Why did the BRIC concept gain such prominence, and is the attention given to BRIC economies justified by the trends, extent and nature of FDI linked to these economies?
When looking at economic history, it is evident to see that emerging markets has always been a relevant issue, with economies fluctuating, as seen in the late 19th century when America surpassed China's economy becoming the largest in the world (Economist, 2013a). In categorising Brazil, Russia, India and China together to form the BRIC concept, Jim O'Neill (former Head of Global Economic Research (GER) of Goldman Sachs Asset Management (GSAM)) played a pivotal role in snowballing the financial flows to these growing powers. By exploring how the BRIC concept gained distinction initially, it will clarify if these trends are justified; while observing how foreign direct investment (FDI) links these economies. It is important to first look at Goldman Sachs and GSAM, along with the trust held within them from investors.
Goldman Sachs functions in mergers and acquisitions (M&A), private equity and investment management. They developed trust, through a solid performance history in market deals (Turnbull & Moustakatos, 1996), while also making a name for having a “culture of smartness” (Ho, 2009, p.20). Specialist knowledge was utilised to validate Goldman Sachs' assertion over financial expertise, preserving its competitive position within the market. This trust and dominance were strengthened through a robust political authority by the firm's alumni, placing it in a unique situation with power to “discipline” markets. Power was exerted through citing the rules and the means of inclusion and exclusion (Hardt & Negri, 2000, p.22), consequently determining ventures that are reliable and those that are not. On the contrary, its asset management subsidiary, GSAM, struggled to maintain trust with investors for a few reasons; poor productivity, bad reputation when compared to opponents (Rynecki, 2000) and an inconsistent performance in volatile markets. To succeed, GSAM needed to mirror its parent image by being “permanently smart” (O\'Neill, 2011, p. 15) in an inevitably full field. Jim O'Neill realised he would need to create an “interesting idea to communicate both inside and outside the bank” (O'Neill, 2011, p.15). Producing exceptional concepts would be critical in building trust in his capabilities and leadership as head of GER, but also in evolving the character of GSAM (McGregor, 2011). This successful development would be fundamental in placing GSAM as a trusted mentor to the biggest investors in the world.
There is no doubt that the BRICs concept was a triumph, seen through the extent of research carried out since its ‘birth', also merited by the notion of studying it in University. Foreign direct investment (FDI) shows there has been greater interest in BRICS (inclusive of South Africa) economies; as reported by UNCTAD (2013) FDI inflows to BRICS were at an estimated US$263 billion in 2012, which is more than triple the amount a decade prior. This means that their stake in world FDI flows continued to rise even during the global financial crisis, reaching 20% in 2012 from 6% in 2000. Their dominance can also be seen through their investments, as BRICS outward FDI has grown to US$126 billion in 2012 from US$6 billion in 2000 – regarding the world flow, this is a jump from 1% to 9% in the space of 10 years.
The BRICs concept contrasts to the previous failed attempts in emerging market investment, such as classifying ‘Asian Tigers and ‘Newly Industrialised Countries' (Sidaway & Priket, 2000). The issue O'Neill faced was that he didn't have a huge amount of personal experience in the BRIC countries; he had only visited one of them (Tett, 2010). Consequently, he relied on Goldman Sachs' ‘culture of smartness', by trusting international economists who held direct local knowledge of the BRICs (Sidaway & Bryson, 2002). It can be said; therefore that globalisation plays a role in the expansion of the BRICs concept due to the reliance O'Neill had on others for specialist knowledge. It is also important to note that due to the current globalised world, there is increased communication and movement of people, providing opportunities for investments to be made with greater knowledge and awareness from experts with personal experience of the market. Regarding the BRIC concept, some specialists disregarded the model as a marketing tactic (Sharp, 2006), intended to influence Goldman Sachs' global control and help the burdening GSAM, which will be explored later in the essay.
Figure 1. BRICS countries: FDI inflows and their share in global FDI inflows, 1998 – 2012 (Billions of US dollars and per cent) (UNCTAD, 2014)
BRICs became a recognised concept a few years after the original document was published (2001) when some of O'Neill's colleagues released a report about the possible outcomes of the BRICs concept (McGregor, 2011). It highlights that the favourable population demographics and sustained economic growth held by BRIC countries were suitable for great future growth, seen through their forecast that by 2040, BRICs would compete or even surpass Western nations who hold a dominant share of global wealth. This prediction caused a multitude of investment banks and hedge funds developing their private BRIC funds, stimulating a movement of FDI into BRICs (see figure 1). However, recently the FDI rate has been falling, bringing into question whether giving the group of countries an acronym was relevant.
A report published by A.T. Kearney (2016), presented the falling rates of FDI in emerging markets and BRICs in particular. In the Index, developed countries constituted the majority making up 8 of the top 10 and 80% of the countries in the top 25 are developed countries, showing the lack of FDI in emerging markets as a whole. Regarding BRICs, this can be attributed to their institutional weakness, precisely a lack of autonomous liability, clarity in public life and external media scrutiny of general performance. This notion applies in particular in China, where a Communist Party restricted public discussion and liberal activists, where decreasing exports and volatility within the market generated economic troubles (Tisdall, 2016).
