The process of economic globalization is characterized by an increasing interdependence between Sovereign Nations. Around the globe, the creation of international institutions, mechanisms of regional integration, technologic development, and other factors intrinsic to the globalization process have contributed to economic development and a higher mobility of people, goods, services and capital between countries.[1]

As a direct consequence of a more interconnected and interdependent international scenario, international markets have gradually evolved and the level of Foreign Direct Investments (FDI) flows in the international economy has had remarkable increase over the last decades.[2]

At the same time, over the years following the end of World War II and the gradual process of economic globalization, developed and developing countries have deepened its economic ties and political relations through active participation on multilateral and international organizations, the establishment of bilateral agreements, internationalization of companies, and through other relevant processes or players of the current world system.[3]

On an economic perspective, this scenario is related mainly to the expansion of multinational firms (generally from developed economies) to other territories located outside of its national borders, where these companies are able to seek, develop and reach different strategic business goals such as lower production costs, access to new markets, government subsidies, and various other location factors that may sustain its operations in the foreign economy.[4]

In this context, Brazil and Germany have progressively deepened its economic ties and developed a solid partnership on which numerous German companies have installed subsidiaries in the country, and also various cooperation and investment agreements between both countries have been executed through government and private-held agencies. This bilateral relation has been gradually constructed since the independence of Brazil in 1822, resulting on a very solid current economic partnership.[5]

In this context, it is important to observe that German immigration to Brazil has played for centuries an important role to consolidate the political and economic relations between both countries. It dates from the 16^th century and continued through its tipping point during the 1930s. In this decade, more than 70.000 Germans left their home country and went to Brazil.[6] By 1950, federal states such as Santa Catarina and Rio Grande do Sul (located in the south of Brazil), had more than 20% of its population composed of Germans and German direct descendants.[7]

Given this scenario, German Foreign Direct Investments (FDI) in Brazil have also played an enormous role in the country’s path to industrialization already since its first years as an independent nation. German FDIs in Brazil date from the late 19^th century, when companies such as Siemens, Bayer, AEG, Philipp Holzmann & Co. and BASF established local subsidiaries in the country. Also, the Deutsche Überseeische Bank (former subsidiary of the Deutsche Bank) established a local branch in Brazil during this period primarily in order to support German companies installed in the country as, for example, a great part of the credit provided to the Brazilian government was bounded to the purchase of German products.[8]

The diplomatic and economic relations between Germany and Brazil were compromised only during the Second World War and were subsequently re-established in 1951 with the re-opening of Brazilian and Western German embassies in both countries.[9]

In the early 20^th century, Brazil and Germany had complementary economies, as most South American countries such as Brazil were considered a very important source of raw materials and agricultural commodities for the German market, supplementary to the goods at the time imported mainly from the eastern European countries. Germany, on the other hand, was considered a relevant country in terms of investment and trade with Brazil, as it represented an alternative foreign partner to counterbalance the economic dependency of Brazil from the United States.[10]

Following the post-war scenario, the second half of the 20^th century and mainly from the 1960s onwards, the Brazilian economy became an even more important economic partner of Western Germany, as the rise of the Iron Curtain and its consequent economic and political barriers with the eastern European countries under the influence of the soviet regime had taken place. [11]

During this period, German FDI in Brazil assumed an important role to develop the rising industry of the country with the establishment of numerous German companies in Brazil, which were attracted substantially by local economic policies and other opportunities that the country offered to foreign investors. In the 1960s, Brazil was already the second main destination of FDI from Germany, only behind the United States.[12]

During the 1970s and 1980s, several political and economic crises in the international level as well as in the domestic scenario of Brazil contributed to an economic deterioration of the country and also affected negatively its direct investment inflows, as foreign investors had low confidence to establish business operations in an economic unstable scenario.

The 1990s was the decade on which this turbulent economic and political scenario in Brazil began to settle, when liberal economic policies took effect and consequently placed the country as a more attractive destination to foreign investments.

