REPORT ON FDI FOR BRICs, GERMANY by RAVI JAIN, GITAM School of International Business

INTRODUCTION
In the today’s capitalist world, individuals’ growth is measured in materialistic terms and
similarly a Country’s growth and development is measured in terms of economic parameters
viz. GDP, Foreign Exchange Reserves, BoPs, and FDIs etc. Social indicators like HDI, Soft
infrastructure have been pushed to the back seat.

FDI stands for Foreign Direct Investment, a component of a country's national financial
accounts. Foreign direct investment is investment of foreign assets into domestic structures,
equipment, and organizations. FDI inflow is a skewed indicator of a nation’s attractiveness to
foreign investors.

Many developing countries, including the least developed countries, have attracted only small
amounts of foreign direct investment (FDI) despite their efforts at economic liberalization in an
increasingly globalizing world. It is generally well known that the modest levels of, and disparity
in, the distribution of FDI inflows, are due to factors such as a deficient regulatory framework, a
poor business environment and opportunities, weak FDI policies and incentives, poor
institutional frameworks, limited market access, unfavorable comparative costs and lack of
political stability. However, what is less known is that the scarcity, unreliability and
inconsistency of data collection and reporting systems in many developing countries cause
severe problems in formulating policies and strategies relating to FDI, which in turn affects their
attractiveness as host countries.
In this report we attempt to consolidate and analyze FDI patterns for the last decade in India,
China, Thailand, South Africa and Brazil. The analysis explains Flow and stock of FDI, FDI trends,
Categorization of FDI, Source wise, Regulatory frameworks and the impact of financial crisis on
the FDI flows.
INDIA
INDIA ranks second in the world in terms of financial attractiveness, people and skills
availability and business environment. This is revealed in AT Kearney's 2007 Global Services
Location Index. Country's financial stability in the current environment of financial turbulence
and a possible unwinding of macro imbalances sends clear message to the prospective foreign
investors about India's position as an expanding investment destination.

“The strong macroeconomic fundamentals, growing size of the economy and improving
investment climate has attracted global corporation to invest in India. A major outcome of the
economic reforms process aimed at opening up the economy and embracing globalization has
led to tremendous increase in Foreign Direct Investment inflows into India", says country's
powerful industry lobby CII.

YEAR-WISE INFLOW AND STOCK

180000

160000

140000

120000

100000
FLOW (m USD)
80000
STOCK (m USD)
60000

40000

20000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

2
YEAR-WISE OUTFLOW AND STOCK

90000

80000

70000

60000

50000
FLOW (m USD)
40000
STOCK (m USD)

30000

20000

10000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

The total FDI inflow into INDIA since liberalization in 1991 has been USD 132.43 billion. Of this,
around USD 115 billion has come during the last decade. CAGR of FDI over the last decade is
24.44%. Equally important is the growth of FDI during the last 4 years. FDI inflow almost tripled
in a single year from US$ 5.5 billion in 2005-06 to US$ 15.7 billion in 2006-07. The FDI outflow
has seen a similar trend over the last decade. Serious M&As by the India Inc., has seen a steady
increase in the FDI outflow.

The above data gives a consolation and a rosy picture of India’s future. It shows the increasing
power of India in the global stage and its attractiveness to foreign investors.

3
SECTOR-WISE INFLOWS

SECTOR-WISE FLOW (m USD)

25000

2006-07
20000
2007-08
2008-09
15000
2009-10
Cumulative '00-'10
10000

5000

ON % BASIS

% BASIS
25
20
15
10
5
0

4
SOURCE COUNTRY WISE

50000
2006-07
45000
2007-08
40000
2008-09
35000
2009-10
30000 Cumulative '00-'10
25000

20000

15000

10000

5000

ON % BASIS

% BASIS
50
45
40
35
30
25
20
15
10
5
0

5
FDI POLICY IN INDIA

Foreign Direct Investment (FDI) is permitted as under the following forms of investments.

 Through financial collaborations.

 Through joint ventures and technical collaborations.
 Through capital markets via Euro issues.
 Through private placements or preferential allotments.

FDI Policy under Automatic Route

Sectors working under automatic route do not require any prior approval of the Central
Government of RBI to attract Foreign Direct Investment. The foreign investors are only required
to inform the Regional Office concerned of RBI within thirty days receiving of inward payments
and submit the required documents in that office again within thirty days of the issuing of the
shares of foreign institutional investors.

