Direct Foreign Investment between China and Brazil - Coursework Example

Direct Foreign Investment I. INTRODUCTION The study of foreign direct investment between China and Brazil is of great importance because it aids in the understanding of the dynamics involved in the country’s foreign investments. Research studies indicate that there is direct relationship between FDI and financial markets. According to the research studies, structural changes in financial markets have been used in attracting FDI. The general view is that stock markets have been established with the main reason of intermediating funds towards investment projects (Hui and Margarida 210). The growth of FDI has always been associated with the growth of financial markets in terms of market capitalization. This paper will compare the FDI in China and Brazil in categories of five factors that influence foreign direct investments. II. LITERATURE AND PREVIOUS STUDIES/ARTICLES SURVEY Research studies indicate that China and Brazil are expected to be among the largest economies in the world by the year 2050. The two countries are considered to be among the biggest and fastest growing emerging markets that have a significant long term growth potential. The two countries occupy a large geographical coverage and research shows that the countries contain about 30 percent of the global population. China and Brazil also have a combined GDP of $16.3 trillion. China and Brazil have an expanding middle class that is expected to double in number within a period of three years. This massive growth in the middle class in the two countries is expected to increase the demand for goods and investments. The two factors of population growth and the growth of the middle income segment make the two countries attractive for foreign direct investment. III. SPECIAL REMARKS AND PERSPECTIVES 1. Attract new sources of demand China has the largest population in the world and population estimates indicate that the population is expected to grow in the coming years. The country’s current population is estimated to be 1.4 billion people as of 2011. This clearly means that china has the largest consumer market in the world. According to Shaukat and Wei (30), large populations imply that an economy has a high potential of consumption hence creating more opportunities for trade. Investors are more likely to invest in China because of its large consumer market. The country has been recording large inflows of investments. The large population also acts as a source of cheap labor for businesses especially manufacturing companies. A large number of businesses have managed to establish their businesses in China because of the low cost of labor. In the case of Brazil, the country has a rapid growing middle class economy that has attracted a lot of FDI in recent years. According to Danhua (127), Brazil has managed to attract demand for foreign direct investment because of its rapidly growing middle class economy. The latest economic statistics indicate that the country has a nominal GDP per capita of $12,916 by the end of 2011. The statistics also indicate that the country has been recording an average nominal GDP per capita growth of 5 percent. These statistics clearly indicate that the country has a large purchasing power. The statistics also show that the country has potential prospects of recording an increase in demand for goods and services. This factor has played a major role in attracting foreign into the country. The above analysis indicates that China and Brazil have different factors that determine and influence new sources of demand. Whereas China drives its new sources of demand through population growth, Brazil drives new sources of demand through the growth of the middle income segment. Statistics reinforce the difference between the two countries through statistical data that support the two factors. China has the largest population in the world while Brazil is considered to have the highest growth in GDP per capita in the world. Estimates indicate that the country is expected to have the fifth largest economy by the end of 2012. However, China has a larger GDP compared to Brazil and this clearly indicates that China has a higher potential of attracting new sources of demand compared to Brazil. 2. Enter markets where superior profits are possible Globalization has transformed the world of business into a one world economy where businesses are able to enter new territories with ease. Research studies indicate that China is ranked as the second economy in the world in terms of foreign direct investments. The country is ranked second after the United States of America. The U.S. and China are the largest world economies in the world and as such they have the largest markets for goods and services. China has managed to target markets that have superior profits such as the U.S. through mergers and acquisitions. Chinese firms have also entered markets with superior profits through cross listing of company shares. There has been an increase in the cross listing of Chinese firms in both the Hong Kong and New York stock markets. This can be attributed to the fact that Chinese companies are maximizing on price disparities between the two markets by reaping the existing superior profits. Brazilian companies have also managed to cross list their shares in foreign markets especially the U.S. with a similar aim of maximizing superior profits created by price differences. However, research studies indicate that Brazil enters markets with superior profits through the establishment of new businesses in the target markets. Hui and Margarida (98) note that there has been an increase in the establishment of new companies by Brazilian investors in recent years. The country has been recording huge economic growth that have seen most of the companies expanding their operations into foreign markets to take advantage of new markets that have the potential of superior profits. China and Brazil have different strategies of maximizing superior profits that may exist in new markets. China mainly enters markets that have potentials for superior profits through cross listing. This is based on the price differences existing in different markets. Brazil has also managed to enter new markets that have potentials for superior profits through both cross listing and establishment of businesses in the target market. However, the country concentrates more on expanding its business operations through the establishment of new businesses than cross listing. 