Business Context Of Brazil Analysis Economics Essay

This paper analysed the business context of Brazil as viewed from the global perspective,identified country specific issues in Brazil as it relates to attracting or discouraging foreign flow of investments from Multinational Enterprises (MNEs) and considered the different entry modes that will suit the country’s business context. Weighing the potential benefits and incentives of doing business in Brazil against the pros, the paper concluded that …… the benefits outweighs the risks and so MNEs should consider doing business in Brazil.

INTRODUCTION

The business environment has been identified as one of the major determinants of the flow of foreign investments in and out of a country. Since no single country is self sufficient, the flow of foreign investments in and out of a country have been identified to be more than just a source of economic development but also a source of technology spillovers, human capital formation, international trade integration and a platform for more competitive business environment (United Nations (UN) 2004).

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Firms, in making the important decision of investing and operating outside their home environment considers and answer some important questions like market opportunities that exists in the foreign market,resources advantage,associated foreign risks,possible challenges,strategic implications and mode of entry (Bartlett et al 2008). This clearly shows that expansion abroad by firms not only have advantages but also carries with it associated challenges and risks.

A number of literatures have seek to explain the factors and motives that influence firms to invest abroad. According to Ghauri (2000) the facors that pushed firms to go abroad can be broadly divided into two categories; the internal factors which includes the goals and ambitions of individuals and the organisation like resources,capabilities and strategies and the external factors which relates to environments at home and in the foreign markets such as tax,regulations,legal requirements,potential profits,etc

The Multinational Enterprise (MNE) has been identified as the dominant vehicle of internationalization in the global economy (Bartlett et al 2008). The United Nations Conference on Trade and Development (UNCTAD) defined the MNE specifically refered to as Transnational Corporation (TNC) as “incorporated or unincorporated enterprises comprising parent enterprises and their foreign affiliates.”

To give a clearer definition, Bartlett et al (2008) defined the MNE as a firm that have substantial direct investment in foreign countries and actively manage and regard this operations as integral parts of the company,both strategically and organistionally.

The aim of this paper is to analyse the business context of Brazil as viewed from the global perspective,identify country specific issues in Brazil as it relates to attracting or discouraging foreign flow of investments from Multinational Enterprises (MNEs) and propose the different entry modes that will suit the country’s business context. The paper also examines some theories of Foreign Direct Investment (FDI) and the motivations behind MNEs decisions to invest outside thier home country of operation.

In achieving this objective,the paper shall first examine how country specific issues has been identified to be major determinants of whether or not a country will be a recipient of foreign investments from MNEs. A review of some of the theories of Foreign Direct Investment (FDI) that seek to explain the motivations behind firms decisions to invest outside thier home country shall be done to support our argument.

Thereafter, an analysis of the macroeconomic conditions of Brazil, it indicators of the business environment,potential investment opportunities or risks and a general SWOT analysis of the business environment shall carried out. Also,the possible entry modes for firms seeking to invest in the country shall be examined.

In conlusion,………

LITERATURE REVIEW

This paper critically evaluate the business potential of Brazil from the global perspective and discuss the differnt entry modes for foreign firms interested in investing in the country.

According to the United Nations (UNTAD) defination of Foreign Direct Investment (FDI)

A number of literatures have seek to explain the factors and motives that influence firms to invest abroad. According to Ghauri (2000) the facors that pushed firms to go abroad can be divided into two categories; the internal factors which includes the goals and ambitions of individuals and the organisation like resources,capabilities and strategies and the external factors which relates to environments at home and in the foreign markets such as tax,regulations,legal requiremants,potential profits,etc

Three major motives have been identified as the motivations by firms who carry out FDI in foreign countries. Accordeing to……..these motives are: market

Also, the thesis looks at the different theories of FDI to explain the ones that best suits the main reasons why MNEs go abroad

Also,different entry modes have be suggested for entry into a new market. The decision of the entry mode to be used as the most suitable into a market should be based on the proper analysis of some identified key factors in the market. The key factors identified are demand condition,strategy,related and supporting industries,infrastructure,government policies,legal framework, informal institutions,etc.

This study critically assess Brazil’s business potentials as viewed from a global perspective and discussess the possible and favorable entry modes available for foreign firms looking at doing business in the country.

