Business Structure and Competitiveness in Brazil - Case Study Example

Business Structure and Competitiveness in Brazil: Porter’s ‘Diamond’ Model Approach Introduction Brazil’s economy is the seventh in the world with apopulation of almost 200 million. The major revenue comes from rising prices for commodity exports. The economic condition is developing with improvement in the conditions of the middle class. In recent years, poverty level has drastically reduced with millions of poor people being pulled out of poverty. However, the country faces strong intervention of its government in the business and economic sector which causes misallocation of capital, limited mobility and a rising sense of unfairness. Currently, the government is experiencing a phase of proving its worth because of the upcoming 2014 World Cup and 2016 Rio Olympic games. The government has promised sufficient security system and proper infrastructure for both events. Corruption in the government hamper the economic stability in the country and in 2013 there has been nationwide protests and roadblocks because of inadequate public services and inefficiency in the political and institutional sectors. In Brazil, contracts are usually considered secure but the justice system is corrupt as it gets influenced by political and economic power. The average tariff rate in Brazil is 7.9 percent. The country is not permitted to import used clothing and cars. In many economic sectors, the foreign investment is limited by the government. However, there is a constant diversification and growth of the banking system and capital markets. There has also been a steady growth of government’s involvement in credit market with public banks accounting for 50 percent of total loans to the private sector (Brazil, 2014). This paper sets out to analyze the business structures and competitiveness of Brazil in the context of Michael Porter’s ‘Diamond’ Model of International Competitiveness. Brazil’s economy in brief (World Bank, 2014) According to Vision 2050 which is WBCSD’s (world business council for sustainable development) project, the goal is that the world population will lead sustainable life within the resources of this planet (Vision 2050: Overview, n.d.). Based on the eagerness and abilities of the companies, Brazil strives to hold fourth position in world economy by 2050 while being able to provide good and sustainable living conditions to its population of 260 million (Vision 2050: A new agenda for business in Brazil, n.d.). Brazil’s economy is currently going through an extremely positive phase. However, its constant growth leading to social and economic developments is also having an adverse effect on the country’s environment. The rate of deforestation is the highest in Brazil while its high pollution level has become a matter of concern for its potential of polluting the drinking water supply. Although there has been a reduction in emissions of greenhouse gases, agricultural emissions and demand of energy are ever increasing. Because of this contrasting impact of economic growth in Brazil, the business sector remains in dilemma whether to emphasize on economic development or environmental protection. There are several companies in Brazil that prove that business in the country can be both sustainable and profitable. From 2012, eight multinational companies are performing in collaboration under the Brazilian Business and Ecosystem Services Partnership (PESE) to assess the impacts of their activities on the environment and they also evaluate the extent to which they are dependent on the environment. The PESE addresses the relationship between corporate functions and the benefits provided by the ecosystem like clean water. Most companies take such benefits as granted although they play a significant role in the success of any business undertaking. One example of a PESE company is the retailer Walmart. Walmart stores in Brazil are confronting the environmental problems attached with its supply of beef. Since 70 percent of the deforested areas of the Amazon is absorbed by the country’s cattle ranches, therefore Walmart strives to attain beef supply chain with zero deforestation by the year 2015. In order to fulfill this objective, Walmart’s ESR (Ecosystem Service Review) will develop cattle ranching processes that will curb deforestation (Ranganathan, 2013). Reducing activities that negatively affect the environment is not only beneficial to the company but also is good for the country. For instance, mining companies like Anglo American and Votorantim have incorporated benefits from the ecosystem into the environmental impact assessment process while designing new mines. By learning the impacts of mining on environment and also how much mining is dependent on the ecosystem, the policy makers can reduce the adverse environmental impacts and also can utilize the advantages of enhanced environmental management. Some of the opportunities include diminishing greenhouse gas emissions and functional costs of mining, while also giving scope for income generation and development in the region (Ranganathan, 2013). Porter’s Diamond Model In this era of globalization, competition between industries plays a significant role in establishing a country in the global arena. Porter’s Diamond Model explains how “firms create and sustain competitive advantage in global industries” (Porter, 2011, Ch.3). The Diamond Model establishes a link between a firm and a particular country’s source of competitive advantages, and how the firm utilizes the advantages to acquire international competitive advantage. Porter emphasized on cluster of firms in an industry, and for economic development of a country it is necessary that the industry studies the external economies. He said that any progressive public policies should focus on creating opportunities to enhance production through innovation for development of the clusters (Smit, 2010, pp.118,121). There