3. Exploit monopolistic advantages According to the monopolistic theory, multinational enterprises posses monopolistic advantages that enable such companies operate their subsidiaries abroad efficiently. This enables MNCs make more profits than local competing firms. Shaukat and Wei (100) define competitive advantage as the benefits accrued to a firm that has monopolistic powers in the market. The identified advantages are related to the investing firm more than the location of its production processes. Research studies indicate on MNEs indicate that FDI takes place because powerful MNEs choose to identify and concentrate on industries and markets that they have greater competitive advantages. The competitive advantages are commonly referred to as firm-specific advantages. China is famous for its monopolistic advantages in the field of technology. Chinese firms dominate the global market for technological products such as radios and mobile phones. This has seen most of the global Chinese firms concentrating on technological products in the global market. The Chinese firms have managed to dominate the market for technological products in terms of expertise knowledge and sale of technological products. The technological expertise in China has led to most of the global companies setting their manufacturing plants in China. Chinese firms such as Lenovo have also managed to establish their presence in foreign markets where their expertise and quality of electronic products is unrivaled. Brazil has managed to create competitive advantages in the field of manufacturing especially the food market. For instance, Brazil is the world’s largest sugar producer and has maintained the dominant position for a very long time period. The country’s manufacturing industry has the largest share of the foreign direct investment stock. Recent research studies on the Brazilian economic performance indicate that the country has recorded a steady growth in a majority of the manufacturing industries in the last one decade. Then growth has been associated with trade liberalization, stabilization and adoption of new technologies in its production processes. Trade liberalization and stabilization has attracted a lot of foreign investments in the country. China and Brazil have different ways of exploiting their competitive advantages. China has managed to create a competitive advantage by possessing expert skills and knowledge in the field of technology. Brazil on the other hand has managed to create a competitive advantage in its FDI by creating trade liberalization and stabilization in the manufacturing sector. 4. React to trade restrictions “barriers” During the 1970s and 1980s, China recorded profound reforms in its trade policies. Before the reforms, the country was monopolized by state owned corporations that specialized in different sets of commodities within the economy. The country was also conducting its trade within the context of a planned economy which led to a number of quantitative barriers. The new reforms involved the country ending the monopolization of its trade activities. The country liberalized its trade policies and encouraged private investments that were categorized into foreign-invested enterprises (FIEs) and “native” Chinese enterprises (Hui and Margarida 189). The two categories of trading regimes operated under different trade frameworks. Domestic enterprises are required to import and export through state owned foreign trade companies whereas FIEs are allowed to directly engage in international trade. Since time immemorial, Brazil has had a regime that is responsible for the regulation of the flows of FDI using mechanisms that are not discriminatory in any way. However, the country has been facing the challenge of tariff and non-tariff barriers on imports. According to Danhua (87), Brazil has managed to address the trade barriers by putting in place horizontal reservations and conventional sectoral restrictions that are consistent with existing economic regimes (Hui and Margarida 219). In simple terms, the country addresses trade barriers using protectionist policies. China reacts to trade barriers through trade liberalization policies whereas Brazil reacts to such barriers using trade protectionist policies. Trade liberalization allows China to establish two different trading regimes including FIEs and domestic enterprises. In the case of Brazil, there is the existence of one trade regime and the country pursues horizontal reservations and sectoral restrictions based on the existing economic regime. 5. Diversity among countries. According to Dominica El Salvador (166), China has traditionally invested most of its FDI in Asia. Some of the main targets of the Chinese FDI include Hong Kong, Macao and Korea. However, the country has in recent times managed to diversify its FDI and globalize its investments in new geographical areas such as Latin America, Europe, Africa and North America. Hong Kong occupies the largest share at approximately 80 percent of the total outward FDI. Other countries include Cayman Islands, British Virgin Islands, South Africa and Nigeria. In the case of Brazil, Europe dominates both in terms of outflows and inflows. According to research studies by Hui and Margarida (Danhua 100), Europe dominates investments in Brazil and the investments are estimated to be about 59 percent of the total investments in Brazil. Most of Brazils FDI outflows are concentrated in Latin America and Europe. However, USA dominates Brazil’s FDI inflow in terms of individual countries. The country has little presence in Asia and African nations. It is evident that China is more diversified in terms of its FDI compared to Brazil. China has its FDI present in almost all the continents with Brazil mainly concentrating on the US and European countries such as Spain and Netherlands. IV. CONCLUSION AND DISCUSSION The comparison of FDI between China and Brazil has been very educative in the sense that we have identified the different frameworks that influence FDI in the two countries. We have gained insights on reasons why China and Brazil are the fastest growing economies in the world and how their growth impacts the financial market. However, our study was limited to five comparative factors and future research studies should be conducted on how the two countries handle trade barriers. This is because the two countries have an almost similar approach to the issue that makes it difficult to spot any differences. Works Cited Danhua, Tang. Foreign direct investment in Brazil and the lesson for our country. Commercial Study, 17, 127, 2006. Dominica El Salvador. International Economics. Tsinghua University Press, 2004. Hui, Fang and Margarida, Gutierrez. A future global economy to be built by BRICs. Global finance Journal, 18, 143-156, 2007. Shaukat, Ali and Wei, Guo. Determinants of FDI in China. Journal of Global Business and Technology, 1 (2), 21-33, 2005. Read More