Foreign Direct Investment (FDI) is a cross-border investment in which a firm, company, organization, or individual from one country invests funds into another country, with the intent of establishing "lasting interest." FDI can play a vital role in modernizing emerging economies' productive structures (Peng, 2018). It can positively influence economic growth, increase employment, and enhance the technological capacity of the country (de Castro et al., 2013). FDI depends on a number of factors, including economic factors in both foreign and host countries. This paper will explore the case study "Emerging Markets: Automobile FDI in Brazil and Mexico." In particular, the following case discussion questions will be addressed.
“ What are the costs and benefits of FDI inflows for a host country such as Brazil and Mexico?”
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Foreign countries are directed to Brazil and Mexico for a number of reasons. First, these two countries' economies are considered the largest in Latin America in terms of Gross Domestic Product (GDP). Secondly, both Brazil and Mexico have large domestic markets. For this reason, many foreign investors are attracted to invest in these two economies. FDI inflows provide a number of costs and benefits. With regard to benefits, FDI inflows facilitate capital inflows as well as stimulate the host country's economic development. Thus, FDI inflows positively influence economic growth. In addition, FDI inflows create employment opportunities. FDI has created many employment opportunities in host countries like Brazil and Mexico. Host countries also benefit with technology as foreign investors bring more advanced technology from abroad. Other benefits provided by FDI inflows include advanced management know-how, capital flow, and reduced costs.
The costs or negative effects of FDI inflows are many. One of the negative effects of FDI inflow in host countries such as Brazil and Mexico is that it hampers the development of the host countries. The inflow of multinational companies creates competition in the domestic market of the host countries. Also, because of FDI, investment, production, and marketing decisions in the host countries are made by foreign companies. These companies often exploit the labor market as well as the resources in the host countries to maximize their profits. As such, the host countries live with some loss of sovereignty. In addition, FDI is very risky because the political issues in the host countries can change.
“ If you were an executive working for an emerging automaker from China or India, assuming your firm only has the ability to enter one Latin American country for the time being, which country would you recommend: Brazil or Mexico?”
If I were an executive, I would recommend my firm to invest in Mexico due to “its participation in NAFTA, economic liberalization, low cost of labor, and proximity to the U.S. market” (Peng, 2018). Unlike Brazil, Mexico's market is much more open. As such, automakers can import resources from abroad tariff-free and duty-free. On the other hand, Brazil maintains high import tariffs on cars and auto components. Thus, I would recommend that my firm enter Mexico as it provides a more open and less protectionist environment.
Based on the case study, Mexico attracts FDI due to its proximity to the U.S (Peng, 2018). As such, my firm would export its produce to the U.S., which is considered one of the world's largest markets. In addition, the cost of labor in Mexico is much cheaper compared to that in Brazil. Although the innovative ability of the Mexican automobile industry is limited, because of the open market, my firm would import innovative technologies from abroad. In this way, my firm would not only be able to manufacture more advanced vehicles but also enhance the innovative ability of the Mexican automobile industry. Overall, due to the tough measures in Brazil, I would recommend my firm to invest in Mexico due to its free-market economy or less restrictions.
“ The automobile industry in both Brazil and Mexico is thriving. If you were a government official from an African country (such as Morocco, Nigeria, or South Africa) who has visited both countries and has been very impressed, which approach would you recommend in attracting FDI from global automakers: the Brazilian approach or the Mexican approach? Why?”
If I were a government official from an African country, let say, South Africa, I would recommend the Brazilian approach. Both Brazil and Mexico have many common features when it comes to attraction foreign investments. Both countries have adopted macroeconomic policies to ensure their economies are stable; both countries favor trade liberalization; and both countries promote legislation more favorable to FDI (Peng, 2018). With regard to the Brazilian approach, Brazil uses its GDP and trade liberalization to attract FDI. On the other hand, Mexico employs trade openness to attract FDI. Trade liberalization is the major attraction factor to FDI. While both countries provide trade liberalization, Brazil's domestic market stand out. In Brazil, the main multination strategy is market seeking.
Multinational companies invest abroad for many reasons, including the following: “resource seeking, market seeking, efficiency-seeking, and strategic asset seeking” (de Castro, 2013, 232). While Brazil is rich in natural resources, advanced technology, management skills, and marketing skills, Mexico only provides cheap labor. With regard to marketing, Brazil attracts FDI primarily due to its large domestic market. Since the dominant strategy for investors is market seeking or market attractiveness, I would recommend the Brazilian approach. The large domestic market, economic stability, trade liberalization, and availability of natural resources is vital for attracting FDI in Brazil.
References
de Castro, P. G., Fernandes, E. A., & Campos, A. C. (2013). The determinants of foreign direct investment in Brazil and Mexico: an empirical analysis. Procedia Economics and Finance , 5 , 231-240.
Peng, M. W. (2018). Global business . Cengage Learning.
