Resources, growing consumer base make Brazil a target for foreign investment

Global executives can’t keep their eyes off Brazil. The country’s potential for growth – fuelled by a stable economy, growing middle class and untapped natural resources – makes it the most popular South American country for foreign investment.

Since 2007, foreign direct investment (FDI) in Brazil has more than tripled, from $19 billion in projects to $63 billion in 2011, according to a report by Ernst & Young. China is the most popular country globally for FDI, with more than $100 billion in projects in 2011.

Brazil was rated the continent’s most popular location for FDI by 78% of global executives. Five of every six survey respondents (83%) believe Brazil’s attractiveness as an investment location will improve over the next three years. By comparison, just 38% feel Europe’s investment attractiveness will improve in the same period.

“Brazil has transformed itself from a country with bleak economic prospects in the 1970s to a formidable force in the global economy,” Jim Turley, chairman and CEO of Ernst & Young, said in a news release. “Part of that success story has been Brazil’s ability to position itself as an increasingly attractive place to do business.”

Evidence of that transformation can be found in major global sporting events scheduled in the next four years. Brazil is the site of the 2014 World Cup and the 2016 Olympics, and infrastructure projects should give Rio de Janeiro, the first South American Olympic host, and other cities a boost.

US companies continue to be the largest investor in Brazil, devoting $12.4 billion to projects in 2011. The UK, the fifth-biggest investor in Brazil in 2010, moved up to No. 2 in 2011 at $12.2 billion. Numbers for the first quarter of 2012 show a decline compared with the first quarter of 2011, but that’s likely tied to companies in other regions pulling back because of economic uncertainty at home.

One US company directing more of its focus to Brazil is Osborn International, which makes wire brushes and other buffers and finishing products used on equipment such as street sweepers.

“What we see in Brazil is a country that is making the investment in infrastructure today – roads, shipping terminals, energy pipelines – that will lead to solid economic growth in the near future, which will be wide-spread among the population,” Osborn CFO Jeff Schad said.

One reason for Brazil’s growth: a huge increase in consumers. From 2003 to 2011, according to the report, nearly 40 million Brazilians joined the middle class, classified in the report as having income between $750 and $3,229 per month.

These changes helped lead to a 91.9% increase in number of FDI projects in the retail and consumer products sector from 2010 to 2011. Across all sectors, the number of FDI projects grew 39% in that span.
More investment equals higher wages, which perpetuates business success.

“This will give rise to increased wages, increased disposable income and the demand for consumer hard goods – housing, appliances, cars, et cetera – which will drive the manufacturing sector to expand,” Schad wrote.

Research by the McKinsey Global Institute on urban growth and the expansion of consumer classes found that Brazil is home to 30 of the 440 emerging growth powerhouses.

Although FDI in Brazil has grown across all sectors, including information and communication technology as well as manufacturing, the report says the foundation of Brazil’s growth is the oil and gas sector.

“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,” Jorge Menegassi, CEO of South America and Brazil at Ernst & Young, said in the report.

This growth comes despite concerns from survey respondents about Brazil’s 34% corporate tax rate and a potential skills shortage. Nearly 30% of respondents cited development of skills and education as a way Brazil could improve its investment attractiveness. Twenty-nine per cent cited infrastructure needs as a way to improve, followed next by incentives to lower corruption (24%) and improvement in urban security (23%).

The rest of the world’s struggle is also Brazil’s gain. With global economic sentiment down, especially in Europe, businesses look elsewhere for growth. In the case of US firms in particular, Brazil is proving to be a big winner.

—Neil Amato (namato@aicpa.org) is a CGMA Magazine senior editor.