Outward FDI in Brazil: A matter of economicgrowth and institutional configuration

Alma Alicia Bezares Calderón

Claremont Graduate University

Prepared for the FLACSO-ISA Joint International Conference in Buenos Aires,Argentina July 23-25,2014

Outward foreign direct investment (OFDI) has been a topic of interest for a long timenow. For years, OFDI was only reserved for firms coming from developed countries look-ing for ways to increase their productivity or attain new markets. During the last decades,attention has been directed towards the determinants that drive the OFDI of emergingeconomies. This study applies a random effects (RE) generalized least squares method to ex-plore the determinants of OFDI in Brazil. An analysis is conducted to elucidate the im-plications of OFDI on Brazil’s economic growth and social development. Particularly, itverifies the repercussions of Brazilian direct investment on domestic investment, ex-ports and tax burden. The study concludes that, even if OFDI has a positive impact oneconomic development, it has exacerbated social inequality by creating an asymmetrictax burden.

I. Introduction

Outward foreign direct investment (OFDI) has been a topic of interest for a long timenow. Although the main interest has been devoted to FDI from the developed countries,during the last decades the attention has been directed towards the determinants that driveOFDI of emerging economies. At the same time of being major recipients of FDI, BRICScountries1 have emerged as an important source of foreign investment; in 2002, the BRICSaccounted for 1% of the world FDI outflows while in 2012 this share increased to 9 percent.China and Russia are the main sources of outward FDI, explaining 54% and 40% respectivelyof the outward FDI from the BRICS.2.

As the needs and characteristics of the emerging countries are different than those of thedeveloped economies, it becomes necessary to explore if the traditional theories that justifythe internationalization of the firms explain the reasons of investment of the companies of de-veloping countries abroad. More precisely, this study aims to test different hypotheses aboutthe factors determining the outward FDI from Brazilian firms. Based on the model devel-oped by Buckley et al. on China, a random effects (RE) generalized least squares method isemployed to test the different hypotheses using a linear model with log transformations inthe GDP per capita. A Lagrangian multiplier test (LM) to test is conducted to verify if theRE model is preferable than a pooled ordinary least squares test (POLS). Other tests includedare the Wooldridge test for autocorrelation, and the likelihood ratio test for homoscedasticity.

An analysis about the factors that influence the decision of the Brazilian firms to investabroad would not be complete without taking into account the repercussions this has on theeconomic and social development of the country. Therefore, an examination is conducted toverify if an increase of OFDI support the economic growth of the country or, on the contrary,prevents its development and magnifies the gap among the social strata.

The paper is structured as follows: section II includes a review of some of the theoriesabout determinants of FDI. Section III examines the trends of outward FDI in Brazil andassesses how investment has evolved during the last years. Section IV introduces the model,data is presented and the different hypotheses are tested. Section V expose the results and an-alyze them. In section VI, the implications of the results are shown. Section VII, introduces

1BRICS: Brazil, the Russian Federation, India, China and South Africa.2United Nations Conference on Trade and Development, UNCTAD Statistics http://unctadstat.unctad.

org/ (accessed May 2014)

1

some final remarks and proposes some lines for future research.

II. FDI: literature review

As the internalization of firms has increased since the mid-twentieth century, numeroustheories have been added to the economics literature. Explanations about the factors thatintervene for firms wanting to invest abroad rather than preferring other options such as ex-porting have been proposed.

One of the first attempts to explain FDI is based on the Heckscher-Ohlin model of trade,considering only two countries, two factors of production and two goods . In this model, in-vestment is related to differences in returns on capital and stable currencies3.

Yet, the OLI paradigm proposed by Dunning in 2001 is one of the most renowned ex-planations of the determinants of FDI. This is a continuation of the internalization theoryproposed by the author at a Nobel Prize Symposium in Stockholm in 19764.

In this model, the ownership variable (O) accounts for specific productivity advantages ofthe firm, which can be transferred to parent companies in other parts of the world. In this case,a company having intensive ownership advantages compared to other firms in other countrieswill be more willing to invest abroad to exploit these ownership advantages, whenever theirsurpass the cost of establishing abroad . This variable is firm-specific.

When these advantages cannot be transmitted, it is because these advantages are location-specific components (L). In this case, the company will seek to combine its ownership advantageswith the endowments of the host country. Thus, the more location-advantages of the hostcountry, the more likely will be that companies will want to invest there . This variable iscountry-specific5.

Finally, when a company prefers to exploit its advantages inside the firm, instead of sellingthem or their rights, it is understood that the company is developing its internalization ad-

3 Faeth, I. (2009), ”Determinants of Foreign Direct Investment- a tale of nine theoretical models”, Journal ofEconomic Surveys, Vol. 23 (1): 165-196

4Dunning, J. (2001), ”The Eclectic Paradigm of International Production: Past, Present and Future”, Interna-tional Journal of Economics of Business, Vol. 8 (2):173-190

5Dunning, J, The Eclectic Paradigm of International Production, pp.174.

2

vantages (I). These advantages are a combination of the previous ones, and thus, the greaterthe benefits to internalize these advantages, the more likely is that the firm will want to investabroad . This variable is firm-specific 6.

