A REPORT ON

IMPACT OF FDI OUTFLOW FROM EMERGING

ECONOMIES (INDIA & BRAZIL) ON THEIR EXPORTS
AND ECONOMY

SUBMITTED BY,

M. SARAVANAN
(26037)

S. MANIKANDAN
(26089)

1
 L. PADMASELVAN
(26097)

Table of Contents

2
ABSTRACT

The paper investigates the flows of FDI and trade in economies of two high performing
East Developing countries with a focus on the relationship between FDI outflow and host
country exports. The development and importance of FDI and trade for the region is described.
The empirical part of the paper examines the relationship between FDI outflow and host country
exports, using data for the period 1995 to 2010. Time series regressions for individual
economies indicate that FDI outflows have a significant and positive effect on Indian economy
and exports, suggesting that export-platform FDI may be important for the East Asian
economies like India, Hongkong, Indonesia etc. No clear link between outflows of FDI and
exports was found, allowing FDI outflows to function as both a complement and a substitute for
Brazilian exports.

1.0 INTRODUCTION

Multinational enterprises (MNEs) are extremely important to generate the global flows of
foreign direct investment and for global trade flows. Since MNEs are responsible for a large
proportion of world trade, it is clear that there is a close relationship between flows of FDI and
trade. An MNE network, consisting of a parent and affiliates, generates simultaneous flows of
goods and investments. There is an increasing body of knowledge and associated models
which explain international trade, but there is less theoretical consensus about the relationship
between trade flows and FDI. To serve the demand in a foreign market, exports and local
production are alternative ways for an MNE. This suggests a substituary relationship between
FDI and trade. MNE production in the host country implies that local production is a substitute
for exports from the home country. On the other hand, MNE affiliate production in a foreign
country can generate a demand for cheap intermediate goods from the parent, and in turn may
generate demand for the finished products from the host country resulting in a complementary
relationship between flows of FDI and trade (exports). This reasoning therefore supports both a
complementary and a substituary relationship between FDI inflows and trade. But it is equally
important to determine whether any such relationship between FDI outflows and trade exists.

3
 India and Brazil are two important developing countries located in different geographies
for which FDI flows have been very crucial for their economic development. Openness to trade
and FDI, export orientation, factor accumulation as well as government policies have all played
an important role in improving the economies of both the countries. The success achieved by
these economies and the dramatic increases in the size of FDI and trade flows reinforce the
argument that BRIC countries provide an exciting setting for an analysis of the relationship
between FDI outflow and trade.

2.0 SCOPE OF THE STUDY:

This paper aims to investigate the relationship between FDI outflows and host country
exports on the macroeconomic level for the economies of India and Brazil.

The paper gives an introduction about FDI inflows and FDI out flows in both India and
Brazil and discusses discretely the trends in GDP growth, exports growth and the economic
growth. It is then followed by the empirical analysis based on the past relevant data and then
the interpretation and conclusion.

2.1 FDI & TRADE IN INDIA:

A majority of India's outbound FDI flows has been as a consequence of a quest for raw
materials since India is a raw material scarce country. For example, Tata Steel has been active
to secure coal assets in Indonesia with superior grade coal due to lack of high quality coal in
the country coupled with a highly regulated industry where private players are not
allowed. The Pharmaceutical sector has gone on an acquisition spree mainly for IP and access
to markets including distribution networks.

A lot of India's FDI outflows in recent times have been in acquisitions in the IT and
IT services sectors. Indian enterprises have developed expertise and capabilities in IT
services which they want to leverage and enter global markets. This is because of
opportunities to acquire newer clients at lower costs as a consequence of a booming local stock
market and low P/Es in economies abroad. For example HCL Technologies completed the
acquisition of Axon for 440 million pounds. India's FDI flows in recent times has been to
acquire crude oil assets in a bid to secure the energy needs of the country through
ONGC Videsh Ltd., a partnership between ONGC and Mittal Steel.

4
 Manufacturing has seen a consistent growth over the last five years. This has especially
been driven by sectors such as automotive components and machine tools which are export
oriented and acquire firms for access to technology and clients, especially in markets
such as Europe where client contracts are long term and it is otherwise difficult to get access.

The Non financial services and Trading sectors have seen wide fluctuations in outward
flows. Others include pharmaceutical and FMCG industries which are anyway cyclical and
one might be acquisition hungry during up‐trends in the sector and conservative during
down‐trends.

2.2 FDI & TRADE IN BRAZIL:

Between 1995 and 2002, Brazil was one of the major recipients of FDI among
developing countries. The result was an increase in the number of multinational enterprises or
firms with foreign capital acting in the country, from 6,322 in 1995 to a total of 11,404
enterprises in 2000.

The service sector received approximate 80% of total FDI in the period 1996-2000 due
to the privatization process. In 2001, however, the total flow to this sector fell to one half of its
value in the previous year, falling further in 2002. This was mainly due to the exhaustion of the
privatization process. On the other hand, total FDI to the manufacturing sector has consistently
grown since 1996, reaching 40% of total inflow in 2002. In addition, the ten major
manufacturing industries received around 95% of total FDI to the sector. Among them, the food
and beverage, automobile and chemical industries received the largest share, around 70%.

