Political Issues in Emerging Economies - Essay Example

Political Issues in Emerging Economies Veema Limited, a Canadian-based corporation, which specializes in the manufacturing of industrial lighting systems, is in the process of developing an effective business entry strategy to penetrate the Brazilian market. Brazil is an attractive opportunity for expansion since the economy is undergoing tremendous economic development, which calls for major infrastructural development (Chung & Enderwick, 2001). This paper will review the political issues that the company will face. The paper will discuss the strategies of entry into Brazil’s emerging economy. The paper will explore the best market segment, the best entry mode, and the best and most cost-effective model of distribution. In case of Brazil, which is an emerging economy, the best entry market segment is the infrastructure and transport sector, due to the current renovations, upgrades, and expansions put in place (Brida & Lionello, 2011). The best entry mode will be using strategic alliances since the company stands to benefit from the networks developed by the Brazilian firms, which will help it gain reputation in the unchartered region. The best method of distribution will be outsourced manufacturing since the company will operate under low production costs while it will also evade high exportation costs and protectionist import levies (Kayo et al. 2010). The Political Issues that the Company will Face The Brazilian economy has a strong domestic services sector, which accounts for about 67 percent of the country’s GDP. Major growth areas include insurance, financial intermediation, and retail sales. According to UK Trade and Investment (2012), about 35 million Brazilians moved from Classes D and E to Class C between 2002 and 2012. Consequently, has marked the major economic growth rates, which resulted in a reduction of economic inequalities. In effect, this had an effect of increasing demand from the middle class, an increasing tendency to spend, and provided a major economic opportunity for companies – local and foreign. Partly due to the emerging class of middle class consumers, the Brazilian economy grew by 2.7 percent in 2011, which is lower than the 7.5 percent realised during 2010. Due to these economic changes, there have been efforts that implement policies to contain the increasing inflation since unfavourable global economy has resulted in a retardation of the economy (UK Trade and Investment, 2012). On the other hand, the slowdown contributed to a reduction in basic interest rates in order to boost growth through passing the reductions to consumers and businesses. Importantly, the labour market conditions are relatively favourable, at 6 percent, which is very comparable to the economies lowest. However, local labour regulations are onerous and complex. Therefore, it is important for foreign market entrants to handle them carefully in order to evade costly liabilities. The exchange rate of Brazil was affected to a large extent by the uncertainty in the global economy/ In mid 2012, the Real Dollar slumped from a ratio of 1: 1.73 against the USD to a rate of USD 1: 2.02 (UK Trade and Investment, 2012). In the area of trade, Brazil has remained balanced, but a comparatively closed national economy. The total of trade flows stood at about 25 percent of the economy’s GDP. Brazil’s exports stood at USD 256 billion in 2011 with the major exports being fuel and oil, ores, soybean, transport produce, ethanol, meat, sugar and chemicals. In 2011, the economy’s major consumers were China and US with these two countries representing 17.3 and 10 percent of total exports respectively (UK Trade and Investment, 2012). Other principal consumers include Argentina at 9 percent; Japan at 3.7; and the Netherlands at 5.3 percent. Brazil’s imports stood at USD 226.2 billion for the year 2012. Major imports included chemical products, machinery, automotive parts, oil, electronics, transportation equipment and electrical appliances. The larger part of the imports were from the US, China, and Argentina, at 14.5, 7.5, and 6.7 percent respectively (UK Trade and Investment, 2012). Despite the effectively-functioning business environment, bribery and corruption are a major impediment to the conduct of business in Brazil. The impact is felt, mainly when carrying out business dealings with local government authorities. The persistence of the threat of corruption is caused by the ineffectiveness of the enforcement of the laws developed to counter the practices. Corruption is common, especially where a service user seeks bureaucratic process that can be speeded up. Therefore, this is likely to affect a company’s pursuit of public contracts. The Brazilian tax structure is very complex, which also increases its exposure to corruption. In this case, tax collection officials collect bribes in order to relax inspections and assessments and stop the pursuit of fraudulent business or push for the required tax obligations (UK Trade and Investment, 2012). The threat and risk posed by terrorism is not immense in Brazil. However, with the increasing attractiveness of the economic role of Brazil, the threat is likely to increase. Throughout the country, there is an improvement in the awareness