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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.
2. Overall picture
Population in
Millions
(2000)
Per Capita
Gross
National
Income in
US$ (2000)
GDP Per
Capita
Percent
Growth
(1990-1999)
Percent
Average
Annual GDP
Growth
(1990-1999)
Brazil
170
3580
0.4
1.8
India
1016
450
3.7
5.6
South
Africa
43
3020
-0.7
1.3
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
3. FDI inflows US$mn
Year
World
1990-95
1996
1997
1998
1999
2000
2001
225321 386140 478082 694457 1088263 1491934 735146
Brazil
2000
10792
18993
28856
28578
32779
22457
India
703
2525
3619
2633
2168
2319
3403
S.
Africa
301
818
3817
561
1502
888
6653
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 crossborder 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.
4. Policy Regimes
Registration
BRAZIL
With the Brazilian
Central Bank for
new investments,
reinvestments and
remittances of
profits to foreign
countries.
INDIA
•With the
Registrar of
Companies.
•There are two
routes of approval:
automatic
approval by RBI
and approval by
FIPB.
SOUTH
AFRICA
•Need to seek
approval under SA
Reserve Bank’s
exchange control
regulations.
• Investors need
to appoint
consultants/audito
rs/ legal advisors
to register a
company.
Trade Policy
BRAZIL
INDIA
SOUTH
AFRICA
•Member of WTO •Member of
•Member of WTO.
•Brazilian
•WTO Removal of •The Trade,
Industrial and
Foreign Trade
Policy (PICE)
established an
agenda of tariff
reductions.
•A member of
MERCOSUR.
Quantitative
Restrictions on
imports from April
2001.
•A member of
South
SAPTA/SAFTA
Development and
Co-operation
Agreement
(TDCA), signed
with the EU in
October 1999,
•SA is also a
member of SADC
Entry and Establishment
BRAZIL
•Bilateral
Investment
Treaties (BITs).
•Procedure has
been simplified
INDIA
•Bilateral
Investment
Treaties (BITs)
•34 industries
eligible for
automatic
approval up to a
foreign equity
participation level
of 51 percent
SOUTH
AFRICA
•Bilateral
Investment
Treaties (BITs)
• Foreign firms
eligible for
national
investment
incentives
Investment Facilitation Institutions/ Initiatives
BRAZIL
•Invest Brazil
•Other statutory
approvals
•M&A deals competition
authority.
INDIA
SOUTH
AFRICA
•Approval granted •Trade and
through FIPB – a
single window
facility.
•Other statutory
approvals
•M&A deals competition
authority Not at
present but in
future
Investment SA
(TISA)
•Other agencies
are: DTI, IDC,
SBDC, IIC
•Other statutory
approvals
•M&A deals competition
authority.
5. Sectoral Distribution
Ranking of Sectors Attracting FDI
RANK
BRAZIL
(2001)
INDIA
(1991-2001)
1
Tertiary
(59.6)
Tertiary
(56.32)
SOUTH
AFRICA
(2000)
Tertiary
(45.5)
2
Secondary
(33.3)
Secondary
(42.78)
Primary
(28.9)
3
Primary
(7.1)
Primary
(0.9)
Secondary
(26.4)
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.
6. Top Three Investing
Countries
RANK
BRAZIL
INDIA
SOUTH
AFRICA
1
USA
USA
USA
2
Spain
Japan
UK
3
The
Netherlands
Germany
Australia
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