In this paper we concentrate on FDI and argue that the contrasting FDI policies in Brazil and India can be traced back to differences in the several colonial ( or semi-colonial ) experiences of the two states during the nineteenth century. Our comparative analysis of FDI in Brazil and India shows the importance of historical and institutional consciousness in deriving an apprehension of the mode in which each society perceived the function of foreign investings in their societies. By making this, we gain an apprehension of the grounds these states adopted different attitudes and policies towards foreign capital.

The relationship between establishments and economic development has been at the centre of development economic sciences since the times of Adam Smith. Recently there has been a revival of involvement in this country. North ( 1991, p. 97 ) defines establishments as ‘humanly devised restraints that construction political, economic and societal interaction. They consist both of informal restraints ( countenances, tabu, imposts, traditions and codifications of behavior ) , and formal regulations ( fundamental laws, Torahs, belongings rights ) ‘ . Given the built-in uncertainness and complexness of modern economic systems, appropriate economic establishments make markets more efficient. This is besides the instance of foreign direct investing ( FDI ) , as has been stressed in the literature ( Tormenting 1998, Gorg 2005, Busse and Hefeker 2007, Meon and Sekkat 2007, Seyoum 2011 ) .

For those who believe that “ establishments affair ” , two inquiries emerge: How do alternate institutional agreements affect the quality and gait of economic development? How make such establishments emerge in the first topographic point? The reply to the first inquiry may be obtained by comparing alternate experiences. The reply to the 2nd inquiries requires a historical position. It is within this model that we present a comparative analysis of Brazil and India ‘s yesteryear and recent experiences with FDI.

Acemoglou et Al ( 2001, 2002, 2005 ) look into the impact of colonialism on institutional and economic development of states. They argue that the biggest impact of colonialism was on economic establishments. In colonist settlements, the colonising states were more likely to set up establishments that protected belongings rights for wide multitudes. This resulted in an classless distribution of political power. By making so, basic ingredients for development were put in topographic point. In other settlements, where European colonies where restricted, the colonising power established “ extractive ” establishments that were unfriendly to come on. Furthermore, to keep these extractive formations, political power was concentrated in the custodies of a little category of elites. These political and economic constructions one time established persisted even after the settlements became independent, ensuing in divergent forms of growing.

In this paper we concentrate on FDI and argue that the contrasting FDI policies in Brazil and India can be traced back to differences in the several colonial ( or semi-colonial ) experiences of the two states during the nineteenth century. However our analysis differs from the “ colonialism-institutions hypothesis ” in several ways. Colonialism in Brazil and India lead to two divergent procedures: On the one manus, regressive political and economic establishments ( bondage, regressive land term of office systems, lopsided distribution of political power etc. ) emerged. On the other manus, colonial development led to another set of effects: disenfranchisement amongst the multitudes and subdivisions of the elite ( particularly the industrial elite ) who sought to interrupt from the international division of labor that had restricted their economic systems into exporters of primary trade goods. One therefore finds that after independency, though a figure of colonial establishments remained, a figure of others were dismantled.

The outgrowth of a proactive province and the induction of import replacing industrialisation were the biggest institutional alterations that were introduced in the twentieth century. However, the specific differences in historical experiences led these states to follow different sets of policies even within a province lead ISI model. In Brazil, the province and domestic category involvements aligned themselves in such a manner so as to supply infinite for FDI in the industrialisation procedure. In contrast, in India the post-colonial society established establishments that restricted FDI in the economic system until the neo-liberal epoch. The basic strategy of our statement can therefore be explained as follows:

nineteenth century historical factors a†’ Institutional continuity and institutional rupture a†’ function of FDI in the economic system a†’ Industrial growing

In the first two subdivisions of this article we shall briefly reexamine the map of foreign investings both anterior to and during the procedure of import replacing industrialisation ( ISI ) in each state. The undermentioned subdivision we analyze the altering function of FDI in the neo-liberal epoch, when ISI was abandoned. Following this, we so analyze the modern-day function of FDI in the several economic systems, and so analyze the advantages and disadvantages the different policies towards foreign capital have had on the development procedure of each state.



