Brazil History and Business Environment: - Research Paper Example

 Business Environment: Brazil Report Brazil has a fascinating history and unique social structure that contributes significantly to the current economic environment. Its people, culture, religious traditions, and politics all combine to make Brazil a truly distinctive environment for business. It differs in many ways from other South American countries, and not just in terms of the language its people speak, i.e., Portuguese is the official and dominant language wherein most of the other countries of the region have adopted one form of Spanish or another. Everything from its geography, industry, and politics to its banking practices and social mores is idiosyncratic. The purpose of this paper is to provide a broad review and analysis of Brazil and its business environment. Starting with a historical perspective that includes religious and cultural elements, as well as a brief geographical review, the primary focus will be upon the economic and political factors that make Brazil what it is today; a potential emerging economic powerhouse whose natural resources, industrial potential, political processes, and economic policy simply need to be managed efficiently for the country to effectively fulfill its potential. Discussion of Brazilian history, religion, and culture. From a European viewpoint, Brazil appeared on the map in 1500, when Portuguese captain Pedro Álvares Cabral landed on the coast and discovered “nearly seven million native people” living in a rich tropical environment with abundant natural resources (Levine, 1999, p. 31). What followed were several centuries of evolution as Brazil followed the track of much of the Americas; colonization, independence, empire, and then the formation of a republic. For the purposes of this paper, the current economic environment of Brazil has its foundations in what historians call the “Vargas Era,” where the deteriorating economic and political environment came about as the result of a “lack of flexibility and capacity to modernize shown by the political structures and processes on the one hand and of the accelerating pace of economic change and resultant societal tensions on the other” (Schneider, 1991, p. 106). Brazil moved forward into democracy, but retained many of the chronic elements of its history; political inflexibility, economic inefficiency, and social disparity. In terms of the religious heritage of the country, it also reflects a similar arc as to the other nations in the region. As it was explored, conquered, and colonized in part through the efforts of missionaries from Europe, modern Brazil has its religious roots in Catholicism. The indigenous people had their own theological pantheon, these views were certainly considered pagan by the arriving Portuguese. One advantage to the entry of the Jesuits with an eye to conversion of the indigenous people was that they brought more than pure religion; they built villages, taught agricultural methods, and instructed the natives in various arts and crafts—the “Jesuits were pursuing long-term designs that looked to the future of Brazil” (Page, 1995, p. 323). In so doing, they preserved a certain aspect of religious culture within the people that remains today an element of the common Brazilian experience. Although the country was strongly Catholic in its post-discovery foundations as a result of its colonial days, that is not to say that there have not been other religious traditions brought to Brazil. Levine (1999) notes that evangelical Protestantism has seen the most rapid growth in Brazil of any other major religion, particularly among the urban poor (p. 149). This establishes yet another incidence of the people of Brazil conforming what is brought to their shores into something that is distinctively of themselves. Nowhere is this adaptive ability seen more clearly than in the overall culture of the people within the nation. In Haberly’s work, (as cited in Levine & Crocitti, 1999, p. 351), there are two persistent themes in the way that Brazilians see themselves; “as a product of multiracial national origins, and as inherently sad or nostalgic, longing for their ancient homelands, whether Portugal, Africa, or the forests of Brazil before the Europeans came” (Haberly, 1983, p. 1). This unique, inborn perspective causes the people and culture of Brazil to tend towards embracing new cultural or economic events and conforming them to their own style. This is a significant perspective on the culture, as any person or company doing business in Brazil should be aware of the tendency to take what is offered and meld it into what is comfortable. In terms of relatively strict corporate standards, e.g., ISO 9000 or Six Sigma, this can be a factor; these efficiency processes do not necessarily lend themselves to adaptation of an individual style. Accordingly, a company implementing such processes in Brazil would need to be aware of the cultural tendency to “take and modify” when employing a Brazilian labor force to ensure that the minimal standards, particularly the key performance indicators and metrics, be kept in place. As for the general history, religious, and cultural background of the country, those that would bring new industry or service-sector businesses to Brazil would be wise to remember the history of the country in terms of its major political movements, the religious heritage of strong Catholicism