The location of BRICS foreign direct investment in the European Union, 1997-2010

Abstract

The BRICS, comprising Brazil, Russia, India, China and South Africa, accounts for 40 percent of global population and is predicted to be the largest economic group by 2050. Outward foreign Direct Investment (FDI) from the BRICS has grown rapidly, from around US$7 billion in 2000 to US$126 billion in 2012 (UNCTAD, 2013). The European Union (EU) is traditionally a major beneficiary of FDI. However, there is few studies on the BRICS outward FDI, and there is relatively little evidence on how BRICS FDI differs in its characteristics between the BRICS countries and its location at a European level. The purpose of the thesis is to explore BRICS FDI location in the EU countries over the period 1997-2010. The thesis analyses data on over 35,000 FDI projects from the European Investment Monitor. The period covers the early stages of BRICS FDI and its growth, and the fifth EU enlargement to include the Central and Eastern Europe countries (CEEC). Conditional Logit, Multinomial Logit and count data methods are used, where the first two consider the dummy for a location as the dependent variable and the last one is used to control for the large number of zeros in the data. The thesis makes three main contributions. First, it describes BRICS FDI location in the EU countries (i.e. members in 2010), cross-tabulating this according to characteristics such as industry and function. Second, it finds many host country characteristics have an effect on global FDI location, but only a few of these are significant for the BRICS, of which the main factors are the GDP growth rate, higher education (i.e. tertiary education) rate, wage rate, exchange rate and political risk. Furthermore, Multinomial Logit model allows the project characteristics and sources to vary, such as the industry, function, investment type and global source region. The results reveal significant differences in BRICS FDI location between the old and new Member States, except the three main destination countries (i.e. France, Germany and the UK). Russian FDI tends to go to Central and Eastern Europe, Brazil FDI to Spain and Portugal, while there are differences in Chinese and Indian FDI location, both of which have grown strongly. The third contribution of the thesis is to examine the “follow-the-leader” behaviour, whereby FDI location in a country follows FDI from the same source in the preceding xiv year. This is explored using both the Conditional Logit and count data models. Statistical analysis shows that there is persistence in the country location whether it is considered over a one or two-year time horizon. The logit analysis shows that at the level of the BRICS group, BRICS FDI prefers the location of FDI from the same BRICS country but it tends to avoid the location of other BRICS FDI as a whole. At the individual BRICS level, China and India are the investment leaders of the five BRICS countries. The results are less clear for the count data methods. The exact reason for the ‘follow-the-leader’ behaviour is not known (e.g. it could be agglomeration economies, linkages or some unobserved heterogeneity, such as cultural factors), but it is worthy of further exploration. Overall, the thesis finds that outward FDI from the BRICS should not be treated as homogeneous. While there is evidence that BRICS FDI spreads out to other countries as it grows, and differences in BRICS FDI location at the European country level are likely to persistent over time.