In the early old ages after independency ( from 1822 to the 1850s ) foreign investings ( largely of British beginning ) were chiefly concentrated in finance and trade. The production of export merchandises ( java and sugar ) was dominated by local occupants, while the transportation and the funding of trade was in the custodies of aliens. In the 2nd half of the nineteenth century the Brazilian authorities encouraged foreign capital to construct the state ‘s substructure – railwaies, ports, and urban public utilities. Much of these investings were designed to better incorporate Brazil into the universe ‘s trading web as a provider of primary goods. In 1880 the entire stock of foreign investings were estimated at US $ 190 million ; this expanded to US $ 1.9 billion by 1914 and to US $ 2.6 billion by 1930. Prior to 1930 Britain was the dominant foreign investor ; it still accounted for 50 % of foreign investing in that twelvemonth, though the United States portion was quickly increasing, already accounting for 25 % of entire foreign investings.

Although foreign investings contributed resources and engineering to Brazil in the old ages prior to 1930, many perceivers had scruples about the type of growing it helped to further and its frequently overlooked costs to the state. Railroads and ports were built to incorporate more efficaciously the agricultural sectors of the inside into the international economic system. By making this, nevertheless, the ensuing national transit system did non associate together assorted geographical parts and therefore did non make a big internal market.

It was the Brazilian authorities ( at both the cardinal and province degrees ) who took the enterprise in acquiring foreign groups to put in the state by offering assorted types of inducements. In the instance of railwaies, for illustration, foreign companies were granted guaranteed rates of return on their investings.[ 2 ]The early building of electricity coevals workss and distribution systems were dominated by foreign houses, which were attracted by the authorities ‘s willingness to let high electricity duties.

By the 1930s, nevertheless, the Brazilian authorities changed its attitude towards foreign investors in public utilities. Duties on electricity, telephone services and public transit were more tightly controlled and were non readjusted to the likings of the foreign grant proprietors[ 3 ]. After World War II, until the 1990s, most public public-service corporations were taken over by either the federal or province authoritiess. The populace sector besides took over most of the development of natural resources.

With the acceptance of Import Substitution Industrialization ( ISI ) as the state ‘s chief scheme of economic development, FDI was given a cardinal function for making new fabrication sectors behind protective walls.


Foreign investing in India in the 19th and 20th centuries was dominated by British investing. British capital was chiefly invested in export oriented sectors such as jute, tea and coal. It besides had the major function in the building of railroads and had a significant presence in trade and finance. While exact informations sing foreign investings in India during the colonial epoch is non available, in a strict Reconstruction of Indian balance of payments, Banerji ( 1963 ) puts foreign investing in India at US $ 61 million for the twelvemonth 1921 and US $ 83 million in 1938[ 4 ]. The Reserve Bank of India ( Central bank of India ) undertook the first comprehensive study of foreign capital in India for the twelvemonth 1948 and estimated it to be between US $ 46 to 64 million ( Tomilson 1978 ) . In position of the above estimates, it would be safe to reason that foreign investing in India during the 19th and early twentieth century was negligible and that it did demo marks of increasing during the early decennaries of the twentieth century.

The first half of the twentieth century witnessed two of import alterations in the construction of foreign investing in India. First, foreign investings in the pre-1920 period were basically in the signifier of portfolio capital. Furthermore it was to a great extent concentrated in the primary sector and in public-service corporations and conveyance sectors. By the 1940 ‘s there seems to be grounds proposing that FDI, as opposed to portfolio investing, had started to rule entire private foreign investing ( Tomilson 1978 ) . Second, the favourable footings of trade in the pre-World-War I era helped Indian houses, particularly in jute and cotton, to develop, despite heavy foreign competition. The two universe wars and the economic depression of the 1930s, allowed Indian houses to derive entree to sectors that were antecedently dominated by foreign houses. In 1914, 70 % of banking sedimentations were under the control of foreign houses, but by 1947 this was reduced to 17 % ( Mukherjee and Mukherjee 1988 ) . Similarly Indian companies had started to rule the insurance sector ( Mukherjee and Mukherjee 1988 ) .

