fdi analysis of brics & germany

REPORT ON FDI FOR BRICs, GERMANY by RAVI JAIN, GITAM School of International Business

INTRODUCTION

In the today’s capitalist world, individuals’ growth is measured in materialistic terms and

similarly a Country’s growth and development is measured in terms of economic parameters

viz. GDP, Foreign Exchange Reserves, BoPs, and FDIs etc. Social indicators like HDI, Soft

infrastructure have been pushed to the back seat.

FDI stands for Foreign Direct Investment, a component of a country's national financial

accounts. Foreign direct investment is investment of foreign assets into domestic structures,

equipment, and organizations. FDI inflow is a skewed indicator of a nation’s attractiveness to

foreign investors.

Many developing countries, including the least developed countries, have attracted only small

amounts of foreign direct investment (FDI) despite their efforts at economic liberalization in an

increasingly globalizing world. It is generally well known that the modest levels of, and disparity

in, the distribution of FDI inflows, are due to factors such as a deficient regulatory framework, a

poor business environment and opportunities, weak FDI policies and incentives, poor

institutional frameworks, limited market access, unfavorable comparative costs and lack of

political stability. However, what is less known is that the scarcity, unreliability and

inconsistency of data collection and reporting systems in many developing countries cause

severe problems in formulating policies and strategies relating to FDI, which in turn affects their

attractiveness as host countries.

In this report we attempt to consolidate and analyze FDI patterns for the last decade in India,

China, Thailand, South Africa and Brazil. The analysis explains Flow and stock of FDI, FDI trends,

Categorization of FDI, Source wise, Regulatory frameworks and the impact of financial crisis on

the FDI flows.

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INDIA

INDIA ranks second in the world in terms of financial attractiveness, people and skills

availability and business environment. This is revealed in AT Kearney's 2007 Global Services

Location Index. Country's financial stability in the current environment of financial turbulence

and a possible unwinding of macro imbalances sends clear message to the prospective foreign

investors about India's position as an expanding investment destination.

“The strong macroeconomic fundamentals, growing size of the economy and improving

investment climate has attracted global corporation to invest in India. A major outcome of the

economic reforms process aimed at opening up the economy and embracing globalization has

led to tremendous increase in Foreign Direct Investment inflows into India", says country's

powerful industry lobby CII.

YEAR-WISE INFLOW AND STOCK

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YEAR-WISE OUTFLOW AND STOCK

The total FDI inflow into INDIA since liberalization in 1991 has been USD 132.43 billion. Of this,

around USD 115 billion has come during the last decade. CAGR of FDI over the last decade is

24.44%. Equally important is the growth of FDI during the last 4 years. FDI inflow almost tripled

in a single year from US$ 5.5 billion in 2005-06 to US$ 15.7 billion in 2006-07. The FDI outflow

has seen a similar trend over the last decade. Serious M&As by the India Inc., has seen a steady

increase in the FDI outflow.

The above data gives a consolation and a rosy picture of India’s future. It shows the increasing

power of India in the global stage and its attractiveness to foreign investors.

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SECTOR-WISE INFLOWS

ON % BASIS

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SOURCE COUNTRY WISE

ON % BASIS

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FDI POLICY IN INDIA

Foreign Direct Investment (FDI) is permitted as under the following forms of investments.

Through financial collaborations.

Through joint ventures and technical collaborations.

Through capital markets via Euro issues.

Through private placements or preferential allotments.

FDI Policy under Automatic Route

Sectors working under automatic route do not require any prior approval of the Central

Government of RBI to attract Foreign Direct Investment. The foreign investors are only required

to inform the Regional Office concerned of RBI within thirty days receiving of inward payments

and submit the required documents in that office again within thirty days of the issuing of the

shares of foreign institutional investors.

FDI Policy under Government Approval

The proposals which involve foreign investment or foreign technical collaboration is granted

permission by the Foreign Investment Promotion Board (FIPB). All the proposals for FDI are to

be submitted to the FIPB Unit and those of Non-Resident Indian (NRI) investments and 100%

Export Oriented Units (EOUs) should be submitted to SIA in Department of Industrial Policy and

Promotion.

