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Brazil, India and South Africa - Different Continents, Different Experiences International Seminar FDI Policies and Regulation: How to Foster Economic Development Rajeev Mathur, CUTS. 1. Importance of comparison.
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Brazil, India and South Africa - Different Continents, Different Experiences International Seminar FDI Policies and Regulation: How to Foster Economic Development Rajeev Mathur, CUTS
1. Importance of comparison • Many Large Emerging Markets (LEMs) received large FDI inflows during 1990s due to their privatisation (of SoEs) programmes: • Power • Water • Transport • Telecommunications • Manufacturing • Hence all LEMs had potential for growth for both domestic and private firms. Three LEMs in the IFD project, namely, Brazil, India and South Africa. All witnessed increased FDI inflows in 1990s.
Varying degrees of success: • Policy ineffectiveness • External factors such as global slowdown • Regulatory regimes • Brazil received relatively high FDI mainly in services industries that did not have a favourable impact on economic growth. • South Africa experienced very little inward FDI and domestic investment but was the biggest foreign direct investor in Africa • India lagged behind other economies of its size due to poor implementation of policy and regulatory measures.
Brazil • Biggest country in South America (size, population and economic performance) • Its potential is magnified by the consolidation of regional market (MERCOSUR) • Attracted 40-50 percent of the flow of FDI to MERCOSUR at the start of 1990s and 40 percent of the total inflow of FDI to Latin America in 1998
India • During the 1970s there was hardly any new FDI inflow and remained meagre in the 1980s. • During the 1990s, wide-ranging liberalisation of the economy – FDI inflows rose steadily
South Africa • Deep socio-economic inequalities • Despite small market size, in recent years, there is an increase in purchasing power and propensity to consume
Brazil • Increase in the share of transnational corporations in the economy, transfer of property of private and public limited companies to foreign companies and reduction of the relative importance of the national capital companies marked the process of internationalisation.
India • FDI inflows have been modest and in 1990s have been associated with cross-border merger and acquisition activity, leading to a shift of control over domestic enterprise by foreign firms
South Africa • Significant transformation with the GEAR strategy which was oriented towards export-oriented global economy. Increased M&A activity.
5. Sectoral DistributionRanking of Sectors Attracting FDI Note: FDI as a percentage of total FDI approvals.
Growing loss of attraction of the manufacturing sector in comparison with the services sector in Brazil and India.
7. Experiences in Investment Brazil • Foreign investment regulation till the end of 1980s attracted foreign capital in manufacturing sector. • Subsequent recuperation and expansion of the internal markets in 1990s resulting from structural changes attracted greater FDI in services. • The privatisation programme explains preponderance of services over industry. • Distinction between Brazilian businesses owned by domestic capital and foreign capital were eliminated.
India • ‘First generation’ of reforms in early 1990s achieved objectives of restoration of BoP and reducing inflation. • Privatisation was a prominent failure. The disinvestment policy for state-run units did not target foreign investors particularly as in Brazil and SA. • Differential treatment is limited to a few industries by caps on proportion of equity that the foreign firm can hold. • Bureaucratic tangles and delays emerge as major impediments.
South Africa • The GEAR strategy aims at crowding in domestic investment and increase in exports. • Foreign investors are essentially treated the same way as domestic except for requirements of employment of residents and ownership of immovable property. • Small market size, low economic growth, risk perception over property rights and unorganised labour, regulatory uncertainty and low level of domestic savings/investment are major impediments. • SA is an important source of FDI in southern African region, particularly SADC countries.
8. Automobile industry • The industry was the object of various incentive policies throughout 1990s in all the three LEMs. • Prior to reforms in these LEMs the growth in automobile sector was primarily due to local content requirements and high tariffs on imports: • Lower productivity • High cost of vehicles • Low volume of production
1990s witnessed widespread reforms: • Brazil launched productive restructuring • Indian auto sector was delicensed • South Africa launched Motor Industry Development Programme.
As a result: • The annual average of investment in automobile industry in Brazil more than doubled from US$500mn in 1980 to US$1.3bn. • In India the contribution of auto industry to GDP rose from 2.77 percent to 4 percent. • South Africa did not export a single motor vehicle a decade ago – now it is poised to export vehicles worth US$6bn.
9. Challenges • Growing consensus that potential benefits outweigh potential costs of FDI means that Governments should play an active role in improving their economies as locations for FDI. • There is a possibility that states/provinces would compete with each other for FDI in LEMs. • It is rational for the states to offer incentives but it is collectively prudent to cease doing so. • No conclusive evidence that FDI increases the competition of domestic industries as the spillovers are more likely to be vertical than horizontal • The ‘crowding out’ of domestic firms may mean fewer linkages into the economy and no technological learning (except in case of IT in India and Pharmaceuticals in Brazil).
10. Recommendations • Improve regulatory framework for FDI • Facilitate business • Improve economic determinants
