Swot Analysis of Brazilian Economy - Case Study Example

Contents

Introduction3

SWOT analysis of Brazilian economy4

Strength4

Weaknesses5

Opportunities6

Threats7

Globalization and International Trade8

Legal environment10

The cultural and social environment11

Environment and ecological issues12

Conclusions and recommendations13

Reference List14

Summary

Emerging economies refer to developing countries and economies in transition experiencing rapid growth through economic liberalization. Private of public owned international organizations have been forced to develop new marketing and operating strategies to cope with the increased market scope, legal and several changes in the emerging economies. This paper will analyze Brazil as one of the countries in the world characterized by rapid growth and development in its economy. There will be SWOT analysis of the local business environment to determine the changes that can influence the performance of business entities. In addition, this research will determine how Brazil is integrated into the global economy through analysis of its participation in the globalization and international trade activities. In this research, there will also be an analysis of Brazil’s legal, cultural, social and environmental issues that can influence new entry or continuous operation of industries within its rapid changing economy. This market analysis will help in determining the key aspects in the emerging economy that can encourage or discourage any business activity in the emerging market.

• Introduction

The 21st-century global economy is characterized by increased complexity, transparency and interdependency. These characteristics have enabled the existence of emerging markets where developing countries are experiencing some economic growth (Moraes 2010 p.4). According to the International Monetary Fund statistics in 2013, the highest economic growth internationally was experienced in developing economies. This has made the countries potential target market for international cooperation and developed economies. Brazil is one of the emerging economies that have created some attention globally. It is a member of the BRICS (Brazil, Russia, India, and China), which is a unified block to encourage trade and other forms of international relation activities to encourage economic growth. However, these countries have a different economic level of development, policies and sociocultural activities. Brazil falls under the fifth category based on its size in the global territory and has more than 80 percent of its population in the urban centers. Despite experiencing the usual emerging economic challenges, there are significant structural reforms that have promoted rapid economic development.

According to the World Bank data, Brazil is one of the countries among the BRICS to experience decreased income inequality as indicated by the GINI coefficient. This was achieved by the government through the establishment of effective policies and investing in basic education programs that helped in increasing the level of literacy in the country (OECD 2012 p.17). Brazil has also experience technological advancements, which helped in the expansion of agricultural activities in poor regions within the country such as Bahia and Tocations. Therefore, modernity has increased the level of demographic transition where individuals in the rural areas adopted the modern lifestyle. The transition was mainly promoted by media platforms such as social networks and television coverage within the country OECD 2012 p.12).

With all the changes Brazil is experiencing, it is a suitable emerging market for organizations and several types of business entities operating in a global market. There is the need to conduct serious market analysis to acquire a competitive advantage. Also, emerging economy such as Brazil gives an opportunity to tap growing middle-class consumers market which provides a long-term global competitiveness to an organization. This paper will present both SWOT and ESTEL analysis of the Brazilian emerging economy to determine its suitability for business organizations aiming to venture into emerging economies.

• SWOT analysis of Brazilian economy
  • Strength

According to Brazil’s geographical details, there is the availability of land and water resources. The total area of the country is over 8 million square kilometers, and it is the fifth largest country in the world. In the year 2012, 80 million hectares was cultivated for crop production, which makes Brazil one of the biggest agricultural countries in the world. Besides, availability of land space and water resources gives companies ways to acquire raw materials for productions process and space for the establishment. According to the Food and Agricultural Organization of the UN report (2015), there is still unexploited land space in Brazil located in the savannah areas that can aid in agricultural and other industrial production processes.

The availability of land and water resources and favorable IPR environment makes Brazil attractive for business entities in the agricultural sector (OECD 2010 p.16). For example, Brazil is one of the sugar producers in the world, and it is estimated that in the next 15 years, sugarcane production will increase by double replacing rice. The capacity of the Brazilian agricultural sector can support many forms of industrial participants that are, from the manufacturer, processors, and service industry (OECD 2009 p.15). Therefore, with the continued government support and adoption of sound macroeconomic strategies, Brazil is one of the potential emerging markets to support profitable business activities.

