Assessing Emerging Markets in Potential Economies: Brazil, India & South Africa Analysis - Research Paper Example

ASSESSING EMERGING MARKETS IN POTENTIAL ECONOMIES: BRAZIL, INDIA & SOUTH AFRICA ANALYSIS Student’s Name Institutional Affiliation Professor’s Name Date Table of Contents Introduction....................................................................................................................................3 A Brazil............................................................................................................................3 B India.............................................................................................................................7 C South Africa...............................................................................................................10 Conclusion & Recommendation.................................................................................................13 References List.............................................................................................................................14 Introduction The focus of many companies nowadays rest with expansion of their respective business operations into the international platform. Thus, the need to look for better rewarding markets that are easier to enter and provides favorable operational environment remains paramount. In essence, the emerging markets such as the BRICS provide companies with ready opportunities for this kind of growth hence they are expected to conduct extensive research in order to determine the most perfect international market to explore. One such company is Star Trucks Ltd, which is planning to venture into these markets. In fact, this report examines three emerging markets: Brazil, India and South Africa in order to establish which of them is fairly positioned to allow easier entry and has better policies in place to prompt long term investments. Thus, the report looks at each of these markets in detail and later makes a recommendation of the most viable market for Star Truck Ltd to explore first. A. Brazil For the past few decades Brazil has witnessed a complete overhaul of its economy so that nowadays it is termed as an economic superpower. The country enjoys an annual average GDP growth rate of more than 4.2% thereby improving on its overall wealth in relation to its home market as well as the enormous amount of its natural resources (Taiar, Mariano & Lourenço, 2007). In 2011, Brazil overtook the UK to become the 6th largest economy in the world and it is even expected to grow past this position by the end of 2017 (Taiar, Mariano & Lourenço, 2007). The country has ensured to formulate and implement certain growth factors that have made it possible to enjoy even greater growth rate over the years (KPMG, 2012). On the contrary, however, the country suffers from complex regulations and limited knowledge of the English language that might render doing business in the country a challenge altogether (Taiar, Mariano & Lourenço, 2007). Consequently, in 2011 the country’s economic growth decelerated from 7.5% to 2.7% in the period between 2010 and 2011 putting most of the industries operating within the country under pressure to make profits (Taiar, Mariano & Lourenço, 2007). However, the government in place took time to formulate numerous initiatives in order to counter this rather slowdown in the level of growth. In fact, despite this slow growth rate witnessed in 2011, the country has not lost its potential attractiveness for aspects related to foreign direct investments given that FDI continues to be stronger each day (Taiar, Mariano & Lourenço, 2007). The recent increase in FDI inflows into the country has prompted the government to launch such important programmes as the Growth Acceleration Programme (PAC) that seeks to promote foreign investments on a larger scale (Doctor, 2007). Certainly, just like other emerging and developed markets, Brazil has had its share of challenges with the recent being negative influences on such matters as oil crises and hyperinflation that might pose a challenge to the investment into the market (Taiar, Mariano & Lourenço, 2007). Despite all this, the following remains to the factors that have ensured continued improved growth rate that the company should comprehend better prior to entering the market. Level of Welfare in the Brazilian Home Market The factors form one of the significant aspects that have continued to foster economical growth within this market. It is important to note that Brazil is home to more than 200M people with a larger percentage of this population, at least 54%, categorized within the upper middle class (Taiar, Mariano & Lourenço, 2007). In a span of five years that lead up to 2011, the country’s GDP per person almost doubled from a mere USD 5,970 to 12,830 p.a (Taiar, Mariano & Lourenço, 2007). It is important to note that the improvements seen in the welfare of the country are set to have a weighty effect on the overall economy at large given that the average Brazilian will interestingly portray a higher demand for quality products and services, which in turn will likely foster intensive economic growth (‘Chapter 4: Business Environment', 2012). Of particular interest, a larger proportion of the Brazilian consumer market have improved on their utilization of consumer credit platforms and long term financing making them more viable for purchase of long term and fixed assets (KPMG, 2012). Infrastructural Investments Infrastructural investments have ensured to propel the economic growth of the market as well s ensuring to ascertain an investment opportunity as a whole. The government seems to understand that this is a major component for growth and has thus, ensured to put up measures and initiatives necessary to address the challenges attributed to the