Outward and inward investment in Mexico and Brazil Essay

This paper compares Brazil and Mexico regarding outward and inward investment, labor costs in both countries and public policies; it also discusses dunning theory in regard to Brazil and Mexico, the comparison between the two countries in terms of investments in which case Brazil is viewed in outward investment while Mexico is viewed in terms of inward investment. The paper also highlights about North America free trade agreement and its relation and effects to both Brazil and Mexico. The J curve: A reduction in the value of a currency as compared to different monetary units varying from one country to the other is what is referred to devaluation. In relation to a country’s trade balance and in which case there is a devaluation this is what is referred to as the J curve. A country’s exchange rate may be lower therefore meaning that exports are much cheaper than the imports. If imports are more expensive it means that the local consumers will find it very hard to buy the imported goods due to their costly prices. Also when the exports are cheaper it means that the foreign consumers will enjoy the affordability of the prices and they will buy more of the exported products and services. In the case of a lower exchange rate it means that the prices of exports are very much lower than those of the imports. Exports sell fore very little foreign currency and hence the foreign consumers buy more due to the low prices. This means that the consumption of the exported goods is higher and hence there is an increase in the exports due to their affordability and also their competitive prices. On the contrary the local consumers cannot afford the imported products since their prices are costlier. It also means that the consumption of imported products by the domestic users will go down due to their being unaffordable though eventually the trade balance may get back to what it was initially. The only reason that may ensure that the imports and exports volumes remain as they were before e is the contracts in a case where there had been an agreement to supply certain products and at a certain price. It means that the both volume and also the reduction in the value of the currency will remain at the same level. However devaluation causes the increase in prices of the imported products, therefore increasing the overall expenses of the imports. It makes the total amount used in imports to increase. For a long period of time devaluation can ensure that the local consumer prefers to buy local products since they are more affordable to them thus keeping away from the imported goods which are much more expensive. Also the demand for exported goods and services goes up. Since the foreign consumers find them more affordable and they find their prices very competitive. Foreign consumers may continue buying the imported goods and keep away from their domestic products since the imported products and services are much cheaper and more affordable to them than their own domestically available products and services. Outward and inward Investment Brazil is an outward investor. Its outward investment has increased over the years although t has also been fluctuating. Brazil practiced foreign direct investment widely, even though it kept fluctuating and sometimes rising sharply. Brazil’s outward investment is directed towards other countries. There has also been a reduction in infrastructure investment, but due to its outward investment it has not affected its company’s labor force. Brazil’s service industries do not require very large investments of capital and still it has managed to provide remarkable services to its foreign clients. It also considers outward investments for financial gains more than anything else. This means that great emphasis is laid on financial transactions other than gains in other services. A large share of Brazils output is through exports. The biggest challenge they face in investing outwardly is inadequate information about markets as well as regulations and rules in those countries where they consider investing. They also face competition from products form other countries and international markets as well as imported products available in their market. In this case they are required to establish key markets of their interests and also create an asset base in order to increase potential for outward foreign direct investment. On the other hand Mexico is open to inward investment. A fall in foreign direct investment prompted Mexico to attract very little international and foreign investments. Domestic investment has also gone down; most of its foreign investment is in ventures held jointly with Mexican firms. Mexico is not as wealthy as Brazil due to its poorly performing public sector but it has been seen to multiply its growth in income. It also has a very authoritative system which was expected to produce high quality public policies with very positive effects. Its policy stability is enhanced by political continuity. Public policies Both Brazil and Mexico are said to be the most attractive in Latin America for foreign investment although Brazil is expected to replace Mexico thus becoming the most attractive while Mexico will fall in the second place. Brazil would like to solidify its position as an emerging country. All rounded in policy making. The country would like to come up with a strategy of development and high level of growth. They have put in place strategies of innovation. Enhanced by agricultural and other fields experts. However thy have faced challenges in trying to implement their innovations. Although their funding for the innovations as well as better legislation has enhanced an improvement achieving the innovations. Major challenges include the lack of clear government guidelines, poor coordination of innovation policies by the government. In Brazil domestic policies are not connected to its international agenda. It’s trying very hard to be domestically innovative which is not the case internationally. Labor costs In Brazil an equivalent job, warrants equal pay. Purchasing power parities determine that equal pay occurs when there is an equal purchasing power. This means that the price levels in different countries are eliminated by the currency conversion. In the year 2003 Mexico and Brazil manufacturing workers earned an hourly wage of $2. 48 and $2. 67 respectively. The cost of living in Mexico is much higher than that of Brazil. Mexico is however considered a middle income country. The North America Free Trade Agreement: The North America free trade agreement is not likely to improve the standards of living and employment in Mexico. Infact it is anticipated to hurt the rural employment in Mexico and prompting worker to migrate to the cities as well as to the united states of America. This is due to the fact that the North America free trade agreement focuses on profits other than wages. However its main focus is investments from the United States of America to Mexico. The investment in manufacturing will not address the issue of unemployment in Mexico since the main focus is not on the employees wages but on profits from the investments. This will cause and increase unemployment due to a reduction in the wages. Conclusion: From the above discussion Brazil is an outward investor. Meaning it participates in direct foreign investment. Its investment is directed to other countries, while Mexico is more open to inward investment, this refers to domestic investments and having shares in both retail and wholesale trade. Most of Mexico’s foreign investment is practiced as joint ventures with other Mexican firms. The cost of living in Mexico is much higher than in Brazil where as the labor costs in Mexico are much lower than those of Brazil. Brazil is the most attractive in foreign investment while Mexico is considered to be a middle income country. The North America free trade agreement favors Brazil since it is more economically liberated than Mexico. Since Mexico is not a rich country, though, it is an upwardly developing income country. Its political system is stable and can manage to come up with agreements to solve its social problems. The reason behind Mexico not being very wealthy or why it is not as economically stable as Brazil, is due to it’s under performing public sector. The political system is authoritarian and is favorable for a good economic growth. It has the approval of North America free trade agreement and has no trade barriers. On the other hand Brazil is seen as an emerging country. More developed than Mexico in terms of strategy of development and innovation. Brazil is all rounded in laying down strategies of development and modes of innovation and it has also been seen to implement its innovations and also it is supported by its government is implementing its innovation strategies. The challenges faced by Mexico is the lack of clear guidelines from its government on development and also a public sector which does not perform very well as well as having experienced a very slow economic growth. As for Brazil the major challenge is lack of information or inadequate information about markets and also the rules and regulations of the foreign countries where they intend to do foreign investment which has to be followed. Another major challenge is the competition faced from other products from other countries and also from the international markets. References: George Grayson (1993) The North American Free Trade Agreement, Foreign Policy Association press,U. S Global alliance (2007) brazil wage gap, retrieved on 11th november, 2008, available at http://74. 125. 113. 104/search? q=cache:UBYFdiNhlXYJ:www. jussemper. org/Resources/Labour%2520Resources/WGC/Resources/WagegapsBra2005. pdf+wage+rate+mexico+and+brazil&hl=en&ct=clnk&cd=1&gl=ke John Sloan (1994) Public Policy in Latin America: A Comparative Survey, University of Pittsburgh Press, Pittsburgh Robert Gwynne (2005) industrialization and urbanization in Latin America, Routledge press, London Paul Krugman and Maurice Obstfeld (1997) International Economics: Theory and Policy, Addison Wesley publishers, New York. Peter Dickens (1992) Global Shift: The Internationalization of Economic Activity, McGraw Hill publishers, New York.