Foreign Direct Investment in Brazil: Post-Crisis Economic Development in Emerging Markets

By Mohamed Amal

Foreign Direct Investment in Brazil: Post-Crisis Economic Development in Emerging Markets explores both the inward and outward ways foreign direct investment (FDI) can help Brazil sustain economic growth and development in the sometimes hostile post-global crisis era. Inward and outward FDI have major roles to play in reviving Brazil’s growth momentum and the country’s transition to a new growth paradigm less dependent on commodity exports. The book provides a comprehensive discussion on the analytical framework of FDI and the policy environment influencing the patterns and development of FDI in Brazil. It compares Brazil to other developing countries, but its focus rests on how, and to what extent, the global crisis is shaping the Brazilian institutional environment and its implications for FDI.

• Covers an important contemporary development issue focusing on the experience of one of the fastest growing and largest emerging economies in the world
• Presents econometric findings using data at different levels of aggregation
• Provides an in-depth study on the determinants of FDI and their relations to institutions
• Explores both the inward and outward ways foreign direct investment (FDI) can help Brazil sustain economic growth and development in the sometimes hostile post-global crisis era

• Language: English
• Publisher: Academic Press
• Release date: Apr 19, 2016
• ISBN: 9780128020968

Mohamed Amal

Mohamed Amal is Associate Professor of International Economics and Business at the Regional University of Blumenau/ Brazil in the undergraduate and graduate programs. He received his Ph.D. in Economic Engineering from the Universidade Federal de Santa Catarina/Brazil and has served as a professor at Halmstad University in Sweden. Currently is Research Scholar at the Columbia Center on Sustainable Invetsment/ University of Columba/ New York. Among other postings he has held a research internship at the University of Bonn while working on issues of globalization, FDI and Institutions and regional integration.

Book preview

Foreign Direct Investment in Brazil

Post-Crisis Economic Development in Emerging Markets

Mohamed Amal

Regional University of Blumenau, Brazil, and Visiting Scholar at Columbia University, New York

Table of Contents

Cover

Title page

Copyright

Dedication

Acknowledgments

Chapter 1: Introduction

Abstract

1.1. Research questions

1.2. Overview of the book

1.3. Advantages of the present book

Chapter 2: Determinants of Foreign Direct Investment: Theoretical Approaches

Abstract

2.1. Introduction

2.2. Theories of FDI

2.3. New perspectives in FDI theory

2.4. General model of FDI determinants

2.5. Conclusions

Chapter 3: General Institutional Framework of Foreign Direct Investment in Brazil

