Introduction

When a country has a market economy, foreign direct investment (FDI) is seen as a force that drives economic growth. Because of this, many economic studies take it into mind. Since ‘the very essence of economic development is the rapid and efficient transfer and adoption of “best practices” across borders’ (Kok et al., 2009), most of the study focuses on FDI as a key factor in economic growth and technology development. Before the First World War, global companies in the first half of the 1800s were the first ones to invest directly in other countries. But now, the amount of FDI coming into the world grows every day. The goals of FDI inflows are different from one country to the next.

Agrawal (2000) says that the main thing that determines foreign investment is the companies’ goals. Some companies want a big home or local market, while others want to get their hands on natural resources. On the other hand, some companies start new plants and buildings in the countries where they are based to cut down on production costs and make new connections with the international market. So, the amount of FDI changes based on how much money is needed. FDI is the lifeblood of international trade and a main sign of the standard of living in a country. FDI has been a big part of the process of globalisation over the last 20 years. It is seen as a way to mix economies with foreign markets as well as a way to ease financial pressures. The host country directly gains from bringing in non-debt-creating foreign capital, which leads to a rise in foreign capital resources, better economic performance, a stronger exchange rate and new jobs. There are also secondary benefits, such as the spread of modern technology, the improvement of operational and management skills, and the growth of human capital. The investor gains from having access to, among other things, a big market, skilled workers who do not cost much, tax breaks and subsidies and the ability to use natural resources. The benefits of FDI are real, but they are not automatic, and their size depends on things such as the stage of growth of the country, its ability to absorb investment, and the type of investment or area that is needed. For example, a country with few college graduates will not be able to use knowledge spillovers, and a country that is not ready for technology may not be able to use technology spillovers. In general, though, FDI has a lot of good effects on the country that receives it.

FDI has become more important and is now seen as a way to help a country’s economy grow. Countries have started changing their policies to increase FDI inflows and the economic benefits that come with them because they know how important FDI is and how good it is for them. So, almost all governments that want their economies to grow are interested in liberalising their policies, lowering restrictions, making it easier for businesses to start up, making it easier for FDI to come in, giving tax breaks and subsidies, and being more proactive. The current flow of FDI is complicated and depends on things such as the size of the company, how competitive it is, and the economic situation in both the country that sends the money and the country that receives it. But there is no agreement on what makes a country or area attractive to foreign companies.

Studies done in Brazil and India show that the most common approach used by foreign investors is market seeking, also known as market attraction. On the other hand, these studies do not compare the countries or times. So, this article’s main goal is to look at the causes of FDI in the economies of Brazil and India from 2000 to 2020. At the same time, it tries to find out what both countries have in common and what makes them different when it comes to drawing FDI.

Statement of the Problem

The biggest problem for emerging countries is getting a lot of money from outside sources. Many people think that FDI is the main way for developing countries to get access to cash, technical, managerial and organisational know-how and other tools that they would not have otherwise. Due to its importance, increasing FDI inflows is the top goal of policymakers in developing countries (Haile & Assefa, 2005; Suleiman et al., 2015). Several policy changes have led to a large increase in FDI inflows into developing countries. But these amounts have been split up in different ways, with most FDI going to poor countries. In this study, the researcher is focusing on India and Brazil, which are the two biggest and most populous countries in the world. People know that the economies of these two countries are growing quickly and that their facilities and surroundings are good. In terms of technology and facilities, these two countries’ economies are getting better. So, this study tries to find out the main factors that affect FDI in these countries.

Objectives of the Study

• To examine the growth and trend of FDI in Brazil and India.
• To examine the macroeconomic factors that influence FDI in Brazil and India.

Scope and Significance of the Study

This study is mostly about FDI in India and Brazil. It compares how well FDI works in both countries. This study was chosen to learn and study more about the cross-border investments made by emerging countries and their involvement in international markets in order to affect global and economic issues. This study is very helpful for experts who want to know what factors affect FDI in fast-growing countries such as India and Brazil and how their economies and environments are different from each other. In 2022, India and Brazil will have had formal ties for 74 years. In recent years, the relationship between the two countries has become better because they have a similar view of the world, are both committed to growth and share democratic ideals. In 2006, they made a strategic partnership, and in 2020, they agreed to an Action Plan to Strengthen the Strategic Partnership to make it stronger. Today, the two countries work together in a number of international venues, such as BRICS, IBSA, G4, G20, BASIC and the United Nations. They also meet at summits, share high-level officials and take part in high-level visits. Over the years, their trade and investments have grown, and they have worked together more on important things such as biofuels and the power sector.