Exports have grown by 30% throughout the period of 1995-2002, mostly after the
devaluation of the Brazilian currency in 1999. The manufacturing sector was responsible for

5
87.5% of total exports in the period, and the ten major manufacturing industries were
responsible for 80% of the exports in the manufacturing sector, or 70% of total Brazilian
exports. On the other hand, imports decreased in the same period, after reaching its peak in
1997. 90% of total imports were manufactured goods. Interestingly, though, the ten major
manufactured goods accounted not only for 70% of total imports between 1995 and 2002, but
also for 70% of total exports.

What, then, is the observed relationship between FDI and trade in Brazil? Multinationals
and enterprises with foreign capital acting in the manufacturing sector also engage in
international trade. In 1995, these enterprises were responsible for 39.1% of total exports and
33.3% of total imports. In 2000, however, their share of total exports and imports increased to
49.4% and 43.1%, respectively. Intrafirm trade also increased among these enterprises, and in
2000 accounted for 31.9% of total exports and 24.1% of total imports. FDI, then, seems to be
strongly related to trade in the manufacturing sector.

Because Brazil is a large market and may have factor costs advantages, it seems
reasonable to believe that FDI in the manufacturing sector was of both vertical and horizontal
type throughout the period of 1995-2002. If vertical investments were predominant in the
period, we would expect an increase in both imports and exports of manufactured goods, i.e., a
complementarity relationship between FDI and trade. If horizontal investments were
predominant, we would expect a decrease in imports of manufactured goods, i.e., a
substitutability relationship between FDI and trade. However, it is possible that many affiliates in
Brazil supply local markets and buy goods and inputs from their home countries, i.e., horizontal
FDI complemented trade, resulting in larger imports. This may be the case of the electronic
industry, where production for local supply may result in larger imports of electronic
components.

3.0 DATA AND METHODOLOGY:

The data used for the analysis are the secondary data obtained from the websites of the
Central Banks of India and Brazil and other publicly available information from Bloomberg. The
Methodology adopted is the Regression Analysis to determine the correlation between the FDI
outflows and the growth in GDP and exports.

4.0 INTERPRETATION:

6
 The analysis was carried out using SPSS software to determine the impact of FDI
outflow on the economy and exports for both the countries. GDP value has been used as a
measure of growth of economy.

INDIA

NULL HYPOTHESIS:

1. There is no significant relationship between FDI outflow and GDP

2. There is no significant relationship between FDI outflow and Exports

ALTERNATE HYPOTHESIS:

1. There is significant relationship between FDI outflow and GDP

2. There is significant relationship between FDI outflow and Exports

The analysis shows that the FDI outflows and exports of India are highly correlated as
the Pearson correlation is 0.877 (>0.7)

7
 Similarly the FDI outflows and GDP of Indian economy are highly correlated as
the Pearson Correlation is 0.848 (>0.7)

REGRESSION ANALYSIS:

8
From the regression analysis, it can be seen that the relationship between FDI outflow and
GDP is framed as

GDP = 89.512*FDI outflow + 1.779E6

From the ANOVA analysis carried out, it can be seen that the significance value is 0 which
means the Null hypothesis is rejected and alternate hypothesis is accepted.

9
 From the regression analysis, it can be seen that the relationship between FDI outflow
and Exports is framed as

Exports = 4.356*FDI outflow + 50569.96

From the ANOVA analysis carried out, it can be seen that the significance value is 0 which
means the Null hypothesis is rejected and alternate hypothesis is accepted.

10
BRAZIL

NULL HYPOTHESIS:

1. There is no significant relationship between FDI outflow and GDP

2. There is no significant relationship between FDI outflow and Exports

ALTERNATE HYPOTHESIS:

1. There is significant relationship between FDI outflow and GDP

2. There is significant relationship between FDI outflow and Exports

The analysis shows that the FDI outflows and exports of India are moderately
correlated as the Pearson correlation is 0.376 (>0.7)

11
 From the regression analysis, it can be seen that the relationship between FDI outflow
and GDP is framed as

GDP = 0.077 *FDI outflow + 415.529

From the ANOVA analysis carried out, it can be seen that the significance value is 0.077
(>0.05) which means the Null hypothesis is accepted and alternate hypothesis is rejected.

5.0 CONCLUSION:

The impact of FDI on exports and GDP is significant in case of India but the
impact of FDI on exports and GDP is not very significant in case of Brazil. This can be
attributed to many reasons. For example, India is basically a service sector economy
and has also flourished on the domestic demand. The domestic demand has contributed
significantly to the GDP even during the crisis of 2008. But Brazil is a commodity based

12
economy which has relied greatly on exports. Their GDP is highly correlated to volatile
commodity prices in the international market which is not the case in India.

13