Executive Summary
A country’s attractiveness to financial direct investment reflects the confidence international financial institutions have in its governance. A nation that has implemented a sound political, economic and social policies all anchored to the rule of law attracts FDI more than the one with weak governance structures. External investors cannot entrust their resources to a nation grappling with governance problems such as civil wars, corruption and high costs of business operation.
This report examines the attractiveness of Brazil to FDI, and therefore, as a preferred investment destination. A. T Kearney, a financial consulting company has been famous since 1998 for ranking countries based on their FDI attractiveness. This information is vital to foreign investors in choosing foreign investment destinations.
Brazil has been fairing well according to the A. T. Kearny FDI attractiveness ranking reports posted in 2007, 2010 and 2012. It ranked 6th, 4th and 3rd respectively. Telecommunication, construction and banking sectors have especially been ranked as the most lucrative to foreign investors.
The report looks at the advantages and disadvantages of investing in Brazil, based on its good ranking in attractiveness of FDI. In assessing these facts, the paper looks at the political, economic and social structures of Brazil and how the company will ride on these structures to set up a successful business venture in the country. The paper will also look at the viability of the real estate business in Brazil, a winning plan to invest in Brazil and effects of currency and trade licensing procedures to the company.
The Economic Overview of Brazil
Brazil prides on its excellent natural beauty with fine weather, characterized by good sunshine all year round. The country also enjoys a stable political system, making it a direct destination for tourists and investors from around the world. It is ranked among the top world economies with a strong currency and high economic growth.
All these factors have led to a rise in the number of foreign investors pitching tent in the country, and consequently leading to a rise in the growth of the real estate sector. The Brazilian government has committed lots of resources to developing the infrastructure, as well as conservation of the major tourist attraction sceneries and culture. Good infrastructure, good governance and increased tourism activities has stimulated a steep growth of the property market in the country.
The Brazilian current population stands at 188 million with an annual growth rate of 20% in the property market. This makes it a viable market for a company focused on investing in a new emerging real estate market with potential of high returns on investment.
Brazil’s currency, the real, stands at an average exchange rate of 2.26 Brazilian Reals per dollar. This makes it one of the strongest currencies in the world; the country has been on a plan to get a million households buy a home per year. The plan is poised to clear the current 8 million housing shortage after eight years.
Attractiveness of FDI in Brazil
Over the last two decades, Brazil has witnessed an increase in FDI flows, leading to increased industrialization. The increase in FDI inflow was occasioned by market opportunities and good governance policies. The FDI resources in the country are largely focused to technology and high capital industry sectors.
FDI inflows in most developing nations have been linked to import substitution. Brazil developed a unique FDI regime that was not discriminatory in this sense. The country opened its borders to free trade with limited barriers, this coupled with a vibrant domestic market largely attracted FDI in the country.
The Brazilian government was committed to upholding the rule of law by protecting the constitution. This led to a stable government that in turn positively influenced investor confidence in the country. The constitution did limit foreign companies to invest in a few economy sectors such as insurance, financial services and technology.
These clauses were lifted and foreign inflow allowed to flow to every sector of the economy without restrictions. The federal government of Brazil offers state autonomy as regards tax incentives offered to foreign companies. Different states in the country, have, as a result made considerable adjustments in their tax regimes to offer favorable incentives in order to attract FDI. The biggest FDI investment has largely been channeled to the state of Sao Paolo due to its attractive economic policies.
Differences in state tax incentives offered to the transitional companies seeking to invest in Brazil have created competition among the states for FDI. This creates room for the transitional companies to bargain for better tax incentives in different states in the country. The companies, however, find themselves at a loss occasioned by changes in state leaderships that bring about leaders with different development agenda, and consequently changing the engagement rules from time to time.
Viability of the Real Estate Business in Brazil
Brazil is the largest country in Latin America with a population of about 170 million people. It is further divided into twenty six states that enjoy legislative autonomy. A good percentage of this population is well educated and can therefore provide the human resource required to run the business to success.
The states have a dependable supply of building contractors, building consultants and good land for property development. Qualified and experienced human resource is an important factor in the success of any business venture. The company will not face the problem of importing labor or outsource services overseas as a result of lack of qualified personnel. This would otherwise inflate the cost of doing business and reduce the profit margins.
Most of the states in Brazil have invested in good and functional infrastructure, which is important for the business to flourish. The choice of a property development site is influenced mainly by presence of good road networks, water and electricity services.
In order to attract FDI in the 90s, most states offered beyond financial incentives, they provided free land to companies to build their set ups, as well as building roads. This sort of competition was good in the long run such that it helped develop most parts of the country, expanding the domestic property market.
The flow of FDI in Brazil has mainly been characterized by the search for part of the huge market existing in Brazil. The target sectors are mainly mining, oil and gas paper pulp and information communication. The real estate sector has been a neglected niche by the transnational companies despite the huge business potential in this sector.
There is a ready market looking at the big population that needs affordable housing. FDI flow in the country has made it realize economic growth, creating jobs for its citizens and raising their living standards. This has increased demand for better housing as many of the employed population can afford to buy or rent the houses.
Disadvantages of FDI Flows in Brazil
FDI flow despite leading to economic growth and creation of jobs in the host country, it has been noted, in some cases, to dispose off some negative effects. In Brazil for example, cases of unsustainable exploitation of resources has been largely linked to FDI and transnational companies.
Cries of environmental degradation resulting from mining activities funded by transnational companies are on the increase without proper mitigation efforts. Besides, there are also cries of these companies flouting labor laws as contained in the country’s constitution regarding terms of engagement between employers and employees.
The country has put in place a lot of bureaucracies in terms of requirements to setting up a business. Potential investors in Brazil take an average of four months to complete the registration process needed to start a business. The rigid bureaucracies and labor laws are responsible for an uncontrolled growth of the informal sector in the country.
There are high trade barriers mostly on industrial goods which have largely discouraged growth of investment in this area. Since our focus is in the real estate, most of these barriers fall out of our company operation lines and is less likely to affect our venture.
Following the world economic meltdown in 2008, most transnational companies started drifting to Brazil in search of better return on investment. This was occasioned by the interest rates in most developed nations including the US falling to a record low. FDI often leads to strengthening of the currency of the host nation. The stronger currency is likely to reduce exports as this will make local products more expensive to the external market. Since the market segment is purely local, the currency problem will not affect our business operations.
The Investment Plan
The best way to penetrate into this market would be to identify one of the top ranked Brazilian real estate companies and work out on a possible merger. This would ease the process of registration and acquisition of licenses. The second step should be to identify land in prime areas for developing large scale shopping centers and residential houses. There is also a need to carry out feasibility studies in various places before acquiring land for property development to ascertain the viability of the project.
The second step will involve selection of a committed and experienced team of personnel ranging from technical members, marketers and office assistants. These will be the pillars that will support the company to gain its perceived success in the venture. The venture should be anchored on sound ethical business practices and observe environmental conservation measures. To achieve this, the company will need to take part in conservation efforts as a way of giving back to the society through a corporate social responsibility program.
Marketing will be the most important part of the company’s departments. The department will need to be led by senior professional assisted by at least two other people. Their roles will involve scouting around to look for potential buyers as well us reaching out to them through the various advertisement channels such as; print media, TV and newspapers.
Conclusion
FDI plays an important role in a country’s economic growth; it should however be well regulated and balanced so as not to undermine the country’s financial system. a country can attract FDI if it has sound economic, political and social policies to instill confidence in external investors. Corruption and civil wars are the main barriers to external funding through the transnational companies.