Foreign direct investment: diagnosis and proposals for a Brazilian public policy.
This article is the result of larger project on Brazilian Outward Foreign Direct Investment--OFDI published in a collection led by Fleury (2010). It deals specifically with the public policies that promote FDI, outward or inward. Campanario et al. (2010) first developed the arguments in a chapter of this collection. Now, after the crisis of 2008, new evidences, the contribution of colleagues (including the blind reviewers), new data and perspectives are best organized in this text.
FDI is the creation or expansion of a subsidiary company outside its country of origin through the acquisition by residents of one country (the source of capital) of assets belonging to residents of another country (the destination of the capital or the host country). Foreign Direct Investment --FDI associates strong increase in rates of foreign trade and the advancement of the process of internationalization of production and financial services. Thus, FDI involves a structured financial transaction, oriented to control production factors in a given host country. Finally, this subsidiary's objectives derive not only from the guidelines of the organizational structure of the company that makes the investment but also by public policies and macroeconomic environment.
From a strictly financial point of view, this type of transaction is an option (in many cases advantageous) to traditional means of loan or financing. Firms conducting FDI expect return (for a given level and degree of risk aversion) and of other sources of gain as technological spin offs or access to strategic assets. FDI does not contemplate merely the acquisition of a controlling stake in a company or business abroad. Unlike investment in financial portfolio (traded on organized markets like stock exchanges), FDI involves investment transactions tailored made, targeted to certain companies and specific sectors, with profile predominantly directed to long term, aiming gains that are of difficult measurement only in terms of financial calculation. In fact, the acquisition of real assets absorbs resources for the acquisition of inputs (machinery, equipment, facilities etc), use of working capital (needed to initiate and maintain an operation), among other expenses, exposing the investor to a series of risks (sovereign risk, exchange rate, etc.) in search of profits. Due to low liquidity and timing required for recovery of capital allocated, the projects involve a high degree of uncertainty. Additionally, several studies indicate that FDI has significance that goes beyond rationality and the dynamics of private investment. In aggregate numbers, these transactions imply profound macroeconomic impacts on the real and monetary economy, profoundly affecting the process of economic growth and development. Not surprisingly, issues associated with the dynamics of the Balance of Payments, Current Account and Capital Account and its impact on the level of activity, investment, production volume and prices, exchange rates, interest rates and international reserves are object of heated political and economic discussions over the past years (SAUVANT et al., 2008).
New conceptions of public policy on this topic may be relevant in the following areas: (i) macroeconomic; and (ii) microeconomic (with emphasis on industrial organization and innovation) and (iii) foreign relations and trade. The proposition advanced here is that policies to strengthen the international capital flows might be viable under current conditions in Brazil. They would improve the competitiveness of Brazilian multinational companies as well as help to better regulate the fluctuations of the exchange rate, attract foreign savings and make the best of Brazilian foreign trade.
To address these issues, the study includes four sections besides this introduction. Section 2 presents a brief literature review, focusing on the modeling of foreign investment (notably the approaches "Ownership, location and internalization"--OLI and "Investment development path" --IDPath) and the role of FDI as an important factor for saving and investment. Section 3 presents the method of the study derived from the models discussed. As the process of internationalization of companies from developing countries is new, the phenomenon lacks a systematic theoretical treatment. The methodological foundations are exploratory, involving the analysis of macroeconomic statistics and survey of literature. The attempt is to summarize, relate and guide the construction of a framework that might support the public action in FDI. Section 4 presents a diagnostic on the insertion of active policies for Brazilian outward foreign direct investment OFDI. Section 5 presents a set of reasoned proposals, contributing to the construction of OFDI policy debate in Brazil. Finally, section 6 presents the concluding remarks, framing the public policy proposals in the field of OFDI.
2. Summary of explanatory models of FDI
From the economic theory point of view, the phenomenon of FDI has been studied since the 1960s, particularly from the contributions of Hymer (1976), in the theory of industrial organization, and Dunning (1970; 1977; 1979) which writes in macroeconomics and microeconomics.
Countries seek to attract foreign investment guided by a variety of interests, but grounded in the idea of promoting economic growth through multiplier effects. The rationale of these interests are generating employment and income, bringing tangible assets such as physical capital and infrastructure, and intangible as knowledge, technologies, supplier networks, culture, among others (CASSON, 1983; TEECE, 1982).
Economic studies also address the macroeconomic effects of the entry of foreign resources in terms of the balance of macroeconomic aggregates, affecting variables such as savings, investment, interest rate and currency exchange. No conclusive statement is adherent to theories available (HELPMAN, 2006; and PAIN and WESUM, 2003). Caves (1971) states that the existence of FDI relates to differentiation and product innovation, the patented knowledge and barriers to entry for new firms. This approach also focuses on issues of trade-off between international trade and investment flows between countries. This is one of the special topics discussed by the International Monetary Fund (GHOSH et al., 2008). Based on these broad approaches, the aim of this work is to examine two major theoretical perspectives in order to create propositions about the case of OFDI from emerging countries: (i) the motivations and impacts of FDI on the microeconomic perspectives of markets and firms; (ii) macroeconomic restrains in the formation of savings and investment; and (iii) the policies that may fit to the Brazilian case.
What motivates FDI? The OLI paradigm (Ownership, Location & internalization) and the IDPath (Investment Development Path) are two strands of theoretical thought, created by John Dunning. As both approaches are closely related, an attempt of synthesis is undertake. Following Table 1, phase 1 of the OLI model, foreign investment is simply opportunistic, seeking to exploit an asset available abroad, usually, a natural resource. In phase 2, there is an incipient convergence of interests of the company and the host country. To explore local markets, it is necessary that a series of requirements in the production chain be met, like searching for lower cost of infrastructure and transaction (including the tax area), more stable policies, suppliers and local labor market minimally organized. Phase 3 incorporates the flow of foreign capital as a more frequent practice of the markets. Flow of capital, inside and outside, is more intense, but still operating based on criteria of comparative advantages. That is, they take advantage of existing tangible assets with economies of scale. In Phase 4, it becomes more relevant the process of searching for competitiveness and efficiency gains. Scale in operations is achieved through innovative technology for processes, products and marketing, fixation of brand and increasing synergies in the supply and distribution chain and more emphasis on intangible assets. Finally, in phase 5, the level of investment reaches maturity and becomes one of the dominant elements of the economy. It surpasses in importance the dynamics of foreign trade, being a very relevant element that can react to the most different macroeconomic situations (interest and exchange rates) and its cycles. FDI will become a mechanism of control of the monetary stability and of market integration in global networks of supply and distribution.