Abstract

3.1. Global patterns of FDI

3.2. Brazil’s political economic frameworks in historical perspective

3.3. General framework of FDI

3.4. Patterns and strategies of FDI in Brazil

3.5. FDI strategies

3.6. Some final remarks

Chapter 4: Determinants of Inward FDI in Brazil

Abstract

4.1. Economic performance and FDI

4.2. Institutions, the global financial crisis, and FDI

4.3. Industry effect

4.4. Some concluding remarks

Chapter 5: Evolution and Determinants of OFDI

Abstract

5.1. Introduction

5.2. OFDI from Latin America: different cycles

5.3. Evolution and patterns of OFDI from Brazil

5.4. Quantitative assessments of OFDI determinants

5.5. Strategies of Brazilian MNCs: final remarks

Chapter 6: FDI and Economic Growth

Abstract

6.1. General theoretical framework

6.2. Quantitative assessment of the determinants of economic growth

6.3. Concluding remarks

Chapter 7: Conclusions

Abstract

7.1. General framework

7.2. Institutional determinants of inward FDI

7.3. Determinants of outward FDI

7.4. FDI and economic development

Index

Copyright

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Dedication

To Patricia and Victor

Acknowledgments

This volume is the result of the several studies I have developed in the last 10 years on FDI in Brazil and Latin America. The original motivation emerged out from the challenge of investigating a general model of FDI, which captures as well inward as outward FDI. Of course, OFDI from Brazil are still relatively limited in scope and are highly unstable, which may reduce the robustness of the analysis. However, inward FDI in the country become one of the most important driver of economic development, as well as promoting substantive spillovers to the internationalization of Brazilian firms. I attempted to discuss the different theories of FDI in light of the new development of International Business studies, particularly by introducing the contributions of institutional and absorptive theories to the understanding of both the dynamics of FDI and its contributions to economic growth in the country. With this volume I expect to contribute to the understanding of FDI determinants and strategies of MNCs in an emerging country, as well as providing critical insights how the consequences of the global financial crisis of 2008 have shaped the patterns and strategies of FDI.

I am grateful and in depth with many friends and colleagues for the support I received before and during the development of this study.

My first thanks goes to Prof. Fernando Seabra from the Federal University of Santa Catarina (UFSC)/Brazil, who introduced me to the investment theory and the particular approach of FDI under the macroeconomic perspective.

My thanks also goes to Prof. Patricia Luiza Kegel from the Faculty of Law at the Regional University of Blumenau/Brazil for her support during all the time of the investigation to the understanding of how noneconomic and economic factors interact in shaping international business.

I would like to thank Bruno Thiago Tomio (FURB) and Paulo Victor Wilhelm (FURB) for their support by the data collection and econometric assistance. Their dedications have made it possible to attend the deadlines of publication.

I would like to thank the CNPQ and my University (Regional University of Blumenau—FURB) for providing resources and scholarships to the accomplishment of my research. Particularly, I am grateful for the opportunity to be at Columbia University/New York as a guest scholar during the period of development of this volume.

Before concluding this acknowledgement list, two more special thanks.

The first goes to my large family in Morocco and Brazil for their wonderful support and understanding. Their support and encouragements have significantly contributed to the conclusion of this study.

Finally, I would like to thank very much Scott Bentley and Susan Ikeda at Elsevier for the opportunity of publishing my researches, and for all support provided by Jason Mitchell and his production team throughout the development of this volume.

Mohamed Amal

New York, 2016

Chapter 1

Introduction

Abstract

The aim of this book is to provide an understanding of the determinants of inward and outward foreign direct investment (FDI) from the particular perspective of institutional theory. We attempt to explore the different avenues by which institutions affect FDI, and under which conditions they may accelerate or restrain the internationalization of firms.

Keywords

inward FDI

outward FDI

institutions

economic development

The aim of this book is to provide an understanding of the determinants of inward and outward foreign direct investment (FDI) from the particular perspective of institutional theory. We attempt to explore the different avenues by which institutions affect FDI, and under which conditions they may accelerate or restrain the internationalization of firms.

We faced three major challenges during the investigation.

The first challenge was theoretical in nature. We tried to set up a general model that captures inward and outward FDI. This was a relatively hard task, since the logic and strategic rationale of MNCs operating in an emerging country may differ significantly from the rationale of MNCs from an emerging country, operating in another emerging country (South–South), or operating in a developed country (South–North). Our study is based on aggregate data and deals with FDI theory rather than with pure international business theories. However, we understand that the questions raised by several scholars (Ramamurti and Singh, 2009; Cuervo-Cazurra and Ramamurti, 2014) about the extent to which we can apply the foundational models and theories of MNCs to the understanding of emerging MNCs (MNCs from emerging economies) also remain key when we focus the analysis on the aggregate, instead of the microeconomic level. This means that since most of the FDI theories were based initially on the case of developed countries, under which conditions can we explore such models to understand FDI from emerging economies?

To overcome such a challenge we tried two specific avenues. First, we introduced the basic assumptions of institutional theory into general FDI theory (Dunning and Lundan, 2008). This avenue has been relatively well trodden in many studies of FDI in emerging countries, using different indicators and techniques (Daude and Stein, 2007; Thomas and Grosse, 2001; Amal and Seabra, 2007; Amal et al., 2010). However, it is still challenging when it comes to addressing outward FDI from emerging economies.