Following this paradigm, four general types of FDI can be identified: 1) resource-seekingFDI (natural, physical or human resources); 2) market-seeking FDI (looking to cover a spe-cific foreign market); 3) efficiency-seeking FDI (seeking specialization); and 4) strategic-asset-seeking FDI (to protect or advance the global strategy of the company)7. These models havebeen adapted to include vertical and horizontal FDI: when asymmetric endowment of factorsexists, vertical FDI appears while in the horizontal FDI approach, similar activities are con-ducted in different locations8.

Considering the four types of FDI, some hypotheses about the Brazilian outflows of FDIcan be developed:

Natural resources seeking FDI

Brazil is considered as a megadiverse country9. Thus, it is just possible to think that Brazil-ian firms are interested in horizontal FDI that allows them to exploit their knowhow abroad.

H1: Natural resources in the host country are positively related with Brazilian outflows ofFDI.

Market seeking FDI

Notwithstanding its large internal market, this emerging economy may be looking to reachnew horizons that adapt to the interests of Brazilian companies.

H2: Brazilian outward FDI is connected positively with relative host market size

Efficiency-seeking FDI

6Ibid.7Faeth, I. Determinants of Foreign Direct Investment, pp.171-1728Ibid.9CIA The World Factbook (2013). https://www.cia.gov

3

As Brazilian firms consolidate their investments abroad, they may want to rationalize theirproduction in the MERCOSUR region, each country specializing in a different segment ofthe final process.

H3: Countries located in the MERCOSUR area are more likely to be selected by Brazilianfirms to make their investments

Strategic-asset-seeking FDI

As Brazil is considered as one of the most prominent emerging countries, its firms mightbe looking to access technology, knowledge and other intangible capabilities to internalizethese advantages and sustain the economic growth of Brazil.

H4: Endowments of technological and human capital are associated positively with Brazilianoutflows of FDI

In addition to the axioms related to the four types of investment, other hypotheses relatedto external factors have been proposed in the FDI literature:

Taxes

Taxes are considered to have a negative impact on the decision of a firm to invest. Thisproblem can be somewhat diminished when companies decide to invest in tax havens, withreduced or zero tax burdens and simplified corporate and financial rules. Companies wantingto invest abroad go to these countries and from there, funds may be invested in other non-taxhaven countries10.

H5: Tax haven countries are more likely to receive Brazilian outflows of FDI

Exchange rate

Two factors related to exchange rates affect outward FDI: volatility and appreciation of thelocal currency. In the first case, a more volatile exchange rate vis-à-vis the local currency willhave a negative effect on outflows of FDI. In the second case, an appreciated local currency

10 KPMG in Brazil, Brazilian Transnational Companies, 2008. http://www.kpmg.com.br

4

will have a positive effect on FDI11.

H6: A stable but depreciated currency on the host country will have a positive impact onBrazilian FDI outflows to that country.

Inflation rate

Volatile and unpredictable inflation is related to instability and uncertainty. In addition,inflation rates are a measure of the performance of exports. Thus export-oriented firms maydiminish their interest to invest in countries with high inflation12.

H7: Inflation is associated negatively with investment of Brazilian outflows if FDI.

Institutions and political risk

High levels of corruption increase the cost of doing business and reduce efficiency, whilepolitical instability and violence will be determinants against FDI inflows.Therefore, poorinstitutions and high political risk will reduce FDI as companies interested in penetrating amarket will prefer to export or license their products13.

H8: Increasing political risk in the host country is negatively related to Brazilian FDI.

Infrastructure

In previous studies, it has been found that FDI is more likely to occur in countries withbetter infrastructure, generating a crowding-in effect14.

H9: Good quality infrastructure is linked positively with Brazilian outward FDI.

11 Blonmigen, B (2005), ”A Review of the Empirical Literature on FDI determinants”, National Bureau of Eco-nomic Research, Working paper 11299

12 Buckley, P et al. (2007), ”The Determinants of Chinese Outwards Foreign Direct Investment”, Journal ofInternational Business, Vol. 38: 499-518

13Ibid14Glass, A. Infrastructure and FDI (2008), in Ramkishen S. Rajan and Kenneth A. Reinert, Princeton Ency-

clopedia of the World Economy, Princeton University Press

5

Substitution developed-developing countries

Some studies have mentioned the difference on the goals of firms investing in developed ordeveloping countries. On the first scenario, companies seek to internalize capacities related totechnological knowhow. When investing in developing countries, companies seek low manu-facturing costs and, possibly, a week institutional environment. Therefore, there is a tradeoffbetween investing in a developed and developing country15.

H10: There is a substitute relationship between developed countries and developing coun-tries

Unemployment

The final impact of unemployment is uncertain, although we would expect it to be positive,as the pool of workers available becomes larger. However, it can also be negatively associatedwith FDI as it indicates poor economic health of the host economy or a high-regulated marketlabor.

H11: Unemployment on the host country is associated positively with Brazilian FDI.

Cultural proximity

The use of portuguese as an official language facilitate the easiness of doing businesses.

H12: Portuguese-speaking countries are more likely to receive Brazilian FDI.

Intensity of trade relations

In some studies, exports have been found to be a previous step to investment16 , althoughit can also be seen as a complementary activity. Furthermore, imports help the firms to inter-nalize the resources received17.