By pointing to several simultaneous factors that contribute to the process of internationalization of investment, Dunning (2006) creates what is conventionally called "OLI Paradigm" or "Eclectic Paradigm". The acronym OLI express the factors: "Ownership, Location & Internalization--OLI". These factors are responsible for the globalization of enterprises by means of a movement that competes not only with the simple act of serving foreign markets through exports, but also replace efficiently export activities. When there are favorable return conditions, the company starts a strategy of OWNERSHIP of tangible and intangible assets (markets of factors, natural resources and capital, technology, etc.) inside and outside the country. Industrial production plants use these assets in multiple LOCATIONS around the globe. The "liabilities of foreignness" can be overcome. They consist of very different factors depending on the region or industry in question: firms operating in the oil sector have a completely different environment than high technology in different parts of the world, as claimed by Gray (2003). This practice allows the company to buy strategic assets and use them in different regions outside its headquarters, expanding its operating capacity in scale or scope, depending on the situation of the production chain where it operates. The use of assets actually involves the opening of branches and is contributing to the INTERNALIZATION of production in the various regions (internalization), making from the activity of local production a substitute for the direct export from the head office (horizontal integration) or a mechanism to increase the export from the head office with local complementation (vertical integration).
The influence of the OLI paradigm, along with other more specific contributions generate a classification of attractive factors for the internationalization process, greatly facilitating the research, such as that conducted by Tavares and Ferraz (2007), the survey by UNCTAD (2008), the collection of articles organized by Ramsey and Almeida (1999) and even the article by Coutinho et al. (2006). A schematized summary of these contributions is in Table 2.
Inward and outward FDI is progressively relevant to explain the dynamism and wealth of many countries and regions, being measured in National Accounting (Gruben and McLeod, 1998). In an increasingly open economy such as Brazil, the investment is financed by private and public savings, with increasing participation of foreign savings. In this paper, we used international accounting conventions, whose basic functions are formally described in detail by Ramos and Feijo 2004).
It is useful to present the basic macroeconomic identity, given by the equality of product produced (Y) and the product sold (household consumption - C; investment spending - I; government expenditure - G; and balance of exports and imports - (X - M)). It follows: Y = C + I + G + (X - M) or Y = C - M + I + G + X, or (X - M) = Y - (C + I + G) (a). Part of the income is spent on tax (T) and government transfer (TR), which provides disposable income, Yd = Y + (TR - T) (b). This part of income is allocated to consumption (C) and Savings (S), where: Yd = C + S (c). From (b) and (c) it is obtained: C + S = Yd = Y + (TR - T) or C = Yd - S = Y + (TR - T) - S (d). With a simple algebraic treatment of the identity (d), we have: S - I = (G + TR - T) + (X M) (d'). Manipulating equation (d), it is possible to highlight the government's budget: T - (TR G) = (I - S) + (X - M). Therefore, there is a close relationship between domestic, public and foreign savings.
However, in theory, public savings (TR - G) and taxes (T) are considered rigid due to institutional constraints and C is a function of the very product (C = f (Yd)). So, domestic savings is more directly related to foreign savings: S - I = g (X - M) (e). Strictly speaking, in order to test these hypotheses further econometric research should be conducted in order to validate the effective relationship between these aggregates and check possible spurious correlations.
This relationship is under dispute in the Brazilian economic literature: (1) the Endogenous Growth Approach--EGA (associated to Latin America import substitution doctrine) sustains that positive trade balances give rise first to greater investment and later to savings. To promote investment interest rate should be low and exchange rate should be devaluated. Therefore, the capital flows and exchange rate should be controlled. In other words, trade balance depends on aggressive economic policy; (2) the Open Growth Approach--OPA (associated to the Asian approach, but also Germany) states that savings (domestic and foreign) brings positive trade balances, great savings and them a promotion to investment. The condition to development is to have a savings greater than investment and ideally positive trade balance. Today the consensus on how to deal with exchange rate is to leave it to float.
The first strand (EGA) aligns with the results obtained by Bresser-Pereira (2009) and Rodrick (2007). According to this perception, it would be a high percentage of "neutralization" of foreign savings for domestic savings. Such evidence confines the empirical results obtained by Fry (1978), Feldstein and Hirota (1980) and Rocha (2004). Edwards (1995), in turn, in a comprehensive study concludes that there is a clear "substitution"
(and not "neutralization") between private domestic savings and foreign savings. However, the variances are very large. Estimates of substitution vary from 0.38% to 0.62%, depending on the country considered. With these studies, there is not much doubt that there is effectively a substitution effect, but with some difficulty establishing a stable structural pattern.
In Brazil, between 1994 and 1999 (period in which fixed exchange rate regime), there was substantial increase (4.3%) in the Current Account deficit (X - M < 0) which was covered mainly by FDI (much of that coming from privatization). At the same time, there was a decrease in the investment rate from 21% to 19%. After the devaluation of the real in 1999, there was a change in Current Account, gradually becoming positive (X - M > 0). Paradoxically, this period shows the rate of aggregate investment decreasing. It fell further, reaching 16.5%. Why did it happen? From this perspective, in early 2000, there was a process of substitution of domestic savings (resulting from exchange rate depreciation) by foreign savings (the result of inflow of foreign exchange arising from trade and foreign capital). Before and after 1999, there was an appreciation of the exchange. First because of a unreal and fixed exchange rate and then a result of the flow of foreign exchange from exports resulting from growth in demand for commodities. In both periods, inward FDI was positive. Only after 1999, outward FDI became a macroeconomic phenomenon.
