Introduction and general country overview Being the fifth largest country in the world by surface area and population, and recently emerging as one of the fastest growing global economies , Brazil can hardly be overlooked as a potential target of investment, especially in the light of the 2014 World Cup and the 2016 Olympics. Nevertheless, an immediate word of caution is at place here.
Even though Brazil is 25% of the highly hyped BRIC-countries, the engine seems to show some hiccups, as it is revealed that due to high interest rates and an overly appreciated national currency, the Brazilian economy in 2011 had its second-worst performance since 2003 (2. 7% growth versus 7. 5% in 2010) . As a result, Brazil is losing international competitiveness and is being outperformed by its fellow BRIC-nations . This is also noted in a recent report from Nasdaq, in which it is claimed that a central bank survey showed forecasts of a growing inflation and declining economic growth .
Notwithstanding these recent hiccups, the fact that Brazil is still in the investor spotlight is, however, not the result of a logical and benign transition. As did many Latin-American nations in the second half of the twentieth century, Brazil too found itself temporarily under the yoke of rightist regimes. In 1964, a successful coup d’etat aimed at the socialist rule of president Goulart hurled Brazil into 21 years of military dictatorship, culminating in the extreme rightist rule of president Medici in the early seventies.
Economically, this led to a steep growth (based on large construction projects), but it only benefitted the rich percentiles of the oppressed population . The welcome change came in 1985, when Brazil set out an a course towards democracy; a goal finally attained during the presidency of Lula da Silva, and his successor Dilma Rousseff. Brazil has the world sixth largest economy by nominal GDP. Its economy can be divided into three components: agriculture, industry sector and service industry.
Brazil has a well diversified agriculture and is the largest producer of sugarcane, coffee, tropical fruits and frozen concentrated orange juice. This industry sector employs 10% of Brazil’s total labour force and contributes to 5. 5% of its total GDP in 2011. Besides this, Brazil has the largest cattle herd in the world. The other side of the coin is that the increase in production of the country’s livestock and crops leads to a rise of deforestation and land cleaning in the country and makes Brazil one of the top world greenhouse gas emitters.
The industry in Brazil is diversified, well developed and even one of the most advanced industries in Latin America. Main output of the industry is automobile and parts, machinery and equipment, textiles, cement, computers aircrafts, steel and petrochemicals and consumer durables. The industry benefits from Brazil’s extensive mineral resources. Raw materials for the industry and for export earnings are provided due to large iron and manganese reserves. Furthermore, deposits of gold, zinc, copper, uranium, chromite and other minerals are exploited.
The industrial sector employs 19% of Brazil’s total labour force and contributes to 27. 5% of its total GDP. Brazil’s services sector is sophisticated, well developed and includes telecommunication, banking, energy, commerce and the computing sector. The banking sector is stable and is responsible for the provision of local firms with a wide range of financial products, however interest rates remain among the highest in the world. The energy sector is embossed by hydroelectric power where Brazil is one of the world’s leading producers.
Hydropower accounts for 90% of the nation’s electricity. Moreover, Brazil is the 9th largest oil producer in the world. The nation’s overall oil production is conducted by Petrobras, a semi-government owned oil company. The service industry employs 71% of Brazil’s total labour force and contributes to 67 % of its total GDP . ? 2. Porter’s Diamond Model Porter’s Diamond Model offers a highly reliable and user-friendly tool in the assessment of the competitiveness of nations. It consists of six key elements, which we shall briefly overview in the first section .
In the subsequent sections, we shall then apply this framework to a wide arrange of Brazilian data found in various reports. The first element is demand conditions. Remarking that innovation is key in the development of economic growth and sustainable competitive advantages, it is no surprise that domestic demand conditions serve as a main component of the diamond, as it is a demanding and savvy home-base that drives innovation and the development of top-notch quality products.
