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Galley 2, 4/15/2013FOR INTERNAL DISCharting aSteady CourseTurning Brazil into a Business andInvestment Hub
Brazil Investments & Business (BRAiN) is a private nonprofit organization whose mission is toreinforce Brazil’s position as an international business and investment hub through a regionalfocus and a global projection, contributing to the sustainable economic and social developmentof Brazil and Latin America.The Boston Consulting Group (BCG) is a global management consulting firm and the world’sleading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most criticalchallenges, and transform their enterprises. Our customized approach combines deep insight intothe dynamics of companies and markets with close collaboration at all levels of the clientorganization. This ensures that our clients achieve sustainable competitive advantage, build morecapable organizations, and secure lasting results. Founded in 1963, BCG is a private company with78 offices in 43 countries. For more information, please visit bcg.com.
APRIL 2013 | The Boston Consulting Group • BRAiNCharting a SteadyCourseTurning Brazil into a Business and Investment HubAndre XavierMasao UkonJuliana AbreuFrederick PierruJoao MoreiraPaulo OliveiraPedro Guerra
2 | Charting a Steady CourseContents 3 Introduction 5 Investment Attractiveness: The Seven PillarsMacroeconomic EnvironmentInstitutional EnvironmentTalent and Human CapitalPhysical InfrastructureFinancial InfrastructureGlobal ConnectivityImage 16 Immense Promise 17 For Further Reading 18 Note to the Reader
The Boston Consulting Group • BRAiN | 3If you know whence you came, there are absolutely no limitations to whereyou can go. —James BaldwinFew observers doubt the immense potential of Brazil, one of theworld’s most significant emerging economies. Indeed, Brazil hasgreat advantages. Compared with its colleagues in the BRIC quartet ofemerging giants, it is richer than India and China and larger and moredemocratically stable than Russia.1It is the largest nation in LatinAmerica, with one-third of the region’s population generating 44percent of its GDP.2Already the sixth largest economy in the world, itcould become the fifth by 2020, according to forecasts by the Econo-mist Intelligence Unit. But growth, and the investment decisions thatunderpin it, doesn’t happen by magic. Substantial growth takesenlightened government and well-informed decisions by potentialinvestors.Decision makers and investors need a compass to guide their choices.In order to know where Brazil is going, they need to know where it isnow—and how it got there. They need an informed sense of Brazil’scomparative advantages and disadvantages, as well as how it is chang-ing—in what direction and how fast. They need a view of Brazil’s so-ciety as well as its economy that goes beyond clichéd images of bril-liant football teams, the Rio carnival, and the poverty and crime ofthe favelas. They should be aware, for example, that Brazilian finan-cial regulations set standards that most global banking centers fail tomatch.Investors and decision makers also need authoritative, balanced infor-mation. Alongside the exuberant forecasts, it is important to knowabout Brazil’s limitations—and to be aware of strictures such as Euro-pean trade commissioner Karel de Gucht’s warning in May 2012 that“Brazil should be proud of the enormous progress it has made in re-cent years, but it must also know it cannot stand still if it wishes tomove to the next stage of development.”We aim to provide that compass and guide. This document has itsfoundations in BCG’s support for the development of The Attractive-ness of Brazil as an Investment and Business Hub, a report published inOctober 2012 by Brasil Investimentos e Negócios (BRAiN). In this re-port, we look at Brazil in terms of seven pillars critical to the aspira-tions of any country with the potential to establish itself as an attrac-tive business and investment hub. We provide investors and othersinterested in doing business in Brazil with a framework to assist themin thinking about the relative attractiveness of the country in the con-Introduction
4 | Charting a Steady Coursetext of different business objectives—and how best to explore the op-portunities Brazil offers.NOTES1. The comparison of Brazil’s wealth with India and China is based on GDP per capita.Its size compared with Russia is based on population and nominal GDP.2. Numbers are from dataworldbank.org, accessed August 15, 2012.