15Duanmu, J (2012), ”Firm heterogeneity and location choice of Chinese Multinational enterprises”, Journal ofWorld Business, Vol. 47: 64-72

16Blonmigen, B (2005),B A Review of the Empirical Literature on FDI determinants, pp. 1617Buckley, P et al. The Determinants of Chinese Outwards Foreign Direct Investment, pp. 507

6

H13: Total trade with the host country is positively related to Brazilian FDI

III. Brazilian OFDI

Although the UNCTAD reports outward Brazilian investments since the 1980s, it has beenonly since the end of the 1990s and most precisely during the first decade of the 2000s thatFDI outflows from Brazil have gained momentum. In fact, it is only since 2001 that the Cen-tral Bank of Brazil conducts an annual survey to measure the annual outward investment flows.

This increase in outward investment coincides with the emergence of Multilatinas in theregion, mainly from Mexico and Brazil, and multinationals from other emerging countries,mostly located in Asia. In the case of Latin American multinationals, they attained an invest-ment record of almost 42,000 million dollars in 2006, the double than in 200518.

In Latin America, Brazil has shown the most prominent surge of FDI outflows: the coun-try generates 40% of the total OFDI in the region19. This increase in the eagerness of Brazilianfirms to participate in other financial markets is usually thought as the result of an intensifi-cation of internal competition, the appreciation of the Real, and the process of deregulationand privatization that the country has experienced in recent years20.

Three have been the pivotal sectors that have boosted Brazilian OFDI. First, the oil sectorrepresented by Petrobras, a semi-public company who since the 1980 has been looking for oilsources to satisfy the needs of the internal market. Secondly, Brazilian banks willing to attaininternational markets to satisfy the needs of the Brazilian companies located abroad. Thirdly,engineering and construction companies looking for infrastructure projects abroad to offsetthe diminishing demand in Brazil21.

Backed by these industries, other Brazilian sectors have expanded abroad. According tothe Central Bank of Brazil, the services sector has been the most well represented, accountingfor 60% of total FDI outflows in 201122, being the financial industry the most flourishing in

18Santiso, J (2008), ”La emergencia de las Multilatinas”, CEPAL19Ibid.20KPMG in Brazil, Brazilian Transnational Companies, 2008. http://www.kpmg.com.br21Tavares, M (2006), ”Investimento Brasileiro no exterior: panorama e consideraçoes sobre políticas públicas”,

CEPAL22Central Bank of Brazil http://www4.bcb.gov.br

7

this sector. The Brazilian firms in the metallic mineral extraction sector also keep an intensiveactivity abroad23. On the contrary, the industrial sector keeps only a marginal contribution tothe total OFDI24.

Figure 1: Brazilian OFDI by sector of activity-2006 (% of total outflows)

These numbers might be somewhat different if we take into account that many invest-ments of Brazilian companies are conducted throughout a holding company, and not directlyby the parent firm, who might have a different line of business25. Certainly, this represents amajor obstacle in the attempt to elucidate the motivations of Brazilian investors to go over-seas. However, detecting the leading Brazilian multinationals, can serve as a guide to identifythe sectors that generate most of the Brazilian outflows.

In 2006, the Fundaçao Dom Cabral (FDC) and the Columbia Program on InternationalInvestment (CPII) released a survey containing a list of the Brazil’s top multinational enter-prises. These companies had $56 billion dollars on assets abroad, which represent almost halfof the total outflows of FDI of Brazilian companies. The firms are mainly located in sectorsrelated to the extraction of natural resources, although companies manufacturing industrial

23Ibid.24Ibid.25KPMG in Brazil, Brazilian Transnational Companies, 2008. http://www.kpmg.com.br

8

Figure 2: OFDI- top 10 activities 2007-2011 (% of total outflows)

products, and service companies are also included in the list. According to the survey, CVRD,Petrobras and Gerdau account for more than two-thirds of the total assets of the top 20 multi-nationals; excepting from Petrobras, the rest is privately hold. Most of the companies becameinternational after 1997 and, in the year the survey took place, the conglomerate of the top20 multinationals were present in 51 countries outside Brazil, although most of their activitieswere conducted in Latin America26 (see Appendix A)

Another way to elucidate the factors that influence Brazilian OFDI is to look at the coun-tries selected as main destinations of investment. Here, the Central Bank of Brazil reportsthe financial centers located in the Caribbean as the primary recipients of Brazilian FDI. TheBrazilian investment in Uruguay, the Netherlands and some states of the United States couldalso be linked to their favorable tax legislation27. Other countries that appear as importantdestinations of Brazilian FDI are Argentina and Portugal (see Appendix B).

IV. The model26Brazil’s Multinationals take off, FDC-CPII (2007) http://www.vcc.columbia.edu/files/vale/documents/

Brazil_2007.pdf27In the case of the United States, this effect is not believed to be large, as only some states maintain this kind

of regulations and it doesn’t appear to be the principal cause of Brazilian FDI. Tavares, M (2006), InvestimentoBrasileiro no exterior: panorama e consideraçoes sobre políticas públicas.

9

FDI = βo + β1LGDP + β2LOREMETEXP + β3PATTOT + β4LEXCHRATE+ β5TAXHAV + β6INF + β7PRSPV + β8PRSGE + β9PRSRQ + β10PRSCC +β11LFUELEXP + β12TPHNES + β13LUNEMP + β14LTTRADE + β15DEV +β16PORT + β17SECENROLL + β18MCSUR

Stated above is the model that satisfied the assumptions of normality and homoscedastic-ity and that provides a better goodness of fit.

