Country briefing Essay
Foreign direct investment has slowly but surely gained popularity across the globe. The need to venture into foreign markets has intensified courtesy of increased globalization as well as technical advancement in various sectors. Companies must however be very cautious before making the final decision of venturing into a foreign market. An effective market research on the nation or economy of interest is vital not only in enabling a company identify the best mode of entry but also paving way to an effective analysis of whether such a venture would be profitable.
(Dunning H, 1980, 9-22). Virtually, all businesses exist with the aim of making profits by ensuring that revenues earned exceed the costs incurred. An Australian firm seeking to invest in Brazil must understand important aspects such as the country’s economic, social as well as political stability. The nation’s economic stability alone is insufficient in determining the viability of a business as other risks for instance political risks play a vital role in determining the growth of a company.
A country where political instability is a risk that can jeopardize with the operations of a business in terms of destruction of property would not be attractive to any investor. Such instability could include constant wars and protests that could be accompanied by destruction of property. Political and economic stability makes it easy for companies to make their long term projection which is important in decision making processes of firms.
Since the mid 90’s the Brazilian government has been committed to attracting foreign investors to invest in her various sectors as she realizes that foreign direct investment will play a vital role in as far as her economic growth and development is concerned. The privatization of various sectors like the extraction industries and the telecommunication has made it attractive for foreign investors to venture into these areas. (Marcio G and Alexandre B,1998).
However, there are some restrictions on some sectors for instance the media, health, rural property, nuclear, aviation as well as fishing. Brazil also restricts foreigners from conducting research on her esteemed forests in the Amazon basin for fear of “biopiracy”. In an effort to making foreign direct investment attractive Brazil allowed foreigners invest in new as well as expanding the existing banks. An effective banking sector is very crucial for both the domestic as well as foreign investors.
This is attributed to the fact that it ensures effective flow of money in an economy. Ease in the acquisition of credit in an economy translates into increased purchasing power which in turn leads to an increased demand for goods and services encouraging production and growth of industries. (US department of State) A unique characteristic of Brazil is that she is among the largest countries in the world. According to the US Department of State her economic growth in 2006 stood at 2. 8% and 4. 5% in 2007.
If this trend was to be maintained any foreign investor eyeing her would gain. This positive trend can be blamed on the policies adopted by the government of the day. The current government embraced effective monetary as well as fiscal policies towards attaining stability in as far as the nation’s economic growth is concerned. This way the country’s unemployment rates have been lowered and the inflation rates made moderate. Exports have also increased and this translates to foreign exchange earnings.
Brazil’s industrial sector is also quite promising especially in automobiles, steel, textile, computers as well as other consumer durables. Her service sector has also diversified and become more sophisticated which is a plus to the country’s economic growth. The major factors to be blamed for the increased foreign direct investment in Brazil are the trade liberalization, effective macroeconomic policies as well as the privatization of various sectors. (US Department of State) All in all, Brazil has not been without challenges that hinder effective foreign direct investment.
Her local currency has remained in high debts for several years and the high tax burden also acts as deterrence to investment. There are also high disparities or inequalities in both wealth and income. The legal uncertainties in Brazil make bilateral investment or joint ventures attractive to many foreign investors. The judicial procedures are sluggish and discouraging for both the local as well as foreign investors. Protection of intellectual property rights is very important to foreign investors.
Weak intellectual property rights make it easy for unscrupulous businessmen to produce imitated goods at lower price which compromises on the consumer confidence on the company’s quality products. It also lowers the market as imitated goods will be offered at a lower price and rational consumers who may not be aware of the compromised quality will opt for the cheaper goods. Brazil’s infrastructure needs to be improved especially on the seaports, the rail transport as well as energy sector that heavily relies on rainfall and suffers drastically from rainfall fluctuations.
Corruption is also an impediment to investment in Brazil. Understanding the host culture is vital for any foreign investor as it has direct effects on the firm’s investment. A people’s way of life plays an important role in influencing investment and hence plays a vital role in foreign investment. Some cultures or religions may for instance abhor the consumption of some products and a firm producing such goods will incur losses as its demand is minimal. Production of pork products in a Muslim dominated region may not only provoke hatred from the host country but it would also be uneconomical for the firm.
Good relationships with the locals are important especially if the firm has objectives of imposing long term influence. Culture is viewed as the generally shared beliefs and values regarding how life is perceived. Culture to Kluckhohn and Strodtbecks is defined as the ‘collective programming of the mind which distinguishes one group or category of people from one another. ’ (Lane H, DiStefano J and Maznevski M, 2006, 28). To them there are six major issues or cultural orientations that matter while understanding people’s culture.
