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Brazil FDI

Page history last edited by Brian D Butler 1 year, 5 months ago

 

Brazil FDI

Brazil reached last year a record US$ 34.6 billion (almost double the US$ 18.7 billion of 2006) in Foreign Direct Investment (FDI), reported the Brazilian Central Bank. FDI this year is expected to topple US$ 28 billion with an estimated record 4.5 billion in January.

 

Another area which in 2007 attracted record foreign capital was fixed rate bonds and the stock exchange, totaling US$ 39.7 billion compared to US$ 14.68 billion in 2006, with an all time record of US$ 8.7 billion last December, said Altamir Lopes, head of the Economics Department of the Central Bank.

 

but, how will brazil be affected by a recession in the US? how would a USA recession effect Latin America.    how much corellation is there between FDI in Brazil and foreign economic activitiy?

 

Table of Contents:


 

 

 

 

Brazil surprises with surge in foreign cash

For much of this decade, foreign direct investment in Brazil has paled beside that of other gigantic emerging markets, China, India and Russia. But in the past few months Brazil has begun to do better // - Jan 17 2008 21:43

 

 

 

 

FDI rules in Brazil

 

Foreign Direct Investment Rules in Brazil:  FDI

 

Foreign capital may freely enter Brazil and is treated like local capital. Legally registered companies, foreign or domestic, enjoy the same rights and privileges, and they compete on an equal footing when bidding on contracts or seeking government financing. Expatriating profits out of the country is not an issue in Brazil.

 

The present Company Law 6404 was passed in 1976, the same year the Securities Commission (Comissão de Valores Mobiliários.CVM) was created. Both were designed to protect minority shareholders, strengthen stock markets and facilitate the formation of conglomerates. The law introduced new corporate concepts to Brazil, including those of a controlling shareholder and the mandatory distribution of dividends.

 

According to the central bank, FDI flows climbed to US$21.52bn during 2005, up from US$20.27bn in 2004 and just US$12.90bn in 2003. The central bank reports that the largest sources of FDI in 2005 were the United States (US$4.64bn), the Netherlands (US$3.22bn) and Mexico (US$1.66bn). The sectors receiving the highest inflows during 2005 were services (US$2.98bn), retail (US$2.10bn), and food and beverages (US$2.07bn).

 

 

Incentives to Invest in Brazil

 

Incentives:

FDI in Brazil is normally accompanied by multiple incentives offered by the state and local governments. For example, Brazil is famous for its “guerra fiscal” (or “tax reduction wars”) in which the states compete with each other to offer the largest tax-incentives to foreign companies. If you are willing to invest in a technology sector in particular, you can expect the Brazilian government to offer very appealing financial incentives.

 

As Brazil’s economy has boomed and the government has proved its fiscal responsibility, several new incentive programs targeting special sectors have recently been created. Law 11,196, published on November 22nd 2005, gives special tax breaks and other incentives to export firms and to investments geared to technology. Research-and-development projects and information technology also qualify for some direct assistance and tax relief

 

It is typical for investments in technology infrastructure to be accompanied by a co-investment by one of these development banks. During our investment research phase, we will be in contact with a number of development agencies to investigate the possibility of investment insurance and co-investment.

 

 

 

 

 

Establishing a local company in Brazil:

 

Foreign firms may engage in business in Brazil by acquiring an existing company or by forming a local subsidiary. Many foreign firms that choose the latter route prefer to establish a limited-liability company, or limitada. This form is easy to set up, has fewer formalities and less public disclosure requirements than the other options. Other types of organization are less suited to foreign investment. The limitada is formed through a simpler procedure and involves the same taxes, but expenses are generally lower since the limitada does not require external auditing. Moreover, little disclosure is required; limitadas rarely reveal basic financial information, such as operating expenses or year-end profits. A limitada need not be registered on a stock exchange, and no minimum amount of capital must be deposited in a bank. A limitada can be established in about two weeks.

 

 

Computer Industry in Brazil

 

Dell Computer - experience in Brazil

1. Why does Dell Want to invest in Brazil? Why does Dell consider a number of different states in Brazil?

 

Internal reasons – wants to invest in international markets to maintain rate of growth

 

Brazil specific reasons – does not yet have any manufacturing facility in S. America. Based on the model of selling directly from factory to consumer, it was important for Dell to have a factory near to the consumers. Brazil was a good choice because of the size of their market, the expected growth in consumer demand for personal computers, and for the market access that it offered to other Mercosul countries (duty free access to Argentina, Uruguay, Paraguay, and also Bolivia and Chile…for all products with more than 60% local content). Sales of PCs were growing faster in Latin America than anywhere else in the world. But imports of non-Mercosul products into Brazil were very high tariff.

