Empirical linkages between some economic factors and foreign direct investment in BRICS countries

Abstract

In 2003 Goldman Sachs published a report written by Wilson and Purushothaman entitled Global Economics Paper No. 99: Dreaming With BRICs: The Path to 2050, which central idea is that over the next 50 years, Brazil, Russia, India and China could become a much larger force in the world economy, even larger than the current G7 economies in US dollar terms. In 2017 BRICS joint contribution to the world economy was 23.6 per cent and according to the International Monetary Fund (IMF) predictions this is set to rise to 26.8 per cent by 2022. Based on the used estimation, the biggest contributor to the FDI inflows is an index of economic openness, where decreasing barriers for trade and investment increase country’s exposure to the global economy, which in return has a significant effect in attracting FDI to the economy. Secondly, in majority of cases change in both import and export values tend to negatively affect FDI inflows, such phenomenon does not necessarily mean that country must not engage and liberalize its trade policy, but that the impact of those factors is inconsistent and has to be researched further. Thirdly, GDP contribution confirms the gravity model hypothesis as larger economies tend to attract larger volumes of FDI inflows, however in case of China this effect seems to be slightly reversed. Lastly, the effect of trade balance on FDI inflows remains complex to capture, however a dummy variable method applied in this paper can be applied to countries that have both positive and negative trade balance dynamic.