They include the relation to nature, relationships among people, the mode of human activity, belief about basic human nature, time orientation as well as the use of space. Various cultural differences between Australia and Brazil may jeopardize the effectiveness of business negotiations carried out by the two parties. The mode of dressing in Brazil is different from that in Australia. Unlike in Australia where women can wear dresses, blouses and skirts, Brazil embrace conservative wear and place more emphasizes on three piece suit rather than two piece suit.
It is vital to avoid dressing in a combination of yellow and green which are colors of Brazil’s flag. It is also important to have the nails manicured something that is not highly revered in Australia. (InternationalBusinessCenter. org. 2008). In Brazil touch is much embraced especially on the arms, elbows as well as the back something uncommon in Australia. Brazilians are not very time conscious as the Australian and this calls for patience on the part of the Australian. However it is vital to make prior meeting arrangements as early as a fortnight’s time.
Unlike the case in Australia where gift giving is not embraced, Brazilians value gift giving although not in the first meeting. There is also a variance in terms of the gift given where Australians would prefer chocolate and a glass of wine while Brazilians would opt for flowers. However purple is associated with death and must be avoided. The Brazilian’s coffee is very concentrated unlike other types of coffee. Although kisses are uncommon in Australian they are embraced in Brazil especially among the women. Opinionated topics are not wholly embraced in Brazil as is the case in Australia.
Although both entertain sports as appropriate discussion topics Brazilians abhor topics on inequalities, politics, religion the rain forests as well as on Argentina and they must consequently be avoided. (InternationalBusinessCenter. org. 2008). According to a UNCTAD January 2009 publication, ‘assessing the impact of the current financial economic crisis on global foreign direct investment flows, the level of foreign direct investment is expected to decline significantly in 2009 due to the economic as well as financial crisis.
The inability to access finances both at the internal as well as the external levels made investment decline. Finances available are not only scarce but quite expensive jeopardizing the profit margins of the investors. With the current conditions many companies have made their intentions to cut on production and lay employees public. Tight restrictions to accessibility of credit and the dwindling corporate profits are to blame for these trends. Brazil has also lowered her trade tariffs in an effort to encourage foreign investment.
Foreign investors are also welcome to purchase land in Brazil although more guidance is needed when acquiring land along the borders. Various changes have been made in the legal as well as procedural processes although there is still room for improvement. Taxes in Brazil do not discriminate against foreigners or the locals but are applied equally. Some areas have been granted federal tax benefits such as the Manaus Free Trade Zone with the aim of encouraging foreign investment in the Northern as well as the Northeastern parts of Brazil. (Political risks services, 2008)
Conversion and transfer of funds from Brazil has been simplified and many restrictions removed. The previous requirement had it that foreigners had to seek approval with the Central bank were erased all with the aim of attracting foreign investors. Currently only online registration a month prior the day of transaction is required. The Brazilian government expects foreign companies to employ at least two thirds of their labor force except on the areas where they are not qualified to do so. Two thirds of the total payroll is also expected to go to the Brazilian nationals.
(Political risks services, 2008). Reduction on her taxes will be one of the strategies adopted to ease the current account deficit. However according to an IMF article ‘IMF Executive Board Concludes 2008 Article IV Consultation with Brazil’, Brazil is in a better position to handle external interferences as it has been embracing effective macroeconomic policies. However, the rate of inflation has remained relatively high courtesy of the high prices triggered by the global economic crisis. The current account balance has also weakened shifting to a deficit rather than the previously recorded surplus.
The current account in 2007 was expected to decline and in 2008 it was feared to be -1. 8% of the country’s GDP. This trend is however expected to change as the government would encourage foreign direct investment to counter the deterioration of the current account. (McKinley T, 2009, 2) A current account deficit implies that there is an imbalance between the exports and the imports where the imports are higher than the exports. This has negative effects on the host economy especially where foreign direct investment plays a vital role in as far as the economic growth is concerned.
This is attributed to the fact that the high imports may be due to the activities of the foreign companies and the gains from foreign exchange will be minimal for the host country as they are repatriated back to foreign companies. (Latin America Monitor: Brazil Monitor, 2008, 1-5). The effect of the global economic crisis on brazil was reduced by the increased flow of foreign investment which the government is relying on to finance her balance of payment as well as counter the possible negative implications of repatriation of profits.
The government must continue embracing policies that will make foreign investment attractive to ensure economic stability. The effective macroeconomic as well as fiscal policies must continue to be executed. To counter the global economic crisis effect on her economy taxes ought to be reduced and availability of credit be ensured to ensure a higher purchasing power. References: Political risks services. 2008. Brazil country conditions climate for investment InternationalBusinessCenter. org. 2008. Geert Hofstede Analysis australia. Retrieved on 25th may 2009 from http://www. cyborlink.
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