In this model, the dependent variable is the Brazilian investment in the host country mea-sured in USD million dollars. This amount includes direct investment plus intra-companyloans. Ninety-six countries are included in a well-organized balanced panel data set. As infor-mation is reported by the Central Bank of Brazil in a different way for the period 2001-2006and the period 2007-2011, tests were conducted to verify if the results were consistent acrossthe time. Data is clustered whenever a territory belongs or is administered by a third partycountry. In the case of the UK and the British territories, country data is from the UK; how-ever, as most of them are tax havens administered by the UK, the tax haven dummy variabletakes, for those territories, the value of 1.

The statistical methods used are pooled ordinary least-squares (POLS) and random effects(RE)28 As the model includes four dummy variables, it is not feasible to use fixed effects (FE).A Breusch-Pagan Lagrange multiplier test is conducted to identify if the RE model providesbetter fitted results.

28This technique to test what methodology provides the best fit is proposed by of Buckley et al. in their paperof OFDI from China.

10

Tabl

e1:

Des

crip

tion

of th

e va

riabl

es a

naly

zed

in th

e m

odel

Tabl

e 1

Varia

ble

Des

crip

tion

Hyp

othe

ses

Dat

a so

urce

FDI-

dep

ende

ntva

riabl

eA

nnua

l out

flow

of B

razi

lian

FDI

Cen

tral

Ban

k of

Bra

zil

LGD

PN

atur

al lo

gari

thm

of

host

cou

ntry

GD

Pin

con

stan

t USD

(200

5)M

arke

t se

ekin

g - r

elat

ive

mar

-ke

t siz

eU

NC

TAD

and

UN

Stat

a fo

rLi

etch

enst

ein,

Puer

to R

ico

and

Net

herla

nds A

ntill

es (2

013)

OR

EMET

EXP

Ore

s and

met

al e

xpor

ts %

of t

otal

ex-

port

s of t

he h

ost c

ount

ryN

atur

al re

sour

ces-

seek

ing

Wor

ld B

ank

Dev

elop

men

t In

-di

cato

r (20

13)

PAT

TO

TTo

tal (

resid

ents

plu

s no

n-re

side

nts)

annu

al p

aten

t reg

istra

tion

in th

e ho

stco

untr

y

Stra

tegi

c-as

set-s

eeki

ngW

orld

Ban

k D

evel

opm

ent

In-

dica

tor (

2013

)

LEX

CH

RAT

EN

atur

al lo

garit

hm o

f hos

t cou

ntry

of-

ficia

l ann

ual a

vera

ge e

xcha

nge

rate

agai

nst B

razi

lian

Rea

l

Exch

ange

rate

UN

CTA

DSt

atist

ics (

2013

)

TAX

HAV

Dum

my

varia

ble

1= t

ax h

aven

cou

n-tr

y;0=

oth

erw

iseTa

xes

Con

gres

sion

al R

esea

rch

Ser-

vice

(201

3)IN

FH

ost

coun

try

annu

al in

flatio

n - C

PIan

nual

ave

rage

Infla

tion

Wor

ld B

ank

Dev

elop

men

tIn

dica

tor

and

IMF

Stat

istic

s(2

013)

PRSP

VPo

litic

al S

tabi

lity

and

Abs

ence

of V

i-ol

ence

in th

e ho

st co

untr

y (h

ighe

r val-

ues a

re li

nked

to m

ore

stab

ility

)

Inst

itutio

ns a

nd p

oliti

cal r

iskPo

litic

al R

isk

Serv

ices

Int

er-

natio

nal C

ount

ry R

isk

Gui

de(P

RS)

PRSG

EG

over

nmen

t Eff

ecti

vene

ss i

n th

eho

st c

ount

ry (h

ighe

r val

ues a

re li

nked

to m

ore

effec

tiven

ess)

Inst

itutio

ns a

nd p

oliti

cal r

iskPo

litic

al R

isk

Serv

ices

Int

er-

natio

nal C

ount

ry R

isk

Gui

de(P

RS)

11

PRSR

QRe

gula

tory

Qua

lity

in th

e ho

st c

oun-

try

(hig

her v

alue

s are

link

ed to

mor

ere

gula

tory

qua

lity)

Inst

itutio

ns a

nd p

oliti

cal r

iskPo

litic

al R

isk

Serv

ices

Int

er-

natio

nal C

ount

ry R

isk

Gui

de(P

RS)

PRSC

CC

ontr

ol o

f C

orru

ptio

n in

the

hos

tco

untr

y (h

ighe

r va

lues

are

link

ed t

obe

tter

con

trol

)

Inst

itutio

ns a

nd p

oliti

cal r

iskPo

litic

al R

isk

Serv

ices

Int

er-

natio

nal C

ount

ry R

isk

Gui

de(P

RS)

LFU

ELEX

PN

atur

al lo

gari

thm

of

host

cou

ntry

fuel

exp

orts

- % o

f tot

al e

xpor

tsN

atur

al re

sour

ces-

seek

ing

- Oil

avai

labi

lity

Wor

ld B

ank

Dev

elop

men

t In

-di

cato

r (20

13)