The second avenue was to explore some contributions on distance in the international business literature (Kostova, 1997; Hotho and Pedersen, 2012; Cuervo-Cazurra, 2008). Studies, particularly in the case of emerging MNCs, have provided important insights for how cultural and institutional distances shape the FDI strategies of firms.

The second challenge is methodological in nature. Since we used aggregate data, our analysis of FDI strategies remains relatively limited. We attempted in different ways to draw some evidence about FDI motives based on an econometric assessment of the data. We added to our quantitative approach in-depth interpretation of the sectoral and regional distribution of FDI, by using several sources of data, such as United Conference of Trade and Development (UNCTAD) and Economic Commission of Latin America and the Caribbean (ECLAC) reports on the strategies of MNCs.

The understanding of FDI motives remains a relatively controversial topic, particularly when looking at the new global economic set-up of competitiveness. Firms face different levels of constraints, which they have to manage by a complex web of strategies, instead of a unilateral market approach. This can be explained by the need for more active or voluntary embeddedness, by seeking to establish specific alliances with local firms and local institutions for R&D and innovation (Van Tulder, 2015).

On the other hand, some authors (Cuervo-Cazurra and Narula, 2015) have claimed a rethinking of Dunning’s typology of FDI strategies; however, we understand, in line with Meyer (2015), that the four FDI strategies (market seeking, resource seeking, efficiency seeking, and asset seeking) remain powerful tools to capture the ways in which MNCs approach different countries. However, because of the tendency of MNCs to face growing challenges in managing the complexity of different levels of interaction (headquarters versus different agents; local embeddedness of the subsidiary versus global integration), they must manage multiple embeddedness across heterogeneous contexts at both MNC and subsidiary levels, which may drive MNCs to adopt multiple strategies in the same location.

The third challenge is related to the implications of inward and outward FDI for economic development. While in the classical perspective the question has been focused on the impacts of FDI on economic development, in the recent literature scholars have been looking to provide insight on the conditions under which FDI can contribute to or accelerate economic development (Lall and Narula, 2013). Thus, the question of FDI determinants and their relationships to economic development become more distinctive, particularly in a context where developing countries have achieved, or most of them at least, substantial economic reforms, mainly driven by liberalization-oriented policies.

To overcome such a challenge we adopt the national absorptive capacity perspective (Narula, 2004) to establish the connections between location advantages, strategies of firms, and economic development. Furthermore, the question remains of how outward FDI can contribute to economic development. We attempt to suggest some avenues for the assessment of this specific question, particularly the role of reverse innovation as a foundational model of technology transfer and spillover effects on the local development of emerging economies. Unfortunately, the database is still very limited and the time series relatively short, which make it difficult to reach a long-term assessment of this question. We consider further research with a qualitative approach very promising in this field.

This project was based on several premises.

First, we consider that inward FDI in emerging countries has been largely shaped by the macroeconomic reforms started at the beginning of the 1990s in most cases (in Latin America in particular). For Brazil, which is our main subject in this book, the 1990s represent a cutting edge in the recent economic history of the country. The changes were not limited to the establishment of new regulatory frameworks to cope with the activities of MNCs, but cover a large set of economic and social organizations. In other words, this period represents a major change in its own framework of economic development. FDI has been intensively engaged in the manufacturing but also in the service sectors, and is becoming a driving factor in the economic development of the country.

For Brazilian firms, the end of the 1990s paved the way for new development prospects and relatively new growth strategies. Internationalization through FDI has been one of the more challenging paths for inserting Brazilian firms into the global economy, which started to become a major trend at the end of the 1990s after a relatively long period of macroeconomic stability and institutional reforms.

We assume, therefore, that these economic and institutional changes have shaped FDI strategies in the country, and opened up new perspectives for domestic firms to ground their growth strategy on internationalization through FDI (Rocha and da Silva, 2009; Fleury and Fleury, 2011).

