V. Benefiting from foreign direct investment and IPR protection.

Author:Kogan, Lawrence A.
Position:Intellectual property rights

    The Ebb and Flow of FDI to Brazil

    It is well recognized how Brazil benefited from FDI flows during the early 1990's, and how such flows precipitously declined from 2001-2003.

    "FDI was a crucial source of financing for Brazil's balance of payments ... during the early [19]90s ... However, since 2001 ... [Brazil's] trade balance has improved sharply, helping produce actual current account surpluses in 2003 and 2004. This trend has enabled Brazil easily to weather the steep continuing decline of FDI from $22 billion in 2001 to $16.6 billion in 2002 and just $10.1 billion in 2003" (emphasis added). (886)

    Fortunately, Brazil's FDI decline abruptly reversed itself during the following year, as "[o]verall FDI in 2004 increased 70% to reach a total of $17 billion" and Brazil became "one of the top three locations for U.S. foreign direct investment", s87 In fact, the 2004 amount may actually have been as high as $18.17 billion! (888) But, if recent data is any indicator, this reversal may have been only temporary and the prior trend of FDI declines may have already resumed. On January 19, 2006, Brazil's central bank once again reported a sizeable drop in FDI to $15.19 billion. (889)

    This data, at a minimum, confirms that, "Brazil's ability to lure foreign direct investment has lagged other emerging market giants like China during the last several years". (890) It may even suggest that, in the face of increasing FDI competition, Brazil will likely have future difficulties securing FDI unless it makes certain structural changes. And, this challenge may persist notwithstanding recent United Nations prognostications to the contrary.

    "Brazil is expected to be the most attractive location in Latin America for FDI in 2005-2006 ... [and] the United States is expected to remain the leading source of FDI in Latin America and the Caribbean" (emphasis added). (891)

    While Brazil's current "surging trade surplus [might] allow [it] to reduce [somewhat] its dependence on foreign institutional financing," (892) and to consider International Monetary Fund (IMF) and Paris Club funding less critical to its maintenance of balance of payment and capital account surpluses, (893) it would be unwise, and perhaps even foolish, for Brazil to extend this newfound economic and political confidence, which may only be temporary (894 895), into the realm of FDI. (896) FDI is often facilitated by the participation of other international financial institutions such as the Word Bank, the Inter-American Development Bank, the U.S. Export-Import Bank, the Overseas Private Investment Corporation, and other foreign governmental export promotion vehicles that, like the IMF, may impose their own strict conditionalities on loan facilities. Brazil must remember that FDI "continues to surpass other private capital and official development assistance (ODA) to emerging and developing countries. As recently as 2004, it was reported that most resources, including funds earmarked for research and development (R&D), continued to flow in the form of FDI." (897) While Brazil may wish to '"self-insure' through large reserve holdings and a declining and less volatile stock of debt ... [by] ... lessen[ing] ... the need for external financial support", (898) it must still provide the necessary enabling environment (e.g., liberalized markets, private property rights and intellectual property fights protections) to attract and reassure multinational corporations. After all, MNCs (i.e., transnational corporations--TNCs), with or without government financial backing, remain the key providers of FDI.

    "Global R&D expenditure has grown rapidly over the past decade ... TNCs are key players in this process. A conservative estimate is that they account for close to half of global R&D expenditures, and at least two-thirds of business R&D expenditures ..." (899)

    "Transnational corporations are the main providers of FDI and are thus an important source of employment. The transnational index (TNI) reveals the importance of TNCs in a domestic economy taking into account the production potential stemming from FDI inflows and the outcome of that investment ... This is especially true for Brazil ... where TNCs are more important than in India, France, [and] even China" (emphasis added). (900)

    Brazil Should Not Take MNC FDI Flows for Granted

    Brazil also must not overlook how indispensable corporate-driven FDI funding of intellectual property-rich R&D remains to its ability to secure the types of sophisticated technology and know-how transfers that it seeks. It is well recognized that, "The world's largest R&D spenders are concentrated in a few industries, notably 1T hardware, the automotive industry, pharmaceuticals and biotechnology" (emphasis added). (901) This general point was emphasized within another recently released United Nations report.

