Attraction of Foreign Direct Investment in Emerging Economies - Research Proposal Example

Programme: Project FDI in China and Brazil Contents Introduction 3 Literature Review 6 Methodology 12 Ethics 17 References: 20 Introduction Macro Business Context Since globalization and liberalization, developing nations in the world are experiencing high economic growth rates. It is believed that these economies have expanded only with the help of large scale private foreign direct investments (FDI). The employment situation and foreign exchange rate positions of these nations have also improved with the essence of increased commercial activities in their economies (Abeles, 2001). Some the developing nations like, Russia, India, China and Brazil, are estimated to soon acquire the economic status of developed world nations. Multinational firms of the developed world are now extending their business branches in these developing nations. The investments made by the multinational corporations in these economies are in form of FDIs. FDIs in the emerging nations have facilitated the transfer of superior technologies. The level of working efficiencies of domestic firms in the emerging nations has also improved with higher inflow of FDIs; this is because a foreign company through such investments encourages higher competition in the market. Most of the emerging nations are labour rich economies and foreign firms have generated considerable amount of employment opportunities in such economies. The corporate taxable revenues of developing nations have also substantially increased with higher FDI inflows. Therefore, attracting higher level of FDIs is a crucial growth stimulating factor for modern developing nations (Abeles, 2001). Figure 1: Rising FDI Inflows in Developing Nations (Source: Abeles, 2001) The above graph explains that since globalization in 1990, inflows of foreign direct investments in developing nations have remarkably increased. Strategic Issues The level of FDI inflows across all developing nations is not equal. Over the last few years, public authorities in most emerging nations have encouraged new forms of competition policies in their economies; with the help of this, they would be able to attract higher amount of FDIs. The level of FDI inflow in an economy is directly proportional to the extent of its trade liberalization policies. Even so, it is found that host governments of certain developing nations enjoy higher bargaining powers than others, as foreign investors can be attracted with their rich pool of productive resources and booming market demands (Abeles, 2001). Moreover, some developing nations also try to intentionally devaluate the domestic currency in order to encourage higher inflow of foreign investments (Hirsch, 2008). The government authorities of certain nations believe that high inflow of foreign investments would compensate for their domestic investment levels; hence, they tend to adopt strict protectionist policies. Since technical infrastructures, type of export led growth policies and excise duty rates settled by public authorities in different developing nations are dissimilar, levels of FDI inflows among them are also diverse (Hirsch, 2008). Rational From the precise description of the macro-business context and key strategic issues, it can be stated that developing nations in the present scenario face substantial challenges while attracting FDIs. Nevertheless, it is proved that FDI is a primary growth stimulating factor for each and every economy. This is a research proposal for a dissertation that aims to analyse key factors that influence the level of FDI inflow in an emerging economy. For accomplishing the research, this dissertation will focus on two popular emerging nations, namely Brazil and China. There two nations belong to the group of BRICS, which represents the class of fastest growing economies of the world (Cuñat & Fons-Rosen, 2009). These are countries deemed to be at a similar stage of newly advanced economic development. Both China and Brazil have experienced the same growth strategy over a long period of time. From the analysis of above strategic issues, it can be suggested that FDI inflow in a nation substantially depends on its factor endowments. So, it is highly rational to select China and Brazil as both these economies have had abundant cheap labour resource; agricultural reform leading to opening up the economy to foreign investors; government policy; foreign investment in technology; investments in education, particularly industrial methods teaching; Both countries ventured in development of electronics in general and computers in particular which contributed to the economic boom. Hence, factor endowment patterns in these two nations are remarkably similar. It is quite reasonable to include such a two country case study as this enables the researcher to appropriately study the exact causes for FDI level in one nation to be higher than that in the other (Cuñat & Fons-Rosen, 2009). Such a consideration also helps to fulfil the desired aim of the research. Research Objectives The set of objectives that would be considered in the dissertation are: 1. To study the extent of FDI inflows in emerging nations 2. To analyse the factor endowment levels of Brazil and China 3. To estimate differences in FDI in Brazil and China 4. To determine key factors influencing FDI inflow in an emerging nation Structure of the Thesis The research work in the thesis would be done with the help of quantitative as well as qualitative analysis. The key objectives of the research would be studied with the help of a literature review, followed by empirical verification of the literature survey through quantitative analysis. The context of methodology