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)
1994	1.260,11
1995	378,05
1996	1.025,56
1997	221,25
1998	2.051,78
1999	607,80
2000	1.170,33
2001	520,71
2002	– 46,92

Source: Bundesbank (2017).

As exposed on the table, German FDI has not maintained a stable level during the years that FHC assumed as President.

In 1994, the year of introduction of the Plano Real, German FDI into Brazil reached the second largest amount of the analyzed period on the table. This was also the year on which former German Chancellor Helmut Kohl introduced the “Lateinamerika-Initiative der Deutschen Wirtschaft”, a strategic industrial initiative that aimed to improve the German investor position and economic participation in Latin America. Brazil would benefit from this initiative, as it is the largest Latin American market. [66]

In 1995, international factors such as the recent consequences of the Mexican Crisis; and German domestic factors followed mainly by its reunification process which led to the increase on wages and the appreciation of the German Mark influenced the financial results of German companies, subsequently resulting on lower levels of German FDI into Brazil and other Latin American countries.[67]

In 1996, the internal and external economic turbulence began to settle and the levels of German FDI into Brazil were strengthened again, reaching a level similar to the first year of implementation of the Plano Real. In 1997, the levels reached a lower level similar to 1995. In the external economic scenario, this can be attributed to the first economic consequences of the Asian Crisis, which also affected the financial results of German companies. [68]

In 1998, German FDI flows into Brazil reached its highest level of the analyzed period but the next year, 1999, it plummeted because Brazil transitioned from a fixed exchange rate to a flexible exchange rate, which devalued the country’s currency and affected its capital inflows – this caused economic turbulence in the country and the FDI inflows were negatively affected.

In 2000, German FDI was strengthened as the Brazilian economy stabilized from the short-term consequences of the exchange rate transition that took place the year before. Moreover, the privatization program of the FHC government was starting to exhaust and in 2001, the German FDI flow values decreased by around half of the previous year.

In 2002, the political scenario in Brazil was very turbulent because of the upcoming elections, on which the populist figure of Luis Inácio Lula da Silva was leading the Presidential election polls. Also, the international scenario was instable, mainly because of the recently exposed frauds of North American firms and the conflict between USA and Iraq. In this year, FDI flows from Germany into Brazil were negative. For instance, negative FDI flows indicate that “at least one of the three components of FDI (equity capital, reinvested earnings or intra-company loans) is negative and is not offset by positive amounts of the other components. These are instances of reverse investment or disinvestment”.[69]

In the international level, the beginning of the 21^st century was a period of economic uncertainty due to the following consequences of the dot-com bubble and the terrorist attacks of September 11^th. During this period, German FDI flows shifted to other emergent economies that proved to be more attractive, including China and eastern European markets.[70]

The raise of economic importance of the aforementioned markets to Germany in contrast to Brazil can be exemplified in the number of bilateral visits of the German Chancellor Gerhard Schröder during his time in office: China accounted six bilateral visits, while Brazil accounted only one bilateral visit in 2002.[71]

It is also observed that the reunification of Germany and the European integration process have also affected the German FDI flows around the globe.[72] Moreover, Germany did not assume a significant role in the privatization of state-owned companies, as the sectors of these companies did not match the German investors interests. The USA was more active in this process.[73]

Considering the aforementioned developments, the FHC administration and the Plano Real played major roles for the recuperation and restructuration of the Brazilian economy, on which the level of FDI inflows mainly in services, productive industries and infrastructure sectors was strengthened.[74] With this economic framework in practice, Brazil experienced a subsequent stabilization and higher attractiveness to foreign investors and, in particular, increasing inflows of FDI.

As previously mentioned, although the level of FDI flows into Brazil substantially increased in the 1990s, the domestic situation of Germany and other external factors also did not allow a higher investment position in the country during this decade, despite the solid bilateral relationship between both countries.

In the beginning of the FHC administration Germany was the 2^nd largest investor in Brazil, corresponding to around 10% of all direct investments in the country. By the end of the FHC administration, Germany’s investor position had decreased significantly, corresponding to only around 3% of all direct investments in Brazil.[75]

3.1.3 The “Lula” administration

In 2003, the populist Luiz Inácio “Lula” da Silva, member and co-founder of the Brazilian Worker’s Party, assumed office as the new President of Brazil. Lula assumed a country that had passed through a very rigorous structural economic reform that took place during the FHC administration. In 2002, inflation had been controlled for years and other macroeconomic variables were solid and stable, which provided Brazil with a safer economic structure to reply to external and domestic crisis, and also to attract FDI.