As the two countries try to figure out how to live in a changing world, their similarities and similar views on multipolarity give them a unique chance to look for ways to work together more. As India celebrates 75 years of independence and Brazil marks 200, this report by the Observer Research Foundation and Fundaco Alexandre de Gusmo gives Indian and Brazilian perspectives on some of the most important issues in multilateral forums that affect both countries and their bilateral relationship. Both countries have a long and strong history of participating in conferences, where they have often made strong and long-lasting relationships with other countries. If both countries knew more about what the other was doing, they could work together to help both of their countries.

Research Methodology

This research is both analytical and empirical in character, with a particular emphasis on the dynamic interaction between FDI and its determinants.

Data Collection

This study is mostly based on facts that came from other sources. The figures come from the website globaleconomy.com and cover the years 2000 to 2020. India and Brazil’s FDI is the dependent variable, and economic growth, trade freedom, inflation and human capital are the independent factors.

Data Analysis

Regression analysis is used to figure out how FDI and its macroeconomic factors are related to each other. The mean, the standard deviation and the measure of difference are all ways to look at how well FDI is doing. Before running the Hausman test, both random effects and set effects are tried. The Hausman test shows which model is better. So, the Hausman test comes first. Based on the result of the Hausman test, the random or fixed effects model comes next. The Hausman test starts with the idea that the random effects model is right. Since the P value is higher than 5% (0.8720), the null hypothesis is accepted, so, the random effects model is chosen. Advanced econometric tools such as the panel unit-root test, the Fisher Johansen test of cointegration, the panel vector error correction model (VECM), and the fully modified ordinary least squares (FMOLS) model, among others, are used to find out exactly what causes FDI in these countries.

Hypotheses of the Study

• Countries with a large market size attract more FDI.
• Inflation stability is essential for FDI inflow.
• Population is a determinant factor for FDI inflow.
• Trade openness and liberal policies lead to FDI inflow.

Review of Literature

Every day, more and more research is being done on FDI in order to figure out its causes and effects. Most people agree that FDI helps countries improve their economies by giving them access to international funds, technology, competition and better access to international markets. At the same time, FDI will boost spending and growth in the country itself. Some reviews about FDI and what makes it happen are as follows:

The study identified significant FDI determinants and provided a complete evaluation of aspects that are deemed to affect FDI attraction. The researchers identified several FDI determinants. The study’s ultimate evaluation is a Synthesis of the elements driving FDI (Tocar, 2018). Market growth indicates a larger market with better possibilities. Foreign investors invest in countries with larger markets and faster economic development rates to maximise their ownership benefits (Cullen, 2002). More FDI will be attracted to a country with a stable macroeconomic position and high and sustained growth rates. GDP growth rates, the industrial production index and other growth proxies are employed (Uri et al. 2000).

Ewe-Ghee (2001) argued that GDP growth signals a higher rate of return, attracting FDI inflow and reducing FDI outflow. Ekholm et al. (2010) and Baltagi et al. (2005) conducted their study on market proximity, i.e., relationship between the size of market and FDI by using a regression model. They identified that there is a positive and significant effect of market size on FDI inflow. The productivity of a country is also a factor that influences FDI inflows. The findings of a cross-country study of panel data indicate that the impact of a country’s productivity differs from one country to another (Razin & Sadka, 2007).

Decades of research have demonstrated the importance of trade in complementing FDI. MNEs prefer to invest in markets with which they are already aware. Imports of complementary, intermediate and capital items may be required. In any case, trade volume increases and trade openness is supposed to be a positive and important determinant of FDI (Holland, 1998). The ratio of export plus import divided by GDP is used to measure trade openness (Nunes et al., 2006).