The second premise was that the global financial crisis of 2008 significantly affected the internationalization strategies of firms, particularly in the case of emerging-economy MNCs. These have gradually expanded their investments worldwide, with special emphasis on value-added activities in developed countries, such as those in Europe and the United States. The shift of FDI from South–South to South–North represents a change in firms’ own strategic rationale for internationalization. We consider in this case, in line with other scholars (Cuervo-Cazurra and Ramamurti, 2014; Cuervo-Cazurra and Narula, 2015), that emerging MNCs are, besides the tradition of market-seeking, also following asset-seeking strategies.

In the specific case of Brazil, we consider that the recent changes (since 2008) have shaped inward and outward FDI. While for the latter this has implied following less escape FDI and more asset-seeking FDI strategies, for FDI in Brazil MNCs have started to implement different and complex strategies to sustain their market positioning in the country. They have adopted different approaches to exploit market dynamism, on both social and regional levels.

The third premise (as stated by Ramamurti and Singh, 2009) was that studying the case of Brazil and emerging economies can be seen as an opportunity to enrich FDI and international business theories.

1.1. Research questions

This book was motivated by a specific objective. While prior studies have focused mainly on studying inward FDI determinants, we attempted to develop and test a general model for inward and outward FDI determinants and the implications of FDI for economic growth. For this general objective, we proposed to provide answers to the following questions:

• How do economic performance and institutional changes in the host country affect FDI? This is a question that has been discussed very often in the economics and international business literatures. It seems that the question is still controversial, and that in particular the role of specific institutional factor determinants does not operate in a uniform way. This opens up the perspective for looking at the hierarchy among factors, and how their effects can change according to changes in the international context. The global financial crisis is a specific event in recent history for which the implications of FDI patterns are still understudied. How has the economic performance of Brazil shaped FDI strategies in the country? How do microeconomic reforms and changes, as in the domestic financial market, act in moderating the pattern of FDI? Under which conditions do institutions matter? These are some of the specific questions we will address when investigating the pattern and determinants of FDI in Brazil.

• How does inward FDI affect economic growth? This is a generic question, but it is still asking for more investigation. We tried to approach it by, in particular, discussing the conditions under which FDI can generate or even accelerate economic growth. For this purpose we use the concept of national absorptive capacity. Assuming that FDI has a positive impact on economic growth, how does the development of the domestic financial market moderate such effects?

• What are the economic and institutional determinants of outward FDI from Brazil? This question is particularly motivated by the search for an understanding of the drivers and motives of Brazilian firms’ internationalization. We believe that one of the sources for advancing FDI theory is to explore again home-market effects, particularly in the case of emerging economies where the ownership advantages of firms are restrained by the disadvantages of their home location. However, we believe that in the case of Brazil, the home-country effect can deliver the opportunity once more to establish how economic changes can generate specific advantages that sustain outward FDI. On the other hand, we also believe that the difference may lie in the way in which MNCs from emerging countries deal with the institutional and economic distances between home and host countries. Thus, two specific questions motivate this general question: How does economic performance in the home country affect outward FDI? and How does cultural and institutional distance between home and host countries shape outward FDI from Brazil?

Brazil is an ideal country to illustrate and test some general assumptions about the institutional determinants of inward and outward FDI and their interaction in light of a perspective of economic development in emerging economies.

First, besides the unstable patterns of development in the last 6 years, the country is one of the most dynamic economies among emerging countries. Second, Brazil is the biggest Latin American economy, the largest recipient of FDI in the region, and one of the leading host countries among developing countries. Finally, yet significantly, although the country started to introduce important market reforms toward more trade openness at the beginning of the 1990s, the internationalization of Brazilian firms through FDI has really been felt in the past 10 years (Amal and Tomio, 2015, p. 80). This is a relatively unusual case of competitive international integration. On the one hand, it is a large economy, with significant resources and structural capabilities that have driven, for a long period, important FDI projects of multinational companies from the Triad (USA, Europe, and Japan). However, such a process seems to have contributed to the development of Brazilian firms of relatively lower scale and scope.

