Examination and Evaluation of Business Strategies and Frontier Markets: Brazil
The South Korean company Samsung began operations in Brazil in December 1986 when it opened a representation office. Since them Samsung has invested a total of U.S.$300 million, employs almost 1,000 staff members and has a revenue of above U.S.$500 million. Since May 1994, Samsung has started offering services to Brazilian consumers, and from November 1995 it has produced TV sets and VCRs locally with an initial capital investment of U.S.$18 million.
Starting from July 1997, Samsung has sold its SyncMaster monitors in Brazil had a little later in June 1998; it started to manufacture them in its Manaus factory in Amazon. In 3 years, Samsung measured its control in this segment in Brazil with 40% of the sales (according to IDC Brazil), conquering over companies that were present in Brazil a good deal before Samsung (Sonis, et al., 2007).
The Samsung factory in Manaus is extremely automated. It has been manufacturing the Samsung Voicer cellular devices since March 1999. Following the path of high technology and advanced design, Samsung Slim, Samsung Colors etc. The company produces 1.5 million cellular devices and 1.3 million monitors per year in Brazil (SEC Family News, 2009). Twenty percent of these products are exported to other countries in Latin America. In 2002 Samsung began the production of disk drives in Brazil with total investments of U.S.$35 million and is starting to export them to neighboring Latin American countries (Baer, et al., 1998).
1. Government stability and openness to foreign investment
Foreign direct investment (FDI) began to change considerably in the 1990s, as Brazil adopted neoliberal policies. The latter consisted of market-oriented policies, privatization of state firms in heavy industries and public utilities, and a drastic decline of protection. In addition, Brazil became actively involved in the Mercosul, the common market of Argentina, Brazil, Paraguay, and Uruguay, which implied a gradual disappearance of regional barriers to trade and investment flows. In this more open economy, especially after the Real stabilization program, which was introduced in 1994, there was a dramatic rise in the inflow of FDI. While in the early 1980s the yearly inflow of FDI amounted to about U.S.$2.6 billion, this declined to about U.S.$1.7 billion in the period 1983 -- 90. FDI stagnated in the early 1990s, averaging U.S.$1.3 billion a year, only gaining momentum after 1994, reaching U.S.$5.5 billion in 2005, U.S.$10.5 billion in 2006, U.S.$18.7 billion in 2007, and U.S.$28.7 billion in 2008 (Martins, 2006).
The privatization process accounted for about one-quarter of the inflow of FDI in the period 1996 -- 98. This represented a dramatic increase of foreign participation in the privatization process. In the first half of the 1990s, when the privatization got started, foreign investments only accounted for about 5% of total privatization. This participation rose to about 35% in 1997 (Balassa 2004). Two factors contributed to this trend. First, the initial lower participation can be explained by the fact that privatization was initially limited to traditional industrial sectors such as steel and petrochemicals. These were not sectors that were inherently attractive to foreign investors. Second, changes in the country's legislation concerning foreign investments made Brazil more attractive to multinational corporations (Geddes, 2003).
The rapid implementation of Mercosul increased the attractiveness of the region to multinationals as it amplified the effective market which they would be serving. The general world flow of capital to emerging markets -- for instance, foreign direct investment in low- and middle-income countries rose from U.S.$23.7 billion in 1980 to U.S.$118.8 billion in 1996 (Savasini, 1978).
Changes in Brazil's legislation concerning foreign capital seemed to have contributed to attracting an increasing amount of FDI. There was an important modification in the Constitution to eliminate the differentiation between Brazilian companies on the basis of resident and nonresident ownership. This allowed foreign firms to invest in a number of sectors that were previously reserved for domestic state or private firms. These sectors include mining, petroleum, electricity, transportation, and telecommunications. The passage of a concessions law for private investors (domestic and foreign) also helped set a framework for the privatization of public utilities, in which foreign groups would be allowed to participate (Arnold, 1999). Nondiscrimination in tax treatment was introduced, as the previously higher taxes on profit distribution to nonresidents discouraged foreign investments.
