This chapter will present my observations on Brazilian OFDI. Throughout this case study I aim to present all the information that is needed in order to test the hypotheses mentioned in the third chapter for the country of Brazil. This case study will have the same outline as the one that focused on India. That is, it will start with a brief introduction on the Brazilian economy and outward foreign direct investments, and it will then continue with more extensive elaborations on the economic and institutional factors that could possibly have an influence on OFDI in the country. 5.1 – Introduction: Brazilian economy and OFDI
Brazil is a federal presidential republic located in South America. Like India, the country has stood out in the past years as one of the fastest growing economies in the developing world. In the past decade alone, Brazil’s GDP has grown from USD 663,733 million in 2004 to USD 2,199,538 million in 2014 (UNCTAD, 2014 c). Brazil has a population of over 204 million citizens, which makes it the fifth most populous country in the world (CIA, 2015 a). Thus, given its significant economic growth and great population, it is no surprise that Brazil, just like India, has been considered worldwide as an emerging market in the past years (Koesterich, 2015).
In terms of overseas direct investments, from the mid-2000s onwards an increasing number of Brazilian firms have engaged in this activity. As a result of that, in the past decade alone Brazilian levels of OFDI have increased substantially from USD 69,196 million in 2004 to USD 316,339 in 2014 (UNCTAD, 2014 b). These numbers indicate that Brazilian firms, and consequently the Brazilian economy, are increasingly taking part in a globalized economy.
According to a study by Sauvant (2005, p.657), Brazilian firms engaging in OFDI are mainly motivated to invest overseas for financial reasons. For instance, for these firms, it could be profitable to invest overseas in case the host country offers lower taxes, or in case the costs of foreign labor are lower than in Brazil. Sauvant (2005, p.657) also mentioned in his study that Brazilian firms engaging in OFDI are also interested in enhancing their access to different sorts of raw materials, resources, and foreign markets.
45 In terms of industry sector, the Brazilian firms most engaged in OFDI are those active in the financial services sector (53% of total OFDI). Other sectors such as communication services and manufacturing are also significant, corresponding to 19% and 14% of Brazilian OFDI respectively. The table that follows illustrates in more details the share of Brazilian OFDI by industry sector, for the year of 2014 in terms of US dollars.
Table 5.1.1 – Brazilian OFDI per industry sector (year 2014)
Sector Total invested (USD million) Share of total OFDI (%)
financial services 12,715 53% communication services 4466 19% manufacturing 3372 14% Mining 1977 8% other services 1230 5% real estate 362 1%
agriculture and livestock 4 less than 1%
TOTAL 24126 100%
Source: (BCB, 2015, b)
In terms of country of destination, Brazilian firms invest predominantly in the Cayman Islands (33% of total OFDI), Portugal (18%), and the United States (12%). The table that follows presents in more details the ten largest recipients of Brazilian OFDI for the year of 2014. For more details, a list containing all recipients of Brazilian OFDI for 2014 can be found in Annex 1.
Table 5.1.2 – Brazilian OFDI per country (2014)
Country Total investments (USD million)
Cayman Islands 7 924
Portugal 4 313
United States 2 782
Austria 2 222
Luxembourg 1 901
British Virgin Islands 1 241
Bahamas 553
Switzerland 328
Panama 311
Spain 268
Source: (BCB, 2015 b)
Thus far, this chapter has shown that levels of OFDI from Brazil have increased substantially since the mid-2000s, and, in general, Brazilian firms engaged in OFDI tend to invest both in the Americas and in other continents across the globe (mainly Europe). To better understand the growth of this economic activity in Brazil, the next two sections will elaborate on different
46 economic and institutional factors to find out whether or not they could be related with the occurrence of OFDI in the country.