The foreign policy strategy of his administration is called “Autonomy through Diversification”, which generally consisted on the goal of reducing economic asymmetry from the major economic powers by establishing solid bilateral and multilateral relations with other developing countries such as Russia, India, China and South Africa.[76]

During the FHC administration and the Lula administration, Brazil assumed a more relevant participation on trade negotiations at the WTO. But it was not until Lula assumed the presidency of the country, that there was a shift on the strategic approach in this institution, following his “diversification” strategy: while FHC adopted a more diplomatic approach based on dialogue, Lula dedicated his strategy to an institutionalized allied coordination policy with the southern economies.[77]

With this foreign policy approach, Brazil intended to be recognized as a logistic state, which consisted on providing “logistical support to private and public enterprises, preferably private, in order to strengthen them in international comparative terms”.[78] The commitment with the external economy is considered a basic condition for the interdependent international system, on which the Brazilian State would assume a “logistic” role by supporting international investments of domestic and foreign firms, and projecting the country as an economic and political leader of the southern countries.[79]

By cooperating with developing economies mainly in international institutions (such as WTO, aforementioned), Brazil pretended to assume a leadership status not only on a regional perspective, but also as a forerunner of the economic south. The south-south cooperation agreements and partnerships would in theory elevate the bargain powers of the emergent countries in face of the developed economies in multilateral forums. [80]

Other examples of the Brazilian intent to establish better relations with emergent economies is the strategic cooperation partnership with India and South Africa (IBAS); and the expansion of partnerships with Russia and China in terms of trade, technology and military cooperation. Also, the increasing investments of Chinese companies in the country is very notable during Lula’s presidency.

In terms of German FDI, as of the confirmation of Lula’s election in 2002 the German government announced that it intended to invest in the following years more than US$ 7,5 billion in Brazil through its multinational companies installed in the country, as well as the amount of US$ 10 billion that could be directed to infrastructure projects that would take place in the country until 2008. From the German government perspective, this statement and further action would be a means to raise its investor position and to elevate its FDI stock in the country.[81]

In the following table, we can observe the German FDI flows into Brazil during the two terms on which Lula was President (2003-2010):

Table 2: German FDI flows into Brazil 2003-2010 (net values, in € Million)

Year	German FDI flows into Brazil (net values, in € Million)
2003	– 390,64
2004	1.416,25
2005	1.228,31
2006	573,39
2007	918,84
2008	– 258,20
2009	219,19
2010	1.331,86

Source: Bundesbank (2017).

In 2003, German FDI flows into Brazil were negative, even lower than the previous year 2002. This means that there was a disinvestment of German companies in the country. In this period, the process of privatization of Brazilian companies had slowed down and also the same previously mentioned international economic situation of the year 2002 was taking place, which affected negatively the German FDI flows in Brazil. This decrease in German FDI flows in the country follows the international trend of decrease in FDI flows from developed nations into developing economies, with the exception of China.

In 2004, the German FDI flows into Brazil were significantly strengthened, also maintaining positive levels during the next few years. This represents the interruption of the decreases of FDI of the last few years (2000-2003), on which the total FDI flows into Brazil plummeted from US$ 32,77 billion to US$10,14 billion.[82]

It is important to notice that 2007 was the year on which Brazil reached its highest level of FDI inflows, with a record value of US$ 34,58 billion. This record value was reached mainly due to the privatization process of the Brazilian federal roads, on which Spanish investors actively participated, also combined with a favorable international and domestic economic scenario.[83]

From 2008 to mid-2009, the world economy was suffering from a stagnation period caused by the financial crisis of 2008. German companies were severely affected in the international level and the German FDI flows into the country followed this economic scenario, and registered negative and low results in 2008 and 2009, respectively.

In 2010, the level of German FDI into Brazil started to reach higher levels that would be maintained during the following years. The Brazilian economy showed the international community one of the fastest post-crisis economic recuperation, strengthening its growth rates.

The main economic pillars of the FHC administration were maintained during Lula’s administration: floating exchange rate and stable inflation. Moreover, this period permitted Brazil to experience high economic growth combined with low inflation rates and a stabilized balance of payments.[84]

In 2010, last year of Lula’s administration, the Brazilian economy grew 7,5%, which was higher than any other yearly growth rate since the re-democratization of the country in 1985. At the same time, the USA and Europe were experiencing signs of economic improvement after the 2008 crisis. The short term economic results of the Lula administration and the international recognition of Lula’s political figure set the path to his successor’s election, Dilma Rousseff.

3.1.4 The Dilma Rousseff administration

Dilma Rousseff was elected in 2011 and assumed her role as Head of State as the first woman President of Brazil and the leading successor of Lula in the Worker’s Party. She took office during a very positive economic scenario, on which Brazil was expected to grow its GDP by at least 4,5% annually. [85]

Following the subprime crisis in 2008, many foreign investors shifted the location of its direct investments to different regions of the globe instead of a holding a major concentration of FDI flows in developed countries.[86]

Therefore, developing countries were considered an alternative destination for FDI, and direct investment and capital flows started to rise over emerging markets. Brazil, for instance, benefited from this international market scenario – it had higher FDI inflows during the first four years of Rousseff’s government than the eight years of Lula’s government and last two years of FHC’s administration combined.[87]

On the following table, it is observed how the German FDI flows into Brazil evolved during Rousseff’s administration. The data comprises from the first mandate (2011-2014) until her impeachment during the second mandate (2015-October 2016).