    "It is clear that, to date, only a small number of developing countries and economies in transition are participating in the process of R&D internationalization. However, the fact that some are now perceived as attractive locations for highly complex R&D indicates that it is possible for countries to develop the capabilities that are needed to connect with the global R&D systems of TNCs. From a host-country perspective, R&D internationalization opens the door not only for the transfer of technology created elsewhere, but also for the technology creation process itself." This may enable some host countries to strengthen their technological and innovation capabilities ... Innovative activity is essential for economic growth and development" (emphasis added). (902)

    Brazil, furthermore, must not forget that it suffers from serious but largely correctable national deficits in human capital (namely, education), know-how commercialization, and implementation and enforcement of intellectual property fight (IPR) protections. These shortcomings may significantly impair the technology and knowledge diffusion/absorption that experts consider necessary for it to create a truly sustainable national innovation system.

    "A key determinant of the development impact on a host economy is its absorptive capacity. Indeed, technological capabilities in the domestic enterprise sector and technology institutions are necessary not only to attract R&D but also to benefit from its spillovers. Other determinants are the type of R&D conducted, and whether the R&D is linked to production. The more a TNC interacts with a host developing country's local firms and R&D institutions, and the more advanced the country's national innovation system (NIS), the greater the likelihood of positive effects on a host economy" (emphasis added). (903)

    Indeed, while the above-referenced 2005 UNCTAD reports forecast the growing desirability of Brazil as an FDI destination in the short-term, they also express certain important reservations about the nature of future FDI flows that will likely enter Broil. In fact, with certain caveats, one of the reports warns that R&D is NOT likely to be among the primary corporate functions to be immediately relocated to Brazil. (904)

    Respondents generally concurred that production is the corporate function most likely to be relocated. Well over 80% of those surveyed by UNCTAD expected some production activities to be transferred overseas. At the same time, growth of offshore outsourcing in services will continue, they predict. Logistics and support services are the functions next most likely to relocate offshore, followed by distribution and sales. ... Regional headquarters and research and development are the least likely corporate functions to be relocated abroad. TNCs expected to see less relocation of R&D activities than [Investment Promotion Agencies] IPAs and experts. Only 20% of TNC respondents expected R&D to be relocated, in contrast with more than 40% of experts and almost 60% of IPAs. This finding is particularly interesting given the recent trend towards the globalization of R&D, and reinforces the notion that since R&D involves knowledge vital to a firm's competitiveness, it is in need of maximum protection, and it is therefore less likely to be transferred overseas. A separate UNCTAD survey of the world's largest R&D spenders shows that the share of R&D funded by foreign companies will increase by 2009, with China, the United States and India as the top three recipients of FDI in R&D ..." (emphasis added). (905) According to the same report, this FDI dynamic reflects the different types of R&D, namely imitative-adaptive and innovative.

    "... TNCs carry out different types of R&D abroad. Foreign affiliates of TNCs may undertake adaptive R&D, which ranges from basic production support to the modifying and upgrading of imported technologies. Innovative R&D involves the development of new products or processes for local, regional or (eventually) global markets. Technology monitoring units are established to keep abreast of technological development in foreign markets and to learn from leading innovators and clients there. (emphasis in original).

    While it is difficult to quantify R&D by type, among developing host economies the evidence points to the predominance of Asia in innovative R&D for international markets ... TNCs have so far located limited R&D in Latin America and the Caribbean. Relatively little FDI in Latin America and the Caribbean is in R&D-intensive activities; when it is, the R&D conducted is mostly confined to the adaptation of technology or products for local markets, called "tropicalization" (906) in the Latin American context. Some important exceptions exist in Brazil ... in particular [however] ..." (907)

    The report's conclusion that Brazil can expect to receive mostly 'adaptive' rather than 'innovative' R&D is probably linked to the importance that such FDI sources ascribe to IP protections and the inability of local businesses to...

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