ARGENTINA: The Brazilian Investment Invasion. Brazilian capital is edging Europe out of pole position in foreign direct investment (FDI) within Argentina.
Heavily invested in the oil and cement industries, as well as mining and steel, textiles, cosmetics, banks, food and beverages, Brazilian capital is edging Europe out of pole position in foreign direct investment (FDI) within Argentina.
Its expansion is part of a general upward trend in foreign investment originating from developing countries. Within the global context, the surge of private investment from Brazil into Argentina, its largest neighbour, is seen by experts as one of the most dynamic regional examples of the phenomenon.
"Brazil is the source of between 35 and 40 percent of FDI in Argentina," said Fernando Porta, one of the authors of a study titled "La internacionalización de las empresas brasileñas en Argentina" (Internationalisation of Brazilian Companies in Argentina), published by the Buenos Aires office of the Economic Commission for Latin America and the Caribbean (ECLAC).
Argentina has been receiving an average of four billion dollars a year in FDI since 2003, nearly 40 percent of which comes from Brazil. Of that Brazilian capital, 55 percent went into mergers and acquisitions, 25 percent into expansion of existing investment and the remaining 20 percent into installing new capacity.
Deloitte, a consulting firm, estimates that Brazilian companies invested approximately eight billion dollars in Argentina between 2002 and 2007.
Official figures from Brasilia indicate that 2.9 percent of Brazilian capital invested abroad between 2001 and 2009 went to Argentina, but Porta said that if tax havens are excluded, the proportion that flows into Argentina rises to 10 percent, making it "a significant market," he explained to IPS.
Luis Alfonso Lima told IPS that Argentina has become the main destination for Brazilian investment in Latin America "as part of a global trend of intra-regional investment between similar countries, such as those of South America or emerging countries in Asia."
Lima, head of the Brazilian Society for the Study of Transnational Corporations and Economic Globalisation (SOBEET), said that cultural factors are decisive. "It’s easier for Brazilian companies to establish themselves in Latin America than in Asia, where communications would be difficult."
Porta concurred that the internationalisation of companies in developing countries "tends to begin in neighbouring countries which share similar patterns of consumption and production processes." Favourable investment conditions in the recipient countries also contribute.
After the recession in Argentina in the late 1990s, many heavily indebted companies were put up for sale.
Petrobras, Brazil’s state-run oil giant, bought the private Argentine firm Pecom from the Pérez Companc family in 2002, which became the second largest oil company in Argentina after Repsol-YPF, formerly the state-owned Yacimientos Petrolíferos Fiscales (YPF).
The Camargo Correa group bought the Argentine cement firm Loma Negra in 2005, which then doubled its production capacity.
Beer and soft drinks company AmBev took over the Quilmes brewery, sponsor of the Argentine national football team, and is currently the market leader for beverages in the Southern Cone region of South America.
Brazilian slaughterhouse and meat packers Friboi also bought Swift Armour, a large beef processing company. Belgo Mineira of Brazil purchased the private Argentine steel mill Acindar, "a fundamental step towards strategic control of the region’s steel sector," according to the ECLAC study.
Other companies simply established themselves, like cosmetic vendors Natura, the Itaú Bank and the Santana textile firm, which will manufacture denim for jeans in the northeastern Argentine province of Chaco.
Apart from the big transactions, a number of smaller operations are not recorded in the statistics but contribute to the trend, Porta said.
According to the study, Argentine companies adopted a "defensive" strategy in the financial crisis of the late 1990s, while Brazilian firms opted for "an aggressive internationalisation policy on a regional scale," in order to spread domestic market risks and acquire experience of investment abroad in countries they knew well.
Brazil and Argentina are the largest members of the Mercosur (Southern Common Market) trade bloc, to which Paraguay and Uruguay also belong and which Venezuela is in the process of joining. "Capital movement is facilitated in the context of the trade bloc, but less so than might be supposed" in the case of Argentina and Brazil, said Porta.
"The Brazilian government has a proactive policy of assisting its companies to branch out internationally by providing credit, because this boosts its foreign trade prospects," he said, adding that the country thereby gains control of oil and gas reserves as well as sources of other commodities.
The ECLAC study indicates that among the main motives for internationalising Brazilian companies are their need to produce on a larger scale, the opportunity to enter a relatively protected market like Argentina’s, and access to plenty of good quality raw materials.
Argentina’s early 2002 currency devaluation, after more than 10 years of a fixed exchange rate at one peso to the dollar, is another advantage that has attracted and accelerated investment.
According to Lima, Argentina "is a good market, with a relatively highly paid population and empty market sectors to be exploited, which are already exploited in Brazil."
One example is the Itaú Bank, which is expanding more rapidly in Argentina than in Brazil, he said.
So just as in the 1990s, capital flowed into Argentina from the United States, Spain, Italy, France and other European countries, attracted by the sell-off of state companies, since 2004 it has been the Brazilians who have come seeking business opportunities.
Concerns arising from the conflict between the Argentine government and farmers, who have blocked roads and been on strike intermittently for three months, might slow the flow of capital, although experts think this will only be transitory.
"Brazilians are willing to operate more boldly than Europeans in less stable markets, and that gives them an advantage," Porta said.
Lima, for his part, said that the uncertainty created by the farm conflict could slow down investment growth to below its potential. "FDI growth depends on a country’s stability and predictability," he said. "Long term planning horizons of, say, 20 years, aren’t possible yet in Argentina."
However, "it’s a question of time: Brazilian investment abroad will increase, and the share coming to Argentina will, sooner or later, also expand," he predicted.
* With additional reporting from Mario Osava in Brazil. (END/2008)
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