Attractive Markets in Brazil
Brazil has attracted a growing number of foreign investors, motivated by great business opportunities in the several regions of the country. Since 2008, Brazil earned the investment grade status, according to the evaluation of rating agencies Standard & Poor’s, Moody’s and Fitch. It is the best rating to receive foreign investments, which is issued only to countries that are likely to meet their payment obligations. According to analysts, this rating reflects the continuous development of the Brazilian economic policy.
Data from the Central Bank of Brazil (Bacen) show that the flow of foreign direct investment has been growing over the last years, having reached US$ 45 billion in 2008. International companies target several segments of the Brazilian economy, particularly tourism, oil and gas, biotechnology and electronic components.
IT-BPO (Business process outsourcing) in Brazil
According to Brasscom (Brazilian Association of Information Technology and Communication Companies), Brazil is the world’s eighth largest market for IT outsourcing. In 2008, the IT-BPO sector (information technology outsourcing services) amounted to approximately US$ 59.1 billion. The bulk of the revenue comes from hardware, specialized servers, storage, peripherals and networking equipment, followed by services, BPO and software.
According to AT Kearney, the IT-BPO sector has about 1.7 million employees in Brazil, including software programmers, system analysts and managers - a figure that has been growing 6.5% annually on average since 2005, reflecting the steady expansion of the sector. Professional schools scattered throughout the country graduate about 77,000 new professionals every year.
According to study conducted by IDC (International Data Corporation), the Brazilian market for call centres is still expanding. In 2007, the market for BPO services accounted for R$ 6.1 billion, a 17% increase as compared to the previous year. According to IDC's expectation, by 2012 there will be an average annual growth of 11.7%, with over R$ 10 billion in revenue. These data are part of the study Brazil Call Centre Services in 2008.
Tourism is an important part of economic development both for developing countries and for those with a strong economy. Combining its natural beauty, cultural diversity and hospitality of its people to improvements in tourism infrastructure, Brazil becomes one of the best tourist destinations in the world. Moreover, the large sporting events to be held in Brazil – such as the 2014 FIFA World Cup and the 2016 Olympic Games – offer even more opportunities for foreign investors.
Despite the global slowdown from the second semester of 2008, tourism in Brazil is expanding. Unlike most countries, Brazil suffered no significant impact on the number of foreign tourists, which is around 5 million people per year. This is a small number of tourists which would indicate that there is a huge potential for expansion. France receives 80 million tourists, the US 55 million, the UK 30 million, Mexico 23 million and Ireland 8 million.
In 2009, according to the World Travel & Tourism Council (WTTC), the tourism sector accounted for 6.2% of the Brazilian Gross Domestic Product (GDP), and foreign tourists’ expenditures on Brazilian goods and services contributed to a 6% increase in total Brazilian exports. For the next ten years, a national growth in the sector of around 4.5% per year is predicted, as well as a 2.8% increase in direct jobs and 4.5% in tourists’ expenditures in Brazil.
It is important to remember that the sector also benefits from a large volume of Brazilian tourists, which has been increasing. Recent research revealed that the number of Brazilians who travelled at least once over the last two years increased to 58.8%. This can be explained by the fact that C and D class members can now afford to buy air tickets and tour packages.
In Brazil, there are currently numerous undergraduate programs in tourism and hotel management in both private and public universities. The first program was founded in 1971 by Universidade Anhembi Morumbi, in São Paulo, which for a long time was the only one in the market. Today there are 740 specialized courses, and about 80,000 professionals earn a degree every year.
It is worth recalling that the abundance of labour in Brazil makes it relatively easy to recruit professionals needed for the tourism industry, although they may require training to suit the standards and norms of their employers.
Tourism and real estate markets combined
Worldwide, tourism opens many opportunities for the real estate market. Brazil is among the most attractive countries to foreign investment into real estate, both for tourism and residential purposes. The interest is due to low prices, abundance of labour, economic and political stability and high profitability.
The choice of Brazil to host the 2014 World Cup and 2016 Olympics, as well as the development of governmental projects to stimulate the economy, such as the Growth Acceleration Program (PAC) and "My House, My Life" program, are also great attractions. The U.S. housing crisis and the stagnation of the Spanish market, besides the natural beauty that Brazil offers, also contributed to the increased interest of investors.
One of the most evolved areas in terms of real estate-tourism development is the Northeast region. This region, together with the Southeast, accounts for 63% of all real estate demand in Brazil.