Industrial Units in India Deprived from FDI as per FDI Policy

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite.

Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

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IMPACT OF FINANCIAL CRISIS

The global financial crisis has applied a brake on India’s booming FDI inflow. To do a

comparative analysis, I have shown the net FDI flows, country-wise, for the 3 years leading to

the financial crisis. We see a steady decline in the FDI inflows from all the countries, except

UAE, which was investing heavily in the Indian Real-estate.

In the above sector-wise graph given, we see that in majority of the sectors, there is a decline in

the FDI inflows. In sectors like, Real-estate, Construction & Infrastructure there was an increase

in the FDI inflow. In all other sectors, there was a decline in the FDI inflow.

-200 0 200 400 600 800 1000 1200 1400 1600

Mauritius

Singapore

USA

UK

Netherlands

Cyprus

Japan

Germany

UAE

FRANCE

2008-09

2007-08

2006-07

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RELATION WITH GROWTH INDICATORS: GDP AND EXPORTS

Regression Equation:

log(GDP) = 2.4840 + 0.3843(log(FDI))

Regression Statistics

Multiple R 0.93121245

R Square 0.86715664

Adjusted R Square 0.85055122

Standard Error 0.06384223

Observations 10

This shows that there is a high dependence of GDP on FDI, exponentially. Around 93.12% of the

GDP growth can be explained by FDI, which in turn is dependent on other macro factors.

2.6

2.65

2.7

2.75

2.8

2.85

2.9

2.95

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3.1

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8

log(GDP)

log(FDI)

FDI - GDP

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log(Exports) = 1.387 + 0.558(log(FDI))



R Square 0.85545223



Observations 10

This shows that there is a high dependence of Exports on FDI, exponentially. Around 92.49% of

the Exports growth can be explained by FDI, which in turn is dependent on other macro factors.

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FDI - EXPORTS

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CHINA

China opened up the door to the world economy since 1979. Since then, China has experienced

a dramatic change in its economy. FDI is one of the main factors to explain the growth of

China’s economy in the past thirty years. The trend of FDI could be separated into three distinct

phases:

From 1980 to 1992, the inflows increased relatively slowly

From 1992 to 2008, the inflows increased rapidly

From 2008 to 2010, there was a decline in the FDI flow.

GOALS:

Having based its economy heavily on agriculture, China intended to use FDI to boost its

development of industries, including building up transportation infrastructure, exploring

energy and processing raw materials.

China wanted to transform its traditional industries, such as machinery, textile and

consumption goods manufacturing, with the new technologies and modern

management systems brought in by foreign investors.


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The total FDI inflow into China has been around USD 475 billion. From 2004-05 to 2005-06

there was an increase of around 20%. This rise was partly attributed to changes in the

methodology underlying Chinese FDI statistics. From 2005, the Government started to include

investments in Financial Services under FDI. In 2005-06, Non-financial investments in FDI were

USD 60 billion as compared to USD 60.6 billion in 2004-05. But this figure was boosted up to

USD 72 billion because of the USD 12 billion investment in financial services.

By 2009, China’s FDI outflow reached USD 200 billion, but about 80% of this has been to Hong

Kong, Macau, the Cayman Islands or the Virgin Islands, meaning a manoeuvre to reduce

taxation for a company operating within China rather than actual investment. Of the remaining

20%, the majority remains in Asia, but investment in Africa and the Pacific Islands has grown

rapidly, particularly since 2008.

