Impact Of Foreign Direct Investment On Brazilian Economy

Over the last few decennaries, foreign direct investings ( FDI ) have played a really relevant function in Brazilian industrialisation, attracted particularly by the big domestic market. The political stableness and authorities policies are besides cardinal factors pulling foreign investors. Because FDI can convey major benefits to recipient economic systems by heightening their fight, the competition to pull FDI has intensified among states, particularly developing states like Brazil.

Theoretically, foreign direct investing depends on the monopolistic advantage of MNCs or comparative advantages in host economic systems ( Hymer, 1976 ; Kojima, 1978 ; Dunning, 1980, 2000 ) 1. Harmonizing to Porters ( 1990 ) , competitory advantages of local industries depend on four factors: factor conditions, demand conditions, context for house scheme and competition, and presence of competitory related and back uping industries. In add-on, external factors and authorities besides play an of import function in act uponing industrial competitory advantage. Dunning ( 1993a, p.8 ) argues that Porters does non sufficiently take the globalisation of economic activity into history and MNC influence is added to Porter ‘s diamond. Inward FDI can convey new resources and engineerings into a state and foreign investors can import advantages from its place base and some of its assets might incorporate ownership specific advantages ( Tormenting 1993, p.108 ) . For Dunning, each factor of the diamond is linked to transnational activity.

The impact of the activities of MNCs on National Competitiveness

It was suggested that MNCs may excite development in host economic systems, as foreign subordinates could present new know-how, stimulate competition, and reassign production techniques and direction accomplishments and these ownership advantages are believed non merely to impact the state ‘s productiveness straight, but besides indirectly through spillovers to better overall efficiency in the economic system and trade public presentation ( Blomstrom and Kokko 1998, p.256 ; Narula and Marin 2003, p. 1 ) 2.

The macro-economic troubles experienced by Brazil as of the early 80s caused a drastic decrease in substructure investings, which until the mid-90s were about entirely the duty of the public sector. The FDI reduced the lack in the substructure. Many acquisitions took topographic point in the denationalization of public companies ( industrial and public services such as electricity and telecommunications ) . Unlike the FDI destined to constructing new assets, acquisition earmarked for purchasing preexistent assets. In this instance, the relation between FDI and increase in productiveness of economic system is indirect. It depends on whether extra investings are made on modernisation and enlargement of merchandise capacity of the acquired plus.

FDI Impacts on productiveness degree of Brazil economic system

Foreign houses with greater technological capacity may straight hike the mean productiveness degree of the host economic system by importing capital, advanced assets and proprietary engineering and could do engineering spillover indirectly. FDI is by and large regarded as a beginning of modern engineering including merchandise, procedure and distribution expertness, every bit good as direction and selling accomplishments ( Blostrom and Kokko 1998, p.247 ) .

Harmonizing to the literature, these spillovers would happen due to two effects- competition consequence and presentation consequence. In footings of competition consequence, increased competition of foreign rivals force national companies to introduce and overhaul their production and direction engineerings. As monetary value competition becomes more intense, domestic and foreign houses have an inducement to distinguish their merchandises and enhanced competition of MNCs ensures that merely the most appropriate direction patterns survive. Sing to presentation consequence, national companies could larn superior production engineerings taking advantage of the arm ‘s length dealingss with MNCs ( Gorg and Strobl 2001, p.723 ) 3. Here, the absorbent capacity of domestic houses plays a important function. It was argued that the impact is greater when domestic houses and MNCs have similar degrees of productiveness ( Driffield and Taylor 2002 ) 4.

Table 1 – Selected Indexs for National & A ; Foreign Companies, Exporters & A ; Non-Exporters – Average during the period 1996 to 2000




Employee turnover

Ad Costs**

Export. Coefficient

Import Coefficient

( R $ million )


Non export


78,30 %






17,50 %







95,80 %






Non export


0,60 %






3,50 %







4,20 %








100 %





Export coefficient: Exports in relation to turnover ; Import coefficient: Imports in relation to turnover

Table 1 shows that foreign houses in Brazil are so larger and more productive than national houses. In the same manner, their workers appear to hold more making and advertisement outgo besides occupy a greater proportion in the turnover. ( It is assumed that the more intensive usage of engineering demands greater makings in the staff runing it. In the same manner, the greater the gross revenues attempt involved, represented by its advertisement costs, the greater on norms the distinction of the house ‘s merchandise. )

5Goncalves ( 2003 ) , based on a sample of 22,000 companies with informations from 1997 to 2000, sought to look into the being of productiveness spillovers from foreign to national companies utilizing a panel econometric theoretical account at steadfast degree. However, contrary to outlooks, there was no grounds of spillovers, either positive or negative. Then the national companies were classified harmonizing to their productiveness spread with foreign companies in the same sector to prove if companies with different degrees of productiveness would hold different capacity absorbing possible spillovers. It was once more surprisingly to happen that the national companies with a narrower productiveness spread were negatively affected and for those with a wider spread, the consequence was positive. Therefore, harmonizing to Goncalves ‘ consequences, for the largest national companies viing straight against foreign companies in national market, the increased foreign portion did non hold a dramatic consequence on productiveness for the industrial construction as a whole, since the negative effects surpass the positive spillovers.

This might due to worsen in graduated table and the MNCs ‘ displacement to take down value-productivity activities. In the 90s, faced with greater competition from imported merchandises, the MNCs tried to accomplish higher grades of productive specialisation and lower degrees of perpendicular integrating which led to increasing imported constituent in the concluding merchandises manufactured in Brazil by cut downing the local value added on concluding goods production.