FDI Policy under Government Approval

The proposals which involve foreign investment or foreign technical collaboration is granted
permission by the Foreign Investment Promotion Board (FIPB). All the proposals for FDI are to
be submitted to the FIPB Unit and those of Non-Resident Indian (NRI) investments and 100%
Export Oriented Units (EOUs) should be submitted to SIA in Department of Industrial Policy and
Promotion.

Industrial Units in India Deprived from FDI as per FDI Policy

 Arms and ammunition.

 Atomic Energy.
 Railway Transport.
 Coal and lignite.
 Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

6
IMPACT OF FINANCIAL CRISIS

The global financial crisis has applied a brake on India’s booming FDI inflow. To do a
comparative analysis, I have shown the net FDI flows, country-wise, for the 3 years leading to
the financial crisis. We see a steady decline in the FDI inflows from all the countries, except
UAE, which was investing heavily in the Indian Real-estate.

In the above sector-wise graph given, we see that in majority of the sectors, there is a decline in
the FDI inflows. In sectors like, Real-estate, Construction & Infrastructure there was an increase
in the FDI inflow. In all other sectors, there was a decline in the FDI inflow.

FRANCE

UAE

Germany

Japan

Cyprus
2008-09
2007-08
Netherlands
2006-07
UK

USA

Singapore

Mauritius

-200 0 200 400 600 800 1000 1200 1400 1600

7
RELATION WITH GROWTH INDICATORS: GDP AND EXPORTS

FDI - GDP
3.1
3.05
3
2.95
2.9
log(GDP) 2.85
2.8
2.75
2.7
2.65
2.6
0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8
log(FDI)

Regression Equation:

log(GDP) = 2.4840 + 0.3843(log(FDI))

Regression Statistics
Multiple R 0.93121245
R Square 0.86715664
Adjusted R Square 0.85055122
Standard Error 0.06384223
Observations 10

This shows that there is a high dependence of GDP on FDI, exponentially. Around 93.12% of the
GDP growth can be explained by FDI, which in turn is dependent on other macro factors.

8
 FDI - EXPORTS
2.5

1.5

0.5

0
0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8

Regression Equation:

log(Exports) = 1.387 + 0.558(log(FDI))

Regression Statistics
Multiple R 0.92490661
R Square 0.85545223
Adjusted R Square 0.83738376
Standard Error 0.0973358
Observations 10

This shows that there is a high dependence of Exports on FDI, exponentially. Around 92.49% of
the Exports growth can be explained by FDI, which in turn is dependent on other macro factors.

9
CHINA
China opened up the door to the world economy since 1979. Since then, China has experienced
a dramatic change in its economy. FDI is one of the main factors to explain the growth of
China’s economy in the past thirty years. The trend of FDI could be separated into three distinct
phases:
 From 1980 to 1992, the inflows increased relatively slowly
 From 1992 to 2008, the inflows increased rapidly
 From 2008 to 2010, there was a decline in the FDI flow.
GOALS:
 Having based its economy heavily on agriculture, China intended to use FDI to boost its
development of industries, including building up transportation infrastructure, exploring
energy and processing raw materials.
 China wanted to transform its traditional industries, such as machinery, textile and
consumption goods manufacturing, with the new technologies and modern
management systems brought in by foreign investors.

YEAR-WISE INFLOW AND STOCK

500000

450000

400000

350000

300000

250000 FLOW
200000 STOCK

150000

100000

50000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

10
YEAR-WISE OUTFLOW AND STOCK

160000

140000

120000

100000

80000 FLOW
STOCK
60000

40000

20000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

The total FDI inflow into China has been around USD 475 billion. From 2004-05 to 2005-06
there was an increase of around 20%. This rise was partly attributed to changes in the
methodology underlying Chinese FDI statistics. From 2005, the Government started to include
investments in Financial Services under FDI. In 2005-06, Non-financial investments in FDI were
USD 60 billion as compared to USD 60.6 billion in 2004-05. But this figure was boosted up to
USD 72 billion because of the USD 12 billion investment in financial services.

By 2009, China’s FDI outflow reached USD 200 billion, but about 80% of this has been to Hong
Kong, Macau, the Cayman Islands or the Virgin Islands, meaning a manoeuvre to reduce
taxation for a company operating within China rather than actual investment. Of the remaining
20%, the majority remains in Asia, but investment in Africa and the Pacific Islands has grown
rapidly, particularly since 2008.

