Brazil and China's economic structures and institutional frameworks

¶ … Global Economic Giants

Brazil is geographically the largest South American country and the fifth largest in the world (Economy Watch, 2010). With more than 190 million people, it is the fifth most thickly populated in the world. Its GDP in 2009 was U.S.$1.482 billion and growth rate was .05%. Its total labor force in the same year was estimated at 95.21 million and unemployment rate was 7.4%, lower than the preceding year's 789.2%. Brazil is part of G-20 or the Group of 20. It is also one of the Big Four or BRIC countries, the three others Russia, India and China (Economy Watch).

Brazil has well-developed agriculture, mining, manufacturing and service industries (Economy Watch, 2010). It enjoyed high economic growth in 2007 and 2008. Thereafter, it reeled from the global financial crisis. Foreign investments dwindled when export demand fell and external credit went up. But it was among the first to recover and restore its GDP to positive levels with a growth prediction of 5% this year (Economy Watch).

The People's Republic of China in East Asia, with 1.3 million people, is the most populous country in the world (Economy Watch, 2010). Its miraculous economic growth in the last three decades has been attributed to market liberalization. While its cities experience prosperity, however, rural China remains poor. The economy grew at an average of 8% in GDP, 10 times until it reached U.S.$3.42 trillion in 2007. China's purchasing parity was second only to that of the United States, so that it was predicted to eventually become the largest world economy in the century on the basis of its GDP. Economic reforms in the 70s and 80s first focused on collectivizing agriculture from farming to household industries. They gradually extended to price liberalization. Fiscal decentralization capped the reforms. China is also part of the G-20 (Economy Watch).

Institutional Structures

Brazil. A primary surplus of 3.3% GDP was forecasted in 2010 or a 2.1% increase over that of the previous year (Economy Watch, 2010). A gradual recovery process of the nominal fiscal balance of -2.14% GDP for 2014 is also expected. No major economic adversities are estimated in the immediate future. But large and early government expenditures for the 2014 FIFA World Cup and the 2016 Rio de Janeiro Olympic Games may deter raising enough capital and pose credit risks (Economy Watch).

Market analysts see higher debt servicing costs in the next years (Economy Watch, 2010). They sense a delayed recovery for the economy. It faces increasing fiscal uncertainties as macroeconomic outlook in the medium term. The forecasted 5% GDP for a politically charged economic policy will induce much social spending and infrastructure projects. This will be costly for the government in the coming years (Economy Watch).

China -- Large state-owned enterprises or SOEs controlled industrial output since 1978 (Economy Watch, 2010). However, the share of these SOEs decreased from 41% in 2002, now representing only 16% of industrial production. Decentralization and the creation of special economic zones are the major changes in economic policy. They enhanced industrial growth, particularly in consumer goods industries, in order to attract foreign investment. Industrial production accounted for 50% of the GDP with a large part of the workforce remaining on the land. The services sector remained steady at 33% in 2003, representing 52.3% of GDP. It displaced agriculture, which continued to shrink. The trend was towards a market-oriented economy and a decollectivized agriculture, resulting in substantial production gains (Economy Watch).

Attractiveness to Foreign Direct Investors

Brazil and India will bypass the United States as the second and third most favored FDI destinations by 2012 (Inchincloser, 2010). The World Investment Prospects Survey 2010-2012 conducted by the United Nations Commission on Trade and Development or UNCTAD. It studied 36 leading multinational corporations and 116 investment promotion agencies to assess the international investment climate. It showed a focusing of FDI on developing and former communist economies, following a global financial crisis. China remains the top favorite and most attractive FDI destination. The U.S. is fourth. Russia is fifth this year as in 2009. Other placers are Mexico in sixth, Britain in seventh, Vietnam in eighth and Indonesia in ninth. Thailand, Poland, Australia, France and Malaysia are the next favored countries. Multinational corporations are now attracted to Brazil for turning its political instability around and overcoming hyperinflation. It is now among the top emerging market economies (Inchincloser).

Most of first-world multinational investments go to the primary sectors of services and manufacturing in the BRIC nations (Inchincloser, 2010). These nations are Brazil, Russia, India and China. The report also predicted that these FDIs will be through equity or non-equity modes. Equity modes will be mainly cross-border mergers and acquisitions or as greenfields projects. Non-equity forms will be partnerships, alliances or subcontracting. These modes allow companies to share risks, reduce expenditures and take advantage of know-how, technologies, and market shares according to the type of product or region (Inchincloser). The presence of foreign banks stimulated the competitive environment in China's banking sector through financial innovation (Hope et al., 2008). And Brazil's confidence lies in its 5% GDP growth prediction.

