The Role of Foreign Direct Investment on
the
Technological Development of Brazil
Christy O’Connor
Stanford University
EDGE
(Graduating Senior)
TABLE OF CONTENTS
1. Introduction..............................................................................................1
Research
Question................................................................................2
Research
Plan........................................................................................2
2. Attractive Features of Brazil for FDI.....................................................3
3. Costs of FDI..............................................................................................5
4. Benefits of FDI..........................................................................................6
Technology
Transfer.............................................................................7
5. Recent Trends in FDI Inflows in Brazil.................................................8
6. Effects of FDI on Development.............................................................11
7. Why is development not improving at the same rate?........................13
Summary of
Findings..........................................................................14
8. Policy Measures to Promote Suitable FDI...........................................15
9. Conclusion...............................................................................................16
Introduction
Foreign direct investment (FDI), which reflects the international expansion of multinational corporations, has become one of the most important components in the globalization process and expansion of technology. During the 1990s, FDI inflows have grown substantially in Brazil (which has a long tradition as a host country for capital inflows), rising from an average of 989 million dollars in 1990 to approximately 4.5 billion dollars in 1995. Since 1996, there has been a more dramatic increase, with FDI rising to around 32 billion dollars in 2000.[i] During this period (from 1995 to 2000) Brazil was the leading recipient of FDI in Latin America, and the country of destination for more than 40% of the FDI going to Latin American countries.[ii] With such a large development of FDI in Brazil during the 1990s, there is a need to interpret the characteristics and outcomes of this phenomenon afresh.
The foreign investment flowing into the new borderless world may be viewed as a potential source not only for financing the Brazilian economy, but for advancing technological achievement. FDI is one of the major channels of acquiring technology for developing nations. When multinational firms bring their business, they also transfer their technology. The contribution of FDI to the technological development of Brazil is an important avenue for current research.
The paper is organized into various sections. I will first discuss my research question and research plan to give a brief overview of my argument. Then I will explore the features of Brazil that have attracted such an increased interest in foreign investment. It is also important to explore the costs and benefits from the presence of multinational corporations (MNCs) in the Brazilian economy. The paper will then analyze the FDI inflows in Brazil since 1990 and discuss the general trend patterns, followed by a discussion of the recent levels of technological capacity in Brazil and other leading recipients of FDI in Latin America. A summary of these findings will lead into a discussion of future pathways for Brazilian policies that would attract the type of FDI suitable for the expansion of their technological capabilities.
Research
Question
With the sharp increase in FDI inflows in Brazil during the 1990s, why have there not been more substantial leaps in technological advancement? My hypothesis is that there will be positive influences from these high inflows of FDI on the technological development of Brazil, although potential growth has been limited. I expect to see significant advances in the area of technological capacity because foreign direct investment constitutes a substantial slice of Brazil’s economic capital, and one of the principal benefits for the recipient country is technology transfer. If my hypothesis were correct, I would expect to find increases of FDI inflows from 1990 to the present, while the level of technological capacity had not significantly improved.
I
come to find that FDI has positive outcomes on technological advancement,
although the benefits could be greater. As of 2000, Brazil ranked significantly
lower in technology achievement when compared to the other leading recipients
of FDI in Latin America, such as Mexico, Argentina, Costa Rica, Chile,
Venezuela and Uruguay.
Research
Plan
I will test my research question by analyzing the relationship between the independent and dependent variables. The independent variables in this research are the potential causes for minimal advances in technological capacity between 1990 and 2000, including the ineffective distribution of FDI, the time lag of the effects, as well as the lack of high-technology investments. The dependent variable is the level of technological achievement of Brazil, measured between 1998 and 2000. The control is the amount of FDI inflows in Brazil between 1990 and 2000.
