Brazil attracts more FDI, but advanced industries lag behind

Since 2022, annual average foreign direct investment (FDI) in Brazil has grown 67% compared with the 2015–2019 period, based on announced greenfield projects, that is, investments that create new productive capacity in the country. In the energy sector, this growth was even sharper: up 158.78% in the same period, reaching an annual average of $17 billion, or about 46.5% of total FDI. In advanced industries, on the other hand, there was a 31.1% drop, with an average of $2.9 billion per year.

Nelson Ferreira, senior partner at McKinsey, said Brazil will likely continue to attract commodity-linked investment. “In areas like agriculture and renewable energy, the country is highly competitive. There’s interest in rare earth elements and metals like copper and gold. Foreigners are investing in those. And everything that depends on renewable energy, like data centers,” he said.

Still, he sees challenges in boosting foreign capital into industrial sectors. “Macroeconomic conditions such as interest rates make returns difficult, especially in advanced industries. Brazil’s competitiveness in manufacturing has been deteriorating. The country would need a new cycle of investment in industrial parks and artificial intelligence to regain its competitiveness in these more strategic sectors,” Mr. Ferreira said.

Barriers for advanced industries

There are several obstacles hindering the development of advanced industries, said Rafael Cagnin, executive director of the Institute for Industrial Development Studies (IEDI). “The main issue is production cost, which stems in large part from tax complexities, but not only that. Other factors include capital costs and exchange rate volatility, which make it harder to calculate the return on foreign investment,” Cagnin said.

Logistics bottlenecks are another challenge. “Especially in these strategic sectors, domestic market scale won’t be enough to meet demand, and the country faces major infrastructure gaps, which reduces competitiveness. Also, it would help to have a clearer strategy for international integration. Multilateralism faces setbacks, but bilateral agreements must move forward,” he said.

Mr. Cagnin also pointed to other concerns in this context, such as the need to modernize regulatory frameworks and the presence of organized crime in regulated economic activities, both of which deter foreign investors.

Workforce training is another area that needs improvement to enable the development of advanced industries, said Roberto de Medeiros, head of the National Industrial Training Service (SENAI). He also argued that attracting international investment will require progress in Brazilian technology. “There needs to be a minimum level of technological competence to succeed in drawing investment,” he said.

Due to these challenges, experts believe Brazil is missing an opportunity to use its natural resources more effectively to also develop domestic industry in globally strategic sectors.

Venilton Tadini, CEO of the Brazilian Association of Infrastructure and Basic Industries (ABDIB), recalled that the country has already missed out on past investment waves. “During the telecom privatization, Brazil failed to build a local industry around it. The same happened with renewable energy generation, which attracted a high volume of investment in recent years,” he said.

“Unfortunately, there was no proper coordination between investments in the sector and the local industry. In solar power, all panels are imported. It should have generated a domestic effect. In wind power, some companies even left the country,” Tadini noted.

Today, ABDIB is setting up a working group focused on data centers to help local companies seize opportunities in new projects. “It’s a fantastic chance for Brazil to become a major global player. We can’t miss this kind of window,” he said.

Some signs of progress

Despite the many challenges, experts also point to progress. Mr. Cagnin of IEDI highlighted the tax reform and an industrial policy aligned with sustainability goals as positive developments, though he noted that the pace of progress remains insufficient.

The McKinsey study also outlines a global trend that Mr. Ferreira sees as favorable for Brazil: while foreign direct investment is covering greater geographical distances, the geopolitical distance between investors and targets is narrowing.

In this context, Brazil’s traditionally neutral geopolitical stance tends to work in its favor, Mr. Ferreira said.

He added that Brazil is likely to see more diversified sources of foreign investment, which is currently heavily concentrated in Europe and North America. “We’ll see more and more projects coming from the Middle East—particularly the United Arab Emirates and Saudi Arabia—as well as China and India.