Semaforos

THE IMPACT OF FOREIGN DIRECT INVESTMENT ON THE BRAZILIAN ECONOMY


By Mariano Laplane[1]



Introduction

In 1997, the prospects for Foreign Direct Investment (FDI) becoming one of the main driving forces for the upturn in the sustainable growth of the Brazilian economy were extremely good. In the previous year, the flow of FDI had reached US$10.8 billion, a higher amount than theflows accumulated between 1990 and 1995. The explosive growth of direct investment raised optimistic expectations among many analysts regarding the potential contribution of FDI as the modernizing agent of the Brazilian economy. It was hoped that the FDI would act as a more stable component of a new pattern of long-term external financing, supported by the attraction of growing flows of foreignsavings. It was also envisaged that foreign companies would be important actors in the adoption of a new style of outward growth with a greater emphasis on exports, founded on a more specialized productive base, with greater technological content.
Not everybody shared such optimistic expectations about the capacity of FDI to overcome serious structural obstacles to sustained growth in theBrazilian Economy. Some analysts pointed that at least much detailed observation of FDI patterns was required before reaching optimistic conclusions[2]. This paper surveys data on FDI on the Brazilian economy in the last decade, aiming to assess its effective contribution to growth and development.

1. The FDI trajectory in the second half of the Nineties
After 1997, FDI continued itsascending path till it reached its apex in 2000, when more than US$32 billion net entered the country (see Table 1). In this period, Brazil was the main pole of attraction of direct investment in Latin America, surpassing Mexico and Argentina, the leaders in the first half of the decade (table 2). As the receiver of FDI, Brazil had a far greater share during this period than that presented ininternational trade (close to 1%) and also in the world product (between 1.5 and 2%).


The continually growing flows of FDI fostered optimism in analysts who believed this form of external financing could make up for the absence of domestic savings and substitute advantageously the flows of portfolio investments, whose volatility became evident after the Asian and Russian crises. Unlike thefinancial investments of foreign residents and foreign loans, FDI seemed to offer a stable source of foreign financing, capable of serving as support to domestic growth.
The relation FDI/Gross Formation of Fixed Capital[3] followed its upward path both in Brazil and the world, making the greater degree of internationalization of economies explicit (table 3). In a superficial interpretation, thisfact appears to evidence that the FDI contribution to the growth of investment (and consequently of product) had become increasingly important.
In our assessment, there is another more plausible interpretation for the same phenomenon. The fact that GFCF does not follow FDI growth is evidence of its small contribution to increase the investment rate in the economy, and not the contrary. Despitea considerable increase in FDI flows, from the second half of the ‘90s onwards, the investment rate (GFCF/PIB) in the Brazilian economy oscillated, with a downward trend, between 21 and 19%. The significant increase of FDI between 1996 and 2000 was not reflected in the behavior of the investment rate.
The contribution of FDI to the Capital Account and to the financing of the deficit in theCurrent Account of the Balance of Payments is reasonably evident, but its contribution to investment and product growth cannot be inferred from this. The quality of foreign investments conditions their contribution to investment and to growth. The analysis of the composition of FDI shows that, in the Brazilian case (as with other Latin American countries and unlike China), a considerable part was...