Fdi Inflow in Bric Countries

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International Business Research

Vol. 4, No. 4; October 2011

FDI Inflow Determinants in BRIC countries: A Panel Data Analysis Vinit Ranjan ABV-Indian Institute of Information Technology and Management Gwalior, India – 474010 E-mail: vinit.iiitm@gmail.com Dr. Gaurav Agrawal Assistant Professor, ABV-Indian Institute of Information Technology and Management Gwalior, India – 474010 E-mail: gauravagrawal@iiitm.ac.in Received: April 28, 2011 Accepted: May 18, 2011 doi:10.5539/ibr.v4n4p255

Abstract This study explores Foreign Direct Investment (FDI) inflow determinants in Brazil, Russia Federation, India and China; collectively known as BRIC countries. A random effect model is employed on the panel data set consisting of annual frequency data of 35 years ranging from 1975 to 2009 to identify the FDI inflow determinants. The empirical results show that market size, trade openness, labour cost, infrastructure facilities and macroeconomic stability and growth prospects are potential determinants of FDI inflow in BRIC where as gross capital formation and labour force are insignificant, although macroeconomic stability and growth prospects have very little impact. Keywords: Foreign Direct Investment, BRIC, Panel Data, Macroeconomic factors 1. Introduction Trade has always been a vital part of economy and with the concept of globalization it reaches to the international level. The role of Foreign Direct Investment (FDI) in this development is very crucial. The enormous increase in FDI flows across countries is one of the clearest signs of the globalization of the world economy over the past 20 years (UNCTAD, 2006). According to UNCTAD Foreign direct investment (FDI) is defined as an investment involving a long-term relationship and reflecting a lasting interest in and control by a resident entity in one economy (foreign direct investor or parent enterprise) of an enterprise resident in a different economy (FDI enterprise or affiliate enterprise or foreign affiliate). Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates. FDI has innumerable effects on the host country’s economy. It influences the income, production, prices, employment, economic growth, development and general welfare of the recipient country. FDI are the most significant channels for the dissemination of modern technology (Blomstrom, 1989). So, we can say that FDI plays a key role in development of emerging economy because the very essence of economic development is the rapid and efficient transfer and adoption of “best practice” across borders. In last two three decades world has experienced a massive change in terms of geopolitics, economics and in organisation and distribution of production. For several reasons, emerging economies of Brazil, Russia, India and China (BRIC) have acquired important role in the world economy as producers of goods and services. All the four countries of BRIC have common characteristic of large population, potential consumer market, fast economic growth, big land size etc, on the basis of which they are attracting large amount of investors around the world. The BRICs, with 40 percent of the world’s population spread out over three continents, already account for 25 percent of global GDP (IMF article “BRICs Drive Global Economic Recovery”, july 22, 2009). The combined economies of Brazil, Russia, India and China (BRICs) appear likely to become the largest global economic group by the middle of this century.” (Cheng, Gutierrez, Mahajan, Shachmurove, and Shahrokhi, 2007). Goldman Sachs predicted that China and India are likely to emerge as dominant global suppliers of manufactured goods and services while Brazil and Russia to dominate in supply of raw materials. Currently BRICs are the world’s four leading emerging market economies, the nominal GDP of which reached 10.67 trillion US dollars in 2010. According to...
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