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

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


1
Brazil, India and South Africa - Different
Continents, Different Experiences International
Seminar FDI Policies and Regulation How to
Foster Economic Development Rajeev Mathur,
CUTS
2
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.

3
  • 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.

4
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
5
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

6
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

7
South Africa
  • Deep socio-economic inequalities
  • Despite small market size, in recent years, there
    is an increase in purchasing power and propensity
    to consume

8
3. FDI inflows USmn
Year 1990-95 1996 1997 1998 1999 2000 2001
World 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
9
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.

10
India
  • FDI inflows have been modest and in 1990s have
    been associated with cross-border merger and
    acquisition activity, leading to a shift of
    control over domestic enterprise by foreign firms

11
South Africa
  • Significant transformation with the GEAR strategy
    which was oriented towards export-oriented global
    economy. Increased MA activity.

12
4. Policy Regimes Registration
BRAZIL INDIA SOUTH AFRICA
With the Brazilian Central Bank for new investments, reinvestments and remittances of profits to foreign countries. With the Registrar of Companies. There are two routes of approval automatic approval by RBI and approval by FIPB. Need to seek approval under SA Reserve Banks exchange control regulations. Investors need to appoint consultants/auditors/ legal advisors to register a company.
13
Trade Policy
BRAZIL INDIA SOUTH AFRICA
Member of WTO Brazilian Industrial and Foreign Trade Policy (PICE) established an agenda of tariff reductions. A member of MERCOSUR. Member of WTO Removal of Quantitative Restrictions on imports from April 2001. A member of South SAPTA/SAFTA Member of WTO. The Trade, Development and Co-operation Agreement (TDCA), signed with the EU in October 1999, SA is also a member of SADC
14
Entry and Establishment
BRAZIL INDIA SOUTH AFRICA
Bilateral Investment Treaties (BITs). Procedure has been simplified Bilateral Investment Treaties (BITs) 34 industries eligible for automatic approval up to a foreign equity participation level of 51 percent Bilateral Investment Treaties (BITs) Foreign firms eligible for national investment incentives
15
Investment Facilitation Institutions/
Initiatives
BRAZIL INDIA SOUTH AFRICA
Invest Brazil Other statutory approvals MA deals - competition authority. Approval granted through FIPB a single window facility. Other statutory approvals MA deals - competition authority Not at present but in future Trade and Investment SA (TISA) Other agencies are DTI, IDC, SBDC, IIC Other statutory approvals MA deals - competition authority.
16
5. Sectoral Distribution Ranking of Sectors
Attracting FDI
RANK BRAZIL (2001) INDIA (1991-2001) SOUTH AFRICA (2000)
1 Tertiary (59.6) Tertiary (56.32) 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.
17
  • Growing loss of attraction of the manufacturing
    sector in comparison with the services sector in
    Brazil and India.

18
6. Top Three Investing Countries
RANK BRAZIL INDIA SOUTH AFRICA
1 USA USA USA
2 Spain Japan UK
3 The Netherlands Germany Australia
19
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.

20
  • 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.

21
  • 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.

22
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

23
  • 1990s witnessed widespread reforms
  • Brazil launched productive restructuring
  • Indian auto sector was delicensed
  • South Africa launched Motor Industry Development
    Programme.

24
  • As a result
  • The annual average of investment in automobile
    industry in Brazil more than doubled from
    US500mn in 1980 to US1.3bn.
  • 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 US6bn.

25
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).

26
10. Recommendations
  • Improve regulatory framework for FDI
  • Facilitate business
  • Improve economic determinants
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