The important characteristic of twentieth century India was the rise of an independent Indian capitalist category, for whom foreign domination was the main obstruction to growing. The history of industrial development in India had convinced the opinion categories of the importance of province protection in supplying stimulation to industrial growing. However, they favored province ordinance over province ownership.



With the acceptance of ISI as Brazil ‘s chief development scheme, foreign investings shifted to the fabrication sector ( lifting from 23.7 % in 1929 to 74.6 % in 1998 ) , while its portion in public public-service corporations declined from 50 % in 1929 to 2.4 % in 1992 ) . This was due to assorted types of inducements given to foreign investors, as policymakers felt that rapid ISI was possible merely with a significant part of foreign finance and proficient know-how. The diminution of FDI in public public-service corporations was due to both authorities ordinances that made investings in that sector unattractive and the fright of nationalist reactions to the foreign control of strategic sectors.

Reliance on FDI in advancing ISI was due to the authorities ‘s pragmatism. The handiness of domestic enterprisers with the fiscal and proficient capacity to make new production installations was limited, and the perceptual experience was that go forthing things to domestic “ test and mistake ” would blow resources and necessitate excessively much clip.

Within the fabrication sector foreign investing was particularly strong in chemicals, conveyance equipment, nutrient and drinks, and machinery.

In the initial stage of ISI the dominant beginning of FDI was the U.S. , which accounted for 44 % in 1951, followed by Canada ( 30 % ) and the U.K. ( 12.1 % ) . Since that clip there has been a significant variegation of beginnings. In 2005 the U.S. accounted for merely 21.6 % of FDI, Canada 6.7 % , the U.K. for 1.5 % , while Japan had grown from about nil to 15.5 % .


The statements prefering state-led industrialisation were fuelled by the belief that the baby industry construct was unequal for a state like India and that it ought to be extended to some kind of “ infant economic system ” construct ( Patnaik 1979 ) . Rather than depending on the international economic system, domestic consumer demand and heavy public investing were to supply the necessary stimulation for industrialisation. Even in instances where foreign coaction and foreign investing were necessary, it was the provinces ‘ responsibility to mobilise loans, foreign assistance, and supply whatever steps necessary to protect the involvements of domestic enterprisers.

The initial policy stance of the Indian authorities was to be wary of foreign investings. The industrial policy statements of 1948 and other legal steps like The Capital Issues Control Act were aimed at curtailing foreign investing. Despite the limitations on foreign investings, FDI stock increased from USD 114 million to USD 185 million, between 1964 and 1974 ( Kumar 1995 ) . In the 1970 ‘s, increased ordinance on foreign capital resulted in a stagnancy of FDI influxs[ 5 ]. The stock of FDI increased from USD 185 million in 1974 to USD 189 million in 1980. The portion of entire FDI in fabricating increased from 20 % in 1948 to 86.9 % in 1980 ( Kumar 1995 ) . The information shows that British FDI declined from over 75 % of all foreign investings in the 1960 ‘s to around 50 % by 1987, while portions of Germany, Japan and US steadily increased.

India ‘s ISI policy was riddled with contradictions. The premise that domestic consumer demand and heavy public investing could supply the necessary stimulation to industrial growing was clearly misplaced. In world, a skewed income distribution and carelessness of agricultural development in the early planning procedure meant that domestic ingestion could ne’er play an of import function. Furthermore, the resources for monolithic public investing were raised by shortage funding and indirect revenue enhancement ( Patnaik 1979 ) . As a consequence, public investing was inflationary and unsustainable in the long-term. Therefore, by the late 1970 ‘s, the planning procedure was already demoing marks of interrupting down. The 1980 ‘s witnessed a declining trade balance owing to turning oil imports and a slow-down of exports. By 1990-91 the Indian authorities took the determination to liberalise its economic system and undertake structural accommodation plans. An of import portion of this liberalisation procedure was a much greater accent on pulling FDI.



