Analysis of Automobile Industry FDI Policy of BRIC Nations

Building up on the previous post of how FDI policies are formulated, here I have analyzed the automobile industry policy of BRIC nations with regards to FDI.

China:

The most remarkable aspect of Chinese policy making is how they try to balance ideology with their economic ambitions. For a long time it was believed that government run economies are bound for failure and filled with inefficiencies. As MIT professor Yasheng Huang points out, economic model that China has created is more conducive for capitalism than free market economy itself. China seems to subsequently move away from Marxist ideology of public ownership but not Leninist ideology of state control. (Huang, 2011)

China’s policy framework for attracting FDI is heavily reliant on a diverse and rules based approach which is based on the involvement of private owners as well as the central and local government actively collaborating with each other. The rules based approach involves a combination of joint ventures, setting up of special economic zones, and an intellectual policy framework which would help transfer technology to the host nation in exchange for access to a robust population with great potential for profit.

China has tried to create a symbiotic relationship between the government and the private enterprise in which Chinese company usually contributes to buildings, rights to use of land, labor, knowledge of Chinese market and distribution channels and expertise in dealing with bureaucracy; whereas the foreign entity brings technology, equipment and expertise, financial investment experience in the international market and management skills.

However, the key to success of this rules based policy operation is decentralization of policy making authority. Although the central government sets general policy guidelines, the local governments also enjoy a great degree of freedom in diversifying policies thereby creating healthy competition between local governments conducive for economic growth.

Russia:

Russia’s policy framework in many ways is the anti-thesis of Chinese policy framework. Russia’s initially depended on liberalization through an incentives based approach which involved a combination of fiscal and financial incentives. These policies were not passed through parliamentary debates but through presidential decrees. So immediately what one notices is how centralized the policy making process in Russia is. On further analysis of policy frameworks and power sharing arrangements between local and central government reveals the fact that local governments tend not to see themselves as stake holders in Russia’s economic growth. It is a direct result from marginalization and skewed power sharing arrangements.

This systemic problem existing in Russia’s power structure is exemplified when Russia tried to imitate China’s success with SEZs in a new rules based approach. However, the process has been made ineffective, as Aervitz points out, due to several reasons: one of the problems being a lack of decentralization, and marginalization of local governments in the liberalization process. Whereas China reinvests the money it obtains from taxes in the location where SEZ is situated the central government of Russia faces no compulsion to follow the same example.

However, it is important to note that Russia has an abundance of natural resources. Oil being one of these important commodities in which Russia has a comparative advantage. These natural resources tend to compensate to a degree for policy failures that take place in attracting FDI. But this makes the Russian automobile industry open to price shocks as seen in 2009 when automobile production reached decade low levels due to drop in price of oil. Lastly, it is important to mention that failure to uphold intellectual property laws has led to a failure in “official” means of technology transfer hence making FDI in Russia less inviting for investors.

Brazil:

Brazil has seen even more decentralization of its policy making authority than China. Whereas China faces a two-tier competition level at national and sub-national (state) levels of governance, Brazil faces a three tier competition at national, sub-national and municipal level. This environment of high degree of competition has led to the rise of “Fiscal Wars”. The sub-national and local governments engage in very high fiscal concessions as incentives to attract investments. The incentives can range from anything between 83 million USD to 153 million USD as seen from the case of Volkswagen. The competition has also meant that different level governments have been at loggerheads with each other. The municipal governments have insisted that central governments relinquish authority to make their own incentive policy in order to level the playing field.

However, in this scenario, more competition does not necessarily yield more revenue. As Da Motta Veiga and Iglesias point out, federal auto regime already provide major savings on investment costs but incentive bidding wars are a reality among sub national governments. This competition eats into the overall earnings from FDI of the Brazilian government. But Brazil can overall claim to be successful with its policy framework. It has seen almost a three-fold increase in its automobile output in the between the years 1999-2010. It has also attracted the highest amount of FDI among South American countries. This has made it the envy of South American markets.

India:

India’s policy framework for its automobile industry has heavily relied on incentives based approach. Relaxing fiscal policies at center and state level is the key tool India has used to attract investment. Particular states have also looked to compete with each other by offering their own financial subsidies. A good example would be the case study of Mahindra-Ford and the competition between Maharashtra and Tamil Nadu to ensure the plant is situated in their respective states. Tamil Nadu adopted a combination of fiscal and financial package in the form of granting tax holiday’s and cheaper access to resources such as water and electricity. India has been highly successful in its incentives based approach when it comes to sheer output. In 2011 it is the 6^th largest producer of automobiles in the world increasing its production capacity by four-folds in last decade.

But India has failed when it comes to taking advantage of rules based approach in attracting FDI. Its SEZs have been overall ineffective. The main problem being lack of sufficient size to achieve economies of scale, have been subjected to restrictive labor laws, and lack of efficient infrastructure to facilitate communication and shipment of goods.

Bibliography

Christiansen, H. (2003).  OECD. (Check previous blog post)

Huang, Y. (2011, September). Speakers Yasheng Huang: Political Economist. Retrieved February 28, 2013, from TED: http://www.ted.com/speakers/yasheng_huang.html

Oman, C. (2000). Policy Competition for Foreign Direct Investment: A Study of Competition among Government to Attract FDI.Paris: Development Centre Studies - OECD.