Opening the domestic market to foreign rivals will non merely increase competition between the direct challengers of the MNCs, but besides heighten competition at the degree of local providers which will take to the development of related and back uping industries. Because of the competition consequence, Brazilian MNCs enabled local providers to develop specific accomplishments to run into the new demands for lower monetary values and higher quality merchandise to distinguish from rivals. These are known as forward and backward linkage, as subordinates train and instruct their local providers, subcontractors and clients. The subordinates of MNCs displacement from the stand-alone theoretical account of operation towards a theoretical account of integrating with the web between corporations involved in the production and trade.

The upgrading of human capital is effect of and a complement to engineering transportation ( Narula and Marin 2003, p.6 ) 6. Under the competition consequence, national companies require for higher quality merchandises with superior engineering. Therefore, the demand for skilled labor additions as the development and effectual usage of engineering requires human capital ( Driffield and Taylor 2002 ; Lall 2001, pp. 128-131 ) . Upgrading of human capital can happen through preparation or the motion of extremely skilled staff from MNCs to domestic houses. MNCs

FDI impacts on Brazilian trade public presentation

In literature, foreign corporations have a greater international orientation than national companies, although this difference is higher for imports than for exports. Table 1 once more shows that foreign companies are so better off in many facets with greater competitory advantages and export potency than the national houses. However, the little difference between the export coefficients and the important import coefficients difference seem to bespeak that these competitory advantages were non translated into a more effectual trade public presentation.

It besides shows that foreign companies ‘ part to positive trade balances was little because of the higher degree of imports. One of the major advantages of MNCs over domestic companies is its well-established trade web and it was shown that these advantages were used chiefly to increase import flows.

MNCs distribution in Brazil – 2000

Beginning: Central Bank of Brazil

Trade liberalisation and exchange-rate grasp during most of the 1990s increased imports dramatically, particularly for the MNCs with international trade web to import technology-intensive inputs, while with no corresponding addition in exports. Foreign companies had an mean leaning to export ( exports/sales ) of 14.3 % in norm and an mean leaning to import of 13.6 % in 2000. Harmonizing to the Pie Chart 1, about half of entire investing have both export and import leaning below than the norm. This is because that these investings mostly comprise service industries, which were oriented toward the domestic market and hence had small influence on trade flows. The chemicals, telecommunications sectors with import leaning above norm and export leaning below norm, which accounted for 31 % of the accrued flows between 1996 and 2005. These industries prioritized the domestic market, but with a high volume of imported inputs and constituents. The resource-seeking industries such as excavation have higher export leaning and lower import leaning which accounted for 10.4 % of the entire investing. The industries such as cars and machinery have both high export and import leaning. This is notified that the difference in the industrial size and distribution from other developing states which are besides attractive for FDI, such as Korea. Take the illustration of Korea, by the 1970s, its authorities was forcing Korean big concern groups into a assortment of new sectors with inexpensive recognition and few bounds on adoption. Furthermore, the export push meant that their concern groups were non held back by the restrictions of the Korean market. In Brazil, nevertheless, import-substitution industrialisation greatly limited markets, though Brazil itself has big domestic market, it is deficient particularly after the crisis in 80s. In add-on, big houses from Asia are more concentrated in middle- and high-technology fabrication, such as cars, computing machines. Brazil, nevertheless, has comparatively little proportion of the big houses in this sector.

7Hiratuka and De Negri ( 2005 ) suggest that most of Brazil ‘s imports of equipment required for local production are from their parent MNCs place states and their major export finishs are the Brazilian domestic market and neighbour states. Foreign subordinates tend to import from their place states technology-intensive merchandises, inputs, and constituents which consequences in important differences between exports and imports flows non merely in value, but besides in footings of technological profile. Harmonizing to literature, the increased foreign portions should hold positive spillover consequence on exports because MNCs cost to come in the international market is lower. However, as there is little difference in Brazilian export coefficient, there is no grounds to demo the being of this spillover.

To sum up, the broad trade policy and exchange rate grasp increase the imports of MNCs subordinates, particularly the extremely technology-intensive inputs. MNCs, nevertheless, have limited impacts on trade flows, because most of the foreign investing in Brazil targets the domestic market.


In footings of productiveness, Brazil has no uncertainty improved the productiveness compared with the beginning of 90s. However, its productive construction is presently dependent on the acquisition of imported inputs from MNCs place state in order to bring forth. The increased imported constituent, on the other manus, increase the specialisation of the local production, therefore cut down some of competitory lacks of Brazilian industry.

In footings of trade public presentation, there is an intense addition in the usage of imported merchandises in the domestic market. The increased imported content of local production improves the quality and efficiency of production significantly, but did non give rise to a considerable addition in exports.

To sum up, the FDI impact on Brazil is different from other developing states such as those Asiatic states. Take once more Korean illustration, the export portion of production has been significantly boosted and the addition of productiveness led to the investing abroad of national companies since the 80s. The internationalisation in other developing states expands foreign markets for domestic production through the investings abroad of national companies or the export of domestic production by local and foreign houses. However, in Brazil ‘s instance, internationalisation had the domestic market as its mark through the greater presence of foreign companies and the addition in the imported content of concluding production.

Therefore, the internationalisation procedure resulted in a productive construction that is a micro economically more efficient, bring forthing more unsatisfactory macro-economic consequence.