5.2 – Economic factors that could influence Brazilian OFDI
Similarly to the case study on India, this first part of the case study on Brazil will offer an analysis on different economic factors that could possibly have an influence on Brazilian OFDI. The selection of these factors has been framed based on the rationale provided by the IDP hypothesis. If the IDP hypothesis is applicable in Brazil, we should see that variations of Brazilian GDP per capita, investments in research and development, and inward FDI might be related with the country’s variations of OFDI. The next paragraphs, therefore, will contain some observations on these three economic factors together with OFDI from 1980 until 2014. The graph that follows illustrates Brazil’s variations of GDP per capita and OFDI:
Figure 5.2.1: Brazilian GDP per capita and OFDI - Sources: (World Bank, 2015; UNCTAD 2014)
As the graph shows, in general both the levels of OFDI and GDP per capita have increased substantially during the period under observation. Nevertheless, the variations of these two variables did not always present similar trends. For instance, up until the early 2000s Brazilian levels of GDP per capita have presented several oscillations, whereas the country’s levels of OFDI have remained virtually unchanged. The several oscillations of GDP per capita could possibly be a reflection of the long periods of monetary and economic distress that the Brazilian economy went through during the 1980s and the 1990s. Up until the mid-1990s, Brazil was facing increasing rates of inflation, and in the second half of the 1990s the country went through a new phase of economic distress when it had to adapt to a new floating currency which was adopted the country in 1994
0.00 2000.00 4000.00 6000.00 8000.00 10000.00 12000.00 14000.00 0 50000 100000 150000 200000 250000 300000 350000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Braz ili an GDP p er cap ita (c u rre n t U SD) Braz ili an O FDI (in U SD mi lli o n ) Year
Brazilian GDP per capita and OFDI (1980 - 2014)
Brazil OFDI
Brazil GDP per capita
47 (Brazilian Government, 2015). It was in the 2000s, when the country’s economy became more stable that levels of OFDI and GDP per capita began to present more similar trends, with both of them showing significant increases. During the first half of the 2010s, however, the two variables began to present differences again, when GDP per capita decreased and OFDI kept increasing. This means that the variations of the two variables have presented several differences over the years.
The next graph illustrates Brazil’s variations of OFDI and expenditures on R&D. For this observation, the variations will be limited to the time period ranging from 2000 until 2011. This is because the variable ‘expenditures in R&D as percentage of GDP’, made available by the World Bank, is only available for those years.
Figure 5.2.2: Brazilian OFDI and expenditure on R&D - Sources: (World Bank, 2015; UNCTAD 2014)
As the graph illustrates, in general, between 2000 and 2011 Brazil has experienced a significant increase in both levels of OFDI and expenditures on R&D. During the years under observation, the two variables presented similar patterns of variations. It was only in 2002 that this pattern differed when OFDI presented an increase and expenditures on R&D declined. In sum, therefore, it is possible to conclude here that in the great majority of the years observed, both variables presented increases. It is important to stress, however, that these findings might not reflect the pattern of variations of these two variables over a longer period of time (before 2000 and after
0 5000 10000 15000 20000 25000 30000 35000 0 50000 100000 150000 200000 250000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Exp en d itu re o n R& D (in U SD mi lli o n ) Braz ili an O FDI (in U SD mi lli o n ) Year
Brazilian levels of OFDI and expenditure on R&D (2000 - 2011)
OFDI
48 2011). The fact that these observations are constrained to the period ranging from 2000 until 2011 might be a limitation in this study.
The next graph illustrates the variations of Brazil’s levels of inward and outward FDI.
Figure 5.2.3: Brazilian inward FDI and OFDI - Source: (UNCTAD 2014)
As the graph shows, both inward FDI and OFDI present significant increases during the years under observation. Up until the 2000s, however, Brazilian levels of inward FDI presented more significant increases than the country’s levels of OFDI, which remained virtually unchanged presenting only very moderate increases. By the 2000s – especially the second half of the 2000s – more substantial increases took place for both variables. From 2010 onwards, however, inflows of FDI present more moderate increases, whereas OFDI continued increasing more significantly. In sum, it is possible to conclude here that, overall, both variables presented similar variations over the years since they show continuous increases during most of the years under observation. In summation, while the observations on these three factors revealed that all of them increased over the years, just like the levels of Brazilian OFDI, not all of them presented the same patterns of variations. From the factors observed, inward FDI and expenditures on R&D present the most similar variations with OFDI. This is because both variables present continuous increases during the great majority of the time under observation, just like Brazilian levels of OFDI. The factor presenting the least similarity of variations with OFDI is GDP per capita.
