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Foreign direct investment

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After scrutinizing economical models and business practices around the world, obvious conclusion is that the modern era is the era of multinational corporations. Money flows transcend national borders and administrative barriers if there is a promise of higher returns on capital. Virtually every major and successful enterprise has operations in another country or region.

Starting with a definition of the term ‘foreign direct investment,’ it is necessary to note that there are several different definitions. According to IMF/OECD, direct investment is the category of international investment that reflects the objective of a resident entity in one economy (direct investor) of establishing a lasting interest in an enterprise (the direct investment enterprise) resident in another economy (OECD, n/d.).

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Analysis of reasons, essence, and consequences of foreign direct investment is best performed with real-life examples. Therefore, this paper will focus on Dell Computer investing in Brazil to establish a manufacturing facility there. This example shows what a country under the existing circumstances should do in order to attract foreign direct investment.

Simultaneously, this example shows how a multinational company should make its investment decisions in order to get high and guaranteed returns.

Latin America, more specifically Brazil, is a region known for its friendly investment environment and possibilities to obtain high returns on capital. Setting up operations in Latin America is a common practice for major multinational corporations, especially for US-based companies due to geographical proximity and traditional business and economic ties between the two regions.

Dell decided to go international in 1990 and opened a manufacturing plant in Ireland. This was followed by a plant in Malaysia in 1996 and in China two years later. The company expanded its operations to the point that by the late 1990s it had offices in 34 countries around the world and sales in over 170 countries. In the year 1999, Dell began to venture into Latin America and started a manufacturing facility in Brazil. Dell decided to open a US $108.5 million manufacturing and customer center in Brazil. In early 1998, the site selection team visited five different states in Brazil in order to decide where Dell should locate its manufacturing plant. In June 1998, the conclusion was made that the plant should be built in Brazil’s southernmost state, Rio Grande do Sul. By mid-March 1999, Dell had already signed agreements with the local government of Rio Grande do Sul; the process of hiring local personnel to manage the plant had begun; and construction on the plant itself was scheduled to start soon.

In November 1999, the first Latin America Dell’s manufacturing plant started operations. The facility occupies a 123-acre site in Alvorada in the metropolitan area of Porto Alegre. The plant employs approximately 200 workers.

Looking at the economic picture of the country and of the region where the foreign direct investment has taken place, it is necessary to note that Brazil is a part of the Latin America free-trade bloc, Mercado Comun do Sul (Mercosur). This South American customs union includes Argentina, Uruguay, and Paraguay, with Chile and Bolivia as associate members. But Mercosur is not only a custom union, but also a free-trade zone and a common market.

Mercosur is a market with more than 200 million inhabitants and a GDP above $1 trillion, in which Brazil is by far the main economy. The benefit of Mercosur is that any company which produced at least 60% of a given product in any of the Mercosur countries would, with some exceptions, be able to export the product to any of the other Mercosur countries at zero tariff (Duina, 2007).

Most companies operating in Mercosur have recorded a considerable sales growth, following an explosive trade expansion among themselves. Mercosur has been of great use to Brazil, since the Brazilian foreign trade is marked by multilateralism. Brazil should be the country with the best conditions to take advantage of open trade, since it is the nation which deals with more than half of the region’s trade.

The governments of the region carry out a policy of attracting foreign investors and creating friendly business environment for foreign enterprises. The market is very high, and the competition is not as fierce as in other regions. Emerging economies in the region have become an attractive option to receive investments in the IT sector. Developing countries in the region present cost savings as a crucial competitive factor. Major problems of the region include bureaucracy and to a certain extent poor infrastructure.

Brazil is considered to be the world’s eighth biggest economy. Privatization process that is currently underway in Brazil’s infrastructure sector offers innumerable investment opportunities in virtually all sectors, especially transport, energy, and telecommunications. Relatively stable economical and social situation coupled with governmental policy of attracting foreign investors make Brazil a very perspective region to invest in.

A set of factors, interconnected in an exceptional way, has transformed Brazilian economy during the last five years into one of the most important centers of business and investment for large international companies.

In its effort to attract more foreign direct investment, the government created Brazilian Fund for Information Technology, which is an important tool of public policy in the area of software development and hardware manufacture, and it invites national and foreign companies to invest in Brazil through tax incentives. Brazil is a federal state, and every territory enjoys considerable autonomy over the tax breaks and related incentives. This system has led to a fierce competition, known as the taxation war, among the states, as they scramble to offer the most favorable tax rates and similar inducements to attract FDI as well as the jobs, economic growth, and related benefits that accompany it. This situation is very beneficial for investors: every state makes its best to create the best conditions for foreign enterprises (Arora & Gambardella, 2006).

Brazil is noted for its skilled labor force: sound technical preparation of Brazilian computer professionals is an important factor to consider when investing. Manpower cost is low, so it increases the competitiveness of products manufactured in Brazil. Besides having well-educated plant workers, engineers and technicians, Brazil has little labor union activity; industry clusters are not very tight. Despite constant economic crises, the country enjoys a relatively stable situation, particularly if compared to other Latin American countries.

The country offers developed and sophisticated technological infrastructure as well as proper access to new technologies.

Adequate supply of electricity is also in place. Sao Paulo’s city network, linked to the Metropolitan Area by high quality road and telecommunication, has an additional advantage of offering excellent life standard, adding the availability of modern services to the quality of life. Several important Brazilian universities, the main research institutes and the most competent education and professional qualification institutions are located in Sao Paulo state (World Bank, 2003).

Looking at the FDI confidence index for Brazil, it is necessary to note that the country made it to the top ten in 2005 (The Global Business Policy Council, 2005):

Country
FDI Confidence Index
China
2.197
India
1.951
United States
1.420
United Kingdom
1.398
Poland
1.363
Russia
1.341
Brazil
1.336
Australia
1.276
Germany
1.267
Hong Kong
1.208
Therefore, there is a broad consensus among industry analysts that Dell’s decision to set up a manufacturing facility in Brazil was a wise and visionary investment. Major goal of setting up a manufacturing facility in the country was to ensure Dell’s easy and rapid entry into Brazilian IT market. In the long-term perspective, the plant in Rio Grande do Sul will ensure Dell’s leadership in the Latin American IT market and will bring high revenues to the company.

References

Arora, Ashish, & Alfonso Gambardella. From Underdogs to Tigers: The Rise and Growth of the Software Industry in Brazil, China, India, Ireland, and Israel. New York: Oxford University Press, 2006.

Duina, Francesco. The Social Construction of Free Trade: The European Union, NAFTA, and Mercosur. Princeton, N.J.: Princeton University Press, 2007.

World Bank. Brazil: Equitable, Competitive, Sustainable. Washington, DC: World Bank Publications, 2003.

OECD. ‘Glossary of Foreign Direct Investment Terms and Definition.’ N/d. July 17, 2007. <http://www.oecd.org/dataoecd/56/1/2487495.pdf>

The Global Business Policy Council. ‘FDI Confidence Index.’ 2005. July 17, 2007. <ww.atkearney.com/shared_res/pdf/FDICI_2005.pdf >

 

Cite this Foreign direct investment

Foreign direct investment. (2016, Dec 12). Retrieved from https://graduateway.com/foreign-direct-investment/

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