Foreign direct investment (FDI) to Brazil has risen sharply since mid-2010. Some analysts see the increase as evidence that portfolio investment is entering the country disguised as FDI to skirt financial transaction taxes. However, a closer look at the data suggests these concerns may be overblown.
Inflows of FDI averaged around USD16 bn per quarter in 2011 and the first quarter of 2012, almost double the average level of inflows per quarter seen in the previous four years. Some analysts argue that the timing of the FDI increase is suspicious as it comes on the heels of a rise in the financial transactions tax on certain types of portfolio investment. In October 2010, the government hiked the tax on foreign inflows into fixed income securities to 6% in an effort to limit the strength of the local currency.
If FDI were masking foreign portfolio investment inflows, then we would expect the data to show a fall in portfolio investment mirroring the rise in FDI. Yet, this is not the case, at least not in the first half of 2011, when portfolio investment inflows rose compared to their levels in previous years.
Given the available data, it is impossible to determine with certainty how much portfolio investment is entering the country disguised as FDI, but other factors suggest it is a relatively small amount.
The Institute of Applied Economic Research (IPEA), a government-led research organisation in Brazil, compared FDI in the first two quarters of 2011 against the same period of the previous year and found that most of the inflows – roughly two-thirds of the total, or USD20 bn – were the result of large-scale transactions of over USD100 m each, which suggests they were long-term investment, rather than disguised portfolio investment.
Also, it is worth noting that one large transaction can dramatically influence the data. For example, SINOPEC, China’s largest petrochemical company, acquired a 40% stake in Repsol Brazil in the amount of USD7 bn, which helps explain the extraordinary increase in FDI registered in December 2010. Consequently, the timing of the government’s increase in the financial transactions tax in October 2010 may have been more coincidental than causal in terms of the jump in FDI.