After the debt-crisis of the 1980s, Brazil was persuaded to follow neo-liberal policies. These consisted of drastic decreases in protective duties, denationalization of province endeavors and the gap of many sectors for private foreign investings. These policies resulted in a noteworthy re-appearance of FDI in public public-service corporations and in the development of natural resources. Foreign houses were allowed to take part in auctions for grant contracts in assorted Fieldss of public utilities. Therefore, public utilities which had accounted for 50 % of the stock of FDI in 1929 and had dropped to 2.4 % in 1992, rose to 25 % in 2000 and so declined once more to about 10 % in 2010.


The 1990 ‘s marked a major displacement in India ‘s FDI policy. After holding followed a restrictive policy towards foreign investing for four decennaries, India undertook major reforms in its economic policy. The new industrial policy of 1991 abolished industrial licensing demands and alleviated limitations on foreign equity engagement.

As a consequence of these policies, FDI inflows increased steadily during the 1990 ‘s and reached $ 3.6 billion in 1997. After a brief stagnancy following the Asiatic crisis, FDI inflows picked up steam from 2003 onwards. During this period the portion of fabrication in entire FDI stock declined from 85 % in 1990 to 48 % in 1997 ( Kumar 1995, 2005 ) . This tendency continued even during the 2000-2010 period, with the portion of fabrication in entire FDI influxs worsening from 41 % in 2005 to 20 % in 2008 ( Dhar and Rao 2011 ) . At the same clip substructure and services ( banking and fiscal services, package and telecommunications ) have progressively attracted FDI influxs ( Nagraj 2003, Kumar 2005 ) .


Both Brazil and India adopted an industrial development scheme based on import permutation. However, the policies towards foreign investing and FDI in peculiar have been really different. In the undermentioned subdivision we compare and evaluate the impact of the two attacks.

Political Economy of ISI in Brazil and India.

A comparative political economic system of FDI policies of Brazil and India has non been adequately analyzed in economic literature. In order to analyze the two states one has to foreground the function of political and societal establishments in modeling public policy. To make this, we return to the historical experiences of the two states before World War II.

Brazil gained its independency in 1822. Britain acted as a surety of its independency in return for which it obtained privileged entree to its markets and was influential in determining assorted types of policies. Many perceivers have hence referred to this period as a “ semi-colonial ” one. At that clip the chief beginning of wealth was export net incomes from primary production. The agricultural elites drew their economic power from exporting primary trade goods and urban elites depended on cheaper manufactured imports from abroad. These governing categories were hence unfastened to a individualistic economic system with limited province intercession. Even the industrial growing which began by the late nineteenth century was at the really outset to a great extent influenced by international factors: incomes generated via java exports provided necessary resources to back up early industrial development ( Kohli 2004, Baer 2008, p. 29 ) .At the same clip, immigrant labour, chiefly from Europe, brought with it entrepreneurial and organisational accomplishments that were important for the constitution of industrial endeavors ( Kohli 2004, Baer 2008, ch. 2 and 3 ) . By the 1930 ‘s, the weakening of the international economic system and lifting patriot sentiments drove the Brazilian leading to follow defensive policies which were of an early import-substituting nature. Although Brazil bit by bit restricted activities of foreign investors in some of the sectors where they made an early visual aspect ( chiefly public utilities ) , it ne’er treated them with the same intuition as did India and the ISI policies left considerable room for foreign investing in new sectors, particularly fabricating.

In the instance of India, the British colonial experience lasted for over two centuries. By the late nineteenth century, a major anti-colonial battle had begun. Repatriation of net incomes, guaranteed returns to investings in railroads, prejudiced duties against Indian fabrics and the unequal development of substructure had convinced Indian patriots about the dangers of incorporating a “ nascent economic system ” in the universe trading system. The rise of a “ national industrial middle class ” during the twentieth century, which developed in resistance to colonialism, strengthened nationalist sentiment in India. The antipathy to foreign regulation translated into an antipathy for foreign investing ( Naoroji 1901, Chandra 1999 ) .

Therefore for big subdivisions of the society, independency meant freedom from foreign domination, non merely in the political and societal spheres but even in the economic domain. The post-colonial province that emerged in 1947 was a merchandise of this anti-colonial sentiment.