TPH

NES

Hos

t co

untr

y nu

mbe

r of

tel

epho

nelin

es p

er 10

0 pe

ople

Infr

astr

uctu

reW

orld

Ban

k D

evel

opm

ent

In-

dica

tor (

2013

)LU

NEM

PN

atur

al l

ogar

ithm

of

ost

coun

try

unem

ploy

men

t- %

of t

otal

labo

r for

ceU

nem

ploy

men

tW

orld

Ban

k D

evel

opm

ent

In-

dica

tor (

2013

)LT

TR

AD

EN

atur

al lo

garit

hm o

f ann

ual b

ilate

ral

trad

e Br

azil-

host

cou

ntry

Inte

nsity

of t

rade

rela

tions

UN

CTA

DSt

atist

ics (

2013

)

DEV

Dum

my

varia

ble

1= d

evel

oped

cou

n-tr

y;0=

oth

erw

iseSu

bsti

tuti

on

deve

lope

d-de

velo

ping

cou

ntrie

sW

orld

Ban

k cl

assi

ficat

ion

ofhi

gh-in

com

e co

untr

ies (

2013

)PO

RTD

umm

y va

riabl

e 1=

por

tugu

ese

as o

f-fic

ial l

angu

age;

0= o

ther

wise

Cul

tura

l pro

xim

ityC

omun

idad

e do

s Paí

ses d

e Li

n-gu

a Po

rtug

uesa

(201

3)SE

CEN

ROLL

Hos

t co

untr

y ne

t an

nual

enr

ollm

ent

rate

Stra

tegi

c-as

set-s

eeki

ngW

orld

Ban

k D

evel

opm

ent

In-

dica

tor (

2013

)M

CSU

RD

umm

y va

riabl

e 1=

Mer

cosu

r m

em-

ber i

n th

at y

ear;

0= o

ther

wise

Effici

ency

seek

ing

Secr

etar

ía d

e M

erco

sur

12

V. Results

Different regressions were conducted to find the model that better explains the reasonsBrazilian companies invest abroad. GDP was tested in current and constant prices (2005) andGDP growth was also evaluated. Likewise, GDP per capita was included using current andconstant prices (2005). All variables were assessed in their log transformation forms. Ho-moskedasticity was also tested to verify if a robust model was needed. The results indicatedthat the assumption of homoskedasticity was fulfilled. As the sample is big enough, the coef-ficients are asymptotically normal.

The results using the POLS and RE methods provide similar results. However, after run-ning the Breusch and Pagan Lagrangian multiplier test for random effects, the results favorthe RE model. Notwithstanding, after conducting the Wooldridge test for autocorrelation,serial autocorrelation was found (see Appendix C). Therefore, a model using generalized leastsquares (GLS) allowing estimation in presence of correlation was used. This method was se-lected as it corrected the autocorrelation problem and reported that, jointly, the variables werestatistically significant.

On the first column, the table reports the results for the Pooled OLS model, which is after-wards excluded as the LM test help us to conclude that the random effects model is preferred.For the random effects model, we get four different versions: in the second column and thirdcolumns we do not take into account serial correlation. In the third column, natural logarithmsare used for skewed variables. The last two columns fix the autocorrelation problem. As inthe previous columns, variables in their normal form and in natural logarithms are considered.

Following previous work on determinants of FDI, this paper uses the results reported onthe fifth column, as non-linearities can be expected. On the theses established, the taxes hy-pothesis seems highly accepted: the variable is statistically significant at the 1% significancelevel and the effect is rather large. GDP is also significant although the effect seems minimal.The efficiency seeking hypothesis has a large and statistically significant as well, which meansthat being part of Mercosur influences positively for receiving Brazilian FDI.

Other hypotheses that are supported with this model are the cultural proximity and thenatural-resources-seeking hypotheses, meaning that portuguese-speaking countries and countries

13

Figure 3: Determinants Brazilian OFDI

14

with expanding oil-sectors will experience an increase in Brazilian investment. As stated above,unemployment is associated positively with FDI and the effect is significative at the 5% sig-nificance level.

In the case of the institutions and political risk hypothesis, government effectiveness ap-pear as having a positive and significant impact on the eagerness of firms from Brazil to invest.Nonetheless, political stability seems as having a large and negative impact which is significantat the 1% significance level. Buckley et al. found a similar unpredicted negative effect whenmeasuring the decrease of country risk for the case of China. They argue that developingcountries have dealt with market imperfections and weak institutional environments so thesecountries have a different interpretation of risk than the one founded in developed countries.This is an interesting finding that needs a more detailed evaluation.

Finally, the hypothesis of market-seeking is supported by this model: the effect is large andsignificant at the 1% significance level. The rest of the variables appear not to have a signifi-cant influence on the decision of Brazilian firms to invest.

VI. Implications

On of the main objectives of this research is to elucidate how the investment of Brazilianfirms abroad impact the economic and social development of this country. Although a muchdetailed study would be necessary in order to provide a more exhaustive conclusion, here aresome ideas sustained by other empirical work fitted into the specific configuration of Brazil.

Domestic investment

On a paper about the effects of OFDI from Korea, Seungjin Kim (2000) states that theeffect of OFDI on domestic investment depends on how the investment is financed29.