Investments and Financing
Undoubtedly, tourism is one of the most important economic activities in Brazil. Given the importance of the sector and growth prospects for the coming years, the government started to give special attention to tourism and outlined goals for its development, with increased investments.
Due to the 2014 World Cup, the Ministry of Tourism and –the Brazilian Development Bank (BNDES) have opened a credit line worth R$ 1 billion to fund the remodelling, expansion and construction of new hotels. In BNDES, there are three categories of hotels, with specific payment deadlines and interest rates for each. It is part of the actions of the federal government to support the 2014 World Cup.
Oil and gas
Brazil has been at the vanguard of deep-water production and exploration of oil and gas. 2007 was marked by the discovery of oil reserves in the pre-salt layer, which will lead to a fourfold increase in current reserves, reaching a peak of 50 billion barrels.
The Brazilian reserves of oil and natural gas are among the fastest growing in the world. Out of the proven national oil and gas reserves, 92.6% are located in offshore basins and 7.4% in onshore basins. In addition, 88% of proven reserves are located in the Southeast of Brazil, in the Campos, Santos and Espirito Santo Basins.
According to BP Statistical Review of World Energy 2007, Brazil had 14.4 billion BOE (barrel of oil equivalent) of proven oil reserves at the end of 2006, with the second largest reserve in Latin America, following Venezuela. Recent discoveries in the country ranked Brazil as one of the world’s most promising regions in residual oil potential.
Rio de Janeiro, the largest oil-producing state in Brazil, holds the main oil-producing basin in the country, the Campos Basin, where about 80% of proven oil reserves and over 40% of proven natural gas reserves are. The combination of vast and unexplored potential resources of oil and natural gas, and a favourable regulatory structure currently makes Brazil one of the world’s most attractive oil regions. For over ten years, Brazil has been offering a stable regulatory structure focused on the open market, thus enabling a larger share for international companies in the sector. The growth of the oil industry makes Brazil a major destination for receiving foreign investment and represents a great opportunity for both Brazilian and foreign investors. Leader of the Brazilian oil industry, Petrobras has expanded its operations to be among the five largest integrated energy companies in the world by 2020. Its 2009-2013 Business Plan foresees investments of US$ 174.4 billion, to be distributed as shown below:
It is important to remark that there will be a significant increase in the sector in coming years, as demonstrated in a study of the Brazilian Organization of the Oil Industry-ONIP on the projected construction of new platforms in two scenarios of different barrel prices. According to the study, depending on the barrel price, between 52 and 63 new platforms will be put into operation by 2025, thus reflecting the significant growth expected in the coming years.
The opening of the Brazilian Oil Sector in 1997 with the Oil Law attracted private companies that previously could not explore and produce oil in Brazil, which until then had been exclusively performed by Petrobras. After the law was issued, by the end of 1997, 60 companies were already operating in Brazil in oil and natural gas exploration and production, of which 32 were Brazilian and the others were from other countries (USA, UK, Canada, Norway, Italy, Japan, Denmark, Argentina, Portugal, Spain, Netherlands, South Korea and France).
In the period of 2003-2009, US$ 54 billion were invested by other (Brazilian and foreign) companies of the oil and gas exploration and production sector
In Brazil, there are more than 38 companies that explore and distribute oil and gas. Out of this total, approximately 21% of the companies are Brazilian. The main operating companies are:
Perspectives - Pre-Salt Layer
The so-called pre-salt layer is a band that stretches over 800 km between the states of Espirito Santo and Santa Catarina, below the seabed, and includes three sedimentary basins (Espírito Santo, Campos and Santos). The existence of oil in the pre-salt layer was announced by Petrobras in 2006 and confirmed by the company in 2007. In 2008 it started the planning work for crude oil extraction.
In the Santos and Espírito Santo Basins are the main pre-salt reserves:
In the pre-salt region between the Espirito Santo and Santos Basins, Petrobras has drilled 31 wells with a success rate of 87%. In the Santos Basin, 13 wells were drilled with a success rate of 100%.
Out of the pre-salt area already granted, Brazil will produce in the coming years almost the same amount currently produced in the whole country. The total average production in the 1st semester of 2009 was 1.936 million barrels per day. It is important to remark that over the coming years; a significant increase in E&P is expected, thus demanding new technologies and equipment.
