I. The Brazilian Macro-Environment

Investment Climate Analysis

Brazil is quite interesting place for investment and many companies are entering this developing market. Its high GDP growth, large economy, developed infrastructure, liberalisation of public sector and many Foreign Direct Investments have turned this struggling country into developing nation that holds 2nd place (China is 1st) in amount of foreign capital invested into the economy. In last 5 years, Brazilian government has been quite stable and it seems that Brazil has a sound strategy when it comes to taking its economy into top performing ones. Government is introducing new, more liberal competition laws and it is introducing new forms of investments, such as PPP, or Private Public Property, where both the investor and government share the risks by holding equal stakes in the investments.

But, let us not be blinded by the Brazilian marketing skills and their portraying of real investment climate. There is for sure a lot of space for improvement. We will perform a few analyses, which will give us precise insights into the environmental conditions for investing in Brazil, and through analysing this country; we shall decide what type of investment is the most suitable for Red & Green.

PESTL Analysis

Investment climate is the economical, institutional, policy, and regulatory environment in which firms operate. A PESTL analysis is an analysis of the external macro-environment that affects all firms. P.E.S.T.L. is an acronym for the Political, Economic, Social, Technological and Legal factors of the external macro-environment. Such external factors usually are beyond the firm's control and sometimes present themselves as threats.

Political environment
Brazil is currently a country with a stable, proactive government and there is virtually no political instability at the moment. However, things can easily change, as they did through out the modern history of Brazil. Political conditions can become volatile, and this threat remains from election to election. Business conditions that change rapidly and social extremes that exist don’t add to country’s attractiveness.
Corruption is still a big issue in Brazil. Opening an operation in Brazil may require additional payments to government officials, which can present a big obstacle to entering a market. According to Transparency International, Brazil holds 70th place in level of corruption among 180 countries, higher then such economies as Cuba, Turkey and Bulgaria.

Economic environment
Due to large population and inflow of FDI, Brazil has extremely high potential for growth. The gap between rich and poor is decreasing gradually, and there is a significant trend of growing middle class. Good news is that Central bank has inflation under control and the risk of domestic currency devaluation is low. Brazil's currency, the real, was introduced in 1994, and is largely seen as a success. Currently, it is considered to be overvalued against the dollar, which hurts exports and helps imports.
Government is clear when it states that it has equal treatment for both foreign and domestic enterprises. There is abundance of unskilled and semi skilled workers, but labour costs on the global level are quite low. When it comes to import duties, there is a system in place which gradually reduces the tariff according to the number of years of successfully importing. Federal government doesn’t offer any help, but local state governments have a right to offer incentives for investing, almost the same set of incentives as it does to domestic enterprises. Corporate tax is 15% and there are no clear incentives for leaving the profit in the country. The tax rate is quite high compared to some economies like Ireland, Portugal or Greece. PriceWaterCoopers, consultant agency, highly recommends that exporters seek assistance from local trade and tax consultants before shipping any goods.

Social environment
We can see that there is a huge economic inequality among the population and around 19% of citizens live under poverty line. But, let’s not forget that Brazil has a population of around 188 million people, which makes it 5th largest nation in a world. Let’s take a look at the income distribution table:

Year
2001
2002
2003
2004
2005
Richest 10%
47.44%
47.02%
46.19%
46.19%
45.31%
Poorest 50%
12.58%
12.98%
13.22%
13.85%
14.07%

Class distribution in Brazil has a huge portion of low (minimal) income people, and a significant number of wealthy citizens. However, middle class is showing growth, but is still to be established. This tells as that there is large consumer population (18 million) of quite rich individuals that could be successfully targeted with our product. Brazilian people are considered as modern and up-to date with fashion movements in the world. They are aware of luxury brands and are willing to buy expensive products.
South and southeast region are the most developed parts of the country and hold the best standard of living. These areas are the most-densely populated and account for the biggest portion of GDP per head. Southeast is the home to cities of Rio de Janeiro and Sao Paolo, where the largest part of population is located. (See Appendix B)

Legal environment
Unfortunately, Brazil is highly bureaucratic country. Opening any sort of business in Brazil involves large amounts of paperwork, there are still numerous regulations and it is a lengthy process. Brazil, represented by Sao Paulo as the largest business centre, ranks 119 out of 155 in ease of doing business. This is behind other major emerging markets. For example, South Africa ranks 29, Mexico 73, Russia 79, and India 116. In Latin America, only Venezuela and Haiti regulate business more heavily than Brazil.
Starting a business is easiest in the states of Minas Gerais and Rio Grande do Sul. It is most difficult in Sao Paulo, Ceara, and Maranhao. The time to start a business varies widely across states—from 19 days in Minas Gerais to 152 days in Sao Paulo. It takes 19 different steps to start a business in Ceara, and 18 in Maranhao and Santa Catarina.

Government is showing effort in providing help to investors by providing manuals and lists of necessary bureaucratic instruments needed to start a business in Brazil. These manuals are quite complicated but accompanied with details, often with described step-by-step process for obtaining necessary licences. Brazil has signed a bilateral agreement on avoiding double taxation with most countries, including Denmark.
There are specific laws regulating pricing models, where we need to take care, especially while eventually promoting sales. Also, every enterprise is required to pay extra (13th bonus) salary to its employees.

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