The second element in Porter’s framework is factor endowments, which Porter hierarchically subdivides into basic and advanced factors of production. Examples of the former are for instance natural resources, demographics, and climate; examples of the latter include skilled labor, research facilities, and technological know-how (Hill 2011). The main difference between the two subdivisions is the fact that advanced factors, as opposed to basic factors, are ultimately the result of investments. The third element is related and supporting industries.
The key word in this third component is spill-over effect: firms can be aided in their quest for a global competitive advantage by knowledge transfers from underlying industries. Hill (2011) gives the example of Swedish steel fabricators, who gained much of their power by virtue of a strong steel industry. The fourth element is firm structure, strategy, and rivalry. Over the course of modern history, it has become ever more clear that the importance of a firm’s strategy can hardly be underestimated, and the same applies for its structure.
It is therefore no surprise that these two elements are incorporated in a model of international competitive advantage. As for the rivalry of firms, more or less the same argument as in the first component of Porter’s diamond applies: a hard-ball industry with vigorous and continuous competition drives innovation, and ultimately, competitive advantages. The final two elements have been grouped together in this paper, and consist of chance and government. Again, it is no surprise that the presence and strength of the first four elements can be completely erased by an unstable and corrupt environment.
As for chance, it is noted that this is per definition an unreliable, but nevertheless omnipresent aspect of all activities and events. A final remark is that these elements are not separate entities, but that they form a mutually reinforcing whole (Hill 2011). 2. 1. Demand Conditions In order to assess the demand conditions of the Brazilian economy, we shall look at both domestic consumer buying behavior (to gain insights in the extent to which domestic consumers are demanding and/or sophisticated), and import and export. Domestic buying behavior.
As noted in previous sections, a demanding and sophisticated consumer base is crucial for a sustainable competitive advantage (Hill 2011). However, this aspect is rather difficult to measure, since both criteria are vague concepts: ‘demanding’, for instance, might be nothing more than homonymous when looked at from different cultural perspectives. A solution to this is provided by the WEF annual survey, included in their report . With just over 14,000 completed surveys retrieved from 144 economies, it gives us a staggering amount of data on various aspects of broad international economic parameters.
With regard to the domestic buying behavior, the results are summarized in table 1 (see appendix) . The good news is that Brazil scores above average on all three aspects; the bad news, however, is that the scores do not point towards highly demanding and sophisticated consumers. Particularly with regard to the final parameter (buyer sophistication) the results are rather poor, barely clearing the 3. 5 benchmark. The results thus show a consuming population that still has a long way to go towards sophistication.
Hope lies in the first parameter, where the well above average agricultural policy might spill-over into a general higher focus on customer orientation and eventually (albeit partially) to a heightened buyer sophistication. Nevertheless, in situations like this the domestic consumers might also become more demanding via exposure to European and American goods over the internet. Notwithstanding this promising potential of technology, the situation for Brazil is rather bleak, with only 45% of the population using the internet. Import/export analysis.
In the following tables a brief overview of the Brazilian import and export data is provided . Again, results are summarized in the appendix: table 2 displays the evolution of trade in both goods and services from 2003 till 2010; table 3 features results from the 2012 WEF annual survey (cf. supra), including relevant data about trade barriers and FDI. In 2011 Brazil exported goods for $256 billion which is 26. 8 % more than in the previous year. With this amount of exports Brazil reached place 23 in the world rank. To compare, China exported goods with a value of $1,900 billion in 2011.
The main export commodities of Brazil are transport equipment, iron ore, soybeans, footwear, coffee and autos. With 17. 3% China was the most important export partner for Brazil in 2011. USA (10. 1%) followed on the second place, Argentina (8. 9%) on the third place and the Netherlands (5. 3%) on the fourth place. Imported goods amounted to $219. 6 billion in 2011 after $181. 6 billion in 2010 which corresponds to an increase of 20. 1%. Here again Brazil reached place 23 in the word rank where the United States got the first place of total US dollar amount of merchandise imports with $2,236 billion in 2011.
