An Economic Analysis of the Role of Foreign Direct Investments in Brazil

Source: Grand Quebec

This analysis is a preview of a research memorandum currently being prepared by COHA’s Research Associate Gustavo de Lima Palhares and one of its Guest Scholars.

The most common manner to execute a foreign investment in Brazil is by means of the so-called Foreign Direct Investments (“FDI”). Although its definition varies in the international framework, according to the Brazilian Central Bank  (“BCB”) (article 2nd of the Ruling # 2997), FDI occurs when all corporate capital participation is acquired or paid-up by corporate shareholders or individual residents abroad, except when they represent shares acquired in the financial or stock market.

Article 1.134 of the Brazilian Civil Code requires that a presidential decree must be issued in order to authorize a foreign company to operate in the country. Therefore, as a strategy to avoid a slower and more bureaucratic process, most investors choose to constitute a new Brazilian company and finance its business by FDI, making this a common transaction.

In accordance with the BCB’s 2011 census (year base 2010), the accumulated amount of international investments (mostly represented by FDI) accounted for 30.8% of Brazil’s GDP, which add up to USD 660.5 billion.  According to the United Nations Conference on Trade and Development (UNCTAD) Brazil was the 10th largest recipient of FDI in 2010, up from the 13th position a decade ago. Also, the BCB estimated an increase of USD 188 billion[1] compared to its last International Position of Investments census (PII).

These numbers show that the amount of the international investments in the country has increased as a result of Brazils growing reputation as a stable and powerful economic force especially during the U.S. subprime crisis in 2008.

In addition, many other reasons can explain the increase of the FDI in the country: i.e. the 2014 World Cup and 2016 Olympics. In order for Brazil to host these events, many mega-infrastructure-projects have been required to be constructed and consequently, foreign capital has been attracted and implemented through FDI.

Another important element to take into consideration is the fact that the U.S. is the primary origin for foreign investments in Brazil, followed by Spain. Thus, relations between both countries are of great significance to Brazil.

The subject at stake is still being analyzed in greater detail by COHA’s Research Team. However, preliminary investigations already indicate the importance  of international investments to Brazil in order for the country’s economy to effectively function, especially when it comes to US investors. As a result, President Dilma Rousseff scheduled her first visit to Washington DC on April 9th 2012, to discuss, among other subjects, how to strengthen the two countries’ business relations. Nevertheless, the research shows once more the shift of capital around the world as U.S. companies start to look for other options outside its homeland in order to survive the present domestic economic crisis.

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[1] A change of the valuation criteria was made from the 2005 census to the 2011 census, which had substantial impact in the number presented.