Policy changes regarding FDI in Brazil

Development Economics

Student : Caldaruse Andrei (11601175)

Professor Naomi Leefmans

Abstract

The aim of this paper is to present an overview of the most important policy changes related
to the foreign direct investment in Brazil, that are related to the changes in economic growth.

The research paper provides an insight into the country’s policy changes during the period
1980-2015 focusing on their relevance regarding the impact on investment.

Adittionaly to the literature review, the text analyses FDI inflows and GDP data provided by
the World Bank data sheets.

Brazil is one of the countries that experienced amazing economic growth and is one of
the largest economies in the world. (The Economist,2009). The country is one of the most
important emerging countries (Amman, Baer, 2012) and although it’s currently facing a
recession, it has proved that it can successfully overcome difficult economic setbacks and
recover after the last global economic crisis. (Ferrari Filho, 2011)

In the early 1980’s period, in which industrialization was assimilated to import substitution
(ISI) in most developing countries, we can assume based on a study conducted by da Motta
Veiga in 2004, that the overall system of the country, that regulated FDI inflows was not
discriminatory.
According to the study „the investments regime presented a few „horizontal” reservations and
conventional sectoral restrictions consistent with the model that was dominant at the time.”
During that period, foreign investments in the country were regulated by a logic of market-
seeking, in which the profitability of the investment was assured by the existent protectionist
trade policy. (Motta Veiga,2004)
The study asseses that the most relevant characteristics of the FDI regulatory regime are :
- being liberal,
- its stability
- the legal framework provided by constitutional rules and by a basic Law (Law number 4.131
from the early 60’s). (Motta Veiga,2004)
Based on the results of the study of Laplane and Sarti, 1999, the study of da Motta
Veiga, emphasises that although the country faced political changes between the 60s and the
80s, these important characteristics were preserved in the process of policy-making. The
main objectives of the regulations concerning the exchange controls and the tax regime, were
to discourage the outflow of the foreign capital already invested in the country and to
encourage reinvestment. (Motta Veiga ,2004)
Due to the exchange crisis in the early 1980’s, the annual net inflow of FDI to the
country dropped from 2.3 billion dollars in the 1971-81 period to US$ 357 million between
1982 and 1991. The 90’s, especially since 1995, marked a boom period for FDI, in which
Brazil returned as an important destination of FDI among developing countries. (World Bank
graphs FDI, figures 1-2). These findings are valid as it results from analysing the World Bank
country dataset and the chrats.
The Plano Real from 1994 had a major impact on creating an environment suitable for
attracting FDI through fiscal reform, eliminating inflation and the encouragement of short
term funds. (Westra, 2010)
According to a CUTS (2003) report and an OECD report(2002) , the main policy
changes that had the greatest impact on attracting FDI during this period, and contributed to
the aforementioned growth were :
- the consolidation of the “MERCOSUL” regional-integration process after
December 1994,
- a series of amendments to the Constitution adopted between 1995 and 1996 which
„eliminated the constitutional distinction between national and foreign companies,
as well as the state monopoly in telecommunications and in oil and gas sectors.”
(CUTS, 2003) (Christensen et. al 2002)
- the extension of the validity of the Union tax incentives for the Manaus free trade
zone until the year 2013.
A study by Bonelli, Veiga and Brito in 1997 cocludes that in the 90’s, of significant
importance were the measures undertaken by the Central Bank of Brazil to encourage
investment such as: the liberalisation of the BOP Capital Account, the access to securities and
fiexed income bonds markets, granted to foreign investors and allowing financial institutions
to keep unlimited amounts of foreign exchange. (Bonneli, 2015)
In linking the liberal measures and regualtions from the 90’s with their causes,
(Kobrin, 2005) provides an explanation in the argument that the policy makers of the country
percieved liberalization as a rational decission related to the changing economic conditions
and the increasing „costs of closure” for FDI.
Of significant importance was also „Auto Regime”, through which the Brazilian government
aimed to reactivate the internal market and to reduce the aliquots to 20 percent until 2000.
(CUTS, 2003)
 In the current times, according to the Lexmundi Doing business Guide (2016), foreign
investment in Brazil is not subject to government approvals or authorizations, and there are
no requirements regarding minimum investment or local participation in capital, with the
execption of financial institutions, insurance companies, and other entities under the authority
of the Central Bank of Brazil. (Advogados, D. ,2016)
One important aspect of FDI regulations is remittances of profits. Since January 1996, there
are no withholding taxes applied to the profits made by foreign investors through local
companies. (Advogados, D. ,2016) This might be one of the most relevant policy changes that
influenced the FDI inflows and led to a climate favorable for investment.
The guide shows that, based on current regulations, foreign capital may be freely invested in
Brazil, and enjoys the same treatment as Brazilian capital, with a few exceptions in some
economic activities :
1. foreign capital is prohibited in the following activities :
· Development of activities involving nuclear energy.
· Development of activities involving oil and natural gas.
· Health services.
2. foreign investment is permitted with certain restrictions in the following sectors :
(i) Ownership and management of newspapers, magazines, and other
periodicals, radio and television networks.
(ii) Airlines with concessions for domestic flight routes.
(iii) Financial institutions.
(iv) Mineral resources.
(v) Rural properties. (Advogados D., 2016)
As it is presented in the World Bank Charts in the appendixes, net FDI inflows peaked
in 2011 at over 101 billion dollars, but currently reach only 75 billion. (World Bank- FDI
Graph figure 1). Still, the country remains one of the top FDI receivers, in the top 10, even
though Brazil is currently going through a deep recession. (The Ecconomist graph - figure 3,
2016)
GDP contracted by 3.8% in 2015, and is expected to fall at least 3% more in 2016. (World
Bank GDP graph - figure 4, 2016). The World Bank’s country overview presents a possible
explanation, in the impact of the economic crisis, and its result in the fall in commodity prices,
and the lack of policy adjustments coupled with the political crisis faced by the country which
undermined the confidence of consumers and investors. (World Bank country overview, 2016)
 In accordance with a report conducted by AT Kearney „after more than five years in
the top 10 of the AT Kearney’s FDI Confidence Index FDI, Brazil is on the 12’th position,
down 6 positions in the last 2 years”, situation which is fueled by the recession period.
Corruption scandals and record-low consumer confidence may be the main concerns of
investors about the country’s security of investments. (AT Kearney FDI Confidence Index,
figure 5, 2016)
Accordoing to the World Bank Country overview the country’s medium-term outlook
will depend on the success of the current adjustments and the enactment of growth-enhancing
reforms. Raising productivity and competitiveness is the main challenge for the country to
achieve higher growth in the medium-term. Facing credit-fueled consumption, labor
expansion and the commodity boom, the country will need to promote higher investment and
productivity gains in order to sustain growth. These recommendations if taken into account
will determine the upcoming policy changes in FDI regulation. (World Bank country
overview, 2016)
References

