Term Paper on "Brazil and China"

Term Paper 8 pages (2400 words) Sources: 10

[EXCERPT] . . . .

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).

Similarities and Differences

Neither China nor Brazil has fully tackled their risk or growth capital needs of early-stage enterprises (Chandra & Fealey, 2009). Their governments resolved financing gaps by putting up lines of seed capital funds. They did this both separately and jointly with business incubators. Business incubators are dynamic tools used by country governments in establishing new enterprises as a macro objective towards economic development and creation of employment. These businesses eventually provide the growth impetus in many emerging and dynamic economies. In China and Brazil, business incubators provided easy access to financial services by functioning as an intermediary. But incubatees had limited resources for direct investments, prompting the need for the two governments to resolve market failure. Resolution may be in the form of support for early-stage startups. Most countries have limited risk and growth capital for early-stage businesses (Chandra & Fealey).

This strategy, however, heavily leans on government (Chandra & Fealey, 2009). Incubators were meant as intervention tools to remedy market failures, such as financing gaps for new businesses. But many of these are non-profit businesses, which have problems with self-sustainability goals per country context. Chinese incubators focus on high-technology-based incubatees and heavily depend on government funding. In comparison, Brazil incubators can tap from a range of funding sources from different levels of government. They can also secure combined public and private support as well as strong networks, which will help them gain policy support from government. But the two countries are similarly strapped in meeting self-sustainability goals in many cases. The incubators in both governments need to gain support from both governmental or public and private sources in order to reduce over-dependence on any one source. Performance criteria must also be clearly stated in order to acquire the full market benefits and to eventually become self-sustaining, like the new businesses they intended to create (Chandra & Fealey).

Chinese incubators followed a social mission set by the government (Chandra & Fealey, 2009). Brazil's wide range of incubators, in contrast, encourages competition and rewards the fittest with innovative proposals. Brazil incubators, then, had to earn, rather than receive, money from the government. As regards the emphasis made on services, such as networking, by business incubators, Chinese and Brazilian strategies also sharply differ. Chinese incubators are largely government-driven and dwell in large buildings, allotting space for 100 to 150 incubatees. On the other hand, Brazilian incubators are smaller than China's at only 15-20 incubatees in a space. They also emphasize softer services, such as networking and training. Many Chinese incubators are operated by former state-owned business managers. This limits management capability to sustain few businesses in a free market milieu. In Brazil, managers had greater market experience than China's (Chandra & Fealey).

These similarities and differences between the two currently largest world economies are relevant not only to cross cultural settings (Chandra & Fealey, 2009). They are also relevant to global incubation in the policies and practices of both developed and developing countries. Global models must adapt to local needs by linking with government, businesses, schools, trade associations, traders, service providers and financial institutions in meeting the capital requirements of new businesses (Chandra & Fealey).

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… READ MORE

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