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DOING BUSINESS IN
Daniela Campillo Valencia, 2014
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BRAZIL
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Table of Contents
Why to Invest in Brazil? p. 6
Market Place: Brazil
Regions p. 8
Culture and human
Resources p. 11
Society p. 15
Education p. 16
Infrastructure and
Transport p.17
Economy p.20
Tax and Fiscal System p. 22
What to do before starting?
p. 25
Choose a Type of Investment
p.26
Types of Investment
Short-‐Term Investment
(Less than 2 years) p.27
Medium-‐Term Investment (2-‐5 years)
p.29
Long-‐Term Investment
(More than 5 years) p. 33
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Table of Contents
Short-‐Term Investment
(Less than 2 years) p.27
Medium-‐Term Investment (2-‐5 years)
p.29 Long-‐Term Investment
(More than 5 years) p. 33
Commodities Market p. 27
Capital Market p. 29
Brazil’s Strategic Assets p. 33
Brazil’s Hidden Assets p. 34
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Table of Contents
Risk Management: What are the possible risks of Investing in Brazil?
p. 36
General Tips and Strategies p. 37
Conclusion p. 38
References p. 40
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Why to Invest in Brazil?
Brazil is the largest economy in Latin America and in order to become an investor
in Latin America it is highly recommended to become an investor in Brazil first. Brazil’s
large population results in a large network of consumers. The country has been growing at a
rate of 4% annually, which is 50% superior to the average growth rates of the country
registered in the past 25 years. (Universidad de Nebrija, 2013) Brazil’s high interest rates,
the sustainable public finances and its relieved external debt have made of it a country with
a trustworthy speculative investment grade (BBB). Furthermore, the reduction of the
poverty indexes of the country and the continuously growing middle class, which had a
significant growth of over 30million people in the last 10 years and which currently
contains around 75% of Brazil’s total population, ensures a higher demand of products and
higher possibilities of success for entering investment projects. (Universidad de Nebrija,
2014)
Furthermore, with a population of over 200million people, Brazil is within the seven
world’s powers in terms of its PIB, which is almost half the total of that of Latin America
and the Caribbean together. Brazil is the first receptor of foreign investment in Latin
America and the fifth worldwide. According to the UNCTAD(United Nations Trade and
Development Commission), Brazil will be the fourth country receiver of direct foreign
investment in the next 10 years, after China, The United States and India.. Brazil also
possesses many multinational industries of first category and ten of those are located within
the top 500 industries in the world. For all these reasons, Brazil is currently in 12th place in
the ranking of the top countries of direct foreign investment worldwide, making it one of
the countries with more opportunities for new investors. For instance, the state of
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Sao Paulo itself was ranked in second place in the top ten attractive places for
investment in Latin America for its large market size, for the presence of important
multinationals in the state and for its constant and sustainable economic growth.
(Universidad de Rosario and Firma de Inteligencia de Negocios de Chile, 2014)
Moreover, Brazil is part of many different treaties, such as Mercosur, which
involves a tax free trade of products, such as commodities, between countries like
Paraguay, Uruguay, Venezuela and Argentina. Brazil also has treaties with Israel, Peru and
Colombia. Investors view this as an opportunity to enter other markets easily and at a lower
cost.
Curios Fact: Four Main Facts that make Brazil an
attractive place for investment
1. The large size of its market and consumer network.
2. The driven dynamic of its economy.
3. The accessibility to other international markets after
entering Brazil’s market.
4. The sustainable growth of the local market.
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Market Place: Brazil
Regions North
The North Region of Brazil is composed of 7 states: Amazonas, Pará, Acre,
Rondônia, Roraima, Amapá and Tocantins. This region lies mostly within the Amazon
forest and therefore this area has the largest concentration of freshwater in the world
compared to that of other countries. It has one fifth of the world’s water reserves. The
major economic sector of this area is agriculture. Furthermore, the North region of Brazil
has an economy that is also based on the vegetation and mineral extraction of resources
such as latex, acai wood and nuts. It has a total of 12.9 million inhabitants, which equals
around a 7% of Brazil’s entire population. This region holds great potential for
development and has good opportunities for investors especially in the infrastructure and
energy sector. (Embassy of Brazil in Wellington, 2014)
Curious Fact! Manaus, the capital of the
Amazon region, is the only
free trade zone in Brazil.
