Development Through International Economic Integration: Institutional Change to Accommodate Foreign Direct Investment in Brazil and China
Abstract: Foreign Direct Investment (FDI) that was mainly flowing to developing countries before the Second World War, became increasingly concentrated among developed economies since the aftermath of the war. A similar increase in the concentration of other capital flows and trade followed suit during the many decades in which the liberal post-war international order was far from being global. In the late 20th century, increased international willingness to expand global markets was matched by changes in the economic policy of developing countries, originating a process that started to reshape economic geography and reorient FDI flows and other economic flows. Eventually, in the wake of the 2008 global financial crisis, developing countries would again receive the bulk of global FDI flows. This paper argues that the primary reason for the new distribution of FDI is the way that institutional change at the global level interacted with institutional change within countries. As such, this interaction will also define the endurance of this reorientation. To sustain this point, the paper takes the cases of China and Brazil and demonstrates that the change in the incentive structure provided by the international environment around the end of the Cold War and the creation of the WTO, was accompanied by major institutional transformations in Brazil and in China along which greater integration with the global economy was pursued. FDI that was always present in Brazil gained a new relevance, while in China it would emerge during the reform era in a way that is responsible for a large part of the unprecedented growth experienced by the country. This study also shows that well defined policies are critically important to harness FDI to further induce higher goals of development at large.