My argument is based on the relationship between these variables. FDI inflows in Brazil have been steadily increasing during the past decade, and surpassed the amount of inflows than any other Latin American country between 1995 and 2000. The incline has had positive effects on the technological achievement of Brazil, but there should be a stronger correlation between the degree of developmental progress and the high levels of capital inflows. The lack of substantial movements could be due to the ineffective distribution of FDI to the appropriate sectors for technological development, a time delay of the effects, as well as the lack of high-technology investments suitable for Brazil’s technological advancement. The principal flaw of this argument is that there are many other factors that could contribute to the lack of substantial movements in technological growth (such as the levels of education in Brazil and how quickly workers absorb technical skills), but exploring each of these effects is beyond the scope of this paper.
The empirical data used in my research stems from two sources in order to measure two distinct facets of my argument. First, in order to measure the foreign direct investment inflows in Brazil, I rely mostly on reports made by international organizations, such as the United Nations Conference on Trade and Development (UNCTAD), and the Central Bank of Brazil. To measure the technological capacity in Brazil and other Latin American countries, I use the Technology Achievement Index developed by the United Nations Development Program (UNDP).
Attractive Features of Brazil for FDI
Why has there been an increased interest of foreign investment in Brazil? Multinational corporations place particular emphasis on the following factors when considering investment in Brazil: the large deposits of natural resources, the large size of the domestic market, a stable regulatory and macroeconomic environment, growth and productivity prospects, the freedom to operate and control, well-developed infrastructure and human capital, the availability of local suppliers and business climate, and the acceptable risk of entry.[iii]
In order to make their economy a stronger magnet for foreign direct investment, Brazil implemented various reforms to liberalize their domestic market for foreign entry. During the 1990s, Brazil adopted free-market economic policies, which contributed to liberalized foreign investment regimes, deregulation, and the privatization of state-owned enterprises.[iv] In 1995, Brazil passed a Constitutional Amendment which eliminated the distinctions between Brazilian companies and those of foreign ownership.[v] This roused foreign investors to take part in various areas of Brazil’s economic activity, including mining, petroleum, electricity, transport and telecommunications. Other measures have included the reactivation of privatizations, the deregulation of monopolies and new rules for the granting of concessions.[vi] Along with tax reforms that have reduced the tax burden on foreign investors, it is not surprising as to why FDI has witnessed such a rapid growth rate. The liberalization of FDI has been a strategic component in their reform.
By expanding on their most appealing features, Brazil has been successful in their efforts to attract more foreign investment. With a growing interest of foreign investors in their resources, they have acquired not only a larger number of investments, but higher-quality investments. This shows that Brazil is capable of attracting more productive types of FDI that would benefit their technological plans through strategic alliances.
Costs of FDI
Foreign direct investment may be viewed as a potential source of benefits as well as a potential source of problems for Brazil. It is only recently that the attitude of developing countries towards foreign investment has shifted from the restrictive policies and skepticism that characterized the early 1970s. Developing countries were viewed as the passive victims of exploitation, whereas now they are seen as encouraging markets for such inflows of investment. The impact of FDI on developing countries is being re-examined because of the changes in the external economic situation, in technology, and in the nature of world-wide companies.
Opponents of FDI make the following arguments concerning negative economic outcomes. MNCs have the ability to use their market power to generate supernormal profits which undermine domestic enterprises. This high market power can lead to non-competitive pricing and result in inefficient resource allocation.[vii] With a rise of foreign investments concentrated in certain sectors, it could imply an increase of monopoly power. MNCs are also capable of influencing local political processes to the detriment of Brazil’s national economy.
Another repercussion is known as denationalization. When there is too rapid a buildup of FDI, or the foreign share of the nation’s wealth, stock increases relative to the local share. It is also said to discourage local tech know-how development, and create job loss when capital-intensive FDI replaces labor-intensive local firms. Although FDI has a positive impact on trade (in terms of higher export earnings and savings on imports for products produced locally), it has a negative impact on higher imports of intermediate capital goods.[viii]
These potential negative
implications for Brazil as a result of FDI should be given careful attention,
especially for the sake of improving measures to attract productive FDI. Although such speculated costs are
important, they do not undermine the benefits of FDI, which far outweigh any
argument as to why Brazil should not try to attract foreign investment.