Table 3: German FDI flows into Brazil 2011-2016 (net values, in € Million)

Year	German FDI flows into Brazil (net values, in € Million)
2011	1.523,97
2012	563,04
2013	1.068,46
2014	1.051,87
2015	2.555,25
2016	424,21

Source: Bundesbank (2017).

As we observe on the table, Germany maintained positive levels of FDI into Brazil during every year of Rousseff’s administration, and reached its peak in 2015 during the first year of Rousseff’s second mandate.

The only exception of lower levels of German FDI into the country under her government is the year of 2012, on which the European Union was experiencing an economic downturn due to several economic crises within its member states. This situation affected negatively the German FDI flows into Brazil, as German investors and companies were severely affected by the crisis.

The higher levels of German FDI into the country in 2013-2015 is explained mainly due to the active participation of German investors on establishing agreements on the construction of sports facilities and infrastructure built for world class sport events such as the Football World Cup in 2014 and also the Olympics and Paralympics in 2016, that took place in Brazil.[88]

The data provided for the year 2016 comprises direct investments flows until October of the same year and for that reason it illustrates a lower value. However, 2016 was the year on which numerous government corruption scandals began to come to public. This situation directly jeopardized the Rousseff administration and had disastrous consequences for the Brazilian economy. Gradually, Rousseff found herself on a very undermined leadership position, as many of her supporters in the government were also involved in those scandals.

Despite the positive results on the flows of FDI from Germany into Brazil during this period, the domestic economy of Brazil has deteriorated during her government. In 2011, the Brazilian economic scenario started to decelerate, on which the following years would experience lower levels of growth and growing current account deficits.

When Rousseff assumed office, the macroeconomic variables of Brazil were considered satisfactory, even with the effects of the recent international economic crisis. By the time she was impeached by the Brazilian senate, these same indicators were extremely deteriorated: high inflation rates, minor economic growth, and deficit on the balance of payments.

After numerous corruption accusations that involved Dilma Rousseff and her Party, Rousseff was enrolled in an impeachment process that deteriorated her image, the integrity of her government, and the Brazilian Economy. Moreover, agencies such as Moody’s and S&P lowered the country’s foreign currency debt rating, classifying it as a “Junk territory”. This situation clearly increased the risk for foreign investments in the country.[89]

3.1.5 Impeachment turmoil

Dilma was accused of having committed fiscal responsibility frauds and subsequently was impeached in August 2016 after a very controversial impeachment process on which her vice-president, Michel Temer, was one of the main pro-impeachment political leaders. After the confirmation, Michel Temer assumed as President of Brazil.

The international markets reacted positively right after the confirmation of Rousseff’s impeachment.[90] Temer is a very important political leader of one of the major center-right political party, the Brazilian Democratic Movement Party, which is very keen to adopt measures of trade liberalization, privatizations, etc.

3.2 Evolution of macroeconomic variables in Brazil after the Plano Real

It is important to observe that the previously mentioned political and economic factors along with the development of macroeconomic variables of Brazil have directly influenced the FDI flows into the country. After the 1990s, the stabilization of the economic environment set a better investment scenario in Brazil. Hence, it is relevant to visualize how these variables evolved over the years after the implementation of the Plano Real. Following, it is presented the development of different macroeconomic variables during the period after the Plano Real.

3.2.1 Inflation

Figure 3: Inflation Rate in Brazil according to Consumer Price Index (1994-2016) – yearly, in %

Source: Ipeadata (2017).

The inflation control in the 1990s was essential to boost FDI entry in Brazil. It is noticeable how inflation plummeted right after the implementation of the Plano Real in the second half of 1994. It passed from a yearly rate of 916,16% in 1994 to 22,41% in 1995 and passing to 9,56% in 1996, 5,22% in 1997, and maintaining rates under 7% for the greater part of the following couple of decades.

3.2.2 Foreign exchange rate

Figure 4: Evolution of the Exchange Rate Real-US Dollars (R$/US$) (1994-2015) – in %

Source: Ipeadata (2017).

In the introduction of the Plano Real, the new currency was pegged to the US Dollar at a 1:1 parity rate, which led to the appreciation of the Real in the second half of 1994. Subsequently, the Brazilian government devalued the currency until the adoption of a floating exchange rate in 1999. This exchange rate modification shoot up the foreign exchange rate right after its adoption, as seen on the graphic. It is also observed that the R$/US$ exchange rate has followed the international developments: after the 9/11 attack in 2001, along with the US Iraq war and political uncertainty in Brazil for the 2002 presidential elections, set up an ascendency trend on the foreign exchange rate. Also in 2008-2009 and in 2012 this increase trend is noticed, following the international crises during these years.