The difference in perceptual experiences of assorted groups in both states sing foreign capital should non come as a surprise. Britain did pull out particular trading privileges from Brazil. However, as it was an independent province, it enjoyed certain – albeit limited – flexibleness sing economic policies ( Topik 1979, Kohli 2004 ) . The province protected java plantations through a buffer stock strategy known as valorization and was instrumental in puting up Bankss and technology schools. The benefits of sovereignty were exemplified in the manner Brazilian railroads were developed. The Brazilian province might hold provided grants to private investors in railroads, but it was still able to exert considerable control over the nature of equipment, and rider and cargo rates ( Topik 1979 ) . Furthermore once these grants started to go onerous, Brazil ‘s authorities borrowed financess from foreign states to nationalise most of the railway system.

In the instance of India, a authoritative settlement by all definitions, the usage of monopoly power by Britain was much more expressed. Britain restricted entree by Indians to finance, land and labour by legal and extra-economic methods. In the instance of the Indian railroads, Indian enterprisers were non allowed to put in them ( Bagchi 2002 ) . Further, despite public indignation, guaranteed returns were non abolished. Therefore, in India foreign domination left small room for domestic categories to dicker with British involvements, which, in bend, generated animus towards foreign presence in the economic system. In Brazil, in contrast, a autonomous province protected domestic involvements ( at least for the domestic elites ) making a contributing and suiting atmosphere for foreign capital.

It is therefore apparent that historically, the development of political and societal establishments followed different waies in the two states. These differences translated into two distinguishable FDI policies. By the 1980 ‘s both states were confronted by terrible macro-economic instabilities. In Brazil there was a turning sentiment against the province both within the in-between category and the concern elites ( Amann and Baer 2002 ) . Similar alterations were taking topographic point in India. Big concern houses, which were one time opposed to foreign investings, had by now matured and strengthened their places in the economic system ( Kohli 1989 ) . A amount of all these alterations resulted in the acceptance of neo-liberal policies get downing in the 1990 ‘s.

FDI: Tendencies and Forms

FDI influxs are shown in Table 1. The information indicate that Brazil has been much more successful than India in pulling FDI between 1970 and 2010. While the differences between FDI inflows to the two states have declined in the neo-liberal epoch, India continues to dawdle behind Brazil in footings of FDI influxs. As a per centum of GDP, FDI inflows to Brazil stood at 3.3 % in 2002 and 2.3 % in 2010. In instance of India FDI influxs were 1.1 % of the GDP in 2002 and reached 1.5 % by 2010.

In the instance of Brazil, the US had been the largest subscriber to FDI throughout most of the twentieth century. In 1951 the portion of the United States in Brazil ‘s FDI stock was 43.9 % , bit by bit worsening to 24 % in 2000 and to 17 % in 2005. By the latter twelvemonth the portion of many other states became important, including Germany, Japan, the U.K. , France and Spain. In the instance of India, Europe, particularly Britain has ever been a major beginning of FDI. However, in the neo-liberal epoch, FDI beginnings have diversified. USA and Singapore have become of import beginnings of FDI. Tax havens like Mauritius, which accounted for 50 % of FDI influxs in 2005-2009, have become significant beginnings of FDI ( Dhar and Rao 2011 ) .

A dramatic characteristic of the neo-liberal epoch is the phenomenal addition in FDI escapes from both India and Brazil ( Amann and Baer 2010 ) . FDI outflows from Brazil increased from USD 0.7 billion in 1994 to USD 11.5 billion in 2010. For India the figures were USD 82 million in 1994 and USD 14.6 billion in 2010.

What explains these enormous differences in FDI influxs in the neo-liberal epoch? Economic and location factors such as market size and literacy rates are important determiners of FDI ( Wheeler and Mody 1992, Zhang 2000, Chakrabarti 2001 ) . With a bigger GDP and a more developed industrial base, Brazil was bound to be a more attractive finish for investors[ 6 ].

