Productivity spillovers from foreign direct investment in the Brazilian processing industry.
| Autor | Bruhn, Nadia Campos Pereira |
| Cargo | Report |
Introduction
Although the attitudes towards the impacts foreign direct investment (FDI) has on the host economy have been mixed, many governments around the world actively attempt to attract FDI to their countries using substantial fiscal and financial incentives. One of the reasons for these policy interventions is the belief that locally owned enterprises (LOEs) can benefit from the foreign owned enterprises (FOEs) through productivity spillovers (Gorg & Greenaway, 2004).
Productivity spillover discussion is part of a broad debate on the effects arising from FDI's inflows and the presence of multinational corporations (MNCs) in the host economies (Blomstrom & Kokko, 1998; Buckley, Clegg, & Wang, 2010; Findlay, 1978; Markusen & Venables, 1999). FDI and multinational corporations (MNCs) are subtly different facets of the international phenomenon, but are not perfectly synonymous (Cohen, 2007, p. 36). A widely accepted concept of MNCs in academic and business circles considers them an enterprise that engages in FDI activities and "owns or, in some way, controls value-added activities in more than one country". MNCs account for almost all FDI flows (Kupfer & Hasenclever, 2002, p. 391) and are the main cause of the major changes in the way that business is conducted throughout the world (Cohen, 2007).
Productivity spillover theory is based on the argument that FDI occurrence requires MNCs to be more efficient than their indigenous counterparts operating in the same location (Buckley, Clegg, & Wang, 2010). So, firm-specific assets, such as marketing and management capabilities, technological know-how and reputation, that play important roles in Dunning's traditional Eclectic FDI theory (2000, 2008) are fundamental to the argument that MNC ownership advantages should lead to relativity higher performances than their counterparts. This notion of "performance differentials is the basis for the general hypothesis that FDI generates productivity spillovers" (Buckley, Clegg, & Wang, 2010, p. 217). Blomstrom and Kokko (1998) comments that, when MNCs establish a subsidiary in certain countries, they bring a series of new knowledge and technologies that can spill over for LOEs, resulting in competitiveness increases and productivity gains, known as productivity spillovers.
This study aims to answer the following research question: Are there productivity spillover effects from FDI received by the Brazilian processing industries? Our intention is to contribute to the discussion on FDI's real impacts, assessing whether the FDI received by the Brazilian processing industries contributed to their performance. In other words, the main objective of this research was to investigate if there were productivity spillovers effects from FDI received by Brazilian processing industries. Specifically we aimed to: (a) investigate the effects of a set of variables representing the characteristics of the industry and characteristics of the country on industry productivity; and (b) investigate the moderating effect of FDI on industry productivity.
We also conduct our analysis using a panel database of twenty-three Brazilian processing industries. We applied the Moderated Multiple Regression (MMR) and Generalized Linear Models (GLM) analysis of variance to address potential spillover effects from foreign presence.
Our main purpose in this study is not to identify with either the pro or con schools of thought on the subject, but to share our belief that both sides have made valid points on the subject. The paper highlights, as argued by Cohen (2007), that each corporation and each industry or country is a special case and that FDI is an extremely complex and heterogeneous phenomenon. It's not our intention to reach a conclusion to the question of whether these phenomena are good or bad, but to add to our far from comprehensive knowledge of what are FDI effects and how they really affect the productivity of Brazilian industries. Only a few studies have considered how the relationship between foreign presence and spillover benefits change as inward FDI to Brazilian industries rises, and little attention has been given to the conditions under which spillover might be larger, non- existent or negative (Cohen, 2007).
The solid understanding of the FDI role on the host economy is vital not only for researchers but also policymakers and managers interested in understanding how FDI inflows influence industry performance. Given their dynamicity and complexity, FDI and MNC phenomena have introduced extraordinary and perhaps revolutionary changes that have profoundly altered the global economy.