 

It considers a number of different states in Brazil because of the various different incentive packages that the states could offer. Ideally, the factory would be in Sao Paulo because that’s where most of the consumers would be (and they had the highest number of well educated people and the best infrastructure). But exterior states were offering incentives to attract investment away from Sao Paulo, such as a reduced ICMS (sales tax), low interest loans and in some cases, free land to build infrastructure.

 

 

 

2. What characteristics does Dell seek in a state where it will locate its investment?

 

High levels of education, and sufficient numbers of qualified people, adequate supply of electrical energy, and high quality of telecommunications infrastructure. Also, they were looking for other special incentives that the states could offer.

 

 

3. Why does Dell select Rio Grande do Sul? What are some of the pros/cons of other states?

 

Not only did RS offer Dell the best financial incentives (75% reduction in sales and circulation tax (ICMS) for 12 years; R$20 million loan with 5 year grace period, and 10 years to pay back…but they also had investment promotion agency that Dell felt most comfortable with. The RS investment promotion agency was fully privatized, and acted similarly to the one they liked in Ireland. They liked that the investment promotion agency took their specific needs into consideration, and treated them differently than other companies (automotive for example). The also really liked the city of Porto Alegre and the type of well educated people they found there.

 

The next best financial offer came from Minas Gerais (70% reduction in ICMS for 10 years, R$20 million loan with 4 year grace period, and a four year repayment, and they also offered them free land for the plant site). The Dell executives visited MG many times, and almost selected them as the final site, but they were turned off by the perceived “rust belt” image of MG. They felt as if the investment promotion agency were too used to dealing with Automotive and mining companies, and were not tuned into the specific needs of the high tech companies like Dell.

 

Rio de Janeiro might have been a good site for the plant, but the first meeting with the investment promotion agency went badly, and the agency low-balled the first offer (expecting the Dell agency to come back with a high offer). The Dell executives were not into playing this game, and move on to other states.

 

Parana was too general in their presentation, and the Dell executives left the meeting with the impression that the same presentation was given to every company from every industry. They did not tailor the presentation to the specific industry, nor show much knowledge of the computer business.

 

Sao Paulo state had two cities the final consideration (Campinas, and Sao Jose dos Campos), but the again, the Dell executives were turned off by the lack of attention that they were given by the investment –promotion agency. Sao Paolo also was the only state that had a policy not to give any incentives (they didn’t need to). Sao Paulo was the main investment city in Brazil anyways. They have the largest pool of well educated people and it was the main market for PCs in South America.

 

 

 

4. After Governor Dutta threatens to rescind the agreement with the previous governor, what are Dell’s options? If you were Keith Maxwell, which option would you recommend, and why?

 

Before looking to move to another state, I would engage the new Governor in private one-on-one discussions about the situation. No sense leaving until all of the negotiations are complete. First of all, we have a signed contract with the government, which I believe he would have difficulty rescinding. Second of all, if we were to leave, it would look bad (more egg on his face, like the Ford deal) and the state would lose not only jobs but also our investment in the education facilities (local universities). Also, I believe that the structuralist discussion that we had with the lawyer would be successful in dealing with the PT party. It’s worth a try.

 

But if the governor is still determined to go through with the rescinding of the offer, I would consider either moving to Minas Gerais, or to Sao Paulo. MG is probably the best option if they still have the offer on the table. It would be best to make sure about that before committing to leaving RS, or you might end up looking really foolish.

 

Although we know that manufacturing costs in RS are lower than SP (by enough to compensate for the additional trucking) even without the incentives, I would not keep my factory in the state if the governor rescinds the offer. It would just prove that the state was not committed to keeping you there and that they didn’t value your inputs. Also, it makes me think that states away from Sao Paulo carry with them some additional political risk. Sao Paulo is safer because it is more of an international city, and more accustomed to dealing with foreigners.

 

 

 

 

Lessons learned

 

Dell should have paid more attention to the local elections and not been caught so off guard by the new governors tough stance on the incentive issue. They should have had a back up plan in place, and they should have discussed the issue the Dutra during his candidacy. In a country with such widely different political parties, they needed to factor in the political risk of their agreements with the existing governor. Also, they needed a better Brazilian lawyer to defend their contract. I believe that the rule of law and the honoring of contracts should have preceded any governor’s preferences (or political ambitions). With a better contract in hand, Dell should have felt more secure.

 

 

 

 

 

 

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