This view assumes that economic growth with foreign savings appreciates the exchange rate by limiting investments to the export activity. This hampers the growth of medium and long terms and does not cause the growth of savings. The exchange rate appreciation (and import of goods) would have only a stimulus to increase real wages and the temporary control of prices. This is associated with the effect of spending on household consumption, with little multiplier effect. In this line, Dooley et al. (2003) criticize the policies of exchange rate fluctuation and the liberalization of capital flows, suggesting the maintenance of local currency depreciation. This would be accompanied by the achievement of current account surplus, making the country an exporter of capital and accelerating economic growth. China and the Asian tigers operate precisely under these conditions: depreciated exchange rate, current account surplus, capital export and inward FDI.
OPA's view is supported by Pastore et al. (2008) and Paiva (2006), within the more traditional neoclassical school. In addition to finding that the depreciated exchange rate has a negative effect on consumption and inflation (net of the volatility in nominal terms, which ultimately affects the real exchange endogenously), the critical variable to be investigated is the savings rate. The formulation of Solow (1956) spread the theory of economic development that savings plays a central role in leveraging growth: countries that save more in per capita terms are those who acquire higher growth rates and has a more depreciated exchange rate and current account surplus higher.
With the firm conviction that this issue is still to be further investigated, this study tends argue that
OPA's perspective is more solid. Indeed, exchange rate (real) undervalued is the direct result of excess savings over investment. The continued growth of reserves weakens the exchange rate policy. In the Brazilian case, the balance in current accounts (due to the increase of X - M) and Capital Account (due to increased FDI) contributes to the accumulation of foreign exchange. This is equivalent to the excess of savings over investment (S - I = X - M). It occurs because of the change in relative prices of assets and goods and services, inside and outside, which makes the dynamic movement of FDI, both within and outside the country. Particularly FDI is due to a fall in the relative price of foreign assets and increase business competitiveness (the result of this process of capitalization and increase the volume of investment in machinery and equipment).
Accounts with negative results mean that there was more output than input of resources in that rubric. According to the official IPEADATA (2011) the main accounts with negative outcomes are royalties, interest, rents and services. The positive accounts are direct investment, portfolio investment and trade balance. The result of Balance of Payments--BOP positive (negative) means an increase (decrease) in reserves. Increase (decrease) may mean a pressure on the exchange rate, reserves and the relative prices. From an accounting perspective, these reserves allow the identity of Current Transactions and Capital and Financial Account (CT=CF). Indeed, there is a basic difference between the two accounts. CT, dominated by the dynamics of foreign trade, does not create a future liability because the transaction is closed when a sale of goods or services (or payments) is performed. CF is dominated by the flow of capital between nations. If an asset is bought with foreign capital, a liability is raised because the interest plus the principal must be paid at some point. The exchange rate obviously affects the relative price of all flows in the BOP and also the terms of trade between nations.
One way to understand the implications of the dynamics of these flows is through the relationship between capital flows and balance of payments, which incorporates business transactions of a nation with the world. The cases presented in figure 1 and discussed in Table 3 show the difficulty in treating the doctrines of growth only by the pair of growth "out" or "in". Depending on the framework of a nation in one of case studies, policy recommendations related to FDI can be done. In fact, Brazil is covered by the case 3 having a combination of surpluses in terms of capital flows and trade balance, influencing a good performance on BOP accounts. Given the conditions of a growing reserves and pressures on the valuation of the local currency, encouraging capital outflows through (OFDI) can be recommended, ensuring lower volatility and higher return on reserves. Nonetheless, these policies, such as the creation of a Sovereign Wealth Fund--SWF, should be driven in a long term perspective given the extreme fragility of the international monetary flows after 2008.
[FIGURE 1 OMITTED]
Evidence of movements in the accounts of the BOP, particularly the relationship between FDI, Trade Balance, Gross Fixed Capital Formation (GFCF) and imports to GDP is shown in graphs below. Brazilian economic integration abroad started particularly from 1994 onwards. Current account surpluses reduce external debts and de-dollarisation of its liabilities, both public and private, which allows a greater monetary stability. The relationship between a positive view of foreign savings in the BOP (positive relationship between exports and imports) and domestic savings are inversely proportional. Clearly there is an inverse relationship between investment/GDP and net exports (current account surplus)/GDP. This shows that there is not a full replacement of external and internal savings, but only partial. Pastore et al. (2008) and his colleagues note that the current account deficits are associated with higher rates of investment. Likewise, the authors of this study calculated the ratio of the sum of current account balance with the balance of FDI as a ratio of GDP and the ratio of investment to GDP, obtained inverse correlation between the two variables. Using IPEADATA and following Campos and Kinoshita (2003), it is possible to correlate these variables and conclude some dynamics on how foreign savings are important to investment.
Graph 1 shows, from 1990 to 2010, the dynamics between Trade Balance (TB), Foreing Direct Investment (FDI) e Gross Fixed Capital Formation (GCFC), in its relation to GDP. From 1994 to 1999, due to the artificial appreciation of the local currency, trade balance was negative, but FDI positive. Foreign savings was partially compensated by foreign capital. In this period the investment rate slowed down. From 2000 onwards, with the floating exchange rate, there is a reversion on these tendencies.
[GRAPHIC 1 OMITTED]
The relation of foreign savings and GCFC to GDP is clearer in the Graph 2. For the whole period, the drop in the Foreign Trade (X - M) is compensated by the increase in FDI. It is importante to point out that the correlation between TB/GCP and FDI/GDP is approximately 50%.
[GRAPHIC 2 OMITTED]
Graph 3 presents the relation of the rate of capital formation and the total TB and FDI, both as percentages to GDP. The adjustment of the curves is similar to the Figure 1. It means that, on average, the drop on TB is compensated by FDI and vice-versa.
