International Management the BRIC Countries

International Management

The BRIC countries are the largest of the fast-growing emerging economies in the world. They are Brazil, Russia, India and China. For international managers, these countries represent some of the best potential for growth in the world today. A study by Goldman Sachs highlighted that China and India would be the world's first and third largest economies respectively by 2050, and that Brazil and Russia would be fifth and sixth respectively (GlobalSherpa.org, 2011). This report highlighted for international managers the need to enter these markets and build share in them. Success in the long run depends on being able to succeed in markets like this.

However, they are each very different countries. Doing business in any one of these countries represents significant challenges for international managers and doing business is all for is even more challenging, because they are so different from one another. Brazil is the largest country in South America by both population and area. That country has a resource-based economy that emphasizes exports, and a social democratic government that blends economic growth with a high level of wealth distribution. Russia is a large industrialized nation that is still in the process of modernizing its economy after the fall of the Soviet Union. Russia's current economic growth derives from its vast stores of oil and especially natural gas. India is the world's largest democracy, with a middle class the size of the United States. China is the world's largest country by population (third by area) and has a very fast-growing economy based on manufacturing exports.

This paper discusses the challenges of managing international organizations in these countries. The challenges include market challenges, competitive challenges and political challenges. Each will be discussed for each country in order to better understand the different challenges that managers face in these countries, in the context of international business.

Brazil

In the 1990s, Brazil embarked under an ambitious economic reform program. The country privatized much of the country's government-run industry and pegged its currency to the dollar to curb inflation (Joffe-Walt, 2010). The peg ended in a currency crisis, being unsustainable, and Brazil ended up with the new socialist government. The new regime continued with most of the economic modernization policies, except the privatizations and it maintains only a loose peg on the currency, which now floats mostly freely. These two governments have orchestrated a turnaround that has made Brazil one of the major growth stories of the past twenty years.

Today, Brazil has the 9th-hightest GDP in the world at $2.172 trillion, and the GDP grew at a rate of 7.5% in 2010 (CIA World Factbook, 2011). The economy has seen greater wealth distribution, and this has helped Brazil's economy as well, since there is a higher degree of consumer spending in the domestic market. The country still relies on exports, however. These come in the form of both raw materials and in the form of manufacturing, the country having built a manufacturing industry in the 1950s and 60s. Brazil has joined the WTO and Mercosur as well, opening up the country's markets to foreign investment. Brazil is the world's 14th largest destination for foreign direct investment, accounting for $368 billion per year.

Politically, while there is always going to be concern among investors about a nominally socialist government in power in the South American nation, Brazil is open for business. A signatory to the WTO and a member of Mercosur, the regional trade bloc, Brazil is committed to reducing tariffs and non-trade barriers in most of its industries. The socialist regime has held to this, and as a result the country has attracted significant foreign investment.

Brazil is a compelling market right now. The country has suffered historically from a very high degree of wealth disparity, which in turn fueled absurd levels of crime in major cities. In the past few years, the country has seen its GINI index decline sharply, indicating that the massive wealth disparity is being reduced. This means millions of Brazilians are entering the ranks of the middle class. With high wealth disparity, GDP gains may not mean much for market size gains, given that the same segment of the population will retain the wealth. With greater wealth distribution, however, the country will see a sharp increase in the number of middle class consumers -- those who will buy the products that international firms are selling.

Brazil's export orientation and large stock of raw materials means that the country is a good base for a production as well. The more business-friendly approach of the government means greater opportunity to use Brazil to reach other South American markets, such that much of the continent is accessible without trade barriers for most firms. The country has a large workforce from which to draw as well. There are concerns that industrial ventures will face relatively high tax rates in order to help finance the government's social programs, but this disadvantage may be outweighed by the opportunity.

From a competitive perspective, Brazil is not a heavily-saturated market yet. Many companies opt not to focus on South America as a major market, something that opens up Brazil for firms that do see value in operating in that part of the world. There are fewer state-run companies on which to compete as well, after the massive privatization moves.

Overall, for the manager Brazil represents a moderate challenge but a significant opportunity. There are economically progressive cities like Curitiba, major metro areas like Rio and Sao Paulo, and the country has a wealth of natural resources on which to draw. The biggest risk in Brazil is the country's historic lack of political stability. The Lula regime has been transferred successful to the next generation of socialist politicians, granting the country some stability, but overall the country's history of poor management raises the specter that its current run of success is something that may not be sustained. In that respect, it might be the riskiest of the BRIC countries. But with political stability, Brazil is likely to fulfill Goldman's vision as the fifth-largest economy in the world.

Russia is a challenging environment in which to operate for Western firms. Historically a superpower as the U.S.S.R., Russia is unused to Western business and political models, and has not translated to globalization very well (St. Petersburg Times, 2010). That said, the country is already industrialized and has enormous natural resource wealth. Russia has the largest proved reserves of natural gas and the 8th-largest proved reserves of oil. Russia has attracted $297 billion in foreign direct investment, ranking it 18th in the world, between Singapore and Austria (CIA World Factbook, 2011). This points to hesitation among the international business community to enter the Russian market.

