Overview of Brazils macro environment
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Published: Mon, 5 Dec 2016
Being one of the members of the “Big Four – BRIC countries”, Brazil experienced the economic downturn and bust and has been hampered by excessive indebtedness and high inflation in the past. Since 1990s, Brazil has implemented numerous policies with government and authorities’ support to launch the reform. Brazil’s economies started to growth rapidly after policies and stabilization plan were implemented. Moreover, the ongoing sound marco-economic and social policies have extended the period of stability, growth and social gains (WorldBank, 2010). Thus, the continuous development of its interior for hosting the World Cup and Olympic Games in 2014 and 2016 respectively can pursue industrial and agricultural growth. With the vast natural resources, labor pool and trading opportunities to other foreign countries therefore significantly increased in Brazil and more foreign investors were attracted. Nowadays, it has become a regional leader with leading economic power of South America that is one of the first in the area to begin an economic recovery (InvestorPlace, 2010).
Overview of Brazil’s macro-environment
In this section, it is going to overview Brazil’s macro environment by applying PEST analysis and the few aspects are being discussed as follow.
PEST analysis is analyzing the external environment which is analyzing the factors of Marco-environment. It includes Political factors, Economic factors, Sociological factors and the Technological factors (Jobber, D., 2004).
Refer to Figure 2.1, Brazil has the stable political climate which under the leadership of the communist party. The legal system of it is based on the Roman Codes (CIA, 2010). Brazil has 26 administrative divisions and the government is divided into executive branch, legislative branch and judicial branch (CIA, 2010). In addition, it perceived the corruption problem as ranked 75th position out of 180 nations of the transparency International’s 2009 Corruption Perceptions Index (Transparency, 2010).
In addition, Brazil involved within the free trade agreement that is signed by the United States, Central America and Dominican Republic which benefited Brazil for trading opportunities (BusyTrade, 2010). Furthermore, it launched the Growth Acceleration Plan in 2007 to develop and steady the economic growth (WorldBank, 2010)
Being one of the emerging economies in the world, Brazil’s economy is growing at a moderate but steady level with continuous growing GDP. Refer to Figure 2.2 which is figured out that the GDP of Brazil is constant growth during 2000 to 2007 significantly.and maintained the sustainable growth to 2008.
From Figure 2.3, Brazil weathered the global financial downturn with relatively minor impacts. The country was one of the last to fall into recession in 2008 and among the first to resume growth in 2009. With the large growth in agricultural, manufacturing and mining, it ranked highest among the South American countries with the strong position in the global economy (Tradingeconomics, 2010).
Brazil is the largest national economy in Latin America, the world’s tenth largest
economy at market exchange rates and the ninth largest in purchasing power parity (PPP), according to the International Monetary Fund and the World Bank. It has large and developed agricultural, mining, manufacturing and service sectors, as well as a large labor pool. Thus, the expanding of its presence in international financial and commodities markets can help Brazil’s economic keep on growth
Refer to Figure 2.4, the interest rate in Brazil is kept on declining as to attract more foreign direct investment. The government lowered down the interest rate, in consequence, to lower the inflation rate.
From Figure 2.4, Brazil suffered serious inflation rate in 2008. However, it declined during 2009. The latest inflation rate is 4.6% in July of 2010 which means the prices measured against the standard purchasing power is still high.
According to Figure 2.6, about currency convertibility, Brazil allows its currency to adjust in value in foreign exchange markets so long as the fluctuations in value.
From Table 2.7, the mid-year population is 201,103 thousands and ranked 5 out of 238 countries (CIA, 2010). Brazil was one of the largest population countries in the world. The growth rate of 2010 is 1.2 which was lower than 1995 and 2005.
The nationality of Brazil was Brazilians (CIA, 2010) and the religions were mainly Roman Catholic (CIA, 2010). The languages of Brazilians were Portuguese (CIA, 2010).
From Figure 2.8, Brazil does not suffer from aging problem. And the birth rate was maintained from 2009 that 18.43% in Figure 2.9 (UNICEF, 2010). Together with longer life expectancy with the index of life expecting at birth in 2008 is around 71.99 years old as maintained (UNICEF, 2009).
The labour force is 101.7 million in 2009 that ranked 6th out of 228 countries (CIA, 2010). The unemployment rate is kept on dropping in these 2 years as refer to Figure 2.10.