3.2.3 Balance of payments

Figure 5: Balance of Payments of Brazil (1995-2016) – US$ Million – BPM6

Source: Ipeadata (2017).

After the Plano Real, the appreciation of the Brazilian currency Real incurred also on the increase of imports, generating a deficit on the balance of payments that lasted until the turn of the century. When the country passed from a fixed to a floating exchange rate in 1999, it is noticeable the effect on the balance of payments, that registered a surplus throughout the next decade. The reduction of Brazilian commodity prices along with international crises illustrate the decrease trend of the Brazilian surplus after its peak in 2006, leading in 2014 to the first deficit after the year 2000. After the deficit in 2014, the Brazilian economy register a surplus on levels similar to the previous decade that can be attributed to a domestic economic recession and appreciation of the US Dollar in relation to the Real, which led to a 24,4% decrease on imports in 2015.

3.2.4 Openness to foreign markets

Figure 6: Degree of Openness of the Brazilian Economy – Trade in percentage of GDP

Source: World Bank (2017).

Openness to foreign markets is also an important macroeconomic variable that may have influenced FDI attraction in Brazil. This variable can be measured by the trade-to-GDP ratio, which associate “the importance of international transactions relative to domestic transactions. (…) it is calculated for each country as the simple average of total trade relative to GDP. It is also called the trade openness ratio”.[91] In the graphic, we can observe that the period after the Washington Consensus, mainly after the adoption of a floating exchange rate in 1999 followed a gradual insertion of Brazil in the international economy. Brazil has predominantly opened its market to foreign investors and trade partners after the rollout of the Plano Real.

4 Consequences of German FDI in Brazil

Brazil is considered the most important host to Foreign Direct Investments in Latin America.[92] As seen on chapter 2, the international economic environment as well as the domestic policies and respective governments have directly influenced the attractiveness and flows of FDI into Brazil throughout the past years.

This chapter seeks to summarize the consequences of the historical developments of German FDI in Brazil and its effects on the Brazilian economy; the main industries that German FDI is present in the country; the agencies that promote German FDI in Brazi; the barriers that have possibly prevented and still limit a faster development of German-Brazilian FDI relations; the current motives for German investors to invest in Brazil; and also briefly describe the current developments and prospects of this bilateral relation.

4.1 Overview of German FDI in Brazil in the recent years

Although Brazil has always been a relatively important economic player and target market for FDIs, this type of investment in the country was intensified mainly during the years after the implementation of the Plano Real, as observed on the previous chapter.

This economic plan founded the basis to a more stable domestic economy in Brazil, and as a consequence, it attracted higher levels of foreign capital and investment flows into the country after the application of its measures. The higher level of FDI inflows affected directly the economic and industrial modernization of the country, projecting Brazil as one of the most important emerging markets of the 21^st century.

As a result of this scenario, it is observed in the following two graphics below that the increase or decrease on the level of German FDI has been influenced by the attractiveness or unattractiveness of the Brazilian economy to foreign investors (mainly due to its political and economic situation) as well as international factors (such as economic crises) and domestic factors of Germany. On years of recession (either international or domestic), the German FDI level into Brazil normally decreases. On more stable periods with a higher international capital liquidity, the levels are increased.

The graphic below exposes the German FDI flows into Brazil starting from the rollout of the Plano Real in 1994 until recent years.

Figure 7: FDI flows from Germany into Brazil – net values, in € Million (1994 – 2015)

Source: Bundesbank (2017).

The next chart (figure 8) represents the German FDI outflows in the international economy during the same period as the previous chart (1994-2015).

Figure 8: German FDI outflows – net values, in U$ Million (1994 – 2015)

Source: UNCTAD (2017).

If we compare both figures, there is a notable trend similarity on the total German FDI outflows to the world and the inflows of German FDI in Brazil.

Observing the first chart, during the years of 2002-2003 and 2008, German FDI flows into Brazil reached its lowest levels, mainly due to recession and financial instability of the international economy. At the same time, the second chart which shows the total German FDI outflows in the world also exposes a similar behavior during these unstable economic periods. Therefore, it is clearly noticeable that the German FDI outflow behavior has developed mainly in accordance to the international trend.

However, it is also important to observe that other political and economic facts mentioned along Chapter 3 have enormously contributed to the fluctuation of the level of German FDI flows in the country.

4.2 Main industries

One of the main consequences of the entry of German capital in form of investments in Brazil is the development and modernization of the country’s economic activities and industry. As previously mentioned, more than 1.500 German companies are active in Brazil, generating tens of thousands of direct jobs in the country.