[GRAPHIC 4 OMITTED]
Finally, Graph 4 presents the data dispersion over the average value of the variables. The data show clearly that there is a strong correlation between foreign savings, FDI and the rate of investment as a percentage to GDP. Moreover, if TB + FDI is lower than average, the endogenous variation of GCFC is more expressive. It demonstrates the importance of the relation
[GRAPHIC 4 OMITTED]
The addition of the curve of investment (GFCF) and FDI implies a curve even more adherent to the theory that there is no perfect substitution between domestic and foreign savings, and that the deficits were much associated with the movement of investments. Given the institutional rigidities in public savings, derived from the fragility of fiscal policies to monitor the dynamics of current accounts, the eventual replacement of foreign savings for the public is not easily verifiable, leaving a stronger relationship between foreign and domestic private savings. Thus, the growth in current accounts will be absorbed by a contraction of investment, as we predict theoretically by Obstfeld and Rogoff (1996). But, there is another interesting relationship between foreign savings, together with the balance of FDI and investment performance. The latter brings a strong correlation with imports, as shown by the data from Figure 4, a fact highlighted by Pastore et al. (2008) Also worth mentioning is the fact that imports depend heavily on investment and FDI abroad. Moreover, it is easy to verify that there is no significant correlation between these variables and domestic consumption, which classically depends on national income (GDP). Therefore, the hypothesis of Bresser-Pereira (2009) that the currency appreciation is detrimental to growth because this value could be reversed primarily for consumption is flawed. In fact, this can happen, but the inertia of consumption is higher, compared to income growth than to changes in a single aggregate national accounts, in case the trade balance. It should be noted that the BOP situation in Brazil is very positive since 2001, with two crucial limiting factors: increasing exports, particularly of commodities, and large FDI inflows, which caused an increase in international reserves. It follows a fall of the "country risk". However, as claimed by Rodrick (2007), this wealth coming from abroad can suffer strong shocks. In fact, after the 2008 economic crisis, international trade grows less, with lower availability of external financing and increased propensity of the U.S. and rich countries reduce their trade deficits and their household consumption, which can cause a drop in international trade and FDI inflow, reducing the situation that still prevails in the country. The question now is whether the conditions for the country to maintain economic growth with greater openness and with the increase of FDI in Brazil, with a view to creating national global players able to compete and increase long-term productivity of the economy. (i)
What are the context and the feasibility of adopting policies to strengthen the Brazilian outward foreign direct investment--OFDI? First, we developed the theoretical survey as a means to better understand the phases and the characteristics for the adoption of policies to enhance FDI. Besides, we collected empirical evidence of the growing importance of foreign accounts to the Brazilian growth. Simultaneously, the revision was done on models seeking to account for FDI, especially the approaches developed by Dunning. More recently, there are collections of works organized by Sauvant (2009) and Sauvant et al. (2008) advancing the policy issue, addressing the institutional rules, support for public policies explicit and implicit and the source and destination of investment. The review of this literature includes the prism of internationalization of companies, particularly emergent countries. It becomes clear that the relevant phenomena of inward and outward FDI and its growing weight over the international trade of goods is not accompanied by policies of emergent economies. Brazil is no exception. The process of internationalization in Latin American is due to privatization reforms and economic liberalization that followed the exhaustion of the process of industrialization through import substitution. However, there is no policy to support the new transnational corporation in these countries.
In Brazil, the significant size of the domestic market, the favorable conditions to augment reserves and the incremental process of economic, financial and commercial openness turned FDI a prominent issue since the Plano Real, in 1994. This supports the view that the firms and the state should be prepared to enforce strategies to overcome the competitive and somehow regulated global economy. In contrast to other countries, as suggested in Table 4, Brazil still is in debt in terms of constructing a strategy and the consequent public policies to guide the private sector.
Considering the international benchmarking and the set of explanatory contributions on FDI to economic development, the research follows three levels of suggested analysis: macroeconomic, microeconomic and foreign relations. Methodologically, this view maintains that the research activity should be initiated by the theory. In this case, following Dunning, these three topics are in the core of the theoretical domain in the field. The advantage of this procedure is related to the concept that theory: (i) summarizes and explains the facts and their relation; (ii) permits the classification and systematization; (iii) guide the gaps in knowledge; (iv) summarizes and explains what science knows about the issue; and (v) provides the construction of hypotheses for investigation.
From the methodological point of view, the research culminated in three dimensions, shown in Figure 2. The main elements can be summarized as follows:
* Macroeconomic: addresses the specific constraints of the dynamics of large aggregates of the Brazilian economy whose dynamics interfere with the formation of the GDP, general price index, pattern of savings (S) and investment (I), FDI and other economic variables;
* Microeconomic/industrial organization: relates to aspects of industry organization and market structure (including business strategies of investment) and technological paths;
* Foreign relations: endorse factors endowments (capital, property rights, etc.), location and other factors related to the forms of action in foreign markets (including the opening of branches and internalization of production).
As explained in the Figure 3, the dimensions (macroeconomic, microeconomic and foreign relation) include positive aspects associated with FDI, but not restricted to them. As proposed here, they allow: the framing of the landscape of political inclusion of incentives for foreign investment (section 4) and also serve as a reference to public policy agenda proposed (section 5).
[FIGURE 3 OMITTED]
4. Comprehensive FDI policy perspective
Table 5 presents an overview of integration of policies to encourage outward Foreign Direct Investment--OFDI. It focuses on the analytical dimensions outlined in the previous section. The field of macroeconomic policy covers issues related monetary, tax, and financial instruments. It should be drawn attention to the Sovereign Wealth Funds--SWF, a new mechanism to finance long terms investments to shape national strategies. Altogether these policies can be used for promoting macroeconomic stability and strengthening national sectors where the country has competitive advantages. The field of foreign relations policy emphasizes the role of Eximbanks, mostly used by Asian economies.
Trade and globalization go together. Moreover, the strengthening of local businesses regarding foreign companies can also be achieved through mergers and acquisitions. Finally, the field of microeconomic policy is focused on a set of aspects (economic defense, regulation of mergers and acquisitions, incentives for innovation and metrology). The internationalization has much to gain from the strengthening of the industrial park through improved quality of regulation and provision of technological services.