11
SECTOR-WISE INFLOWS

Hotel & Power, 320

Real Estate, 452
Restaurant, 633 Transportation, 523

Computer & S/W,

1286
Agriculture, 917

R&D, 1839

Manufacturing,
11568
Lease & Business
Service, 3138

Wholesale &
Retailing, 5854

No. of Projects

Transportation,
Power, 16.96 28.51

Hotel & Real Estate, 185.9

Restaurant, 9.39
Computer & S/W, Manufacturing,
27.75 498.95
Agriculture, 11.91
R&D, 15.06

Lease & Business

Service, 50.59 Wholesale &
Retailing, 44.33
Realized Value

12
SOURCE COUNTRY-WISE INFLOW

Virgin Islands, 975

Mauritius, 133

USA,
1772

EU, 1844

Taiwan, 2360
Hong Kong, 12857

Republic of Korea,
2226
Japan,
Singapore, 757 1438
Malaysia, 219
Macau, 435
No. of Projects

Virgin Islands,
Mauritius, 1.494 15.954

USA, 2.944
Hong Kong, 41.04
EU, 4.99

Taiwan, 1.9
Republic of Korea,
3.135
Singapore, 4.435 Realized Value
Malaysia, 0.25 Macau, 0.58 Japan, 3.652

13
FDI POLICY IN CHINA

China has eased its FDI policy in order to attract considerable foreign investments. Major
themes pertaining to the Chinese FDI Policy are:

 Liberalising the approval process

o Streamlining the FDI approval process
o Separating FDI approval from other processes
 Re-considering foreign ownership restriction
o Re-considering remaining ownership restrictions
o Catalogues for guiding foreign investment
o Licensing criteria for foreign banks
 Capital Market Opening
o Allow FIEs to list on domestic market
o Allow FIEs to issue corporate bonds on the Chinese market
 Increasing transparency
o Develop a single website for foreign investors (www.fdi.gov.cn)
o Provide clear & up-to-date information on taxation obligations
o Improve corporate governance
o Improve the accuracy and comparability of FDI statistical information
o Clarify & systemize labour laws & employer obligations
 Strengthening the rule of law
o Improve the functioning and independence of the legal system
o Develop a transparent & accountable legislative process
o IPR Protection laws
o Deepen co-operation with OECD in tackling corruption issues

14
RELATION WITH GROWTH INDICATORS: GDP AND EXPORTS

FDI - GDP
3.7

3.6

3.5

3.4

3.3

3.2

3.1

3
0 0.5 1 1.5 2 2.5

Regression Equation

log(GDP) = 0.7716 + 1.4117(log(FDI))

Regression Statistics
Multiple R 0.98625495
R Square 0.97269883
Adjusted R Square 0.96879867
Standard Error 0.03364281
Observations 9

This shows that there is a high dependence of GDP on FDI, exponentially. Around 98.62% of the
GDP growth can be explained by FDI, which in turn is dependent on other macro factors.

15
 FDI - EXPORTS
3.5

2.5

1.5

0.5

0
0 0.5 1 1.5 2 2.5

Regression Equation

log(EXPORTS) = -0.7565 + 1.9436(log(FDI))

Regression Statistics
Multiple R 0.98175414
R Square 0.96384119
Adjusted R Square 0.95867565
Standard Error 0.05354288
Observations 9

This shows that there is a high dependence of Exports on FDI, exponentially. Around 98.17% of
the Exports growth can be explained by FDI, which in turn is dependent on other macro factors.

16
BRAZIL
Foreign direct investments have played an important role in Brazil's economic development.
FDI inflows into the country are mainly attracted by its big domestic market and the liberalized
economy thanks to fair government policies. Most investments in Brazil have been made with
a bias on the technological aspects of the economy. However, the service sector has attracted
foreign investments too. The Brazilian FDI regime has remained liberal and has been plausible
in its sum financial output for its economy. Brazil investment opportunities have a minor
number of horizontal reservations or limitations.

Brazil investment opportunities flourish in the various sectors of the economy; production as
well as the service industries. With an economy estimated at $1.3 trillion, foreign direct
investments are crucial in financing the country's payment balance due to investors taking out
money from the capital markets and the slow recovery from the global recession.

YEAR-WISE INFLOW AND STOCK

450000

400000

350000

300000

250000
INFLOW
200000
STOCK
150000

100000

50000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

17
YEAR-WISE OUTFLOW AND STOCK

180000

160000

140000

120000

100000
FLOW
80000
STOCK
60000

40000

20000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008

Brazil’s FDI stock stands at USD 400.8 billion as of March, 2010. The FDI inflow into Brazil has
seen several crests & troughs over the last decade. The positivity of the FDI inflow into Brazil is
that it is more or less spread homogeneously. The FDI inflow was the highest in 2008-09 of
about USD 45 billion. The CAGR of FDI inflows into Brazil has been around 10.96%.