• • Weaknesses

Given the development level of the Brazilian economy, there is a significantly low level of labor qualification. This is attributed to the fact that Brazil has been among the poor countries for years hence quality education has been a challenge. According to the OECD report (2011 p. 4), by the year 2007, 63 percent of adults aged between 25 and 64 years had not completed upper secondary education program. The individuals aged between 25 and 65 are considered the most productive in any economy in the world. Therefore, lack of necessary qualifications has been a challenge for Brazilians to join the labor market. In addition, companies face a huge challenge when recruiting their employees since there is a huge challenge in the transition from education to employment. This is attributed to the long schooling period and the irrelevant traditions that limit instances of learning. Limitation of lack of quality skills might force companies to import experienced personnel, which might be expensive (Yang & Ma 2013 p.38).

Another weakness in Brazil is its poor infrastructure, which has been a challenge for years. The poor infrastructure reduces the competitiveness of any industry located in Brazil. Poor conditions of roads and railways increase the costs of transportation hence increasing the operating costs for business entities. In addition, high logistics prices have made Brazil an expensive market for any business entity since most of the business earnings are used in servicing and maintenance of vehicles and storage facilities in case of unnecessary delays that can result from breakdowns (OECD 2013 p.15). The obsolete Brazilian infrastructure cannot support production process and cannot support the evolving needs of the users.

Another challenge is the poor establishment of land property rights in Brazil. There is a serious challenge that individuals face as a result of inequality experienced in land distribution among individuals. Also, insecure land tenure is a huge challenge that has led to environmental degradation and human rights abuse in Brazil. Despite being one of the economic giants there are serious challenges that companies can face because of poor establishment of land distribution in the country. More than fifty percent of the industrial producers in Brazil rely on natural resources for production (OECD 2010 p. 27). The resources are unevenly distributed, and protection of individuals and their resources is a big challenge. Therefore, due to legality challenges in ownership property companies can experience some difficulty in acquiring enough resources for production.

• • Opportunities

Given that Brazil is one of the growing markets in the world, numerous business opportunities can be profitable for investors. The Brazilian markets are actively evolving and have high liquidity hence; it has attracted series of investors both locally and abroad (OECD 2010 p.17). Also, the technological transformation has enabled the market to be more efficient in enforcing business transactions. The recent reforms in the regulatory policies have freed local funds hence promoting investment activities. There are also trading activities that happen in the Brazilian economy, and they include futures, arbitrage and commodities trading. These trading opportunities are expected to continue for longtime due to the increasing demand indicated by the trading activities in Brazil (Sánchez-Fung 2011 p.45).

The existence of new technologies is also advantageous to investors targeting the emerging Brazilian market. Technology is an essential part of the economy as it promotes innovation, which is one of the features of the developing economy. The Brazilian government has been focusing on the science and technology sector for over forty years and this has led to robust technological improvement in the country. Technology has improved the production level, especially in the agricultural sector where the process of production has evolved (Food and Agriculture Organization of the UN 2015 p.6). In addition, technology has made it possible for companies to reconvert low productivity agriculture for modern crops, which are suitable for large-scale output and are environmentally friendly. There is also increased demand for ethanol, which is an important industrial raw material.

• • Threats

Despite the economic advancements, there exist some serious threats that can affect business performance in Brazil. There are frequent regulatory changes that can increase costs of operation and production for an organization (Guzzini & Neumann 2012 p.92). For example, the increasing level of education among workers may result in increased demand for higher wages due to the improved skills and experience. In addition, working regulations can be stringent in some sectors especially on how companies dismiss and employ their workers.

Also, due to the existing poor infrastructure, the cost of doing business can be high in the Brazilian economy. However, the Brazilian government has always supported free enterprise and free trade system but some sectors in the industry experience monopoly power, which might increase costs. Additionally, due to the high number of semi-skilled and unskilled labor force business can face a huge challenge hence fencing them to invest in training and participate in exchange programs, which might be expensive depending on the industrial sector (OECD 2012 p.18).