It was during this decade that the Plano Real was launched by the Brazilian government. The Plano Real was the first successful economic policy that led to the stabilization of the Brazilian economy after many failed attempts to reconstruct the country’s general economic instability, which subsequently also led to higher FDI inflow levels in the country, while Brazilian policy makers followed the liberal economic trends of the 1990s.

Meanwhile, Brazil and Germany rise in the international economy as global players and assume political and economic leadership in Europe and South America of its respective regional integration organizations (Germany in the European Union and Brazil in Mercosur) and also as a sole power.

Furthermore, the ongoing process of regional integration in Europe and Latin America also had a major influence on the trade and direct investment flows between Germany and Brazil. In the mid-1990s, Germany had lost its second place as the second major trade partner in the country to Argentina, also a member of Mercosur. Also, German trade and investment flows shifted its interest to other countries of the European continent and other alternative regions, following the path of regional economic integration and globalization.[13]

As a result of the complex economic and political factors that have shaped the bilateral relation between Germany and Brazil, German FDI flows into Brazil have been positively or negatively influenced by the domestic economic policies of both countries, the international and domestic political and economic scenario, and regional integration processes in Europe and South America during the last decades.

Nevertheless, German FDI in Brazil still proves to be a relevant player in the country’s economy: to this day, there are more than 1.500 German companies installed in Brazil that actively generate around 360.000 direct jobs. The German companies that are installed in the country account currently for around 15% of the Brazilian industrial GDP.[14]

As Germany is considered a strategic partner as well as one of the most important trading partners of Brazil,[15] it is very important to understand how this economic bilateral relation has evolved over the recent years specially in terms of German FDI in Brazil. This thesis seeks to evaluate the macroeconomic and political scenario of Brazil during a specific period of time (from 1994 onwards), analyzing the developments, causes and consequences that influenced the level of German FDI flows in Brazil.

Moreover, it is important to notice that the contemporary process of industrialization of the Brazilian economy was triggered by its recent gradual openness to foreign investors based on different economic policies on which German FDI has for a long period of time assumed an important position. Also, the privatization process of many Brazilian state-owned companies in the 1990s and the country’s economic stabilization followed by a gradual integration to the international economy and with its neighboring countries boosted FDI flows into Brazil.

Given the importance of FDI flows to the development of the Brazilian economy as well as the relevant investor position that Germany holds in the international level, the main factors that have contributed to this strategic partnership and bilateral economic relationship regarding the level of FDI flows from Germany into Brazil during the recent years will be discussed in the next pages.

1.1 Chapters Overview

The present Bachelor Thesis is divided into five parts: Introduction, Chapter 2 – German FDI in Brazil: Theoretical Framework; Chapter 3 – German FDI in Brazil: Developments and Causes; Chapter 4 – Consequences of German FDI in Brazil.

On Introduction, the importance of the subject and goals of the thesis are presented. Also, a chapter overview with a short explanation of the content of each chapter is also presented.

On Chapter 2, “German FDI in Brazil: Theoretical Framework”, a general definition of Foreign Direct Investment is presented in order to clarify the object of study of this thesis. This chapter also exposes very briefly the main contemporary economic theories of FDI and the importance of the improvement of macroeconomic variables to the attraction of FDI into Brazil.

On Chapter 3, “German FDI in Brazil: Developments and Causes”, the level of German FDI in Brazil is presented on a political and economic perspective, starting from the policies executed during the President Fernando Henrique Cardoso administration until the current President Michel Temer government. Aspects such as domestic and foreign economic policies, the developments of the level of German FDI in Brazil according to the respective year, as well as the national and international economic scenario during the respective period of time are taken into consideration. Also, it is exposed the evolution of some important macroeconomic variables of Brazil, which are linked to the increase of FDI flows in the country from the 1990s onwards.

On Chapter 4, “Consequences of German FDI in Brazil”, it is presented an overview of the German FDI flows into Brazil; main economic sectors that German companies are active in Brazil; agencies that support the internationalization of German companies in Brazil; barriers and motives to invest in Brazil, identified by German investors; and also perspectives for the development of this bilateral relation. This part of the thesis has a more practical approach on how the German FDI in Brazil may evolve in the next years.

