1. Why is Brazilian FDI so low? Victor Prochnik Institute of Economics/UFRJ

2. Presentation items 1 Statistics on Brazilian outward foreign direct investment (FDI) 2 Home country effects of FDI 3 Why is Brazilian FDI so low? 4 Characteristics of Brazilian industrial firms 5 Opportunity for comparative research

3. 1 Statistics on Brazilian outward foreign direct investment (FDI)

4. Participation (%) of FDI in the total investment (average 2001-2003) Sweden 27.4 France 22.0 United Kingdom 19.0 United States 6.6 Germany 4.1 Japan 3.2 Singapore 36.3 Hong Kong28.2 Taiwan 10.5 Chile 7.4 Malaysia 5.3 India 1.0 China 0.8 Brazil 0.2

5. Outward FDI (UNCTAD data) 19801990199520002005 Annual growth rate 00/05 World (US $ bi)5711,7912,9496,47110,67210.5 BRICS (US $ bi)44721675217487.5 Brazil (US $ bi)39414452726.7 LDCs (%)12.58.211.313.211.9 BRICS/world (%)7.84.05.78.07.0 Brazil/world (%)6.72.31.50.80.7 Brazil/LDCs (%)7.72.51.70.90.8 Brazil/BRICS (%) 87.056.726.710.09.6

6. Outward Brazilian FDI (Central Bank) 20012005 Annual growth rate 00/05 Mineral extraction 3.7 5.18.4 Industry 5.1 2.8-13.9 Civil Construction 2.9 0.9-25.4 Commerce 4.2 4.51.7 Banks, insurance 48.7 49.20.3 Information technology, R&D, education 0.2 0.1-15.9 Services to the enterprises 33.6 36.11.8 Other1.61.3-5.9 Total100.0 Total (US $ bi) 42,6 65,411,3

7. 2 Home country effects of FDI (a survey of the international literature)

8. 2.1 The effect of FDI on home output and employment: EXPORTS: an increase in foreign affiliate sales is tipically associated with na increase in export by the home operations. EMPLOYMENT: in the short run, there is evidence of substitution between home and foreign labour. But in the long run they are complementary.

9. 2.2 The effect of FDI on home skills: Headquarters activities are more skill intensive than production The rellocation of activities contributes to skill upgrading of home activities

10. 2.3 Technological sourcing Findings: a coutry’s productivity is increased by outward investments when it invests in R&D-intensive countries

11. 2.4 Productivity Investing abroad enhances the productivity path of investing firms, which gets steeper after the investment, compared with the path of non-investing firms.

12. 3 Why is Brazilian FDI so low? – a survey of the literature

13. Export structure (intensive in commodities) Export products are homogeneous and do not need producers’ support on target markets. Differentiated products are exported primarily by subsidiaries of multinationals, whose external logistics make foreign investment unnecessary.

14. The targeted markets The size of the national market, as long as it ‘fulfills the company’s objectives’ (stronger for smaller companies). Insufficient scale to compete evenly with international players. Low share of exports in national firms’ overall sales

15. Macroeconomic conditions unfavourable capital market conditions and, particularly, high interest rates

16. Geographic and cultural factors Brazil is distant from the areas in which the main trade flows occur, There is a widespread perception of cultural distance (less important in relation to the other South America countries), Portuguese is spoken by a relatively small part of world population.

17. Future trends: It is expected a sharp growth in the internationalization of Brazilian firms Motives for internationalization (results of a recent study – 2006): 1 Profit and growth opportunities in the international markets 2 To reduce dependence on domestic market

18. Characteristics of Brazilian industrial firms according to the internationalization index

19. 1 Internationalization index ‘DOM firms’ – Brazilian capital firms that sell only to the national market ‘EXP firms’ - Brazilian capital firms that only export ‘INV firms’ - Brazilian capital firms that export and engage in foreign direct investment (FDI)

20. Brazilian capital industrial firms 1 DOM firms 2000 EXP Firms 2000 INV Firms 2000 DOM firms 2003 EXP Firms 2003 INV Firms 2003 # of firms 66,7352,86219171,12510,929213 Employees 40.9351.31,94633.4204.62,184 Productivity 0.060.090.320.060.140.48 Sales 2.331.8613.42.128.01,037

21. Brazilian capital industrial firms 2 DOM firms 2000 EXP Firms 2000 INV Firms 2000 DOM firms 2003 EXP Firms 2003 INV Firms 2003 Mean em- ployment time 34.743.267.835.645.269.6 Mean years schooling 7.07.59.17.68.19.6 Age of the firm 32.032.133.213.723.734.7

22. Brazilian capital industrial firms 3 DOM firms 2000 EXP Firms 2000 INV firms 2000 DOM firms 2003 EXP Firms 2003 INV Firms 2003 R&D expen- ditures 7.91555,69476.335412,339 Employees R&D 0.33.546.10.11.344.1 No. Masters and PhDs 0.0090.15.20.0070.0804.1 % Employees in R&D 0.0070.010.020.0030.0060.02

23. % of Braz. Cap. industrial firms 4 DOM firms 2000 EXP Firms 2000 INV firms 2000 DOM firms 2003 EXP Firms 2003 INV Firms 2003 new to the firm product innovation 12.5128.2420.4213.1817.123.8 new to the market product innovation 2.7814.6139.273.371.96.7 new to the firm product innovation 21.4940.8234.0322.3224.734.7 new to the market process innovation 1.769.96 36.1 3 2.190.72.8

24. DOM firms EXP fims DOM firms Horizontal axe: productivity Vertical axe: proportion of firms

25. 5 Opportunity for comparative research Study of a small sample of leader firms from the same economic sectors, Emphasis on comparability. Main topics: Growth dynamics Competitiveness, organizational structure Geographical diversification Product diversification