Brazil’s main import commodities are machinery, electrical and transport equipment, chemical products, oil, automotive parts and electronics. In 2011 Brazil bought most of its import commodities from the United States (15. 1%) followed by China (14. 5%), Argentina (7. 5%), Germany (6. 7%) and South Korea (4. 5%) . In terms of foreign direct investment (FDI) Brazil is ranked as the world’s No. 5. From 2006 to 2011 FDI rose from $19 billion to nearly $67 billion which corresponds to 55% of South America’s FDI in 2011. Brazil is only excelled by China, United States, India and Indonesia .
The fact that Brazil has the lowest global import rate is not surprising. Firstly, there is a positive correlation between country size and openness: the larger the country, the more closed the economy. Secondly, imports depend partially on the difference between domestic production and domestic demand; if the latter exceeds the former, the remaining part of the demand is imported. However, with a consumer base that is not yet fully deployed in terms of purchasing power, it is very likely that demand does not yet exceed production.
Thirdly, due to high tax rates, inflation, corruption and trade barriers, incentives for foreign exporters are severely limited. 2. 2. Factor endowments Table 4 (cf. appendix) is an overview of Brazil’s main factors of production . We note a broad conceptualization of the term ‘factor of production’, close to Barney’s definition of firm resources: “(…) all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness” (Barney 1991) .
Porter grouped these factors into a number of categories: human resources, physical resources, knowledge-resources, capital resources, and infrastructure. Below, we will apply Porter’s classification and definitions . 1. Human Resources deal with the quantity, skills and cost of personnel and working hours. General Data ?Employed Persons: 22,95 million persons ?Population 196,65 million ?Labor Costs 153,57 Index Points ?Unemployed Persons 1,29 million persons ?Wages 1751,18 BRL ?Unemployment rate: 5,30 percent ?Average working hours: 44 hours
More specific data can be found in The Global Competitiveness Report with labour market efficiency ranked 4. 4 (7 being the most desirable outcome). Especially professional management and brain drain are considered to be advantages in Brazil – compared with the individual ranks of flexibility of wage determination (118) and hiring and firing practices (114). 2. Physical Resources: climate conditions, nation’s location and natural resources. Brazil has a varied climate, typically defined as tropical and subtropical. The Amazon Rainforest covers a large part of Brazil’s geographical size.
The rainforest’s biodiversity and natural resources (such as water supply) benefits local and global producers as well as consumers. Despite Brazil’s rich climate, the Global Competitiveness Report mentions a number of environmental concerns, viz. climate change and deforestation. Both issues can have a negative effect on either the supply/quality of natural resources or on the productivity of sectors, such as agriculture – e. g. increasing sugar prices due to untimely rain. The geography of Brazil affects transportation as well; the sea, the long coastline and the rivers of Brazil offer potential for economic use.
The oil and gas sector, for example, has embraced water transport. However, it has to be said that investment and improvement of the existing routes are required in order to benefit from it . As mentioned above, table 4 provides a summary of Brazil’s natural resources. 3. Knowledge resources: scientific, technical and market knowledge 4. Capital Resources 5. Infrastructure Tables 5, 6, and 7 respectively display some relevant data concerning these last three elements. 2. 3. Related and supporting industries As mentioned earlier, the presence of powerful supporting industries can provide a major boost to domestic firms.
The goal of the this section is therefore to determine whether or not Brazilian firms can make advantage of their respective, related and supporting industries. Particularly, EconomyWatch lists the following related and supporting industries: agriculture, services, hydroelectric energy, and banking . E. g. the steel sector can support automobile/aircraft sector. The chain of events might go as follows: an abundance of key natural resources such as iron and bauxite (from which Aluminum is extracted) might have enhanced the performance of the Brazilian steel industry, which in turn greatly benefitted the strong automobile and aircraft industry. 2. 4. Firm structure, strategy, and rivalry Our analysis of the rivalry between domestic firms starts with the basic assumption that the more firms there are in an industry, the more vigorous the intra-industry competition will be, as stated in Krugman et al. (2012) : “the more firms there are, the more intense is the competition among firms (…)”. As an exhaustive listing of the entire Brazilian business landscape would fall beyond the scope of the present report, in table 8 (cf. appendix) we limit ourselves to an overview of the most important domestic firms, with respect to either size or innovative character . . 5. Chance and government Porter (1998) states that the government can influence the four previous determinants either positively or negatively. Clearly, the Brazilian government – scoring low in the Global Competitiveness Report – is in need of improvement. Examples such as public trust in politicians (rank=121) and wastefulness of government spending (135) only confirm this. What is more, inefficient government bureaucracy, together with tax regulations (a part of the government’s macroeconomic policy) is among the most problematic factors for doing business in Brazil.