Benefits of FDI
Many economists believe foreign direct investment is the most advantageous kind of capital that flows into a developing host country. MNCs can be considered to bring a package of five benefits with their investment: transfer of capital, employment creation, managerial and production capability, access to world markets, and technology transfer.
The recent transfer of capital into Brazil has helped relieve the severe balance of payments pressures experienced at the beginning of the decade.[ix] Yet the foreign funds MNCs bring are not necessarily their most important contribution. They often borrow some of the funds by issuing bonds or borrowing from local banks. The returns of foreign private funds are sometimes sent to owners abroad, limiting their benefit to Brazil. However, they still benefit from foreign funds because the additional capital created from foreign investment raises the marginal productivity of domestic labor (increases the amount of capital per worker).[x] Employment creation is minimal, but still brings more opportunities than before. MNCs do not create much employment because they have a tendency to use capital-intensive technology. Another potential reason why Brazil does not advance as much as they could is because some corporations transfer human capital along with their technology. MNCs also offer wages that are relatively higher to the wages of Brazil to attract better workers who are more motivated to work harder.[xi] Managerial and production capabilities are one of the main benefits of investment by MNCs in Brazil. Basically they transfer management skills and more efficient methods, which generate an inflow of investment funds to the balance of payments, thereby increasing exports, savings and investments.[xii]
Using their connections and knowledge of international markets, MNCs have helped Brazil enter the word trade market. Economic authorities have looked at FDI in Brazil as a relatively stable source of financing to cover external deficits and as a mechanism for modernizing the goods and services production system, thereby improving productivity and international competitiveness.[xiii] This new competitiveness stimulates their growth in the international market.
The degree which MNC investments benefit Brazil depends on the relationship between the MNC and the recipient country. For example, a corporation that does not hire many domestic nationals, and sends its profits abroad will not benefit Brazil as much as one that hires local labor and is involved in the community. However, FDI is usually defined as the foreign purchase of 10% or more of voting stock of an asset in the host country, which usually implies a lasting interest on the part of foreign management. Sometimes the investment takes the form of a “greenfield investment.” In those cases, the foreign investor builds a new factory from scratch. Other times, it entails the purchase of existing assets. Even in this scenario of acquiring existing assets, such as when Brazil privatizes a concern by selling it to foreigners, the costs for modernization and expansion will generally follow.[xiv]
Technology
Transfer
Possibly the most significant benefit of FDI is the transfer of technology. Brazil has been trying to catch-up technologically with industrialized countries for several decades. With the presence of MNCs entering their industries, they have the ability to do so. Whether technological know-how will transfer to the local community or continue to be dominated by foreign companies and its expatriates is a concern. However, Brazil can help aid the transfer of technical skills. They could implement clauses in contracts or agreements to require the proportion of Brazilian employees to increase over time, or require the MNC to train native Brazilian employees. Brazil must also have the policies and ability to absorb the technological knowledge. The higher the levels of education, the more capable they will be of absorbing the knowledge quickly. Another concern is that MNCs do not always use technology best-suited for Brazil’s development, either because it is too capital-intensive or the skills required to use the technology might not be available in Brazil. This can also be easily remedied by using strategies to attract MNCs that would be well-suited for their technological development.
Guy Pfeffermann, the Chief Economist of the International Finance Corporation, supports all of these benefits, “FDI brings quite a lot along with it: Solid owners, modern management, up-to-date technology, ‘deep pockets’ which can finance modernization and expansion, export networks – as well as other desirable goodies.”[xv] The combination of these benefits -- capital inflow, creation of employment, increased managerial and productivity capability, access to export markets, and the transfer of technology -- undermine any pressing concerns of opponents to FDI.
Recent Trends in FDI Inflows in Brazil
According to the Central Bank of Brazil, the net entries of FDI increased from US $287 million in 1990 to approximately US $31 billion in 2000. The sharpest increases have occurred after 1995, when FDI doubled from US $9.5 billion in 1996 to nearly US $29 billion in 1999.[xvi] These figures offer a strong reason as to why Brazil should be witnessing significant leaps in their technology achievement.