Brazil has the largest biodiversity on the planet, a wide cultivable area, leading-edge agro-industrial technology, strong structure for research in farming and evolving biotechnology processes. The country meets all the requirements to be a leader in the biotechnology field.
The Brazilian biotechnology industry is new, despite its prominent position in areas of high technical specialization, such as stem cells, genetic sequencing, genome studies, farming processes and new vaccines. With 20% of the world biodiversity, abundant natural resources and a multiethnic set of races, Brazil also presents as an incomparable place for clinical trials and development of new drugs. Over the last years, it has been considered a strategic theme by federal policymakers, in order to transform Brazil into a key world player in the sector.
In Brazil, research and development has traditionally been lead by universities and research centres. New investment sources (private investors and public financing institutions) and policies for the establishment of regulatory frameworks brought universities and businessmen together, so that technology transfer encourages the emergence of new biotechnology companies.
Results are already acknowledged. According to Fundação Biominas, Brazil has 250 companies in the bioscience sector, which generated revenues of US$ 400 million and profits of US$ 55 million just in 2008. More than 70% of these companies are concentrated in the Southeast region (of which 64% are located in the states of São Paulo and Minas Gerais) and 15% in the South region. Human health (30%) and agriculture (18%) are the main niches of these companies.
Companies by sector (in %)
Distribution of bioscience companies in Brazil according to age
More profitable sectors
Brazilian Industry of Private Equity and Venture Capital
The first venture capital initiatives in Brazil date back to early 1980s. However, due to the unstable economic environment, marked by countless crises, industrial growth remained at a slow pace: between 1981 and 1993, the total committed capital raised in the industry was US$ 741 million.
The great cycle for private equity and venture capital in Brazil began after the first half of the 1990s, after the economic stabilization and the implementation of a new legal framework that brought to Brazil investment structures which are close of those used in the United States ("limited partnerships"): Mutual Funds for Investment in Emerging Companies (FMIEE) and Investment Participation Funds (FIP).
These changes in economic and regulatory environment had important consequences for the equity fund industry: in 1999, the volume of committed capital raised had already reached US$ 3.7 billion (five times the amount captured during the entire period from 1981 to 1993).
In June 2008, according to the last survey on the industry statistics conducted by the Centre for Studies in Private Equity and Venture Capital FGV-EAESP, the amount of committed capital reached a total of US$ 27.1 billion, with a 438% growth in relation to figures in 2000. At the time of the survey, these resources were distributed among over 470 companies with a significant concentration in critical sectors for a competitive country, such as: computers, electronics, biotechnology, communication, energy, financial services and agribusiness.
The geographical distribution of the private equity and venture capital industry in Brazil considering the location of offices is concentrated in the Southeast region, in Rio de Janeiro and São Paulo.
The country offers options for net output, either by going public or by strategic sales, and attractive and diversified investment options, as well as fragmented sectors, which represent opportunities to be consolidated. According to Global Entrepreneurship Monitor, the areas of infrastructure, real estate, IT, biotechnology and agribusiness have been attracting investors. Other prominent sectors include energy and mineral resources, manufacturing and services.
Out of the total committed capital for investment in PE and VC, about 58% is made by foreign investors. Until the first half of 2008, they brought about US$ 1.11 billion into Brazil, which represents 43% of funds raised. Brazil also has a strong base of domestic investors. In 2008, the share of Brazilian pension funds in new funding has reached 50%. In the amount of committed capital, those Brazilian funds accounted for 24% of total, which equates to US$ 6.4 billion.
The private equity and venture capital sector has a great potential for growth and reaffirms its importance for the development of capital markets in Brazil. The constant efforts of the market, government and regulatory agencies to improve the intermediation of financial resources, is focused on providing entrepreneurs with better access to capital and contributing to better employment and income rates in addition to promoting sustainable economic growth.
In 2003, the national environment for investment in VC/PE advanced after the ICVM 391/03 (instruction of the Real Estate Securities Commission which regulates the Private Equity Funds) was issued. Until that moment, there were not any arrangements provided in laws or in the regulations. Added to this were previous reforms in corporate law, confirmation of arbitration as a legitimate settlement of corporate disputes by the Courts and maintenance of basic macroeconomic conditions.
The conversion of Provisional Measure 281 by the National Congress in the Law 11.312/06 brought great benefits to the sector by reducing to zero the income tax for earnings of non-resident investors on regulated local funds of VC / PE. It also established its own tax regime for these funds, determining a rate of 15% for resident investors.