Another threat is the volatile macro environment where there is high liquidity level, which might result in serious tension for emerging economies such as Brazil. The tension results from the implementation of conflicting monetary policies and the financial stability of the economy. The volatile macroeconomic environment can also increase the pressure from inflation where capital inflows attract high-interest rates, which is associated with high credit, increased asset price and resource misallocation across the economy. Therefore, the volatile macroeconomic environment is an important factor that needs serious consideration before investing in the Brazilian market (Food and Agriculture Organization of the UN 2015 p. 5).

• Globalization and International Trade

Despite the global success of Brazil, it is one of the least integrated BRICS countries in the international trade activities. According to the World Bank, Brazil ranks 130 out of the 183 countries regarding ease of conducting business transactions. Brazil is known to be relatively closed and has a tough business environment with the complex regulatory framework and under developed infrastructure (Williamson 2013 p.125). For example, according to the recent business transaction between Brazil and China, it is clear that it is a more north-south relationship because Brazil exports cheap raw materials while it imports value added manufactured products. This is a clear indication of lack of enough resources to engage in industrial processing activities and unfavorable policies that can encourage foreign investment in the country to ease industrial functions.

According to the taxation of foreign cooperation, the Brazilian government established tax [policies that might increase tax in case a local agent enters into a binding contract with a foreign investor due to tax exposure of export activities in Brazil. Such policies have made the participation of Brazil in international trade to be negligible since most domestic companies are only focused on supplying the domestic market. Despite the recent trade openings internationally, there has been no significant change in participation in trade activities in the global market (Moraes 2010 p.13). This is attributed to strict regulatory changes that altered the level of competition in the domestic market, which attracted new investors and guaranteed the survival of local companies.

Also, local Brazilian firms have induced international strategies that limit the level of competition and new entries in the Brazilian economy (Paula 2011 p.35). For example, nationally owned firms started buying locally owned firms and forming a strategic alliance and joint ventures to obtain a position in the local market. Despite such strategies, the process of internationalization of Brazilian companies is still low due to the macroeconomic processes that affect the overall investment of the economy abroad.

However, regardless of the low level of participation in international trade, Brazil has appreciated the process of globalization. This is depicted in the country’s participation in multilateral and regional trade negotiations that has helped it establish bilateral relationships with other countries (Looney 2014 p.54). However, these relationships are concerned with protecting local companies from unfavorable competition from international organizations. That is, Brazil signed bilateral agreements to promote the protection of investment in other countries. These negotiations are more restrictive in accessing the Brazilian market to limit the level of competition from foreign suppliers but promote foreign investors. Therefore, the main objective of the regulations governing foreign trade in Brazil is to promote direct investment in the economy.

• Legal environment

Brazil’s legal framework still faces serious challenges especially in relation to the enforcement of property rights and regulation of utilization of natural resources in the country. The substantive economic growth experienced over the last decade has exposed the country to serious environmental and human rights challenges. Since this research focuses on market analysis, it will focus on how the established legal framework in Brazil enforces property rights and access to natural resources that are always important factors for foreign investors (Frederick 2012 p.58).

According to the Brazilian constitution, any individual or company has a right to ownership since it is a fundamental right according to the civil code of 2002. The land is an important factor that needs important consideration when trying to venture in Brazilian emerging market. Brazil is known to have a low level of participation in international trade activities because of its harsh policies (Frederick 2012 p.56). For example, in the year 2010, the government was aiming to limit the ability of foreigners and companies to purchase rural or agriculture land. In addition, the president signed a law that limited the amount of land an individual foreign investor can own Brazil. Despite the established legal framework of land and property ownership, the law does not state the purpose in which the acquired land property can be used; this may result in abuse of natural resources that can result in instances of insecurity and conflict of interest in governing organizations (Frederick 2012 p.72).

There have been serious situations where associated market programs resulted in unlawful exploitation of uninhabited land and eviction of poor individuals who are unable to negotiate for the prices of land that they inhabit. The reforms have also been inhabited by confusion regarding the jurisdiction of each organization mandated in enforcing property rights (Logue 2011 p.64).

The government administration and institutions are mandated in ensuring that various economic transactions are according to the law and does not infringe on human rights. The country has favorable labor laws that protect workers from any form of abuse or unlawful dismissal from duty. The labor market regulations in Brazil are established to achieve two main objectives; the first includes improvement of the labor force welfare despite the existing inefficiencies in the economy. The second objective includes improving the level of efficiency in the labor market regardless of the existing market imperfections. Therefore, Brazil has a well-established legal framework that is essential for legal business transactions and enforcement of contractual agreements.