Localizing Operations

Brazil

Trading with Brazilians has not always been easy (the Economist, 2010). Foreign investors who failed remember how they first arrived with full optimism. They paid a lot for a local firm and then left when the business sagged. They ended up selling the company to a Brazilian firm for a tiny fraction of the original investment. While the lesson has been learned, other lessons still have to be addressed. Its unsatisfactory legal system drives investors to apply the art of jeitinho, a Brazilian way of overcoming business obstacles. Multinationals have cropped up in the country. Many of them have expanded into foreign markets decades earlier. Their purpose appears to be to protect themselves against Brazil's ups and downs, not to participate in its growth potential. They feel they have survived and overcome harsh business environment and want to operate in risky markets like Brazil. Some of them benefited from privatization or part-privatization. The current government dislikes the notion of privatization, which tends to improve businesses. But it likes national champions to succeed abroad. A government minister wrote the World Economic Forum in 1996 that it was not in the interest of the government for Brazilian companies to expand abroad. He said that capital was limited and they wanted to create local jobs. Brazil's laws also make the sending of profits from foreign subsidiaries back to Brazil impossible. They also refuse to recognize losses incurred abroad in company accounts. Some of the Bolivian assets of foreign investor Petrobras were nationalized by Brazil's president, Evo Morales. Multinationals are likely to encounter similar obstacles, but commodity producers, consumers or traders can be sure that their built-in comparative advantage will remain uncontested (the Economist).

China

Chinese banks, which have been infused foreign investment, do not seem to have become more efficient than those not infused (Hope et al., 2008). Furthermore, none of these foreign banks has proved to perform better than those not infused foreign capital. Not all partnerships in the arena have succeeded. Many opportunities accorded by strategic investment were limited and late. This can be attributed to inertia and slow-decision processes inherent in some local business partners. Management conflicts between foreign investors and partner shareholding and city commercial banks may be behind it. The success formula presents as the effective cooperation in management between the foreign investor and the higher-level managers of the local partner bank. Infusing new capital or introducing new financial products will not necessarily lead to success if management does not properly exploit new opportunities in the industry (Hope et al.).

Some shareholding banks have also been found to perform better than others without foreign investment (Hope et al., 2008). A survey of Chinese shareholding banks revealed significant differences in governance and information disclosure. They also differed in the capacity to deal with economic volatility and reporting financial need to shareholders. The survey also found great potential for foreign banking investors in China's city commercial banks. These banks are in early development stage and in search of suitable foreign investment. This is furthermore encouraged by the government. China views foreign investment as stimulating more effective competition in the banking industry. All banks operating in China since 2007 thrive in the same domestic international financial milieu and compete in the same level (Hope et al.).

Varying Ethical Business Practices in BRIC Countries

A recent survey found that Brazil and China observe ethical business practices less than the other two BRIC countries, India and Russia (Ardichvili et al., 2010). Employees of Chinese businesses had lower regard for such practices than those of Brazil. One explanation was that Brazil and China descended from communist economies and political structures. This could have established the direction of their business practices in general and in business practices in particular. The 2010 Edelman Trust Barometer survey conducted among the BRICs on ethical business practices showed that India observed the practices most at 69%. Brazil ranked second at 65%, China at 62% and Russia at 67% (Ardichvili et al.).

Survey findings suggested the need for a more detailed examination of the differences between each of the BRIC countries and the G7 countries; practical recommendations beyond general comparisons between the BRICs and G7; and a comparison between ethical practices in BRICs and other large and emerging economies, such as Mexico, Indonesia and South Africa (Ardichvili et al., 2010). The survey revealed the complicated nature of universal business norms and the threat of cultural differences on the business environment. Multinational companies facing increased threats are those operating under potential penalty for violating government regulations. These include or relate to Foreign Corrupt Practices Act, Federal Sentencing Guidelines for Organizations and Sarbanes-Oxley Act of 2002. These violations incur a loss of trust and will damage corporate goodwill and reputation. They also subject violators to financial penalties and fines, either at the individual or corporate level or both, and prosecution and sentencing of culpable corporate executive or employees (Ardichvili et al.). #