2 German FDI in Brazil: Theoretical Framework

In order to structure the study and analyse the FDI flows from Germany into Brazil, it is relevant to understand the definition of foreign direct investments as well as to expose the theoretical framework and macroeconomic variables that influence and shape this bilateral relation in terms of FDI.

2.1 Definition of Foreign Direct Investment

There are many definitions of Foreign Direct Investment by scholars and international organizations. Graham and Krugman (1991), define it as the “ownership of assets by foreign residents for purposes of controlling the use of those assets”.[16] According to Salvatore (2011), FDIs are “real investments in factories, capital goods, land, and inventories, where both capital and management are involved and the investor retains control over the use of the invested capital”.[17] The Organization for Economic Co-operation and Development (OECD), defines it as an investment category that “reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor”.[18] Krugman and Obstfeld (2015) affirm that this type of investment occurs when “a firm largely owned by foreign residents acquires or expands a subsidiary firm or factory located in the host developing country”.[19]

The aforementioned definitions of FDI englobe an introductory understanding for this internationalization strategy, which is implemented by firms mainly through three different approaches: Greenfield Investments, cross-border Mergers and Acquisitions (M&As – also called brownfield investments), and Joint-Ventures.[20]

Greenfield investments are investments on which a company installs a new production facility or subsidiary in the foreign country.[21] M&As refer to the cross-border merger of two companies leading to the foundation of a new company (merger) or the complete purchase of the targeted company (acquisition).[22] Furthermore, joint-ventures are defined as an alliance between two or more firms on an international level, on which each party contributes with the defined resources and share a common business objective.[23]

There are various reasons why firms decide to implement FDI strategies, such as: the necessity of market access in other countries or regions; the pursuit for lower costs in its production and distribution chain; access to natural resources or other core materials that are not available or too expansive in the domestic economy; access to technology and management know-how, amongst others.[24]

This type of investment is measured in the national economy of a country through two different approaches: FDI stock and FDI flows. The first approach (FDI stock) refers to the total amount of direct investments during a certain period of time: its value correspond to the accumulated previous FDI flows. The second approach (FDI flows) refers to the inflows and outflows of this investment in a certain country during a certain period of time.[25] The FDI net flows comprise three main elements: equity capital, reinvested earnings or intra-company loans.[26]

2.2 Theories of FDI

In order to explain the causes of internationalization of firms through FDI, is important to at least have a brief understanding of the main ideas of relevant economic theories of FDI, such as the Production Cycle theory, Internalization theory, and the Eclectic Paradigm or OLI-Theory.

The main contemporary economic theories that address the FDI subject in order to explain the causes of internationalization of firms through this strategy are: Production Cycle, Internalization, and Eclectic Paradigm.[27]

The Production Cycle Theory is based on the idea that innovation within the firm, such as new production methods and products, is the main reason why firms invest internationally. The innovation involves specific competitive advantages of the firm, and is part of a cycle that composes four main stages: introduction, growth, maturity, and decline. In order to have positive economic results from an innovative product, the firm would internationalize its activities to countries where the product has not yet been introduced. Therefore, firms would invest directly to introduce the product in the foreign market as a result of its decline on the domestic market or on foreign markets that the company has already explored.[28]

The main argument of the Internalization theory is that companies create internal markets (internalize external markets) through establishing subsidiaries located in foreign countries, in order to maximize profits and reduce costs. Hence, the firm would internalize its activities and invest directly in foreign subsidiaries when the location offers possibility of lower operation costs that help on the development of its specific advantages, implying on the internalization of activities.[29]

The Eclectic Paradigm or OLI-Theory combines elements of different internationalization theories. According to this theoretic framework, FDI is a result of the combination of three elements or advantages: Ownership (specific advantages of the firm – technology, products, processes, patents, etc.), Localization (comparative advantages of the target country – subsidies, foreign exchange rate, labor availability, market size, language, etc.), and Internalization (internalize activities to avoid transaction costs). If the firm identifies the set of all advantages within the OLI framework, it will invest directly on foreign markets.[30]