The Boston Consulting Group • BRAiN | 5BCG’s analysis identified seven keypillars that underpin a country’s orregion’s relative attractiveness as a businessor investment hub:Macroeconomic environment,•• includingeconomic growth, predictability, andcapital investmentInstitutional environment,•• includingpolitical and legal systems, legal security,level of bureaucracy, and businessoperationsTalent and human capital,•• includingdemographics, education and training,and talent mobility and attractionPhysical infrastructure,•• including urbanmobility, logistics connectivity, telecom-munications, and basic servicesFinancial infrastructure,•• including fundingfor the economy and effective riskallocationGlobal connectivity,•• including trade ingoods and services, capital and invest-ment flows, international businessoperations, and flow of peopleImage•• of the country, including percep-tions of Brazil as a place to do business, tolive, or to visitWe analyzed each pillar of Brazil’s perfor-mance through a number of indicators—a to-tal of 57 in all—and weighed these resultsagainst the performance of 13 other coun-tries. (For a list of these countries, see thesidebar below.) We chose these countriesfrom three distinct groups—internationalhubs, developed nations, and developing na-InvestmentAttractivenessThe Seven PillarsBrazil’s performance was compared with the following 13 countries:International hubsHong Kong••Singapore••U.K.••U.S.••Developed nationsFrance••Germany••Japan••Korea••Developing nationsChile••China••India••Mexico••Russia••Brazil Versus the World
6 | Charting a Steady Coursetions—as a means of illustrating Brazil’s cur-rent position. For each pillar, a dashboardgraphic is used to summarize in what direc-tion and to what degree Brazil has to progressin order to become a business and invest-ment hub, and how it compares with otherexisting and potential hubs.Macroeconomic EnvironmentBrazil offers an attractive macroeconomic en-vironment. It has grown steadily, is stable andpredictable, and is increasingly regarded as asafe place to invest. (See Exhibit 1.) The pri-mary remaining weaknesses are its incomeinequality and low saving and investmentrates. This means Brazil will probably contin-ue to need foreign investment in order toachieve its desired growth rates.While growth slowed in 2011 and 2012, Bra-zil’s overall economic performance is instriking contrast to its slower and more er-ratic growth of the 1980s and 1990s. It isnow economically stable after having grownrapidly in the second half of the last decade,when it averaged 4.4 percent annual growthfrom 2006 through 2010. Brazil is well be-hind India and China, but it comfortablyoutgrew developed nations such as the U.S.In spite of the recent slowdown, it is still pro-jected to grow faster than any of the devel-oped nations sampled, albeit at slower ratesthan China and India.This growth has been driven by upward so-cial mobility, which has created a much largermiddle class with greater purchasing power.In 2011, it was estimated that 55 percent ofBrazilian adults lived in middle-class house-holds—defined as having a monthly incomeof between $1,200 and $5,174—comparedwith only 38.6 percent in 2002.Furthermore, poverty and inequality havedecreased. The World Bank estimates thatthe proportion of the population living inpoverty (defined as a per capita daily incomeIncome distributionEconomic growth1Monetary stability1Fiscal solidity1External vulnerabilityEconomic volatilityHuman developmentInternational hubs Other developed nations Developing nationsBrazilChileChinaGermanyFranceU.K.Hong KongHong KongIndiaJapanSouth KoreaMexicoRussiaSingaporeU.S.BrazilChileChinaHong KongIndiaSouth KoreaMexico RussiaSingaporeBrazilChileChinaGermanyFranceSouth KoreaU.K.Hong KongIndiaJapanMexicoRussia Singapore U.S.RussiaIndia BrazilChinaMexicoChileSouth KoreaSingaporeU.S.FranceGermanyJapanJapanU.S.SingaporeFranceU.K. GermanyIndiaBrazilMexicoHong KongChina RussiaHong KongU.S.U.K. SingaporeFrance GermanyJapanChileRussia ChinaSouth KoreaMexicoIndiaBrazilBrazilChileMexicoRussia U.S.SingaporeHong Kong China JapanIndiaU.K.FranceSouth KoreaGermanyPoor Needs improvement Good ExcellentU.K.SouthKoreaChileSource: BCG analysis.Note: Information for some countries was not available for every indicator.1Based on projected data.Exhibit 1 | Brazil Is Increasingly Considered a Safe Place to Invest
