Risk Analysis of Brazil - Essay Example

International Business Management - "Risk Analysis of Brazil" This article deals with the International Business Management and the, “risk analysis of Brazil” in terms of the country’s Agricultural Sector. It traces Brazil’s growth in the agricultural sector and how it stands today as one of the world’s agricultural giants, without even realizing its true potential. Hence the article is aimed at the “why” factor that is crippling the agricultural sector of Brazil from realizing its real worth. And how these factors can have a dampening effect on the future, that is slow down the long-term growth of the Brazil’s Agricultural Sector. The article has emphasized the need for FDIs in the agricultural sector of Brazil, and how with the proper flow of finance into this sector will help agriculture of Brazil reach the unfathomable heights. Table of Contents 1.Introduction 3 2.An Overview of the Brazilian Economy 4 3.Major Economic Sectors of Brazil 5 4.Comparative Analysis Of The Different Sectors Of Brazil 6 5.SWOT Analysis on Brazilian Agriculture 7 6.Need for FDI in Brazil’s Agricultural Sector 9 7.Conclusion 11 8.List of References 11 1. Introduction “Foreign Direct Investment (FDI) occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage the asset.” (Graham Jeffery P, 2005) Over the years FDI has helped a great deal in the globalisation and internationalisation of business ventures across the globe especially in the developing countries. According to a source from the UNCTD, in the developing countries annual FDI flow has increased from less $10 billion to $636 billion in the span of three decades that is from 1970 to 2004. (U.S. Dept of States, Jan, 2009) This huge increase in the flow of FDI was driven by the industrial mergers, acquisitions and globalisation of businesses. One of the main aspects of FDI is that it enhances the flow of capital and technology into the developing countries. This is generally beneficial to both the parties, the home ground and the host ground, that is, the country which makes the investment and the country which takes in the investment, respectively. It also presents the smaller and the medium sized industries with the opportunity of becoming more actively involved in business on the international level. To sum it up the FDI assists in the internationalisation of small business, harnesses a spirit of cooperation between the different nations and different firms within the nations and overall speeds up the growth and economic development of the participating nations and firms. (Graham Jeffery P. and Spaulding R. Barry, 2005). 2. An Overview of the Brazilian Economy The Federative Republic of Brazil, geographically situated on the Latin side of America and with a work force of 99.23 million is one of the fastest growing economies in the sphere of developing countries of the world, with an estimated annual growth rate of 5.4% for the year 2008. In the year 2007, the GDP of the country in terms of its purchasing power parity was $1.849 trillion, with the per capita GDP of $9,500. The Agricultural Sector of the country accounted for 5.5% of the total GDP, the Industrial Sector 28.7% and Services Sector 65.8%, respectively. The trade balance of the country as of 2007 was $43.6 billion surplus, with the exports accounting to $159.2 billion and imports $115.6 billion. The exclusive merit for the increase of the economic growth of Brazil from 2.8% in the year 2006 and 4.5% in 2007 and to an estimated growth rate of 5.4% for the year 2008 goes to Luiz Inacio Lula da Silva, the re-elected president of the country. (U.S. Dept of States, Jan, 2009) With the implementation of some prudent and sensible fiscal and monetary policies together with the necessary microeconomic developments, President Lula with his team of economic experts was able to trigger this economic growth. Brazil today has joined the ranks of the affluent creditor nations. Some of the exports of the country are booming, it’s external accounts are healthy and growing, moderate inflation envelopes the country which have all added up to the decrease in employment. But, however, significant these booms in the economy of Brazil may look major vulnerabilities in the economy of the country still remain. Despite the fact of the country’s improving growth rate, the local currency debt of Brazil still remains high, the total tax burden bore by the country is still high and the income and land distribution system of the country remains off- centered. So as to minimise these vulnerabilities that still persists in the country on a rather wide scale, to the maximum, the government should encourage more FDIs into the country. Especially in the sectors in which the country lags behind the most. (U.S. Dept of States, Jan, 2009) 3. Major Economic Sectors of Brazil The major economic sectors of Brazil comprises of – 1. The Agricultural Sector, 2. The Industrial Sector and 3. The Service Sector. The Agricultural Sector of Brazil accounted for the largest percentage of the country’s GDP till the year 1945. From then on with the rapid growth of industries and other service sectors has led to the gradual fall to the net productivity of the agricultural sector in Brazil. By the year 1999, the industrial sector was 3 times as more valuable than the agricultural one. As of today the Brazilian Agricultural Sector accounts for 5.5% of the country’s GDP and 36% of all exports of Brazil. (U.S. Dept of States, Jan, 2009). The country is the world’s largest producer of agricultural goods like soybean, sugarcane, coffee, tropical fruits and frozen concentrated orange juice. Brazil accounts for the world’s largest commercial herd. Apart from these, the other important agricultural products of Brazil are cotton, corn, cocoa and tobacco. In the industrial sphere, Brazil represents