The outflow of Brazil’s FDI was high prior to 2000, when no privatization was restricted. But
after that, FDI outflow has considerably decreased. 2006 saw a huge outflow of FDI from Brazil
to the tune of USD 28.2 billion. This was due to increasing energy prices.

In the early 2000s, the FDI stock in Brazil actually declined due to the high political instability at
that time. A crisis in Argentina, Brazil’s major trading partner, also contributed to this decline

18
SECTOR-WISE INFLOWS

Food , 2.5
FLOWS Agiculture &
Rubber &
Chemicals, 3 Plastics, 0.7
Mining, 1.5
Iron & Steel, 0.4
Automobile, 4.6

Business Services,
22.9 Power, 14

Finance, 13.7

Wholesale
Trade, 4.8
Telecom, 16 Retail Trade, 3.7

Sales
Agiculture & Mining,
1.6

Food ,
5.5

Business Services, Chemicals, 11.2

26.9
Rubber & Plastics,
3.1
Iron & Steel,
6

Finance, 3 Automobile, 6.7

Telecom, 0.5
Power, 0
Retail Trade, 1.6 Wholesale Trade, 5

19
SOURCE COUNTRY WISE INFLOWS

FLOWS
Portugal, 5.048

USA, 19.138
Spain, 11.955

Cayman, 7.96
Germany, 1.302
France, Switzerland, 0.812
5.993 Japan, 1.086

Netherlands, 7.422 Canada, 0.909

Virgin Islands, 0.873 UK, 1.671

Spain,
0.251
STOCK
Cayman, 0.892 Portugal, 0.107
Netherlands, 1.535
Virgin Islands, 1.736

UK,
1.793
USA, 10.852

Canada, 1.819
France, 2.032

Japan, 2.659

Germany, 5.828

Switzerland, 2.815

20
FDI POLICY IN BRAZIL

FDI in Brazil have been in diverse areas of the economy. FDI regulations have encouraged
inward investment. The country’s FDI share in investments, production and foreign trade has
continued to grow over the decades. The investment regime of Brazil shifted from import
substitution to economic liberalization that enabled industrialization. This is due to the fact
that, at the time of its policy formulation, Brazils FDI regime didn’t discriminate investments.
Tariffs and non-tariff restrictions on imports were liberalized. The FDI share of the country’s
investments, production and foreign trade grew over the last decades. As opposed to tariff and
non-tariff restrictions as practiced in other states on FDI regulation, the Brazilian regulations
were not quite a challenge to investments.

A functional regulatory mechanism that applied to all sectors of investments with a radical shift
to institutional regulatory mechanism has been the hallmark of Brazil’s FDI regime. Privatization
of investments such as services with support from the government led to an efficient and
improved service delivery to a large domestic market. During the 1990s, Foreign Brazil
investments regime underwent major changes such as structural reforms, trade and finance
liberalization, state reforms, improvement of the macroeconomic environment that sought to
balance payments and deficit, microeconomic goals that enhanced competitiveness and export
performance. At the legal level, changes were made that eliminated entry barriers enabling
equal treatment of all investors and the abandonment of discriminatory FDI policies.

With these liberalized market, FDI in Brazil investments grew rapidly overtaking global FDI flows
from 1994 onwards. Sectoral policy developments, trade policy development, macroeconomic,
foreign trade relations, institutional developments; changes in this various sectors have been a
main source of attraction for investors. The result of these gradual FDI policy shifts from their
initiation has witnessed an increased FDI flow that has seen Brazil emerge as a favourite
investments location.

21
RELATION WITH GROWTH INDICATORS: GDP

FDI - GDP
3.3

3.2

3.1

2.9

2.8

2.7

2.6
0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8

Regression Equation:

log(GDP) = 2.15 + 0.565(log(FDI))

Regression Statistics
Multiple R 0.63415802
R Square 0.40215639
Adjusted R Square 0.31675016
Standard Error 0.14985363
Observations 9

This shows that there is an average dependence of GDP on FDI, exponentially. Around 63.42%
of the GDP growth can be explained by FDI, which in turn is dependent on other macro factors.

22
RUSSIA
Russia offers many opportunities to foreign investors. It has huge reserves of natural resources.
It has more than 90% of forest area, 70% of coal, 80% of natural gas and the majority of iron-
ore of the former USSR. It has huge mineral reserves of iron, copper, zinc, tin, gold & silver. The
natural conditions of the Russian Federation have a significant impact on its economic
development. Broad forest belt and abundant land resources helps in the development of
agricultural sector.