5. Proposals for an agenda of priority to Brazilian FDI
Moran (2008) argues that there are three strategies for FDI policies: promotion, inhibition, and neutrality. Such alternatives are motivated by two major issues: (i) Does FDI bring out some damage to the origin country, affecting the labor market, taxes and draining resources to another country?; (ii) Does this type of investment imply some loss of control by governments on national autonomy and related resources? The proposals, presented below, argue that there is economic rationality to businesses, government and markets in more active government action towards FDI, particularly outward flows. As defined, public policy actions are defined in three levels: macroeconomic, microeconomic and foreign relations and trade.
The monetary stabilization and the economic foreign integration (which actually justifies the existence of a strong flow of capital into and out of the country) started with a first wave of tariff reductions (in early 1990s) and the monetary reform of 1994 (known as Plano Real). The Plano Real would not be successful without actions taken on privatization of public enterprises (particularly steel, electric and telecommunications), new fiscal approach to control state expenses and to improve tax revenues and, finally, the application of a quite strict orthodox monetary policy. In fact, interest rate was used to adjust the rhythm of economic growth and inflation. Exchange rate, first kept artificially appreciated (1994-1999) was then substituted by the regime of inflation target with free exchange rate flotation (1999-today). In both cases the appreciation of the local currency is the rule. These measures have kept the memory of inflation stemmed. The cost was a relatively slow growth, dependent on foreign savings, as recognized by most analysts in Brazil [2, 18].
Since 2000, Brazil has a situation of trade surplus. BOP has a positive balance in the capital and financial account, but still has a nominal deficit in the fiscal account. This has contributed to appreciate the real, which has negative consequences for the export of manufactured goods. This effect can also affect the export of primary goods more competitive. The fiscal account deficit is accompanied by high interest rates. This reinforces the movement of exchange rate appreciation. With the policy of floating exchange rate, reserves tend to reduce their rate of accumulation, with the relative enhancement of national assets and reduced exports.
The other perspective is that of China: it keeps the exchange rate artificially depreciated. This makes domestic assets remain undervalued to attract FDI. Furthermore, by expanding its exports by increasing the reserves, SWFs is used as an instrument of policy investment for national strategic projects, including some OFDI. In a situation like Brazil, it is important to indicate that both the World Bank and the International Monetary Fund  suggest that monetary policy as the "relaxation" of restrictions on OFDI since it relieve pressure on the exchange rate. This is very bold and interesting, because the country could have a policy of strengthening its presence in industries outside the country, with higher yields than the remuneration of reserves (which earn interest below 1% bringing in significant loss in the medium and long time, given the inflation in dollars). It should be considered, however, that SWF projects are governmental and not necessarily market driven, carring a greater risk that must be considered in the policy formulation. This strategy may enhance the formation of leading global companies, able to increase the Brazilian presence outside.
The tools to do so could be the strengthening of conditions for exports, via the creation of an Eximbank and the effective implementation of Brazil's Sovereign Wealth Fund - BSWF. In addition to measures in the tax policy (including changes in taxation of funds in the portfolio), the alternative is to increase the interest rate as a means to sterilize the inflation caused by the inflow of dollars. With some inflationary pressure, the action at hand is to maintain the exchange rate appreciated moderately, responsible fiscal policy and the encouragement of Brazilian OFDI. As suggested above and in Table 6, the encouragement of FDI is justified as auxiliary instrument of economic policy.
5.2 Foreign relations and trade
The exchange is strongly influenced by the flow of goods and financial transactions, especially FDI. There is a strong relationship between capital flows and current account, the result of greater or lesser use of foreign savings. There are times when capital flows meet the demand for financing of current account deficits and other moments that are more speculative and depend on opportunities for short-term income. After the crisis of the 1980s (marked by enormous pressure over its BOP), Brazil has gradually entered into a comfort zone in the medium term, particularly when there are positive signs for both the incoming flow of capital. After the 2008 crisis, due to reversal of commodity price and exchange rate appreciation of 2009, the Current Account impacts was strongly felt. Moreover, statistics indicate that there is strong correlation between trade and investment. Stimulating international trade generates numerous benefits. Specifically, the contact with external markets exposes companies to international standards of quality, price and other requirements of foreign markets. The interaction of businesses with foreign markets leads to increased resource productivity and generates spillovers, ensuring greater efficiency in production, foreign exchange from exports and technology transfer (FROUFE, 2009). Finally, trade also generates a gain to expand the operational scale, making companies less dependent on the domestic market and the economy less susceptible to external shocks. A summary of these factors are presented in Table 7.
In Brazil, the literature on public policy in the field of international direct investment and its relation to industrial organization is scarce. Mostly they are devoted to advanced capitalist economies as it can be appreciated by the publications of the Vale Columbia Center on Sustainable International Investment (http://www.vcc.columbia.edu/content/publications), perhaps the most important study center on the topic, now a day. Also, a series of recent Brazilian publications are investigating the theme under the various perspectives (Fleury (org.), 2010; and Barros & Giambiagi (org.), 2008). Moreover, there is no consensus on how to regulate FDI. The objective is to attain more efficient allocation of resources, particularly if it considers the balance between the private and the state interests involved and the macroeconomic restrictions to investment. This literature is grounded on factors such as "location incentives", "performance demands" and "induced barriers", to protect de local producers (ECIB, 1993). More recently, there has been a policy to demand performance in terms of the scale required to Brazilian firms to compete abroad. Perhaps this is the sole policy we can detect in the area of FDI (Ramsay & Almeida (org.), 2009). In fact, although the literature deals with topics such as technology, generation of spillovers, export promotion and generation of new investments, the policies are still quite restricted to actions of the Banco Nacional de Desenvolvimento Economico e Social--BNDES. A review of these studies and the literature indicates that there is a huge challenge to consolidate the process of internationalization of the Brazilian economy (PIB, 2010). This includes the dissemination and access to technology services in addition to export promotion and strengthening of companies and industries with an international vocation. Table 8 summarizes some of the policies, considering that it is still a mere reference to future studies.
6. Final remarks
This research contemplates a review of the literature on the internationalization of capital through multinational corporations, with emphasis on economic theory. Three dominant theoretical perspectives were explored: the OLI paradigm and models of U and I, developed from the work of John Dunning. These schools focus on critical dimensions of the relationship between FDI and economic growth. The Brazilian academy and the public sector have still a long way to debate this important issue. In this article, it is concluded that the investment of multinational companies brings competitive advantages in not only organizations but also international trade and economic growth through increased foreign savings. With these dimensions in perspective, it is summarized a public policy agenda for OFDI (Table 9).
