Determinants of FDI in emerging markets: evidence from Brazil

The paper aims to evaluate the relative importance of various factors that influenced the flow of foreign direct investment (FDI) into Brazil in recent years. Analysis of empirical data indicates that evolution of the consumer market and strength of consumer sales are more important in explaining capital movements into Brazil than other frequently offered explanations such as exchange rates and country risk.

The paper uses two‐stage least squares regression to estimate the coefficients of a system of simultaneous equations relating FDI flows into Brazil to various influential factors.

The results indicate that internal market growth represented by aggregate consumer sales was a significant determinant of FDI into Brazil. Increase in interest rate on consumer financing was negatively related and the attractiveness of the Brazilian market had no impact on FDI flows during the captioned period.

While factors such as inflation and exchange rates might be more important for smaller, less stable markets, in the case of larger emerging markets such as Brazil, multi‐national firms might be less concerned with short‐term fluctuations and more guided by internal market growth that affords greater opportunities to achieve economies of scale and scope.

The findings suggest that policy planners in big emerging markets should try to stimulate their internal markets rather than tweak fiscal and monetary policies to attract FDI.

The paper extends and expands the knowledge of international capital flows and provides a more nuanced understanding of the importance of internal market dynamism in attracting FDI into emerging markets.