Question

CASE DISCUSSION QUESTIONS:

1. What are the costs and benefits of FDI inflows
for a host country such as Brazil and Mexico?
2. If you were an executive working for an emerging automaker from China or India, assuming your firm only has the ability to enter one Latin American country for the time being, which country would you recommend: Brazil or Mexico?
3. The automobile industry in both Brazil and Mexico is thriving. If you were a government official from an African country (such as Morocco, Nigeria, or South Africa) who has visited both countries and has been very impressed, which approach would you recommend to your own government interested in attracting FDI from global automakers: the Brazilian approach or the Mexican approach? Why

EMERGING MARKETS: Automobile FDI in Brazil and Mexico Closing Case

Brazil and Mexico are, respectively, the top one and two largest economies in Latin America in terms of GDP. Globally, Brazil and Mexico are, respectively, the seventh- and eighth-largest car producers and the fourth- and 16th-largest automobile markets. Almost all of their production is undertaken by global auto- makers via foreign direct investment (FDI). Audi, Fiat, Ford, General Motors (GM), Honda, Nissan, Renault, Toyota, and Volkswagen (VW) have assembly fac- tories in both countries. In addition, Hyundai, MAN, and Mercedes- Benz produce in Brazil; and BMW, Chrysler, Isuzu, Kia, and Mitsubi- shi operate assembly plants in Mexico. For multinationals striving for ownership, location, and internalization (OLI) advantages, their efforts in leveraging O and I advan- tages are similar in both countries. However, these two countries have pursued location (L) advantages in different ways.
Brazil attracts FDI primarily due to its largest domestic market, while Mexico pulls in FDI due to its proximity to the United States. As a result, only 13% of Brazil’s vehicle production is exported (67% of such exports go to its neighbors in Mercosur—a customs union with Argentina, Paraguay, Uruguay, and Venezuela). In contrast, 64% of Mexico’s vehicle production is exported to the United States, and all together 82% of its output is exported. Brazil maintains high import tariffs on cars and auto components (except when 65% of the value is imported from one of the Mercosur partners or from Mexico—with which Brazil had a bilateral free trade deal in cars and auto components). As a result, only 21% of the content of Brazil’s exports is imported. This ratio of imported content among exports is 47% for Mexico, indicating a much more open and less protectionist environment in which automakers can import a great deal more components tariff-free and duty-free.

The differences in the production, export, and import patterns, of course, are not only shaped by the resources and capabilities of multinationals, but also by government policies in both host countries of FDI. Whether Brazil or Mexico gains more is subject to intense debates in these two countries and beyond. One side of the argument posits that Mexico is only leveraging its low-cost labor and has not fostered a lot of domestic suppliers. Indeed, most first-tier sup- pliers in Mexico are foreign owned and they import a great deal of components to be assembled into final products. As a result, most final assembly plants are maquiladora type, otherwise known as “screw driver plants.” With little technology spillovers to local sup- pliers, the innovation ability of the Mexican automobile industry is thus limited. Brazil, on the other hand, has pushed auto- makers to work closely with domestically owned sup- pliers or with foreign-owned suppliers that have to source locally. With a domestic focus, Brazilian sub- sidiaries of multinational automakers, aided by suppliers, have endeavored to search for solutions to meet unique local demand, such as ethanol fuel. Brazil is a world leader in ethanol—a sustainable biofuel based on sugarcane. By law, no light vehicles in Brazil are allowed to run on pure gasoline. Led by Volkswagen’s Gol 1.6 Total Flex in 2003, the Brazilian automobile industry has introduced flexible-fuel vehicles that can run any combination of ethanol and gasoline. All the multinational automakers producing in Brazil have eagerly participated in the flex movement. Starting with 22% of car sales in 2004, flex cars reached a record 94% by 2010. By 2012, the cumulative produc- tion of flex cars and light vehicles reached 15 million units. Advocates of Brazil’s policy argue that such success has generated opportunities to involve locally owned component producers, local research institutions, and smaller suppliers, which have specific knowledge not available elsewhere in the world. The other side of the debate points out Mexico’s shining accomplishments as an export hub with a more open trade and investment regime. Mexico has successfully leveraged its NAFTA membership and its free trade agreements with more than 40 countries. While such institution-based boosters are helpful, at the end of the day, Made-in-Mexico vehicles—from a resource-based standpoint—have to be valuable, rare, and hard-to-beat on performance and price in export markets. This is largely attributed to Mexico’s persistent efforts to keep its wage levels low, its labor skills upgraded, and its infrastructure modernized. Brazil, on the other hand, suffers from the legendary (and notorious) custo Brasil (Brazil cost)—the exorbitant cost of living and doing business in Brazil (see Emerging Markets 2.1). Since President Dilma Rousseff took office in 2011, she has imposed new tariffs on shoes, textiles, chemicals, and even Barbie dolls. In the absence of protectionism, the Brazilian auto- mobile industry, according to critics, simply cannot stand on its own. Brazil even threatened to tear up the agreement with Mexico that allowed free trade in cars and components, because Brazil—thanks to its uncompetitive automobile industry—suffered from an embarrassing trade deficit. In 2012, Brazil renegotiated the deal with Mexico, imposing import quotas on Made-in-Mexico cars and components. More recently, the Brazilian government has introduced Inovar Autos, a new automotive regime for 2013–2017, which is intended to encourage firms to hit specific targets in localization of production and R&D incentivized by additional tax benefits. Critics argue that this is just one more round of protectionism and government meddling that is ultimately counter-productive.