Policymakers in particular need information that provides them with the necessary tools for the decision making process. They influence the regulatory regime in which MNCs and LOEs are embedded and, therefore, need to understand how policy instruments can induce or control MNC actions so that they can offer benefits to LOEs. MNC effects on host economies is also relevant for managers. First of all, positive effects of spillovers can be used to build a reputation, since companies are concerned with stakeholders. Second, recognizing complementary interests and areas of conflict helps identify strategies that benefit both MNCs and LOEs in host economies.
Our main contribution is not providing a definite explanation on the issue. It is, however, just a step in a long journey to a more accurate understanding on the subject. There still remains a need for continuing the research and data accumulation in this field (Cohen, 2007).
This paper's structure is organized as follows: the next section presents the evolution of FDI inflows to the Brazilian economy. Third section presents the theory of spillovers from FDI, while fourth section clarifies the conceptualization and operationalization of FDI spillover determinant factors, which is followed by a presentation of our methods and data in fifth section. Sixth section presents the empirical results and seventh section presents the discussions. The last section offers final considerations.
Foreign Direct Investment Trajectory
Until the Second World War, only a small portion of capital movement was related to FDI. FDI global flows had suffered a slump in the 1970s related mainly to the oil shock and macroeconomic crises. The decline in FDI global flows in the 1970s and 1980s was interrupted by a reaction in the early 1990s, when FDI flows became really significant. In 1990, FDI flows worldwide were approximately $200 billion, reaching their maximum level at the end of the decade, in 2000, when flows reached $ 1.4 trillion (Figure 1).
After this global boom, FDI flows fell to $651 billion in 2002, approximately half the value that was reached in the peak period in 2000 (United Nations Conference on Trade and Development [UNCTAD], 2003).
FDI global flows began to increase again in 2003 and in 2006 accumulated $1.306 billion, an increase of over 38% compared to the previous year, reaching levels close to those reached in 2000 (UNCTAD, 2007). FDI inflows increased in all three groups of economies, reflecting the propensity of growth of multinational corporations (MNCs) and favorable economic performance in many parts of the world. While in developed countries FDI reached $857 billion in 2006 (a growth of 45% over the previous year), the flow reached its highest levels in developing countries and economies in transition. The flows in developing countries accumulated $379 billion, representing an increase of 21% over 2005, while the flows to transition economies reached $69 billion, representing an increase of 68% compared to 2005 (UNCTAD, 2007).
The major sources of FDI were MNCs from developed countries, especially the European Union (EU). MNCs from developing countries and economies in transition continued their international expansion, led by China (UNCTAD, 2007).
The flows of FDI into Brazil started primarily during the 1955 - 1960 period, when specific governmental programs were created to attract foreign capital as strategy for industrial development through import-substitution industrialization. In the 1970s, the amount of capital went down, mainly due to the oil shock associated with macroeconomic crisis.
The 1970s were characterized by a large FDI inflow into the Brazilian economy. The main determinants of the FDI supply abundance were related to economic growth orientation and a nondiscriminatory foreign capital police consolidation. During the 1980s, there was a reversal of capital flows, essentially from the lack of credibility due to non-accomplishment of external obligations, economic instability and increased uncertainty associated with anti-inflationary plans. Starting in the 1990s there was an extraordinary recovery of FDI flow growth, reflecting the financial globalization effects and mergers and acquisitions (M&A) possibilities due to the opening and privatization of the Brazilian economy (Fernandes & Campos, 2008).
The Brazilian economy experienced a boom in FDI flows in 2000. After this period, FDI flows to the Brazilian economy decreased, following the world's FDI behavior, but also reflecting the inexpressive Brazilian economy's growth and the end of the privatization phase that marked the 90s. In 2004, there was a reaction to FDI inflows and, according to the United Nations Conference on Trade and Developmen (UNCTAD, 2007), FDI to the Brazilian economy had the highest increase rate in the world in 2007 (from $18.8 billion in 2006 to $37.4 billion, representing an increase of 99.3%). This new record surpassed 2000, when FDI inflows reached $32.8 billion, and 22% of the total amount of FDI inflows were related to privatization operations. The new record occurred even without privatization operations, reinforcing the significance of the record reached in 2007.
The upward movement of FDI in the Brazilian economy in recent years occurred simultaneously with appreciation of the Real (R$, the...
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