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Northeast
The Northeast region of Brazil has nine states: Maranhao, Ceará, Rio Grande do
Norte, Paraíba, Pernambuco, Bahía, Alagoas and Sergipe. This region is located in an area
that is chronically subjected to droughts. The states of Pernambuco and Bahia where the
first major centers of colonial Brazil and therefore their culture is strongly influence by the
African-slave culture. This area is rich in natural resources, such as sugar, cocoa and cotton
production. Another strong sector of the economy of the region is cattle breeding and
mining. Tourism is also important for this region, considering that it is famous for its
beaches and tropical climate. This Northeast region of Brazil has a total of 53 million
inhabitants, which represents around 30% of Brazil’s entire population. (Embassy of Brazil
in Wellington, 2014)
West Central
The West Central region of the country has 4 states: Mato Grosso, Mato Grosso do
Sul, Golás and the Federal District. This region is covered with extensive savannas and
tropical grasslands. Brasilia, which is the capital of Brazil, is located in this region and it
was founded in 1960 as a planned urban city constructed by the architect Oscar Niemeyer.
This region is scarcely populated and it is also considered the paradise of wildlife due to the
fact that it contains the Mato Grosso swamplands. It has around 12million inhabitants
around 6% of the population. (Embassy of Brazil in Wellington, 2014)
Curious Fact! Today, the northeast region of Brazil is growing faster than the state of Sao Paulo.
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South East
The South East region of Brazil has four states: Rio de Janeiro, Sao Paulo, Mina
Gerais and Espíritu Santo. This region is the most industrialized and developed region of
the country. It is rich in minerals and its agriculture is the most advanced in the country.
The majority of the population of the country is concentrated in the South East region. It
has around 72 million inhabitants, which is around 36% of the total population of the
country. Sao Paul, which is the financial capital of the country, is located in this region. It is
considered to be one of the major urban areas. Sao Paulo has a population of around
20million people. It is the world’s third largest city and the largest in South America. The
city of Sao Paulo by itself is considered the fourth largest economy of Latin America and it
has been growing significantly over the last decade. (Embassy of Brazil in Wellington,
2014)
South
The South region of the country has 3 states: Paraná, Santa Catarina and Rio Grande
do Sul. This region is highly developed and it has a balance between the rural and the
manufacturing sectors. This is the smallest region of Brazil, taking only around 7% of its
territory. It has around 27 million inhabitants, which is about 13% of Brazil’s total
population. (Embassy of Brazil in Wellington, 2014)
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Culture and Human Resources
Brazil has a very diverse culture with people from many different ethnic groups.
47.7% of its population is white, 43.1% is mulatto, 7.6% is black, 1.1% is Asian and 0.4%
is indigenous. (The World Factbook, 2014) The official language of Brazil is Portuguese.
Brazilians are thought to be very friendly and open minded people. They are usually very
caring and hospitable and willing to share their culture with foreigners.
At first, Brazilians tend to be very inquisitive, but they act this way because they are
always trying to build a strong connection with the people they meet and they use the
method of questioning people to try to get to know them better and to find points of
commonality. Another aspect of Brazilian’s profile is their ability to be patient, in fact it is
usual to arrive 15 minutes late and it is rude to arrive 10 minutes early to any appointment.
For Brazilians is better to arrive late than to arrive before time. Furthermore, body contact
is essential for communication in Brazil and for instance touching arms and elbows is
completely acceptable.
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Regarding the human resource area, the IMD (Institute of Management
Development) World Competitiveness ranking released in the year 2013 Brazil was located
in place 51; it fell 5 places with respect to the report made in the year 2012. (Institute for
Management Development, 2013) Brazilian executives are usually characterized by their
embracing attitude and their ability to be flexible and adapt easily to changes. Today one of
the top priorities of businesses in general, including businesses in Brazil is to work on the
development of its workers human talent by helping them develop their competences
through internal projects and education programs.