In studies of economic stability, inflation is often used as an explanatory variable. Countries with rapidly inflating currencies would be unattractive to foreign investors, signalling volatility, risk and a reduction in long-term profitability. Furthermore, an inflating currency would result in lower domestic investment and economic development. It is crucial to understand how inflation affects a country’s FDI inflows. Inflation seems to have a negative effect on FDI, although this is not always the case.

Williams (2015), Ranjan and Agrawal (2011) and Tsaurai (2017) found that inflation is likely to be bad and important. On the other hand, Erdoan and Unver (2015) and Das (2017) think it is good and important, which goes against the economic theory. Some studies (e.g., Tampakoudis et al., 2017) say that inflation is not important.

For governments to get FDI, they need to have strong human capital. Population size is also used as a stand-in for human capital (Barro, 1990), and actual studies like the one of India (Utsav & Muhammad, 2018) find this to be important and hopeful. Nilofer (2011) looked at statistics from 1991 to 2009 to show the main economic reasons for FDI inflow and the sector-by-sector trend of FDI intake into India. The research showed that FDI flows have been unstable over the past few decades and have changed from sector to sector.

FDI intake was found to be strongly linked to the economic factors that were looked at in the study. According to the authors, it is in India’s national interest to remove restrictions on stock capital investment and other things that have made it harder for India to get more foreign investment. Sahni (2013) used the ordinary least-square method for time-series data analysis to look at the trends and factors that affected the flow of FDI into India from 1992–1993 to 2008–2009. During the post-reform period, GDP, inflation and trade openness were found to be important in drawing FDI to India. However, foreign exchange reserves were not found to be an important factor in understanding FDI to India.

da Silveira et al. (2017) used a panel database for 49 industries from 1996 to 2003 to find out the many factors that affect FDI flows to the Brazilian economy. The rate of economic growth and how open the country is to trade were found to be the most important socioeconomic factors in getting foreign capital into Brazil. Costa (2002) used panel data from FDI flows in the 1990s. The finding shows that the exchange rate, wage rates, privatisations, physical distance and natural resources were all statistically significant factors that affected FDI.

Research Gap

Reviewing the literature shows that there are a lot of studies that look at the macroeconomic factors that affect the flow of FDI. But there are not many studies on the flow of FDI into India and Brazil, two emerging countries that are part of the BRICS economy. As they become world players, Brazil and India are going through big changes. Even as they become more involved in foreign affairs, they still have things in common with other poor countries. The rise of Brazil and India and their ideas about how to solve global development problems have big effects on international development strategy. In recent years, the relationship between the two countries has got better because they have a similar view of the world, are both committed to growth, and share democratic ideals. So, the main goal of this study is to look at how macroeconomic factors affect the amount of FDI coming into two BRICS countries (India and Brazil) as a whole.

The rise of FDI in Brazil and India is shown in Table 1. The values of the numerical mean, standard deviation and coefficient of variation are also shown. It shows how FDI in Brazil and India has changed over the past 20 years. This data shows that in 2000, neither country got a lot of FDI. Brazil’s trend of falling kept going in 2002 and 2003 (see Figure 1). Even though the amount of FDI coming into Brazil was going up until 2009, it went down in 2010. On the other hand, India’s overall trends are both going up and down, with the exception of the years 2000 and 2004 (see Figure 2). Since 2011, there has been less FDI into Brazil. The World Investment Report 2020 from the UNCTAD, on the other hand, says that FDI imports increased by 20% from 2018 to 2019, reaching USD 72 billion. FDI stock stayed the same for two years and was worth USD 640 billion at the end of 2019. Flows to Brazil dropped by almost half, to USD 18 billion, in the first half of 2020, as the privatisation plan for 2019 stalled. But in the second half of 2020, asset sales started up again, and a new infrastructure plan was revealed. The average rise of FDI in Brazil is 50.64 and in India, it is 27.11. From this, we can tell that Brazil’s average was higher. The average amount of change in a set of data is the standard deviation. Brazil’s standard variation is 31.462, while India’s is 16.212. The amount of risk is shown by the standard deviation. We can get the coefficient of variation by dividing the standard deviation by the mean. This number can be used to compare risks. India’s index is 59.798 and Brazil’s is 62.119. If the ratio is smaller, it means that the trade-off between risk and profit is better. So, India has less of a trade-off between risk and gain than Brazil does.

Table 1. Foreign Direct Investment in India and Brazil.

