- services displaced manufacturing as country’s most favoured sector, receiving 57% of 1997 inflow -

For the second consecutive year, Brazil is the main net recipient of foreign direct investment (FDI) in Latin America, accounting for 30% of total flows to the region. The country recovered first place in investors’ preferences in 1997, overtaking Mexico, reports the 1998 edition of ECLAC’s Foreign Investment in Latin America and the Caribbean.

FDI flows to Brazil grew from US$3,072 million in 1994 to more than US$19,650 million in 1997. This increase coincided with the Plan Real programme of stabilization, opening-up and liberalization carried out by the Brazilian government. This year, inflows in excess of US$24,000 million are expected.

BRAZIL: INFLOWS OF FOREIGN DIRECT INVESTMENT, 1980-1998*
(millions of dollars)

Source: ECLAC, data base of the Unit on Investment and Corporate Strategies, Division of Production, Productivity and Management, based on balance of payments information of the IMF and the FIRCE of the Brazilian Central Bank.

*/ estimates for 1998 based on official information to end-June.

This spectacular growth is due to two separate but related phenomena, says the ECLAC study: the response to the new economic context by transnational companies with a longstanding presence in Brazil and the reaction of foreign investors to the opportunities offered by deregulation.

In 1995, 55% of FDI was concentrated in manufacturing, where the transnationals dominated technologically more sophisticated sectors. Until mid-decade, at a time of great macroeconomic instability in the country, these companies defended their market share by rationalizing their local operations and investing little, leading to greater technological backwardness. But, as a result of the successful stabilization programme and the gradual opening-up and liberalization of the economy, transnational companies already present in Brazil re-evaluated their corporate strategies and relationships with their overall networks of production. As a result, while some withdrew, others restructured, carrying out important investments to defend their market share, in line with two very different strategies:

• Restructuring and modernizing installations, or building modern new plants, with Mercosur in mind, as in the case of automobile assemblers and a number of other industries.

• Aggressively acquiring the assets of local firms in order to strengthen and extend their own presence in the Brazilian market, while concentrating efforts on the company’s main activity. This was done principally in the food and chemicals industries.

With regard to the second phenomenon, the massive arrival of new companies was especially significant in the service sector, where FDI had often faced serious restrictions. As a result, services displaced manufacturing as the main destination of FDI, accounting for 57% of such investment by late 1997. The main strategy adopted by these new investors was the purchase of existing assets by two principal means:

• buying privatised state companies, such as those in electricity and telecommunications, where foreign purchasers dominated;

• acquiring local companies adversely affected by the newly competitive conditions of the Brazilian economy, which were especially intensely felt in the financial sector.

Two new aspects of Brazil’s recent experience are particularly noteworthy: the significant proportion of the FDI flows that have gone towards transfers of property and the considerable concentration of such investment in non-tradeable activities. The effects of all this on the Brazilian economy are uncertain and have triggered fierce debate. On the one hand, the massive arrival of foreign investors through the purchase of existing assets could have positive implications for the modernization and improvement of services, and hence for the country’s systemic competitiveness. Similarly, new patterns of competition could stimulate the manufacturing sector into integrating the country more actively into its international production networks. Finally, the large dimensions of the internal market (made even greater by Mercosur), together with better economic prospects, should ensure continuing interest in the country by international investors.

On the other hand, the large FDI inflows into the Brazilian economy are more likely to turn out to be temporary rather than a long-term trend, above all if it is taken into account that the privatization programme will come to an end in the next few years. In addition, the preference for services could exacerbate the anti-export bias of industrialization in Brazil, creating greater balance-of-payments difficulties in the future.

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