Brazil, India and South Africa - Different Continents, Different Experiences

International SeminarFDI Policies and Regulation: How to Foster Economic

Development

Rajeev Mathur, CUTS

1. Importance of 1. Importance of comparisoncomparison• Many Large Emerging Markets (LEMs) received Many Large Emerging Markets (LEMs) received

large FDI inflows during 1990s due to their large FDI inflows during 1990s due to their privatisation (of SoEs) programmes:privatisation (of SoEs) programmes:– PowerPower– WaterWater– TransportTransport– TelecommunicationsTelecommunications– ManufacturingManufacturing

Hence all LEMs had potential for growth for both Hence all LEMs had potential for growth for both domestic and private firms. Three LEMs in the IFD domestic and private firms. Three LEMs in the IFD project, namely, Brazil, India and South Africa. All project, namely, Brazil, India and South Africa. All witnessed increased FDI inflows in 1990s.witnessed increased FDI inflows in 1990s.

• Varying degrees of success:Varying degrees of success:– Policy ineffectivenessPolicy ineffectiveness– External factors such as global slowdownExternal factors such as global slowdown– Regulatory regimesRegulatory regimes

• Brazil received relatively high FDI mainly in services Brazil received relatively high FDI mainly in services industries that did not have a favourable impact on industries that did not have a favourable impact on economic growth.economic growth.

• South Africa experienced very little inward FDI and South Africa experienced very little inward FDI and domestic investment but was the biggest foreign direct domestic investment but was the biggest foreign direct investor in Africainvestor in Africa

• India lagged behind other economies of its size due to poor India lagged behind other economies of its size due to poor implementation of policy and regulatory measures.implementation of policy and regulatory measures.

2. Overall picture2. Overall picture

Population Population in Millions in Millions

(2000)(2000)

Per Capita Per Capita Gross Gross

National National Income in Income in

US$ (2000)US$ (2000)

GDP Per GDP Per Capita Capita

Percent Percent GrowthGrowth (1990- (1990-

1999)1999)

Percent Percent Average Average

Annual GDP Annual GDP Growth Growth

(1990-1999) (1990-1999)

BrazilBrazil 170 170 35803580 0.4 0.4 1.8 1.8

IndiaIndia 1016 1016 450 450 3.7 3.7 5.65.6

South South Africa Africa

4343 30203020 -0.7 -0.7 1.31.3

BrazilBrazil

• Biggest country in South America (size, Biggest country in South America (size, population and economic performance)population and economic performance)

• Its potential is magnified by the Its potential is magnified by the consolidation of regional market consolidation of regional market (MERCOSUR)(MERCOSUR)

• Attracted 40-50 percent of the flow of FDI Attracted 40-50 percent of the flow of FDI to MERCOSUR at the start of 1990s and 40 to MERCOSUR at the start of 1990s and 40 percent of the total inflow of FDI to Latin percent of the total inflow of FDI to Latin America in 1998America in 1998

IndiaIndia

• During the 1970s there was hardly During the 1970s there was hardly any new FDI inflow and remained any new FDI inflow and remained meagre in the 1980s.meagre in the 1980s.

• During the 1990s, wide-ranging During the 1990s, wide-ranging liberalisation of the economy – FDI liberalisation of the economy – FDI inflows rose steadilyinflows rose steadily

South AfricaSouth Africa

• Deep socio-economic inequalitiesDeep socio-economic inequalities

• Despite small market size, in recent Despite small market size, in recent years, there is an increase in years, there is an increase in purchasing power and propensity to purchasing power and propensity to consumeconsume

3. FDI inflows US$mn3. FDI inflows US$mn

YearYear 1990-1990-9595

19961996 19971997 19981998 19991999 20002000 20012001

WorldWorld 225322253211

38614386140 0

478084780822

69445694457 7

1088261088263 3

14919314919344

73514735146 6

BrazilBrazil 2000 2000 10792 10792 1899318993 2885628856 2857828578 3277932779 2245722457

IndiaIndia 703703 2525 2525 36193619 26332633 21682168 23192319 34033403

S. S. AfricaAfrica

301 301 818818 38173817 561561 15021502 888888 66536653

BrazilBrazil

• Increase in the share of transnational Increase in the share of transnational corporations in the economy, corporations in the economy, transfer of property of private and transfer of property of private and public limited companies to foreign public limited companies to foreign companies and reduction of the companies and reduction of the relative importance of the national relative importance of the national capital companies marked the capital companies marked the process of internationalisation.process of internationalisation.

IndiaIndia

• FDI inflows have been modest and in FDI inflows have been modest and in 1990s have been associated with 1990s have been associated with cross-border merger and acquisition cross-border merger and acquisition activity, leading to a shift of control activity, leading to a shift of control over domestic enterprise by foreign over domestic enterprise by foreign firmsfirms

South AfricaSouth Africa

• Significant transformation with the Significant transformation with the GEAR strategy which was oriented GEAR strategy which was oriented towards export-oriented global towards export-oriented global economy. Increased M&A activity.economy. Increased M&A activity.