Answer 1

Q1..Benefits

In my perspective, outside direct venture (FDI) can make a positive commitment to a host economy by providing capital, innovation.

1-   Capital: FDI makes positive commitments to the host nations by capital inflow, the free progression of capital crosswise over countries is probably going to be supported by numerous financial specialists since it enables cash-flow to search out the most noteworthy pace of return.

2-   Technology: Technology can invigorate financial advancement and industrialization. It can take two structures, the two of which are important. Innovation can be consolidated into a creation procedure (e.g., the innovation for finding, removing and refining oil) or it very well may be joined in an item (e.g., PCs). Studies managing the connection between FDI from one viewpoint and efficiency and additionally monetary development then again, have discovered that innovation move through FDI has contributed decidedly to profitability and financial development in having nations

3-   Employment Effects: FDI makes both Direct and circuitous occupations in host nations, an immediate impact happens then an outside organization utilizes various host nation natives. The circuitous impact emerges when occupations are made in neighborhood providers because of the venture and when occupations are made on account of expanded nearby spending by representatives of the MNE. FDI has made a great many occupations in have nations like Brazil and Mexico

4-   International Trade: The effect of FDI on universal exchange varies, contingent upon nation rationale – regardless of whether it is proficiency chasing, advertise looking for, asset chasing or key resource chasing. For instance, FDI can have an extraordinary commitment to financial development in creating nations by supporting fare development of the nations.

5-   Effect on Competition: The nearness of remote endeavors may incredibly help financial advancement by prodding local challenges and in this manner driving inevitably to higher profitability, lower costs and progressively proficient asset allotment.

Expenses of FDI inflows for have nations – Brazil and Mexico is as per the following:

1-   Adverse Effects on Balance of Payments: Adverse consequences for the parity of installments emerge from the surge of a remote auxiliary's profit and from the import of contributions from abroad.

2-   National sway concerns raised by FDI: Key choices that influence the host nation will be made by a remote parent that may have no genuine promise to the host nation and the host government will have no power over them

3-   Environmental sway: Due to the challenge among creating nations to pull in FDI, a few nations offer increasingly loosened up guidelines so as to draw in progressively outside speculation; Therefore, Local requirement of natural assurance now and again has less power on remote interest in those nations; which prompted sad results in numerous pieces of the world .

4-   The sway on the working conditions: As legislatures of creating nations limit the authorization of work environment guidelines so as to draw in FDI; it has been accounted for that, individuals have whined that multinationals misuse their laborers, and contract youngsters wrongfully.