The Boston Consulting Group • BRAiN | 7of less than $2) fell from 21 percent to 11percent from 2003 through 2009. The num-ber living in extreme poverty (less than $1.25per day) fell from 10 percent to 2.2 percentfrom 2004 through 2009. Brazil’s poorest 10percent saw their incomes rise by 7 percentannually in the first decade of this century,whereas the richest 10 percent saw incomegrowth of only 1.7 percent. The result is thatBrazil’s Gini coefficient—a measure of theequality of income distribution, with 0 ex-pressing total equality and 100 expressing to-tal inequality—reached a 50 year low at 51.9in 2011. This is a sign that Brazil is beginningto combat the extreme disparities often citedas a serious drag on its social and economicpotential.Brazil has shown adeptnessin taming inflation andmanaging public finances.Brazil has also managed to tame inflation. In-flation targets were introduced in 1999, andannual rates have been in single figures since2001. While higher than ideal—and also high-er than in China—at 5 percent on average,projected inflation from 2012 through 2016runs lower than both historic levels and lev-els held by competitors such as Russia andIndia.In addition, the country has shown adeptnessin managing public finances. Public-sectordebt as a proportion of GDP declined bymore than a third from 2002 through 2011,falling from 60.4 percent to 36.4 percent.More important, Brazil has become a net for-eign creditor since 2006—with reserves andcredits exceeding those held by overseascountries. This is a significant reversal of Bra-zil’s previous long-term history as a net for-eign debtor. And real interest rates, a signifi-cant factor influencing investment costs forgovernment and the private sector, are attheir lowest level since tracking began in1986. The 2012 level of 2.7 percent is in sharpcontrast to an 11.7 percent level six years ago,and Brazil’s real interest rates are now com-parable with those of China and Russia.All these improvements mean that Brazil isnow widely recognized as a much safer coun-try in which to invest. Its score in J.P. Mor-gan’s Emerging Market Bond Index Plus riskscale has remained at around 200 pointssince 2011.1In 2002, it scored more than2,000 points but has improved steadily eversince—reaching investment grade in 2008.This helps attract foreign capital—an impor-tant attribute, since domestic savings remainsa weakness. Brazil invested 17.3 percent ofGDP from 2002 through 2011, lower not onlythan the 22 percent needed to maintain the 4to 4.5 percent growth rate seen from 2006through 2010 but also well behind BRICpeers India (30 percent) and China (42 per-cent). Given these low savings ratios, Brazilcannot expect to finance its future growth onits own. This opens up space for savvy foreigninvestors and businesses willing to bet onBrazil’s continued growth and prosperity.Institutional EnvironmentInvestors interested in Brazil will find a stabledemocracy and solid rule of law, but theyshould include a slow judicial system as wellas cumbersome labor and taxation legislationwhen calculating the cost of doing businessthere. (See Exhibit 2.)Brazilian democracy is now firmly ingrained,and the World Bank’s governance indicatorsfor stability place it in the same class as long-time democracies such as the U.K. and theU.S.—and well ahead of other emerging na-tions such as Mexico and the other BRICs.And even though the legal system has notchanged as much as the political system, ithas made real progress in the past 15 years.The rule of binding precedents has been im-plemented, bankruptcy laws rationalized, andthe scope for long-running appeals reduced,although not eliminated. Nevertheless, judi-cial processes remain slow. The World Bankcalculates that a dispute that takes 280 daysto settle in Hong Kong and 150 days in Singa-pore would take 731 days in Brazil.Delays caused by bureaucracy are another in-tractable fact of Brazilian life. Setting up abusiness can be a slow and cumbersome pro-
8 | Charting a Steady Coursecess that demands 15 steps, taking an averageof 120 days. But change is already beginning.For example, the state of Minas Gerais has pi-oneered a one-stop interactive system thatsimplifies the process to 11 steps and reducesthe number of days to set up a business to anaverage of 19. This system is being piloted ineight other states.Similar complexities are to be found in thelabor market, as well as in labor taxes and so-cial-security charges. A Brazilian companymay have to pay nine separate taxes, com-pared with five in Singapore and three inHong Kong.2It must also deal with copiousnew tax requirements and regulations.Talent and Human CapitalBrazil’s demographics are the envy of manyother countries. (See Exhibit 3.) A 2009 BCG-World Economic Forum study rated it at thetop when compared with the 13 countriesalso considered in this report. Foreign inves-tors will find a large and relatively youngpopulation. Although most large economiesanticipate labor shortages over the next de-cade, Brazil projects an average annual sur-plus of 2.2 percent in the period from 2011through 2023.At the same time, Brazil is becoming more at-tractive to international management talent.It has risen from number 27 to number 12 inthis criterion in IMD’s World CompetitivenessYearbook over the past two years, and therewere 15 percent more medium and long-termvisas granted in Brazil in 2011 than in 2008.While qualified international talent has avaluable role to play, the real key tocapitalizing on Brazil’s demographic bonus