Brazil Ranks First in Foreign Investment in Paraguay

by | Oct 9, 2024 | FDI Latin America

In 2021, Brazil emerged as the leading source of foreign direct investment in Paraguay, surpassing even the United States, which is traditionally one of the largest investors in the region. Data from the Central Bank of Paraguay (BCP) reveals that Brazilian companies and investors injected a substantial $904 million (BRL 4.8 billion) into foreign investment in Paraguay, edging out the United States, which contributed $892 million (BRL 4.7 billion). This marks a significant milestone in the economic relationship between the two South American nations, highlighting Brazil’s growing influence in investment in Paraguay and its economic development.

Brazil and the U.S. Dominate Paraguay’s Foreign Investment

The figures underscore Brazil’s critical role in investment in Paraguay’s economic landscape, as Brazil and the United States accounted for 26% of the total foreign investment in Paraguay in 2021. Brazilian investment came largely from companies seeking to expand operations or establish a foothold in Paraguay’s strategic sectors, which include commerce, financial services, and manufacturing. These sectors’ potential for growth and development make Paraguay an attractive destination for foreign investment. The strong presence of Brazilian businesses reflects geographic proximity, shared infrastructure projects, and robust trade relations between the two countries.

Other Major Investors in Paraguay

The “Top 10” list of foreign investors in Paraguay also includes the Netherlands, which ranked third with $779 million, followed by Spain at $589 million and Chile at $536 million. Other notable contributors to foreign investment in Paraguay in 2021 were Uruguay ($491 million), the British Virgin Islands ($383 million), Argentina ($279 million), Mexico ($239 million), and Switzerland ($230 million). The diversity of this group of investors highlights Paraguay’s growing attractiveness as an investment destination, particularly for countries in Latin America and Europe.

The Role of Tax Havens

The British Virgin Islands’ inclusion in the list of top investors is noteworthy due to its reputation as a tax haven. Often, investments from jurisdictions like the British Virgin Islands are linked to tax planning strategies by multinational corporations, allowing them to minimize tax liabilities. Despite its relatively small size and geographic distance, the British Virgin Islands contributed significantly to foreign investment in Paraguay, showcasing the global nature of financial flows and investment strategies.

Diplomatic Relations and China’s Absence

Paraguay’s diplomatic stance is also reflected in the list of top investors. Notably absent is China, which has become a leading global investor in many Latin American countries. This absence is primarily due to Paraguay’s diplomatic recognition of Taiwan over the People’s Republic of China. Paraguay remains one of the few countries that maintains formal relations with Taiwan, a decision that has likely influenced its exclusion from China’s substantial global investment portfolio.

Paraguay’s Resilience Amid Global Challenges

Despite the absence of Chinese investment, Paraguay saw an overall 5% increase in the gross volume of foreign investment in Paraguay compared to 2020. This rise reflects Paraguay’s resilience and capacity to attract foreign capital even during global economic uncertainty. The COVID-19 pandemic disrupted investment flows worldwide, yet Paraguay managed to sustain and grow its foreign capital inflows, a positive sign for the country’s economic future.

Key Sectors Attracting Foreign Investment in Paraguay

The sectors that attracted the most investment in Paraguay in 2021 offer insights into the areas of the Paraguayan economy that foreign investors see as holding the most significant potential for growth.

Commerce was the leading sector, accounting for 16.4% of total FDI. This includes retail and wholesale trade, where foreign businesses have identified opportunities in Paraguay’s expanding consumer market and its role as a regional trading hub.

Financial intermediation followed closely, making up 16.3% of the total value of FDI. This sector covers banking, insurance, and other financial services supporting domestic economic activities and cross-border trade. Paraguay’s stable monetary system and favorable regulatory environment have attracted foreign financial institutions, which see the country as a promising market for growth.

Oil and olive production was another prominent sector in 2021, accounting for 11.7% of FDI. Paraguay has a relatively small but developing oil sector, attracting attention from foreign investors looking to capitalize on the country’s untapped resources. Meanwhile, though niche, the olive oil industry has seen growing investment due to the increasing global demand for healthy and natural food products.

Transportation also attracted significant attention from foreign investors, contributing 8.1% of total FDI. Paraguay’s strategic location as a landlocked country in the heart of South America makes its transportation infrastructure vital for moving goods within the region. Investments in this sector are critical for improving Paraguay’s logistics capabilities, particularly in road, rail, and river transport, and are essential for boosting trade and economic activity.

The Importance of Foreign Investment in Paraguay’s Development

By definition, foreign investment in Paraguay involves acquiring an equity stake in a company by a non-resident investor or an entity based abroad. A practical example would be when a foreign company creates a subsidiary in another country, transferring resources to set up and run operations. This type of investment is a crucial driver of economic development because it brings in capital, expertise, and technology, fostering growth in the host country.

Conclusion

In conclusion, the BCP data for 2021 highlight the significant role that foreign investment, mainly from Brazil and the United States, plays in Paraguay’s economic development. The increase in FDI despite global challenges demonstrates Paraguay’s resilience and growing appeal as an investment destination. As Paraguay continues to attract investors worldwide, sectors such as commerce, financial services, and transportation will likely remain critical areas of focus for foreign capital.