2.3 Macroeconomic variables and FDI flows into Brazil

The economic approach to weigh internationalization strategies is based on a rational conduct. The advantages and disadvantages of these strategies are carefully measured in order to evaluate the maximum economic gains for the business in the long term in the chosen location.[31]

One of the most essential external factors for internationalization strategy analysis is the country’s environmental factors, which include political, economic, social, technological, environmental and legal scenarios of the target country.[32]

This thesis exposes a great part of the aforementioned variables, and also exposes the macroeconomic environment of Brazil. By analysing the evolution of relevant macroeconomic variables of Brazil, it is possible to observe the interaction of the level of FDI flows and German FDI flows into Brazil along with changes in these variables.

Inflation control, for example, has for a long period of time caused major economic instability in Brazil. Various economic policies in the country have been put in practice in order to control its high rates during the last decades. Its further stabilization during the second half of the 1990s positioned the country as a safer destination to foreign investments.

Other relevant macroeconomic variables such as the exchange rate regime, openness to foreign markets, and balance of payments results have influenced the flows of FDI into Brazil during the last decades. The stability or instability of the aforementioned macroeconomic variables set the economic environment which also affected the flows of FDI into Brazil.[33]

The exchange rate regime and policy in Brazil has suffered important modifications throughout the last decades. These changes had enormous impact on the inflow of FDI in the country.

Moreover, openness to foreign markets in Brazil has also significantly changed over the years. After the re-establishment of democracy in the country in 1985, Brazil has gradually opened its borders to foreign investors, followed by privatization processes and liberalization trends and policies. On the other hand, protectionist measures to shield specific domestic market sectors still hinder the flows of FDI into the country.

Furthermore, FDI is an instrument that connects the domestic and foreign economies and, therefore, it also affects the balance of payments of a country.[34] The Brazilian balance of payment has fluctuated during the last decades, registering surpluses and deficits and accompanied by the yearly specific economic environment, which led to higher or lower FDI inflows.

The historical development of the aforementioned macroeconomic variables are exposed on topic 3.2.

3 German FDI in Brazil: Developments and Causes

The topics presented in this chapter are extremely important to understand the flows of German FDI into Brazil in the recent decades. Firstly, a recent historical overview of the German FDI flows into Brazil is exposed. Subsequently, each period of the recent Brazilian political history is analyzed, according to the policies of international trade and investment practiced by every Brazilian government since 1994 which influenced directly the German FDI flows into the country. In the last topic of this chapter, the historical development of important macroeconomic variables that have influenced the level of German FDI flows into Brazil is also briefly discussed.

3.1 Historical overview of the main developments and causes of German FDI in Brazil

Germany, as a developed country with limited access to natural resources and abundance of qualified labor, is one of the main economies on which its companies have decided adopt internationalization strategies and invest directly in Brazil,[35] following the path of globalization and the increasing interdependence and partnership between both countries.

In the international system, FDI inflows and outflows from developed and developing economies have substantially increased during the course of the last decades. Germany and Brazil have followed the international trend and increased its positions as international investors essentially after the 1980s. In the graphic below, outflows of German and Brazilian FDI to the international economy is exposed, as observed by statistics of the United Nations Conference on Trade and Development (UNCTAD):

Figure 1. Foreign Direct Investment: outward flows, annual, 1970-2015. US Dollars at current prices in millions

Source: UNCTAD (2017).

As it is exposed on the graphic, Brazil has maintained a minor investor position in the international economy when compared to Germany, which has developed one of the strongest national economies of the last decades. During the analyzed period, Germany significantly increased its FDI flows throughout the world.

Moreover, Brazil and Germany are considered very important economic and political players in the current world system, as both countries assume leading roles in its respective geographic regions and international/regional organizations.

Brazil, as the most important economy in Latin America and leading political member of the Mercosur; and Germany, as the most important economy of the European Continent and leading political member of the European Union (EU), have established solid bilateral and intra-regional partnerships throughout the last decades, which contributed to the bilateral exchange of capital and investments between both countries.[36]

At the same time, during the previous few decades, the Brazilian economy has faced many challenges in its internal and external development. In the course of turbulent or moderate domestic and international economic scenarios, Brazilian policy makers have tried different economic strategies to stabilize and develop the country’s economy. As a result of this, the level of FDI inflows in the country has fluctuated following the aforementioned economic and political framework.