Apart from strictly economic factors, the institutional model of a state is besides an of import determiner of FDI flows. This seems to be true for Brazil and India where the establishments and perceptual experiences developed during the ISI epoch have persisted even in the neo-liberal period. Indian policy devising is still marked by export pessimism and gradualism that characterized its ISI scheme ( Ahluwalia 2002, Balasubramaniam and Mahambre 2003 ) . Unlike Brazil, India ne’er undertook monolithic denationalization plans. Its duty rates remained higher than Brazilian 1s until the first decennary of the twenty-first century. Taxes on international trade ( import responsibilities, export responsibilities, exchange net incomes, etc. ) in Brazil accounted for 4 % of entire gross in 2000 and 2 % in 2009. For India, the figures were 19 % in 2000 and 11 % in 2009 ( World Development Indicators ) . Harmonizing to UNCTAD ‘s inward FDI possible index covering 141 states, for the period 2000-2002, Brazil was ranked 68 while India was placed at 89. The greater extent of liberalisation has been an of import factor pulling more foreign investing into Brazil than into India.

Quality of FDI Inflows

One of the of import maps of FDI is to function as a tool of funding development. However, FDI can non be treated as a homogeneous construct. The extent to which FDI flows lend to development depends mostly on its quality. By quality, some economic experts ( Kumar 2002, 2005 ) refer to the positive impact of FDI on productiveness, employment and end product. Two of import steps of quality are the manner of entry ( Greenfield or M & A ; A ) and the sectoral composing of foreign investings[ 7 ].

Greenfield FDI adds to existent resources of an economic system by augmenting domestic capital formation and is associated with strong productiveness spillovers. FDI flows in the signifier of M & A ; A ‘s, nevertheless, have a smaller impact on productive capacity of an economic system since they normally involve merely a alteration in ownership ( Mencinger, 2003 ) .

Sectoral composing of FDI is an every bit of import index of FDI quality. It is by and large accepted that FDI directed towards sectors with extended backward linkages is more likely to bring forth sustained growing. The growing and employment bring forthing potency of FDI in the primary sector tends to be limited due to miss of linkages with the local economic system. On the other manus, FDI in the fabrication sector tends to make extended positive outwardnesss for the local economic system. The impact of service sector FDI, on entire aggregative GDP growing rates is equivocal ( Alfaro 2003, Chakraborti and Nunnenkamp 2008 ) .

Table 2 shows the ratio of M & A ; A gross revenues to entire FDI influxs in Brazil and India[ 8 ]. The figures indicate a predomination of M & A ; As in FDI. In 2000, M & A ; A related gross revenues were more than 50 % of FDI flows to Brazil and were 30 % of FDI flows to India. It should be noted, nevertheless, that one one-fourth of all FDI influxs into Brazil during 1996-2000 were related to denationalizations, which were concentrated in that period.

In footings of sectoral composing there have been major structural displacements for both India and Brazil. During the early twentieth century, FDI was chiefly in the extractive and natural resource sectors and in public utilities. In the ISI period, both India and Brazil were able to direct foreign investing into fabrication, particularly into engineering intensive sectors. The neo-liberal epoch has seen a re-emergence of FDI flows in services and public public-service corporations[ 9 ]. The portion of FDI stock in the fabrication sector has declined steeply. It must be noted that within fabrication sector, engineering intensive sectors like pharmaceuticals, cars and electronics have received a large portion of FDI, in both states.

FDI Performance: Productiveness and Industrial Growth

The relationship between productiveness, growing and FDI is an equivocal one. While there are legion cases of states that have successfully used FDI to develop their industrial base ( United States and Australia during the late nineteenth century ) , the history of Korea, which minimized trust on foreign investings, should convert us that FDI is a necessary but non a sufficient status for successful industrialisation ( Mardon 1990 ) .

In the ISI period industrial growing of Brazil outpaced that of India. Even in footings of GDP, Brazil grew at a much faster gait ( see Table 3 a ) and b ) ) . The extent to which differences in the FDI policies explain the divergency in economic public presentation in the two states is hard to quantify. In certain sectors, nevertheless, FDI seems to hold played a major function.