The role of female and male are vary by social classes (EveryCulture, 2010). Most of the Brazilian women had jobs outside home and employed in low-skill or low paying jobs (EveryCulture, 2010). It meant that there was no gender equality in that society.
Source: Tradingeconomics, 2010
Despite the poverty ratio is decreasing as refer to Figure 2.11, Brazil’s inequality levels remains among the highest in the world. Many people still live in poverty with social exclusion is quantitatively and qualitatively pronounced and structurally ingrained (WorldBank, 2010).
Brazil is a leader in science and technology in South America and in some fields as a global leader. About the technological research is largely carried out in Brazil which is mainly supported by government. Furthermore, the Brazilian information technology market is the largest in Latin America and the spending on IT product and services is expected to increase positively. Together with the expending economy lifting millions into middle class for whom computers are no longer beyond reach. Brazil’s IT services market is expected to continue to grow strongly in 2010, with total spending of around US$9.4bn as the economy continues to bounce back from recession. For a developing market, the percentage of Brazil IT market revenues generated by services is high at around 38%, which corresponds more to developed market levels.
Brazil government supported the technology development by providing the funding as it was the leader of science and technology development in South America. Refer to Figure 2.12, Brazil’s research and development is keen on innovation of technology infrastructure.
Brazilians had the strong national ideology that they called their land as the “racial democracy” (EveryCulture, 2010). They were seldom judge on the black and white people but classified racially depend on the social classes (EveryCulture, 2010). As a result, it meant that Brazilians were having heavy concepts on the social classes.
Brazil’s Trade, Investment and Migration Pattern
Brazil is in Group 4 which is the nearly new industrialised economies with the average growth rate in pass decades (Thompson, G., 1998). Agricultural was playing an important role in Brazil. However, Brazil is turning from agricultural to industrialization. Agricultural should be a critical role to Brazil (Balassa, B., 1998). As a result, in order to develop the economics, Brazil needed to import the industrialization subsidiaries such as machinery and equipment.
By the trade theory, the comparative advantage of the nation is determined by “factor endowments” (Thompson, G., 1998). “During the process of industrialization, the structure of comparative advantage shifts from simple, labor-intensive product to sophisticated capital and technology-intensive product” (Thompson, G., 1998). As a result, Brazil as the “latecomer industrialization” (Thompson, G., 1998) begins to import the products from the advanced nations such as United States.
The following are the indicators of imports and exports by values.
From Figure 3.1, Brazil’s value of exports and imports is sustainable growth during 2007 to 2008. As the brought down by weaker economic activity and lower global commodity prices drive the total exports fell by 22.7% (in US dollar terms) and imports by 26% as economic recession (CIA, 2010).
Furthermore, Brazil’s export major commodities are transport equipment, iron ore, soybeans, footwear, coffee, autos is ranked 26th when compare to the universal. And import major commodities are machinery, electrical and transport equipment, chemical products, oil, automotive parts, and electronics (CIA, 2010).
In Latin America, Brazil is the largest recipient of foreign direct investment (FDI) as Brazil is open to and encourages foreign investment. Only generate the domestic savings is not sufficient for sustainable long-term growth in Brazil (Investorplace, 2010), thus must continue to attract FDI. Together with the legislation promoting public-private partnerships and infrastructure development program known as the Growth Acceleration Program can boost Brazil’s economic.
From Figure 3.2, the foreign direct investment climate was not stable during 2002 to 2009. There are undulated changes during 2007 to 2009 because of low labour cost and rich natural resources, hence, many foreign direct investments were attracted to invest in Brazil. For many foreign direct investors, the most attraction point was the growing local market and policies that encourage the foreign investment (Hubpages, 2010). The largest single source of the foreign investment in Brazil was the United States, then Germany, Japan as follow (Hubpages, 2010). Moreover, the biggest foreign direct investment activities were invested in manufacturing (Hubpages, 2010). In 2014 and 2016, it is going to held World Cup and Olympics encourage the investment through tourism sector (InvestBrazil, 2010).
As economic growth, Brazilian started to move to urban to have a better living environment. There were two factors driven the movement, push and pull factors (Thompson, G., 1998). Push factor was Brazilian to avoid poverty and poor living standard. Pull factor was Brazilian to improve the living environment. As a result, there is now 88% of population is classified as urban (CIA, 2010). Only a few percent were still living near the coast. The net migration rate was -0.09 migrants/1,000 population (CIA, 2010).
