Foreign direct investment (FDI) is a global phenomenon that has opened up the global markets through enhanced international economic integration. Business organizations undertake FDI to enhance their expansion programs and to gain competitive advantages over their rivals in the respective target markets. The development of FDI promotes economic growth to the host countries. Although there are significant positive effects accompanying FDI, there are numerous challenges in attracting and maintaining them in the host countries. Governments in developing countries have to entice these foreign investors by changing many of the trade barriers. They also have to offer unique incentives in order to make their countries attractive to invest. This paper looks at the relation between FDI and governments of host countries; moreover, advantages and limitations of FDI to host countries and instruments the host governments use to protect and attract FDIs. Brazil is considered, for example, purposes.
Brazil is a country with the fast growing economy developing. It is a country that is endowed with natural resources such as oil. In the early 1990s, the main FDIs Brazil was attracted in manufacturing while the trend has significantly changed in recent time with the increase in FDIs involved with mining, chemicals, automotive, beverages and food sectors. The US accounts for the largest share in Brazil’s FDI with the European and Asian investors following respectively. Brazil accounts for the largest economy in Latin America owing to its landmass and attractive incentives towards FDIs. It is only second to China among the developing countries (McFadden, 1975).
FDI is essential in the economic growth of the host countries. It offers numerous benefits including employment, services, improved technology and skills imported to the host country. These are the benefits the host nation, although the government should regulate the entry of FDIs to have the best interest of the host country from these FDIs. Government intervention may come to inform laws and regulations to what standards of goods are to be produced and released for sale in the market. It may priorities what FDIs to license in the country as this helps to protect the local firms. Laws should be put up to restrict capital repatriation to parent nations of foreign firms especially if the host countries economy is small (Kumar, 1998). Brazil’s market liberalization marked an era where the state monopolies would compete with the foreign markets freely. This led to increased efficiency in production and improved service delivery in order to set the pace for economic growth.
The Brazilian government has enacted and amended some of its laws to allow the competition with its global neighbors. The laws of 1988 that allowed exclusive rights for some economic sectors such as oil to state owned monopolies have been changed. This allows competition and enhanced resource extraction. Privatization of these monopolies and equal treatment of all businesses both foreign and local firms enhance Brazil’s attractiveness to FDIs. Brazil’s tax regulations are FDI friendly, although improvements should be placed to limit the bureaucracies involved (Marinov & Marinova, 2011).
Regionalization in trading blocs helps to increase the amount of FDIs attraction to a country. It is essential for developing countries to form trading blocs in order to enhance their attractiveness to FDIs (Kumar, 1998). There are numerous established regional blocs including East African Community, European Union, and Mercosur among others. To this regard, Brazil prides itself as a member the South American trading bloc of Mercosur. This helps in regional integration, provides a wide market range of products for member countries and promotes growth to the regional member states. Foreign firms have a prime reason to venture out of their parent country being expansion and growth. They are attracted to countries with ease in business operations and regional integrated markets. Brazil’s involvement in Mercosur helps it to continue increasing attraction of FDIs. The advantages of regionalization is providence of large markets for goods and services to member countries, economies of scale in trading with the outside developed countries and increased economic growth. The disadvantage of foreign direct investment is that it may cause crowding out effect endangering the local businesses as well as making the host country over-reliant on foreign technology (Marinov & Marinova, 2011).
It is prudent for developing countries to attract FDIs. However, this should be done with regard to the best interest of their needs and priorities as a nation. Economic growth should be beneficial to the citizens of the host nation as the foreign firms enjoy profit making. It is also evident that developing countries should form regional economic blocs in order to enhance their attractiveness to FDIs. This paper showed that Brazil is an enviable model of effective policies to attracting FDIs.