The following table shows the distribution of German FDI in Brazil by its respective economic sector or industry:

Table 4: Main German FDI receptor Industries/Sectors in Brazil (2011)

Economic Activity / Industry	Volume (in US$ million)	Participation (%)
Commerce	157	13,9
Plastic and rubber products	135	12
Chemical products	133	11,8
Financial Services	120	10,7
Machine and equipment manufacture	107	9,5
Machine and electrical material manufacture	80	7,1
Computing equipment, optical and electronic material manufacture	58	5,1
Printing and recording materials	57	5,0
Vehicles and auto parts	51	4,5
Insurance	50	4,4
Other Industries	179	15,9
Total German FDI flow in Brazil	1125	100

Source: Brazilian Central Bank (2011).

It is important to observe that the data from this table is from 2011. However, the main industries and sectors that German investors direct their investments in Brazil has not significantly modified during the previous years. The services sector is still the leading destination of German FDI into Brazil.

As exposed on the table, the main economic activity that attracts German FDI in Brazil is commerce, representing almost 14% of this type of investments in the country. Following, industries of plastic and rubber products, chemical products, financial services, and machines and equipment are also relevant economic sectors for German FDI, and corresponded to around 10% each of the total German FDI into Brazil in 2011.

4.3 Agencies that support FDI flows between Germany and Brazil

As a consequence of the growing levels of German FDI into Brazil, numerous private and government-held agencies and organizations have established local subsidiaries in order to support the long term economic partnership between both countries and to assist companies in their internationalization processes.

These agencies are the first main channel of communication that many German companies establish in Brazil in order to develop its internationalization processes in the country. There are four major German organizations or agencies installed in Brazil that promote cooperation and direct investment agreements in the country: the GIZ; the KfW Group and DEG; GTaI; and AHK;

The GIZ or Deutsche Gesellschaft für Internationale Zusammenarbeit is a worldwide organization that supports the German government on international cooperation projects in the area of sustainable development. In Brazil, the GIZ has developed cooperation for renewable energies and energy efficiency, sustainable development projects in the Olympic and Paralympic games and other diverse projects, which have benefited many German companies and public-private partnerships. The BMZ or German Federal Ministry for Economic Cooperation and Development is one of the main supporters of the GIZ projects in the country.[93]

The KfW Group is a German government development bank that has played a major role on improving the financial cooperation between Germany and Brazil. It runs numerous projects in the country mainly in the sustainable economic development areas. [94] Brazil is one of the top five main country partners of the KfW and many German companies profit from the projects and cooperation partnerships of the KfW in Brazil. The DEG or Deutsche Investitions- und Entwicklungsgesellschaft is part of the KfW group, which helps on the financing of private investments in the country focusing mainly in the agriculture, industry and infrastructure sectors.[95]

The GTaI or German Trade and Invest is the economic development agency of the German government, also present in Brazil. It promotes and supports German firms in establishing its direct investments in foreign locations and also promotes and assists foreign companies to invest in Germany.[96]

The AHK or Deutsch-Brasilianische Industrie- und Handelskammer is the Chamber of Commerce and Industry of Germany and Brazil, that provides numerous services and support for German companies in the country. The Chamber is present in thirteen locations throughout Brazil and its main objective is to attract investments to the region of each location. It also aims to increase the bilateral ties and investments of German and Brazilian companies in the country.[97]

All of the above-mentioned organizations are key to supporting German FDI in Brazil. They represent the institutional support for German investment in the country, and also promote the sustainable economic and political partnership between Germany and Brazil.

4.4 Barriers and motives

Foreign investors tend to analyze the target market before the decision to internationalize their business activities in a certain country. A careful evaluation of the barriers and determinants of FDI regarding the possible success of their business in a location abroad takes place and subsequently the best destination for the investment abroad is chosen.

As a consequence of the growing importance of German direct investments in Brazil, research has identified the current main barriers and motives that German investors encounter during the implementation of internationalization strategies in the country.

In a survey conducted in 2012, executives of German companies installed in the Brazilian market were asked to analyze the most important barriers they have found to conduct its investments and businesses in Brazil. The results can be observed in the following graphic:

Figure 9: Barriers to investments in Brazil, appointed by German Companies

Source: Rödl Rechtsanwaltgesellschaft Steuerberatungsgesellschaft mbH (2012).

The leading barrier to investments in the country is by far the state bureaucracy, which was cited by more than 80% of the German interviewees as important or very important. Other factors that also involve state bureaucracy were mentioned: import procedures (65,1%), duties and trade regulations (60%), monetary regulations and control (53,8%), public services (51,3%), licenses and concessions (46,9%).

Infrastructure problems also hinder German investments in Brazil, as it was classified by 60% of the interviewees as important or very important. More than the half of the participants (52,1%) consider the Brazilian legal system as a restriction to their investments. Likewise, corruption (54,7%), criminality (43,3%), transport and traffic (46,8%), and access to financial resources (38,1%) are on the list of the most important restraining factors to German investments in Brazil.