The role of foreign investment has undergone considerable changes over the past century. Prior to World War II, foreign firms concentrated on public utilities and export-related sectors. During the ISI period, most public utilities were nationalized, and foreign firms were encouraged to establish manufacturing facilities for the protected domestic sector. This resulted in a diversified industrial structure that was relatively inefficient and characterized by secondhand technologies. With the opening of the economy and the privatization process, one finds once again a substantial amount of foreign investments in public utilities. At the same time, one finds that the behavior of multinationals has changed as a result of lower protection from imports, which, together with an overvalued exchange rate in 1994 -- 98, exposed the economy to global competition (Fujita et al., 1999). The multinationals reacted to this by emphasizing investments in advanced technologies, which also led their subsidiaries to attend not only the domestic market, but also to compete internationally, especially within the Mercosul area. In fact, it seems that in the 1990s the existence of the latter and its possibility of expanding became a primary motivating factor for a substantial number of multinationals that established themselves in Brazil for the first time (Sonis, et al., 2007).
Ironically the large inflow of foreign capital in the 1990s also had a problematic aspect in that it enabled the government to postpone a much-needed fiscal adjustment. Since the Real Plan's introduction in mid-1994, which brought down inflation, the government has financed its deficits in a noninflationary way by issuing short-term debt, which was bought by financial institutions and the public at large (Magalhaes, et al. 2001). As long as foreign capital was flowing into the country at a rate which was greater than the sum of the trade deficit, the yearly debt servicing obligations and profit remittances, it was possible to maintain a stable and gradually overvalued exchange rate. This stability reassured the public about the credibility of the government's financial obligations. Unfortunately this stability became increasingly fragile. The government had to resort to excessively high interest rates in order to maintain foreign portfolio investors and prevent Brazilians from sending their money abroad. But gradually, the credibility of the government was undercut by the fast rising domestic debt and the Asian and Russian financial crises of 1998 and 1997, forcing devaluation in February 1999 (Martins, 2006).
2. Strength and stability of local Currency
The various governments of the 1980s and 1990s were either not willing or capable of devising noninflationary ways to deal with the distributive conflict. That is, not being able to maintain a budgetary equilibrium and thus stability of the money supply, the government undermined credibility in the domestic currency, thus setting the stage for the distributive pressures to manifest themselves through price increases (Baer, et al., 1998).
The Constant Absence of a Fiscal Adjustment
In the period analyzed, Brazil suffered from both inflation and stagnation. This contrasts with most advanced industrial economies, where long periods of stagnations have usually been accompanied by either no price increases or very small rates of inflation. (Note that stagflation was talked about in the United States, but for shorter time periods.) Brazil's stagflation comes as no surprise to the observer, since both inflation and stagnation can be interpreted as being different manifestations of the same disequilibrium (Reis, 1999).
Over the years, Brazil's public sector experienced chronic budget deficits, which were financed by increases in the indexed domestic debt. The problem in the 1980s was the gradual decline of the government's credibility with the public, that is, there was increasing doubt about the government's capacity to service the debt and eventually to repay the principal (Baer et al. 1998). This gradual loss of credibility required the shortening of the terms of financing, reaching a point at which most of the debt was being financed through the overnight market and at increasingly higher real rates of interest. The high interest rates, combined with the large stock of the debt, substantially increased the financial expenditures of the government, whose share in total government expenditures grew rapidly. This created a vicious cycle of rising debt -- leading to rising deficit -- leading to further increases in debt (Fujita et al., 1999).
Brazil found itself in a situation in which an enormous amount of financial resources were invested in the overnight market, which was extremely liquid so that investments could at any time be turned into money, with the possibility of a capital flight into real assets. In 1989, for instance, while the stock of M1 was 1.7% of GDP, M2 was equal to 12% of GDP (Cantwell, 1999). Thus there existed the real threat of a loss of control…