1. Aggre egate FDI Infl ow in BRIC 

Context in source publication

Context 1

... model is employed on the panel data set consisting of annual frequency data of 35 years ranging from 1975 to 2009 to identify the FDI inflow determinants. The empirical results show that market size, trade openness, labour cost, infrastructure facilities and macroeconomic stability and growth prospects are potential determinants of FDI inflow in BRIC where as gross capital formation and labour force are insignificant, although macroeconomic stability and growth prospects have very little impact. Keywords: Foreign Direct Investment, BRIC, Panel Data, Macroeconomic factors Trade has always been a vital part of economy and with the concept of globalization it reaches to the international level. The role of Foreign Direct Investment (FDI) in this development is very crucial. The enormous increase in FDI flows across countries is one of the clearest signs of the globalization of the world economy over the past 20 years (UNCTAD, 2006). According to UNCTAD Foreign direct investment (FDI) is defined as an investment involving a long-term relationship and reflecting a lasting interest in and control by a resident entity in one economy (foreign direct investor or parent enterprise) of an enterprise resident in a different economy (FDI enterprise or affiliate enterprise or foreign affiliate). Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates. FDI has innumerable effects on the host country’s economy. It influences the income, production, prices, employment, economic growth, development and general welfare of the recipient country. FDI are the most significant channels for the dissemination of modern technology (Blomstrom, 1989). So, we can say that FDI plays a key role in development of emerging economy because the very essence of economic development is the rapid and efficient transfer and adoption of “best practice” across borders. In last two three decades world has experienced a massive change in terms of geopolitics, economics and in organisation and distribution of production. For several reasons, emerging economies of Brazil, Russia, India and China (BRIC) have acquired important role in the world economy as producers of goods and services. All the four countries of BRIC have common characteristic of large population, potential consumer market, fast economic growth, big land size etc, on the basis of which they are attracting large amount of investors around the world. The BRICs, with 40 percent of the world’s population spread out over three continents, already account for 25 percent of global GDP (IMF article “BRICs Drive Global Economic Recovery”, july 22, 2009). The combined economies of Brazil, Russia, India and China (BRICs) appear likely to become the largest global economic group by the middle of this century.” (Cheng, Gutierrez, Mahajan, Shachmurove, and Shahrokhi, 2007). Goldman Sachs predicted that China and India are likely to emerge as dominant global suppliers of manufactured goods and services while Brazil and Russia to dominate in supply of raw materials. Currently BRICs are the world’s four leading emerging market economies, the nominal GDP of which reached 10.67 trillion US dollars in 2010. According to World Bank Database, between 2000 to 2008 FDIs net inflow (BoP, current US $) grew from $77.47 billion to $309.16 billion representing a compounded annual growth rate of 18.88%. China, by far the leading market destination of FDI received US$147.79 billion inflows in 2008 where as Russia, Brazil and India attracts US$75, US$45.05 and US$41.31 billion respectively. China and India are emerging as the most important economic driving forces in the world. The two Asian giants have 40% of the lobal labor force and 18% of the world economy in terms of purchasing power parity (PPP). According to A. T. Kearney’s 2005 FDI Confidence Index, China maintained its position as the most attractive FDI destination globally for a fourth year in a row, with India in second place, rising from fifteenth in 2002. Following substantial increases during 2004-2008, FDI flows to the Russian Federation is at about US$ 37.62.8 billion on average during the following five years. Compared the size of the Russian economy with the volume of flows to other countries in Central and Eastern Europe, the level of FDI in Russia is relatively low, suggesting that FDI in the country is still at an early stage (World Investment Directory online). Brazil, which has traditionally fallen behind of other three in attracting FDI due to its size and resource endowment, doubled its inward foreign direct investment between 2006 and 2007 (US$18.8 billion to 34.58 billion). After 2008, the world has been stuck in the turmoil of financial crisis. The BRICs are certainly not wholly immune to the economic decline of the US, whose sub-prime mortgage crisis has triggered the turmoil in global financial markets. A sharp decrease in FDI inflow in figure 