blended with ancient tribal beliefs and modern Protestantism, as well as the inherent nature of the adaptive culture. With this as a backdrop, the geography, modern political divisions, demographics, and metropolitan populations can be considered. Geography, political divisions, demographics, and population centers. The geography of Brazil is as diverse as its people, and every bit as different as its abundant natural resources suggest. As the largest country in South America, Brazil shares borders with every other country except Chile and Ecuador; its topography, is primarily “flat to rolling lowlands in the North, with some plains, hills, mountains, and narrow coastal belt,” and its rich natural resources include bauxite, gold, iron ore, manganese, nickel, phosphates, platinum, tin, uranium, petroleum, hydropower, timber and agriculture (CIA, 2009, n.p.). In terms of political divisions, Brazil is Federation with 26 separate states, one federal district, and 5,507 municipalities with a presidential system “that exists on the federal, state, and municipal levels” (Carvalho, 2006, n.p). It has free elections like most democracies and, although its “electoral laws encourage incumbency, in contrast to the United States (where turnover in the House is less than 10 percent with each election) turnover in the Brazilian Chamber of Deputies has consistently exceeded 50 percent (Samuels, 2003, p. 1). This is as a result of politicians choosing to include a stint in national politics prior to pursuing local political or business opportunities. Brazil’s demographics are as follows: Population: 180 million is primarily concentrated in the coastal areas, and expected to grow to 190 million by 2010. Over 90 percent of the people live on 10 percent of the land, primarily in Sao Paulo and Rio de Janeiro. Ethnic Composition: Fifty-five percent are of European descent—primarily Portuguese, 38 percent is a mixture of cultures (African, German, Japanese, Amerindian, etc.), six percent are African, and one percent is Amerindian. Age: Approximately twenty-nine percent of the population is under fourteen years old, sixty-six is between 15 and 64 years old, with the remaining five percent being over 65 years old. (Brazil Sourcing, 2009, n.p.) While there are several large cities with populations exceeding one million people in their metro areas, the main population centers are Sao Paulo with 19.6 million people and Rio de Janeiro with over seven million. For business purposes and analysis, it is these areas upon which expansion of international commerce should focus. As the interior of the country is agricultural, forested, or under-populated, the coast and the two largest cities in the country should be the first choice for businesses looking to penetrate the Brazilian markets. Political system, legal system, and corruption. Brazil is a fully democracy, with regular elections that are free and fair, based on the principle of one person, one vote. The issue for politicians, however, is not so much being fairly elected as it is being effective in bringing economic prosperity to the general population. As Bethell (2000) states, if the Brazilian democracy “ fails to deliver not only economic benefits to the population as a whole but at least the beginnings of a more equitable distribution of wealth and power, it will always be fragile and will always struggle to command popular support” (p. 1). She goes on to note that the Brazilian electorate is very young, poorly educated, and very poor—and that the failure of politicians to bring substantial social and economic change could cause the electorate to support more negative solutions to their problems through populist authoritarian methods (p. 1). Naturally, political stability is of major concern to international corporations seeking to enter a market; there is no suitable risk/reward analysis that would support market entry in the midst of a populist uprising. The legal system in Brazil, while based upon the rule of law, is not yet fairly applied. This is particularly true when minority defendants are before the court. As Mitchell & Wood (1999) point out, the facts of many cases are determined specifically by individual judges, who “lend substantial credence to the physical and emotional demeanor of the accused, making determinations that are highly responsive to the defendant's comportment and appearance of truthfulness. The historical legacy of Brazil's legal system thus disposes it to potential bias against some defendants, particularly those who are poor and nonwhite” (Mitchell & Wood, 1999, p. 1007). Overall, the legal system does not seem to pose any threat to an international company doing legitimate business in the country. Rather than considering the legal system as a major risk, the more significant consideration would be that of local or state official corruption. Corruption in Brazil is, not unlike other countries in the region, a significant concern. Analysts have written that there is not adequate regulation in the country, and this fact has “fostered increasing business-related corruption…[for example] corruption in Brazil increases the cost of public project by between twenty and forty percent” (Wang & Rosenau, 2001, pp. 28 & 31). Unlike a sometimes-misapplied legal case, this issue is of direct concern to the economic development of the Brazilian markets; particularly by those companies coming in from outside its