Foreign Direct Investment - Essay Example

?Foreign Direct Investment (Brazil and Argentina) Table of Contents Introduction 4 Brazil 4 Demographics 5 Political System 5 Business Environment 6 Registered Businesses 7 Economic System and Characteristics 7 Famous for 8 Legal System and transparency 8 Advantage and disadvantage of investing 8 Raw Materials and Labor 9 Barriers to investment 9 Argentina 9 Demographics 9 Political System 10 Business Environment 10 Registered Businesses 10 Economic System and Characteristics 11 Famous for 11 Legal System and transparency 11 Advantage and disadvantage of investing 11 Raw Material and labor 12 Barriers of Investing 12 Conclusion 12 References 13 Introduction Foreign direct investment (FDI) is one of the most crucial factors that determine the structure of a particular country’s economy. At the present age all the developed as well as developing nations from all over the world compete with each other in terms of socio-economic development and FDI plays a decisive role in this competition. However, business organizations whose primary objective is to make profit do not choose any country overnight for investing their resources. Each and every possible destinations of investment is thoroughly researched and analyzed by the organizations. In other words, it’s the nation’s responsibility to attract organizations by promoting different interesting facts regarding its demographics, economy and society. Organizations, before making final decisions regarding investment compare two or more countries on the basis of these dimensions. Over the past decade, South America has emerged as a major destination for the multinational corporations and Brazil and Argentina are the two of the most important countries in this part of the world. This paper attempts to portray a clear picture of these two countries in terms of their economy, demography, society and legal system. The paper includes a comparative analysis keeping these two countries as subject. The principle objective of this paper is to help the decision makers in the process of making effective decisions regarding foreign investment. Brazil Presently Brazil is known as the most influential country in the South American region. It is one of the largest democratic countries whose economy is developing at a remarkable rate (BBC, 2011). Further information about this important member of BRIC (Brazil, Russia, India and China) is provided in the following sub-sections. Demographics Brazil is one of the most populated countries; in fact according to Central Intelligence Agency it is the fifth most populated country in the world. Currently, almost 203,429,773 people live in this South American giant. Average age of the country’s one fourth population falls within the range of 0-14 years, whereas the age of almost 67% of total population is found to be within the range of 15-64 years. Brazil’s population is one of the youngest populations in the world as the average age of all the males is 28.5 years and the same in case of females is 30.1 years. The country’s population is increasing at a rate of more than one percent (1.134%). Most of the people (almost 87%) in Brazil live in the urban areas. As far as the languages are concerned, most of the people prefer to speak Portuguese. However, there are other languages like Spanish, Italian, German and English that are also spoken. Almost 90% of Brazil’s total population is officially literate. More than 50% Brazilians are found to be ‘white’ and almost 75% are Roman Catholic (Central Intelligence Agency, n.d.). Political System Brazil is one of the largest democratic nations not only in South America but in the entire world. The government in the country is federal republic in nature. Brazil’s political system is a ‘multiparty’ system. In other words, the system allows the legal foundation of several political parties. This ‘Federative Presidentialist’ country is led by the President who acts both as the head of state and chief of different branches of the government. There are three important branches of the government and these are ‘Legislation’, ‘Executive’ and ‘Judicial’. The country is comprised of several states which are further divided into different municipalities. There are independent and distinct bodies that control and monitor these states and municipalities. Major political parties that greatly influence the country’s political environment are Brazilian Democratic Movement Party, Brazilian Renewal Labor Party, Brazilian Labor Party, Brazilian Socialist Party and Brazilian Social Democracy Party (Brazil Gov, n.d.). Business Environment Today, Brazil is considered as one of the fastest growing countries, but according to the report of World Bank, Brazil’s business environment is yet to be the best when compared to the business environment of other developed countries. As per World Bank’s report almost 411 days are required for getting construction permit in Brazil. Furthermore, paying tax is still a time taking process. As far as currency is concerned, the Real is the main currency in Brazil. One Brazilian Real is equivalent to .60 US dollar. With a GDP of 2.194 trillion