As observed on the graphic below, the FDI flows into Brazil have substantially increased mainly after the second half of the 1990s, succeeding the introduction of the Plano Real by President Fernando Henrique Cardoso (FHC). Following the economic trends of liberalization of western economies during the aforementioned decade, this economic policy reflects a successful path that led to a higher attraction of FDI into Brazil, which subsequently sustained the modernization of its economy and industrial infrastructure, and projected Brazil as a more relevant economic and political player in the international system.

Figure 2: Foreign Direct Investment: inward flows, annual, 1970-2015. US Dollars at current prices in millions

Source: UNCTAD (2017).

Given this scenario, it is extremely important to understand the factors and causes that contributed to the development of the FDI flows into Brazil and in particular German FDI flows directed to this country, regarding the international scenario as well as the Brazilian domestic situation and macroeconomic variables that have influenced this bilateral relation. This topic seeks to explain the political and economic progress (developments), and different economic policies (causes) that have taken place in Brazil since the “Plano Real”, linking its progress and effects to the evolution German FDI flow levels into the country.

3.1.1 The path to economic stabilization: the years leading to the Plano Real

After the first World War, the Brazilian economy featured an Import-Substituting industrialization process, on which the State played an important role on the economic regulation of the country. This is a government policy aspired by nationalistic ideals, that targeted the industrialization of the country in a more autonomous way. In other words, Brazil aimed to produce domestically the goods that were at the time being imported from other nations.[37]

Despite the efforts of this protectionist measure to develop the national industry, this policy actually had several problems that hampered its progressive goals, leading to negative consequences to the Brazilian economy such as lack of market competition, industrial inefficiency, and lack of incentives for innovation.[38] However, at the same time, it was reasonably efficient to attract FDI into the country: from the 1950s until the first years of the 1980s, Brazil was the developing country that most received FDI. As imports were restricted, foreign companies started to install productive subsidiaries in Brazil. Hence, the restrictions applied in the domestic economy to import products served as an incentive to foreign companies to invest directly in Brazil and benefit from its large domestic market.[39]

By the late 1950s, Brazil was experiencing an economic development peak with the consolidation of several industry sectors throughout the country due to the implementation of the “Plano de Metas”, a policy led by former president Juscelino Kubitscheck (JK) to modernize the country. This policy targeted a higher maturity degree for the consumer durables industry, guided by partnerships between the pubic power, private sector, and foreign capital.[40] As a result of it, in 1956 the industrial production in Brazil overvalued for the first time its agricultural production.[41]

This period attracted many multinational companies to install industrial subsidiaries in Brazil. German companies such as Volkswagen and Mannesmann established factory plants in the country in order to supply the Brazilian and Latin American markets with their products. Also, the development of the car industry in Brazil, which was one of the main goals of the JK administration, attracted many foreign supplier companies to establish subsidiaries around the main car manufacturers.

During the early 1970s, many countries in Latin America benefited from a high international market liquidity which provided international bank credit expansion to Latin American governments. This credit availability eventually led to debt crises in many Latin American countries during the following decade. [42]

In the 1980s, Brazil and other Latin American countries were having difficulties on the payment of its international liabilities because of high international interest rates and reduction on the price of its commodities, which led international economists to characterize this period as the “lost decade” of Latin America. This decade featured economic stagnation, high levels of inflation and high unemployment rates in Brazil, which hampered the entry of foreign capital and investments in the country. [43]

In Brazil, in addition to the high levels of international debt, the protectionist measures of the Import-Substitution economic policy weren’t efficient nor sufficient to develop the country anymore, since the country was gradually becoming more dependent on international credit. Furthermore, the Brazilian economy started to face many difficult challenges in order to achieve a sustainable economic growth, while inflation rates began to rise and reach very high levels in the country.[44]