Relationship between Brazil and the international environment
In 1990, Brazil’s government has radically changed the framework conditions for industrial development accompanied by technology and industrial policy programs. Moreover, Brazil is gradually opening the market to foreign competitors that remarked few regulations on trade and investment from foreign countries, thus creating an environment that requires international competitiveness and thereby forces companies to attain international levels of quality and efficiency (BrazilGov, 2010).
There are a number of implications that Brazil is implementing to control the Foreign exchange rate of currency with the policies and action programs. Moreover, the presence of legal and regulatory trading protection for foreign investor doing business in Brazil. As refer to Figure 4.1, Brazil was ranked 73th out of the 183 best practice economies countries (IFC, 2010). Together with foreign direct investment and government support that has mobilized a significantly large amount of capital to upgrade the infrastructure of interior (FloridaBrazil, 2010).
Despite the economic crisis, Brazil’s GDP showed continued growth through 2007-2008 while other regional countries’ GDP declined (Worldbank, 2010). In addition, the steady growth with strong consumer spending and job creation that stability of living forming a healthy economy, hence, Brazil certainly attract the foreign investors to catch up the business opportunity (Obelisk, 2010).
Brazil with large growing in agricultural, manufacturing and mining, thus, Brazil is keen on performing its potential to being emerging market. As a result, Brazil ranks among the 10th richest nations of the world by GDP and has maintained the lowest external debt when compared to other regional countries (SloanCenter, 2010).
Brazil is one of the countries that has the largest population of the world with around 102 million labor force that ranked as 6th when comparing to the world as shown in Figure (CIA, 2010).
Brazilians had strong sense of national ideology that proud of their country’s natural resources and diverse culture (EveryCulture, 2010). Besides, Brazilians are welcome the foreigners to travel and invest in such robust emerging market (FloridaBrazil, 2010).
Brazil is a community leader in Linter American with collective security efforts in economic cooperation of Western Hemisphere (BrazilGov, 2010). Moreover, as a member of Organization of American States and Inter American Treaty of Reciprocal Assistance that can figure out that Brazil has potential to expand relations with its neighbors (BrazilGov, 2010).
In addition, Brazil is a founding member of the Latin American Integration Association and Union of South American Nations that has been a leader of G-20 group of nations (BrazilGov, 2010). In 2009, Brazil not only became a creditor country that trading with United States, Western Europe, and Japan, but also China is a growing market for Brazilian exports.
Characteristics and Challenges of macro-environmental factors towards the trade, investment and migration patterns of emerging markets
Main drivers for doing business in Brazil
Brazil is the 5th largest economy with population of 198 million.
Many local companies are undervalued and in need of restructuring, capital and technology
Growth potential and consumer market
Broad industrial base and infrastructure, and a diversified economy
Creativity and flexibility of labor force, coupled with its competitive cost basis
Abundant agricultural, mineral and energy resources and potential
Established transportation networks (railways, highways, ports) and distribution channels in most industrialized areas
Privatization in late stages and follow-on transactions still in development
Inflation under control in the last 10 years
Increasing globalization and international trade, with Government policies favoring exports
Foreign investors are eligible for most available fiscal incentives
Goodwill generally tax deductible
New regulations favoring minority shareholders
Improvement in local capital and debt markets
Main Challenges of doing Deals in Brazil
Complex tax and employee related regulatory environment, with high taxes and social charges on payroll, sales and income
Multiple taxes with fast changing legislation affecting business plans and increasing risks of contingencies
Economic environment still considered volatile as compared to more stable economies
Fast-changing business conditions
Lack of local financing coupled with high real interest rates
Quality of historical financial information affected by fluctuations in exchange rates and Generally Accepted Accounting Principles differences
Complex transfer pricing and foreign capital registration rules
Difficulties in reorganizing companies quickly, including high costs for employee terminations
Important cultural peculiarities, including a different perception of the due diligence process
Sometimes the ³know-who´ is more important than the know-how in the local market
Considerable bureaucratic rules and regulations for certain businesses and industries
High demand for investments in the distribution channels and infrastructure
Semi-skilled and unskilled labor in certain developing areas
Social extremes with unequal distribution of wealth – a significant portion of the
Population not participating in the consumer market
Justification of selection of Brazil
There are many reasons of choosing Vietnam and going to identify its economic future as emerging market.
