Market entry strategy for management consulting companies into the Brazilian market with focus on the LEAN consulting business

Table of Contents

Statutory Declaration

Acknowledgements

Abstract in English language

Abstract auf deutsch

1 Introduction
1.1 Objective, relevance and research questions
1.2 Structure of the topic
1.3 Methodology

2 Economic overview and background of Brazil
2.1 Mercosur
2.1.1 History
2.1.2 Foundation
2.1.3 Economic role of the Mercosur
2.2 The country Brazil
2.2.1 Political and economic history
2.2.2 Economic environment
2.2.3 Political environment
2.2.4 Macroeconomic data
2.2.5 Social inequality
2.2.6 Level of corruption and governance indicators

3 Market Evaluation
3.1 The “three-sector-theory” of Brazil
3.2 Productivity
3.3 Potential markets for management consulting companies
3.3.1 Major Brazilian companies
3.3.2 Strongest regions in Brazil
3.3.3 Most promising branches
3.4 Conclusion

4 LEAN Consulting
4.1 Definition and Philosophy of LEAN
4.2 Typical practices applied
4.3 Differences of LEAN Management towards other methods
4.4 Management consulting companies in Brazil
4.4.1 LEAN consulting companies in Brazil
4.4.2 The IBCO
4.5 Reasons to choose an external consultancy
4.5.1 Criteria to choose consulting services
4.5.2 Average consulting fees
4.6 Conclusion

5 Market entry strategy
5.1 Overview of the classical market entry strategy
5.1.1 Methods for market entry
5.1.1.1 Contractual agreements
5.1.1.2 Sole Venture
5.1.2 Influencing factors for the entry mode decision
5.1.3 Special characteristics of services
5.2 Market entry strategy into the LEAN consulting market
5.2.1 Competition
5.2.2 Opportunities and threats
5.2.3 Framework for strategy formulation
5.2.3.1 Business communication
5.2.3.2 Starting the business
5.2.3.3 Employing foreign workers
5.2.3.4 Obtaining a credit
5.2.3.5 Legal constraints
5.2.4 The Delphi Study
5.2.4.1 Reasons to choose the Delphi method
5.2.4.2 Limits to the Delphi method
5.2.4.3 Experts
5.2.4.4 First round
5.2.4.5 Second round
5.2.4.6 Short summary of most important findings

6 conclusion
6.1 Final results and recommendations
6.2 Direct comparison of theory and empiricism
6.3 Future outlook
6.4 Prospect for further research

7 Bibliography
7.1 Books
7.2 Articles/Publications
7.3 Websources
7.4 Further reading and experts

8 Appendix
8.1 Delphi Study – Summary of first round
8.2 Delphi Study – Summary of second round
8.3 Concrete steps for starting a business in Brazil
8.4 Paying taxes in Brazil

Statutory Declaration

“I declare in lieu of an oath that I have written this diploma thesis myself and that I have not used any sources or resources other than stated for its preparation. I further declare that I have clearly indicated all direct and indirect quotations. This diploma thesis has not been submitted elsewhere for examination purposes.”

Eidesstattliche erklärung

„Ich erkläre an Eides statt, dass ich die vorliegende Diplomarbeit selbstständig verfasst, und in der Bearbeitung und Abfassung keine anderen als die angegebenen Quellen oder Hilfsmittel benutzt, sowie wörtliche und sinngemäße Zitate als solche gekennzeichnet habe. Die vorliegende Diplomarbeit wurde noch nicht anderweitig für Prüfungszwecke vorgelegt.“

Date/Datum Kristina Erikson

Acknowledgements

To my family, in particular to my parents, in love and gratitude

You always supported and encouraged me in every respect throughout my studies and patiently stood by my side.

Without you it would not be possible for me to be where I am

Thank you

Abstract in English language

Especially during the last two decades consulting companies established themselves in the international marketplace. In times of globalization particularly emerging economies, such as Brazil, are experiencing an upward trend. The term LEAN consulting became frequently used in this context and plays a major role in the Brazilian consulting market. This thesis develops recommendations for the market entry of management consulting companies into the Brazilian market. The implication of the term Lean in the context of the consulting business and its future potential in Brazil is examined, supported by an evaluation of the target market. Accordingly, the outcome of the theoretical part is then being compared with empirical findings. These findings are conducted via a Delphi Study, identifying that the most promising strategy for doing business in Brazil is intensive networking. New ventures should enter the market only with professional support from Brazilian partners who are more familiar with the peculiarities of the market.