The same survey also compiled the factors that essentially attracted German companies to invest directly in Brazil:

Figure 10: Motives to invest in Brazil, appointed by German Companies

Source: Rödl Rechtsanwaltgesellschaft Steuerberatungsgesellschaft mbH (2012).

As observed in the graphic above, German companies that internationalize its activities to Brazil benefit from the enormous market potential that the country offers not only domestically but also throughout Latin America.

More than 80 % of the interviewees considers Brazil as a great location for market access, and nearly the same percentage think that the country offers possibilities to expand the company’s market position. Therefore, Brazil is recognized by German investors as an “entry door” to further investments and market access to the entire South American continent.

Other motives to invest in Brazil mentioned by German investors and classified as important or very important factors are: workforce access (54%), development of new product lines (51%), cost reduction (46%), development of new technologies (39%) and access to raw materials (36%).

The aforementioned barriers and motives to invest directly in Brazil are a result of the current Brazilian economic and political scenario, its bilateral relations with other sovereign countries and economic blocs, and improved integration to international markets over the last few decades.

Brazil is the most important economy in South America and most of its foreign direct investors believe that the country’s vast population combined with its gradually increased power of purchase over the last years are crucial aspects that influence their internationalization strategies. On the other hand, the entire institutional framework of the Brazilian State, along with other factors, tend to restrict German FDI into the country.

4.5 Current developments and perspectives

Currently, one of the greatest challenges to German investors in Brazil is the country’s lack of qualified labor. Brazil does not offer sufficient qualified human capital to meet the standards and demands of a great part of German companies that wish to invest directly in Brazil, mainly in the production economic sector.[98]

Furthermore, German FDI in Brazil is still very low when compared to other countries: it corresponds to only about 1,4% of all German FDI in the world. However, there are many reasons why this bilateral relation should grow stronger in the next decade.

The table below shows the trade and investment complementarities between Germany and Brazil, on which both countries should focus their efforts in order to expand its scope of action and strengthen its bilateral economic results:

Table 5: Perspectives of economic importance in the Brazilian-German relations

Economic importance of Brazil to Germany	Economic importance of Germany to Brazil
Growing domestic market and middle-class of Brazil leads to a higher demand for German products as well as foreign investments	Germany has a high diversification of commercial partners, not limited to USA and China.
The economic development of Brazil implies on better business opportunities to German companies	German specialization as a means to develop the Brazilian industrial sector and infrastructure
Maintaining security on resource supply to German industry	The demand for German commodities may increase the quantity/price of Brazilian exports
Global leader on green technology exports	Sustainable development effort and development of green technologies

Source: translated and adapted from Bertelsmann Stiftung (2014).

The table above demonstrates how the German-Brazilian economic relationship should evolve and be focused on in the next years. German and Brazil need to explore the comparative advantages of each country, in order to develop a more relevant economic partnership.

Another factor that is very important to understand how the German-Brazilian relations may evolve in the near future is the ongoing regional integration processes of the regions where both countries are located. The further development of the EU and the Mercosur plays an enormous role in the FDI flows between both countries, as it has “reduced the negotiation spectrum of both countries when establishing bilateral agreements. The decision-making process needs to consider the demands of the economic policies of each bloc, which depends on consensus.”[99] Therefore, the construction of a stronger bilateral economic relation depends directly on the influence that Germany and Brazil hold inside its respective regional economic bloc.[100]

Furthermore, it is crucial that the Brazilian government improves its institutional framework in order to develop a feasible multi-level investment process, on which investors, governments and institutions can easily cooperate and create a more dynamic and safe internationalization environment.

In a globalized world, countries are gradually more interdependent and rely on each other to develop its economies. A couple of centuries after the first years of German Brazilian relations, both countries still prove to have complementary economies and an interdependent economic relation.

5 Conclusion

The relations between Brazil and Germany date from the 1800s, even before the German reunification. During this period until the mid-1900s, as a result of different historical aspects such as war, religion, economic difficulties, living conditions in Germany, hyperinflation during the Weimar Republic and others, numerous German families immigrated to Brazil and established agricultural settlements mainly in the southern part of the country. This immigration has had important influence on the Brazilian economy, strengthening cultural, diplomatic and economic ties between both countries.[101]

In Latin America, Brazil is considered by far the most important economic partner of Germany, and the bilateral relation between both countries has been strengthened since those first immigration waves. In terms of FDI, the 1970s was the summit point of the participation of Germany in the Brazilian economy. After that decade, however, different factors related to the process of economic globalization have diluted the investor position of Germany in Brazil.

