What drives the capital flows into BRICS economies?

• DOI: http://doi.org/10.1111/twec.12606
• Published date: 01 February 2018
• Date: 01 February 2018

ORIGINAL ARTICLE

What drives the capital flows into BRICS

economies?

Vighneswara Swamy

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Vijayakumar Narayanamurthy

IBS-Hyderabad, Finance, IFHE University, Hyderabad, India

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INTRODUCTION

What drives the capital flows into the countries? This is an important question that lies at the cen-

tre of a long-standing debate in international economic policy and research. The significance of

capital flows and the relationship with economic growth have been the subject of numerous empir-

ical studies. Foreign direct investment flows as primary capital flows among other capital sources

are of substantial interest in the developing countries in view of their magnitude and less variance

(Acharyya, 2009; Ozt€

urk, 2007). Of late, there has been a renewed interest in the spatial aspects of

capital flows, and how they consequently impact the expansion of multinational enterprises into

foreign markets. The interest in location aspects of capital flows stems from the fact that most

countries compete with each other to attract higher capital inflows. Therefore, changes made by

the host countries are important for attracting significant capital flows. In this context, though the

importance of capital flows has been appreciated and emphasised over time, nevertheles s there

exists a gap in understanding the growing capital flows into BRICS countries in the recent years.

The BRICS

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(Brazil, Russia, India, China and South Africa) countries received substantial capi-

tal flows during the recent past. During the last two decades, BRICS countries have participated in

international trade of goods and services to drive their incredible growth rates. As these economies

become more and more open to trade, they also expose their domestic markets to the economic

outcomes of the rest of the world. In recent years, BRICS economies have received increasing

scholarly attention as well (Bhar & Nikolova, 2009; Ghorbel & Boujelbene, 2013; Gilenko &

Fedorova, 2014; Mensi, Hammoudeh, Reboredo, & Nguyen, 2014). These countries are able to

exert great influence on the governance of the global economy.

BRICS countries demonstrate some distinguishing features in terms of GDP growth, GDP per

capital growth, trade openness and foreign direct investment inflows (see Table 1). It is worth not-

ing that the financial crisis had no strong effect on the BRICS countries and it is evolving as fast-

growing emerging markets group owing to increased input of factors, enormous scales of the

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BRICS brings together five major emerging economies, comprising 43% of the world population, having 30% of the world

GDP and 17% share in the world trade in 2016. In 2001, Jim O’Neill coined the acronym “the BRIC countries”in his paper

entitled “Building Better Global Economics BRICs.”In 2003, the research paper “Dreaming with the BRICs: the Path to

2050”by Wilson and Purushothaman from Goldman Sachs Investment Bank drew a lot of attention from academicians and

practitioners as they identified the BRIC group as the new economic growth force in the world. Later in 2011, the BRIC

was expanded with the joining of South Africa to form BRICS.

DOI: 10.1111/twec.12606

World Econ. 2018;41:519–549. wileyonlinelibrary.com/journal/twec ©2017 John Wiley & Sons Ltd

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TABLE 1 BRICS countries—Macroeconomic indicators

Brazil Russia India China South Africa

2001 2015 2001 2015 2001 2015 2001 2015 2001 2015

Exports of goods and services (US$ billion) 66.52 223.87 109.27 393.21 62.13 428.63 208.57 2,429.29 35.91 96.90

External debt stocks (% of GNI) 43.04 31.30 46.68 36.26 20.32 23.40 14.02 13.12 20.89 45.22

Foreign direct investment (US$ billion) 24.71 61.58 0.31 15.71 4.07 36.50 37.36 62.06 10.79 3.55

Foreign direct investment, net inflows (% of GDP) 4.15 4.23 0.93 0.49 1.04 2.10 3.51 2.27 5.98 0.50

GDP (US$) 559.37 1,774.72 306.60 1,331.21 493.95 2,095.40 1,339.40 11,007.72 1,21.52 314.57

GDP growth (annual %) 1.66 3.85 5.09 3.73 4.82 7.56 8.34 6.91 2.70 1.26

GDP per capita (US$) 3,135.16 8,538.59 2,100.36 9,092.58 460.83 1,598.26 1,053.11 8,027.68 2,705.78 5,723.97

GDP per capita growth (annual %) 0.16 4.67 5.54 3.93 3.02 6.27 7.56 6.37 0.62 0.39

Gross savings (% of GDP) 12.35 14.40 32.96 25.87 26.84 31.74 38.25 48.67 16.01 16.38

Inflation, consumer prices (annual %) 6.84 9.03 21.46 15.53 3.68 5.87 0.72 1.44 5.70 4.59

Population growth (annual %) 1.49 0.86 0.42 0.19 1.73 1.21 0.73 0.51 2.05 1.65

Population 0.18 0.21 0.15 0.14 1.07 1.31 1.27 1.37 0.04 0.05

Portfolio Investment (US$ billion) 0.08 22.05 0.70 26.42 2.85 9.49 19.41 66.47 8.30 4.87

Rural population (%) 18.45 14.31 26.65 25.99 72.08 67.25 62.91 44.39 42.63 35.20

Trade (% of GDP) 26.94 27.37 61.11 50.74 25.55 42.41 39.05 40.67 54.80 62.45

Source: World Development Indicators, World Bank Data, February 2017.

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SWAMY AND NARAYANAMURTHY