Akio Toyoda announced on Thursday that his company plans to invest $495 million to build an engine plant in Brazil.
Toyoda was in the country attending the inauguration of Toyota's (IW 1000/5) third factory in Brazil.
The engine factory, to be located in Porto Feliz -- 20 miles from Sorocaba -- will be ready in 2015, employ 600 people and churn out engines for Etios and Corolla cars.
It will eventually enable Toyota to produce the two models with 85% local content and thus avoid being subject to the 30% import tax.
Last April, Brazilian authorities introduced a new directive known as Inovar Auto aimed at spurring innovation by forcing automakers to invest in vehicle and component research and product development.
The move triggered a flood of inward investment in the domestic auto market by companies hoping to avoid the import tax.
Toyota plans to introduce Etios compact cars, currently produced for the Indian and South African markets, in Brazil in September, with engines imported from Japan.
"We can say that the Etios will be a car made by Brazilians for Brazilians," Toyoda said.
The Japanese automaker said the new investments are aimed at boosting local production "now that the Brazilian auto market is showing signs of consistent growth."
Sales in Brazil -- the world's fourth largest auto market after the United States, China and Japan -- fell 1.2% in the first half of 2012, compared with the same period last year, according to the National Association of Motor Vehicle Manufacturers.
But government stimulus measures fueled signs of a rebound in June, when sales rose 22.9% to 353,200 units, from 287,500 in May, according to the auto trade organization.
Copyright Agence France-Presse, 2012