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SECTOR-WISE INFLOWS

Manufacturing, 11568

Wholesale & Retailing, 5854

Lease & Business Service, 3138

R&D, 1839

Agriculture, 917

Computer & S/W, 1286

Hotel & Restaurant, 633

Real Estate, 452Power, 320

Transportation, 523

No. of Projects

Manufacturing, 498.95

Wholesale & Retailing, 44.33

Lease & Business Service, 50.59

R&D, 15.06

Agriculture, 11.91

Computer & S/W, 27.75

Hotel & Restaurant, 9.39

Real Estate, 185.9

Power, 16.96

Transportation, 28.51

Realized Value

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SOURCE COUNTRY-WISE INFLOW

Hong Kong, 12857

Japan, 1438

Macau, 435

Malaysia, 219

Singapore, 757

Republic of Korea, 2226

Taiwan, 2360

EU, 1844

USA, 1772

Mauritius, 133

Virgin Islands, 975

No. of Projects

Hong Kong, 41.04

Japan, 3.652Macau, 0.58Malaysia, 0.25

Singapore, 4.435

Republic of Korea, 3.135

Taiwan, 1.9

EU, 4.99

USA, 2.944

Mauritius, 1.494

Virgin Islands, 15.954

Realized Value

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FDI POLICY IN CHINA

China has eased its FDI policy in order to attract considerable foreign investments. Major

themes pertaining to the Chinese FDI Policy are:

Liberalising the approval process

o Streamlining the FDI approval process

o Separating FDI approval from other processes

Re-considering foreign ownership restriction

o Re-considering remaining ownership restrictions

o Catalogues for guiding foreign investment

o Licensing criteria for foreign banks

Capital Market Opening

o Allow FIEs to list on domestic market

o Allow FIEs to issue corporate bonds on the Chinese market

Increasing transparency

o Develop a single website for foreign investors (www.fdi.gov.cn)

o Provide clear & up-to-date information on taxation obligations

o Improve corporate governance

o Improve the accuracy and comparability of FDI statistical information

o Clarify & systemize labour laws & employer obligations

Strengthening the rule of law

o Improve the functioning and independence of the legal system

o Develop a transparent & accountable legislative process

o IPR Protection laws

o Deepen co-operation with OECD in tackling corruption issues

http://www.fdi.gov.cn/

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RELATION WITH GROWTH INDICATORS: GDP AND EXPORTS

Regression Equation

log(GDP) = 0.7716 + 1.4117(log(FDI))



R Square 0.97269883



Observations 9

This shows that there is a high dependence of GDP on FDI, exponentially. Around 98.62% of the

GDP growth can be explained by FDI, which in turn is dependent on other macro factors.

3

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FDI - GDP

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Regression Equation

log(EXPORTS) = -0.7565 + 1.9436(log(FDI))



R Square 0.96384119



Observations 9

This shows that there is a high dependence of Exports on FDI, exponentially. Around 98.17% of

the Exports growth can be explained by FDI, which in turn is dependent on other macro factors.

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FDI - EXPORTS

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BRAZIL

Foreign direct investments have played an important role in Brazil's economic development.

FDI inflows into the country are mainly attracted by its big domestic market and the liberalized

economy thanks to fair government policies. Most investments in Brazil have been made with

a bias on the technological aspects of the economy. However, the service sector has attracted

foreign investments too. The Brazilian FDI regime has remained liberal and has been plausible

in its sum financial output for its economy. Brazil investment opportunities have a minor

number of horizontal reservations or limitations.

Brazil investment opportunities flourish in the various sectors of the economy; production as

well as the service industries. With an economy estimated at $1.3 trillion, foreign direct

investments are crucial in financing the country's payment balance due to investors taking out

money from the capital markets and the slow recovery from the global recession.


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http://www.articlesbase.com/investing-articles/fdi-statistics-in-brazil-brazil-investment-opportunities-2354189.html





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Brazil’s FDI stock stands at USD 400.8 billion as of March, 2010. The FDI inflow into Brazil has

seen several crests & troughs over the last decade. The positivity of the FDI inflow into Brazil is

that it is more or less spread homogeneously. The FDI inflow was the highest in 2008-09 of

about USD 45 billion. The CAGR of FDI inflows into Brazil has been around 10.96%.

The outflow of Brazil’s FDI was high prior to 2000, when no privatization was restricted. But

after that, FDI outflow has considerably decreased. 2006 saw a huge outflow of FDI from Brazil

to the tune of USD 28.2 billion. This was due to increasing energy prices.