The following table shows this increased growth of foreign direct investment inflows in Brazil from 1990 to 2000. It also includes the trends of capital inflows for other leading recipients of FDI in Latin America. I look at this ten year span because it illustrates both the incline of FDI that has occurred in Brazil over the decade, and the dramatic rise that occurred after 1995.
FDI Inflows (US millions) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Brazil 989 1, 102 2, 061 1, 291 2, 150 4, 405 10, 792 18, 993 28, 856 28, 578 32, 779 Mexico 3, 374 5, 705 8, 094 6, 715 15, 041 9, 552 9, 938 14, 044 11, 933 12, 534 14, 706 Argentina 1, 836 2, 439 4, 432 2, 791 3, 637 5, 610 6, 951 9, 156 6, 848 24, 134 11, 152 Venezuela 451 1, 916 629 372 813 985 2, 183 5, 536 4, 495 3, 290 4, 464 Chile 661 822 935 1, 034 2, 583 2, 956 4, 633 5, 219 4, 638 9, 221 3, 674 Colombia 500 457 729 959 1, 446 968 3, 112 5, 562 2, 828 1, 468 2, 374 Uruguay 42 32 11 102 155 157 137 126 164 239 285
Table 1. FDI Inflows
in Latin American Countries: 1990 – 2000
Source: Online Handbook of Statistics, United Nations
Conference on Trade and Development
For detailed information on foreign direct investment
in Latin American countries, please refer to UNCTAD’s website: http://stats.unctad.org/fdi/eng/TableViewer/wdsview/print.asp
This chart illustrates not only the history of FDI inflows in Brazil, but the relation of its inflows to those of its neighboring countries. Since 1996, Brazil has far outweighed all the other leading recipients of FDI in Latin America and the Caribbean. This observation will be given careful consideration in the following section, when analyzing the effects of FDI on the technological development of Brazil, specifically in relation to these other leading recipients of FDI.
There was a sharp decline of FDI inflows in Brazil in 2001, when Mexico took the lead for the first time since 1995 as the top recipient of FDI.[xvii] Brazil’s annual FDI inflows, which peaked at US $32 billion in 2000, shrunk to approximately US $20.7 billion in 2001.[xviii] According to the recent annual report from the Economic Commission for Latin America and the Caribbean (ECLAC), FDI fell not only in Brazil, but in all of Latin America due to both internal and external factors. The region’s total decline is attributed to a combination of three principal factors: adverse global conditions, destabilization due to the economic crisis in Argentina and Venezuela, and the tapering of the privatization process, especially in the services sector.[xix] In the uncertainty of the current climate, I have excluded the 2001 decline in my conclusions.
It is important to take into account that the statistical figures of FDI inflows offered by various sources are not the same across the board. There are discrepancies between the figures recorded by the Central Bank of Brazil and international organizations such as UNCTAD and the OECD reviews of FDI inflows in Brazil. Usually these figures vary within one billion dollars. These discrepancies could be a result of intended manipulation or unreliable methods of measurement. The Central Bank of Brazil did not implement a credible way of gathering high-quality information on the capital invested in the country until 1995, with the first Census of Foreign Direct Investment in Brazil. Up to 1995, the certificates of registration of investments and the foreign exchange contracts were the principal sources of the data collected by the Foreign Capital Department of the Central Bank of Brazil.[xx]
Another potential discrepancy with my data is that the FDI inflows above are not measured in relation to the size of the economy (as percentage of Gross Domestic Product (GDP)).[1] While the biggest countries in the region are also the largest recipients of FDI, when FDI receipts are measured in relation to the size of the economy, the situation could look rather different. The contribution of FDI to economic growth may appear more significant in certain smaller economies. For example, from 1997 to 2000, Chile exhibited a higher net level of FDI as a percentage of GDP (8%) than Brazil (4.3%).[xxi] This shows that although the largest amount of inward capital flows to Latin America have been to Brazil, Chile has been an even more desired recipient for its size.