The adoption of market liberalization policies by the Brazilian government after the 1990s and the consequent establishment and success of the Plano Real in 1994 allowed the Brazilian economy to develop stability and attract a more relevant FDI flow level into the country. The trend of FDI flow increase can also be observed in the international economy during this decade. Moreover, Brazil has more than doubled its middle-class population since the 1990s, which contributed to the expansion of its consumer basis and led the country to become a very relevant target market for foreign companies.[102]

Given this scenario, it is possible to highlight four main factors that contributed directly to economic development and growth in Brazil since the aforementioned decade, which had a positive impact on the entry of foreign capital and investments in the country: openness to foreign markets, economic globalization, political stabilization, improvements on macroeconomic variables, and privatization programs.[103]

Despite the general positive developments of FDI in Brazil during the analyzed period, Germany did not consolidate its position as an investor and important economic partner of Brazil. The German participation on the Brazilian economy actually sank during this period despite its considerable role in the industrial and service sectors. The privatization process of state owned firms, which was one of the most important policies to attract foreign capital into Brazil, also lacked the participation of German companies, and was overtaken by a major participation of other countries such as the USA.

Nevertheless, it is important to observe that the inflation control after the Plano Real is the most relevant factor that led to the increase of FDI flows into Brazil. On the years before its execution it was a completely chaotic situation to run a business in the country, as prices varied drastically from one day to another.

Moreover, it is also noticeable that the improvement on other important macroeconomic variables also had a major impact on the attraction of FDI into the country, as a more stable economic environment provides a safer investment ground in order to foreign investors apply internationalization strategies in Brazil.

Although German companies currently have an important role in the Brazilian economy and have been responsible for the modernization of various economic sectors throughout the last decades (mainly industrial and chemical sectors), the German FDI in Brazil still represents a very small percentage of all FDI flows into the country.

Part of this shy FDI investment participation of Germany in Brazil is related to the more active participation of Germany on investments in the European economic bloc, its reunification in the 1990s which required high government investments in the former Eastern Germany, the rise of important alternative target markets for internationalization strategies (China, for instance), amongst other factors.

Furthermore, the international crises that occurred during the analyzed period are extremely important to evaluate the FDI flows into the country. Whenever the international economic environment was somehow weakened, the foreign direct investments in Brazil also presented lower results. This is likewise linked to the insertion and vulnerability of Brazil in the international economy, and how the country is affected and depends on foreign players in order to develop its economy.

Besides, it is very challenging to separate the political framework from the economic developments in order to analyse the economic impacts of FDI in a specific country. Hence, it is not possible to affirm that there is a direct connection (causality relationship) between the stabilization of the macroeconomic variables of Brazil and the German FDI flows into the country, but only to assume a qualitative correlation of these factors.

The development and analysis of the scenario for German FDI in the Brazilian economy is certainly much more complex and depends on the consideration of many different economic variables and political situation of both countries, not to mention the interconnectivity of the world economy.

As previously observed, the general political and economic situation of Brazil has influenced the entry of foreign investments in the country. The recent impeachment turmoil and the daily novel corruption scandals have been gradually deteriorating the current situation of Brazil as a safe destination country of FDI. The next presidential elections in Brazil will be held in 2018, and there are high expectations that the country will finally recover from the economic and political damages that occurred during the previous years.

Germany and Brazil need to further explore its economic complementarities in order to strengthen the trade and foreign direct investment flows between both countries in the next decades. This is path that demands a very focused commitment of both governments and also private companies, as FDI flows are directly related to stabilization and attractiveness of a country’s economy.

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[1] Cf. Jackson, Sørensen, 2016, P.194

[2] See Figure 1

[3] Cf. Jackson, Sørensen, 2007, P. 294

[4] Cf. Kapoor & Tewari, 2010, P. 150

[5] Cf. Itamaraty (Brazilian Ministry of Foreign Affairs), 2017

[6] Cf. Bertelsmann Stiftung, 2014, P. 8

[7] Cf. Gregory, 2013, P. 114

[8] Cf. Rinke, 2014, P. 3-4

[9] Cf. Brazilian Ministry of Foreign Affairs

[10] Cf. Soares, 2000, P. 87-88

[11] Cf. Soares, 2000, P. 87-88

[12] Cf. Soares., 2000, P. 88

[13] Cf. Soares, 2000, P. 89

[14] Cf. Moniz-Bandeira, 2013, P. 191

[15] Cf. Moniz-Bandeira, 2013, P. 194

[16] Graham, Krugman, 1995, P. 7

[17] Salvatore, D., 2011, P. 220

[18] OECD, 2008, P. 48.

[19] Krugman, Obstfeld, 2015, P. 714

[20] Cf. Pazienza, P., 2014, P. 8

[21] Cf. OECD, 2008, P. 86

[22] Cf. OECD, 2008, P. 86

[23] Cf. Czinkota, Ronkainen, Moffer, 2002, P. 460

[24] Cf. Hamilton L., & Webster P., 2015, P. 124-127

[25] Cf. Graham, Krugman, 1995. P. 11-15

[26] Cf. UNCTAD, 2017.