0 50000 100000 150000 200000 250000 300000 350000 0 100000 200000 300000 400000 500000 600000 700000 800000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Braz ili an O FDI (U SD m ill ion ) Braz ili an in w ar d FDI (U SD m ill ion ) Year
Brazilian inward FDI and OFDI (1980 - 2014)
Inward FDI (USD million) OFDI (USD million)
49 Because only two of the factors observed present variations similar to those of OFDI, the IDP hypothesis cannot be entirely confirmed here as an explanatory theory for Brazilian OFDI. For this reason, similarly to the case with India, an alternative explanation for the occurrence of Brazilian OFDI should be considered and tested. The remainder of this case study will, therefore, follow by elaborating on some institutional factors that could have an influence on the occurrence of OFDI in Brazil.
5.3 – Institutional factors that could influence Brazilian OFDI
This section will elaborate on the same institutional factors that have been elaborated upon in the case study on India, namely: (1) policies easing capital controls for OFDI, (2) the politico- economic inclinations of key policy-makers in the country, (3) the existence of financial services providing low-interest loans to firms engaging in OFDI, and (4) policy prescriptions by the IMF and/or World Bank. Before the remaining of this section elaborates on these factors, however, the following sub-section will briefly explain how the Brazilian political system and institutions function.
5.3.1 – Background information on the Brazilian political system
Brazil is a federation that has a presidential system of government. Thus, the country’s political and administrative organization includes the federal government, the states, and the municipalities (Governo Federal, 2009 a). The president of the country is both the head of state and of government. This means that the chief of government, who has the power to form the cabinet, is the country’s president.
The federal government exercises control at the national level. This unit is represented by the central government, and it is composed of three branches: the executive, the legislative, and the judicial. The states, in turn, are sub-national semi-autonomous entities, having their own governments (i.e. executive, legislative, and judicial branches). Finally, the municipalities are minor federal units, also with their own governments exercising political and administrative control at the municipal level.
For the specific policy field of OFDI, policies are made at the federal government level, that is, they have a national scope (BCB, 2015). As the remainder of this section will show, the institutions that have the most direct influence on national OFDI governance in Brazil are the head of government (i.e. the president), the Ministry of Development, Industry, and Foreign Trade, and
50 the Central Bank of Brazil. For this reason, most of the policies and actors examined in the following sub-sections belong to these institutions.
5.3.2 – Brazilian policies easing capital controls for OFDI
When it comes to Brazilian policies on capital control for OFDI, an overview on the country’s economic situation in terms of foreign reserves in the past decades is necessary. Over the years, especially throughout the late 1980s and the 1990s, the Brazilian economy went through constant reforms in its economic policies (WTO, 2015). Several pro-market reforms took place, and, as a result, Brazil attracted an increasing volume of FDI. Moreover, Brazilian firms also experienced significant increases in their levels of exports, which resulted in trade surpluses in most of the 1980s and early 1990s (Caseiro & Masiero, 2014, p. 249). Also in the 1990s, particularly in the mid-1990s, Brazil began to experience major monetary reforms as a new currency - the Real - was introduced in 1994, setting the environment for future monetary stabilization (Campanario et al., 2012, p.12).
The combination of the increases in inward FDI and exports, together with a consequent appreciation of the Real that occurred by the early 2000s, led Brazil to enjoy an improvement in its external position. As a consequence, by the early 2000s the country experienced surpluses in its balance of payments, increased its access to foreign capital, and accumulated more foreign reserves (Caseiro & Masiero, 2014, p. 249).
With the increasing liberalization of the economy for foreign companies, especially from the 1990s onwards, the environment became more competitive for Brazilian firms. In this scenario, many Brazilian firms recognized that they needed to become more competitive in order for them to survive. OFDI was, therefore, seen as a good strategy for those firms to increase their competitiveness. Many representatives of Brazilian companies realized that, by engaging in OFDI, they could enhance their access to raw materials, foreign technology, and international markets, and the combination of these factors would enhance their firms’ competitiveness (Sauvant, 2005, p.657).
The Brazilian government seems to have recognized the strategic importance of OFDI for the competitiveness of Brazilian firms. Thus, as the country accumulated larger foreign reserves, its
51 national authorities were in a better position to ease capital controls for OFDI, and in fact they began to relax these policies in the 1990s (Caseiro & Masiero, 2014, p. 249).