The response of the international community to revert the economic situation of the indebted countries is summarized in the Washington Consensus, a set of neoliberal macroeconomic measures developed by economists of international financial and economic institutions. The measures served as a guideline to governments of developing countries, especially in Latin America, to restructure its economy. The economic policy recommendations included, amongst others: fiscal austerity, openness to foreign markets, promotion of FDIs, elimination of trade barriers, privatization of state-owned companies, decrease on government expenses, market deregulation, law enforcement of intellectual property rights, etc.[45]

Following this guideline of economic liberalization proposed by the Washington Consensus, Brazil started to adapt the measures to its domestic needs already in the early 1990s, and soon began to increase its relevance in the international economy. Following numerous failed attempts to stabilize its economy with different economic policies,[46] the country adopted the Plano Real in 1994 and by the end of this decade, a “boom” of FDI in Brazil occurred.[47]

This increase of FDI flows into the country particularly during the second half of the 1990s was accompanied by the Washington Consensus and as a consequence of the globalization process, by the Plano Real and also privatization processes of state-owned enterprises. Moreover, the international economic conditions of this decade were favorable and Brazil was able to establish a more active and solid international economic position.

Additionally, another very important factor that influenced on the following rise of FDI inflows during this decade in Brazil is the constitutional amendment of 1994, which no longer established a legal distinction between a national company and a foreign company with subsidiaries in the country, which would later reflect on repatriation of profits to the headquarters of foreign companies and government taxation policies.[48]

On the other side of the Atlantic Ocean, Germany was experiencing its first years after the reunification, following the fall of the Berlin Wall and the collapse of the Soviet Union. This period led to increased government expenses in order to reconstruct, integrate and develop the former German Democratic Republic, which hampered German FDI flows to the rest of the world. Furthermore, the European Integration had also reached a higher maturity level. There was an increase of member-states and the economic bloc was constructing the path to monetary integration, which also interfered on direct investments in non-European countries.[49]

3.1.2 The Plano Real and the FHC years

After more than two decades of dictatorship (1964-85) and economic protectionism, Brazil established back its democracy in 1985. Since then, the country has gradually opened its economy to foreign markets. However, it was not until the launch of the Plano Real in 1994 that the antecedent protectionist and economic stagnated period would be reverted by the country’s first successful major economic policy of the 1990s. The Plano Real was an economic plan led by former President Fernando Henrique Cardoso in order to restore and stabilize the Brazilian economy.

Prior to his presidency years, Fernando Henrique Cardoso assumed roles as Minister of External Relations (October 1992- May 1993) and Minister of Finance (May 1993 – March 1994) during the government of his predecessor, Itamar Franco, and was the main mentor of the Plano Real. FHC was elected in 1994 as head of state, assuming his role from January 1^st, 1995 to January 1^st, 2003, for two consecutive presidential terms.[50] The previous years to the Plan were characterized mainly by high monthly inflation rates, high international liabilities, and numerous unsuccessful economic policies.[51]

The Plano Real established a new currency named “Real”, pegged to US dollars, in order to cease the fluctuations of the last currencies and the rising inflation that had led to a long period of recession and unattractiveness for foreign investors. The fixed exchange rate proved to hinder the growing inflation in the country during the following years until 1999, when the government established back a floating exchange rate.[52]

In this context, the new currency (Real) appreciated its value in face of the US Dollar and in 1995 the country had its first current account deficit after several years of protectionism, which eventually indicated to foreign investors the end of the import-substitution era and a posture of openness to international markets, which also led to higher levels of FDI flows into the country. [53]

After 1995, FDI and foreign capital inflows were decisive to finance the current account deficits of this period as well as to the creation and development of the country’s production capacity and infrastructure in order to attend the domestic market and also the Latin American region.[54]

According to Krugman and Obstfeld, “Brazil defended the new exchange rate with high interests in 1995, then shifted to a fixed, upwardly crawling peg in the face of substantial real appreciation. Inflation dropped from an annual rate of 2669 percent (in 1994) to under 10 percent in 1997”. [55]