Salaries are an essential aspect to consider when talking about human resources
because it can become a decisive aspect of competitiveness in businesses. In Brazil salaries
have increased over the years, while the local currency has appreciated. The result of this
trend is that now Brazilians find it more logical to buy abroad because the internal market
has become very expensive. This has forced companies that are based in Brazil to become
more productive because they have to reduce their cost structure without reducing the cost
Curious Fact!
Research studies conducted by the company Korn Ferry show that only 20% of the people
in any country can be considered truly outstanding.
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of the salaries. Moreover, the increase in the salary has given Brazilians a higher acquisitive
power, which has resulted in more consumerism. In fact, one of the characteristics of
Brazilian is that they don’t have fear to consume or to be indebted. For instance, Brazilians
have the chance to pay everything with checks; even a parking lot that costs 5 reais can be
paid in different quotas with a certain interest rate. This gives Brazilians a higher
acquisition power but also a higher risk of accumulating debts.
Moreover the low unemployment rate of the country, which is currently at 5%, is a
great challenge that investors face when entering Brazil’s market. A low percentage rate
means an increment in the salaries of the workers and a lower availability of talent in the
country.
Curious Fact! Today Brazil’s government is searching for scientists in order to
explore the Amazon region of the country, which holds great
potential for investment. The government is also looking for
engineers and technicians in order to improve the infrastructure of
the country.
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Think About…
How does the way of doing business
differ throughout the regions? • South and Southeast regions.
People are extremely efficient and committed to their work. They tend to work fast and
stayed focused on their work. In the south of the country farmers and other people
working in the commodities sector are very proud of themselves; they prefer doing
business with companies that have a good reputation rather than with companies that give
them a higher profit.
• North, Northeast and West Central regions. People are very committed to their work, but they have a more relaxed attitude and prefer
doing things calmly and at their own pace. In the north of the country farmers and other
people working in the commodities sector are very business oriented and they prefer
trading their products with those companies that offer them a higher profit.
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Society
Brazil is the 6th most populous country in the world, with a population of
approximately 200million people. On contrast to most societies, Brazil’s social structure is
not a pyramid but a rhomboid, meaning that the majority of the population belongs to the
middle class. Even though most of Brazil’s population belongs to the middle class, Brazil
has experienced one of the highest indexes of inequality. During the economic crises of the
years 2008-2010, Brazil was the only country to have the 5% of its population on the group
of the poorest people in the world while the other 5% of its population belonged to the
group of the richest people in the world. In the last 14 years the income inequality of Brazil
has declined greatly and over 75% of its population currently belong to the middle class.
(Universidad de Nebrija, 2013)
The poorest classes in Brazil live in public land in which they built slum cities
called favelas. Many favelas reside near the richest neighborhoods making the social gap
between classes even more stark. Furthermore, the index of urbanization of the country is
of 75% and it even reaches 93% in some regions such as Sao Paulo, meaning that most of
the population concentrates in the bigger urban areas. (Guia de Negocios, 2014)
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Education
Brazil has one of the highest literacy rates (90%) among the developing countries.
Around 98% of the children in Brazil are enrolled in primary education and approximately
51% are enrolled in higher education. The government of Brazil spends an average of 4%
of its total government expenditure on education. (The World Factbook, 2014) Two-thirds
of Brazil’s education sector is dominated by the general school education, followed by a
higher education and a preschool education. The government provides its citizens a free
basic education at public schools.
The paradox that lies behind Brazil’s education system is the fact that the best
universities of the country are public and it is very difficult to be accepted in these
universities. The only people who can access the public universities are those who had the
best high school education, which can only be found in public high schools and it is
extremely expensive. The paradox is that the government is financing the education of
those who have a very high income and not of those who cannot afford to have a good
education. It is very difficult for people in the public education sector to get accepted into
public universities because the education in public schools is very precarious. The system is
precarious because it doesn’t have well-founded bases. For instance, a teacher in the public
sector gets paid the same as a maid; therefore, teachers don’t have any motivation to keep
working on the education system.