Abstract auf deutsch

Insbesondere während der letzten zwei Jahrzehnte haben sich Consulting Unternehmen im internationalen Markt etabliert. In Zeiten der Globalisierung kann man vor allem in Schwellenländern wie Brasilien eine Tendenz nach oben erkennen. Der Begriff LEAN Consulting wurde in diesem Zusammenhang sehr frequentiert und spielt eine wichtige Rolle im brasilianischen Consulting Markt. Diese Diplomarbeit entwickelt Handlungsempfehlungen für den Markteintritt von Management Beratungen in den brasilianischen Markt. Die Bedeutung des Begriffs LEAN im Zusammenhang mit dem Beratungsgeschäft und dessen Potenzial in Brasilien wird untersucht, basierend auf einer Analyse des Marktes. Die Ergebnisse des theoretischen Teils werden mit den empirischen Befunden verglichen, welche via einer Delphi Studie ermittelt werden die klar herausstellt dass intensives Networking eine der vielversprechendsten Strategien für Unternehmen in Brasilien ist. Start-up Unternehmen sollten den Markt nur mit professioneller Unterstützung eines brasilianischen Geschäftspartners erkunden, der sich mit den Besonderheiten des Marktes auskennt.

List of Tables anD Figures

Figure 1: Structure of the thesis

Figure 2: Framework applied (“bottom up”)

Figure 3: % of GDP distribution in Latin America

Figure 4: Inflation rate (1995 – 2007)

Figure 5: FDI into Brazil

Figure 6: GDP 2005 of selected countries

Figure 7: GDP development in Brazil (PPP US$)

Figure 8: Comparison with regional average in Latin America

Figure 9: Comparison with Germany

Figure 10: Percentage change of industrial production (2005 – 2008)

Figure 11: Forbes Global 2000 – Brazil

Figure 12: Largest companies in the chemistry and petro chemistry sector

Figure 13: Largest companies in the food and beverages sector

Figure 14: Largest companies in the automotive and airplane sector

Figure 15: Largest companies in the engineering sector

Figure 16: Regional GDP distribution

Figure 17: Industrial production by regions and states

Figure 18: Turnover in the industry sector per branch (2005)

Figure 19: The Toyota House

Figure 20: LEAN Management: 6 basic Strategies

Figure 21: Signification of KAIZEN

Figure 22: Direct comparison of Innovation with LEAN

Figure 23: Criteria used by clients to choose consulting services

Figure 24: Average consulting fees in Brazil

Figure 25: Structure of market entry

Figure 26: Market Entry Alternatives

Figure 27: Factors in the Entry Mode Decision

Figure 28: Forces Governing Competition in an industry

Figure 29: Criteria to choose consulting services

Figure 30: Average use of measures to increase level of awareness

List of maps

Map 1: Map of Mercosur

Map 2: Map of company locations in the South, Southwest and Northwest

Map 3: Map of Consulting landscape in Brazil

Table of Abbreviations

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1 Introduction

“Brazil is rich: rich in natural resources, rich in fertile soil, and rich in people” (Walter, 2006). Although the country still shows deficits in different areas, the Brazilian market has attracted large investors and companies especially in the past decade. The country’s potential has been the focus of many analysts and researchers by renowned economic institutes. After years of high inflation and slow growth – especially in the eighties and early nineties – Brazil was able to recover and get back into game with the other global players.

From a historic perspective it is to say that the country has gone through large transition periods in the last century. Emerging from being a major coffee exporter until the early 20th century, Brazil now belongs to one of the most industrialized countries in Latin America. Although it is the largest country in the region in terms of population figures and geographical size, its GDP share in Latin America or annual growth rate offer a different conclusion. Nevertheless, the consulting market in Brazil has been growing, in particular during the last ten years. Many European and North American consulting companies have invested into the country, built branch offices and bought local firms. Although the market is still very young, its future potential has clearly been discovered.

When thinking of Brazil, the words that tend to enter people’s minds are positive sounding ones such as Samba, Carneval and beautiful beaches which radiate joy and energy. On the other side issues like criminality, poverty and high social inequality are often associated with Brazil as well. Either way, it is almost certain that one will have heard of Brazil. The country manifested itself in the mind of people and has made front page news more than once.