The institutional environment has also been showing significant improvement. There is greater transparency and partnership, as well as deep knowledge of managers and increasing specialization of funds, which are more focused, smaller and specialized in different themes.
The industry of VC/PE has helped to develop governance standards for companies not listed on the stock market and to prove that good corporate governance, besides bringing more transparency and protection for minority shareholders, increases the value of the partnership, facilitates their access to capital, and contributes to its endurance. Entrepreneurial culture
It is important to highlight the strong entrepreneurial culture in Brazil. According to the Global Entrepreneurship Monitor (GEM) report, Brazil is among the seven entrepreneurial countries with more than 200 business incubators, 3,000 companies, more than 15 million entrepreneurs and over 450 new companies established in the country every year. It is important to mention Instituto Gênesis, created in 1997 at PUC in Rio de Janeiro, which offers courses in entrepreneurship and is establishing a research centre for the development of venture capital. There is also Coppe, at Universidade Federal do Rio de Janeiro, which created a huge technological park.
The Brazilian Gross Domestic Product (GDP) is hardly affected by the electronics industry, mainly because of its technological intensity and the influence it has over other economic areas. This sector is essential to increase the quality and technological development of several cutting-edge sectors, such as aerospace, automobile and medical and hospital equipment, in which Brazil stands out globally due to its productivity and efficiency, presence of international players and export volume.
Despite being a great producer of consumer electronic devices, Brazil still depends on imported semiconductors and displays to supply its production lines. Today, the country is among the top five largest world markets of PCs locally manufactured more than 70% of that it is domestic market demands. Brazil is also an important cell phone manufacturer, supplying demands of 70 million cell phone units annually. Large international groups such as Motorola and Nokia have established industrial plants and research and development centres in Brazil.
The increasing domestic demand for computers, cell phones, cars, TV sets and other consumer electronic devices turns the Brazilian semiconductor and display market into one of the most attractive in the world. In 2008, this market amounted to US$ 4 billion, of which US$ 616.8 million corresponded to the sector of Digital Integrated Circuits (Digital IC). In that same year, Brazil imported US$ 1 billion in displays (plasma and LCD).
The Brazilian Government has prioritized the electronic devices industry through its Productive Development Policy, due to its relevance for technological development. In order to increase competitiveness in the sector and attract foreign electronic device companies, the Brazilian government established the Brazilian Program for the Development of the Semiconductor and Display Industry (Padis) that presents incentives to relieve taxes on production and exports. Padis offers incentives to companies that invest at least 5% of their local revenues in research and development, and it offers credit lines through the Brazilian Development Bank, BNDES, to support design houses, front-end (wafer fab) and back-end (assembling & testing) projects.
The eligible companies for the Padis incentives are:
Semiconductor Electronic devices headings 8541 and 8542 of the Mercosur Common Nomenclature (NCM). Chip on board is included.
Displays manufactured as input to electronic equipment with technology based on liquid crystal displays (LCD), photoluminescence (Plasma display panel – PDP), electroluminescence (light-emitting diode – LED, Organic light-emitting diode – OLED or thin film electroluminescent displays –TFEL) or similar technology, with electric field emitting microstructure.
Brazil has 18 design houses (check map below) and successful initiatives in front-end (wafer manufacture) and back-end (assembling and testing) in Porto Alegre and in São Paulo.
The display industry in Brazil was pioneered in the 1970’s, when UNICAMP (University of Campinas), at that time focused on research in solar cells, redirected its activities for the production of the first liquid crystal cells. In the beginning of the 1980’s, research activity was transferred to Renato Archer Information Technology Centre, where the first LCD-TN pilot line was established in Latin America. In 1990, researchers involved with activities on displays trigged the first official demonstration of an electronic voting system, as publicized in several newspapers of that time. In the 1990’s, the Brazilian Network for Information Display and the Ibero-American Network for Information Display were established. The increasing relevance of researches conducted in Brazil resulted in the creation of the Latin American Chapter of the Society for Information Display.
Today, Brazil is recognized as the emergent centre for displays, due to its pioneering status and mainly to recent activities as consequence of the Productive Development Policy, that has been supporting annual events, such as the LatinDisplay, encouraging the training of human resources and financing research, development and industrialization projects in Brazil.