targeted at the risk. In effect, this little implication has necessitated the employment of action or planning aimed at eliminating the potential threat. Brazil has not yet developed a legal structure to counter IT-related crime since the Act on Cybernetic Crime is still not fully developed to offer the protections required. In 2008, cyber crimes increased by 318 percent (UK Trade and Investment, 2012). However, the civil society has mobilised resources aimed at monitoring of online-supported businesses. One such programme is the Safernet project. Trademark and patent crimes have been placed under control after the government increased the power of the Patent and Trademark rights office, although it is still affected by bureaucracy. Counterfeit products are common in the Brazilian economy (UK Trade and Investment, 2012). The Market entry of Veema Limited at Brazil Entry into emerging markets presents a number of challenges. In Brazil, there are a number of environmental and socioeconomic challenges. Economic success in emerging markets is a complex and dynamic process, which goes beyond the limits of micro and macro-economic bases of prosperity and value creation. In this case, Canadian enterprises are haunted by the trade disputes between their country and Brazil, which started with the aeronautics industry (Gouvea, 2004). Company analysis of Veema Limited The company is a family-owned international enterprise, which has developed a differentiated company culture, which adopts a flexible and casual approach to business. The company has maintained a customer-centred approach, which dictates their time and the regard offered for the satisfaction of customers – after they are offered the required lighting products. The company pursues remaining consistent and dependable in the provision of customized and high quality products. Following the company’s outlook, the company will adopt the most effective market entry model. Market Segmentation strategy Due to the nature of the products of the company, and the expansion opportunities available in the Brazilian economy, especially the infrastructure and transport sector, the company should aim the available opportunities in the construction sector (Canever, Trijp, & Lans, 2007). Within the Brazilian construction industry, the segments of infrastructure include transportation, corporate properties, educational and residential buildings, and healthcare centres, which the company can target. Each of the sectors presents major opportunities for the company although the opportunities in the transportation sector are the most effective (Papadopoulos, 2011). The areas of potential projects for the company will be explored later. Mode of Market Entry The model of entry into the Brazilian economy will determine the success of the company at the foreign market. Based on the fact that the company is targeting the infrastructure and transport sector, its aim should be securing upcoming projects in the Brazilian emerging economy. In particular, the company should focus on venturing into the infrastructural transformation to take place before the 2014 FIFA championship and the Olympic Games to be held in 2016. Following the nature of the target opportunities, it is recommended that the most effective market entry strategy will be the development of strategic International Alliances (SIA), with Brazilian firms (Moreira, Poole, & Burini, 1994). Challenges Anticipated During the Entry The company will face a number of challenges during its entry into Brazil. One of these challenges includes the policy of safeguarding local entities from foreign competition through protectionist importation taxes. These create a very complicated labour and tax regulatory environment. Bribery and corruption are also areas that influence the Brazilian market and the transparency levels of organizations. The language of the target market will be another challenge as Portuguese is not a commonly understood language among the employees of the company. Due to these challenges, the limited nature of the resources available to employ at Brazil as well as the company’s limited knowledge of the Brazilian market – the entry model should be one that compensates for these needs (Kim & Oh, 2002). Therefore, the company should adopt a strategy that presents a low or medium level cost, one that allows the company the highest level of internal operational control. The strategy adopted should also safeguard the company’s resources, including their intellectual rights while also limiting the risk levels facing the company during their entry into the new market. Conversely, the entry strategy should also be able to allow the company to control major complementary resources like local distribution networks due to its failure to have conducted business in business prior to its entry. Through a consideration of these different areas and considerations, the company will be most advantaged to employ an SIA Approach for entry into Brazil. Strategic International Alliances (SIA) As previously discussed, Brazil is planning major transport and infrastructural developments in preparation of the sporting visitors to be hosted in coming years. Government projects are ordinarily offered through a streamlined tendering process. The tenders