In the case of Brazil, it seems that the capital outflow has not have a negative impact ondomestic investment. According to the World Bank, gross capital formation30 remained be-tween 16 and 20% of GDP, a percentage similar to that of the United States31. This values are

29Kim, S.(2000), ”Effects of outward foreign direct investment on home country performance: evidence fromKorea”, NBER, p.295-317

30Known before as gross domestic investment.31The World Bank Database http://data.worldbank.org/indicator/NE.GDI.TOTL.ZS?page=2

15

confirmed by the IMF, who reports similar numbers for total investment32.

The Brazilian Development Bank, which is the institution charged of promoting and di-recting domestic and international investment in the country, reports that between 2006 and2008, the gross fixed capital formation grew above GDP, thus mobilizing strategic sectors andexpanding the investment on infrastructure to create a spillover effect33. During this period,OFDI from Brazil showed an important expansion, rejecting the thesis that domestic invest-ment was affected by an increase of investment of domestic firms abroad.

In addition, a Working paper published by the IMF concludes that FDI inflows crowd indomestic investment34. If we consider that in 2012 inward FDI equaled 27.5% of GDP, wecould expect that domestic investment in Brazil will be favored, or that at least, it will notsuffer for an increase in OFDI.

Taxes- tax burden

As previously shown, the tax haven variable appears as one of the most important and sig-nificant variables in the model. This means that Brazilian firms are willing to send their moneyprimarily to these financial centers and not precisely invest it in productive activities insidethe country or abroad.

Different reasons might drive the decision of Brazilian firms to invest their money in taxhavens. Tax incentives provided to inward FDI, either when foreign firms make a direct in-vestment or when they act as equity investors, could be one of the reasons Brazilian firmsprefer to go to a tax haven and afterwards reinvest in the country, thus getting those incen-tives. This can be clearly observed on the registry of foreign capitals in Brazil published by theCentral Bank of Brazil, where many of the investors are companies already existent in Brazilbut whose capitals come from tax havens such as Bahamas or the Cayman Islands35. Otherreasons may be related to imperfections in the domestic capital market, financial expertise,

32IMF, World economic outlook 2014 http://www.imf.org/external/pubs/ft/weo/2014/01/weodata/

index.aspx33Teixeira et al., ”The global financial crisis and the investment outlook in Brazil for 2009-2012”, Brazilian

Development Bank, 2009 http://www.bndes.gov.br/SiteBNDES/export/sites/default/bndes_en/Galerias/

Download/insight60.pdf34Al-Sadig, A. (2013) ”Outward foreign direct investment and domestic investment: the case of developing

countries”, IMF Working paper WP/13/52º35Central Bank of Brazil http://www.bcb.gov.br/?REGCAPESTR

16

or the stable institutions that those country usually have36: if we go back to the results of themodel, government effectiveness has a significant effect on Brazilian FDI.

Despite those arguments, investment in tax havens has been closely related to the exacer-bation of social inequality and an institutional degradation.

Tax havens reduce taxation efficiency and increase the tax burden to the tax base. A studyconducted by Gabriel Ondetti mentions that the overall tax burden in Brazil equals 35% ofGDP37 . Meanwhile, the Institute for Socioeconomic Studies reports that 9 percent of theGDP goes to tax havens every year38. This contributes to the constitution of an unequal taxstructure, where the largest share of taxes are collected on wages and not on capital and otherassets39. The Institute of Applied Economic Research of Brazil states that, roughly, two thirdsof the taxes are collected as taxes in consumption, while only one third belongs to taxes oncapital40.

Consequently, while the top decile of the richest population disburses 22.7% of their in-come in taxes, the lowest decile contributes with 32.8%. What this displays is that, even if thetax burden in Brazil is the same as the one found in rich countries, the structure is different.While in Brazil, indirect taxes are prioritized, in industrialized countries, taxation attentionis focused on direct taxes41.

This might be one of the major reasons to explain why Brazil remains one of the most un-equal countries in the world. Even if the government has made colossal efforts to eradicatepoverty and distribute wealth among the population in a more egalitarian way, the tax systemprevents the success of those policies.

In addition to the effect on the tax burden, tax havens have an incidence on the institu-36Sutherland, D. et al. ”The role of Caribbean tax havens and offshore financial centers in Chinese outward

foreign direct investment”, draft37Ondetti, G. (2011), ”Taxation and historical legacies: Brazil and Mexico compared”,prepared for the ICPA

Forum seminar38Cernov-Rocha, A. (2013), ”What does tax justice has to do with the guarantee of rights?”, Human Rights in

Brazil Report39Ibid40Lula, E. ”Justiça tributária-Quem vai pagar a conta?”, Desafios do desenvolvimento, IPEA, Ed. 43, 200841Ibid, Cernov-Rocha, A.)

17

tional capacity, weakening the legal system and increasing corruption42. Although the CentralBank of Brazil makes an effort to track the outflows and inflows of FDI in the country, it isnot an easy task to prevent tax avoidance, something that, in turn, weakens the institutionalcapacity of the country. As a result, this creates institutional gaps that can be leveraged bypoliticians and public servant looking after their own private interest.