The investment of domestic companies abroad brings about earnings to the country of origin of the capital. This position dispels the myth that, be it inward or outward, the flow of capital would be harmful to national interests. Obviously, this theme also brings controversy, but the empirical evidence is very strong in favor of greater openness to capital, either on macroeconomic and on microeconomic grounds. By recognizing the existence of a very wide range of general and specific policies, we chose to select those that most contribute to the internationalization process and its earnings.
In the foreground, highlight goes to the macroeconomic framework for FDI. The article opens a theoretical and practical possibility of increasing the FDI as a tool to Brazilian exchange control and strengthening of external trade, particularly OFDI. In the same way, the creation of the Brazil's SWF, besides providing greater monetary and exchange rate stability, may promote strategic projects of various kinds. The risks and uncertainties should be critically analyzed in further research. By recognizing the close relationship between FDI and foreign trade, proposals are made to strengthen the Brazilian trade openness. In this field, there is still too much to analyze study and implement. Finally, based on foreign experience, considerations were made on policies for foreign companies operating in Brazil with national production chain. These policies should consider that they involve business and state interests to integrate economies, with impact upon FDI. It tends to decrease trade and transactions costs and easies exports. Moreover, market sizes tend to be greater in relation to fixed investments, making national champions economically feasible.
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Milton de Abreu Campanario (i)
Marcello Muniz as Silva (ii)
Milton de Freitas Chagas Junior (iii)
Leonel Cesarino Pessoa (iv)
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(iv) Universidade Nove de Julho; Programa de Mestrado e Doutorado em Administragao; email@example.com; Av. Francisco Matarazzo 612, Agua Branca, Sao Paulo/SP.
Table 1: Summary of IDPath and OLI. Integration model Phases of Ownership Location IDP--OLI Phase 1: High legal and Natural assets with Opportunistic institutional high demand risk. Scale of operation. Exploration contracts. Low production High transaction costs. costs. Value Rarity /Resource Base Value--RBV Phase 2: Incentive policies Nascent Market Incipient and investment Infrastructure. attraction. Less transaction Joint-ventures. costs. Asset ownership Labor market and local supply. Phase 3: Appropriate policies. Strong Market Practitioner International Systemic tangible asset competitiveness. management. Phase 4: Management of Export platform. Competitor international, Capital Markets. strategic tangible Skilled labor. and intangible Differentiated assets. Infrastructure. Global technology and Logistics. innovation. Scale and focus of production. Global business leadership. Phase 5: Greater mobility Global Capital Dominant of capital. markets. Supply and global Intangible projects. Resources. Advanced technology Increased in production, sensitivity to organization variables and market (interest and Efficiency and exchange rates) rationality in and economic international cycles. management. Created Assets: brands, products, process and knowledge. Phases of Internalization IDP--OLI Phase 1: Exploitation of Opportunistic static comparative advantages (tangible assets). Phase 2: Market penetration Incipient for local segment. Phase 3: Capital entry in Practitioner open segments. Incipient capital outflows in competitive segments. Phase 4: Increased inflow and Competitor outflow of capital. Dynamic comparative advantages (tangible and intangible assets) Phase 5: Open Economy. Dominant Dependence on created intangible assets. Complementarity with global trade. Supply and distribution chain in global networks Source: Formulated by the authors based on the Investment Development Path--IDPath and on the Paradigm of Ownership, Location and Internalization--OLI. Table 2: Summary of the OLI/IDPath, U e I Models. Focus in critical variables Phases do IDPath--Cumulative Focus on Resources Opportunistic * Natural and unique. * Country receptor of specialized * Natural and complementary. capital. * Infrastructure. * Exploration of tanglible assets * Logistic. * Static Comparative Advantages. * Units of resource extraction. * Sector infrastructure. * Value-rarity/RBV Focus on Market (market-seeking) Incipient * Open Markets. * Country receptor: * Chains of distribution. diversifFDI capital * Global and Regional Leadership. * Puplic Policies. * Comatible Income range. * Market strategies. * Local income. * Selected segments. Focus on efficiency Praticant (efficience seeking) * Scale manufacturing. * Host country and source capital * Operations and Logistics. * International asset management * Global management and * Open public policies. learning. * Global sector competitiveness. * Search for efficient * Creation of intangible assets infrastructure. not imitable.-organization/RBV. * Supplies and distribution. * Labor market * Broad Labor Market * First flows out. Focus on created assets Competitor (created asset) * Globalization of the brand. * Intense flows into and out. * Technologies, patents and * Expansion of tanglible assets. brands. * VRIO/RBV. * Formation of global supply and * Dynamic comparative advantages. distribution networks. * QualifFDI Labor market * Value Chains (market * Differentiated infrastructure. affiliates). * Picture: brand and values. Jumping the barrier Dominant * Reduction of risk and * Break boundaries and sensitivity uncertainty. to cycles and short-term * "Insecurity of being economic policies Foreigner". * Building networks for global * Overcoming transaction costs. supply and distribution. * Mobility of capital for input * Flow of additional capital to and output. world trade. Source: Prepared by the authors based on the OLI/IDP Paradigm and Models U e I. Table 3: Relationship between capital flows and balance of payments in specific cases, following IMF Source: Compiled from Ghosh et al. (2008) Case 1 (positive net flow of capital financial the current account deficit): The premise here is that capital flows are responding effectively to the demand for foreign savings. However, although the sum of capital flows on the current account balance is positive, the heavy dependence on capital flows makes these situations a calculated risk by the weight of the negative current account. Case 2 (flows of capital in search of income): This is the case with the largest number of observations or situations. Instead of responding to demands for financing the current account, clearly this situation the high liquidity of capital migrates in search of income, with opportunistic characteristics, where there is a deficit (most cases) or current account surplus. Observe that this is the situation where capital flows are dominant, which can pose risks in times of shortage of international liquidity. Case 3 (pressures by current account surplus): In this case the volume of comments is not as significant as in previous ones, indicating an area of current account surplus and, in some cases, a positive sum of capital inflows. If the current account balance is positive but not excessive, then policies to encourage capital outflows are recommended. Case 4 (capital flight than the current account balance): In this case there is clearly a matter of negative pressure on the capital and financial account of BOP and a likely weakening of growth in the long term. Case 5 (pre-crisis BOP) There are bad indicators of capital outflows and also the