1.1 Objective, relevance and research questions

The objective of the thesis is neither to conduct a market evaluation nor to point out the importance and future relevance of Brazil in the world economy. In fact this work is an empirical study on a market entry strategy which can serve as a reference for management consulting companies that want to enter the Brazilian consulting market. Furthermore, the work attempts to deliver a comprehensive picture of this market, with the intention of elaborating on whether it is wise to invest in Brazil, or whether there may be another – more suitable – Latin American country. Yet, the focus lies on the framework for strategy formulation and the proposals that will be made thereupon. In order to accomplish this, both a classical and an empirical approach were chosen whose outcomes will be compared to one another in the last chapter.

LEAN Management is a booming term in the consulting business. Everybody wants to learn the “LEAN-Thinking” and apply the method to his/her own company. Since the late 1990s LEAN Management is experiencing an upward trend and the word has spread all over the globe to reach Brazil. Consequently, there is a growing demand for LEAN in this country, as evidenced by the number of consulting companies already present in the market and the excellent prospects it shows.

The aim of the thesis is to propose which geographical regions and economic sectors in Brazil may yield attractive prospects for management consulting companies. The information is then used to formulate a market entry strategy for LEAN Consulting in the Brazilian market. In addition, proposals will be made and future scenarios presented to the reader which are augmented by emprircal findings.

Based on the introduction and the objective of the topic – giving a perspective of the situation in Brazil – the following two research questions are being raised.

- Is the LEAN market in Brazil a suitable market for a LEAN consulting company to invest in?
- Which recommendations for an entry strategy can be given when entering the Brazilian LEAN market?

Out of these research questions, a sub-question is derived.

- Can Brazil serve as an entry port to Latin America for LEAN consulting businesses?

The analysis of these questions will be conducted through a theoretical as well as an empirical approach.

1.2 Structure of the topic

After having presented the objective and relevance of the topic as well as the research questions, the author will introduce the structure of the thesis. Accordingly, to strengthen the arguments that will be highlighted in the conclusion, the thesis is divided into three parts.

The first part consists of theoretical results selected from secondary research. Based on the theory, an empirical study is conducted, involving a group of experts who will elaborate on their personal experiences and opinions with regards to the topic. The empirical findings deduced from the study are compared with the theoretical results in order to verify, if there exist a consensus among theory and empiricism. This comparison is then used to build up the third part of the thesis – the conclusion.

Figure 1: Structure of the thesis

illustration not visible in this excerpt

Source: developed by the author (2009)

In the following the framework of the thesis is illustrated. It is arranged bottom up, with each element adding additional information to complete the picture. In order to achieve this, it is important to take a look at the history and current economic situation of Brazil and moreover, to gain an insight into the market situation in oder to understand the ideas that compose the strategy proposition. Moreover, an economic overview and a market evaluation provide facts about Brazil and the Mercosur, the productivity level in Brazil and potential markets. Various factors will be taken into consideration such as market size, market share, competition and the level of government regulation. All these metrics serve as indicators for the suitability of the target market for entry of a management consulting company as well as the kind of strategy that will be employed.^[1]

Together with a chapter about LEAN Consulting – in general and in a Brazilian context – this theoretical part leads to the strategy formulation. Integrated in this second part is the classical approach to market entry – including Porter’s Five-Forces-Model – and the empirical findings conducted via the Delphi Study. Accordingly, the final results are presented, offering several recommendations and discussing future prospects.

Figure 2: Framework applied (“bottom up”)

illustration not visible in this excerpt

Source: developed by the author (2009)

1.3 Methodology

In order to create a solid basis for the strategy formulation chapters two and three provide a brief overview of the economic situation in Brazil – in a Latin American context – from the earliest settlement in the 14^th century until today. Furthermore, an evaluation of the market, its productivity and its growth potential, completes the picture. Recent political changes have brought an upwind into the descending system. Since the implementation of the Real Plan in 1994 the country has experienced low inflation, trade liberalization, substantial privatization, increases in import penetration and the expansion of FDI. Thus, Brazil has reason to hope for future in prosperity. The information drawn for this section consists of secondary research, covering literature as well as various online resources and online libraries, to provide an adequate framework. The literature is primarily in English and partly in German or Portuguese language.

The term LEAN Consulting is explained in detail in chapter four, in order to understand the impact and relevance of the term in this context. The literature for this part is provided by a consulting company that is working according to the LEAN principles. It consists entirely of secondary research with books and magazines as main sources. The LEAN Consulting market in Brazil has a special importance for the topic and the sources are given by the same consulting company.

