As one of the BRIC countries, Brazil is emerging as a developing economy that is contributing to world trade with its abundance of agricultural products and natural resources. Global trading and foreign direct investment is contributing to economic growth and social progress by raising the standard of living and reducing poverty around the country; especially in Brazil.
Many factors are contributing to economic development and growth in Brazil. Government policies, reduced barriers to trade and investment, free markets, labor laws, open banking systems, and privatization have facilitated global trading and foreign direct investment.
Brazil's economy is very diverse in a number of industries and is supported by its export of agricultural products, natural resources, manufacturing, and a multitude of services. The diversification of its exports reduces risk from unexpected and unanticipated market shocks, which provides strength and stability for investment. Brazil also has a trade surplus from its exporting, which provides a great deal of optimism for the country. According to A to Z Business World (2014), 'Brazil is regarded as the World's number one producer and exporter of several agricultural commodities including coffee, sugar cane, tropical fruits, and most recently soybeans.' The agricultural business accounts for approximately 23 percent of Brazil's economy (IB Times, 2014). Brazil is also considered one of the world's top food suppliers. With all the global food shortages, Brazil has become reliant on trading its agricultural commodities. The agricultural commodities are also a contributing factor to Brazil's trade surplus. Brazil is renowned as the world leader in agricultural research (A to Z Business World, 2014). According to IB Times (2014), Brazil is expecting record harvests of soybeans for 2014 and is expected to exceed the United States as the world's top supplier. However, a recent heat wave and lack of rain is impacting coffee supply and may result in shortages in coffee around the globe, which will be reflected in higher prices in grocery stores and coffee shops.
Brazil has many natural resources that are in demand around the world. Brazil is a major exporter of several things such as iron ore, lumber, petrochemicals, and other minerals. Additionally, Brazil recently discovered offshore oil reserves which it hopes will enable some sort of self sufficiency and make it less dependent on other countries for oil imports. This recent oil discovery could contribute and make Brazil a top exporter in the future. (A to Z Business World, 2014)
In an effort to stimulate growth and encourage economic development, 'Brazil has made efforts to reduce its debt and build up foreign reserves, which has also contributed to improving its macroeconomic strength' (A to Z World Business, 2014). The government has reduced trade barriers by lowering import tariffs to make it easier and less costly for foreign countries to sell their products in Brazil. Additionally, the legal system has also made vast improvements, which contributes to enforcement of laws and faster resolutions to disputes. Through these government and legal reforms, contract and property right disputes are now starting to be enforced. Subsequently, many of these efforts have contributed to high GDP growth, which has also contributed to increased shareholder and stakeholder confidence.
Additionally, the government also provides tax incentives, free trade zones, and financing to encourage domestic and international development and investment. The creation of the Manaus Free Trade Zone in an underdeveloped area, with underserved people, in the North and Northeast area of the Amazon provides major tax benefits and incentives for many foreign investors looking to build new plants in order to lower their costs of production. (A to Z World Business, 2014)
'In August 2011, Brazil announced a new industrial policy, Plano Brasil Maior (the 'Bigger Brazil' plan), to support domestic producers, encourage investment, and spur innovation.' (A to Z World Business, 2014). The plan was designed to reach investment goals by attracting local and foreign investors for infrastructure projects.
Infrastructure remains high on Brazil's list of needed improvement and is an important and significant obstacle for investors of future economic development. Recently Brazil moved to privatization of some of its airports, a new train system, road construction, improved technology, and improvements and upgrades to its seaports. Brazil began offering concessions to attract private investors, capital, and management know-how and expertise, which is extremely lacking in Brazil, in an effort to make several required and crucial improvements. Additionally, the government implemented a Growth Acceleration Plan (GAP) to encourage private investors and increase its economic growth potential. With the country hosting the 2014 World Cup and the 2016 Summer Olympics, major infrastructure is necessary and crucial throughout the country. Privatizing these areas will contribute to overall economic growth in Brazil by providing many jobs and improving the living standards and well-being of its people (Business News Americas, 2014).