current account deficit, which makes the debt the only way, apart from insolvency. Source: . Table 4: Main features of state strategies for internationalization in selected countries: South Korea, China and Japan. Characteristic Most relevant Implications Industrialization * nascent industry develops in the midst of and production searching for strong external orientation with focus on * contact with foreign markets and early foreign market exposure to international standards of competition in product and process Great * transfer through subsidized interest rates, participation of long grace periods and amortization periods public funds for outstanding performance of the funds financing Eximbanks * resources generated in certain economic activities carried out by large Stimulus to the * presence of large conglomerates formation of * trend and encourage the concentration large economic * vertical and horizontal integration groups * creation of inter-sectoral linkages, measures aimed at creating market reserve * conglomerates producing gains reinforce vertical integration scale Integration * promoting development with explicit between attention to the role and level of patterns of trade integration with financial system and investment development model Incentives to * oriented policies tended or productivity supply of gains linked to incentive policies, technology * import of designs and plans, gains through the process of technology transfer and learning Behavioral Aspects * opening for the development of national innovation system--in contrast to the National Science and Technology * support and investment in vocational training in technical and engineering * clear vision and commitment to the business development model * strengthened political and cultural aspects-oriented model by integrating inter- and intra-sectoral Source: Authors. Table 5: Overview of OFDI incentives MACROECONOMIC POLICY Monetary and Tax policy/tax Brazil SWF--BSWF exchange rate * Surplus in * Fiscal * New private trade balance loosening financial surplus in the (increased players have capital costs) affects entered the and financial current account scene of FDI: account of BOP; surplus, private equity deficits in reducing the funds--PEF and nominal tax bill: pressure on the venture capital the real balance of funds--VCF situation is payments. It (these more assessed, with need to be present in negative simulated in segments based consequences for terms of other on emerging exports. effects such as science and its impacto n technology), led competitivity. by market signals; * Fiscal account * This policy * Sovereign deficit can surely bring Wealth Funds-- increases the an increase in SWF. led by the interest and interest rates, government with bring more which encourage the concept of volatile capital the arrival of constructing which leads to short-term long term more capital, strategies for appreciation of increasing the development in the exchange. pressure on strategic exchange rates. projects, not necessarily following market signals. In Brazil, the discussion of rules and policy of the National Sovereign Fund is controversial. * Floating * The two * The use of exchange rate movements instruments such policy, reserves (pressure on as restrictions tend to reduce fiscal policy on foreign their rate of and monetary investment on accumulation, policy) will specific with the relative require segments and the enhancement of actionssuchas legal risks and national assets raising interest uncertainties is and reduced rates which still incipient. exports. reduces the dynamism and growth of output and income FOREIGN TRADE POLICY Action of Development Integration Eximbanks Bank/Eximbank Eximbank/DB * There are * Promote debate * International certain on issues such trade, FDI and limitations in as: the concentration the policy of of economic support to activities are exporters: tools Siamese twins in for this market that part of are operated by the modern various pattern of ministries. accumulation of capital internationally. * In 2009 the * (i) With the * Countries that government increase in opened their announced the international economies creation of the liquidity and perform better, Eximbank, which capital flows, attract more will belinked to the extent to capital and BNDES. which BNDES showed reconcile their significant lines of work? increases in trade. In short, trade performance and investment in flows go together. * Its operations * (ii) BNDES has are centered-- a clear agenda which should on this issue, contribute to linking it to better well-defined organization of policies and foreign trade investment * New bank * The posture of should not the BNDES is finance still dubious, investments in including other countries, mergers and only lend to acquisitions--M governments or & A. There is no foreign formal position companies that on the process want to buy of integration Brazilian between the products stimulus to exports and strengthening domestic enterprises in foreign investment and trade. INDUSTRIAL POLICY Economic Defense Mergers/ Innovatin/TIB Acquisitions (M&A) * Country has * Liquidity * The production the Brazilian conditions in system operates System for world trade in a context of Protection of greatly growing need and Competition-- reinforced dispersed based SBDC, which access to long- laboratory consists of a term debt and accredited to set of practice of M&A, provide testing government which is and calibration agencies closely linked studies in the responsible for to the practices field of promoting a of compliance. competitive internationalization There is no economy in of capital. metrology policy Brazil, through to direct the prevention and Brazilian enforcement efforts in actions that may foreign limit or hinder free competition. * There is room * M & A is often * Many companies for shares to used to expand have no culture elect winners as inward and of use of a means to outward FDI and technological strengthen there is no services from productive formal strategy initial design segments with an to even direct proposals/ international the Brazilian projects which vocation. efforts in the causes loss of area, other than value in these helping national activities. champions. Policies should guide the private sector in this issue. Source: Authors. Table 6: Public policies and macroeconomic guidance to foreign investment in Brazil--OFDI. Monetary and exchange Fiscal Policy/Tax rate * World Bank and * The tax issue facing International Monetary Fund FDI does not necessarily suggest policies of harm the national accounts. "relaxation" of restrictions * Election of policies on OFDI (investment aimed at strengthening the abroad), which would Brazilian FDI requires a relieve pressure on the paradigm shift, and the most exchange rate in countries recommended neutral model with BOP surplus. Special (Capital Export Neutrality). interest rates and tax * System has been incentives should be very little used for economic considered. policy at the expense of * Policy of strengthening allocative character of a its presence in logic based on the volume industries outside of the of the collection and country justified by the combating tax avoidance higher yields than the remuneration of reserves (which earn interest equal to the basic American U.S. Treasuries) gains with the formation of leading global companies, using this instrument to regulate exchange rate volatility. * Uncertainty and/or high risks should be considered in the formulation of this strategy. Monetary and exchange BSWF in the context of rate FDI * World Bank and * Creation of a International Monetary Fund systematic discussion and suggest policies of technically competent in the "relaxation" of restrictions