one of the most advanced industrial sectors in the whole of Latin America. To protect many of the local industries from international competition the government of Brazil uses import taxes. The diverse range of Brazilian industry includes shoes, steel, textiles, cement, tin, automobiles and parts, machinery, cement, iron-ore, tin, software and computer manufacturing, petrochemicals to aircrafts and other consumer durables. In the year 2007 the industrial sector of Brazil accounted for one-third that is about 28.7% of the country’s GDP. Last but not the least, in fact the most important economic sector of Brazil is the Service Sector. The service sector alone accounted for 65.8% of the country’s GDP in 2007. (U.S. Dept of States, Jan, 2009). In the diverse and sophisticated services industry of Brazil, mail and telecommunications are the biggest players. They are followed by banking, energy, commerce and computing respectively. In the energy sector of services Brazil is one of the leading producers of hydroelectric power. The total capacity of the Brazilian hydroelectric power is 90,000 megawatts of which 66,000 is presently being powered. Other than these three major economic sectors of Brazil, it’s mineral resources is also extensive. Deposits of nickel, tin, chromite, bauxite, beryllium, copper, lead, tungsten, zinc and gold is exploited in more or less a daily basis. The country also has large reserves of large iron and manganese and accounts much for the country’s export earnings. (U.S. Dept of States, Jan, 2009) 4. Comparative Analysis Of The Different Sectors Of Brazil This brief outline of the major economic sectors of Brazil gives an idea on how one sector fairs in comparison to the other. Through this short analysis of the three sectors it can be seen clearly that the Brazilian Service Sector is way ahead of the other two sectors. But, in this modern age where technology plays more than a vital role in determining the economy of a country, the Service Sector accounting for more than half of the country’s total GDP is very natural and moreover it shows that the nation is progressing technically as well. However, progress and development on the technical front only, does not make for the overall development of the country. In the year 2007 the agricultural sector of the country accounted for only 5% of the country’s GDP. This gives an indication of how far behind the agricultural sector of Brazil lags, in comparison to the industrial and service sectors of the country. Brazil for more than half of the 20th century was mainly an agricultural country and is still endowed with vast agricultural resources, that make Brazil an agriculturally self-sufficient state. The country as pointed out earlier is one of the largest producer of agricultural products like soybean, sugarcane, coffee, corn, wheat, cocoa and tropical fruits. Brazil is the home of the world’s largest commercial cattle herd (50% more than that of U.S). Brazil with so much agricultural strength that has led to it’s becoming one of the key players in terms of global agricultural markets, is still so far behind the other two economic sectors of the country, with just 5% input of the total GDP. This surely provides some food for thought on the agricultural scenario of Brazil. (Brazil Country Brief, Nov, 2008) 5. SWOT Analysis on Brazilian Agriculture A SWOT is an analysis usually carried out to serve as the basis and to provide a sense of direction for the development or the making of marketing plans. The SWOT analysis relies on basic and a straightforward approach to accomplish this, as in evaluating the strengths and weaknesses of the organization, in addition to the likely opportunities and threats that the organization may face. (Danca C. Anthony, 1992) The SWOT analysis on the agriculture of Brazil was able to provide the following facts: 1. Strengths: The main strength of the agricultural sector of Brazil is the agriculture itself. Brazil has always been an agricultural state with vast agricultural resources. Suitable climatic conditions, adequate and well distributed rainfall and availability of good soil adds to the strength of agriculture in the country. The other elements that makes up for the strengths are - the country’s geographical closeness to the U.S., the cultural affinity of the country, the effectiveness of the human resources and the prompt availability of land, labour and water. 2. Weaknesses: The main weakness of the Agricultural Sector of Brazil, is the country’s inadequate access to finance or limited access to credit in terms of production and marketing. Due to this factor, the agricultural sector of Brazil is not being utilised to its full potential. Another weakness is that the country’s development in the field of infrastructure and transportation systems have failed to keep in pace with the rapid growth rate of agricultural production. Though Brazil may rank one in a number of agricultural exports like sugar, coffee and tobacco to name a few, the cost that the country bears in supplying and transporting these products, invariably cuts down the profits. 3. Opportunities: The growing demand of the country’s agricultural products on the global scale is the opportunity that lies with Brazil. 