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Infrastructure and Transport
Brazil’s infrastructure sector holds great potential and it is currently passing through
drastic changes and improvements, considering that the world’s two greatest event will be
held in Brazil: World Cup 2014 and Olympics 2016. Brazilian transportation infrastructure
faces many challenges and the government is currently investing to upgrade the roads and
ports. Highways are the most common method of transportation and despite the existence
of an extensive river network waterways are rarely used. The exception is the North region
in which the Amazon River is located. In this region, rivers are usually the only way to
access isolated communities. In Brazil the railroad network is very uncompetitive and the
use of trains for long distance transportation of passengers is restricted to only a few urban
tourist routes and cargo transportation via railroad is mostly restricted to mineral industries.
The government established a 20-year plan horizon called The National Plan for
Logistics and Transport (PNLT) that provides a framework for the evaluation of public and
private initiatives to increase the competitiveness of the logistics and infrastructure sector.
This plan focuses on the integration of watery network with highway and railway networks,
the expansion of road capacities, the improvement of signage, the control of axle load on
trucks and the expansion of the railway network. (Export, 2014)
Brazil has one of the highest logistics costs in the world. According to the World
Bank, in 2010 the distribution cost structures included around 32% of the total logistics cost
of the country. This cost included administration, warehousing, inventory, legal
requirements and transportation costs. The same report made by the World Bank showed
that the cost of logistics represent an average of 20% of Brazil’s GDP (World bank, 2013).
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Regarding the waterway system of transportation, Brazil’s use of waterways is
small when compared with other countries and considering that it possesses an extensive
network of rivers. Only 13% of Brazil’s total cargo is transported through rivers. The use of
ports in Brazil’s is limited due to their infrastructure problems. Projects have been made for
the year 2025 to increase from the current 13% to 30% the water transportation.
Furthermore, the railway network is rarely used in Brazil and the government is
currently working to make the railways the main means of transportation in the country,
because transport by rail can be up to 30% cheaper and more efficient than transport
through highways and roads. For instance, one train wagon has almost ten times the
capacity of a regular truck.
Currently, Brazil has one of the most extensive highway networks in the world, and
therefore this is the main means of transportation in the country. It counts with a network of
approximately 1,7million kilometers, but only 165,000 kilometers can be transited. (Export,
2014) A study conducted by the CNT (Confederación Nacional de Transporte) stated that
only 26% of Brazilian roads could be considered to be of good quality. This fact results in
extremely high transportation costs, which can account up to 60% of the transported
merchandise. (CNT, 2013)
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Think About…
What strategies could be used to minimize
the negative impact that the poor
infrastructure can have on your business? • Place your business in a strategic location.
For instance, if your business is focused towards the exportations sector, a good option
will be to place the production plant near the ports. On the other hand, if your business is
focused in the local market a good strategic place will be the central urban areas, in which
there is a higher acquisitive power.
• Situate your business in the region of the country that has a higher
potential in your target area. For instance, if an investor wants to enter the capital or financial market he should
establish the business in Sao Paulo. If he wants to invest in the energy and commodities
sector he should move to the central-north region of the country. If the investor is
planning to enter the cattle sector, the central-west and south regions are the one with
more potential. Lastly, a good region to invest in renewable energy, such as windmills, is
the Northeast region of Brazil.
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Economy
Brazil’s economy is characterized by the current development of many different
areas, such as agricultural mining, manufacturing, commercial and service sectors. Its
economy outweighs that of the other South American countries, making it one of the
developing countries with more power worldwide. Since the year 2003, Brazil has been
working successfully to achieve a stable macroeconomic profile by building up foreign
reserves and by reducing its debt burden. In 2008, Brazil became a net external creditor,
meaning that its profits were greater than its liabilities and therefore it was credited to lend
money to other countries. After a strong growth in Brazil’s economy in the years 2007 and
2008, the global crisis hit Brazil and it experienced the recession through a lack of demand
in one of its strongest sectors, which is the agricultural sector, which depended on the
exportation of commodities. During the recession, Brazil changed its currency 5 times. It
reached a level of hyperinflation of 166%, meaning that prices changed within hours
making the economy very unstable. Regardless of the economic crises that Brazil
experienced, it was one of the first emerging countries to begin a rapid recovery. In 2010,
consumer and investor confidence rose 7.5%, which is the highest growth rate in the past
25 years. (The World Bank)
Moreover, Brazil has a history of high interest rates and this has made it an
attractive destination for foreign investors. The large capital inflows over the past several
years have caused Brazil’s currency to appreciate significantly, posing a threat to the
competitiveness of Brazil’s internal industries. In order to avoid hurting Brazil’s internal
market economy the government intervened in foreign exchange markets and decided to
raise taxes on some foreign capital inflows.