YEAR-WISE INFLOW AND STOCK

600000

500000

400000

300000 FLOW
STOCK

200000

100000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

23
YEAR-WISE FDI OUTFLOW AND STOCK

400000

350000

300000

250000

200000 Series 1
Series 2
150000

100000

50000

0
2001 2002 2003 2004 2005 2006 2007 2008 2009

During the period of 1990-97, the Russian economy was completely collapsed after the fall of
USSR. But after 2000, there was a serious revamp in the Russian economy and the economy
was liberalized. The FDI inflow steadily increased till 2008 and then declined owing to the
Global financial crisis. The FDI stock also dropped steeply after 2007.

Since 2000, the FDI outflow from Russia has been steadily increasing. The FDI outflow was
around USD 50 billion in 2009. The outward FDI stock also experienced a major decline in 2008.

24
SECTOR WISE INFLOWS

25
SOURCE COUNTRY-WISE INFLOWS

European Union was the major source of FDI into Russia. Following chart gives a breakup of the
FDI inflows into Russia from major EU nations.

26
FDI POLICY IN RUSSIA

 LEGAL FRAMEWORK
o Foreign Investment Law, 1991
o Law on Foreign Investments in Russia, 1999
o Grandfather Clause
o Resource Usage
o Labour Laws
 TAXATION
o Streamlined taxation legislation
o Non-discriminatory policy
o One of the lowest tax rates in Europe
 IPR
o Improved legal framework but dismal implementation
o Member of Paris Convention, Geneva Convention, Berne Convention
o Abides by TRIPS, Copyright law, Trademark law, Patents
 COMPETITION REGULATION
o Law on competition and limitation of monopolistic activity, 1995
 RESTRICTED SECTORS
o Natural Resources – 11%
o Banking – 12%
o Insurance – 15%
o Aerospace – 25%
o Power – 25%
o Defence
o Transportation
o Communication

27
GERMANY
YEAR-WISE FDI INFLOWS

800000

700000

600000

500000

400000 FLOW

300000 STOCK

200000

100000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

YEAR-WISE FDI OUTFLOWS AND STOCK

1600000

1400000

1200000

1000000

800000 FLOW

600000 STOCK

400000

200000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008

28
Germany is the 7th largest investor of India. A few details of the FDI flows from Germany are
given below:

29
SECTOR-WISE FDI INFLOWS

30
DESTINATION-WISE OUTWARD FDI

31
SECTOR-WISE OUTWARD FDI

32
FDI POLICY

There are three main international legal frameworks for German FDI:
 The European Treaty
 Treaties concluded by the European Union and
 National BITs.
German MNEs have concentrated a large part of their OFDI in the EU member states.
Therefore, the European treaties are a very important framework for Germany FDI activities.
The EU guarantees free trade of goods and services for all members of the European Union and
the free movement of capital among EU member states and with third states. In case of
violations of these rights, the European Commission can bring a case before the European Court
of Justice.
The EU has concluded several free trade agreements that contain declarations of supporting
FDI flows between the EU and its partner states. Since the Lisbon treaty took effect on
December 1, 2009, the EU has gained new competences concerning FDI. However, the practical
implications of the Lisbon Treaty for Europe’s FDI-policy remain uncertain (e.g. the Lisbon
Treaty fails to clarify the exact definition of FDI).
The EU and the United States have the most important bilateral trade and investment relations
in the world. The United States is the single most important target country for German OFDI.
Among the triad of North America, the EU and Japan, FDI flows are not restricted in any way
and are not governed by BITs.
Within these legal frameworks, the German Government offers companies many services and
support for FDI in developing countries. The German Government for example gives guarantees
for FDI that may fail because of political risks. But those guarantees are only granted in case of a
minimum of legal protection for FDI by the host countries - either in form of BITs or a stable
legal system.

33
EFFECTS OF GLOBAL CRISIS

The global financial crisis and recession seriously affected the German economy. German
companies suffered from a sharp decline of exports and falling profits. In 2009, German OFDI
fell by 53% against 2008, to reach US$ 63 billion. The decline in German OFDI in 2009 was
mainly due to increased long-term credits of financing affiliates of German companies located
in the Netherlands to their parents in Germany that were financed by the emission of securities
abroad. These intra-firm financial transactions resulted in net disinvestments abroad via intra-
company loans that explained three quarters of the decline in German OFDI abroad. Despite
the difficult economic situation, German equity capital investments abroad remained
remarkably strong, declining by only 27% against the record value of 2008 and amounting to
US$ 66 billion in 2009. Especially German energy providers like RWE AG and E.on AG were very
active in cross-border M&As and Greenfield investments to expand their market share and to
improve their competitive position in foreign markets.

34