4. Threats: The threats that the agricultural sector of Brazil should be aware of are, the shifts on the regulatory environment, its discernment of the economic status and the increases in the labour rate. 6. Need for FDI in Brazil’s Agricultural Sector Though the agricultural sector of Brazil is seen to booming and expanding, it is in dire need of Foreign investment to fill in the ample room for growth. As for the assistance in terms of the foreign investment Brazil can look forward to America and it’s firms. The two nations have always been on cordial and friendly terms. Just last year that is on March 2008, the U.S. Secretary of State, Condoleezza Rice paid a visit to Brazil and signed the historic Joint Action Plan for Racial Equality. (U.S. Dept of States, Jan, 2009) The relations between the two nations encompass a broad range of political as well as economic agenda. Moreover, the close geographical proximity between the two countries will help matters in terms America making direct economic investment in the agricultural sector of Brazil. Currently, Brazil is only using one-third of its full potential, in terms of its arable land. Over the last ten years, Brazil has been trying to consolidate its agricultural sector and its position as one of the leading agro-food producer and exporter to the global market. Tracing Brazil’s growth in this sector over the years will show that the country has done quite well, despite the supply side hindrances faced by the sector. In the year 2000, the net exports in billion US$ was 17, in 2003 it was 23, in 04’ it reached the 30 billion mark and by the end of 2005 the agricultural exports had reached the US$30.9 billion mark accounting for 10% of the country’s GDP. (World Bank Group, Sept 2008) The agricultural sector of Brazil accounting for 10% of GDP in the year 2005 does not reflect the true potential of the country’s agricultural sector. As put forward in the SWOT analysis, the main negative aspect that prevents the agricultural sector of Brazil from performing to its full potential is the lack of necessary credits that is it’s access to credit is limited. For the betterment of the agricultural industry in the immediate future, the sector will need financing that will make for a producer’s capital, at higher rates. The other factor that is proving to be the Achilles’ heel for the agricultural sector of Brazil is the country’s infrastructure and transportation. The storage and port facilities are not in league with the pace at which the agricultural sector is growing. The roads and the railways of the country are poorly maintained and are usually congested. On an average an agricultural commodity has to travel about 1,000 kms to each the port, the congestion and the poor quality of the roads usually adding up to the late delivery of the goods, an in international trade time is of the most essence, more so when dealing with farm products. Due to the lack of proper port facilities more often than not the volume of agricultural commodities for export overwhelms the loading docks, which normally results in lengthy delays and additional costs. Studies done in the recent years, brings into light an interesting fact that the logistic costs bored on the export of soybeans by Brazil is 83% and 94% higher than in America and Argentina respectively, on an average. So to get the most out of the agriculture sector and bring down the cost of inefficiency or the “Custo Brazil,” the term used to refer to the cost of inefficiency occurred during the production, distribution and the final exports of goods, the government of Brazil must invite FDIs to invest in this economic sector of Brazil. Through the FDI the agricultural sector can make investments in, “producer-to-market, producer-to-port and port-to- the final distribution of goods” thus cutting down the Custo Brazil, maintaining the product quality and the most important of all making the delivery on time. (Valdes C., Nov, 2006) 7. Conclusion But for the FDI to come into the country, the government of Brazil must enlighten the prospective firm or the country making the FDI, upon the true potential that lies with the agricultural sector of Brazil. For instance, currently 62 million hectares of land is under agricultural use, but the expansional potential that lies with the country is three times this amount. For over more than a decade Brazil has been the leading producer and exporter of many agricultural products, taking into the fact, the many obstacles faced by this sector, as mentioned earlier in the essay. So with the proper flow of investment into the agricultural sector helping to create better infrastructure and transportation facilities, true potential of the agricultural sector of Brazil can be definitely realised. (Wainio J.,2008) 8. List of References 1. An Overview of the Current State of Agricultural Biotechnology in Brazil, (May 2005), Harvard University, retrieved on 2nd Feb, 2009, from: http://belfercenter.ksg.harvard.edu/publication/3211/overview_of_the_current_state_of_agricultural_biotechnology_in_brazil.html 2. Brazil Country Brief, (Nov. 2008), retrieved on 2nd February 2009, from: http://www.dfat.gov.au/geo/brazil/brazil_brief.html 3. Danca C. Anthony, (1992), SWOT Analysis, University of St.Francis, Illinois, retrieved on 2nd February 2009 from: http://www.stfrancis.edu/ba/ghkickul/stuwebs/btopics/works/swot.htm 4. Graham Jeffery P and Spaulding R. Barry, (2005), Understanding Foreign Direct Investment, retrieved on 2nd February 08’ from: http://www.going-global.com/articles/understanding_foreign_direct_investment.htm. 5. U.S. Dept of States, Jan, 2009, Bureau of Western Hemisphere Affairs, retrieved on 2nd February, 2009, from: http://www.state.gov/r/pa/ei/bgn/35640.htm 6. Valdes C., (Nov, 2006), Brazils Booming Agriculture Faces Obstacles, retrieved on 2nd February, 2009, from: http://www.ers.usda.gov/AmberWaves/November06/Features/Brazil.htm 7. Wainio J., (2008), Future of Brazil’s Agricultural Sector, retrieved on 2nd February 2009, from: http://72.14.235.132/search?q=cache:XfagpbYKScsJ:www.ers.usda.gov/publications/agoutlook/may1998/ao251h.pdf+agriculture+sector+of+brazil:.edu&hl=en&ct=clnk&cd=1&gl=in&client=firefox-a 8. World Bank Group, (Sept. 2008), Brazil at a Glance, retrieved on 2nd February, 2009, from: http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/LACEXT/BRAZILEXTN/0,,menuPK:322367~pagePK:141132~piPK:141109~theSitePK:322341,00.html Read More