4. Policy Regimes4. Policy Regimes RegistrationRegistration

BRAZILBRAZIL INDIAINDIA SOUTH SOUTH AFRICAAFRICA

With the With the Brazilian Central Brazilian Central Bank for new Bank for new investments, investments, reinvestments reinvestments and remittances and remittances of profits to of profits to foreign foreign countries. countries.

•With the With the Registrar of Registrar of Companies. Companies.

•There are two There are two routes of routes of approval: approval: automatic automatic approval by RBI approval by RBI and approval by and approval by FIPB.FIPB.

•Need to seek Need to seek approval under approval under SA Reserve SA Reserve Bank’s Bank’s exchange exchange control control regulations.regulations.

• Investors Investors need to appoint need to appoint consultants/audiconsultants/auditors/ legal tors/ legal advisors to advisors to register a register a company.company.

Trade PolicyTrade Policy

BRAZILBRAZIL INDIAINDIA SOUTH SOUTH AFRICAAFRICA

•Member of Member of WTOWTO

•Brazilian Brazilian Industrial and Industrial and Foreign Trade Foreign Trade Policy (PICE) Policy (PICE) established an established an agenda of tariff agenda of tariff reductions.reductions.

•A member of A member of MERCOSUR.MERCOSUR.

•Member of Member of

•WTO Removal WTO Removal of Quantitative of Quantitative Restrictions on Restrictions on imports from imports from April 2001.April 2001.

•A member of A member of South South SAPTA/SAFTASAPTA/SAFTA

•Member of Member of WTO.WTO.

•The Trade, The Trade, Development Development and Co-and Co-operation operation Agreement Agreement (TDCA), signed (TDCA), signed with the EU in with the EU in October 1999, October 1999,

•SA is also a SA is also a member of member of SADCSADC

Entry and EstablishmentEntry and Establishment

BRAZILBRAZIL INDIAINDIA SOUTH SOUTH AFRICAAFRICA

•Bilateral Bilateral Investment Investment Treaties (BITs).Treaties (BITs).

•Procedure has Procedure has been simplifiedbeen simplified

•Bilateral Bilateral Investment Investment Treaties (BITs) Treaties (BITs)

•34 industries 34 industries eligible for eligible for automatic automatic approval up to a approval up to a foreign equity foreign equity participation participation level of 51 level of 51 percentpercent

•Bilateral Bilateral Investment Investment Treaties (BITs) Treaties (BITs)

• Foreign firms Foreign firms eligible for eligible for national national investment investment incentives incentives

Investment Facilitation Institutions/ InitiativesInvestment Facilitation Institutions/ Initiatives

BRAZILBRAZIL INDIAINDIA SOUTH SOUTH AFRICAAFRICA

•Invest Brazil Invest Brazil

•Other Other statutory statutory approvalsapprovals

•M&A deals - M&A deals - competition competition authority.authority.

•Approval Approval granted through granted through FIPB – a single FIPB – a single window facility.window facility.

•Other Other statutory statutory approvalsapprovals

•M&A deals - M&A deals - competition competition authority Not at authority Not at present but in present but in futurefuture

•Trade and Trade and Investment SA Investment SA (TISA) (TISA)

•Other agencies Other agencies are: DTI, IDC, are: DTI, IDC, SBDC, IICSBDC, IIC

•Other Other statutory statutory approvals approvals

•M&A deals - M&A deals - competition competition authority.authority.

5. Sectoral Distribution5. Sectoral Distribution Ranking of Sectors Attracting FDIRanking of Sectors Attracting FDI

RANKRANK BRAZIL BRAZIL (2001)(2001)

INDIA INDIA (1991-(1991-2001)2001)

SOUTH SOUTH AFRICA AFRICA (2000)(2000)

11 Tertiary Tertiary (59.6)(59.6)

Tertiary Tertiary (56.32)(56.32)

Tertiary Tertiary (45.5)(45.5)

22 Secondary Secondary (33.3) (33.3)

Secondary Secondary (42.78) (42.78)

Primary Primary (28.9) (28.9)

33 Primary Primary (7.1) (7.1)

Primary Primary (0.9) (0.9)

Secondary Secondary (26.4) (26.4)

Note: FDI as a percentage of total FDI approvals.

• Growing loss of attraction of the Growing loss of attraction of the manufacturing sector in comparison manufacturing sector in comparison with the services sector in Brazil and with the services sector in Brazil and India.India.

6. Top Three Investing 6. Top Three Investing CountriesCountries

RANKRANK BRAZILBRAZIL INDIAINDIA SOUTH SOUTH AFRICAAFRICA

11 USAUSA USAUSA USAUSA

22 SpainSpain JapanJapan UKUK

33 The The NetherlandsNetherlands

GermanyGermany AustraliaAustralia

7. Experiences in 7. Experiences in InvestmentInvestment BrazilBrazil• Foreign investment regulation till the end of 1980s Foreign investment regulation till the end of 1980s

attracted foreign capital in manufacturing sector. attracted foreign capital in manufacturing sector. • Subsequent recuperation and expansion of the Subsequent recuperation and expansion of the

internal markets in 1990s resulting from structural internal markets in 1990s resulting from structural changes attracted greater FDI in services.changes attracted greater FDI in services.