Another consequence of this phenomenon deals with the fact that, when money goes to atax haven destination, it is frequently directed towards an unproductive activity. Therefore,there is no opportunity for the money to increase productivity in Brazil or to serve as a wayto generate a spillover effect when investing in a productive activity abroad43. According tothe Government Commission on Capital Flight from Poor Countries of Norway, this effectis particularly evident in developing countries with abundant natural resources and is relatedwith a rent-seeking strategy of ”corrupt politicians and destructive entrepreneurs”44.

Exports

OFDI might be negatively correlated with exports. Firms might prefer to transfer produc-tion of a product to another site, instead of exporting it. On the other hand, horizontal FDIcalls for a multi-location production, where different intermediate parts are manufactured indifferent countries. This would promote exports, as the firms might need to send the inter-mediate goods out of the country.

Considering the specific case of Brazil, it is important to remember that the efficiency-seeking hypothesis was accepted, as the Mercosur variable appears to be statistically signifi-cant at the 1% and its impact is large. On the one hand, this could mean that the Brazilianfirms take advantage of the Mercosur agreement and implement horizontal investments in theregion. On the other hand, one may believe that companies in Brazil prefer to go to other Mer-cosur countries and direct their production from there. However, this last hypothesis seemsunlikely.

Looking at the data published by the UNCTAD, during the first year of the XXI Century,the intra-group trade in the Mercosur region suffer a relevant decrease. However, after 2003,

42Government Commission on Capital Flight from Poor Countries of Norway, Tax havens and development,Ministry of Foreign Affairs of Norway (2009)

43Ibid.44Ibid.

18

total trade among the members of market has steadily increased45.

At the world level, Brazil has maintained a constant expansion of its exports. Taking intoaccount that the country mainly exports commodities and intermediate goods, it is implausi-ble that an increase in OFDI will have a negative impact on exports from Brazil46.

VII. Conclusion

The objective of this paper is twofold. First, it attempts to formally describe the determi-nants of Brazilian outflows of FDI; second, it tried to delineate some ideas about the implica-tions the outflows of investment have on the economic and social development of Brazil. Toattain the first objective, some classical hypotheses were included and some other were incor-porated to capture the specificities of Brazilian OFDI. To reach the second goal, the papernot only focus on the effect the expansion of OFDI has on growth but it also aimed to see ifthe destination of investment has an impact on Brazilian development.

In the elaboration of the dataset, many problems were encountered, being the most crucialthe information about Brazilian FDI outflows. While it is important to recognize the effortthat the Brazilian authorities have done to track the outward FDI, it becomes hard to iden-tify the final sectors and countries that receive the Brazilian FDI. In addition, the differentway used to report the information in two short periods complicates the analysis. Additionalresearch about this topic should be conducted to compare the results with those found in thispaper. For instance, a model including lagged values can be used as it can be expected thatcompanies look to the past performance of a country to make their decision to invest or notto invest in a specific country. Nonetheless, the model developed in this paper is valuable asit provides a guide for future research and confirms information that previous literature andthe intuition sustain.

Most importantly, further analysis is necessary in the case of the implications of BrazilianOFDI. As demonstrated, even if no negative impact of OFDI on exports or domestic invest-ment was found but, on the contrary, a steady increase in these values was observed in recentyears, Brazilian OFDI in tax havens might be correlated with the persistence of high inequality

45Although 2006 shown a small decrease in total trade. UnctadStat http://unctadstat.unctad.org/wds/

TableViewer/tableView.aspx46Some of the products that Brazil exports are iron ore, crude petroleum, soybeans and raw sugar. Source:

Observatory of economic complexity http://atlas.media.mit.edu/profile/country/bra/

19

in the country, as taxation becomes inefficient and the 10% of the population with the lowestincome gets a burden higher than that of the 10% richest population. This creates a paradox:even if Brazilian OFDI is the result of domestic growth and can propel it, it could also be adetonator of social inequality and institutional inefficiency. A more detailed research mightbe considered in the future to verify this and other implications of OFDI from Brazil.

20

Appendix A. Top 20 Brazilian multinationals

Figure 4: Ranking of the top 20 Brazilian multinationals-2006 (In terms of foreign assets)

21

Appendix B. Main recipients of Brazilian FDI

Figure 5: 2001-2006 (USD million)

22

Figure 6: 2007-2011 (USD million)

23

Appendix C. Autocorrelation test

Figure 7: Wooldridge test for autocorrelation

24

References[1] Al-Sadig, A. (2013) ”Outward foreign direct investment and domestic investment: the case

of developing countries”, IMF Working paper WP/13/52

[2] Asiedu, E and Lien, D. (2011) ”Democracy, Foreign Direct Investment and natural re-sources”, Journal of International Economics, Vol. 84: 99-111

[3] Blonmigen, B (2005), ”A Review of the Empirical Literature on FDI determinants”, Na-tional Bureau of Economic Research, Working paper 11299

[4] Brazilian Development Bank (domestic investment) http://www.bndes.gov.br/

SiteBNDES/bndes/bndes_en/Institucional/The_BNDES_in_Numbers/Annual_Report/

(accessed June 17, 2014)

[5] Buckley, P et al. (2007), ”The Determinants of Chinese Outwards Foreign Direct Invest-ment”, Journal of International Business, Vol. 38: 499-518

[6] Central Bank of Brazil (Domestic capitals abrad) http://www4.bcb.gov.br (accessed May2014)

