Definition: A system of laws, regulations, and institutions that regulates the treatment of direct investment from outside the country.
Foreign direct investment (FDI) is a category of investment where an entity from one country controls an enterprise in a different country through equity capital, reinvested earnings, or intra-company loans. FDI can be mutually beneficial to both the investor and to the country in which the investor invests.
The overarching incentive for the investor is to maximize profit by expanding into new markets not already saturated, improving efficiency by reducing production costs, or tapping into raw materials and other resources previously undiscovered. For the FDI beneficiaries, incentives include the transfer of innovative production techniques, advanced technologies, marketing expertise, and other such knowledge transfers, in addition to the actual funds invested. Increased FDI may also improve a developing country’s access to foreign markets.
Although profit is the driving force for investors, they also consider other incentives when deciding where to invest. The establishment of an unambiguous and accessible rule of law, efficient judicial and regulatory processes, low corruption and related institutional reform, and overall economic reforms are four areas that are critical to the competitiveness of countries in attracting FDI. Trends have shown that investors also consider the following incentives/disincentives: domestic market size, regional market access, growth history, political and social stability, stable and convertible national currency, limited foreign exchange restrictions, freedom to acquire ownership and effective control, and adequate investment and property rights protection.
Brazil FDI Incentives and Reforms
Since the late 1990s, FDI in Brazil has decreased from approximately $30 billion to $10 billion, following the regional trend of FDI flight. In response, Brazil passed a Public-Private Partnership law guaranteeing returns on investments in national infrastructure projects. This incentive initiative was passed on the heels of other key institutional and legal reforms, including tax reforms, social security reforms, and a new bankruptcy law. Also, Brazil is taking steps to reduce bureaucratic red-tape in environmental procedures by including officials from the environmental ministry at the earliest possible stage, to identify and address concerns in advance.
Source: Wall Street Journal, June 2004