• The privatisation programme explains preponderance The privatisation programme explains preponderance of services over industry.of services over industry.

• Distinction between Brazilian businesses owned by Distinction between Brazilian businesses owned by domestic capital and foreign capital were eliminated.domestic capital and foreign capital were eliminated.

IndiaIndia• ‘‘First generation’ of reforms in early 1990s achieved First generation’ of reforms in early 1990s achieved

objectives of restoration of BoP and reducing objectives of restoration of BoP and reducing inflation.inflation.

• Privatisation was a prominent failure. The Privatisation was a prominent failure. The disinvestment policy for state-run units did not target disinvestment policy for state-run units did not target foreign investors particularly as in Brazil and SA.foreign investors particularly as in Brazil and SA.

• Differential treatment is limited to a few industries by Differential treatment is limited to a few industries by caps on proportion of equity that the foreign firm can caps on proportion of equity that the foreign firm can hold.hold.

• Bureaucratic tangles and delays emerge as major Bureaucratic tangles and delays emerge as major impediments. impediments.

South AfricaSouth Africa• The GEAR strategy aims at crowding in domestic The GEAR strategy aims at crowding in domestic

investment and increase in exports.investment and increase in exports.• Foreign investors are essentially treated the same Foreign investors are essentially treated the same

way as domestic except for requirements of way as domestic except for requirements of employment of residents and ownership of employment of residents and ownership of immovable property.immovable property.

• Small market size, low economic growth, risk Small market size, low economic growth, risk perception over property rights and unorganised perception over property rights and unorganised labour, regulatory uncertainty and low level of labour, regulatory uncertainty and low level of domestic savings/investment are major impediments.domestic savings/investment are major impediments.

• SA is an important source of FDI in southern African SA is an important source of FDI in southern African region, particularly SADC countries.region, particularly SADC countries.

8. Automobile industry8. Automobile industry

• The industry was the object of various The industry was the object of various incentive policies throughout 1990s in all the incentive policies throughout 1990s in all the three LEMs.three LEMs.

• Prior to reforms in these LEMs the growth in Prior to reforms in these LEMs the growth in automobile sector was primarily due to local automobile sector was primarily due to local content requirements and high tariffs on content requirements and high tariffs on imports:imports:– Lower productivityLower productivity– High cost of vehiclesHigh cost of vehicles– Low volume of productionLow volume of production

• 1990s witnessed widespread 1990s witnessed widespread reforms:reforms:– BrazilBrazil launched productive restructuring launched productive restructuring– Indian Indian auto sector was delicensedauto sector was delicensed– South Africa South Africa launched Motor Industry launched Motor Industry

Development Programme.Development Programme.

• As a result:As a result:– The annual average of investment in The annual average of investment in

automobile industry in Brazil more than automobile industry in Brazil more than doubled from US$500mn in 1980 to US$1.3bn.doubled from US$500mn in 1980 to US$1.3bn.

– In India the contribution of auto industry to In India the contribution of auto industry to GDP rose from 2.77 percent to 4 percent.GDP rose from 2.77 percent to 4 percent.

– South Africa did not export a single motor South Africa did not export a single motor vehicle a decade ago – now it is poised to vehicle a decade ago – now it is poised to export vehicles worth US$6bn.export vehicles worth US$6bn.

9. Challenges9. Challenges

• Growing consensus that potential benefits outweigh Growing consensus that potential benefits outweigh potential costs of FDI means that Governments should play potential costs of FDI means that Governments should play an active role in improving their economies as locations for an active role in improving their economies as locations for FDI.FDI.

• There is a possibility that states/provinces would compete There is a possibility that states/provinces would compete with each other for FDI in LEMs.with each other for FDI in LEMs.

• It is rational for the states to offer incentives but it is It is rational for the states to offer incentives but it is collectively prudent to cease doing so.collectively prudent to cease doing so.

• No conclusive evidence that FDI increases the competition No conclusive evidence that FDI increases the competition of domestic industries as the spillovers are more likely to be of domestic industries as the spillovers are more likely to be vertical than horizontalvertical than horizontal

• The ‘crowding out’ of domestic firms may mean fewer The ‘crowding out’ of domestic firms may mean fewer linkages into the economy and no technological learning linkages into the economy and no technological learning (except in case of IT in India and Pharmaceuticals in Brazil).(except in case of IT in India and Pharmaceuticals in Brazil).

10. Recommendations10. Recommendations

• Improve regulatory framework for Improve regulatory framework for FDIFDI

• Facilitate businessFacilitate business

• Improve economic determinantsImprove economic determinants