borders. Given the global economic conditions, the costs of corruption could move projects and business efforts into a far less profitable position. Infrastructure. The infrastructure of Brazil is lacking in many ways, particularly outside the major metropolitan areas and in spite of government attempts to shore up its services. As Prado (2008) notes, the Brazilian government established independent regulatory agencies for “electricity, telecommunications, oil, gas, and other infrastructure sectors as part of a very ambitious privatization program” (p. 435). The issue, however, is the independence of these agencies has been compromised; in spite of institutional guarantees of independence and attempts to ensure such through various means, the agencies themselves have suffered political interference and a general absence of the ability to function as they were originally intended. Accordingly, much of the country outside of the major cities suffers from a lack of fundamental services such as electricity and serviceable transportation corridors. This is particularly true within the interior of the country, as the coastal areas retain the vast majority of the population and receive the priority when it comes to infrastructure support. This condition, while significant for the people of the interior, is not a particular negative for the international company considering investing in Brazilian operations. The rational for this is that most market penetration strategies are going to focus on the areas where there is a significant population and adequate support services. GDP, GDP per capita, inflation, economic integration, social welfare, and projections. According to the CIA Factbook (2009), Brazil has well-developed economic sectors; agriculture, mining, manufacturing, and service. The country ran trade surpluses from 2003 through 2007, as productivity gains and global commodity price gains provided significant improvement in its debt profile. The fundamental economic data from this source is provided below: GDP: $1.99T for 2008, with an expected real growth rate of 5.2%. This translates into a per capita rate of $ 10,100.00. Sector accountability for the GDP is: Agriculture: 5.5% Industry: 28.5% Services: 66% The unemployment rate in Brazil is 8%, and the consumer price inflation rate is 5.8%. The current commercial bank prime lending rate is a staggering 43.72% as of 31 December 2007. The most significant number in this data is the lending rates. Interest rates of this proportion do not induce business start-ups, but do attract foreign investment. This is precisely what the government of Brazil intends; it wants the World Bank and International Money Fund to invest in cooperative projects within the country that local government officials control. In terms of social welfare, economic integration, and projections of improvement, Brazil suffers from the international perception that it is corrupt, there is too much disparity between the rich and the poor, and that poor are being oppressed. This perception is strengthened by the international press, which has broadcast images of “children wandering and being killed in the streets or working in sweatshops; urban dwellers crowded in shantytowns; landless peasants clamoring for agrarian reform; Indians decimated by loggers, gold seekers, and ruthless landlords; dozens killed every day in the cities by armed gangs or the police” while those portrayals of the affluent in the countries living in luxurious mansions with spectacular views (Schwartzman, 2000, p. 29). Industries, exports, technology, and international trade (CIA, 2009, n.p.). As previously noted, Brazil is rich in natural resources. Its primary outputs are: Agriculture: Coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus products, and beef. Industrial: Textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles, machinery, and equipment. Petrochemical: Oil and petroleum products. Brazil produces over 2M barrels per day of oil, and exports about half a million barrels per day to other countries. Its proved reserves are over 12B barrels as of January 2008. Brazil exports approximately $200B worth of goods annually, and lists its primary trading partners as the United States, Argentina, China, Netherlands, and Germany. As for its financial condition, the country is carrying over $236B of debt, with over $280B of direct foreign investment. Its reserves of foreign currency and gold amount to over $ 197B, and its currency, the Real, is exchanging at 1.88 per U.S. dollar (2008 est.). Analysis. Having established a reasonable amount of information regarding the history, culture, economic, demographic, and financial conditions to be found in Brazil, it is important to synthesize these elements and the accompanying data into a practical understanding of their impact upon the business climate for international companies wishing to penetrate the Brazilian markets. In terms of the people of Brazil, on paper there is a wide disparity of income that might lead the casual observer to conclude that there is little, if any, middle class. This is not the case, however, as the income disparity is magnified when the wealthy of any country is measured against the poorest; in this case, even the middle class residing in Sao Paulo are wealthy compared to the farmer in the central region or the indigenous people in deep in the Amazon Basin. In fact, the people of Brazil tend to be