1.2. Overview of the book

In addition to this introduction, this volume consists of six more chapters.

Chapter: Determinants of Foreign Direct Investment: Theoretical Approaches provides the theoretical frameworks for the analysis of Brazilian inward and outward FDI. After a general overview of classical FDI theories and the different contributions of recent approaches, we discuss how the introduction of institutional theory and investigations of outward FDI from developing countries represent important contributions that challenge the main assumptions and perspectives in the general theory of FDI. This perspective opens up fresh opportunities for understanding how the interaction between economic and institutional factors shapes inward and outward FDI strategies from developing countries.

In chapter: General Institutional Framework of Foreign Direct Investment in Brazil, we address the general institutional framework of FDI in Brazil. In particular, we focus on the economic and institutional changes in Brazil from the period of import–substitution policies (ISP) to the period of reforms in the 1990s, in which the country implemented a new model of development based on free competition, fiscal responsibility and economic openness. Furthermore, we analyze the evolution and patterns of FDI and draw some conclusions about the strategies and performance of multinationals in the country, comparing the periods before and after the global financial crisis of 2008.

In chapters: Determinants of Inward FDI in Brazil; Evolution and Determinants of OFDI; FDI and Economic Growth, we make quantitative assessments of the general hypotheses established in the first few chapters.

In chapter: Determinants of Inward FDI in Brazil, we present several quantitative analyses of FDI determinants in Brazil. First, we evaluate the relationships between the economic performance of the host country and FDI in a long-run perspective, testing the effects of macroeconomic and trade variables. In the second approach, we estimate the role of institutions and their effects on the patterns of FDI. Finally, we discuss how absorptive national capacity moderates the effects of economic performance.

Chapter: Evolution and Determinants of OFDI provides a general understanding of outward FDI from Brazil. First, we discuss the evolution and patterns of outward FDI from Brazil. More specifically, we address the driving forces of FDI from a dual perspective. First, we assess the role of home-market economic performance. Second, we evaluate the effects of the host country on outward FDI, in particular by estimating the role of economic performance and distance. The chapter provides qualitative and empirical assessments of the impacts of economic and institutional factors on the patterns of outward FDI.

After discussing the drivers of inward and outward FDI, chapter: FDI and Economic Growth, discusses the relationships between economic growth and FDI. More specifically, we attempt to point to some avenues for how absorptive capacity may moderate the effects of FDI on economic development.

In the last chapter, we conclude the book by providing a critical discussion of the determinants of inward and outward FDI and their interactions with economic development. We also point to some specific research avenues on the internationalization of firms in emerging countries.

1.3. Advantages of the present book

Several scholars have discussed the role of FDI in emerging economies. However, very few have attempted to look at the connections between FDI, development, and institutions. Readers may be interested in how some emerging economies, after a long period of FDI hosting, also become the origins of FDI. The findings of this study may shed some light on different paths of internationalization and therefore contribute to the theory of FDI and multinational companies. Besides discussing the interaction between FDI, development, and institutions, in addressing firms’ policies and strategies the book may also contribute to the understanding of the practices of Brazilian firms in the global economy.

The aim of the book is to reach a large number of students in undergraduate and graduate programs in economics, finance, and international business. In some topics we will be using econometric analysis; however, understanding the book overall requires no advanced knowledge of econometric and mathematics. We are planning to develop a more critical perspective on the connections between FDI, development and institutions, and to illustrate how the study of a leading emerging economy may contribute to advancing international business theories.

It is planned to accompany the book with some special datasets to support the access of readers to data sources from Brazil. However, some special features of the book may contribute to increasing its value. First, we will discuss the source of the data and show different sources for approaching the topic. Second, we will comment on the contributions of the literature on internationalization that has been largely published in a very restricted way (often only in Portuguese). And last but not least, we will address the dynamic of FDI and development in Brazil from the perspective of an insider, without losing the critical approach that supports scientific work.

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