In Brazil, the institution in charge of making capital control policies is the Central Bank (BCB, 2015). For the economic activity of OFDI, the Central Bank of Brazil (hereinafter CBB) has carried out significant policy reforms to ease capital controls in the 1990s and 2000s. The first remarkable reform took place in 1992, when the CBB created a policy similar to India’s ‘automatic route’. According to this new policy, Brazilian firms would have, for the first time, the opportunity to invest overseas without having to apply for a permission by the CBB. These investments, however, could not exceed a ceiling of USD 1 million per year (BCB, 1992, p. 3). Investments beyond USD 1 million per year were still conditional to approval by the CBB.
The policy mentioned above was entitled ‘Consolidation of Exchange Norms’. This policy lasted until 2005, and it went through a significant reform in 1994, when the CBB decided to raise the monetary limits for OFDI. Under this reform, the CBB gave automatic permission to OFDI projects by Brazilian firms that did not exceed USD 5 million (BCB, 1994, p. 2). Interestingly, however, as the graph below illustrates, when the CBB conducted reforms on capital controls throughout the 1990s, the levels of Brazilian OFDI have not presented any substantial increase.
Figure 5.3.2.1: Brazilian policies easing capital controls for OFDI in the 1990s
The investment ceiling of USD 5 million was in place until the end of the ‘Consolidation of Exchange Norms’ policy in March of 2005. In that same year, this policy was replaced by a new
52 one, entitled ‘Regulation on Exchange Markets and International Capitals’, or REMIC, which is still active (BCB, 2015).
The REMIC policy was established during a period of economic and monetary stability, when the Brazilian economy was adapted to the Real (the country’s currency), but also when it was more open to foreign competition (Caseiro & Masiero, 2014). The most significant change that the REMIC brought to Brazil was the complete liberalization of capital controls for OFDI. In other words, since 2005 the CBB does not impose any monetary limitation for Brazilian firms engaging in OFDI (BCB, 2014). In addition to that, Brazilian firms investing abroad do not need to apply for a permission by the CBB before engaging in OFDI (BCB, 2014).
Coincidently or not, after the REMIC was established, the levels of OFDI from Brazil began to present more substantial increases. For instance, by 2005 the country’s levels of OFDI were equivalent to USD 79,259 million, by 2006 it totaled USD 113,925 million, and by 2010 it reached USD 191,349 million (UNCTAD, 2014, b).
The graph below summarizes with illustrations the policies that have been mentioned in this sub- section. The graph also illustrates the variations of OFDI over the years between 1980 and 2014.
53 5.3.3 - Brazilian policy-makers and Brazilian outward FDI
By observing the politico-economic views of key policy-makers in Brazil from 1980 until 2014, it is possible to affirm here that, in general, most of them had at least to a certain extent pro-market ideologies or inclinations. As the next paragraphs will show, Brazilian policy-makers have taken several measures to stabilize, open, and deregulate the country’s economy throughout the 1980s and 1990s. During the 2000s and early 2010s, with a more stable and deregulated economy, policy- makers then began to give increasing attention to policies directly aimed at promoting OFDI. In the first half of the 1980s Brazil was still under a military dictatorship (which was in place since 1964). Under the military regime, national authorities propagated liberal ideologies to promote capitalism and economic development in the country (Governo Federal, 2015). Projects aimed at enhancing economic development, however, were often funded through foreign loans. Because of these loans, from the 1960s up until the early 1980s, Brazil experienced substantial increases in its foreign debts (Folha de S. Paulo , 2014). By the early 1980s, however, U.S. interest rates for its international debtors increased significantly. Thus, politicians in Brazil had to be more cautions with their foreign borrowings, and debt repayment was becoming a concerning issue (Brazilian Government, 2015). Another issue that emerged during the military regime was an increase of inflation rates. For instance, in the last decade of the military regime, inflation rates increased from 34.5% in 1974 to 223.8% in 1984 (Folha de S. Paulo , 2014).
It was in this concerning economic scenario that the military regime ended in 1985 and democracy was established in Brazil. In that same year, Jose Sarney was elected as president. His main tasks as a president were to control inflation and reconstruct democracy in Brazil (Governo Federal , 2015 a). It is evident, however, that he also had the intention to open the country’s economy