dollar, Brazilian economy is the largest economy in the South America. In 2010 the real growth rate of GDP was 7.5% and in the same year GDP per capita was $10,900. Agriculture, manufacturing and mining are the three main industries in Brazil. Major agricultural products that are produced in Brazil are coffee, wheat, soybeans, rice, sugarcane and corn. On the other hand major industrial products include textiles, shoes, cement, chemicals, iron and lumber. Three of the main cities in Brazil are Brasilia, Rio de Janeiro and Sao Paulo. Brasilia is the capital of the country; however Sao Paulo is the largest city among all the Brazilian cities. The country has excellent transportation system which is led by the roadways. Brazil has roadways of 1,751,868 km. which is fourth largest in the world. Furthermore there are 726 airports and 50,000 km of waterways (Central Intelligence Agency, n.d.). Registered Businesses In Brazil any type of business organizations are required to be registered with the concerned authority in order to run them smoothly and legally. However, the registration process involves significant amount of cost and time (The World Bank & International Finance Corporation, n.d.). Economic System and Characteristics It is mentioned earlier that Brazil has the largest economy in the South American region. Brazilian economy is mainly concentrated on agriculture, manufacturing, mining and service sectors. With its fast growing economy the country is strengthening its presence in the global markets. Over the past 7-8 years Brazil has enhanced its macroeconomic stability in a very steady manner. The country has successfully reduced its debt profile and built up foreign reserves. It has experienced record growth during the period of 2007-08. However, in 2008 the country’s economy was hit by global recession. By 2010, Brazilian government was able to restore the confidence of investor and consumer on the country’s economy. Over the last year capital inflows have increased significantly and as a result of that the Brazilian currency has appreciated. This has resulted in the increase in taxes on some specific foreign investments. Brazil is known for its huge labor force (103.6 million). However, almost 7% of this force is found to be unemployed. Despite of excellent economic growth, almost 26% of total population lives below poverty line. In 2010, inflation rate in Brazil was around 4.9% and the discount rate provided by the central bank was 15.17%. Brazil mainly exports iron ore, transport equipments, footwear, coffee and soybeans. On the other hand the country imports machinery, chemical products, electrical equipments, oil and electronics products (Central Intelligence Agency, n.d.). Famous for Brazil is known as the nation of football. The five times world champion has produced some of the greatest football players of all time. The booming footwear industry of Brazil is actually the result of its domination in the world of football. Brazil is also famous for beautiful models. Furthermore, the famous rain forest, samba dance and carnival distinguish the country from the others. Legal System and transparency The legal system in Brazil is founded on the basis of Roman codes. In this system compulsory ICJ jurisdiction is not accepted. The welfare systems and labor laws are found to be quite complex in Brazil. Corruption has been a major problem for this country and therefore a strong legal structure is already developed with the purpose of bringing transparency in the system (Noruega, n.d.). Advantage and disadvantage of investing Investors can capitalize on the developing economy and a large population of Brazil by investing in the country. Being one of the largest countries in the world, Brazil has a huge customer base that can be effectively utilized by the companies. Pleasant geographical condition, stable political set up and currency offer investors a favorable environment for investment (Hanko Hackberry Group., n.d.). On the other hand, main disadvantage of investing in Brazil is the complicated legal issues that are faced by the investors. There are some investors who prefer to avoid Brazil because of different complex regulatory problems (FX-Invest, 2011). Raw Materials and Labor Brazil is enriched with raw materials like sugarcane, iron ore and coffee beans and soybeans. The country has a labor force of almost 103.6 million (Central Intelligence Agency, n.d.). Barriers to investment Complex legal and regulatory frameworks of Brazil act as barriers to investment. Complicated bureaucracy is considered as a big challenge in the process of investing in Brazil. Such framework creates critical problems especially during the process of establishing any shop (Noruega, n.d.). Tax system is also a major challenge for the foreign companies. Moreover, some of the newly developed environment related standards may make the overall environment unfavorable for foreign direct investment. Argentina Argentina is the second largest nation in the South American region. It is located in between Uruguay and Chile. Further information regarding this country is given below. Demographics According to Central Intelligence Agency, Argentina has a population of 41,769,726. Argentina is facing a population growth rate of 1.017%. Median age of the total population is around 30.5 years. 