After having applied the theoretical framework of the thesis, chapter five provides the framework for the strategy formulation. The basis to this approach is the Five-Forces-Model by Michael E. Porter.

Since the topic – market entry strategy – is a rather practical issue, the main part consists of empirical findings deducted from a Delphi Study. It is based on expert interviews that were held with a group of initially nine experts from the consulting business in two stages. In the first stage, these experts were confronted with two questionnaires – consisting of open and closed questions – which they had to answer based on their personal experience and opinion. The questionnaire in the second round was based on the summarized answers of the first one, raising new thoughts to the topic.

The questionnaires were submitted in German, since all of the participants were either native German speakers or had sufficient knowledge of the German language to understand the questions. The aim of this Delphi Study was to gain opinions and experiences that can neither be found in books nor in any other relevant literature. Usually, Delphi Studies are used for business forecasting. The author receives new viewpoints that are based on personal experience of the experts by living in Brazil and working in the consulting business during the last decades.

The last part of the thesis draws the conclusion, comparing the classical market entry approach to the empirical findings of the Delphi Study. This then gives a profound basis for constructing strategic recommendations and provides a future outlook. It is interesting to see how the experts of the Delphi Study view the future prospect of the consulting business in the country and what should be done to boost economic growth in this area. The thesis concludes by summarizing all important findings under consideration of the background layed out in the first part of the thesis.

2 Economic overview and background of Brazil

Choosing the best way to enter a market is not a simple task. There is no universal strategy that fits all products, companies and markets. However, in order to develop a suitable strategy, a thorough background of the target market needs to be provided to be able to base the decision on actual facts. Therefore an economic overview of Brazil is essential before going into depth with the particular market entry strategy. In the following the historical and political background of the country, including the Mercosur, is presented in order to submit a clear picture to the reader that will be used later on to fill the strategy with the necessary data.

2.1 Mercosur

The Mercosur (port.: Mercosul), known as the common market of the south, represents a regional trade agreement between the Argentine Republic, the Federal Republic of Brazil, the Republic of Paraguay and the Eastern Republic of Uruguay, all of which are classified as full members. According to Klonsky and Hanson (2007), the primary interest in establishing the Mercosur was to eliminate any impediments to interregional trade between the member states, such as high tariffs or income inequalities. Bolivia, Chile, Colombia, Ecuador, Peru are stated as associate partners to the Mercosur. In contrast to full members they do not enjoy all voting rights and complete access to markets of the Mercosur. Venezuela is expected to become a full member, as soon as the application for the membership is ratified by Brazil and Paraguay (as of 2008). The Mercosur is comparable to the European Union and the North American Free Trade Association (NAFTA) in that it promotes free movement of goods and services, people and currencies (mercosur.int, 2008).

Map 1: Map of Mercosur

illustration not visible in this excerpt

Source: Pnuma.org (2008)

2.1.1 History

The Mercosur has its origin in the Latin American Free Trade Association (1960) and the Latin American Integration Association (1980). In 1988 Argentina and Brazil set the goals of eliminating tariff barriers, harmonizing macroeconomic policies and establishing a common market among each other. The arrangement later came to include Uruguay and Paraguay. Since December 2005 Venezuela is granted the status of an “active observer”. Chile, Peru, Colombia, Ecuador and Bolivia became associate members later on and have signed free trade agreements with Mercosur (Federal Reserve Atlanta, 2000).

2.1.2 Foundation

The Mercosur was created by the Treaty of Asunción, signed in March 1991, and constitutes the most important union of these four countries to this day. As provided for in this treaty, a probation period preceeded the establishment of the common market after which the member nations called in a special meeting in order to determine the final institutional structure for the public agencies managing the Mercosur. Furthermore, the meeting was held to define the specific functions of each agency and the decision making process (mercosur.int, 2008).

The protocol of Ouro Preto, named after the Brazilian city in the state Minas Gerais, established this institutional structure of the Mercosur in December 1994. With this protocol the probation period ended and the fundamental political instruments were put into effect. With this, the member states started a new era of stabilisation and consolidation. The free trade zone and the customs union constitute intermediate steps to achieve a common market that is supposed to generate economic growth and take advantage of increasing specialisation and greater economies of scale (mercosur.int, 2008).