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Today, Brazil’s currency is called the Real (R), which is equal to $0.45. The country
has a GDP of $2.19 trillion and a growth rate of 2.5%, placing it in the ranking of the
highest GDP worldwide in 8th place. Its GDP per capita is equal to $12,100. A 40% of
Brazil’s GDP consists of the taxes established by the government on foreign investments.
As in 2014, Brazil is experiencing an inflation rate of 7%. (The World Factbook, 2014)
Currently, Brazil’s Fitch rating, also called debt qualification, qualified Brazil in the
category BBB, which means that it is a country with a good creditworthiness and with a
high chance of a good return on the investment. Also, the Fitch rating qualified Brazil in the
F2 category, meaning that it has the capacity to sustain its financial compromises. (Fitch
Rating, 2014)
In 1952, the BNDES(National Bank for Development) was created through the
initiative of the President Getulio Vargas, with the purpose of promoting sustainable
development through the offering of long term credit for base industries, infrastructure and
environmental projects. This initiative has had a positive impact in the Brazil’s economy
and has helped many Brazilian entrepreneurs to start their own businesses.
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Tax and Fiscal System
The fiscal system, also called the tax system is the one that is in charge of collecting
and regulating tolls and taxes of the citizens that are using the services provided by the
government. In Brazil, all imports are subjected to both taxes and fees. The four main taxes
for importing costs include the import duty, which is the federal tax, which must be paid for
foreign products that enter Brazil’s territory; the average duty rate is of 15%. They also
include the Industrial Product Tax (IPI), which must be paid for both domestic and
imported manufactured products and it varies from 10-20%. This tax usually applies to the
automotive industry, which is one of the biggest industries in Brazil. The fiscal system also
includes the Merchandise Circulation Tax (ICMS), which is applicable to both domestic
and foreign products and it represents the state government value-added tax. The ICMS
changes on each state and for instance, in Sao Paulo it is 18%. (Export, 2014) Another
significant taxes are called PIS and CONFIS. PIS is the contribution to the Social
Integration Program and Civil Service Asset Formation Program and CONFIS stands for
Contribution to social Security Financing. These two are federal taxes that serve to fund
social security. Lastly, two other important taxes are the Merchant Marine Renewal Tax
(AFRMM) and the Import Tax (II). The AFRMM is a federal social contribution directed to
the development of Brazil’s merchant marine and naval industries. It applies to sea imports
and it represents a 25% tax on the ocean freight plus all the port charges, which vary
depending on each port. The import Tax (II) protects Brazil’s domestic industries and it
ranges from 0-35% depending on each product.
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In general, taxes represent around a 30-40% of Brazil’s total income. (Amcham,
2014) The tax burden in Brazil is so high that a product can cost over 80% of its original
price as the result of the taxes. Moreover, as the country supports exportations, a product
made in Brazil can cost more inside the country than outside. In Brazil some taxes vary in
the different states because they are their main income source and therefore states fix taxes
depending on their economic power. This has become a problem for the country because it
leads to a lack of stability in the fiscal system. Overall, the tax and fiscal system of Brazil
reduces the competitiveness of the country significantly.
Curious Fact! Most investors view the complex
tax and fiscal system of Brazil as
the main limiting factor for
investment.
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Think About…
What strategies can be used to deal with the
tax and fiscal system of Brazil ? • Reserve a portion of the income of your business that goes
exclusively towards risk management. In Brazil companies have a portion of the money reserved to risk management, which they
call provision, that is directed only towards managing the risks that result from the complex
tax system.
• Contact a local partner Most investors prefer entering Brazil’s market with the help of a partner who understand in
depth the complexity of the fiscal system of the country. Another advantage of entering with
a partner is that he can help you build a large network of clients and in that way be well
connected.
• Contact Brazilian law and accounting firms If an investor wants to enter the market by himself the best way to do it is by contacting
excellent law and accounting firms that can help him structure his business in a way that
could minimize the cost of taxes.
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What to do before starting?