In the early 2000s, the FDI stock in Brazil actually declined due to the high political instability at

that time. A crisis in Argentina, Brazil’s major trading partner, also contributed to this decline

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SECTOR-WISE INFLOWS

Agiculture & Mining, 1.5

Food , 2.5

Chemicals, 3

Rubber & Plastics, 0.7

Iron & Steel, 0.4

Automobile, 4.6

Power, 14

Wholesale Trade, 4.8

Retail Trade, 3.7Telecom, 16

Finance, 13.7

Business Services, 22.9

FLOWS

Agiculture & Mining, 1.6

Food , 5.5

Chemicals, 11.2

Rubber & Plastics, 3.1

Iron & Steel, 6

Automobile, 6.7

Power, 0Wholesale Trade, 5Retail Trade, 1.6

Telecom, 0.5

Finance, 3

Business Services, 26.9

Sales

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SOURCE COUNTRY WISE INFLOWS

USA, 19.138

Germany, 1.302

Switzerland, 0.812

Japan, 1.086

France, 5.993

Canada, 0.909

UK, 1.671Virgin Islands, 0.873

Netherlands, 7.422

Cayman, 7.96

Spain, 11.955

Portugal, 5.048

FLOWS

USA, 10.852

Germany, 5.828

Switzerland, 2.815

Japan, 2.659

France, 2.032

Canada, 1.819

UK, 1.793

Virgin Islands, 1.736

Netherlands, 1.535

Cayman, 0.892

Spain, 0.251

Portugal, 0.107

STOCK

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FDI POLICY IN BRAZIL

FDI in Brazil have been in diverse areas of the economy. FDI regulations have encouraged

inward investment. The country’s FDI share in investments, production and foreign trade has

continued to grow over the decades. The investment regime of Brazil shifted from import

substitution to economic liberalization that enabled industrialization. This is due to the fact

that, at the time of its policy formulation, Brazils FDI regime didn’t discriminate investments.

Tariffs and non-tariff restrictions on imports were liberalized. The FDI share of the country’s

investments, production and foreign trade grew over the last decades. As opposed to tariff and

non-tariff restrictions as practiced in other states on FDI regulation, the Brazilian regulations

were not quite a challenge to investments.

A functional regulatory mechanism that applied to all sectors of investments with a radical shift

to institutional regulatory mechanism has been the hallmark of Brazil’s FDI regime. Privatization

of investments such as services with support from the government led to an efficient and

improved service delivery to a large domestic market. During the 1990s, Foreign Brazil

investments regime underwent major changes such as structural reforms, trade and finance

liberalization, state reforms, improvement of the macroeconomic environment that sought to

balance payments and deficit, microeconomic goals that enhanced competitiveness and export

performance. At the legal level, changes were made that eliminated entry barriers enabling

equal treatment of all investors and the abandonment of discriminatory FDI policies.

With these liberalized market, FDI in Brazil investments grew rapidly overtaking global FDI flows

from 1994 onwards. Sectoral policy developments, trade policy development, macroeconomic,

foreign trade relations, institutional developments; changes in this various sectors have been a

main source of attraction for investors. The result of these gradual FDI policy shifts from their

initiation has witnessed an increased FDI flow that has seen Brazil emerge as a favourite

investments location.

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RELATION WITH GROWTH INDICATORS: GDP


log(GDP) = 2.15 + 0.565(log(FDI))



R Square 0.40215639



Observations 9

This shows that there is an average dependence of GDP on FDI, exponentially. Around 63.42%

of the GDP growth can be explained by FDI, which in turn is dependent on other macro factors.

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FDI - GDP

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RUSSIA

Russia offers many opportunities to foreign investors. It has huge reserves of natural resources.

It has more than 90% of forest area, 70% of coal, 80% of natural gas and the majority of iron-

ore of the former USSR. It has huge mineral reserves of iron, copper, zinc, tin, gold & silver. The

natural conditions of the Russian Federation have a significant impact on its economic

development. Broad forest belt and abundant land resources helps in the development of

agricultural sector.