2.1.3 Economic role of the Mercosur

With a GDP of more than US$1 trillion in 2006 and a population of over 260 million inhabitants, the Mercosur constitutes the fourth largest economic power in the world. Brazil, with 79%, generates the highest GDP among the member states, followed by Argentina with 18%, Uruguay with 2% and Paraguay with 1%. (EC, 2007, p.9)

The trade agreement represents a significant economic presence in Latin America. Combined, the member countries represent more than two-thirds of the population of the Middle- and South American continent altogether. Figure 3 illustrates the GDP distribution of the Latin American countries compared with the member countries of the Mercosur. 43%, which accounts for almost half of the GDP generated in Latin America, stems from the Mercosur countries.

Figure 3: % of GDP distribution in Latin America

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Source: adapted from CEI based on World Bank Atlas (2002)

The ultimate goal of the Mercosur is to create a common market, which allows free mobility of all production factors and goods and services as well as the harmonization of macroeconomic policies and the elimination of all tariff barriers. In addition to being a trading bloc, Mercosur also played an important political role in the region in the past when its member countries acted in unison to oppose military coups in Paraguay and Ecuador (Federal Reserve Atlanta, 2000).

2.2 The country Brazil

The Federative Republic of Brazil is the world’s fifth largest nation judged by its geographical size, exceeded only by China, Russia, Canada and the United States. It is by far the largest country in Latin America and borders every South American country except Ecuador and Chile. About 70 percent of the total population, which counts 196 million as the CIA World Factbook (2008) states, is concentrated in the major cities near the costal regions of São Paulo and Rio de Janeiro. On the other hand, the interior of the country is only sparsely settled. This can also be seen in other countries that have a remote countryside, (e.g. Australia). Almost half of Brazil’s territory is covered by the Amazon Region which holds 20 percent of the world’s fresh water and thus has the largest river system in the world (workmall.com, 2002).

2.2.1 Political and economic history

Prior to becoming an independent country in 1822, Brazil was a Portuguese colony for three centuries. This fact contributes to a major part of the country’s history. Unlike the other Latin American countries, which have been divided into twenty different nations after independence from the Spanish crone, Brazil became a single nation with a rich cultural and a diverse ethnical background. Furthermore, as the only Portuguese-speaking country in Latin America it differs from its Hispanic neighbours, and even from Europeans and Northamericans, in various ways (workmall.com, 2002). Hudson (1997a) argues that this seems to result from the peculiar blend of Portuguese, African and Amerindian cultural influences. During the 18^th and 19^th century the country brought uncounted numbers of slaves from Africa and exploited the natives in Brazil.

For many years, the country’s interior remained unexplored because the Portuguese sailors, who first landed in Brazil, were more interested in trading with profitable goods and in expanding their agricultural knowledge rather than exploiting the country. The Hispanic conquerors, on the other hand, were more easily guided by greed and the prospects of glory, as alluded by geographia.com (2006). This changed however during the gold rush in the 18^th century, which led to an increase in the number of slaves that were brought into the country from Africa or transferred from the sugar plantations to work in the gold mines. After the gold deposits were depleted, exports declined in the last quarter of the 18^th century (Hudson, 1997b). Consequently, from the beginning of the 19^th century onwards, the Brazilian economy has been dominated primarily by the coffee sector, accounting for more than half of the country’s exports at its peak (Hudson, 1997c). However, due to the Great Depression in the 1920s and the resulting overproduction, coffee prices in the world market declined sharply and led the country to realize that it could no longer rely solely on the export of primary goods. This brought on a significant change to the economy, which manifested itself in the industrial era (Hudson, 1997d). Accordingly, for the next half of a century Brazil struggled with governmental instability, military coups and a fragile economy.

The 1980s became known as the “lost decade” in Latin America and, as a result, the stabilization plan, called the “Real Plan”, was implemented in Brazil by the former president Cardoso between 1994 and 1999. Under his presidency, inflation was decreased and the weaked economy revived. In short, this period represented a turning point in the country’s economic history. As explained by Barbara Fritz (1995), the plan focused on the root cause of the hyperinflation in the post-military dictatorship. Brazil experienced its peak in the early nineties and introduced the new currency “Real” with a fixed exchange rate to the dollar. This influenced the inflation rate of the country and let it decrease from the incredible high rates of 2,490.2% in 1993 and 929.3% in 1994 to a stable rate around five to ten percent in the subsequent years.^[2]

Figure 4: Inflation rate (1995 – 2007)

illustration not visible in this excerpt

Source: adapted from EconStats (2008)