1. Set a Bhag (Big Hairy Audicious Goal).
For example: Have a return of the investment over 20%.
2. Determine the available capital of investment.
For example: $1,000 US dollars
3. Fix the term of the investment.
For example: 1-year (short term),
5-years (medium term), 10-years (long term)
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Choose a Type of Investment
Short-term Investment
(Less than 2 years)
Long-term Investment
(More than 5 years)
Medium-term Investment
( 2-5 years)
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Short-Term Investment
(Less than 2 years)
Short-term investment is the type of investment that will expire in a period no
longer than two years. This type of investment can be usually liquidated fairly easy. There
are many different types of short-term investment, but the one with the highest potential is
the commodities market also called the futures market.
Commodities Market
The commodities or futures market hold great potential for short-term investment
because it deals with the trading of future crops or other non-differentiable products with a
life expectancy of less than two years. Moreover, the transaction made in the futures market
occur on a daily bases and the investor either gains or loses money at the end of each day.
The commodities market is a very liquid market and it is easy to quit the investment,
without losing a 100% of the capital invested, if it is not going as planned.
To begin with, the market of commodities is the one in charge of the trading of non-
differentiable products that do not have an extra cost, such as soymeal, corn, oil and crude.
Currency can be considered a commodity itself. The two main factors that affect the
commodities market are the technical and the fundamental analysis. Fundamental analyses
are those that focus on how current situations affect economy, while technical analysis
focus on the statistical and mathematical trends of the market itself. The best way to invest
28
in the commodities market is to use both modes of analysis for an optimal return on the
investment. Moreover, another important aspect to take into account when dealing with the
commodities market is the fact that it also works based on the demand and supply;
therefore, it is important to take into account what are the most commercialized
commodities in order to have a higher return on the investment.
The trading in the commodity market is based on the exchange of futures. The
contract of futures refers to the quantity of a product that is sold or bought in a specific
point in time with a fixed price. Some of the most important commodities in the market of
Brazil are corn and soymeal. Almost 95% percent of these crops are GMOs (Genetically
Modified Organisms), which reduces the cost of the commodities in the futures market,
considering that non-GMO products are 30% more expensive. (Bunge, 2014. In general, the
commodities sector of the country plays a very important role on the development of its
economy and for this reason Brazil has also adopted the name of the World’s Food
Dispense.
Curious Fact! Today, the trading of grains accounts for approximately 11% of the global
commerce.
Curious Fact!
Today, the most liquid commodities in Brazil’s
futures market are coffee and cattle.
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Medium-Term Investment
(2-5 years)
Medium-term investment is the type of investment that has a return of the
investment in a fast way within a period of 2 to 5 years. This type of investment can also be
liquidated fairly easy. There are many different types of medium-term investment, but the
capital market in Brazil, called Bovespa holds great potential for foreign investment.
Capital Market
The capital market has two basic divisions: the debt market and the equity market.
The debt market is composed of bonds, which are a means of financing for some companies
that consists in issuing bonds or loans with a fixed interest rate in order for people to lend
them the money to finance their projects. The equity market is also called the stock market
and in this division of the capital market investors can have a direct benefit and
participation in the company’s decisions. Investors who decide to enter the stock market are
usually planning on medium-term to long-term investments and therefore they are looking
for a market that is very volatile with a high marketability in which profits could be easily
maximized.
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The stock market in Brazil is called BOVESPA and its base operations are located
in the financial capital of the country, which is Sao Paulo. The 52-week range percentage is
-5.99%, showing how it has decreased significantly over the past year. The 52-week low
was $44,107,06 and the high was $57,099,62. The index of the stock market is called IBOV
and it indicates the daily performance of BOVESPA as well as its 52-week range.
Curious Fact!
Bovespa is the largest capital market in Latin America.
For instance, last year’s average daily trade in Bovespa is
equal to 450millionUSD, while the stock market of
countries such as Colombia it is of around 34millionUSD
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The main regulation organisms of the capital market in Brazil are the CMN, the
Central Bank and the CVM. These entities supervise the risk management of the investors
and the liquidation of actions of the stock. The CVM is the security exchange commission
of the market and it creates the rules that need to be followed by the exchange and by its
members, while the central bank supervises the transparency of the transactions.
