Determinants of FDI in emerging markets: evidence from Brazil

Abstract

PurposeThe paper aims to evaluate the relative importance of various factors that influenced the flow of foreign direct investment (FDI) into Brazil in recent years. Analysis of empirical data indicates that evolution of the consumer market and strength of consumer sales are more important in explaining capital movements into Brazil than other frequently offered explanations such as exchange rates and country risk.Design/methodology/approachThe paper uses two‐stage least squares regression to estimate the coefficients of a system of simultaneous equations relating FDI flows into Brazil to various influential factors.FindingsThe results indicate that internal market growth represented by aggregate consumer sales was a significant determinant of FDI into Brazil. Increase in interest rate on consumer financing was negatively related and the attractiveness of the Brazilian market had no impact on FDI flows during the captioned period.Research limitations/implicationsWhile factors such as inflation and exchange rates might be more important for smaller, less stable markets, in the case of larger emerging markets such as Brazil, multi‐national firms might be less concerned with short‐term fluctuations and more guided by internal market growth that affords greater opportunities to achieve economies of scale and scope.Practical implicationsThe findings suggest that policy planners in big emerging markets should try to stimulate their internal markets rather than tweak fiscal and monetary policies to attract FDI.Originality/valueThe paper extends and expands the knowledge of international capital flows and provides a more nuanced understanding of the importance of internal market dynamism in attracting FDI into emerging markets.

The Impact of Economic Factors on the Foreign Exchange Rates between USA and Four Big Emerging Countries: China, India, Brazil and Mexico

“…According to Moura, Lima, & Mendonça (2008), the exchange rate in Brazil is linked with current and future economic fundamentals and does not follow a random walk. Felisoni, Eunni, & Manoel (2010), two-stage least squares (TSLS) regression was employed to show that exchange rates of Brazil did emerge significant to explain FDI inflows into Brazil during [2000][2001][2002][2003][2004][2005][2006][2007]. Another study of Bahmani-Oskooee, Harvey & Hegerty (2013) examined bilateral export and import flows between the United States and Brazil from 1971 to 2010 by using cointegration analysis to explore that exchange-rate volatility supported international commodity trade in long-run.…”

“…Chinese yuan will be an alternative for countries seeking to accumulate foreign currency reserves other than in dollar and euro (Eichengreen, 2011). Besides, the emergence of Asia, in particular Chinese economy, has been one of the most important features reshaping the world economy and providing an important source of global production and International Finance and Banking ISSN 2374-20892016 demand (Lee, 2014). Trade and foreign investment flows have been major factors in China's booming economy (Morrison, 2009).…”

“…Brazil is also another member of BRICS, which makes up 40 percent of the world's population, 25 percent of the world's landmass, and about 20 percent of global GDP and control some 43 percent of global foreign exchange reserves International Finance and Banking ISSN 2374-20892016, Vol. 3, No.…”

“…This means that forty cents of every dollar spent on imports from Mexico comes back to the U.S. (Wilson, 2011). Mexico has taken advantage of its relatively inexpensive labor to attract U.S. manufacturing firms and expand its exports with more than 70% of Mexico's exports go to the U.S. and the U.S. is Mexico's main trading partner for agricultural products (Bahmani-Oskooee & Hegerty, 2009 ISSN 2374-20892016 Organization) as a strategy for economic growth in itself (Santos, 2012).…”

“…It was believed that the advent of Euro would create an integrated monetary and financial zone larger than the United States (Hartmann, 1996;Bergsten, 1997;Schinasi, & Prati, 1997;Greenspan, 2001;Gaspar, 2004;Papaioannou, Portes & Siourounis, 2006;Chinn & Frankel, 2007;Cohen, 2012). Moreover, it was expected that it would quickly come to rival and even surpass the dollar as the leading International Finance and Banking ISSN 2374-20892016 reserves by the central banks (Eichengreen, 1998).…”