Foreign Direct Investment in Brazil: The Effects of Productivity and Aggregate Consumption

Abstract

The objective of this paper is to analyze the effects of shocks from productivity changes on the flow of foreign direct investment (FDI) to the Brazilian economy, over the period from 1992 to 2011. We hypothesize that domestic productivity increases may encourage foreign direct investment inflows, while foreign productivity increases may discourage the same, ceteris paribus. We also test if aggregate demand plays a role in attracting FDI over the long run. SVAR (Structural Vector Auto-Regression) models were estimated based on the proposed hypotheses. We did find evidence that FDI inflows into Brazil react to productivity as well as consumption variations in the directions predicted. Brazilian productivity growth attracts FDI and US productivity growth lowers FDI to Brazil. As expected, long run consumption growth generates an increase in FDI to Brazil. In sum, economic policies that foster countries’ long run productivity growth are the recommended ones to attract FDI, according to the results.