would include detailed steps through which the research in the thesis would be accomplished. Literature Review The policy makers of emerging nations perceive that FDI can effectively stimulate the nation’s level of financial development, productivity and technological knowhow. Furthermore, they have also found that problems of portfolio reversal during critical conditions in an economy can be easily reduced with the help of FDIs. Since 1990, the level of FDI inflow in emerging nations had increased (Peltonen, Sousa & Vansteenkiste, 2012). Figure 2: The FDI inflow Trend in the Developing Nations (Source: Peltonen, Sousa & Vansteenkiste, 2012) From the above graph, it is clear that during the global financial crisis in 2008; the level of FDIs inflow in developing nations has significantly fallen. In general, there are two theoretical models on basis of which the level of foreign investment trend in a nation is analysed. One of these is the Traditional Neoclassical Model that was introduced by Jorgenson in 1963 and the other one is the Tobin’s Q model introduced by Tobin in 1969 (Peltonen, Sousa & Vansteenkiste, 2012). The levels of investments made in developing nations are examined with the help of Traditional Model. According to this model, investments are considered to share a negative relationship with cost price of capital and are directly proportional to GDP growth levels in emerging nations (Peltonen, Sousa & Vansteenkiste, 2012). So, over time, economists of developing nations have encouraged FDI inflows as this boosted the growth rate of domestic products in these nations and lowered cost of capital resources. According to the research done by United Nations Conference on Trade and Development, the level of FDI inflows in emerging nations has substantially increased over time (Peltonen, Sousa & Vansteenkiste, 2012). However, the extent of foreign fund inflows in these nations had fallen in 1980s, 1990s and 2000. In addition to that, proportion of domestic income in developing nations with contribution of FDIs has notably increased. At present, more than 122 emerging nations of the world advocate foreign direct investments (Peltonen, Sousa & Vansteenkiste, 2012). There are various factors that significantly influence the level of FDI inflow in a nation. In 2000, Shatz and Venables had claimed that economic status of an emerging nation has the ability to affect inflow of foreign capital. For instance, if the market size of a country is large, then potential investors from foreign markets show greater interest to invest in that economy. There are researchers who have claimed that rise in GDP in a developing nation helps to attract higher FDI. On the contrary, another group of researchers claimed in 2011 that a rise in FDI level leads to an increase in GDP. So, GDP and FDI in an emerging nation experience a symbiotic relationship. In 2003, it was stated that that the extent of trade openness in a developing nation is directly proportional to its FDI inflow. According to some researchers large amount of FDIs in China is flown away from its economy to other emerging nations, where the level of trade openness is much higher (Groh & Wich, 2012). Furthermore, macro-economic stability in a nation substantially affects its FDI inflow. It is found that those emerging nations with unstable levels of macroeconomic satiations experience lower foreign investments. It was also stated in 1985 that nations, where per person income level is high and debts of public sector authorities are low, experience higher foreign investments in economy. The political and legal framework of an emerging nation also determines its FDI inflow. This is because foreign investors refuse to invest in nations, where business environments are poor and uncertain. Illegal capital flights, civil wars, political corruptions and financial market instabilities are conditions, which are considered unfavourable by foreign investors. Intra as well as international conflicts between nations affect FDI inflows negatively. Also, in 2004, Janicki and Wunnava claimed that costs of labour resource in an economy are significant factor affecting foreign investments (Janicki & Wunnava, 2004). This is because; if companies are able to gain access to cheap local labour resource in an emerging economy, then they would be able to experience growing market demand by incorporating cost effective operations in business. This is the reason for per worker labour productivity in a country to be positively related to its FDI inflow. In 1984, Hartman claimed that complexity of tax policies in an emerging nation also manipulates decisions made by foreign investors regarding investing in the concerned economy (Hartman, 1984). Here the level of FDI inflow appears to fall with rise in taxable complexities. The level of political and economic bureaucracies and corruption in an emerging nation also determines its FDI inflow. Both composition and volume of FDI inflow in emerging nations change with such cultural and social factors. Developed communication and transportation facilities in a nation also contribute towards establishing higher inflow of productive foreign investments. Wheeler and Mody claimed in 1992 that in developing economies, sound transportation and communication facilitates greater inflow of foreign investments (Wheeler & Mody, 1992). Authors, Alexander Peter Groh and Matthias, included a model in their paper in order to estimate key driving factors of FDI in a nation. The model was: Where, c was considered to be the vector of social and economic future of a developing nation. The quantitative analysis included several factors; however, the results were: Since the value of Cronbach’s alpha was highest (>0.8) for legal and