This overall failure of BRICs could be the result of a multitude of issues. One of which is classifying the group of countries from the outset. By giving the grouping an acronym, it simplifies a very complex theme, which in turns causes it to fail. Marketing departments can sell BRICs as an acronym easily to investors, but now the substance falls short on the grounds of the falling FDI in general in BRICs. ‘Many analysts suggest that the BRIC concept is more marketing than economic' (Sharma, 2012) and therefore doubts are created over its solidity as a long-term economic concept. Indeed emerging markets grow faster than developed economies; however, that doesn't mean that they will be equally successful in the long-term. Any attempt to bundle stocks or countries will ultimately miss the complexity that defines them, consequently resulting in the likelihood of a ruined performance.
Another reason for the failure of BRICs is that some countries get ‘thrown into' the acronym due to starting with the correct letter needed for it to make sense. This can be argued regarding adding South Africa to the BRICs concept in 2010, as it caused concerns regarding the classification needed to justify the grouping of the BRIC economies. Originally no African countries were included in the concept, which suggested that the continent was of economic insignificance, solely good for offering primary resources to the rest of the world (Economist, 2013b). Nigeria was probably the better option, as it was forecasted to overtake South Africa in GDP. Only one would keep the acronym intact, resulting in the concept changing from BRICs to BRICS. However, it can also be contested the viability of the inclusion of some of the other countries in BRICs, as when reflecting on the past ten years the BRIC economies haven't lived up to the expectations of growth (apart from China), as seen through the reduction in inflows of FDI. FDI into the BRIC countries of Brazil, Russia, India and China dropped more severely that the rest of the world in 2012, consequentially the fell in their global market share (The Financial Times, 2013). A tame economic growth in Europe and Brazil, reduced growth in China, political unpredictability in the Middle East and policy doubt in the US are the reasons around the decline in FDI in 2012, which impact the global FDI market. Russia has affected the reduction in the inflow of FDI due to the economic effect of the conflict in Ukraine in 2014. Sanctions enforced by the West, accompanying the concern among investors, intensified a slowdown in growth in the economy – with US$85billion pulled from Russia in 2014 (Walker, 2014). It also hasn't been included in the FDI Confidence Index since 2013 (A.T.Kearny, 2016). In the FDI Confidence Index, published by A.T.Kearny, it stated that Brazil experienced the country's worst recession for 20 years; thus the economy contracted 3.8% in 2015. The business environment of Brazil should make investors cautious, with the continuing corruption scandals. FDI inflows dropped $6billion between 2014 and 2015 (12%), with Greenfield FDI diminishing at disturbing rates since 2011, from over 500 projects valued at $500billion to 56 projects in 2015 (A.T.Kearny, 2016). It was reported in the same Index, that China remained behind America for the fourth consecutive year, with $299billion FDI inflow, an increase of 29% in 2015. As previously stated, China's GDP is continuing to grow but at a reduced rate (from 10.3% average in the 2000s to a prediction of 6.1%average in the later 2010s). This causes concerns for investors as well as the change from export to a consumption-led economy. Several financiers have said that foreign companies are not as welcome than a few years ago, and are favoured for inquiries for corruption and safety. Despite this FDI will continue in China as a long-term plan to appeal to the potential customers the increasing Chinese middle-class; this is seen through Ford, who decided to keep investing in China to develop smart cars designed for local customers even with the slower growth in the market. China increasingly attracts FDI from firms outside its region as well. The largest FDI deal of 2015 was the Abu Dhabi Investment Authority's acquisition of the Grand Hyatt Hong Kong and Renaissance Habour View hotels property for $1.2 billion.
India, on the other hand, is seen as an increasingly attractive place for FDI; seen by the increase to 9th spot in the FDI Confidence Index released by A.T.Kearny. A lot of this has been credited to the new government, which is dedicated to regulatory improvement as to attract future FDI, as the FDI stock remains at a small 12.4% of GDP. To combat this, the threshold for foreign investment review was increased to $731billion in 2015, plus manufacturing and exporting states eradicated governing barriers to attract FDI and domestic investment. It was also reported in the Index that FDI inflows improved by 70% to reach $59billion in 2015, with the country being the top Greenfield destination in the first six months of 2015 – attracting $7billion more than China and the US combined. China and the US were major investors in India during 2015, shown by the Chinese manufacturer Foxconn announcing an investment of $5billion in facilities in India until 2020 and US company GM, also announcing an investment of $1billion to encourage the country to move towards exporting. Regarding M&A, investors in the IT market have a high interest in India, seen through the US computer system provider company Aricent acquiring the Indian software-design enterprise SmartPlay Technologies for $180million.
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