We elaborate a little more on this in the next part. 3. Political and commercial risks According to the risk assessment of Ducroire | Delcredere SA. NV, a Belgium insures and reinsures for political and commercial risks of current trade transactions, the political risk of Brazil is rated with 2 out of 7, which is the second best rate. Ducroire | Delcredere SA. NV defines political risk as “any event occurring abroad which assumes the nature of force majeure for the insured or for the debtor, such as in particular, wars, revolutions, natural disasters, currency shortages, government action”.
For the commercial risk Brazil is rated with a C which is the worst rate and means high risk. Commercial risk is defined by Ducroire | Delcredere SA. NV as “risk resulting from the deterioration of the debtor’s financial situation, leading to the impossibility to pay the debt”. Another way to assess the political and commercial risks of Brazil is the consideration of the Index of Economic Freedom by the Heritage Foundation. In 2012 Brazil reached an Economic Freedom Score of 57. 9 which means the world rank 99.
Regarding the rule of law (property rights and freedom from corruption) Brazil’s judiciary is seen as inefficient and subject to economic and political influence. However, contracts are generally considered secure, but corruption continues to undermine economic freedom. Limited government (fiscal freedom and government spending) is one of Brazil’s weaknesses. In Brazil the tax burden is much heavier than in many other emerging countries. The top income tax rate is 27. 5% and the overall corporate tax burden equals to 34. 3% of total domestic income.
Besides this, public spending amounted to 41% of GDP in the most recent year, which exacerbates the budget deficits. According to the regulatory efficiency (business freedom, labor freedom and monetary freedom) doing business in Brazil is cumbersome and bureaucratic. Business activities in Brazil are costly and time-consuming and the labor market is interfered by government-created rigidities. Lastly, an eye must be kept on the inflationary pressures . The last pillar of the Economic Freedom Index is open markets and includes trade-, investment- and financial freedom.
The use of anti-dumping measures and increasing reliance on non-tariff measures is a cause for concern regarding free trade. While foreign investors are granted national treatment, their investment activities are restricted to some sectors. The banking sector in Brazil is well-regulated and supervised and passed the financial crisis 2008 without major problems. Brazil’s banks have become more competitive and diversified and support the economic expansion with credits to the private sector . 4. SWOT analysis
In order to assess the strengths, weaknesses, opportunities and threats of Brazil, we base our discussion on the twelve pillars of competitiveness, as suggested by the world economic forum report 2012-2013 . Specifically for Brazil, these twelve pillars are summarized in table 9 (cf. appendix); each with its respective score (from 1=low to 7=high), global rank (out of 144 nations), regional rank (out of 23 Latin American nations), and rank among the fellow BRIC nations . From this table it is immediately clear that Brazil’s main asset is the size of its market: with a population of just under 0. billion people and a growing middle class, this is one of the largest opportunities for foreign investors. As for the strengths, we follow the same cut-off logic as suggested in the WEF report: any aspect that is ranked higher than the country’s global GCI is an advantage . From this perspective, both the development of the financial markets and the business sophistication (including such parameters as quantity and quality of local suppliers, extent of marketing, and state of cluster development) count as strengths.
Noting that this cut-off is rather strict, we should also keep in mind the relative strength of the technological readiness and innovation, both aspects scoring within a single ranking point of Brazil’s global GCI. When we turn to the weaknesses of the Brazilian economy, we immediately see the substantial gap between the efficiency of the goods market and the other eleven parameters, with a score that is far down the global table.