First, Brazil has strong commitment that has made significant progress in developing a sustainable investment market over the last decade and rightly deserves its reputation as the leader among emerging economies in this regard. These achievements can proofed that foreign investors are tend to doing business in Brazil as refer to Figure 6.1, 6.2.
Second, the evolution of a sustainable investment market by Brazil has led other emerging markets to focus on the same issues and goals.
Third, Brazil has strong business case that importance of sustainability in business and investment in Brazil that provide stable political climate and facilitated rules and regulations that maintained the economy steady growth.
Finally, Brazil demonstrated impressive courage, determination, flexibility, and creativity in sustainable future. Together with Brazil’s stable economic and political environment that liberal investment and government’s commitment to economic reform can direct Brazil being success.
In order entering into Brazil, 4P is playing an important role to guide the investors as refer to Figure 7.1.
“Product is a key element in the overall marketing offering.” (Armstrong, G. & Kotler, P., 2007).
From Figure 7.2, there are three levels of products which are core benefits, actual product and augmented product. In order to evaluate the product element in Brazil, it is important to understand their lifestyle, habit and their consumption behaviour.
Nowadays, Brazilian demand more IT products such as mobile phone, computers and software. Moreover, as Brazilian are becoming more wealthy, the demand of housing and transportation are increasing (Laposte, 2010).
Most Brazilian including the low-income population is loyal to brands. Those people with the upper-middle classes are pay attention on the quality and the value-added services such as the warranty or after-sales services. They will not reject the foreign goods although they have the national pride (Laposte, 2010).
As a result, based on the three levels of product, in order to design the product to enter into Brazil, it is recommended that import the convenience, shopping and specialty products to satisfy both low and high income group. For the low income group, the core benefit of the product should be high quality commodities with low price such as toothpaste. For the high income group, the core benefit of the product should be strong brand preference such as luxury goods.
“Price is the amount of money charged for a product or services” (Armstrong, G. & Kotler, P., 2007). As there is a wide gap of rich and poor in Brazil, the price setting should based on the target segment which is the segmented pricing. Segment pricing is selling products or services at two or more prices which difference in price not differences in costs (Armstrong, G. & Kotler, P., 2007). If the target segment is the low-middle class, the price setting should be lower. If the target segment is the high-middle class, the price can be higher as they are less price-sensitive.
Place (Distribution Channel)
“Marketing channel is a set of independent organization that help make the product or service available for use or consumption by the consumer or business user (Armstrong, G. & Kotler, P., 2007). When enter into Brazil, producers cannot sell the goods directly to the final users. As a result, the intermediaries are playing the important role to bring the products to the markets. In Brazil, supermarket is becoming more important for the distribution channel as it made 80% of sales (Laposte, 2010). There are several large local wholesalers and retailers in Brazil. When entering into Brazil, it can choose the major wholesaler as the intermediaries to help bringing the foreign products to Brazilian.
“Promotion mix is the specific mix of advertising, personal selling, sales promotion, public relations and direct marketing that a company uses to persuasively communicate customer value and build customer relationships.” (Armstrong, G. & Kotler, P., 2007). In order to make the effective promotion in Brazil, it is going to discuss on the media environment in Brazil.
Television has the lowest average Advertising Index in the world (Anonymous, 2006). However, it was the most effective promotion tools to Brazilian. Refer to Table 7.1, TV’s penetration is 97.4% which was dominant. Brazilian watched television over five hours per day. As a result, the promotion should mainly focus on television which has a high coverage.
Moreover, there is another new opportunity to promote in Brazil which is direct e-marketing such as telemarketing, e-mail etc. These can be used as the promotional tactics but not to maintain the relationship between the customers and companies (Laposte, 2010).
The most effective way of the promotion strategy should be the pull strategy which spends a lot on advertising to create customers’ demand on products (Armstrong, G. & Kotler, P., 2007). In addition, the promotional message on advertising should be reflecting Brazil’s culture such as Brazilian is enthusiasm.
Brazil has steadily improved macroeconomic stability, building up foreign reserves, reducing its debt profile by shifting its debt burden toward real denominated and domestically held instruments, adhering to an inflation target, and committing to fiscal responsibility. Brazil’s potential can be maintained and sustained in future of development.
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