5-   FDI affects the conversion scale.

Q2..At first sight, Brazil may have all the earmarks of being a superior decision given that it is now a piece of the BRIC, or Brazil, Russia, India, and China, a gathering of driving rising economies. Be that as it may, after a more top to bottom examination of these two conspicuous Latin-American nations and the security key factors that impact their presentation and future chances, as a financial specialist I am progressively disposed to pick. Mexico's key area alongside the world's biggest economy is the jealousy of most different nations. Likewise, it is an explanation of pulling in more FDI. Other than Mexico's key area, the other key factor deciding Mexico's achievement in drawing in significant car firms has been the transparency of its exchange strategies, so from speculators perspective, it is smarter to put resources into a nation that facilitate the business, for instance, Mexico has unhindered commerce concurrences with 40 nations, including the U.S., Canada, the European Union, and a few Latin American nations, giving it a considerable edge over Brazil .

Government support, is a significant factor in remote organization's prosperity, for instance Mexico persevering attempts to keep the pay levels low, work abilities overhauled, and foundation modernized so as to be steady with asset-based outlook in which the asset must be important, uncommon, and difficult to-beat on execution and cost in fare markets. This is absolutely inverse to what the Brazilian president did, she forced new taxes on shoes, materials, synthetic concoctions, and even Barbie dolls. Without protectionism in Brazil, financial specialists will be increasingly disposed to Mexico in their ventures.

For example, the distinctions in the creation, fare, and import designs, obviously, are not just molded by the assets and capacities of multinationals, yet in addition by government strategies in have nations of FDI. As a result of high work costs and assessments, Brazil-made vehicles too costly to even think about sending abroad and go for the most part to nearby purchasers. Mexican industrial facilities send out 82% of its yield—while 13% of Brazil's vehicle creation is sent out. These solid signs direct the financial specialists toward Mexico as opposed to Brazil

Q3..At first sight, one would imagine that Mexico approach is the best way to deal with pursue, the facts confirm that the Mexican methodology is superior to the Brazilian methodology for pulling in more FDI be that as it may, in my perspective, there are numerous things that will be considered before picking the best approach that could work with African nations.

Mexico Approach: The primary thing we need to consider is the nation area, Mexico's closeness to the US assumed a significant job in its prosperity. Next to that Mexico has an unhindered commerce connection with in excess of 40 nations. At last, Mexico's modest work coast and government support likewise assumed a significant job in Mexico's way to deal with progress. Then again, African nations may have modest work costs, yet this isn't sufficient as they don't have the area advantage that Mexico has. Then again, the African nations' capacity to make an organized commerce connection isn't ensured. Consequently, following the Mexico approach doesn't imply that African nations would achievement on the off chance that they tail it.

Brazil Approach: Brazil draws in FDI principally because of its biggest household showcase, a large portion of its items devoured inside, the rest is traded to its neighboring nations. Brazil keeps up high import taxes on vehicles and auto segments, which make troubles for the car organizations. With a residential center, Brazilian backups of worldwide automakers, have attempted to scan for answers to satisfying one of a kind nearby need, for example, ethanol fuel. Brazil is a world chief in ethanol. Following this methodology by African Countries doesn't ensure their prosperity since African nations can't be contrasted with Brazil in its utilization (Internal Market), then again, they don't have such important asset of vitality as Brazil portion.

My proposed Approach: In my perspective, African nations, for example, Morocco, will make a half and half approach of both Mexican and Brazilian approaches, the methodology will think about the aces and keep away from the cons of the two approaches. For example, they can be available to organized commerce relations with certain nations as Mexico did to make it simple for global organizations, then again, they need to concentrate on their work aptitudes, multinationals will put resources into those nations with a blend of low wages, however high work profitability and abilities. In view of the Brazilian model, the inward market is imperative to pull in FDI; African nations need to concentrate on their inner market and their inside assets also. Morocco can apply some import taxes yet it ought to be in a worthy add up to abstain from making troubles for the global organizations and to keep up modest work cost.