By Daniel Hunter

The UK is now the second largest investor into Brazil after the US, fuelled by a wave of confidence in the attractiveness of the country as a place to do business, according to Ernst & Young’s first annual Brazilian Attractiveness Survey.

The report combines an analysis of foreign direct investment (FDI) around the world into Brazil since 2007, with a survey of 250 global executives, on their views on the country as a potential place to do business, both now and in the future.

While the US still tops the investment league tables for Brazil, UK investors created 21,040 jobs in the Brazilian economy. This job creation came from 45 investment projects, valued at over US$12b in 2011 — almost 1% shy of the total value of all US projects in the same year and 9% of all total foreign direct investment (FDI) into Brazil.

The total number of UK projects in Brazil last year (45) was up 125% on 2010, propelling the UK from fifth to second in just 12 months, with the US leading at 149 projects. 58% of total FDI projects from the UK were in the Southeast region of Brazil, primarily Sao Paulo.

“A stable economy, growing middle-class, burgeoning domestic market and huge untapped reserves of natural resources, have led UK investors to become increasingly interested in Brazil as an investment destination,” Ernst & Young’s UK Chairman and managing partner Steve Varley, said.

Of those executives surveyed in UK companies (50) more than half said they are considering establishing or developing their business in Brazil in the near future. Nearly 80% believed the country’s attractiveness as an investment destination would improve in the next three years.

A ‘steel’ for the UK!

The business services sector in Brazil attracted the largest number of projects (17 in total - 38% of total UK FDI projects) from the UK in 2011. However, the most lucrative UK investments, in terms of value and job creation, were in the mining and metals industry — with 12,482 jobs created and a total value of US$8.63b for six projects. This was boosted by the US$5b investment by Mir Steel UK into a joint venture with Cosipar, the Brazilian pig iron producer, in 2011.

“Brazil’s broad industrial base means it has remained a key destination for the manufacturing and extractive sectors," Varley said.

"But UK companies are now looking to divest into business services; retail and consumer products; and information, communications and technology (ICT). There’s also a wealth of un-tapped opportunity available for those UK mid-market companies and SMEs willing to take a risk.”

Overwhelming interest from UK mid-markets and SMEs in Brazil

Ed Hudson, head of Brazil Business Services at Ernst & Young in the UK, says that he is seeing an overwhelming interest from mid-market companies and SMEs in Brazil. “I’ve recently been on a tour of the UK meeting with our mid-market and SME clients to talk about the opportunities for international trade,” he remarks.

“They believe that Brazil is the next big investment destination, above other fast-growth markets. I would say that 80% of the businesses I have spoken to are either already looking at the market, or want to explore the potential of doing business in the country. Those companies operating in defence manufacturing, consumer industries and infrastructure are showing a particular interest. The investment appetite across the UK regions is balanced in both services and manufacturing, but it the export focussed manufacturers in the Midlands, Scotland and South West that appear to be particularly active here.”

Brazil’s complicated investment landscape remains a challenge

However, while the will to invest is apparent, there are challenges in operating in Brazil which could have an impact on sustaining its attractiveness to UK investors.

“Brazil’s complex tax regime, strict labour regulations and infrastructure bottlenecks continue to pose obstacles for companies looking to invest in the country,” says Hudson.

UK investors expressed a strong need for improvement in the business environment and operational conditions. When asked how the country could improve its competitiveness in the next year, 26% of UK investors cited improving the tax system, 24% infrastructure and 22% said improving the education system.

Improving education and training in new systems and technologies (42%) also topped the list of reforms that UK investors felt the Brazilian government needed to make, in order to improve innovation.

Strong bilateral trade ties

Meanwhile, the UK has emerged as Brazil’s leading European FDI destination (between 2007 and 2011). Brazil was the only country from Latin America to have invested in the UK over the last five years. The majority of projects were in the finance and business services sector, and were largely attracted to London.

“Brazil and the UK enjoy strong political and economic ties. Regular dialogue between the two country’s governments has really helped to promote mutual investment and bilateral trade,” says Varley. “This is being reinforced further by the Rio 2016 games, of which we are a supporter, and out of which UK business will be able to explore new investment opportunities, particularly around infrastructure.”

Optimism and opportunity prevails — but not without challenges

Hudson concludes, “The overall outlook for Brazil in terms of the prospects for closer ties and collaboration with UK business, leading to greater investment from the UK, looks very positive indeed. Progressing some of these projects is not without its challenges. But if Brazil can start to address and introduce some of the reforms that both UK and global investors say are required, the opportunities are tremendous.”

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