63.6% Argentinean have age in the range of 15-64 years. Argentina is getting urbanized at the rate of 1.1% and more than 90% of the total population lives in the urban areas. Almost 97% Argentinean are officially literate. Spanish is mostly spoken by the people of this country (Central Intelligence Agency-a, n.d.). Political System Like Brazil, Argentina is also a democratic country. The government of the country is republic in nature. Similar to Brazil, the Argentinean government is comprised of three important branches which are executive branch, legislative branch and judicial branch. President is considered as both head of government as well as chief of state. Major political parties of the country are Civic and Social Accord, Civic Coalition and Dissident Peronists (Central Intelligence Agency-a, n.d.). Business Environment Business environment in Argentina is not as good as Brazil and this mainly because of the economic condition of the country. Argentina’s economy has faced several problems starting from recession to huge external debt. In 2010, the country had a GDP of $596 billion and the GDP growth rate was almost 7.5%. Apparently this growth rate might look impressive but in 2009 Argentinean economy was contracted by almost 3%. In 2010, Argentina’s GDP per capita was $14,700. The country has a labor force of almost 16.62 million. Main agricultural products that are produced in Argentina are lemons, sunflower seeds, grapes, soybeans, tobacco, corn etc. Major industrial products include consumer durables, motor vehicles, processed foods, textiles etc. Important cities in Argentina are Buenos Aires (capital), Cordoba, and La Plata. The country has roadways of only 231,374 km and waterways of 11,000 km. There is only 156 airports with paved runways (Central Intelligence Agency-a, n.d.). Registered Businesses Similar to Brazil, Argentina also permits the registration of any type and size of company. A time taking and costly method of registration is waiting for those who want to register their business in Argentina. Economic System and Characteristics The economy of Argentina is concentrated on its rich natural resources, an export dependent agriculture sector and on a highly educated population. A century ago it was one of the wealthiest economies in the world. However, over the past two decades the country has faced several financial problems like economic crisis, high inflation, current account deficits and increasing external debt. At present the country’s GDP is 596 billion dollar and last year it has grown at a rate of 7.5%. Argentina’s 30% population still lives well below poverty line and most importantly the country is still struggling with its inflation rate which is as high as 22%. Furthermore, its present volume of external debt has mounted to $128.6 billion (Central Intelligence Agency-a, n.d.). Famous for Like Brazil, Argentina is also famous for football. It is one of the most important football playing nations in the world. Legal System and transparency The legal system in Argentina is found to be a combination of West European and US legal systems. Similar to Brazil’s system it also does not accept compulsory ICJ jurisdiction. This mixed system is a complex one as it allows inequalities and hence a major challenge for the business organizations. Argentine legal system has failed in increasing the transparency in the system as corruption is a major problem for the country (Central Intelligence Agency-a, n.d.). Advantage and disadvantage of investing Argentina is full of natural resources and these resources can be greatly utilized by the multi-national corporations. Furthermore it is a populated country. Its large population provides a huge customer base to the investing companies. The major disadvantage of being an investor in Argentina is complicated legal and social issues that are experienced by the companies. Raw Material and labor Argentina is full of raw material. Agricultural raw materials are grapes, sunflower seeds, lemons, soybeans, tobacco, tea etc. The country has a labor force of 16.62 million (Central Intelligence Agency-a, n.d.). Barriers of Investing Complicated legal system and a struggling economy is a major concern for both investors and Argentine government. Investors are found to be more interested in investing in other South American countries like Brazil and Mexico where situation is more favorable for foreign direct investment. Conclusion If Brazil and Argentina is compared with each other on the basis of above mentioned information then it will be very clear that Brazil is likely to be the preferred country over Argentina in case of foreign direct investment. I will choose Brazil because of its huge population, fast growing economy, investment friendly government and developing infrastructure. I would like to sell consumer durables to the huge customer base of Brazil as the purchasing power of this customer base is rising day by day at a very fast rate. 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