DISCUSSION

According to the World Bank Country Brief on Brazil (n.d),Brazil is an economic giant whose economy ranked among the world’s ten highest Gross Domestic Product (GDP) in 2009 with a GDP of US$1,571 Trillion. Brazil,an upper middle income level country with a GDP per capita estimate (in terms of Purchasing Power Parity) of US$10,520, has been identified as one of the BRIC countries (Brazil,Russia,India,China) whose economies could be a much larger force in the world economy by the 21st century (Economic Intelligence Unit (2010);GoldmanSachs (2001);World Bank Data (2010).

With an average GDP growth rate of 4.8% per year in 2004-2008,although falling by 0.2% in 2009 and a forecasted growth of 5.9% and 5% in the next few years, the economy of Brazil has been identified as an important one in the Latin American region Banco Central de Brazil (BCB);BBVA Research (2010). The economic growth in Brazil is driven by private consumption,public spending,investment and external demand BBVA Research (2010). In per capita terms,the GDP grew by 72% between 2005 -2010 (Refer to Table……) reflecting an increase in the income of an average Brazilian. The high economic growth rate in Brazil has been facilitated by the pursuance of stable economic policies by the Brazilian government. To stimulate the economy,the Central Bank of Brazil (Banco do Brazil) introduced expansionary fiscal and monetary policies like increase in public expenditures,reduction in tax rates, flexible exchange rate,increased accessibilty to credits from public banks. In curbing inflation which increased from 3.6% to 5.7% between 2007 and 2008 as a result of the expansionary monetary policies introduced earlier,inflation targeting monetary policies like reduction in the interest rates was introduced leading to a reduction in the inflation rate to 4.9% in 2009. According to the Economic Intelligence Unit,the 12-month consumer-price inflation rate as at September 2010 stands at 4.49%, just 0.01 basis points shy of the Central bank’s target rate of 4.5% in 2010.

The foreign reserves of Brazil as at 2009 stood at 238,539 Trillion, a 32% and 23% increase from the 2007 and 2008 balance respectively. With this solid reserve,the country can adequately support its balance of payments position (BOP) and smothen any volatility in the value of its currency, the Brazilian Real. Analysing Brazil’s soveriegn credit risk rating showed that it has increased substantially with a foreign reserve that is 15% of GDP. This figure reflects that Brazil can fully service its external debt Garcia-Herrero (2009). The country ran a modest current account deficit of 1.5% of GDP in 2009 but external solvency is not a risk in the short term as the foreign reserves provides adequate buffer. According to The Economist (2009), Brazil is one of the first Latin American economies to emerge from the recession. The quick recovery can be attributed to the strong domestic demand and accessibility to credits that existed in the economy which was facilitated by government’s adoption of expansive fiscal and monetary policies using the large reserves as a means. Also,Brazil operates a well diversified economy with the service,manufacturing and agricultural sectors accounting for 68.5%,25.9% and 6.1% of GDP respectively.

Brazil is the largest country in area and population in Latin America and the Caribbean with a population size of 193.7 Million in 2009. It is bordered by the Atlantic Ocean and share common boundaries with every South American country except Chile and Ecuador (World Bank Country Brief ;CIA Report) thereby making it an import and export gateway to other Latin American countries. As a major commodity export country, the total exports of Brazil accountted for 13% of the GDP figure in 2009, a 7% decline from the 2008 figures while total imports accounted for 13% of the GDP The Economic Intelligence Unit;World Bank Country Data (2010) identified rising international prices for agricultural and mining commodities and rising demand from Asian markets as an important driver of the Brazil’s economic growth. The value of exports is expected to increase by 12.8% year-on-year in 2010.

Brazil’s human development indicators have been equally impressive over the years with the proportion of the population living below poverty line reducing from 1.8% to 1.3% between 2006 and 2007 and a adult literacy rate of 90% was recorded over the two year period. Public spending on education as a percentage of GDP increased from 4.5% to 5.2% between 2005 and 2006. Brazil recorded a total labor force of 99 million in 2009, a 2% increase from the 2008 figure while the unemployment figure in 2009 declined to 7.9% from 9.3% in 2008. There has also been a noticeable reduction in the income inequality gap in Brazil. This can be attributed to the upward trend in the real household income level as reflected in the GDP per capita figures over the years.

According to Sacerdoti,El-Masry,Khandelwal and Yao (2005), the quality of institutions in an economy plays an important role in explaining its economic performance. The goverment of Brazil can be said to have a strong weight on the economy as observed in its high level of intervention in the economy.The country operates a democratic system of government with a constitution that has been in effect since 5 October 1988. The official langauage is Portuguese and the capital is Brasilia. Although,the current administration of President Lula da Silva has been credited for maintaining policy credibility,political stability, strong macro-economy and improved domestic investment climate, the noticeable rise in fiscal spending and the strong inventionist role of the govenment in the economy has been a major concern (Economic Intelligence Unit). The government is actively involved in the management of the country’s key sectors owning significant stakes in the oil,financial and energy sector thereby restricting private investments in these sectors.