political factors, the result analysis claimed legal and political aspects of a nation as the most significant factors for determining FDI inflow (Groh & Wich, 2012). From the context of literature review, it can be stated that the level of factor endowments in a nation greatly affects its FDI inflow. For instance, if labour factor in a country is in abundance, then it is implied that cost of human capital resource in the concerned nation would also be low, thereby facilitating higher FDI inflow. It is found that the factor endowment ratios are dissimilar across different emerging nations. Brazil is considered to be an emerging nation with high FDI inflow rate. The population of the nation is above 2 million and hence, experiences a high market demand. Brazil is regarded as a labour rich economy; and since trade liberalization, quality of its human capital has notably improved. Apart from Brazil, China is another dominant emerging nation in the world, which houses the highest population in the world. The literacy rate and quality of human capital in China have also enhanced. Even though both Brazil and China share common factor endowment patterns in their labour rich economies, yet extent and composition of FDI inflows in these nations are not similar. In 1980, after trade liberalization, FDI inflow of Brazil was $ 1960 million. Nevertheless, by 2011, FDI inflow of Brazil had declined to a level of $ 66 billion (Xu, 2013). On the other hand, until 1979, FDI inflow was strictly prohibited in China. In 1980, level of FDI that flowed in Chinese economy was $ 57 billion (Xu, 2013). Over time, this volume has increased and in 2011, it was as high as $ 123 billion (Xu, 2013). It is found that China has experienced severe negativities in terms of economic recession since 2012, which has considerably lowered its FDI inflow (Xu, 2013). According to the report of Ministry of Commerce, FDI inflow of China has dropped by 7.3% to a level of 9.3 billion dollars. Even so, in Brazil; due to occurrence of Olympics and FIFA World Cup, the level of FDI inflow has substantially increased since last few years (Xu, 2013). In terms of FDI inflow volume, China is still the leader among all developing nations. It is found that nature of FDI policies in Brazil and China was dissimilar for long. Brazil had entertained foreign intervention in its economy since the beginning of 19th century; whereas, in China, open door policies were adopted by public authorities from 1979 (Xu, 2013). Figure 3: Historical FDI Inflow Composition (Source: Xu, 2013) The above table explains that majority of Chinese FDIs come from Hong Kong and only 3% of the investors are from United States, as of 2011. On the contrary; in Brazil, maximum amount of FDIs flow from Netherlands; whereas, the minimal amount comes from Japan (Groh & Wich, 2012). Figure 4: Sectorial FDI Distribution (Source: Xu, 2013) From the above table, it can be stated that in Brazil, majority of foreign investments till 2002 were made in the tertiary or service sector. Then again, in China, a larger proportion of FDIs was invested in the secondary sector till 2002 (Groh & Wich, 2012). The economy of Brazil has experienced semi-colonial governance for a long period of time. After colonial rule of the British, nationalists of the country had forced the government to change open foreign policies of the country in 1930. After emergence of World War II, Brazil had undertaken export promotional and import substitution policies. FDI inflows in the nation during these times were discouraged. The poor competences of existing state owned companies forced Brazil to undertaken the program of National Privatization, under which inflow of foreign funds was encouraged (Xu, 2013). Imperialism was brought to an end in China in 1940 with emergence of Communist Party. However, domestic productivity of China was so high that its foreign trade income contributed only 25% of the total national income. Since 1979, Chinese economy has opened up for foreign investments. Special Economic Zones were also created in the country at that point of time, where foreign investors received special benefits for establishing their business branches. Unlike the case of Brazil; in China, the privatization program in 1990 had only allowed foreign investors to invest in the country by forming special joint venture contracts with existing state owned companies. So, from the context of the literature review, it can be stated that multiple legal and political policies in China and Brazil were substantially responsible for separate trends of FDI inflow (Xu, 2013). Most of the literature claims that FDI inflow in a nation is positively related to its GDP growth rate and economic productivity. Nevertheless, FDI inflow trends in China and Brazil for certain time-periods reflect that rise in domestic income and competencies in a nation generates detrimental impacts on foreign investments. As a nation’s income generating capacity increases, it is often seen to discourage foreign participation. It has been claimed that export dominating position of China has compelled it to discourage higher FDI inflow, similar to Brazil. It should also be noted that FDI inflow has been encouraged in Brazil through privatization policy. Under this regime, non-efficient state owned companies of the country were sold to efficient foreign business entrepreneurial organizations. On the other hand, in China, foreign investors were encouraged to invest through special allowances provided to them on grounds of tax and legal regulations. Regional disparities in terms of FDI investment volumes are found to occur more in China than in Brazil. Yet, economic productivity of both countries has substantially improved with the essence of FDI