growth (‘Chapter 4: Business Environment', 2012). In essence, with the recent facilitation of the just concluded World Cup 2014 prompted intensive increase in the infrastructural investment platform with more than BRL 33B having been injected into completion of infrastructure projects (‘Chapter 4: Business Environment', 2012). International Demand For Products and Services This is yet another principal driver for investment opportunities within the country. The transportation sector is specifically deemed a more crucial sector of the market as more demand is directed towards agricultural and energy-related products (‘Chapter 4: Business Environment', 2012). Its vast resources are likely to attract even more trading with companies abroad prompting an even stronger operational market. Efficient Public Policies The Brazilian government clear understands that formulation and implementation of efficient and workable public policies is fundamental to enhancing intensive foreign investments that will further improve the economy (KPMG, 2012). With the induction of the first ever phase of the Growth Acceleration Programme (PAC 1) towards the end of 2007, this government made sure to portray its active involvement and encouragement to all levels of foreign direct investments in the country (KPMG,2012). In fact, the PAC-1 ensured to prioritize easier foreign direct investments into the country as well as ease operational policies for foreign companies prompting to make investments in the market. Weaknesses in the Brazilian Regulatory Environment Even though the Brazilian business environment is deemed to be friendlier in comparison to other emerging markets, there is sometimes a lack of transparency and lots of bureaucratic rules for specific businesses and industries, which affects operations at all stages. World Bank statistics indicates that the process of starting a business in Brazil takes more than 119 days with a minimum of 13 processess in place; making it longer in comparison to other BRIC countries (KPMG,2012). On a positive note though, the country has ensured to improve on its level of professionalism, which has ensured to sustain the degree of bureaucracy. Notably, the country suffers from intensive degree of corruption in both private and public sectors. The rate of corruption is deemed to be highly placed in comparison to economies of such size and wealth. On the contrast, Brazil seems to be doing better than other BRICS countries in matters related to corruption in businesses given that numerous institutions have been created to ensure that proper investigations are conducted in regards to possible claims (KPMG, 2012). Another important to note is that Brazil businesses operate under a sophisticated and time consuming import processes. In truth, the Brazilian customs is lengthy since the process of controlling invoices and many other paper networks is tedious (KPMG, 2012). Notably clear is that most of the procedures and regulations in place are altered even without any form of notice; a factor that hits hard of businesses that are involved in importing products. Apart from this, Brazil imposes a high import tariff, which is set up at 60% of the overall cost (KPMG, 2012). This has been made especially possible by the Brazilian government taking time to set product classification that establishes rates for specific import types. Star Truck Limited should also understand that Brazil imposes high corporate taxes given the companies are compelled to pay taxes at three levels’ federal, state and the municipal levels (KPMG, 2012). B. India According to World Bank reports, India is one biggest beneficiaries of foreign direct investment amongst the emerging markets having attracted a whopping $37.9B in the operational year that ended 2010 (Chapter 4: Business Environment, 2011). The country posits as a perfect investment environment because of the current inexpensive English-speaking labor force personnel that are able to do job of Western workers at significantly lower wages that is paid in Australia and other already developed markets (Chapter 4: Business Environment, 2011). Below are some of the country’s most viable factors for investment opportunities; India’s Foreign Investment Policy India has over a number of decades remained to be an increasingly attractive market for foreign investments especially the FDI. The country enjoys a significant market size of more than a billion people, efficient and positive cost structures as well as an almost perfect macroeconomic climate that avails favorable operational environment for more foreign investors in the country. In consequence, potential foreign investors are also attracted by the larger educated workforce that possesses top notch management capabilities necessary for conducting successful business (Chapter 4: Business Environment, 2011). Compared with other BRICS countries, India FDI inflows is somehow smaller however; it enjoys a highly-skilled and intensive personnel that is far much concentrated within the information and communications technologies as well as in manufacturing sectors (Chapter 4: Business Environment, 2011). The current government has made significant strides in ensuring to liberalize the underlying FDI regime by way of loosening previous limitations on foreign investment. Subsequently, the Indian government has made sure to implement an automatic system in relation to FDI approval in a significant number of the sectors with the list being expanded gradually since the 1990s (Chapter 4: Business Environment, 2011). India’s Tax Regime The country’s tax returns have continued to increase, which is a clear and concise reflection of the tax reforms that has been implemented by the existing government. Significantly, the country imposes a higher corporate tax rate that stands at about 34% for locally-owned