1.1 and 1.2 tells the story. But unlike the US and many other developed countries, the BRICs (Brazil, Russia, India and China) appear well positioned to weather the global economic downturn. Based on newly revised GDP growth projections, IMF (International Monetary Fund) has anticipated a modest declaration of BRIC’s amazing growth path. According to IMF, BRIC countries have a share of 46.3% of global GDP growth (based on purchasing power parity, in $) in 2000-20008, where as G7 countries contribution is only 19.8%. These differences raise interesting questions for both academia and policymakers as to why the BRIC countries have performed differently in attracting inward FDI. What is determining the FDI flows into the BRIC countries? Will BRIC continue an increasing trend of receiving FDI? These questions need to be addressed from both theoretical and empirical perspectives. In this context, present study is intended to determine the major determinants that show the capital flow to BRIC countries in a globalization framework. The aim is to provide a much more robust and generalized empirical analysis and conclusions by employing large panel-data over a long time period. The rest of the study is organized as follows. Section 2 presents a brief review of literature; Section 3 discusses the FDI determinant theory and structure hypothesis; Section 4 narrates the methodology and data used in the paper; Section 5 explains the findings and the empirical analysis and finally Section 6 provides conclusion of the study. The classical model for determinants of FDI begins from the earlier research work of Dunning (1973, 1981) which provide a comprehensive analysis based on ownership, location and the internationalization (OLI) paradigm. Duran (1999) uses the Panel data and time series techniques to find out the drivers of FDI for the period 1970-1995. The study indicates that the size, growth, domestic savings, country’s solvency, trade openness and macroeconomic stability variables are the catalysts of FDI. Beven and Estrin (2000) establish the determinants of FDI inflows to transition economies (Central and Eastern Europe) by taking determinant factors as country risk, labour cost, host market size and gravity factors from 1994 to1998. The study observes that country risks are influenced by private sector development, Industrial development, the government balance, reserves and corruption. Garibaldi et al (2002) analyse the FDI and Portfolio investment flows to 26 transition economies in Eastern Europe including the former Soviet Union from 1990 to 1999. The regression estimation indicates that the FDI flows are well explained by standard economic fundamentals such as market size, fiscal deficit, inflation and exchange rate regime, risk analysis, economic reforms, trade openness, availability of natural resources, barriers to investments and bureaucracy. While some of these studies conclude that there are growth benefits associated with FDI, many tend to find no effects or limited effects (results that are not robust across alternative specifications) through traditional channels such as capital accumulation for developing countries (Kose at al., 2009a).Sound macroeconomic policies can create a general stimulus for FDI spillovers to domestic investment by raising the marginal product of new investments and creating an enabling environment for technology diffusion (Mody and Murshid, 2005) Since previous papers indicates mixed results and doesn’t provide any significant aggregate information about the determinants related to FDI in BRIC countries, present study focuses on the aggregate empirical analysis of determinants of FDI in BRICs in the view of major country level events. The period of the study has been taken from 1975 to 2009. Based on the literature review, this study reckons a set of potential determinant variables that influence the FDI inflows and classify the variables into six broad categories, viz., Market size, Economic stability and Growth prospects, Trade openness, Infrastructure facilities, Labour cost and Gross capital formation. This classification has resemblance with the classification of FDI determinants by UNCTAD presented in table 3.1. Large consumer market means more potential of consumption and thus more opportunity for trade. Countries having larger consumer market should receive more inflows than that of smaller countries. Market size is generally measured by Gross Domestic Product (GDP), GDP per capita income and size of the middle class population. It is expected to be a positive and significant determinant of FDI flows (Lankes and Venables, 1996; Resmini, 2000; Duran, 1999; Garibaldi, 2002; Bevan and Estrin, 2000; Nunes et al., 2006; Sahoo, 2006). In contrast, Holland and Pain (1998) and Asiedu (2002) capture growth and market size as insignificant determinants of FDI flow. Higher market growth indicates a potential larger market and more promising prospects. FDI, therefore, ...