Foreign Direct Investment in Brazil – Navigating the Labyrinth
Attracting more than US$45 billion in foreign investment in 2008 and US$41 billion in the 12 months to June 2009, Brazil is by far the leading foreign investment destination in Latin America, with new flagship investments announced weekly. This is not a new trend. Brazil has long been one of the world’s most internationalized economies, with investment focused on heavy industry and manufacturing until the 1990s, but spreading to the services sector in recent years.
Whether attracted by new markets or new efficiencies, through privatization, mergers and acquisitions, or new investment; most would agree that Brazil offers a huge advantage with relatively little risk. While there is no federal framework for foreign investment, there are strong fiscal and financial incentives for greenfield investment, including tax breaks, site preparation, and infrastructure development. But there are downsides.
As the World Bank recently noted, there are serious problems with law and order and bureaucracy, with Brazil ranking 125th out of 181 for “ease of doing business.” It takes an average of 18 procedures and 152 days to start a business; an average of 411 days to obtain a building permit, compared to the OECD average of 157.
Furthermore, in “strategic sectors” (media and communications, transportation, aviation and mining), investors face strong ownership restrictions and highly complex regulatory frameworks, with many opting for joint ventures to minimize restrictions. The new national energy strategy is expected to present huge constraints in the oil and gas sector, with suppliers required to commit in advance to local R&D facilities and workers, and exploration partners required to and production for the new subsalt deposits in the Santos Basin enter joint ventures, with discreet terms and conditions.
In other words: Brazil presents enormous challenges and opportunities, and these require careful navigation. Companies entering the market or expanding their operations must intelligently manage regulatory issues and risks, build relationships with key stakeholders, and secure third-party support at the municipal, state, and federal levels.
Such an approach not only manages downsides, but is also crucial to maximizing incentives, as automotive students attest. Volkswagen reportedly secured incentives equivalent to $54,000-$94,000 for direct employment created at its Rio de Janeiro site in 1995; Renault secured an estimated $133,000 per job from the state of Paraná the same year; and Mercedes allegedly obtained incentives of $340,000 in 1999 from the state of Minas Gerais.
These huge variations in incentives can be attributed in part to the choice of location, as less industrialized states in the north are willing to pay more to offset the higher cost of marketing. To be sure, they are also the product of unhealthy competition for investment between states. But it is also unquestionably the case that the system is malleable and those with a clear understanding of the process and can significantly improve the terms of investment.
More and more voices are challenging the consensus: companies such as Shell, which have publicly announced that concerns about political and regulatory risk mean they will not seek to increase operations in Brazil until the outlook improves. In our opinion, this is bearish, but investors should be careful.
For foreign investors entering or increasing their presence in the Brazilian market, especially those operating in strategic sectors, hiring one of the big four, local legal advice and engineering or real estate support is not enough: smart corporate communications and public affairs in the moment. the ground is key.