[7] Cernov-Rocha, A. (2013), ”What does tax justice has to do with the guarantee of rights?”,Human Rights in Brazil Report

[8] CIA The World Factbook (Country profile) (2013). https://www.cia.gov/library/

publications/the-world-factbook/rankorder/2119rank.html?countryName=

Brazil&countryCode=br&regionCode=soa&rank=5#br(accessed November 5, 2013)

[9] Comunidade dos Países da Língua Portuguesa http://www.cplp.org/ (accessed Novem-ber 10,2013)

[10] Duanmu, J (2012), ”Firm heterogeneity and location choice of Chinese Multinational en-terprises”, Journal of World Business, Vol. 47: 64-72

[11] Dunning, J. (2001), ”The Eclectic Paradigm of International Production: Past, Presentand Future”, International Journal of Economics of Business, Vol. 8 (2): 173-190

[12] Faeth, I. (2009), ”Determinants of Foreign Direct Investment- a tale of nine theoreticalmodels”, Journal of Economic Surveys, Vol. 23 (1): 165-196

25

[13] FDC-CPII (2007), Brazil ’s Multinationals take off, Fundaçao Dom Cabral andColumbia Program on International Investment http://www.vcc.columbia.edu/files/

vale/documents/Brazil_2007.pdf (accessed November 5, 2013)

[14] Glass, A. Infrastructure and FDI (2008), in Ramkishen S. Rajan and Kenneth A. Reinert,Princeton Encyclopedia of the World Economy, Princeton University Press

[15] Instituto de Pesquisa econômica aplicada http://www.ipea.gov.br/portal/ (accessedJune 2014)

[16] Government Commission on Capital Flight from Poor Countries (2009), ”Tax havensand development”, Ministry of Foreign Affairs

[17] Gravelle, J (2013), ”Tax Havens: International Tax avoidance and evasion”, CongressionalResearch Service

[18] International Monetary Found, IMF Data and Statistics http://www.imf.org/external/data.htm (accessed November 2013)

[19] International Monetary Found, World Economic Outlook Database http://www.imf.org/

external/pubs/ft/weo/2014/01/weodata/index.aspx (accessed May 2014)

[20] Ito, T. and Krueger, A. (2000), ”The role of foreign direct investment in East Asian eco-nomic development”, University of Chicago Press NBER-EASE Volume 9

[21] Kim, S.(2000), ”Effects of outward foreign direct investment on home country perfor-mance: evidence from Korea”, NBER, p.295-317

[22] KPMG in Brazil (2008), Brazilian Transnational Companies. http://www.kpmg.com.br (ac-cessed November 20, 2013)

[23] Kumar, N (2007), ”Emerging TNCs: trends, patterns and determinants of outward FDIby Indian enterprises”, UNCTAD

[24] Lula, E. ”Justiça tributária-Quem vai pagar a conta?”, Desafios do desenvolvimento, IPEA,Ed. 43, 2008

[25] Observatory of economic complexity (Brazilian exports) http://atlas.media.mit.edu/profile/country/bra/

[26] Ondetti, G. (2011), ”Taxation and historical legacies: Brazil and Mexico com-pared”,prepared for the ICPA Forum seminar

26

[27] Political Risk Services (PRS) (2005) International Country Risk Guide (ICRG), [www doc-ument] www.prsgroup.com/ICRG.aspx (accessed November 2013).

[28] Secretaría de Mercosur official website (Member list) http://www.mercosur.int/ (ac-cessed November 20, 2013)

[29] Santiso, J (2008), ”La emergencia de las Multilatinas”, CEPAL

[30] Sauvant, K. et al. (2009), ”Foreign direct investment by emerging market multinationalenterprises, the impact of the financial crisis and recession and challenges ahead”, OECDGlobal Forum on International Investment

[31] Sutherland, D. et al. ”The role of Caribbean tax havens and offshore financial centers inChinese outward foreign direct investment”, draft

[32] Tavares, M (2006), ”Investimento Brasileiro no exterior: panorama e consideraçoes sobrepolíticas públicas”, CEPAL

[33] Teixeira et al., ”The global financial crisis and the investment outlook in Brazil for 2009-2012”, Brazilian Development Bank, 2009 http://www.bndes.gov.br/SiteBNDES/export/

sites/default/bndes_en/Galerias/Download/insight60.pdf

[34] Tognetti, S. (2013), ”Tax incentives and opportunities in Brazil: how to consider it in yourstart up in Brazil?”, BPMG http://www.ttn-taxation.net/pdfs/Speeches_New_York_

2011/08-SilvaniaTognetti.pdf (accessed on June 13, 2014)

[35] UNCTAD, ”Globa l Investment Trends Monitor ” , http://unctad.org/en/

PublicationsLibrary/webdiaeia2013d6_en.pdf (accessed May 2014)

[36] UNCTAD Statistics http://unctadstat.unctad.org/ (accessed May 2014)

[37] United Nations, UNStats http://unstats.un.org/unsd/snaama/introduction.asp (ac-cessed November 21, 2013)

[38] World Bank, World Bank Data http://data.worldbank.org/ (accessed May 2014)

[39] World Bank (2012), Draining development? Controlling flows of illicit funds from developingcountries, The World Bank: Washington

27