firms while foreign business are impacted with 42% of the tax (Chapter 4: Business Environment, 2011). On the contrary though, there is a need for the government to initiate a significant number of improvements in order to realize its full FDI potential. Notwithstanding, the investment environment in India is marred with significant hurdles as witnessed in the lack of an efficient legal framework as well as a completely complex regulatory environment (Rajakumar, 2009). Following this line of reasoning, in comparison to other BRICS countries the country still lags behind in the following ways; Physical Infrastructure India suffers from poor infrastructural development, which is one of the most important factors in prompting efficient market operations. In essence, the country is marred with poor road, port and railway network. New governments have resorted to changing this perception in vain especially because of numerous red tapes as well as major corruption scandals amongst the many public procurement officials that is couple with severe delays as well as cost overruns caused by severe public protests (Rajakumar, 2009). Without any form of improvements that should be impacted on the country’s infrastructural environment, the expected economic growth rate in India in the long term will remain a hurdle to attain. Poverty Index It is important to note that despite its large population, the country’s still suffers from a high rate of poverty rates amongst the people (Rajakumar, 2009). This is set to culminate into a potential challenge since most of the population is not able to afford long term finance and other notable credit platforms deemed necessary for spending (Rajakumar, 2009). Current Legal Framework & Corruption Index India’s current legal fundamentals are based on English common law prompting its complexity in nature. The complex nature of the legal framework has always provided platforms for conflicting regulations that are still in place. Foreign-owned companies have little or no chance maneuvering through a rather lengthy set of rules and certifications on order to go through more than 70 specific and separate approvals needed for starting up companies (Buckley, Cross, & Horn, 2012). In regards to corruption, India ranks amongst the worst corruption-infested markets. This is especially true with the existing enormous administrative discretion that is availed by India’s bureaucratic platforms that provides public officials with wide chances to engage in extortion of bribes (Buckley, Cross, & Horn, 2012). The poor capacity to ensure activities are conducted in a transparent manner in matters related to governance rules and excessive bureaucratic processess avails the necessary platform for graft to prosper. Particularly, the underlying government-based procurement system has been noted to be extensively riddled with intense corruption and malpractices and despite numerous convictions, the vice still takes root in most of the markets’ companies regardless of whether they operate as a public or private entities (Buckley, Cross, & Horn, 2012). Despite all of the aforementioned challenges, India being a core member of the BRICS membership is set to enjoy the benefits of being a major emerging market with expected growth rates of between 4 and 5 per cent in the period commencing in 2012 (Buckley, Cross, & Horn, 2012). There is also a distinctive potential increasing domestic consumption especially in the IT and data sector (Chapter 4: Business Environment, 2011). C. South Africa South Africa provides a modern platform for foreign companies that want to set a strong foot in Sub-Saharan Africa given its intensive developments in regards to easier business registration processess and a relative higher size of the middle class population that are able and willing to engage in the purchasing of products ('Chapter 5: Business Environment', 2010). Though the population is not fairly advanced and developed in comparison to such other BRICS countries like Brazil and India, the current size is still sustainable. Foreign Investment Policy The process of implementing efficient economic development strategies, most of the governments engage in the creation of optimal investment policies, enhance different activities to support activities related to both local and foreign investment, and also establish distinctive economic initiatives in order to positively affect investor views of costs and benefits associated with conducting business in specific sectors ('Chapter 5: Business Environment', 2010). Currently, South Africa does not enjoy such a distinct legal investment framework for foreign direct investment. In fact, due to its rather complex business environment in the entire Sub-Saharan Africa, it represents a fundamental component of its status quo and thus, perceived as an economic powerhouse ('Chapter 5: Business Environment', 2010). The existing stronger condition of the country’s institutions promotes a rather relative political and economic stability, which has been a fundamental component in attracting significant numbers of foreign investors in the past few decades. On the contrary, the rather impoverished energy sector has really affected its image in a negative manner as a top investment destination in Africa and this could inhibit possible future FDI inflows ('Chapter 5: Business Environment', 2010). Subsequently, the higher levels of crime as well as inefficient and stringent labor market is set to result to intensive structural challenges that will inhibit the attractiveness of the country’s business environment in the long run. It is important to note that the country’s overall share of FDI in relation to capital intensive inflows is deemed to be significantly lower within the region at a approximate figure of 30%, which confirms the dominance of majorly portfolio related