BRICs Series – 8 : Investing in Brazil and India

1) Brazil:

Growth Prospects for the Country: Brazil’s economy grew by 7.1% in 2010, and is expected to grow at an average annual rate of 5% for the next 5 years (its economy is expected to be larger than Italy’s by 2020).

Risks and Barriers to Investing in Brazil:

– Brazil has a historic trend of macro-difficulties that have resulted in a limited confidence from investor. Its economy is still “inward-looking” that has not fully integrated into the global economy yet.

– There is also a high cost of doing business in the country – high tax rates, interest rates, cost of labor. Access to capital is difficult. It’s tough to operate in Brazil – high cost of operation, high transaction costs.

– The labor market is rigid due to taxes, regulations, and unions.

– There is a lack of skilled labor, and low labor productivity due to the poor quality of education.

– Brazil has a big government (size), and low investment from the private sector, resulting in poor infrastructure.

– Brazilian economy is vulnerable due to its heavy dependence on commodity prices.

Incentives for Investing in Brazil:

– Brazil is politically the most stable among all the BRIC countries. And geographically it is located in a stable neighbourhood with no real threats for war from its neighbors. This form of stability is one of the key factor for all the global investors to invest in Brazil.

– Brazil has taken tremendous strides in improving its global competitiveness has seen an upward trend in its competitiveness rankings in recent years (up 16 positions between 2007 and 2009). This recent improvement in the rankings is due to the big strides Brazil has made in the past couple of decades towards macroeconomic stability, liberalizing and opening the economy, and reducing income inequality.

Brazil is rich in natural resources, particularly in agricultural and mining commodities.

It has a growing middle-class creating a huge demand in a big domestic market (population is 192 million).

Sectors that the United States Should Invest in Brazil:

Infrastructure: Brazil has a poor infrastructure that is hindering its economic development. With Brazil hosting the Soccer World Cup in 2014 and the Olympic Games in 2016, improving the infrastructure has become a big priority. Realizing this, the Brazilian government approved a $880 billion spending package in March 2010 to boost infrastructure development in energy, transport and housing programs. Some US$18.7bn in new investment is slated for the development of sports complexes. Brazilian airports and ports need to be upgraded. There is also a need for the modernization and expansion of the energy infrastructure, due to the fact that demand for electricity in Brazil is expected to rise by an annual average rate of 4.5% over the next 10 years. Hence, there is a tremendous need and opportunity for FDI in infrastructure in Brazil.

Technology:
Natural Resources: With its rich biodiversity, water resources, and new oil finds, Brazil is increasing becoming more natural resources oriented. And it needs help in exploiting and managing these resources, by investments in R&D and technology. It also needs its agricultural efficiency, manage increasing levels of carbon emissions, and control the deforestation of the Amazon. Hence, there is tremendous potential for a technology giant like the United States to invest and exploit the opportunities in these sectors in Brazil.
ICTs: Brazil was ranked 61st in the world in 2009 in terms of its degree of preparation to participate in and benefit from ICT developments. Although it has a sophisticated online voting and tax-reporting system, the internet penetration rates are very low, and mobile phone use is also on the rise. With the rising middle-class, there is a tremendous growth potential in the ICT sector that the Telecommunication companies can exploit
Education: Has a low-skilled labor force. Need to invest to improve quality of education – by diversifying tertiary education, acquire/adopt the knowledge/technology from abroad. Innovation, R&D, and Universities is the strength of the United States, which it can use to invest and collaborate with Brazil in its education sector.
Commodities: Brazil has greatly benefited from the high prices of commodities and the demand from China. With China expected to grow in the coming decade, the Brazilian commodities market is a great value for investors.

Conclusion on Brazil:

In spite of Brazil’s fairly inward-oriented economy, and its legacy of high cost of doing business in the country, it is a very attractive place for FDI in the coming decade. This mainly due to its macroeconomic and political stability, vast market opportunities, and growing middle-class in a large domestic market that is serving to a huge demand. Brazil has the least political risks – no real internal or external threats. It is also be a great platform for setting up a base in Latin America.

2) India:

Growth Prospects for the Country for the next 10-20 years: India’s economy grew by 9.4% in 2010 and is expected to grow at an average annual rate 8.7% the next 5 years (its economy is expected to be larger than Spain, Canada or Italy by 2020).

Barriers to Investing in India: Bureaucratic and unstable government, high rate of corruption, poor infrastructure, high cost of doing business, high inflation, tremendous needs in agricultural sector, rigid and inefficient labor force. Weak rule of Law (British style) – courts take a long time to execute justice. Very weak international property rights. Internal and external security threats to India, and corruption scandals have led to political instability.

Incentives for Investing in India: Democracy, huge market (population of 1.2 billion), growing middle-class (currently around 300 million), expected long-term economic growth, tremendous potential for improvements in technology and infrastructure, thriving private and IT sector, low crime rates. Very little anti-American sentiment (74% of Indians are pro-American), hence a natural symbiosis of the two societies – helps American investors.