inflows. Foreign investments in these economies have helped to employ a large proportion of workforce as well as lower the unemployment rates. The living standards of individuals in these nations have also improved with such investments. Furthermore, it should be observed that in recent years, a sudden rise in the level of FDI in Brazil has boosted its currency value in the international market, thereby raising questions against the country’s international competitiveness. In fact, several investors in China are investing in Brazil at present. High level of foreign fund inflow and low exports has become a matter of grave concern for Brazil; this is because domestic productivity of Brazil has consequently fallen. On the contrary, with open door policies, China’s domestic competiveness has significantly increased. The country is enjoying better export incomes as compared to Brazil. Hence, from the context of literature review, it can be claimed that the level of FDI inflow is currently higher in Brazil than that of China. Even so, excessive foreign investments in Brazil have lowered competencies of its domestic economy in the international market compared to that of China (Fischer, 2011). Methodology The following context of the paper will elaborate on the exact method whereby research work of the dissertation will be conducted. It is the method through which information would be collected for the purpose of research. The methodology does not set out to provide solutions but will offer the theoretical underpinning for understanding which set of methods are best applicable to understanding the effect of FDI. In the identification and evaluation of the growth method and strategies that facilitated the rapid development of China and Brazil the project will consider conducting adequate research on the ground. This is done to analyse most important causal factors affecting FDI inflows. The research will be collect relevant data through field research and use of questionnaires to retrieve information from citizens of both countries, Research Philosophy This explains the appropriate method through which information would be collected for the purpose of research. The research work of the dissertation will be performed on the basis of Positivism. On following the concerned philosophy, outcome of the research will be measurable. The researcher would first go through relevant theories and then through empirical analysis in order to prove the theories. Thus, the researcher will not exercise any power to influence research results of the dissertation (Yanow & Schwartz-Shea, 2006). Research Approach The entire dissertation research will be done on the basis of Inductive research approach. Under this regime, the researcher would analyse several authentic theories and information to access the factors influencing FDI inflow among emerging nations. At the end of the research, desired objectives of the research work would be accomplished and policy implications will be provided (Fischer, 2011). A qualitative research approach based on observations, document studies and interviews taken from real world modelling projects is argued for in order to meet the research objectives. Research Design The research work would be designed in the form of a case study analysis. This is done to analyse most important causal factors affecting FDI inflows; the researcher would incorporate a two country case study analysis in the dissertation; the two countries being Brazil and China. The research design will be aimed at; 1. Identifying the research problem clearly and justifying its selection. 2. Reviewing previous published literature associated with FDI. 3. Clearly and explicitly specifying hypotheses [i.e., research questions]. 4. Effectively describing the data which will be necessary for an adequate test of the hypotheses and explain how such data will be obtained. 5. Describing the methods of analysis which will be applied to the data in determining whether or not the hypotheses are true or false. Research Method This explains the exact method whereby the research would be accomplished. The dissertation would put greater emphasis on qualitative research method, rather than quantitative method. This is because trends and factors influencing FDI inflow in Brazil and China can be more appropriately figured out through analysis of qualitative research work (Fischer, 2011). This is because qualitative data collection method will give an understanding of underlying reasons, opinions, and motivations. It will help to develop ideas or hypotheses for potential quantitative research. Some common methods include focus groups, individual interviews, and participation/observations. The sample size is typically small, and respondents are selected to fulfil a given proportion. Qualitative Techniques The qualitative analysis in the dissertation would be done on the basis of inductive and positivist research approaches. This will be a naturalistic method of research and require the researcher to collect authentic scholarly books and public journals relating to the topic. The researcher will use special interpretive skills to amalgamate the collected literatures in form of a literature review (Fischer, 2011). Along with a literature review, the dissertation will also include two case studies. Each case study will explain FDI related trend and information of an emerging world nation, in a detailed manner. China and Brazil will be the two case countries. The factor endowment levels of both the nations are similar. The detailed case studies would strengthen the consensus and results of the literature review (Fischer, 2011). Quantitative Techniques Under the regime of this analysis tool, the dissertation will accumulate relevant