FDI in the BRIC: Changing the Investment Landscape

The economic and financial crisis seems to have altered the global investment landscape considerably. It is now the developing countries that are taking the lead in attracting investments as well as investing globally (UNCTAD, 2009). The BRIC economies, in particular, have emerged as the most favoured destination for foreign direct investment (FDI). Governments of the BRIC economies are investing heavily in infrastructure, industry, education, healthcare, housing and tourism, with the realisation that they have the opportunity to attract FDI, increase GDP, substantiate growth of import and export trade at the same time as increasing local employment and wealth. As these four states gain importance on the global stage, the international community will increasingly look to the BRIC nations to stabilize the world’s economic system. If the BRICs can productively work together today, it should bode well for the future economic order. Together, they will continue to build their economic strength. In this paper, we will look at one of the key drivers of their economic might – their trade and investment potential, in particular foreign direct investment.

The structure of the paper is the following. Section 1 looks at the global scenario in FDI inflows and examines the trends in each of the four BRIC economies in detail. Section 2 presents a sectoral breakdown of the inward FDI in the BRIC economies. Section 3 analyses the factors that make the BRIC economies attractive for FDI inflows. Section 4 examines the relation between economic growth and FDI. Section 5 discusses the rise of outward FDI from BRIC economies. Section 5 outlines the relevant policy issues and Section 6 presents the conclusions.

2 GLOBAL SCENARIO

Amidst a sharpening financial and economic crisis, global FDI inflows fell from a historic high of $1979 billion in 2007 to $1697 billion in 2008, a decline of 14%. Importantly, the decline posted globally in 2008 differed among the three major economic groupings i.e. developed countries, developing countries and transition economies - reflecting an initial differential impact of the current crisis. In the first half of 2008, developing countries weathered the global crisis better than developed countries as their financial systems were less closely interlinked with the banking systems of US and Europe. Their economic growth remained robust supported by rising commodity prices. And their FDI inflows continued to grow, though, at a much slower pace than in previous years, posting only a 17% increase to $621bn in 2008. In a sense, the crisis changed the investment landscape with developing and transition economies share in global FDI flows surging to 43% in 2008.