Sectors that the United States Should Invest in India:

a) Technology:

Defense: India is always concerned about its national security due to the volatile relations with its neighbors and due to the rise of terrorism within it borders. Hence, it is currently revamping its military and is open to buying technologies for its navy and airforce. The United States and India are two democracies with common enemies in terms of Islamic terrorists. Hence there is great potential for American companies in doing business with India and sharing its security and defence technologies. This will lead to further collaboration in terms of training, spare parts, services, and helps build trust, partnerships and long-term investment opportunities for American Companies.
Environmental Technology: By 2035, India will consume as much energy as the EU, but with higher CO2 emissions due to its higher proportion of carbon-based fuels and lower energy efficiency[17]. Global warming will negatively impact India in a big way – in its agricultural production, depleted freshwater resources and threatened biodiversity. Hence there is a huge opportunity in investing in India’s technological push for renewable energies, improving its agricultural productivity, and its technological development for combating climate change.
Information and Communications Technologies (ICTs): The Indian government is increasingly working towards improving its efficiency by implementing e-government services like VAT online registration systems, and, electronic tax payments[18]. But internet penetration rate is very low in India (7%). And although mobile phone usage has exploded in recent years [19], India still has ways to go in terms of its ICT penetration rates. There is tremendous potential for the American Telecommunication companies to invest in the ICT equipment and infrastructure (last mile connectivity) in India.

b) Infrastructure: Infrastructure is one of the biggest bottlenecks for India’s future growth. It is estimated that India needs to invest $1.7 trillion in next 5 years on its infrastructure, and hence, there is a tremendous potential for the American firms to tap into this massive infrastructure requirement. India needs more ports, airports, needs and railway tracks, and needs massive investment in its power/electricity sector to satisfy its growing need for energy due to its growing middle class (currently at 300 million). Food inflation is very high in India (food prices have doubled in the past year), in spite of the fact that it is the world’s largest producer of milk and second largest producer of fruits/vegetables. Forty percent of the agricultural production goes waster due to poor farm to market supply chain infrastructure – roads, warehousing, and refrigeration. This is a big issue for the Indian government, and a huge investment opportunity for the American firms.

c) Education: India has high illiteracy (46% of the global illiterates) and a very young population (54% under the age of 25). The young demography can turn into a disaster if India’s poor education system is not fixed. There is a tremendous shortage educational infrastructure (schools/universities) and of qualified talent in India. The Indian government is realizing this, but it needs assistance in reforming its education system. With India passing the Foreign Education Bill in 2010, American Universities have a tremendous opportunity to open up campuses in India, and tap into this huge market and collaborate in the higher education sector. There is also a great potential in the vocational education. Example – airline industry in India is growing at 40% per year, which leads to requirements in skilled labor for technical support, maintenance etc. This is where the American institutions can play a big role in getting the Indian workforce trained and ready for the knowledge-based global environment.

Conclusion on India: Recent trend of rooting out corruption (e.g. “Anna Hazare fast” last week) is gaining momentum in India[28]. In spite of the barriers to investors, the rewards outweigh the risks in India. Its huge market, young demography, and expected sustained economic growth this decade, is a huge incentive for investing in India.

Overall Assessment:

Both India and Brazil are very attractive markets for investment, due to the huge markets and their rising economies. But they still have integrated fully into the global economy, and have a high cost of doing business. So, the key for a foreign investor will be to pick a right kind of sector to invest – the one with relative stability and minimal risks. Also the foreign investor has to bring a distinct advantage over the domestic competitor – in terms of technical capability, access to finance, distribution network, managerial capability, supplier sources and brand names. But both Brazil and India are here to stay, and the right investment strategy can lead to long-term sustained profits in these two emerging economic giants.

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About pritamkabe

Originally from Bombay, India. Relocated to the United States in 1997 for attending graduate school at The University of Texas. Completed my Masters in Electrical Engineering in 1999 and then worked in the Hi-Tech industry for the next 11 years in Austin, Texas. I have a passion for travelling, meeting new people, and experiencing new cultures...and i've been very fortunate to have gotten the opportunity to travel quite a bit. Sports and food are my other big passions in life. Some life-changing experiences in my life a years ago changed my perspective of life, after which, just have an engineering job was not meaningful to me anymore. Hence i quit my engineering career, and I'm now motivated to give back to society and make a positive impact in some way. To get started on that journey, i went back in graduate school, and recently graduated as a "Mid-Career Fellow in Foreign Service", from the Edmund A. Walsh School of Foreign Service, at Georgetown University, Washington DC. Currently in New Delhi, India, on a research fellowship, to learn about the educational issues in India, and brainstorm my ideas about technological interventions for resolving those issues.
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