With regard to the threats, we note the following list of “most problematic factors for doing business” in Brazil, as constructed by the WEF : tax regulations, inadequate supply of infrastructure, tax rates, inefficient government bureaucracy (including wasteful government spending and burdensome government regulations), restrictive labor regulations, inadequately educated workforce, corruption (according to the report, Brazil is still above the world average when it comes to frequency of irregular payments and bribes), poor access to financing, insufficient capacity to innovate, crime and theft, instable government, poor public health, and inflation (5. 43% by the end of 2012, according to Nasdaq ). 5. Conclusion Political risk: Low (Delcredere) Commercial risk: High (Delcredere) Financial risk: Medium (Standard and Poor’s rating of BBB) GCI score 2012-2013: 4. 40 (rank 48/144) Country attractiveness: Too high to be neglected
Suggested projects: Innovation-oriented. Notwithstanding some major drawbacks of the Brazilian business climate, such as high tax rates, relatively poor infrastructure, high inflation, and corruption (see the WEF for the complete list of problematic business factors), it would still be financially wise to engage in FDI. Key aspects of attractiveness include a large population with a growing middle class (even though consumers still lack sophistication); the two upcoming global sports events (the 2014 World Cup and the 2016 Olympics); the soundness of the banking sector and the strength of the steel industry; and the future-oriented potential for innovation (eg. hydropower).
We do, however, suggest greenfield FDI for the following reasons: a) the convenience of having a production hall close to a large consumer base, b) the poor state of the present infrastructure, which will slow down exports from HQ to Brazil, and c) the presence of large trade barriers. We also suggest innovation-oriented projects, based on Brazil’s relatively high marks for WEF’s ‘innovation and sophistication factors’, and their technological readiness. ? 6. Appendix Tabel 1 Domestic Buyer Behavior Name of aspectQuestion asked in surveyScoreMeanRank Agricultural policy costs. How would you assess the agricultural policy in your country? (1=excessively burdensome for the economy; 7=balances the interests of taxpayers, consumers, and producers). 4. 63. 917/144 Degree of customer orientation. How do companies in your country treat customers? 1=badly; 7=highly responsive to needs and retention). 4. 84. 649/144 Buyer sophistication. How do buyers make purchasing decisions? (1=based solely on the lowest price; 7=based on a sophisticated analysis). 3. 83. 547/144 Tabel 2 Evolution of trade in goods and services 2003-2010 20032004200520062007200820092010 Export minus import (goods)24. 933. 844. 946. 540. 024. 725. 320. 3 Imports of goods48. 362. 873. 691. 3120. 6173. 2127. 6181. 6 Exports of goods73. 296. 7118. 5137. 8160. 6197. 9153. 0201. 9 Export minus import (services)-4. 9-4. 7-8. 3-9. 7-13. 2-16. 7-19. 2NA Imports of services15. 417. 324. 429. 137. 247. 147. 0NA Exports of services10. 412. 616. 019. 524. 030. 527. 7NA
Tabel 3 WEF annual survey 2012 results for trade barriers and FDI Name of aspectQuestion asked in surveyScoreMeanRank Prevalence of trade barriers. In your country, to what extent do tariff and non-tariff barriers limit the ability of imported goods to compete in the domestic market? (1=strongly limit; 7=do not limit). 3. 94. 3103/144 Trade tariffs. Not a survey question (objective data). Score= trade-weighted average tariff rate, 2011 or most recent year available. 11. 6NA123/144 Prevalence of foreign ownership. How prevalent is foreign ownership of companies in your country? (1=very rare; 7=highly prevalent). 4. 54. 682/144 Business impact of rules on FDI.
