Brazil's new generation of directors and producers are faced with a difficult challenge: how to combine arthouse sensibility with a desire for international recognition.

Since most Brazilian productions are funded by the territory's tax shelter system - which means they can fully fund their films by offering tax breaks to private investors - producers do not really need to make money in order to start another picture. But the reality of the international marketplace is different and film-makers realise they need to make profitable films to get future work financed.

The local industry has grown considerably in recent years - jumping from 40 productions in 2000 to more than 80 per year now - and film-makers see this moment as an opportunity to make an impact overseas. Recently, films such as Cao Hamburger's The Year My Parents Went On Vacation have also proved that art films can do well commercially. The film, about a boy whose parents are persecuted by the dictatorship, competed in Berlin this year and sold to more than 20 territories.

"It's possible to make an art film that is not hermetic and, at the same time, a commercial movie that is not superficial and conventional," says Philippe Barcinski, who recently directed his first feature, Not By Chance. This story of two control-obsessed men is still on release in Brazil, where it has been seen by more than 100,000 people so far.

That is a promising figure considering that most Brazilian films attract less than 30,000 admissions. Not By Chance is being sold internationally by Ondamax: one of the film's selling points is leading man Rodrigo Santoro, undoubtedly the hottest Brazilian actor at the moment after his role in 300, as Persian King Xerxes.

The idea of matching good business with cinema d'auteur is at the heart of production company Zazen Producoes, a Rio-based outfit set up by Jose Padilha and Marcos Prado in 1997. Zazen's latest picture, Elite Squad (Tropa De Elite), was picked up by The Weinstein Company for markets outside Brazil and Latin America at script stage - rare for a Brazilian film. Universal will distribute the $5m production. It is also screening at the Rio International Film Festival, locally and in all Latin American territories.

Padilha, the director of Elite Squad, picked up more than 20 awards worldwide with his previous film, the documentary Bus 174, about a bus hijacking in Rio in 2000 which was caught live on TV. Elite Squad, his first feature, follows two young police officers while they deal with the harsh reality of crime-fighting in Rio.

His preference for social themes is probably due to his background as a documentary film-maker, along with his business associate Marcos Prado, who debuted as a director with Estamira (2004) and produced Elite Squad. "Since we opened the company we've tried to focus on social and ecological issues," says Padilha.

Brazil's social issues, tackled in international hits such as Central Station and City Of God, have undoubtedly given the territory's films traction internationally. "Films that expose our social problems are usually well received overseas, especially in rich countries where these stories are less likely to take place," says Fabiano Gullane, who produced The Year My Parents Went On Vacation with his brother Caio Gullane. "On the other hand, we noticed more recently that there is interest in different facets of Brazil. A positive side maybe."

Padilha says: "I don't think that there is a specific expectation regarding Brazil. In general, what works are good scripts, good actors and a good direction.

"It's not so much the subject, it's more how it's expressed dramatically in a script and then on screen."

The new film-makers have no problem with the word "industry", which in the past had pejorative associations. "Now we are indeed creating an industry, where our goal is to raise the quality of our films, reach the audiences and place Brazilian cinema in competitive local and international markets," says Gullane.

His next film to be released is Quero. This story of an orphan who lives in warehouses is the debut feature from Carlos Cortez. "We also have the responsibility of revealing new auteurs and creating a new voice for Brazilian cinema," adds the producer.

Even Brazilian actors nowadays do not see auteur films as being incompatible with good business. "Films that take a look at human behaviour with a very personal point of view have always moved me the most. But there is no point in making an extraordinary film if only few people see it," says actor Lazaro Ramos, whose credits include Madame Sata (2002), Carandiru (2003) and Lower City (2005). One of the best of his generation, he will next be seen in A Morte E A Morte De Quincas Berro D'Agua. This adaptation of Jorge Amado's book will be directed by Sergio Machado, who took the Award of the Youth in Cannes with Lower City and produced by Walter Salles' Videofilmes.

Another hot actor is Hermila Guedes, who proved a mesmerising screen presence as the single mother of Suely In The Sky (2006) and continued to seduce audiences in her most recent films, Bog Of Beasts (2007) and Happy Desert (2007), playing prostitutes in both. With Suely In The Sky she went to Venice, while Happy Desert took her to Berlin, and her ambition is to work overseas.

"Our films are travelling because Brazil's film-makers are looking for a more universal language, without losing their realistic and thought-provoking approach," she says.