Another key factor is Brazil's open banking system and open stock market, which allows for foreign investors and representation. The banking system is regulated by Brazil's Central Bank which contributes to less risk and greater efficiency. Additionally, the government provides low interest loans to attract domestic and international business investors. It is also easier to convert and transfer funds in the foreign exchange market because rates are determined by what the market dictates. The government also follows the rules established and enforced by the International Monetary Fund.
Brazil has a strong labor force which is protected by many labor unions. Unemployment is low in Brazil and there is a shortage of highly skilled workers (A to Z World Business). Subsequently, the government has many laws that make it difficult to fire an employee. Many workers are protected by labor codes and unions which guarantees generous leaves, one month salary bonuses each year, and severance pay for dismissal without cause. The governmental laws are of great concern to many business owners because terminating an employee can be very costly and difficult.
Foreign Direct Investment
Brazil is open to Foreign Direct Investment and encourages foreign investment by offering a friendly and open environment, open banking, privatization, and ownership. Many opportunities exist for foreign direct investment in mining, manufacturing, banking, telecommunications, and infrastructure. There is also an increase in domestic demand, a demand for highly skilled workers, and a demand in the development of technology. According to Brazil's Central Bank, the United States is the largest investor in foreign capital stock in Brazil (A to Z World Business, 2014). Japan and Western Europe are also contributors to economic development in Brazil. Because Brazil is a growing economy, shown by high gross domestic product (GDP), many foreign investors are taking the initiative in investing in Brazil. Brazil also allows foreign investors the right to own and establish business, and repatriating back to one's home country is not discouraged. (A to Z World Business, 2014)
Market to entry in Brazil can be somewhat detailed and terms and conditions for all contracts are always very lengthy and must be in writing. Furthermore, consumers in Brazil are big proponents of Corporate Social Responsibility. Before a business builds a factory or plant, members of the community want to know how a business is going to contribute to local education and the environment. The community also expects a commitment from the business as to what services they intend to provide to the community once present. Getting the community to support a new business is crucial to its success.
Potential and challenging issues for foreign investors include crime and corruption. Because Brazil is a developing nation, there is a significant amount of inequality between the rich and the poor. This inequality among the rich and the poor contributes to an increase in crime. Furthermore, the use of cocaine has led to drug related violence from kidnappings, burglary, and robbery to smuggling of weapons and other dangerous criminal activity.
Additionally, political corruption and pay-for-vote scandals have led to problems with bribery of some foreign investors. (A to Z World Business, 2014) In an effort to fight all the corruption, Brazil has enacted several laws; however, they are not very reliable and consistent in enforcing the laws. Many countries that do business in Brazil are subject to the Foreign Corrupt Practices Act, which 'prohibits any sort of gifts, bribes, or favors' (Wild & Wild, p. 53).
With the enormous amount of infrastructure necessary and recent privatization in Brazil, the market for foreign direct investment is very lucrative and profitable. Recently, John Deere announced a partnership with Hitachi to construct two manufacturing plants in Brazil to produce construction equipment for the vast amount of needed infrastructure. Brazil is the world's fastest growing market in demand for construction equipment. John Deere & Hitachi partnered up to manufacture backhoes and excavators in Brazil. The company is confident the investment will be a success because of its long history of equipment sales to Brazil and because of the increase infrastructure investments by Brazil. (Business Insights: Global, 2014)
SUMMARY AND CONCLUSION
In summary, world trade is a mutual benefit and mutual cooperation among countries is the goal in order to achieve economic well-being and global competitiveness through job creation whereby raising the standard of living and lifestyles of many individuals around the globe. The reduced barriers to trade and investment, free markets, government policies, and open banking systems have contributed to the success of foreign direct investment in Brazil and across the globe. It is only a matter of time before Brazil emerges as a developed country.
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