are four determining factors and two auxiliary elements to this approach. The first one is factor conditions including human resources, technology, natural resources, capital and infrastructure that contributes towards production of a firm. Certain factors can be upgraded for enhancing their advantages. The second factor is demand condition of the domestic market that encourages a firm to improve their production through innovations thus reinforcing their competitive advantage. The third factor is related and supporting industries which also induces firms to innovate. The fourth factor is a firm’s strategy, structure and rivalry. A firm’s strategy includes management and production process to achieve its profitability goals. Also, to strengthen competitive advantage through improved production, internal rivalry is also needed. The two auxiliary elements are chance and government. Chances are events that cannot be controlled by the firms like sudden inflation, natural calamities etc. Such events can have positive impacts on some firms and negative impacts on others. Finally, government can influence the production process, market demand structure and competition between firms. Government interventions can be local, regional, national or international (Zhang & London, 2013, pp.98-99). Brazil’s manufacturing industry The manufacturing industry is a key industrial sector in Brazil that invites foreign investments and global companies. Since Brazil has a market replete with opportunities and an ambition of sustainable long-term expansion, therefore companies around the world cannot ignore the country’s industrial strategies regarding economic growth for the next few years. This section will explore the competitiveness of Brazil’s manufacturing industry vis-à-vis Porter’s Diamond Model. There are three factors that will be responsible for enhancing production of the country’s manufacturing industry and increasing its competitiveness in the global market. Firstly, there is the physical infrastructure which is an essential element for planning production process in an industry in any country. To ensure transportation of raw materials to the factories and finished products to the markets, it is important that there should be efficient and dependable infrastructure like proper roads, railways, ports and telecommunication networks. Therefore, the fact cannot be ignored that huge investments are necessary to build and maintain a country’s infrastructure to ensure increased production and economic development. Since, Brazil will be the host country of two of the most important events in the near future namely 2014 World Cup and 2016 Rio Olympic games, therefore there is absolute likely that focus will be on improving transport and other infrastructure which will also attract foreign direct investments. All these will have maximum possibility to exert positive impact on the production level of manufacturing industry and increase its competitiveness in the global economy. The second factor that influences the manufacturing industry in Brazil is talent. The continuous need to innovate and develop technologies and strategies to ensure production of new products and increasing manufacturing of existing products is widening the skills gap. Many manufacturers are facing challenges with respect to operations, innovations and production levels because of lack of skilled workers in production jobs. In order to sustain its economic development and to maintain competitive position in the global market, Brazil is in the same position like any other country in attracting and maintaining skilled people like scientists and engineers in order to produce world class commodities through research, innovations and development (Araujo et al., 2012, p.18). The lack of skilled people indicates weakness in the education sector caused by poor funding in primary and secondary schools along with inadequate training to teachers and supervisors. The available programs to address poverty reduction and school enrollments are sufficiently efficient. The lack of development in the education sector is reflected in the competitiveness of the country’s manufacturing sector as there has been practically no change in the exports of high-tech commodities from 1990s to the 2000s (Kingstone, 2012, p.20). The third influential factor is energy costs. Availability of clean and reliable energy is vital for maintaining low production costs and therefore acts as vital contributing factor for determining competitiveness of the Brazilian manufacturing industry in the global arena. The positive thing is that Brazil has an abundant natural resource base along with comparatively progressive research facilities. This means the country is in an advantageous position to utilize different energy forms that are ecologically sustainable to take over the profitable phases of the value chain (World Economic Forum, n.d.). Government intervention is strong in Brazilian economy. Recently, the Brazilian President Dilma Rousseff planned to “extend payroll tax exemptions to all Brazilian manufacturing industries to boost investment and growth in a stagnant economy” (Reuters, 2013). By doing this the government will be releasing a large part of the Brazilian economy from payroll taxation. The motive is to encourage more production and increase the domestic consumption level. This will help the manufacturing industry and attract more foreign investments (Reuters, 2013). Exemption from payroll taxes will also reduce the cost of production which in turn will increase the domestic demand market. As for chances or external factors, increased investment in education sector can provide skilled labors that will increase production with advanced technology and also will produce new products to intensify global competition. Although there are significant pitfalls in the science and technology sector of Brazil, there have been improvements in some areas