 

Figure 1. Flow of FDI in Brazil.

 

 

Figure 2. Flow of FDI of India.

 

Model Specification

Based on the study of the literature and previous studies, this research is looking into a model that includes socioeconomic factors and how each country’s variables affect FDI. The researcher develops a model with the help of econometric techniques, to verify the determinants affecting the FDI in Brazil and India.

FDI = F (CPI, GDP, TO, POP, e)

FDI = Foreign Direct Investment

CPI = Consumer Price Index

GDP = Gross Domestic Product

TO = Trade openness

POP = Population

e = Error Term

The preceding empirical analysis demonstrates the model’s independent and

dependent variables.

Empirical Results

This section illustrates the model’s variables’ integration properties using panel unit-root tests (refer to Table 2). Before proceeding with co-integration and long-run relationship of the model, test for stationarity of time series. The LLC, IPS, Fisher–ADF and PP–Fisher tests all fail. The null hypothesis that the data series is not stationary is accepted at level but rejected at first difference. That is, at first difference, these variables are stationary (1). This means that all variables in this study are I (1) for all countries.

Table 2. Unit-root Test Results.

 

All factors are co-integrated at first. The next step is to examine the Johansen Fisher panel cointegration test to see if they are in the same or different order. This test is mostly used to check the long-term link, or cointegration, between FDI and macroeconomic factors in India and Brazil. At the 5% level, the real-world data show that there are two co-integrated equations (see Table 3). This shows that there is a long-term link between FDI and socioeconomic factors in India and Brazil.

Table 3. Johansen Fisher Panel Cointegration Test.

 

VECM Model: FDI and Its Linkage with Macroeconomic Variables in India and Brazil

If there is a link between FDI and India and Brazil’s financial data, the next step will be to use the VECM. It lets you figure out how things work in the short run, how they work in the long run, and how fast things change as they move towards the long-run stability (see Table 4).

Table 4. VECM Model.

VECM Estimated Model

D(FDI) = C(1)*(FDI(-1) + 19.6732028598*GDP_P(-1) + 7.5246833215*TO(-1) -0.00557955130047*POP(-1) - 383.072652878) + C(2)*(CPI(-1) -0.532036209339*GDP_P(-1) - 0.290712345342*TO(-1) + 0.0198464419618*POP(-1) - 8.43534575622) + C(3)*D(FDI(-1)) + C(4)*D(FDI(-2)) + C(5)*D(CPI(-1)) + C(6)*D(CPI(-2)) + C(7)*D(GDP_P(-1)) + C(8)*D(GDP_P(-2)) + C(9)*D(TO(-1)) + C(10)*D(TO(-2)) + C(11)*D(POP(-1)) + C(12)*D(POP(-2)) + C(13).

 

The goal of the ECM is to show how quickly the economy moves from a state of short-run equilibrium to a state of long-run equilibrium. If either ECT or C (2) is negative and significant, it means that the rate of change between the short-run dynamics and the long-term equilibrium relationship is 189% per year (see Table 5). This shows that FDI and socioeconomic factors in India and Brazil are linked in a long-term way.

Table 5. Estimates of Error Correction Term.

 

Table 6 shows the result of the panel regression analysis of FDI in India and Brazil. The empirical conclusion demonstrates that market size and population strength are the most important factors attracting FDI to these countries, whereas inflation and trade openness are insignificant factors. A more populated nation can have a more promising future for investors. That means human capital acquisition promotes FDI. The study reveals that, for both countries, market size is an important factor. FDI is drawn to big markets because they give foreign companies more chances to sell and make money.

Table 6. Panel Regression Analysis of FDI in India and Brazil.

 

Conclusion

The examination of FDI drivers in Brazil and India revealed numerous similarities in FDI attraction. Both countries have enacted macroeconomic policies to stabilise the economy, including trade liberalisation, FDI-friendly legislation and the privatisation of public firms. Until the crises and recessions, both countries had similar patterns in attracting international investment. The empirical conclusion reveals that foreign investment interest in Brazil and India is linked to economic and population growth. Population and economic growth positively affect FDI. Other macroeconomic variables do not significantly affect FDI in India and Brazil.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The authors received no financial support for the research, authorship and/or publication of this article.