Brazil operates a legal system based on the Roman codes and its yet to accept the International Court of Justice (ICJ) jurisdiction. The legal process in Brazil is very breaucratic and cumbersome thereby impeding private business development. According to EIU, “Contracts in Brazil are generally secure. It is important, however, to specify the jurisdiction for any dispute. Each state has its own judicial system, and there is a national court system for matters outside state jurisdiction. The judiciary and civil service are fair, but time-consuming procedures hamper their ability to reach speedy judgments.”

In the Latin American region,Brazil’s economy is a systematically important economy in the region because of its closeness to the US market and its possession of a well developed agricultural,mining,manufacturing and service sector CIA(2009). Owing to its macro economic and politcal stability over the years, its richness in natural resources like oil,mining and agricultural resources and vast local market, Brazil has become an attractive destinations for foreign direct investment (FDI) among emerging-market economies (EIU). As a result of this economic advantage,many MNEs are using the country as a base for their operations in Latin America. Examples include General Electric,Hyundai,GE Healthcare.

Infrastructural development has been a challenge to the economic growth of Brazil’s economy. The overutilized airport, poor road networks and congested port has significantly contributed to the increase in logistics costs in the manufacturing and agricultural sector thereby hampering international trade. Also,the annual increase in electricity consumption has put a pressure on the energy capacity of the country thereby demanding an expansion of the energy infrastructure. In resolving the infrastructural problem, the government has initiated a Public-Private Partnership to encourage investment in infrastructure. Also, it has invested billions of dollars to improve its rail network. As a result of the surge in the number of internet users in Brazil, the country’s e-commerce activities has increased significantly boosting the already bouyant service industry in Brazil.

Although falling by 42% in 2009 as a result of the global financial crisis which Brazil was not immune to being an open economy, the net inflows of FDI into the country over the years has been overwhelming. The net inflow of FDI into the country increased from US$15 Trillion in 2005 to US$45 Trillion in 2008 representing a 200% increase over the 3 years period. The stock of FDI and flow of FDI accounted for 20% and 1.65% of GDP respectively. Brazil, a member of the World Trade Organisation (WTO) as been identified as the third-most-attractive country for future foreign direct investment, behind China and India (World Investment Prospects Survey 2010-12). According to BCB, the Netherlands accounted for 20.6% of FDI inflows during the first half of 2010, ahead of the US (15.5%), Spain (10.8%),Germany (7.8%) and France (6.8%).

Despite the encouraging figures on FDI in Brazil, the country still possess a strong regulatory and institutional risk. According to the 2010 World Bank Ease of Doing Business Report on Brazil, the country slipped 3 places from 127th position in 2009 to 129th place in 2010 among 183 economies in terms of overall ease of doing business. As shown in Table……,the process of registering new businesses,properties,getting credits,closing businesses in Brazil is cumbersome and breaucratic. Asides this, companies operations are subjected to a high tax burden and a rigid labor law which impedes the enforcement of employment engagement contracts. In mitigating these regulatory and institutional risks in ………..

SWOT ANALYSIS OF BRAZIL’S ECONOMIC ENVIRONMENT

STRENGHTS

Strategic position as a commodity producer

Demographic advantage in terms of its geographic proximity to the U.S

Institutional Stability

Size of domestic market

Effectiveness of Human Resources

Competitive Risk-Adjusted Cost

Infrastructure

Strong Banking system

WEAKNESSES

Low saving rates

Excessive governtment intervention in the ecomony

Legal system Corrupt and incompetent judiciary

Private sector imbalances

Slow progress of economic reforms

High unequal income distribution

Foreign Perception of the Country

OPPORTUNITIES

Springboard to the U.S. Market

Maturing Economies in Latin America

Emerging Local Service Providers

Institutional Support for the IT Service Industry

Leveraging Different Language Skills

Acceptance of Alternative Delivery Models

Development of a sound rail system

THREATS

Government management of oil resources

Regulatory Environment Shifts

Perception of Economic Status

Investments in the IT Sector and Support of the Education System

Labor Rate Increases

Labor Law Requirements

Intellectual Property Protection, Privacy and Data Security Issues

Crime level being the second largest consumer of cocaine in the world.

CONCLUSION