The three pillars of this economic program consisted of a floating exchange rate, an inflation-targeting regime, and prudent fiscal policy – all of which were reinforced by a series of IMF programs. The result was an overvalued currency that let the exchange rate system virtually collapse overnight in January 1999, leaving the Real with one-third of its former value. In the aftermath of this collapse, the economy began to slow down again. This happened due to several reasons, including declining terms of trade, the energy crisis in 2001 and the sluggish Argentine demand for Brazilian exports – Argentina was Brazil’s biggest export partner at that time, as examined by the World Bank (2003). Yet, after a few years of financial instability, the economy was able to recover and is now producing current account surpluses (cia.gov, 2008).

2.2.2 Economic environment

Brazil is widely regarded as the most industrialized country and the leading economic power in Latin America due to its cheap labour and its abundance of natural resources. The Brazilian economy generates about one third of the total net product in Latin America. Nonetheless, its GDP per capita of US$ 3.460 was below the Latin American average of US$ 4.008 in 2005. In contrast, countries like Mexico and Chile performed far better with US$ 7.310 and US$ 5.870, respectively. Whereas dynamic economies like Chile and Costa Rica reached an average yearly growth rate of 5,6 and 5,0 percent per annum, Sangmeister (2007) points out that Brazil performed much worse with only 2.6 percent in the same period of time.

The reason for this lag lies for the most parts in the high growth volatility of the Brazilian economy during the decade between 1991 and 2000. As a result, the country had to deal with a series of domestic and international economic shocks that could only be handled without a major financial collapse due to the strong economic program that was introduced by former president Cardoso and carried on by today’s president Lula da Silva (cia.gov, 2008). However, these shocks took a toll on the economy, stalling it every time it began to recuperate.

Nonetheless, the most important driver in the Brazilian economy was without a doubt its export sector, which more than doubled in the period between 1996 and 2005, from US$ 52 to US$ 134 billion. Between 2003 and 2007, Brazil ran record trade surpluses and recorded its first positive current account balance since 1992 (cia.gov, 2008). Currently, products “made in Brazil” are exported to more than 180 countries in the world. In the international context, however, Sangmeister (2007) emphasizes that the significance of this fact pales in comparison to countries such as Germany, which accounts for 17 percent of world trade, while Brazil accounts for less than 2 percent.

Brazil’s openness to foreign investors has boosted the amount of FDI received, rendering it a major recipient among emerging markets. Currently, it holds the 2^nd place in amount of foreign capital invested into the economy, with China placing 1^st (unctad.org, 2009). The World Investment Report 2008 by the UNCTAD, illustrated in Figure 5, identifies the Foreign Direct Investment inflows for Brazil during the last years. Noteworthy is the three fold increase during the last three years from 2005 to 2008, partially attributable to the policy change of the Brazilian government during the last couple of years, which boosted confidence among foreign investestors to believe in the country’s positive outlook.

Figure 5: FDI into Brazil

illustration not visible in this excerpt

Source: adapted from UNCTAD, Banco Central do Brasil, IMF (2008)

2.2.3 Political environment

The Federative Republic of Brazil has gone through various governmental reforms since the election of the current president Ignacio Lula da Silva in 2003. These reforms were implemented with the approval by the 513-seat Chamber of Deputies (the lower house) and the 81-seat Senate (the upper house). The country can now claim a stable, proactive government and a total of 21 political parties represented in the lower house. Fortunately, there is practically no political instability at the moment. This situation can be ascribed to the former president Cardoso, who brought the country back on track after a period of military dictatorship with detrimental policies implemented by former leaders, and also to the current government led by President Lula. In this context, Peter Luff (2007), chairman in the House of Commons Trade Committee, asserts in an interview with John Fitzpatrick:

“Brazil is fortunate among developing countries to have benefited from a stable political environment in recent years, and its economic strength today, and continued strength in the future, will depend on continued stability with reforms such as those suggested in the President’s five year growth plan.”

As stated by a report of the FCO (2009), Brazil plays a leading role in Latin America because it “has encouraged closer co-operation between the region and the Middle East“ (FCO, 2009). Also, the relationship with Africa is a priority for the current government. In general, the country maintains good relationships with its neighbouring countries and its trading partners.

2.2.4 Macroeconomic data

The population of Brazil counted a total of 196.3 million people in 2008, with an annual growth rate of 1.2% (cia.gov, 2008). It is the fifth most populated country in the world, only surpassed by China, India, United States and Indonesia.