Furthermore, BOVESPA also has its own auto regulating entity called the BSM
(BOVESPA Market Supervisor). The job of this entity is to monitor the transactions of the
companies that are allowed to operate in the market and to make sure that the investor is
having an adequate investment without infringing the law. Currently, over 300 companies
are listed in BOVESPA, many companies are looking into the idea of going public and
entering the stock market as a source of financing their investment. (BOVESPA, 2014)
Daily traded volume of Brazil’s stock exchange (Bovespa) compared with
Colombia’s stock exchange (BVC):
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Think About…
What are the advantages/disadvantages
of investing in the capital
or financial market?
• Advantages. The advantages of investing in the capital market are many. In first place, it is a cheaper and easier
way to finance a project than asking for a bank loan. Furthermore, the financial market is more
liquid than long-term investment options and therefore the investor will have a faster return on the
investment and the possibility of undoing his investment without losing all of his initial invested
capital. Moreover, investing in the capital market allows investors to have a clearer vision of the
behavior of the market as a whole and more clarity on the performance of the demand and supply
trends for certain specific products.
• Disadvantages. The disadvantages of investing in the financial market include the fact that companies who invest in
this market are exposed to the public. They have to share their performance on a daily basis.
Moreover companies that enter the capital market have many regulations to comply with. In
addition, the capital market is very competitive and it is easy to lose the opportunity if the investor
decided to wait.
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Long-Term Investment
(More than 5 years)
Long-term investment is the type of investment that has a return of the investment a
period of over 5 years. This type of investment is also called direct investment because it
usually deals with the establishment of a company in the marketplace. There are many
different types of long-term investment, such as establishing an enterprise or investing in a
specific sector of the economy. A person can decide to invest either in the strategic assets
of the market place or in its hidden assets.
Brazil’s Strategic Assets
The strategic assets of a country can be considered the strength areas of the country
and for this reason they have a great potential for investment. In the case of Brazil, its
principal strategic assets are the mining sector, tourism and the origination of raw material.
The mining sector of the country can be found in the southeast and northeast region of the
country. Tourism has a great potential in every region of the country. For instance, the
north region of Brazil is known for its great opportunities for investment in eco-tourism,
while the northeast and southeast have beautiful coasts with great potential for maritime
tourism. The origination of raw material is concentrated in the West central region of the
country, which is located at the interior of Brazil.
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Brazil’s Hidden Assets
The hidden assets of a country are those that are not exploited to the maximum and
therefore they have a great potential for development. Brazil’s major hidden assets are the
energy and logistics or infrastructure sectors of the country.
The energy area of Brazil is having many difficulties that could lead to an electric
shortage in the country. One of the main problems that this area is having is the lack of
transmission lines to connect the energy generators with the areas of greatest consume.
These difficulties give investors many places from where to start investing in the energy
area of the country. For instance, people are investing in renewable energy sources, such as
Aeolic energy resulting from windmills, in the northeast region of the country.
The infrastructure and logistics area of the country also holds great potential
because it still has many aspects to be improved, which can be considered opportunities for
investment. For instance, there are very few railways to transport the grain production from
the interior of the country to the coasts.
Curious Fact! Around 45% of the investment that arrives to Latin America arrives to Brazil; in
particularly, to the services and energy sectors.
35
Think About…
What are the advantages/disadvantages
of direct installations also called
long-term investment?
• Advantages. The main advantage of long-term investment is that there are many different options and
possibilities to do so. Furthermore, if the investor has an idea but needs time to save more
capital to begin his investment, he would not lose the opportunity as easily as he would in
short-term investment.
• Disadvantages. One of the most visible disadvantages of long-term investment is the fact that the investment
is not as flexible as it would be in a financial investment type. It is not easy to remove the
investment from the market if it is not going as planned and therefore the investor can lose
all the invested capital.
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Risk Management:
What are the possible risks of investing in Brazil?