area of economics and law on OFDI (investment to discern the role that the abroad), which would FSB would have as an relieve pressure on the instrument of monetary and exchange rate in countries exchange rate stabilization. with BOP surplus. Special * Instrument would interest rates and tax promote activities for FDI in incentives should be Brazil, and other strategic considered. purposes (such as the * Policy of strengthening promotion of developments its presence in of infrastructure and industries outside of the sustainability projects, country justified by the promotion of sectors where higher yields than the the country has a vocation remuneration of reserves such as paper and pulp, (which earn interest equal to steel, oil and gas the basic American U.S. Biotechnology, animal Treasuries) gains with the protein). formation of leading global * The selection of companies, using this sectors to be promoted is instrument to regulate always a debatable question. exchange rate volatility. Market signals should * Uncertainty and/or always be considered the high risks should be portfolio analysis. considered in the formulation of this strategy. Source: Authors. Table 7: A Reference to Public Policies towards Brazilian OFDI. Action of Eximbanks Export financing and the role of Development Banks * The Eximbanks can and should * Agencies and development co-finance actions in the banks in some countries are database (in the case of BNDES) ahead in seeking to integrate providing funding for these "new" spheres of short-term and medium term activity of enterprises associated with production abroad explicitly--as in the and commercial operations, cases of Japan, South Korea through financing the buyer, and India P. ex. export of capital goods and * A breakthrough in terms of project finance oriented growth action should be oriented of business activities abroad. towards: * The feasibility of fund * (i) promote the natural investments in other countries synergy between the business is debatable. The control over plan and actions to technology and other assets stimulate investment (ii) should be considered. The expand the scale of balance between OFDI and export cooperation with foreign is a question yet to be markets and the influx of defined in Brazilian policy. capital among trading partners. Action of Eximbanks Eximbank financing and integration * The Eximbanks can and should * Countries that opened co-finance actions in the their economies perform database (in the case of BNDES) better, attract more capital providing funding for and showed significant short-term and medium term increases in trade. associated with production * International trade, FDI and commercial operations, and the concentration of through financing the buyer, economic activities are export of capital goods and Siamese twins in that project finance oriented growth part of the modern of business activities abroad. pattern of accumulation * The feasibility of fund of capital internationally. investments in other countries * In short, trade is debatable. The control over performance and investment technology and other assets inflows go together and should be considered. The are reinforcing, producing balance between OFDI and export gains collectivity. is a question yet to be defined in Brazilian policy. Source: Authors. Table 8: FDI policies to microeconomic level Economic Barries Regulation of mergers and acquisitions * Ensuring the protection of * Complex M & A constitutes competition and the the most common form of formation of cartels; expansion of FDI, so it * Promote companies to must be contemplated in obtain economies of scale the industrial policy. to ensure a high level of * Promote the formation competitiveness and of strategic alliances. productivity. * Creation of R&D consortia, * Temporary barriers to technology licensing protect emergent innovation agreements, subcontracting firms and segments or arrangements with even natural resources. involvement of less * Promote national tangible resources. champions to guarantee * Public debate on FDI competition in large-scale impact on selective operations in local sectors, particularly in oligopolistic markets health, environment and foreign markets with and energy. * SWF should be included in the Brazilian agenda as fast as the foreign reserves increases. Economic Barries Innovation and Technology Industrial Base--TIB * Ensuring the protection of * Large space to organize competition and the and grow the system of formation of cartels; metrology, particularly * Promote companies to when the obtain economies of scale internationalization to ensure a high level of demands standards and competitiveness and certification of productivity. conformity of products * Temporary barriers to and services by protect emergent innovation accredited sources. firms and segments or * Search of mutual even natural resources. recognition of * Promote national certification systems champions to guarantee and national competition in large-scale accreditation, increasing operations in local the product in each oligopolistic markets compliance test required. and foreign markets with * Use horizontal policies Brazilian comparative that promote more advantage. intensive use of technological services * Reduce dependence on for businesses, such outside contractors of as specialized strategic inputs, such integrated firms in as technologies useful complex systems such to the power system, as air space and health and environment. nuclear industries. * Promote the search for strategic assets through OFDI. Brazilian comparative advantage. * Reduce dependence on outside contractors of strategic inputs, such as technologies useful to the power system, health and environment. * Promote the search for strategic assets through OFDI. Source: Authors. Table 9: Summary of Agenda for Public Policy Priorities OFDI. Strategic Priority Instruments Objectives Macroeconomic * Trigger capital flows as an instrument of economic growth. a) Monetary and * Promote capital flows and foreign trade to Exchange Rate boost national saving. Stability * Establish the SWF and FDI as additional b) Modernization instruments of monetary and exchange rate of Tax stabilization. Legislation * Rationalize fiscal incentives and taxation c) Establishment to export and to invest abroad. of the Brazil's * Avoid double taxation and facilitate the SWF use of credits, particularly for export (Eximbank). Foreign Relations * Articulate official policies of the funding and Trade system to domestic and foreign FDI through BNDES. a) Promoting * Strengthen the public financing system openness to (BNDES, BB, CEF) and private in order to foreign trade increase the productive capacity of local and FDI flows enterprises in specific sectors. b) articulated * Creation of the Eximbank of Brazil, regulatory incorporating not only financing, but framework to operating throughout the value chain in promote the export and import, including FDI. development and * Through the resources of funding and investment to financing, promote the formation of trade and FDI alliances, R & D consortia, technology licensing contracts, sub-contracting, involving tangible and intangible resources for FDI. Innovation * Incorporate the role of FDI in the innovation agenda to facilitate the a) Strengthen positioning of leading Brazilian the system of companies. technical * Innovation policy, technology services barriers (metrology, mainly), infrastructure b) Regulate and R & D & I tied to a stimulus to mergers and the national FDI. acquisitions * Create system of technical barriers c) Support to in line with accepted international Innovation practice. * Map and promote M&A according to market and official state interests. Source: Authors.