During the last years from 2005 to 2008 the real GDP growth rate was above the global average of 3.8% according to the World Factbook (2008). This shows that the economy grew at a strong pace during the past few years. At the same time, the inflation rate decreased to around 6%, which proves the success of the country’s governmental reforms. Due to Brazil’s enormous potential, strong economic growth is projected for the next decades. Together with the other BRIC countries – the four biggest developing countries comprising of Brazil, Russia, India and China - Brazil is widely regarded as one of the new economic powers in the world (Sangmeister (2007) p.49).

In international comparison, however, Brazil still lags far behind the major economic powers such as the USA, Japan or Germany, as demonstrated in Figure 6. In 2005, a total of 3 percent of the world’s population lived in Brazil, but contributed only 1.8 percent to global GDP. This is a rather weak performance compared to the industrialized nations.

Figure 6: GDP 2005 of selected countries

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Source: adapted from World Bank (2008)

In a worldwide ranking of 225 countries – considering even the smallest of all economies – Brazil’s GPD per capita at purchasing power parity (ppp) ranks with US$ 9.700 only 95^th (cia.gov, 2008). This needs to be put in contrast with economies such as the US with US$ 46.000 or Germany with US$ 34.400 The ppp is a theory based on two exchange rates, deriving the purchasing power of different currencies in a nation, assuming that identical products and services in different countries should cost the same. GDP per capita (ppp US$) is calculated by taking the value of all final goods and services produced within a nation and dividing it by the average population, on the basis of the purchasing power parity – compared to US economy. In other words, it is the price of the same product, given in US$, in different countries. This provides a superior measurement of the living standards in different economies than the evalutation of the real GDP amount and it is often preferred to the former method (worldbank.org, 2009). Figure 7 exhibits the GDP levels of Brazil during the years of 2000 to 2008. The real value of the nation’s income has been increasing during the last years, mainly due to the monetary programs that were implemented by the Brazilian government.

Figure 7: GDP development in Brazil (PPP US$)

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Source: adapted from CIA World Factbook (2008)

The total labour force accounted for 100.9 million Brazilians in 2008, with an average growth rate of 4.7% between 2003 and 2008. The substantial increase of 20 million people within only five years can partially be explained by the sharply declining mortality rates since the 1940s (Ramos, 2000, p.58) However, according to the World Bank poverty report (2009) “the participation of children in the labour force in Brazil is at least twice as high as in any other country in Latin America.” On the contrary, this also means that almost half of the entire population – the total population counts 196 million people– is able to work. At the same time, the unemployment rate is at 7.9%, counting about 8 million people – which roughly compares to the total population of Austria (OECD, 2009, p. 252).

This leads us to the country’s socio-economic problems – explained in the next chapter – which it faces due to its enormous size. A staggering illiteracy rate of 10% in 2007 (not including children under the age of 15) partially explains the unemployment rate by itself. In most rural areas, the importance of education is very difficult to enforce. In today’s knowledge driven society, the chances of a better life grow and fade with education.

2.2.5 Social inequality

Despite its vast natural resources and its high growth potential this gigantic country faces various problems. One big problem is Brazil’s social inequality, which excludes large parts of the population from economic progress. Brazil has one of the world’s most unequal distribution of wealth, meaning that only a small percentage of the richest in the country own more wealth than all the poor people together. In 2000, only 2.4% of the wealthiest Brazilians accounted for one third of the nation’s wealth. The Gini coefficient^[3] in 2007 was measured at 0.53 (World Bank Country Brief, 2008), which represents one of the world’s highest income inequalities – in comparison, Germany for instance has a Gini coefficient of 0.28 (World Development Indicators, 2008).

A great part of the Brazilian population lives in low-income communities that are generally characterized by a lack of basic infrastructure services and inadequate housing (port.: Favela). The socio-economic problems that Brazil faces should not be underestimated. Many Brazilians are poor because Brazil has a poor infrastructure system, a medium-range income per capita (as compared with the United States, which is in the high range), and a weak education system (Hudson, 1997e).

The high level of inequality is partially the product of various economic crises the country went through during the last decades since its dictatorship, as described earlier. This led to an increasing unemployment rate and missing social security by the government. Many people migrated to the larger cities, hoping to find employment, failed, and now live without any perspective of a better life. It is a downward spiral, maybe even a vicious circle, that affects many Brazilians. The social inequality also has an influence on the country’s criminality rates. People that are unsatisfied or have nothing to lose are more vulnerable to criminal activities than people in a stable social and economical environment (Mendonca, 2003).

