By Carlos Pallordet.
Brazil’s former president, Luiz Inacio Lula da Silva, once commented: “It is time for Brazilian businessmen to abandon their fear of becoming multinational businessmen.” Brazilian companies have taken the cue and increased their global footprint in recent years. Their overseas investments have surged over the last decade as they aspire to become regional and global players. However, the government could do more to help local companies expand globally.
According to data from Brazil’s central bank (BCB), outward foreign direct investment (FDI) flows have increased significantly since the late 1990s. They picked up sharply during the 2000-05 period, more than doubling to USD15 bn from USD7 bn in the 1994-99 period (Chart 1). Despite a moderate reversal in FDI outflows in 2009-10, owing to the impact of the global financial crisis, outward investment rose further in the 2006-11 period, reaching USD56 bn. Improving terms of trade and a strong currency helped fuel Brazilian companies’ ability to expand overseas.
A comparison with the other BRICS countries (Russia, India, China and South Africa) reflects a similar trend. Although Russia, China and India exhibited the largest outward FDI flows among the BRICS countries over the last decade, Brazil’s outward FDI flows also rose, peaking at USD28.2 bn in 2006, the highest among the BRICS for that year (Chart 2).
BCB data shows that most of the overseas investments made by Brazilian companies during the early part of the last decade were in primary industries, especially energy and mining. Recently, Brazilian companies investing abroad have diversified into other sectors. The sectoral pattern of outward FDI flows shows that equity investments in primary industries, as a percentage of total FDI outflows, declined drastically from 68.8% in 2006 to a mere 3.6% in 2011. In contrast, equity investments in the services sector have risen sharply, from 17.4% to 63.0% over the same period, primarily driven by investments in financial services (Chart 3).
Most of Brazil’s FDI outflows consist of the purchase of equity stakes in companies abroad. An equity stake of 10% or more is classified as FDI, while smaller equity contributions are classified as portfolio investment. Loans to subsidiaries abroad also are classified as FDI. Outward FDI flows in equity capital averaged around USD16.4 bn per year between 2006 and 2011. If it were not for the global financial crisis in 2008-09, the average would have been higher.
In recent years, repayments of inter-company loans by Brazilian affiliates abroad to their parent companies have surged, partly offsetting the outflows of equity investment. If it were not for such repayments, Brazil’s outward FDI flows would be significantly higher (Chart 4). Companies are reportedly using these loan repayments as a way to park their cash in Brazil to benefit from the high interest rates there.
Although Brazil has no formal policy to support outward FDI, the Brazilian National Development Bank (BNDES) provides support to select Brazilian companies by offering financing at below-market interest rates. The government also has signed almost 40 double taxation treaties, but it could do more. Unlike China, Brazil does not provide direct subsidies for outward FDI and unlike the US and other advanced economies, it does not offer insurance against political risk.
Currently, a handful of companies account for the lion’s share of Brazilian FDI outflows. These include Vale (mining), Petrobras (oil and gas), Odebrecht (construction), Itau Unibanco (banking), Gerdau (steel) and JBS (food). Outward investment has improved these companies’ ability to compete internationally by providing them with greater access to technology and increased scales of production.
Domestic industry in Brazil is currently struggling to maintain competitiveness, and helping more companies expand overseas could be one of the policy tools used to shift this dynamic. However, the current administration appears to be inwardly focussed. Instead of implementing policies to help more Brazilian companies ‘go global,’ the administration has implemented a range of protectionist measures.
The rise of Brazilian multinationals over the past decade has been impressive, but much more could be achieved if the government recognised the benefits of having a ‘going global’ strategy.