Although successful for the domestic economic stabilization of the country, the validity of the Real as an anchor currency (1994-1999) as the basis of this economic plan led to a few problems within its execution, as it raised the vulnerability of the country to the international economic scenario, causing higher deficits on current account transactions, damages to public finance, higher dependency on international portfolio investments, the appreciation of the real exchange rates and worsening of the trade balance.[56]

In 1999, as a following measure of the Plano Real, the country devalued its currency by 8%, changing its exchange rate regime from a flexible exchange rate that had been adopted since 1994 to a floating exchange rate, which no longer had an absolute intervention of the Brazilian Central Bank (BCB).[57] The domestic market stabilization and mainly the stabilization of the inflation rates in Brazil provided international investors a safer ground to FDIs.[58]

In addition to this successful economic plan, the foreign policy led by President Fernando Henrique Cardoso was extremely important to promote the alignment of Brazil with the international economy. His foreign policy was characterized by a doctrine called “autonomy through participation”, which pursued to domestically internalize, absorb and consolidate the liberalization trends that were taking effect in the international system.[59]

The main goal of his foreign policy was to make Brazil internationally recognized as a “Global Trader”, by a more autonomous but active participation on international regimes and norms, as well as in multilateral economic organizations such as the World Trade Organization (WTO). This policy had enormous impact in the Brazilian economy, and also contributed to rise the interest of foreign investors to invest directly in the country. [60]

Following the guidelines of the Washington Consensus, Brazil gradually adopted liberal economic policies such as the privatization of state-owned enterprises, less restrictions to FDI processes, orientation to foreign markets, liberalization of commercial and financial operations, less bureaucracy to foreign investments, and a high-interest rate economic policy. The propositions of the Washington Consensus progressively dissolved the traditional Brazilian state intervention policies in terms of foreign trade and investments and projected Brazil into the international economy.[61]

In a more stable economic scenario, foreign capital entered the Brazilian financial market attracted by high interest rates in the country, the reduction of inflation rates, agreements to settle the payment of its international debt, and the further stabilization of the Brazilian economy during the 1990s. Foreign investors also perceived Brazil as a more attractive market to realize FDI, and many companies internationalized its production factors and services in Brazil.

During this decade, German direct investments in Brazil surpassed the amount of investments in other BRIC countries by Germany.[62]

In this context, FHC also intended to take important steps towards a more solid regional integration process through Mercosur, and use this economic bloc as a platform for a more competitive economic insertion of the country on the international level. FDI flows from the member-states of Mercosur increased significantly in the country.

The relative success of the Plano Real as an economic stabilization policy on a very liquid financial international scenario contributed to the entry of international capital in Brazil and modernization of its economy.

FDI flows into Brazil have exponentially increased between the launch of Plano Real in 1995 and 2002, last year of the FHC administration. FDI stock in this period in Brazil achieved US$ 165,5 billion, corresponding to around three times of the FDI stock in the country until 1995.[63] During this time frame, Brazil was the second most attractive developing country for FDI, losing its first place to China only.[64]

The FDI inflows in this period were mainly directed to the services sector than the industry sector, and the greater part of these investments aimed the acquisition of domestic companies (brownfield investments) rather than greenfield investments (construction of new factory plants, for example). Germany, for instance, concentrated its direct investments also in the service sector rather than the worldwide known strong industrial German businesses (car industry, construction, etc.).[65]

During the FHC administration, German FDI flows into Brazil fluctuated in accordance to the domestic scenario of Brazil, the domestic scenario of Germany, and also due to international developments, as observed on the following table:

Table 1: German FDI flows into Brazil 1994-2002 (net values, in € Million)

Year

German FDI flows into Brazil (net values, in € Million)

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Consequences of German FDI in Brazil

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Abbreviations

1 Introduction

1.1 Chapters Overview

2 German FDI in Brazil: Theoretical Framework

2.1 Definition of Foreign Direct Investment

2.2 Theories of FDI

2.3 Macroeconomic variables and FDI flows into Brazil

3 German FDI in Brazil: Developments and Causes

3.1 Historical overview of the main developments and causes of German FDI in Brazil

3.1.1 The path to economic stabilization: the years leading to the Plano Real

3.1.2 The Plano Real and the FHC years

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