Sustained growth is a major challenge for the Brazilian economy. Although the macroeconomic performance has improved, it still remains below the global and Latin American average. The social inequality has already reached its peak and some progress was made on the microeconomic level during the last years through government reforms that provide for a better educational system. Other iniciatives included infrastructure programs to create jobs and a stable economy to foster Foreign Direct Investments, privatisation and trade liberalisation. The growing middle class is a clear sign of this progress. Nevertheless, the level of inequality remains high and there are still many challenges in this area, but the country is making improvements (World Bank Country Brief, 2008).

2.2.6 Level of corruption and governance indicators

Due to the federal structure of the political system companies operating in Brazil have to deal with a wide range of regulatory agencies. The level of corruption is seen as particularly high during the entry period of starting a business. Regulation and taxation are subject to constant change, which makes it difficult for a company to do business in Brazil without support from the inside.

The World Bank Institute, in collaboration with other units of the World Bank Group, supports countries in improving governance and controlling corruption (info.worldbank.org, 2008). The Worldwide Governance Indicators project examines various factors and evaluates them in form of a ranking of 212 countries during the period from 1996 to 2007 (the higher the number, the better the country is rated). The ranking considers the following dimensions:

- Voice and Accountability
- Political Stability and Absence of Violence
- Government Effectiveness
- Regulatory Quality
- Rule of Law
- Control of Corruption

This ranking only reflects a selected view of the World Bank or the conjecture of one single country. In fact, the aggregate indicators combine the views of a large number of enterprise, citizen and expert survey responses in industrial and developing countries (info.worldbank.org, 2008).

The country’s percentile rank indicates the rank of the country among all other countries in the world. 0 corresponds to the lowest and 100 to the highest rank. The colours of the graphic represent the percentile rank in comparison with the rest of the world.^[4]

As illustrated in Figure 8, within four out of the six dimensions, seen in international context, Brazil reaches an average ranking of more than 50%. In comparison with the regional average in Latin America, Brazil leads the ranking in almost all six categories. Only within the dimension “Political Stability” Brazil lies below Latin American average. Consequently, this means the country’s political risk is categorised as more stable than the rest of Latin America, a factor that can be used as accelerator to attract investors and companies.

Figure 8: Comparison with regional average in Latin America

illustration not visible in this excerpt

Source: adapted from World Bank (2008)

A comparison with Germany on the other hand (see Figure 9) puts Brazil’s benchmark status in the Latin American context into perspective, making it appear far less attractive. Many factors need to be considered before drawing a conclusion here. As argued by Kaufmann, Kraay, Mastruzzi (2008), Brazil is still considered to be a developing country, whereas Germany has been a mature industrial nation for many decades. Internationally and in the Latin American context, Brazil performs better than the world average and the country is also leading the BRIC countries in this ranking. Russia, India and China show poorer results according to the World Bank study.

Figure 9: Comparison with Germany

illustration not visible in this excerpt

Source: adapted from World Bank (2008)

With respect to various studies and surveys from PwC or Transparencia Brazil, among others, in the years from 2003 to 2008 it was revealed that the level of corruption is by no means higher in Brazil than in any other developed nation like the Netherlands, Germany, US or UK (business-anti-corruption.com, 2008).

Evaluating the ranking from both sides – Latin American average and comparison with Germany – leads to two conclusions. One is the positive outcome as the leader in the Latin American comparison and thus providing a relatively more stable political environment for potential marketers. The other one is Brazil as a poor performer compared with Germany, advising companies and investors to refrain from entering the market. However, since the decision to enter a market is not entirely based on the political risk assessment of the country, Brazil’s potential as a growing economy prevails.

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^[1] For simplification the term management consulting company will in spots be reduced to consulting company.

^[2] The years 1993 and 1994 are not displayed in Figure 4 to better visualize the differences in rate during the years from 1995 to 2007.

^[3] The Gini coefficient is an index for measuring income distribution inequality. The values of the coefficient range from 0 to 1, where the value close to 0 indicates perfect equality and close to 1 indicates perfect inequality (Pan American Health Organisation, 2001, p.120).

^[4] In both Figure 8 and 9 the average of the years 1998, 2003 and 2007 are displayed