The political environment remains the biggest challenge for international managers in Russia. Contributing to the country's low globalization score is trade policy (St. Petersburg Times, 2010). Russia is the only one of the BRICs not in the World Trade Organization, and therefore not particularly committed to liberalizing its trade regime, although it is just now at time of writing set to join in mid-December 2011 (Prasad, 2011). At present, however, the country still suffers from heavy state intervention in markets, making it a difficult operating environment for foreign firms.

The market, however, is promising. Although the smallest of the BRIC countries by population at 138 million, Russia is the wealthiest, with a per capita income of $15,900. Its consumers are clustered into cities, most of which are in the Moscow-St. Petersburg corridor and along the Volga River. This makes Russia a relatively easy market to reach. The country also has the best transportation infrastructure. The biggest concern is that unlike most developing nations, Russia has a declining population. Thus, even if its economy gets a short-term boost from resource exploitation, Russia's long-term future is in question if it does not see a population boom.

The competitive situation in Russia is characterized by state involvement. Many firms, particularly in the lucrative resource sectors are either owned or run by the government. This means that access to the Russia market is difficult in this sector. Consumer products are easier to sell. The challenging political and cultural environment means that few foreign firms have entered the Russian market, and that some of the ones that have entered eventually left.

For the international manager, Russia is an interesting prospect. The country's accession into the World Trade Organization should open the country up to more foreign investment, negating one of its biggest disadvantages. Yet, if China can join the WTO without unwinding its state-controlled industries, so too can Russia. The consumer products market remains enticing for foreign firms, because most Russians are already middle class, especially in Moscow and St. Petersburg. Outside of the cities, the people have less money but the markets are more difficult to reach as well, so firms can concentrate on the major metro areas of the country easily and profitably.

Lastly, many firms have taken to producing in Russia for the local market. This is attractive because Russia has long been industrialized, so its managers and workers are capable of functioning in that environment. There are many natural resources that firms can take advantage of as well. Additionally, Russia is a gateway to other markets with which it has close trade ties, throughout the former Soviet Union.

India

India is the second most-populous country in the world with 1.2 billion and may eventually overtake China in that regard. This alone makes it enticing. Certainly, its per capita GDP does not, as most Indians are dirt poor. What makes India attractive is the country's high level of economic growth. India has the world's 5th-largest GPD and it grew at 10.4% last year (CIA World Factbook, 2011), accelerating an already hot pace. This economic improvement has lifted millions of Indians out of poverty in a very short period of time. In under ten years, the number of middle class households had more than tripled. There are now over 200 million Indians living in middle-class households.

Despite these successes and the much-publicizing offshoring of call centers, India attracts relatively little foreign direct investment, sitting at 23rd in the world, between Poland and Saudi Arabia. While the country is in the World Trade Organization, it still has a high level of government involvement in business, a holdover from the days of near-Communist Indian governments. This heavy involvement, combined with rampant corruption, presents unique challenges to firms in the Indian market. Transparency International rated India's corruption perceptions index at 3.3. While not the worst in the BRICs (Russia at 2.2 is worst), it still ranks lower than either Brazil or China and far below Western markets.

Competition in India is also characterized by a high level of government involvement. Many firms form joint ventures with local companies in order to help navigate the political system, reduce political risk and assist with India's complex distribution networks. At the retail level, however, while things are competitive once a local partner has been established there are many channels that can be used to distribute. This is especially true in the country's cities, where most of the middle class and upper class Indians live.

India has, in recent years, attracted service industries, because its population is relatively highly educated and English-speaking, yet works for a low wage relative to workers in the U.S., Canada or Britain. The IT services industry in India has grown to become a $60 billion industry (Wharton, 2011).

For the foreign manager, India is a difficult country in which to operate because of the vastly different culture, the high levels of corruption and the heavy government involvement in business. However, the middle class is growing rapidly, and the country is well positioned to become a dominant player in the global services industry. As such, India remains a compelling proposition if a local partner can be found to navigate the complex Indian political environment.

China

China is the world's most populous country and its second-largest market (CIA World Factbook, 2011). It has also become the world's manufacturing center. It has the 9th-highest rate of foreign direct investment, the 2nd-most exports, the 3rd-most imports and the economy is growing at over 9% annually. It is this growth rate that makes China such an attractive market for international business, and the country's low cost of manufacturing makes it attractive for outsourcing of production.

As with the other BRIC countries, China still has high trade barriers despite recently joining the WTO. As a communist country, the government is heavily involved in most aspects of Chinese business. Foreign firms must either find a local partner or outsource to Chinese firms entirely. The cultural barriers between China and the West are high, and difficult to overcome because there are so few capable Chinese managers -- they often must be imported from Taiwan or Hong Kong.

Competition is fierce in China, as there are local companies saturating every industry. In addition, the lack of intellectual property rights makes China a difficult proposition for companies that rely on brand strength for competitive advantage. The Chinese consumer responds to different triggers as well -- there is a high learning curve and those Western firms that have been successful have generally utilized local partners to overcome the learning curve.

China is an excellent place to manufacture for a number of reasons. The first is that the country has a low cost of manufacturing, although it is beginning to rise after several years of robust growth. Rising labor costs actually threaten the growth that China has experienced, at a point before the entire country has become wealthy (Business Week, 2006).