Effects of Foreign Direct Investment on
Development
There are numerous effects of FDI and multiple dimensions of such effects. Some of these outcomes might influence economic performance, national debt, infrastructure, and upstream and downstream integration. Under the narrow framework of this paper, I only focus on one important consequence: technological advancement. Being that one of the most important benefits of FDI is technology transfer, it is critical to review the potential of such high levels of FDI on Brazil’s technology capacity.
The United Nations Development Program (UNDP) has developed a technological achievement index, which reflects three dimensions of Brazil’s technological capacity, including technology creation, diffusions of recent innovations, diffusion of old innovations and human skills.[2] I will use the technology achievement index (TAI) as a tool for measuring the technological development in Brazil over the past decade.
Table 2, configured from the TAI values recorded by the UNDP in their latest annual report (2000), reflects the levels of technological development in Brazil and other leading recipients of FDI in Latin America between 1998 and 2000. According to the ECLAC report, Brazil has been the top recipient of FDI in Latin America from 1995 to 2000.[xxii] Even so, Brazil still is behind the other leading recipients of FDI in the region in technology development.
Table 2. Technology Achievement Index 1998-2000
The chart shows that Brazil ranks lower than each of the listed countries but Colombia in technology achievement. According to the UNDP rankings of TAI, Brazil is classified as a dynamic adopter, the third ranking below leaders and potential leaders, but above those termed as marginalized and others. The others category includes those countries which did not have enough data to be included in the ranking. Brazil’s dynamic adopter status follows after Mexico, Argentina, Costa Rica, Chile, Uruguay and Panama. Hence, even though there have been rapidly increasing levels of capital inflows to Brazil, exhibiting positive influences on Brazil’s economy, the country is not exhibiting a proportional growth in technological achievement, like its neighboring countries.[3]
Why is development not improving at the
same rate?
There are three central reasons as to why Brazil is not developing their technology at the same growth rate of their foreign investment inflows: ineffective distribution of FDI, the time lag of the effects, and the lack of suitable technological investments.
The first reason is due to the structure of their FDI disbursement. FDI from the U.S. goes to three general categories: manufacturing (automobiles, electronics, textiles, food, beverages, tobacco), services (telecommunications, electricity, finance), and oil extraction and copper mining.[xxiii]
The following chart helps illustrate the size of these slices of disbursement of the capital inflows in 2001.
Source: ECLAC & Central Bank of Brazil
These percentages demonstrate two conclusions. First, high-technology foreign investments in Brazil are lacking, and second, the distribution of FDI is very unevenly distributed. As of 2001, the largest percentage of FDI went to the manufacturing industry, which received a third of the total. The leading targets within this sector were the motor industry (7% of total), chemicals (7%), electrical material & telecommunication equipment (6%) and food and beverages (3%).[xxiv] Telecommunication corporations are highly interested in Brazil at the present time, with many current investment projects involved in telecommunication as well. Such telecommunication investments broadly define Brazil’s technological development. The smallest proportion of FDI goes to internet. The data does not define whether this includes internet corporations or investment. There are no slices dedicated to high-technological pursuits, such as computers, research and development or medical plans.
It is also worth noting the current investment projects in Brazil in order to see the where the direction of development is presently heading. In the telecommunications sector, the most prominent investments are Nextel’s four year, US $2 billion plan, Telecom Italia’s US $1.3 billion program, and a US $207 million plan announced by Telecom Portugal. In the power sector, the Spanish firm Iberdrola plans to build gas-fired power plants with a combined capacity of 1,260 megawatts, and Edesa, also of Spain, will build a US $207 million gas-fired plant in Ceara.[xxv] These projects portray the same lack of high-technology investment interests in Brazil.
One of the most plausible reasons for the lack of significant advances is that many of the effects of the high levels of FDI might not be visible until several years from now. Yet it is not too early to start analyzing the potential benefits and the more effective ways of using FDI inflows for technological growth.