of research and development in the past decade. In the year 2008, gross expenditure on research and development was 1.1% of the country’s GDP. It is still less than the average of OECD countries; however it is greater than countries like India, Russia and South Africa. In 2008, total expenditure from business sector on research and development was 0.5 percent of the country’s GDP. To increase expenditure for science and innovations, the Brazilian government has granted 25.5 percent subsidy rate for every US dollar spent on research and development. In Brazil, there is low human resources in science and technology which is a hindrance for competitive advantage in the manufacturing industry. In the year 2006, the rate of researchers was only 1.5 for every thousand total employment. In the year 2007, there was a slight increase in the number of students graduating with science and engineering degrees leading to 11 percent of all new degrees. This number is almost 50 percent of the OECD average. Of Brazilian population belonging in the age group of 25-64, only about 11 percent were qualified at the tertiary level. On the other hand, there is a trend of increment in the number of doctorate degrees. Although there is low rate of graduated students, Brazil has more doctorates per capital than the OECD average (Brazil, 2010, p.160). If this trend continues in the coming years then it will be beneficial for the manufacturing industry’s competitiveness in the global market. Today, skilled labors and researchers are needed for innovations in production process and product designs to capture the international commodity market. From 2007 to 2012, exports of manufactured goods grew at an annual average rate of only 1.8 percent. In the global export volumes of manufactured goods, Brazilian export share was 46.6 percent in 2007, and it dropped considerably in 2012 to 33.8 percent (WTO, n.d., p.8). Brazil’s automotive industry Today there are numerous factors that influence the growth of automotive industry. Government intervention is increasing for garnering more revenue from this industry while there is enhanced competition for labor and capital. Tax authorities are resorting to change their enforcement processes, and are changing their perspectives and strategies to align with changing environment of business. Automotive companies are adjusting their priorities on competitive factors while at the same time ensuring they maintain conformity with increasing value (Ernst & Young Global Limited, n.d.). This section explores the competitiveness of Brazilian automotive industry in the context of Porter’s Diamond Model. The major factors for increasing competitiveness in Brazilian automotive industry are human resources, capital, information, science and technology. In Brazil various events occurred in connection to automotive industry that are results of factor evolution. Some of them are 1) railroad operation was launched from Rio de Janeiro City to Sao Paolo City in 1928, 2) In 1939, first oil well was uncovered in Bahia State, 3) several steel makers were created between Sao Paulo and Rio de Janeiro state, etc. To increase skilled and qualified human resources in the automotive industry several universities and technical and business schools were introduced in last hundred years which include Escola Técnica Federal de São Paulo in 1910 and ESAN business school in 1941 in Sao Paulo, the first engineering school FEI in 1946 in ABC region and EAESP/FGV in 1954 which is the most important Business school (Sakuramoto & Di Serio, 2004, pp.15-16). Then there are Supporting Institutions which are “locally based suppliers and firms” like CSN and CST which are steel makers, Goodyear and Pirelli which are multinational manufacturer of wheels, Cofap which is a Brazilian manufacturer of various automotive components, and so on (Sakuramoto & Di Serio, 2004, pp.16-17). As for rivalry which indicates stiff competition from firms in same industry, Brazilian automotive industry did not face severe competition till 1950. Till that year, there were only 2 rival firms in the industry which were Ford launched in 1919 and General Motors launched in 1925. Post 1950, government took measures to attract foreign direct investments leading to opening of many competitors like the Volkswagen, Fiat, Mercedez Benz, and so on. This trend lasted till the 1990s (Sakuramoto & Di Serio, 2004, p.18). The domestic demand of passenger cars and trucks increased significantly from 1940 to 1950 at 129 percent and 176 percent respectively (Sakuramoto & Di Serio, 2004, p.19). Brazilian government’s intervention includes control of imports and exports of automotive goods, and attracting investments for better infrastructure (Sakuramoto & Di Serio, 2004, p.19). Conclusion In recent years, Brazilian economy has emerged as rapidly developing economy with increased foreign inward investment and global positions as exporter. However, there are deficiencies in certain sectors like the infrastructure which is facing paucity of development and progress. Therefore, during harvest time trucks wait in queues to discharge their loads. There is also shortage in production of electricity and communication facilities resulting in potentials of blackouts in industrial sectors. Major deficiency is in the airport sector as investments are pending for runway and terminal construction. These problems have become even more acute because of the upcoming 2014 World Cup and 2016 Rio Olympic games. Then, manufactured goods export sector is facing low competitiveness not because of inefficiencies but because of incongruity in the exchange rate appreciation. This problem is enhanced by increased competitiveness in the Chinese manufacturing sector in both domestic and foreign markets (Amann & Baer, 2012, pp.415-417). References Amann, E. & Baer, W. 2012, Brazil as an emerging economy: a new economic miracle? 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