Brazil – an Investment Success Story
A stable economy, a burgeoning domestic market and huge untapped reserves of natural resources have led foreign investors to become increasingly interested in Brazil as an investment destination although there are challenges to sustaining this attractiveness according to Ernst & Young’s first annual Brazilian Attractiveness Survey.
The survey combines an analysis of foreign direct investment (FDI) into Brazil since 2007 with a survey of 250 global executives on their views on Brazil as a potential place to do business both now and in the future.
Despite an unsettled world economic outlook, Brazil saw a record number of FDI projects in 2011, establishing it as the second most popular global destination in terms of FDI value and fifth in terms of number of projects. The value and number of inward investment projects to Brazil has tripled since 2007 from US$19b to US$63b and from 165 in 2007 to 507 last year respectively.
Brazil was rated as easily the most attractive location for future foreign direct investment destination in Latin America by 78% of survey respondents. In addition, 83% of respondents believed that Brazil’s attractiveness as an investment location will improve over the next three years in comparison to just 38% who believed that Europe’s attractiveness will improve over the same period.
Jim Turley, Chairman and CEO of Ernst & Young, comments, “Brazil has transformed itself from a country with bleak economic prospects in the 1970s, to a formidable force in the global economy. Part of that success story has been Brazil’s ability to position itself as an increasingly attractive place to do business. The future has its challenges but the hosting of the soccer World Cup in 2014 and the Rio 2016 Games will contribute to infrastructure development and act as a catalyst to attract significant additional investment into the country.”
Where has the investment into Brazil come from?
Last year the US continued to be the largest investor in Brazil in terms of projects (up 43% to 149), value (US$12.4b) and jobs created (35,195). This is largely explained by the geographic proximity and the development of trade agreements between the two countries. US investors have historically primarily targeted the ICT, manufacturing, business services and financial services sectors in Brazil.
The UK jumped from being the fifth largest investor in Brazil in 2010 to second in 2011 by project numbers with 45 and the total value of UK investment was nearly on a par with the US at US$ 12.2b. Although UK companies have been present in Brazil for many years, they are now looking to expand their investment across a wider array of sectors including business services, manufacturing, mining and metals and ICT.
Spain was the third largest investor into Brazil with Germany fourth in terms of projects numbers. Although the value of German investments remains low at US$3.0b this is likely to increase in the near future given the involvement German corporates have with the infrastructure upgrades for the World Cup and the Rio 2016 Games. Both Germany and Japan, which ranks fifth and increased its FDI projects by 57% in 2011, are also beginning to invest heavily in the energy sector.
China has emerged as the fifth largest investor in Brazil in terms of value of FDI with investment increasing six-fold since 2010 and a 70% increase in project numbers. It also ranks fifth with the number of jobs created at 9,049. The recent boom in the Brazilian consumer market has also led to an increase in investments by small and medium-sized Chinese companies in the country’s manufacturing sector. In the future Chinese investment is also expected to be directed at the areas of technology, logistics and infrastructure. The overall momentum across all sectors is also expected to increase as a result of a joint communiqué signed in 2011 to promote cooperation in trade and investment.
As Jorge Menegassi, CEO, South America and Brazil at Ernst & Young explains, “Brazil is an attractive investment destination for Chinese companies thanks to its vast natural resources in oil, gas and minerals.”
Building a diverse economy
ICT and manufacturing were the top two sectors for FDI in Brazil in 2011 attracting 105 and 94 FDI projects respectively – followed by business services and retail and consumer products. The latter was driven by the growing consumption power of Brazil’s ever increasing middle class. Buoyant consumer demand and easy availability of credit has also led to investment in the automotive sector creating the biggest market in Latin America and the fourth largest in the world.
Despite the impressive number of projects in other sectors in 2011, the foundation of Brazil’s growth over the past decade has been on the back of its rich commodity base. The oil and gas sector still presents huge potential with the recent discoveries of pre-salt reserves which is expected to boost job creation and spur R&D investment in oil and gas exploration and production as well as having a positive spill over effects on other industries such as manufacturing.
But the country must now also look for other areas for development to further diversify and to shield itself from the huge volatility inherent in global commodities markets. Investment in industrial activity, including infrastructure, along with a strong culture of entrepreneurship, will help to drive a shift towards manufactured goods and away from commodities.
Menegassi comments, “The abundance of natural resources has on one hand been an advantage for Brazil and has enabled the economy to grow, however it has also created a challenge for Brazil by drawing FDI away from value added sectors and innovation based services.”
Brazil’s steady growth over the past decade has amplified the requirement for a qualified and productive workforce. There is now a shortage of skilled labor in Brazil which has meant that there is now a higher labor cost in the country compared to other rapid-growth markets such as Russia, China and Mexico. Nearly a third of our survey respondents, when asked how Brazil could improve its attractiveness, highlighted the development of education and skills. On the regulatory side they also expressed concerns about rigid Brazilian labor regulations.
Other improvements that would enhance the attractiveness of Brazil include investment in major infrastructure and urban projects which was cited by 29% of respondents, closely followed by incentives to lower corruption (24%), an improvement in urban security (23%) and a more transparent tax system (17%). Brazil’s high corporate tax rate of 34% was also cited as unattractive especially when compared to rates in other Latin American countries as Chile (18.5%) and Mexico (30%).
Despite the positive long-term outlook for Brazil, the FDI numbers for the first quarter of 2012 were down significantly with only US$5b of inflows in Q1 2012, compared to the US$23b invested in Q1 2011. Similarly project numbers were down by 19% from Q1 2011.
Menegassi concludes, “The long-term historic investment trend is an upward one and Brazil and its people should be very proud of the economic advances that have been made in the past two decades. The decline in FDI value in the first half of this year may well be a temporary blip but Brazil must listen to the concerns of global investors and entrepreneurs who feel the authorities could do more to encourage innovation by addressing concerns around the high tax burden and the challenges of starting a new business. Similarly we must do all we can to promote alternate regional investment destinations to Rio de Janeiro and Sao Paulo.”