[27] Cf. Amal, 2016, P. 18-19

[28] Cf. El Kahal, 1995, P. 70

[29] Cf. Buckley, Ghauri, 2015, P. 88

[30] Cf. Dunning, 2008, P. 95

[31] Cf. Davies et al., 1989, P.253

[32] Cf. Davies et al., 1989, P.261-262

[33] Cf. Garibaldi et al., 2001, P. 17

[34] Cf. Kurtishi-Kastrati, 2013, P. 29

[35] Cf. Bertellsman Stiftung, 2014, P. 6

[36] Bertelsmann Stifftung, 2014, P. 7

[37] Cf. Brum, 1997, P.213

[38] Cf. Tomazini, 2011, P. 138

[39] Cf. Oman, C., 2000, P. 29

[40] Cf. Gremaud et al, 2011, P. 359

[41] Cf. Brum, 1997, P. 214

[42] Cf. Coutinho, Belluzzo, 1996, P. 138

[43] Cf. Tomazini, 2011, P. 140

[44] Cf. Coutinho, Belluzzo, 1996, P. 139

[45] Cf. Tomazini, 2011, P. 140

[46] Cf. Amal, 2016. P. 73

[47] see Figure 2

[48] Cf. Scherer, 2004, P. 115

[49] Cf. Soares, 2000, P.89.

[50] Cf. FHC Foundation, 2017.

[51] Cf. Luiz, 1994, P. 135

[52] Cf. Silva M., 2002, P. 6

[53] Cf. Silva M., 2002, P. 7

[54] Cf. Laplane, Sarti, 2016, P. 149

[55] Krugman, Obstfeld, 2015, P. 718

[56] Cf. Silva M., 2002, P. 14

[57] Cf. Krugman, Obstfeld, 2015, P. 718

[58] Cf. Scherer, A.L.F., 2004, P. 108

[59] Cf. Lampreia, 1998, P. 14

[60] Cf. Lampreia, 1998, P. 14

[61] Cf. Vasconcellos, Lima, Silber, 2006, P. 131

[62] Cf. OSW Report, 2011, P. 41

[63] Cf. Scherer, 2004, P. 115

[64] Cf. Scherer, 2004, P.115

[65] Cf. OSW Report, 2011, P. 51

[66] Cf. Moniz-Bandeira, 2013, P. 191

[67] Cf. Ecfin, 2002, P. 6

[68] Cf. Moniz-Bandeira, 2013, P. 191

[69] Gugler P., 2009, P. 248

[70] Cf. OSW Report, 2011, P. 22

[71] Cf. Moniz-Bandeira, 2013, P. 193

[72] Cf. Saraiva, 2017, P. 9

[73] Cf. Soares, 2000, P. 97

[74] Cf. Scherer, P. 126

[75] Cf. Moniz-Bandeira, 2013, P.192

[76] Vigevani, 2007, P. 276

[77] Vigevani, 2007, P. 275

[78] Cervo, 2009, P. 87 (translated from Portuguese)

[79] Cf. Campielo, 2013, P. 2

[80] Cf. Saraiva, 2010, P. 155

[81] Cf. Lohbauer, 2013, P. 35

[82] Cf. Devai, 2015, P. 130

[83] Cf. Devai, 2015, P. 130

[84] Cf. Gentil, Hermann, 2016, P. 1

[85] Cf. Pires, André, 2015, P. 197

[86] Cf. Pires, André, 2015, P. 207

[87] Cf. Pires, André, 2015, P. 208

[88] Cf. OSW Report, 2011, P. 41

[89] Cf. Bloomberg, 2017

[90] Cf. Hessel, 2016

[91] OECD, 2011, P. 66

[92] Treviño, 2004, P. 235

[93] Cf. GIZ (2017)

[94] Cf. Brazilian Ministry of Planning, Budget and Management (2017)

[95] Cf. KfW Group (2017)

[96] Cf. GTaI (2017)

[97] Cf. AHK (2017)

[98] Cf. Bertellsman Stiftung, 2014, P. 29

[99] Soares, 2014, P. 105

[100] Cf. Soares, 2014, P.105

[101] Tock, D., 1994

[102] Hamilton, Leslie, Webster, 2015, P. 106.

[103] De Barros, Goldenstein, 1997, P.27

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Figures

Tables

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

3.1.3 The “Lula” administration

3.1.4 The Dilma Rousseff administration

3.1.5 Impeachment turmoil

3.2 Evolution of macroeconomic variables in Brazil after the Plano Real

3.2.1 Inflation

3.2.2 Foreign exchange rate

3.2.3 Balance of payments

3.2.4 Openness to foreign markets

4 Consequences of German FDI in Brazil

4.1 Overview of German FDI in Brazil in the recent years

4.2 Main industries

4.3 Agencies that support FDI flows between Germany and Brazil

4.4 Barriers and motives

4.5 Current developments and perspectives

5 Conclusion

References

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