As in any emerging economy, entering Brazil’s market also has some risks. The first
one is the constant change in the tax and fiscal system, which might affect the performance
of a company significantly. There is also a laborer risk when investing in Brazil because
the salary cost is very high and due to the low unemployment rate, which is around 5%,
there is a lower availability of talent. Moreover, there are many restrictive labor laws
regarding the amount of hours worked and the social charges that companies must pay for
their employees. Furthermore, there is also an economic risk that results from the uncertain
model of development and growth of Brazil’s economy. This model was based in the
growth of Brazil’s internal market and this market is not growing at the rate that it was
projected. Another risk that companies have to face when entering Brazil’s market are the
import taxes and protectionism, which were established by the government in order to
protect the local market. In addition to this, one of the major risks or challenges that
investors face when entering Brazil’s market is the poor infrastructure which accounts for a
great percentage of the losses. Lastly, Brazil is mostly an exporting country and therefore it
is dependent on the economy of foreign countries, such as the United States and China.
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General Tips and Strategies
1. Before entering Brazil’s market identify the region of the country with the highest potential
for the target area.
2. Set a strategy and a structure for your business that minimizes risks, taking into account the
tax system of the country and companies that can be considered the major competitors.
3. Understand in depth the Brazilian culture in order to be able to adapt easily.
4. Contact a local partner that can help to build a large network of clients in order to be well
connected.
5. For every investor that enters Brazil’s market it is a good strategy to reach a chamber of
commerce. For instance, the American Chamber of Commerce in Sao Paulo is very active
and supportive.
6. It is essential for an investor to conduct risk management and reserve a portion of the
income exclusively to doing this.
7. It is important to focus the investment in target segments of the economy. There are many
opportunities present in these sectors. It is also useful to speak with locals who are experts
in these target segments and that could help an investor evaluate the aspects of Brazil that
are unique and that have great potential for foreign investment.
8. Identify the differentiating factors of human talent in the different regions of the country in order to be able to enter the market easily.
38
Conclusion
Brazil is a very attractive place for foreign investment due to its large market and
the high interest rates it pays to investors, but before entering the market there are some
essential aspects to ponder upon.
Regarding the fiscal and tax system of Brazil most investors agree that this is the
main limiting factor for investment in the country. The system is very complex and the fact
that it varies throughout the regions reduces significantly the competitiveness of the
country. Some of the strategies that can be used to minimize the negative impact that the
tax and fiscal system can have on a business are to contact a Brazilian partner who
specializes in the tax sector and who can also help the investor enter the market with a large
network of clients and also to reserve a portion of the company’s income exclusively for
risk management.
With respect to the human resource area, the main characteristics of Brazilian
human talent are their flexibility and charisma. Furthermore, Brazilians are very embracing
and committed to their work. The two biggest difficulties when dealing with the human
resource area in Brazil are the increasing salaries and the different ways of doing business
throughout the regions of the country. In first place, the low unemployment rate of the
country, which is around 5%, results in higher salaries and in less availability of talent in
the country, which can limit the competitiveness of a business. Second, it is important to
identify the differentiating factors of human talent in the different regions of the country in
order to be able to enter the market easily. For instance, in the south region of Brazil
farmers have more pride of themselves and prefer doing businesses with well-known
39
companies; whereas, in the north region of Brazil, farmers are more business-oriented and
prefer doing business with the companies that give them a higher profit.
When talking about the commodities and energy sectors, these can be viewed as
areas of great potential for foreign investment. In the case of the commodities or futures
market it is the most direct way of short-term investment because the investor either gains
or loses money at the end of each day. On the other hand, the energy sector has a great
potential for long-term investment because Brazil is short on energy and therefore there is a
high demand of this need in the country.
Moreover, the capital market is a great tool for a medium term investment, between
2-5 years. This happens because the capital market in Brazil, called Bovespa, is very liquid
and therefore it is easy to quit the investment if it is not going as planned. Furthermore, the
capital market can be viewed as a great tool for a business that wants to finance new
projects in a cheaper and easier way than asking for bank loans.
Finally, regarding the logistics and supply chain sectors, which are closely related to
infrastructure and transport in the country. Most investors view this sector as another major
limiting factor for foreign investment in the Brazil and stated that it has a high potential for
long-term investment. One of the best ways to deal with the infrastructure issues of the
country is to place the business in a strategic location that can minimize the transport costs.
In general, Brazil is a country that holds a great potential for foreign investment and
that can result in investments with high return.
40
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