Brazil failed to take advantage of greater capital inflow, says researcher

Investment inflow from foreign companies and the internationalization of Brazilian corporations still have not generated the desired effects for the country’s economic development, says Roberto Borghi (Cambridge).

By Elton Alisson

Agência FAPESP – The recent changes in the global economic scenario—with the adoption of more favorable policies for circulation of international capital—have benefited both foreign corporate investment in Brazil and Brazilian corporate investment abroad. The country, however, did not know how to take advantage of capital inflow to improve or increase productive capacity.

Roberto Alexandre Zanchetta Borghi, who is pursuing doctoral studies at Cambridge University’s Centre of Development Studies, presented this analysis during the Fourth Latin American Advanced Programme on Rethinking Macro and Development Economics (Laporde), held January 7–11 at the think tank Fundação Getúlio Vargas (FGV) in São Paulo.

“Brazil has not used these capital movements to strengthen domestic production chains, where investments by foreign and Brazilian companies would be combined to give the economy greater dynamism,” affirmed Borghi in an interview with Agência FAPESP.

Organized by the Center of Macroeconomics Structuralist Development (EESP), which is part of its FGV’s São Paulo School of Economics, the purpose of the event was to debate the macroeconomics of development from different perspectives. The event was held under the auspices of the FAPESP’s São Paulo School of Advanced Sciences (ESPCA).

Borghi and two other Brazilian graduate students were selected to present the results of their studies during the event. According to the researcher, who began his research and a master’s degree with FAPESP fellowship, the two major cycles of foreign capital inflow to Brazil in the recent globalization movement occurred in the second half of the 1990s and continued through the middle of the following decade. Both had weaker than desired effects on the country’s productive capacity.

In the 1990s, the injection of private foreign resources in the country was more strongly linked to the process of privatization and mergers and acquisition of national companies by multinationals than to the realization of new investments, such as construction and expansion of factories.

In the 2000s, with the implementation of economic policies focused on the growth of the domestic market, the foreign capital inflow to the Brazilian economy was, in fact, according to researcher, more focused on new investments, such as the expansion of the production capacity of companies to meet rising consumer demand.

A period of resumed economic growth in Brazil began in 2004. However, it was short-lived and was partially interrupted by the global financial crisis in 2008, which caused a reduction in the flow of external investment. Even Brazil’s rapid recovery did not lead the Brazilian subsidiaries of automakers to resume their investments in the country.

“Soon after the crisis, following implementation of economic measures in Brazil, such as the reduction of the Excise Tax (IPI), the demand for automobiles made a strong recovery. The pace of production and investment in the country during this period, however, left a lot to be desired,” affirmed Borghi.

“There was a market in expansion that would have afforded automakers opportunities to invest in the country, particularly given the high levels of utilization of installed capacity in the sector. However, what we saw was a movement to remit profits and dividends from these corporations to cover the losses that they had in central economies that had been more sharply impacted by the crisis,” he said.

Chinese strategy

Borghi believes that the government must adopt policies to stimulate development of technological capacity in the country to ensure that the foreign companies operating in Brazil make productive investments in exchange for the benefits obtained on the Brazilian market.

According to the researcher, the process of opening the Brazilian market to foreign capital did not occur as cautiously as in Asian countries. He affirmed that countries in eastern Asia knew how to best use external investments to develop their domestic economies and make them compatible with their national interests.

The demands made by China on foreign companies interested in setting up shop there included, for example, the establishment of joint ventures and transfer of technology to allow domestic companies to develop some local production capacities to compete globally. When China began to open its market in the 1980s, it found that foreign companies initially settled in coastal areas to reduce export costs.

“In Brazil, these policies ended up not being a priority,” said Borghi. “The country adopted a much more intense and immediate form of financial capitalism in the process of opening its market than did the Asian countries.”

The internationalization movement among Brazilian corporations, according to Borghi, is much more recent. Furthermore, it is still incipient, regionalized and led by sectors with low-technological intensity, which are often eyeing acquisition of foreign competitors.

“The number of transnational Brazilian companies is still relatively small, and they are still relatively heterogeneous. There are some large corporations and many small companies operating in low-added-value niche markets,” said Borghi.

In the economist’s assessment, we are seeing today a much broader foreign capital inflow to Brazil than Brazilian corporate investment abroad. Although internationalization of Brazilian companies is growing, we must stimulate this internationalization to guarantee the country’s economic competitiveness.

“The strengthening of national companies that can compete globally is of fundamental importance for a country’s economic and social development and for it to become less vulnerable to international market conditions in a more liberalized world, where competition is no longer limited to national borders,” he affirmed.

In his doctoral research in Cambridge, Borghi is studying why Brazil is not capable of sustaining growth rates for relatively extended periods, unlike China and India.

The researcher is also one of the authors of the book Formação e internacionalização de grandes empresas: experiências internacionais selecionadas (Forming and internationalizing large companies: selected international experiences), released by the Administrative Development Foundation (Fundap). In the book, he dedicates a chapter to analyzing cases of internationalization in Japanese and Korean companies.