Brazil Country overview World Bank site, retrtieved 5th April

http://www.worldbank.org/en/country/brazil/overview#1

The 2016 A.T. Kearney Foreign Direct Investment (FDI) Confidence Index summary – „FDI on
the Rebound? ”

Retrieved April 5th from

https://www.atkearney.com/documents/10192/8064626/2016+A.T.+Kearney+Foreign+Direct+Invest
ment+Confidence+Index%E2%80%93FDI+on+the+Rebound.pdf/e61ec054-3923-4f96-b46c-
d4b4227e7606

CUTS, 2003, Investment Policy in Brazil – Performance and Perceptions

Retrieved Apil 5th from http://www.cuts-

ccier.org/pdf/Investment_Policy_in_Brazil%E2%80%93Performance_and_Perceptions.pdf

Economist (2009) - Brazil takes off, November 12 , retrieved April 5th from
http://www.economist.com/node/14845197

Advogados, Demarest (January, 2016) - Legal Aspects of Doing Business in Brazil, Lex Mundi
Guide to Doing Business retrieved April 5th from
www.lexmundi.com/Document.asp?DocID=8524

Amman E. , Baer, W. (2012) - Brazil as an emerging economy: a new economic miracle? Rev.
Econ. Polit. vol.32 no.3 retrieved April 5th from
http://www.scielo.br/scielo.php?script=sci_arttext&pid=S0101-31572012000300004

Bonelli, Regis (January 2015) - A NOTE ON FOREIGN DIRECT INVESTMENT (FDI) AND
INDUSTRIAL COMPETITIVENESS IN BRAZIL , IPEA 2015 retrieved April 5th from :
http://repositorio.ipea.gov.br/bitstream/11058/5143/1/DiscussionPaper_79.pdf

Christensen, H., Oman, C., Charlton, A. (December, 2002)- Policy-Based Competition for FDI:
THE CASE OF BRAZIL – OECD 2002 retrieved April 5th from
https://www.oecd.org/gov/regional-policy/2489894.pdf

Ferrari Filho F. (2011) - Brazil's response: how did financial regulation and monetary policy
influence recovery? Rev. Econ. Polit. vol.31 no.5 retrieved April 5th from:

http://www.scielo.br/scielo.php?script=sci_arttext&pid=S0101-31572011000500019

Kobrin, Stephen J. (April, 2005) – The determinants of liberalization of FDI policy in

developing countries: a cross-sectional analysis, 1992-2001, Transnational Corporations, Vol.
14, No. 1 Retieved April 5th from :
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.723.5288&rep=rep1&type=pdf

Motta Veiga, Pedro (May, 2004) - Foreign Direct Investment in Brazil: regulation, flows and
contribution to development retrieved April 5th from
http://www.iisd.org/pdf/2004/investment_country_report_brazil.pdf

Westra, Richard (2010). Confronting Global Neoliberalism, Third World Resistance and
Development Strategies. Atlanta, USA, Clarity Press Inc.

Figures references :

Graph FDI The Economist – retrieved 3th April http://www.economist.com/news/economic-

and-financial-indicators/21701141-foreign-direct-investment

Graphs FDI World Bank retrieved 3th April

http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=BR

http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=BR&view=chart

Graph GDP World Bank retrieved 3th April

http://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=BR&view=chart

AT Kearney graph retrieved 3th April

https://www.atkearney.com/documents/10192/8064626/2016+A.T.+Kearney+Foreign+Direct

+Investment+Confidence+Index%E2%80%93FDI+on+the+Rebound.pdf/e61ec054-3923-

4f96-b46c-d4b4227e7606
APPENDIX

Figure 1. FDI inflows in Brazil (current US$) World Bank(2016)

Figure 2. Net FDI inflows as percent of GDP in Brazil World Bank(2016)

Figure 3. Foreign direct investment (current US$) The Economist (2016)

Figure 4.GDP in Brazil (current US$) World Bank (2016)

Figure 5.AT Kearney FDI Confidence Index (2016)