Summary of Findings
With the substantial increase in FDI inflows in Brazil during the 1990s, in addition to the dramatic rise since 1995, Brazil has not witnessed substantial leaps in technological advancement due to three central causes: the inefficient distribution of capital inflows, the lack of productive foreign investment in technology, and the time lag of visible effects.
Policy Measures
to Promote Suitable FDI
In order for national economies to take advantage of the benefits from multinational investments, they must strive to understand the global environment and the types of policies most advantageous for their country. The presence of MNCs in Brazil, and the ensuing transfer of new technologies, provides a valuable resource for the process of development. In this context, it is important to plan and execute policies that boost the attractiveness for quality foreign investment which will be integrated into Brazil’s national development and technological plans.
There are two central limitations currently inhibiting Brazil. First, there needs to be more data on the amount of money spent by MNCs on local research and development. Another negative outcome of FDI is the large, unexpected capital outflows that can bring economic instability and affect the level of international reserves. To counter this, Brazil needs to start a collection of a historical series of empirical data in order to create projections that can forecast new outflows in time to set stabilizing policies.[xxvi]
There are various policy steps Brazil can take to boost their attractiveness to the better-suited foreign investors. Some of these suggestions apply generally. For example, governments have to be proactive in their policy stance. If the Brazilian government defines its role as a “partner in progress” with foreign investors, they can create a more balanced relationship between the role of MNCs and the role of the Brazilian community. This could strengthen the role of FDI in facilitating technical change and technological learning because it would help to attract more technologically based corporations in the first place.
Develop a positive image of Brazil so that other countries and the high-quality corporations interested in expansion think of Brazil as a stable, competitive and beneficial country in which to develop their business. This generated greater awareness of the “new” Brazil will not only appeal to the traditional manufacturing corporations, but all companies seeking to expand their market, including those capable of rooting their management systems and technological know-how into the local community.
There are also promotional efforts Brazil could put into practice to attract productive foreign firms. Let MNCs play a leading contributing role in setting technical standards. Publicize success, and tell MNCs about the achievements of other MNCs, such as export development. For example, an investment promotion agency, whose principal task would be to attract FDI to Brazil (particularly the type deemed most important for advancing the country’s development) would be a great marketing method for attracting the right entities. These targeted promotional efforts should be aimed at companies that are competitively strong in their global industries, or who have the potential to become very strong. In addition, Brazil should request foreign firms engaged in economic activities to invest some of their profits on technological development projects. Also, as Brazil places increasing emphasis on attracting FDI, providing effective information and meaningful data to future existing foreign investors could attract more investments. In this aspect, Brazil has begun making valuable movements.
The FDI policies should focus on positive consequences. Concentrating on all they have to gain rather than all there is to lose, allows Brazil to approach investment attraction policies with a more persuasive outlook.
Conclusion
The impact of FDI on developing countries is being re-examined in the face of dramatic changes in the external economic situation, particularly with technology and the growth of multinational corporations. FDI maybe be viewed as a potential source of benefits as well as a potential source of problems for Brazil’s economy. From one point of view, it is important to encourage foreign investors to develop their corporations in the host country, as long as they are not offering them certain privileges that involve sheltering the MNCs from competition to the detriment of the host economy. On the other hand, there are a notable number of positive outcomes, although FDI must be managed more effectively to improve their development.
Inflows of foreign direct investment alone can not be viewed as the sole solution to all problems facing the Brazilian economy, but it is an important part of it. There are several other measures that would improve the stability of Brazil’s technological development process, but are beyond the scope of this paper.
Brazil is facing the tough and important decision of how to effectively route the benefits of inward capital flows to the appropriate sectors of development. As noted earlier, Brazil has already taken steps to liberalize their reforms and remove any discriminating legislation that might inhibit foreign investors from participating in Brazil’s economy. As a result, Brazil has witnessed positive impacts on their economic performance. It is time to dedicate their efforts towards attracting the appropriate kinds of investment and how to effectively route those benefits into the areas of greatest interest to Brazil’s technological development.
ENDNOTES