The instance of the car sector is one such illustration where FDI did hold an of import function[ 10 ]. The Indian authorities, unlike that of Brazil, badly restricted FDI and maintain rigorous control over engineering transportation. As a consequence, the Indian car makers ended up bring forthing low terminal autos, whose chief client was the authorities itself. By 1980, Brazilian auto production was 20 times that of India ‘s ( Arbix et. Al. 1998 ) . The Brazilian scheme had another added advantage. Specifically, competition from MNCs and transportation of engineering helped develop an efficient car constituent bring forthing sector. In India, these spillover effects were limited because of limitations imposed on foreign investings, ensuing in less efficient constituent makers ( Arbix et. Al. 1998 ) . Even in the electronics goods industry, Brazilian pragmatism benefitted industrial growing[ 11 ].

After the economic reforms of the 1990 ‘s, GDP growing rates in Brazil and India have been increasing steadily ( particularly after 2003 ) .The service sector has been the biggest subscriber to GDP. Until 2003, industrial growing was let downing. In Brazil fabricating value added grew at an norm of 1.5 % during 1990-2003 and 3 % from 2003-2010. In India fabricating value added grew at 5.7 % in the 1990-2003 ( which was slower than the 1981-1990 growing rates )[ 12 ]and at 9 % during 2003-2010. Tables 3 a ) and b ) show the tendencies.

What explains the slow growing of the industrial sector in 1990-2003? To a big extent, industrial public presentation can be explained by the alterations in the institutional construction of these economic systems. Historically, industrial growing was financed by public investing in India and a combination of public and foreign investing in the instance of Brazil. In a liberalized economic system, nevertheless, public disbursement is constrained: an addition in financial shortages leads to rising prices which, in bend, causes depreciation of the currency. Faced with the chance of weakening currencies, foreign investors are less likely to put. The instance of Brazil and India has been no different as public investing declined during this period ( Mohan 2008, Afonso, Araujo and Junior 2005 ) .

In such a scenario, foreign investing becomes important to finance industrial growing. In world, non merely has the portion of FDI in fabrication declined ( in add-on to the turning proportion of M & A ; As in entire FDI ) , even the volume of influxs have been comparatively little. For case, in 1995 FDI influxs to Brazil and India were 1.2 % and 0.6 % of universe FDI influxs compared to China ‘s 11 % . By 2005 the portions were 1.5 % , 7.3 % and 0.8 % for Brazil, China and India severally. These tendencies, coupled with worsening public investings are a large factor behind the lacklustre public presentation of industries during the first decennary of reforms[ 13 ]. It is no surprise hence that increases in fabricating growing rates after 2003 have coincided with additions in public investings in India. Even in Brazil aggressive authorities disbursement in important sectors like substructure have played an of import function in exciting industries. Public investing in substructure was the chief push of the PAC ( “ growing acceleration plan ” ) plan in Brazil ( OECD 2011, p. 27 ) .

Industrial productiveness in both economic systems has improved in the last two decennaries ( Bonelli 2002, Ferreira and Rossi 2003, Unel 2003 ) . MNC ‘s have played an of import function in this respect. There are two channels through which, in theory, FDI could lend towards industrial productiveness. First, competitory force per unit areas could coerce local houses to put in R & A ; D in order to vie with MNC ‘s. As a consequence, houses might take portion in advanced activities. FDI could therefore supply a stimulation to the economic system to overhaul many of its prima sectors, and thereby make inactive efficiency additions ( Amman and Baer 2010, Kumar 2005 ) . Second, MNC ‘s might play an of import function in R & A ; D in both states. For illustration, TNC ‘s similar Motorola, General Motors in Brazil and Novartis GlaxoSmithKline and Microsoft in India, have set up R & A ; D installations. In fact, in Brazil, of the entire patents granted to occupants by the USPTO, 42 % were on history of foreign affiliates in 2001-2003. In the same period in India, 40 % of patents granted by the USPTO were associated with foreign affiliates ( UNCTAD 2005, p. 135 ) .