To what extent do rules governing foreign direct investment encourage or discourage it? (1=strongly discourage FDI; 7=strongly encourage FDI). 4. 64. 576/144 Burden of customs procedures. How would you rate the level of efficiency of customs procedures (related to the entry and exit of merchandise) in your country? (1=extremely inefficient; 7=extremely efficient)3. 14. 1129/144 Imports as a percentage of GDP. Not a survey question (objective data). Score= imports of goods and services as a percentage of gross domestic product, 2011 or most recent year available. 12. 4NA144/144 ? Tabel 4 Natural resources Factor of productionBasic or advancedCompetitive advantage? BauxiteBasicYes, as demand for Aluminum is rising.
GoldBasicNo, not a major resource. Iron oreBasicYes, plentiful and very high in demand (e. g. China). ManganeseBasicNo, not a major resource. PlatinumBasicNo, not a major resource. UraniumBasicNo, nuclear fission is politically touchy. HydropowerAdvancedYes, plentiful and future-oriented energy source. TimberBasicPlentiful but politically touchy subject. PhosphatesBasicNo, rather a supporting resource (e. g. soybeans) . Rare earth elementsBasicYes (e. g. recent finding worth USD 8. 4 billion) . CoffeeBasicYes, world’s largest grower. Sugar-Cane ethanolAdvancedPossibly, ball in court of government. OrangesBasicYes, world’s largest producer and exporter.
Deepwater oilBasicNot sustainable. CattleBasicPlentiful, but at the expense of forests. SoybeansBasicDepends on climate changes. Tabel 5 Knowledge resources People with tertiary educationAdvancedNo, only 25. 6% enrollment rate. Educational systemAdvancedNo, low quality of the educational system, math and science education. But the quality of scientific research institutions and the university-industry collaboration in R;D are ranked high in The Global Competitiveness Report. Management schoolsAdvancedNo, barely above average. Rank=52/144. Despite the relatively low rank, business sophistication has in general high scores. Talented peopleAdvancedYes.
The question can be asked whether talent in combination with technological readiness, business sophistication and innovation outweighs the disadvantages of poor education. Scientists and engineersAdvancedNo, availability is below average. Latest technologiesAdvancedNo, but close. Rank=50/144 Tabel 6 Capital Resources Financial servicesAdvancedYes. BanksAdvancedYes, very sound banking sector. ? Tabel 7 Infrastructure General infrastructureAdvancedNo, still underdeveloped . The electricity sector is dominated by the enterprise Eletrobas. The telecommunication sector regulated by ANATAL. In both sectors there is room to increase competition. Water and sanitary sector needs to be enlarged.
Railway sectorAdvancedUnderdeveloped. Road systemAdvancedLongest network in the world, but only 15% is paved. PortsAdvancedNo, still underdeveloped. Tabel 8 Overview of domestic firms NameIndustryLarge or Innovative Petrobras-Petroleo BrasilOil and biofuelsLarge Itau Unibanco HoldingBankLarge Banco BradescoBankLarge Banco do BrasilBankLarge ValeMining (minerals)Large ItausaBankLarge EletrobrasEnergyLarge CSNSteel and metallurgyLarge CemigEnergyLarge Tele Norte LesteTelecommunicationLarge Bug Agentes BiologicosPesticides (wasps)Innovative Boo-boxInternet advertisingInnovative Grupo EBXMining, energy, logisticsInnovative StefaniniIT servicesInnovative
EmbraerAircraft manufactureInnovative PredictaInternet ad networkInnovative F*HitsFashion blogInnovative ApontadorIT services (geolocation)Innovative VostuGamingInnovative ? Tabel 9 Twelve pillars of competitiveness and global competitive index PillarScoreGlobal rankRegional rankBRIC rank Institutions3. 787963 Infrastructure4. 007063 Macroeconomic environment4. 736293 Health and primary education5. 4388123 Higher education and training4. 276663 Goods market efficiency3. 94104163 Labor market efficiency4. 396952 Financial market development4. 454662 Technological readiness4. 434861 Market size5. 63914 Business sophistication4. 513311 Innovation3. 424953 Total GCI 4. 404842