multi-cultural, open to new concepts and products, a relatively prosperous in the major metropolitan areas. All of these aspects combine to create a favorable business climate for international companies wishing to penetrate the service and retail sectors. The case is even stronger for those international companies that wish to engage in business within the major output sectors of Brazil, e.g., the industrial, agricultural, and petrochemical markets. With an 8% unemployment rate, the non-specialized labor force should yield sufficient supply for service sector and retail operations. The legal landscape is similarly hospitable to the overall economic opportunity represented in Brazil. Given the government’s position on foreign investment and encouraging economic growth, there are no insurmountable legal barriers to market entrance by international firms. One primary political concern for any business considering operations in Brazil is the fact that corruption is still a specter within the country, and can represent a significant competitive disadvantage, i.e., those companies that have no compunction at paying a judicious bribe would have an advantage over those companies who, by policy, would not engage in that practice. Depending on the location of the proposed enterprise, companies might find state and local officials who are less than supportive of their endeavors, but this is not nearly the barrier that is presented by corruption. As for security, there are issues in Brazil. Whether the international media has inflated concerns about crimes or disruptions or not, these are a fact of life in Brazil to one extent or another. No international business wants to start operations with concerns for employee safety, security of property, or fear of civil unrest. These issues must be considered in the risk/reward ratio of market analysis. That said, the risk of such matters is relatively location-specific, and are largely controllable by choice of site and reasonable steps taken by management to mitigate any security concerns. The economic environment of Brazil is conducive to foreign business operations for the most part. Certainly, the commercial lending rate would preclude any in-country loans, but the investments of excess working capital would pay a significantly higher return than elsewhere. Given the abundant labor pool that is employed at wages certainly lower than large industrialized countries, companies entering this market could expect to benefit from economies of scale. There is also something to be said for early-market entry in the country; Brazil is one of the emerging economic leaders outside of the G-7, and if the political environment embraces the necessary reforms and employs the international standards currently before it, there is a high potential for growth and profitability. Accordingly, although inflation is higher than the current international rates, the economic climate in Brazil will not present excess difficulty to the company that engages in calculated penetration and thoughtful management of operations. In conclusion, Brazil represents an opportunity for foreign investment through international commerce. As the global economy expands, the country is going to be a major player on the world stage and those private companies that find opportunity in Brazil will stand to gain long-term profit from the association. With strategic planning, close management, and operational efficiencies, the overall business climate in Brazil is a good one. Those companies poised for international expansion would do well to give Brazil a very serious consideration. References Brazil Sourcing. (2009). Brazil Demographics. Retrieved April 10, 2009, from http://www.brazilsourcing.com/demographics.php Bethell, L. (2000). Politics in Brazil: From Elections without Democracy to Democracy without Citizenship. Daedalus, 129, 2, 1. Carvalho, P.C.F. (2006). Brazil Profiles from the Food and Agriculture Organization of the United Nations. Retrieved April 11, 2009 from http://www.fao.org/ag/AGP/AGPC/doc/Counprof/Brazil/Brazil.htm Central Intelligence Agency. (2009). World Factbook – Brazil. Retrieved April 10, 2009, from https://www.cia.gov/library/publications/the-world-factbook /geos/br.html#Intro Haberly, D.T. (1983). Three Sad Races: Racial Identity and National Consciousness in Brazilian Literature. Cambridge: Cambridge University Press. Levine, R.M. (1999). The History of Brazil. Westport, CT: Greenwood Press. Levine, R.M. & Crocitti, J.J. (Eds.) (1999). The Brazil Reader: History, Culture, Politics. Durham, NC: Duke University Press. Mitchell, M.J. & Wood, C.H. (1999). Ironies of Citizenship: Skin Color, Police Brutality, and the Challenge to Democracy in Brazil. Social Forces, 77, 3, 1001-1021. Page, J.A. (1995). The Brazilians. Reading, MA: Perseus Publishing. Prado, M.M. (2008). The Challenges and Risks of Creating Independent Regulatory Agencies: A Cautionary Tale from Brazil. Vanderbilt Journal of Transnational Law, 41, 2, 435-452. Samuels, D. (2003). Ambition, Federalism and Legislative Politics in Brazil. Cambridge: Cambridge University Press. Schneider, R.M. (1991). Order and Progress: A Political History of Brazil. Boulder, CO: Westview Press. Schwartzman, S. (2000). Brazil: The Social Agenda. Daedalus, 129, 2, 19-38. Wang, H. & Rosenau, J.N. (2001). Transparency International and Corruption as an Issue of Global Governance. Global Governance, 7, 1, 25-33. Read More