Despite the increasing importance of foreign investings in the economic system, the degrees of R & A ; D have been modest. R & A ; D as a per centum of GDP amounted to 1.1 % of GDP in Brazil and 0.8 % in India, compared to 2.7 % in the U.S. The impact of the modest sum of R & A ; D in both state means that dependance on foreign engineering by them will go on to be significant. This can be measured by analyzing the patent applications of Brazil and India, compared to industrial states. It will be noted in Table 4 that whereas in 2007 patent applications of China amounted to 153,060 and of the U.S. 241,347, the entire sum for Brazil in that twelvemonth was 4,023 and for India 6296.


Our comparative analysis of FDI in Brazil and India shows the importance of historical and institutional consciousness in deriving an apprehension of the mode in which each society perceived the function of foreign investings in their societies. By making this, we gained an apprehension of the grounds these states adopted different attitudes and policies towards foreign capital.

We have shown how historical experiences of both states shaped both, formal ( Torahs and ordinances ) and informal establishments ( perceptual experiences sing foreign investing ) in the post-independence epoch. During the ISI epoch, FDI came to play an of import function in the industrial development of Brazil. In the instance of India the colonial experiences, in add-on to political and societal limitations, prevented it from to the full working the advantages of FDI.

In the neo-liberal epoch, though both states have opened their doors to foreign investings, the establishments established during the ISI epoch have persisted. In comparing with Brazil, the Indian liberalisation policy continues to be marked by export pessimism and gradualism. As a consequence, Brazil has been far more successful at pulling FDI than has India: in 2010 FDI stocks in Brazil were more than twice the FDI stocks in India.

Though FDI is an of import ingredient of development, the extent to which FDI contributes to economic development depends non merely on the measure of influxs but besides on its structural composing and its spillover effects on the domestic economic system, or what has been come to be known as FDI quality. By analysing two cardinal determiners of FDI quality- the sector wise distribution of FDI and its manner of entry- we find that the construction of FDI has undergone enormous alterations in the neo-liberal epoch. First, there has been a displacement of FDI off from fabricating sector towards public utilities and services. Second, M & A ; A related FDI influxs have become prevailing in Brazil and to a lesser extent in India.

FDI may hold contributed in portion to the high industrial growing rates of India and of Brazil ‘s recovery from its slow growing rates in the last decennaries of the twentieth century. Yet as we have noted, that a strong presence of the province can besides act upon the effectivity of foreign investings by increasing public disbursement in substructure and other cardinal sectors of the economic system. From a policy position our analysis makes it clear that an effectual FDI policy is one in which province intercession and foreign investings complement each other, thereby maximising the potency for industrial growing and development.

Table 1.

FDI Flows and Stocks for Selected Years ( Inward, Millions of Dollars )






FDI Inflows













FDI Stock













Beginning: UNCTAD

Table 2.

Value of Cross-Border M & A ; A Gross saless for Selected Years ( Millions of dollars )








( N )


( 27.67 % )


( 52.69 % )


( 19.86 % )


( 18.32 % )



( 2.10 % )


( 5.50 % )


( 29.65 % )


( 6.90 % )


( 22.47 % )

Beginning: UNCTAD ; ( Footings in the brackets refer to M & A ; A gross revenues as a per centum of FDI influxs. )

Table 3.

a ) Macroeconomic Indicators of Brazil





GDP ( % one-year growing )





Gross fixed capital formation ( % of GDP )





Industrial value added ( % of GDP )





Manufacturing value added ( % of GDP )





Industries exports ( % of ware exports )





Servicess value added ( % of GDP )





High-tech exports ( % of manufactured exports )





Beginning: World bank

B ) Macroeconomic Indicators of India





GDP ( % one-year growing )





Gross fixed capital formation ( % of GDP )





Industrial value added ( % of GDP )





Manufacturing value added ( % of GDP )





Industries exports ( % of ware exports )





Servicess value added ( % of GDP )





High-tech exports ( % of manufactured exports )





Beginning: World Bank

Table 4.

R & A ; D: A Comparative Viewa

Patent Applications

R & A ; D Expenditure ( % of GDP )



















United States



Beginning: World Bank

a: For the twelvemonth 2007