• The cultural and social environment

According to the cultural characteristics, it is important to note that Brazil has many regional variations despite being unified by a single language. That is Brazil is a country that is composed of the multicultural mixture were there are individuals from the African, Europeans and Native American origin, which form the single Brazilian culture. In addition, Brazilians are characterized by risk-averse individuals due o their low level of tolerance for uncertainty. Uncertainty avoidance is evident on how business cooperation operates domestically (Frederick 2012 p.70).

According to the cultural mixture, Brazilians are known to have quality entrepreneurial behavior since one out of every eight adults in the society is known to be an entrepreneur. In addition, 12.8 percent of the Brazilian population participates in entrepreneurial activities. The entrepreneurial culture is evident due to the numerous opportunities that people venture in because of lack of employment opportunities in the labor market (International Monetary Fund 2012 p.7).

According to the social class, the modern Brazilian has the different social class level. The first class individuals are the wealthy individuals who own several resources in the society then there is middle class, middle lower class, and the lower class. Individuals in the middle class are graded based on the wealth, knowledge, and skills that have as members of society (Frederick 2012 p.120). Initially, the Brazilian population has experienced some tremendous growth. The society is also characterized by high level of inequality issues especially related to gender and the amount of wealth and individual owns.

The cultural and social analysis is important for any business entity because it helps in defining the marketing, management and operational strategies that are effective in venturing into the Brazilian market. In addition, understanding of the culture is important in noticing various challenges and opportunities a society presents to the business in case the operation is commenced.

• Environment and ecological issues

Over the years, Brazil has established serious environmental regulations and policies with an aim to protect its natural resources and indigenous forests. Modernity and economic development have resulted in increased population and exploitation of uncultivated lands in Brazil. Therefore, the government establishes a suitable legal framework in the environmental sector to prevent environmental destruction. In addition, there are established permanent forest estates, which are under government protection (Jones 2012 p.48).

The local communities within Brazil are also accorded commercial forest rights, which helps in settlement issues. Brazil is known to have strict environmental rules and policies, which made it, have one of the best mining regulations in the world (Jones 2012 p.72). There are strict policies the prevent instances of dumping which has become one of the global challenges in the modern society. The local government has established international relations with nongovernment organizations such as the IFC and GTZ to protect its tropical forests. These programs indicate the existence of serious laws and regulations that prevent instances of pollution and promote conservation activities.

• Conclusions and recommendations

Given the above SWOT, legal, cultural, social and environmental analysis, Brazil is one of the best-emerging markets given that most of its natural resources are unexploited. However, there exist some challenges especially in the infrastructural sector, which can end up being costly for a business that needs logistic processes to operate. In addition, the country has currently formed several international relations that promote direct investment programs to boost its economic performance. For example, it recently joined the global block known as BRICS with an aim of participating in global trade transactions and opens its economy to encourage foreign investments. Brazil also exhibits the traits of the strong economy with stable government, which has adapted friendly regulatory changes that are suitable for investors and companies operating in the global market.

From macroeconomic view, Brazilian emerging market presents a business lucrative opportunity for investors and business cooperation. The country has well legal framework and environmental policies, which gives a clear platform for business activities. In addition, due to the existence of resources, the country presents an investment suitable opportunity because there is availability of resources that can be used in the process of production. For example, since there is large part of unexploited land, sugar companies can invest in the Brazilian market to increase their production.

However, it is important to note that there can be serious market segmentation that results from the poor state of infrastructure in Brazil. Poor conditions of roads and railways have significantly affected the transportation sector. However, recently the country is improving its infrastructural condition, which will promote market integration since the movement of people and commodities will be improved. Besides improvement in infrastructure will help in removing interstates trade barrier hence increased economic development.

Business can be also beneficial from investing in the Brazilian market because the export activities help in integrating the country into the world hence limiting the impact of its strict regulations that discourage foreign investors. The constant improvement in Brazilian macroeconomic power is significant in ensuring stable economy and promotion of investment activities.

• Reference List

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