investments ('Chapter 5: Business Environment', 2010). Interestingly, the country’s all sectors are open to foreign investment given that the government approval is not needed and there are no virtual limits to the amounts of foreign investment as FDI inflows are mainly made up of few enormous transactions as opposed to a flowing stream of inward investment ('Chapter 5: Business Environment', 2010). On the contrast, despite the foreign investment policy being regarded as perfect, in numerous occasions foreign investors have cried foul over imposition of government policies that act towards infringing their business operations. A perfect example of such hurdle rest with the immigration limitations that has resulted to severe delays in the course of processing work permits for all foreign employees ('PESTLE ANALYSIS', 2014). Remarkably, there have also been numerous concerns over a lack or even poor clarifications of BEE legislation currently in place. In 2003, the country introduced a 2% training levy on all salaries of all foreign employees for the purpose of entering the country under expedited visa processess (Wentworth, 2012). It should be noted that South Africa lacks a coherent foreign trade zones or even free ports but rather has focused more on Industrial Development Zones in Port Elizabeth (Wentworth, 2012). Infrastructure Development The country boasts of a developed physical infrastructure in comparison to other Sub-Saharan African countries. Certainly, the major infrastructural developments are highly attributed to the recently held World Cup that facilitates improvements in the overall transport sector; a component perceived to be core on having an effective business environment (Wentworth, 2012). Tax Regime South Africa’s tax regime is indeed continual and involves a significant number of initiatives for all expatriates. Allowances of up to 100% are allowed for companies that are managed under the Strategic Industrial Project programme of the overall DTI. The current corporate tax rate for foreign-owned companies stands at 34% while the capital gains are taxed in relation to the normal corporate or personal tax rates on 50% of the overall gains that have been realized by a given entity while 25% is impacted on gains that have been realized by individuals (Wentworth, 2012). Possible Operational Risks The level of security in the country is not related to the common rebels, armed conflicts and civil strife, however; the country still faces intensive levels of crime rates, which poses immediate threats to both individuals while still posing considerable level of costs to all business operations in the country as a whole (Wentworth, 2012). Another important operational risk for consideration rests with the high volatility of the country’s foreign exchange in the recent times that has continued to hinder possible growth in the area of foreign investments (Wentworth, 2012). Star Truck Limited should take this aspect seriously since it is likely to affect overall investment goals and objectives. Conclusion & Recommendation To sum up the analysis above, it can be noted that all of the three BRICS member countries provide a viable operational environment for foreign-based investments however; India and South Africa still lag behind in their legal frameworks and other things. Therefore, Star Truck Limited should choose to enter Brazil market first over the two because it has a ready and extensive upper middle class population that continues to grow over time. Brazil foreign investment policy is advanced and accommodates foreign direct investments from foreign-owned companies. Despite a slower economic growth in the period between 2009 and 2011, Brazil policymakers have continued to devise efficient and effective ways that will spur the domestic economic growth towards the right direction. Subsequently, with the country’s annual average GDP increasing by more than 4.2%, the country is set to be regarded as an economic super house in the ever-growing South America region. Thus, it follows that Star Truck Limited should first enter Brazil in case it is keen in entering other countries within the region. Another important factor to consider rest with the country’s developed road, rail and air transport networks, which offers a favorable transport network needed for moving commodities from one place to another. In fact, Brazil’s transport system is far much better in comparison to other BRICS member nations. References List Buckley, P, Cross, A, & Horn, S 2012, 'Japanese foreign direct investment in India: An institutional theory approach', Business History, 54, 5, pp. 657-688 'Chapter 4: Business Environment' 2012, Brazil Business Forecast Report, 3, pp. 29-35 Chapter 4: Business Environment 2011, India Business Forecast Report pp. 29-39 n.p 'Chapter 5: Business Environment' 2010, South Africa Business Forecast Report, pp. 35-44 Doctor, M 2007, 'Boosting Investment and Growth: The Role of Social Pacts in the Brazilian Automotive Industry', Oxford Development Studies, 35, 1, pp. 105-130 KPMG 2012. Investing in Brazil: A land of opportunities. Retrived on January 3, 2015 from https://www.kpmg.com/NL/nl/IssuesAndInsights/ArticlesPublications/Documents/PDF/High-Growth-Markets/Investing-in-Brazil-2012.pdf 'PESTLE ANALYSIS' 2014, South Africa Country Profile, pp. 14-31 Rajakumar, JD 2009, 'Corporate Financing and Tax Environment in India', IUP Journal Of Public Finance, 7, 3/4, pp. 25-42 Taiar, A, Mariano, A, & Lourenço, A 2007, 'Global investors eye up Brazil', International Tax Review, pp. 3-7 Wentworth, L 2012. South Africa’s investment landscape: Mapping economic incentives, Occasional Paper No.105: Economic Diplomacy Programme. Retrieved on January 3, 2015 from http://www.saiia.org.za/doc_download/42-south-africa-s-investment-landscape-mapping-economic-incentives Read More