulk of FDI in the Brazilian economy has been greatly contributed by the United States throughout the early twentieth century (Xu, 2013, 138). According to Baer (2008), foreign investments by the United States were greatly concentrated in trade, public utilities, distribution of petroleum and finance prior to world war II (Xu, 2013, 140). In this category, half of the investments were taken by public utilities. Nonetheless, 48% of all Foreign domestic inflows in the Brazilian economy between the year 1997 and 2001 was largely contributed by European investors as opposed to 21% from the American investors. Notably, the European investment has since risen to 52% with Netherlands projected as the largest contributor to Brazil’s FDI while the United states reporting a 19% decrease in 2011. On the other hand, the FDI inflows in China has been increasing sharply since the early nineteenth century to 2011 as opposed to the decreased experienced by Brazil during this period especially considering that China’s FDI had not started at the time. Despite the differences, FDI has equally to the contributed to the GDP of the two economies such that FDI inflows were 3.5% in 2002 and 3.0% in 2011 for China as a percentage of GDP whereas they level at 3.4% and 2.9% respectively in Brazil (Xu, 2013, 147). FDI from Policy Perspective Brazil altered the landscape for its exports following the world war II in mid nineteenth century consequently experiencing a gradual shift to capital goods form exports goods (Xu, 2013, 152). This was as a result of a decrease in trade restrictions due to accumulation of foreign exchange reserves during the period. In the mid nineteenth century, FDI in Brazil shifted to the secondary sector registering a decrease in utilities as result of foreign capital being granted inform of incentives (Xu, 2013, 155). On the other hand, the rise of communist party in the mid nineteenth century in China abolished several treaties of the imperialist government in order to gain Japan’s privileged positions. The government lifted some equity and foreign debt barriers by passing a new law on joint ventures. However, such policies brought about inefficiencies and complex procedures of most state owned enterprises that were so hard to deal with. Regional and Sectoral Distribution According to Laura’s statistical standpoint, whereas the manufacturing sector is positively impacted by FDI inflows, the latter negatively impacts the primary sector (Xu, 2013, 163). The primary sectors in Latin American countries accounts for a small percentage of the FDI stock shares. Subsequently, about 75% of Brazilian’s comes from the primary service sectors while the rest tends to come from the manufacturing sector. However, a sharp decrease was observed in the FDI inflows from financial and telecommunication of industries in the years 2002. Brazil’s FDI from regional variations is tends to have a limited literature review since the region has been heavily dominated by over 50% of the total value added from the manufacturing sector. On the other hand, FDI inflows from China’s manufacturing sector according to the National Bureau of Statistics of China, dominated the FDI share in the year 2002 accounting for 58% of the total FDI inflows (Xu, 2013, 168). Early appearance of the Taiwan and the Hong Kong investment is largely attributed to China’s cheap source of labour and thus both American and European investors subsequently joined for the same purpose. FDI in the era of Neo-Liberalism The late nineteenth century in Brazil saw the average FDI inflows falling around $1.6 billion while remaining fairly constant around 1994 to 1996 (Xu, 2013, 171). The flows however raised dramatically to over $11 billion and $18 billion in 1997 and 1998 respectively. During this era, a number of factors such as process of privatization, real stabilization and the rapid implementation of Mercosul contributed towards the significant increment of FDI inflows. The chief factor for this increment was the privatization process increasing the foreign participation from 5% to 36% between 1991 to 1998 (Xu, 2013, 176). On the other hand, China experienced several jumps in the FDI inflows during this era with high increase from $ 58 million to $1.5 billion between 1981 to 1985 respectively. The only time China’s economy experienced a decrease was in 1999 and 2000 where its FDI inflows decreased from $46 billion to $40.2 billion. Otherwise, China’s FDI inflows have maintained its uptrend with Hong Kong and Taiwan being its major sources of FDI inflows (Xu, 2013, 177). 3. Method For empirical analyses, the study will consider using secondary data collected from both city and country level data of Brazil and China’s FDI over a period of 18 years. Most of the data in this study will be obtained from the Economics Information and Database and National Bureau of Statistics of both Brazil and China. This particular database will be used due to their numerous advantages such as the sources being collected by professional statisticians and from authoritative institutions. Similarly, the data that will be collected from this sources are highly comprehensive and touches on all aspects of Brazil and China’s economy. In addition to this, the information provided by this sources are exhaustive and might be very difficult to obtain them at an individual level. Works Cited Xu, Bo. "Foreign Direct Investment in Brazil and China: A Comparative Study." International Journal of Business and Management, vol. 9, no. 1, p110-180, 10 Oct. 2013. Read More