empirical data relating to the case study and research topic as well as analyse the data with help of descriptive statistical tools. Nonetheless, it should be noted that the dissertation will mainly use qualitative methods of research as results derived will strengthen the qualitative information and data (Donald & Schindler, 2003). Data Collection and Sampling The data will be collected on variables related to FDI or its influencing factors. Authentic sites of World Bank and UN will be consulted for this purpose. However, it should be noted that the data will be collected on China and Brazil. So, the method of sampling chosen will be purposive. It will be time series data for at least 12 years. Correlation and graphical tools are analysis tools that are to be used for the purpose of quantitative research. The data will be collected on variables like, FDI inflow, FDI sector wise inflow, GDP data, employment rate, exchange rates and so on (Coldwell & Herbst, 2004). Limitations of the Research The context of the dissertation and its analysis will prove to be valuable and facilitate future research development (Bhattacharyya, 2009). The analysis could have been more robust if few more emerging nations with similar endowments could have been included in the framework of the research. The dissertation will primarily focus on qualitative analysis tools. If more quantitative analysis tools (like, inferential analysis method) were included in the paper, then greater technical efficiency could have been achieved from the results. The dissertation will not make use of any primary research work. The entire analysis would be based on data and information collected from secondary authentic sources. Primary research could render the analysis more realistic (Bhattacharyya, 2009). Time Plan Month 1 2 3 4 5 6 7 8 9 10 11 12 Component 1 Submit Proposal 2 Conducting Literature Review 3 Plan Methodology and Research Design 4 Writing Down Introduction, Literature Review and Methodology 5 Data Collection and Analysis 6 Writing Findings and Analysis 7 Final Revision (Source: Author’s Creation) Ethics Both academic and corporate research work must be conducted on the basis of certain valuable ethical norms. Hence, the dissertation will consider the ethical perspectives of research. The researcher would elaborate factors that had truly motivated to conduct the research work. At the same time, rationale for conducting the research will also clearly mentioned in the dissertation. The literature review will help the researcher to understand the subject in a more efficient manner, thereby deducing accurate conclusions. However, the analysis results would not be drawn directly from the literature review. All information and data that will be provided in the dissertation would be authentic and highly relevant to the topic (Bernard, 2000). Ethics Check Form: Notes for Guidance Before completing the Ethics Check Form the person undertaking the activity should consider the following questions: YES NO N/A 1 Is the size of sample proposed for any group enquiry larger than justifiably necessary? 2 Will any lines of enquiry cause undue distress or be impertinent? 3 Has any relationship between the researcher(s) and the participant(s), other than that required by the academic activity, been declared? 4 Have the participants been made fully aware of the true nature and purpose of the study? If NO is there satisfactory justification (such as the likelihood of the end results being affected) for withholding such information? (Details to be provided to the person approving the proposal). 5 Have the participants given their explicit consent? If NO is there satisfactory justification for not obtaining consent? (Details to be provided to the person approving the proposal). 6 Have the participants been informed at the outset that they can withdraw themselves and their data from the academic activity at any time? 7 Are due processes in place to ensure that the rights of those participants who may be unable to assess the implications of the proposed work are safeguarded? 8 Have any risks to the researcher(s), the participant(s) or the University been assessed? If YES to any of the above is the risk outweighed by the value of the academic activity? 9 If any academic activity is concerned with studies on activities which themselves raise questions of legality is there a persuasive rationale which demonstrates to the satisfaction of the University that: i the risk to the University in terms of external (and internal) perceptions of the worthiness of the work has been assessed and is deemed acceptable; ii arrangements are in place which safeguard the interests of the researcher(s) being supervised in pursuit of the academic activity objectives; Iii special arrangements have been made for the security of related documentation and artefacts. References: Abeles, T. P. (2001). Impact of Globalization. On the Horizon, 9(2), 2 – 4. Bernard, R. (2000). Social Research Methods: Qualitative and Quantitative Approaches. London: Sage Publications. Bhattacharyya, D. K. (2009). Research Methodology. New Delhi: Excel Books India. Coldwell, D., & Herbst, F. 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Investment in Emerging Market Economies. Financial Markets Group Review, 43, 97-119. Wheeler, D. & Mody, A. (1992). International Investment Location Decisions: The Case of U.S. Firms. Journal of International Economics, 33 (2), 57–67. Xu, B. (2013). Foreign Direct Investment in Brazil and China: A Comparative Study. International Journal of Business and Management, 9(1), 1833-3850. Yanow, D. & Schwartz-Shea, P. (2006). Interpretation and Method: Empirical Research Methods and the Interpretive Turn. New York: M.E. Sharpe. Read More