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YEAR-WISE FDI OUTFLOW AND STOCK

During the period of 1990-97, the Russian economy was completely collapsed after the fall of

USSR. But after 2000, there was a serious revamp in the Russian economy and the economy

was liberalized. The FDI inflow steadily increased till 2008 and then declined owing to the

Global financial crisis. The FDI stock also dropped steeply after 2007.

Since 2000, the FDI outflow from Russia has been steadily increasing. The FDI outflow was

around USD 50 billion in 2009. The outward FDI stock also experienced a major decline in 2008.

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SECTOR WISE INFLOWS

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SOURCE COUNTRY-WISE INFLOWS

European Union was the major source of FDI into Russia. Following chart gives a breakup of the

FDI inflows into Russia from major EU nations.

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FDI POLICY IN RUSSIA

LEGAL FRAMEWORK

o Foreign Investment Law, 1991

o Law on Foreign Investments in Russia, 1999

o Grandfather Clause

o Resource Usage

o Labour Laws

TAXATION

o Streamlined taxation legislation

o Non-discriminatory policy

o One of the lowest tax rates in Europe

IPR

o Improved legal framework but dismal implementation

o Member of Paris Convention, Geneva Convention, Berne Convention

o Abides by TRIPS, Copyright law, Trademark law, Patents

COMPETITION REGULATION

o Law on competition and limitation of monopolistic activity, 1995

RESTRICTED SECTORS

o Natural Resources – 11%

o Banking – 12%

o Insurance – 15%

o Aerospace – 25%

o Power – 25%

o Defence

o Transportation

o Communication

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GERMANY

YEAR-WISE FDI INFLOWS

YEAR-WISE FDI OUTFLOWS AND STOCK

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Germany is the 7th largest investor of India. A few details of the FDI flows from Germany are

given below:

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SECTOR-WISE FDI INFLOWS

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DESTINATION-WISE OUTWARD FDI

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SECTOR-WISE OUTWARD FDI

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FDI POLICY

There are three main international legal frameworks for German FDI:

The European Treaty

Treaties concluded by the European Union and

National BITs.

German MNEs have concentrated a large part of their OFDI in the EU member states.

Therefore, the European treaties are a very important framework for Germany FDI activities.

The EU guarantees free trade of goods and services for all members of the European Union and

the free movement of capital among EU member states and with third states. In case of

violations of these rights, the European Commission can bring a case before the European Court

of Justice.

The EU has concluded several free trade agreements that contain declarations of supporting

FDI flows between the EU and its partner states. Since the Lisbon treaty took effect on

December 1, 2009, the EU has gained new competences concerning FDI. However, the practical

implications of the Lisbon Treaty for Europe’s FDI-policy remain uncertain (e.g. the Lisbon

Treaty fails to clarify the exact definition of FDI).

The EU and the United States have the most important bilateral trade and investment relations

in the world. The United States is the single most important target country for German OFDI.

Among the triad of North America, the EU and Japan, FDI flows are not restricted in any way

and are not governed by BITs.

Within these legal frameworks, the German Government offers companies many services and

support for FDI in developing countries. The German Government for example gives guarantees

for FDI that may fail because of political risks. But those guarantees are only granted in case of a

minimum of legal protection for FDI by the host countries - either in form of BITs or a stable

legal system.

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EFFECTS OF GLOBAL CRISIS

The global financial crisis and recession seriously affected the German economy. German

companies suffered from a sharp decline of exports and falling profits. In 2009, German OFDI

fell by 53% against 2008, to reach US$ 63 billion. The decline in German OFDI in 2009 was

mainly due to increased long-term credits of financing affiliates of German companies located

in the Netherlands to their parents in Germany that were financed by the emission of securities

abroad. These intra-firm financial transactions resulted in net disinvestments abroad via intra-

company loans that explained three quarters of the decline in German OFDI abroad. Despite

the difficult economic situation, German equity capital investments abroad remained

remarkably strong, declining by only 27% against the record value of 2008 and amounting to

US$ 66 billion in 2009. Especially German energy providers like RWE AG and E.on AG were very

active in cross-border M&As and Greenfield investments to expand their market share and to

improve their competitive position in foreign markets.

fdi analysis of brics & germany

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