and contracts will be advanced by the government through commissioning of the services of companies or outsourcing from the private sector companies. Since many companies cannot have all the required capabilities and skills, many enter into alliances, which are expected to offer them a higher probability of winning the bids. In the case of Veema Limited, entering into a strategic alliance with a local firm will be the best option (Baker & MacKenzie, 2004). Entering into a SIA with a local firm will allow the company access to information about the partnered firm, which will piggyback on the company’s reputation. This strategy will be very effective for Veema Limited since it has not yet realized brand knowledge globally, which would help it attract the bids as a self-standing bidder. The companies that Veema can partner include the architectural, engineering, or construction firms that are well established in Brazil. The target partner should also be well established, with a good brand image in the infrastructure and transport sector. The choice of the potential alliance partner for the company will entail doing an extensive research about the identified partners. Some possible partners for the SIA include Construtora, and Odebrecht. The competitors of the company include lighting firms working in strategic alliances and independent lighting firms. A comprehensive understanding of the competition in the offering of the Brazilian economy will help the company develop a better understanding of the demand in the foreign market. The costs of the transaction of the contracts will be shared between Veema limited and the Brazilian firm. In effect, the venture will be relatively cheaper for the company. There are various risks that come with the company’s entry into the new, unchartered market. These risk areas will expose the company to a number of factors that are unfavourable. These factors include the risks associated with the collection of payment, which is dependent on the contractual agreement between the organization and the allied firms overseeing the construction project. Through the contractual agreement with a Brazilian company, the company will be exposed to the corruption and bribery structures nurtured over time. The future opportunities available to the company include that the SIA will help it develop sustainable cooperative relationships with the Brazilian company. Through the relationship development, the company will develop knowledge on the inner workings of the infrastructure and the transport sector business of the Brazilian economy, as well as the corporate culture. Through the strategic relationships, the company will benefit from access to further strategic alliances; including consortia alliances, international ventures, and FDI options like acquisitions and mergers (Katsikeas et al., 2000). The final step of the entry strategy mode into Brazil will be the development of a distribution model. This stage will involve the determination of where the products will be produced from, and the channels of moving the finished goods from the place of manufactory to the customer, in the most cost effective and logical way. Entry into the Brazilian market will be a hard task as the target market is different in the areas of culture, language, typical management, social norms, and business operations. Conclusion Veema limited is a Canadian corporation planning its entry into the Brazilian market. The Brazilian market is an attractive investment destination as the economy is undergoing tremendous economic development in infrastructure and transport. The political issues that the company will face include a stalled economy, where policies to cut inflation levels have been employed. The company will face a labour environment that is likely to cause the company major problems in case it fails to observe nationally accepted standards. The company will counter the comparatively closed economy, which limits the activities of foreign enterprises through the regulation of trade levies. The company will face a business environment characterised by corruption and bribery and the risks of fake products, which could threaten the company’s business. Therefore, the best market entry strategy for the company is a Strategic International Alliance (SIA) with a Brazilian firm. Through the SIA, the company will benefit from the prior business networks and knowledge of the strategic partner. The risks that are likely to face the company after entering into the SIA include exposure to risk of payment collections and bribery and corruption networks. Lastly, the company should develop a distribution model, which will entail the production areas and the channels of transporting the finished goods to the customers. References Baker & McKenzie. (2004). Doing Business in Brazil. Law Firms. Brida, J., & Lionello, F., et al. (2011). Research note: Tourism as a factor of growth – the case of Brazil. Hospitality and Tourism Index. Canever, M. D., Van Trijp, H., & Van der Lans, I. (2007). Benefit-feature segmentation: a tool for the design of supply-chain strategy. Marketing Intelligence & Planning, 25(5). http://dx.doi.org/10.1108/02634500710774978 Chung, H., & Enderwick, P. (2001). 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