isimproved education. Brazil’s educationparticipation rates are not bad. Enrollment inprimary and secondary school is 87 percentand 69 percent, respectively—not far belowglobal averages. Following recentamendments to Brazil’s constitution, thegovernment will be required to offeruniversal free access to a high schoolInternational hubs Other developed nations Developing nationsBrazilChileChinaGermanyU.K.Hong KongIndiaSouthKoreaMexicoRussia SingaporeU.S.BrazilChileChinaFranceU.K.IndiaJapanSouthKoreaMexicoRussiaSingaporeU.S.BrazilChileChina GermanyFranceU.K.India JapanSouth KoreaMexicoRussiaSingaporeU.S.BrazilChileChina GermanyFranceU.K.IndiaJapanSouth KoreaMexicoRussiaSingaporeU.S.FranceBrazilGermanyMexicoSouth KoreaRussiaChinaIndiaChile Japan U.K.U.S. HongKongSingaporeBrazilMexicoChinaJapan RussiaIndiaSouthKoreaU.K.FranceU.S. SingaporeHong KongChilePolitical stabilityQuality of regulationsLegal securityLabor market ﬂexibilityEase of opening abusinessEase of paying taxes forbusinessesPoor Needs improvement Good ExcellentHongKongHongKongGermanyFrance JapanSource: BCG analysis.Note: Information for some countries was not available for every indicator.Exhibit 2 | Democracy Is Stable, but Brazil’s Legal and Taxation Systems Can Be a Nuisance
The Boston Consulting Group • BRAiN | 9education by 2016. And although universityenrollment is, at 27 percent, lower than theglobal average, this is a higher rate than inChina and India.The issue with education is not just quantitybut quality. The Organisation for EconomicCooperation and Development (OECD) ratesBrazilian basic education at below average.The country’s students scored 401 on the Pro-gramme for International Assessment (PISA)test, compared with the OECD mean of 497and a global mean of 468. A governmentstudy rates language and math skills at thelower end of expected performance in prima-ry schools and below expectations at the sec-ondary level.This means Brazil performs very poorly in in-ternational talent comparisons. The Heidrick& Struggles Global Talent Index, which proj-ects performance through 2015, ranks BrazilInternationalizationof education(foreign languagesand experience)Quantity ofhigher educationAlignment betweenhigher educationand the marketDemographicattractiveness1Quantity of primaryand secondaryeducationEase of immigrationproceduresQuality of primaryand secondaryeducationAvailability of qualiﬁedmanagers andengineersIntensity of researchand developmentAttractiveness tointernational talentDiaspora managementPoor Needs improvement Good ExcellentInternational hubs Other developed nations Developing nationsU.K. GermanySingapore Hong KongChile RussiaIndiaBrazilBrazilChileChinaGermanyFrance U.K.Hong KongIndiaJapanSouth KoreaMexicoRussiaSingaporeU.S.Brazil ChileChina GermanyFranceU.K. Hong KongIndiaJapanSouthKoreaRussia SingaporeU.S.BrazilChileChinaGermanyFrance U.K.Hong Kong IndiaJapanSouthKoreaMexico RussiaSingaporeU.S.BrazilChileChina GermanyFrance U.K.Kong HongIndiaJapanSouth Korea MexicoRussia SingaporeU.S.BrazilChile China GermanyFranceU.K.Hong KongIndiaJapanSouth KoreaRussiaSingaporeBrazilChinaGermanyFranceU.K. IndiaJapanSouth Korea MexicoRussiaU.S.Brazil Chile ChinaGermanyFrance U.K.Hong KongIndiaJapan South KoreaMexico RussiaSingaporeU.S.Brazil ChileChinaGermany FranceU.K.Hong KongIndia JapanSouth KoreaMexicoRussia SingaporeU.S.BrazilChileChina GermanyFrance U.K.HongKongIndiaJapanSouthKoreaMexico RussiaSingapore U.S.Brazil Chile ChinaGermanyFrance U.K.Hong KongJapanSouthKoreaMexicoRussiaSingaporeU.S.Source: BCG analysis.Note: Information for some countries was not available for every indicator.1Based on projected data.Exhibit 3 | Brazil’s Demographics Have Great Appeal
10 | Charting a Steady Course38 out of 60 countries—behind not only itsBRIC peers but also Latin American neigh-bors Mexico and Argentina. These weakness-es make it tough for employers to locate staffwith the right skills. For example, Brazil trailsthe other 13 countries in availability of quali-fied engineers and managers.The good news is that Brazilians are increas-ingly aware that education matters. Morethan 70 percent of middle-class children havehad more education than their parents. Addi-tionally, there are many initiatives to attackthese deficiencies. For example, nearly225,000 students from the state of São Pauloare enrolled in Centro Paulo Souza, whichmanages technical schools run by the stategovernment. In 2011, the national govern-ment launched Programa Nacional de Acessoao Ensino Técnico e ao Empreso (Pronatec), aprogram that enables underprivileged stu-dents to attend private technical schools. Thissupplements the Programa Universidadepara Todos (ProUni) university scholarshipprogram, which supports 195,000 studentsfrom households with incomes of less thanthree times the minimum wage.These improvements are essential if Brazil isto tackle its impending productivity chal-lenge. Approximately 75 percent of BrazilianGDP growth over the past decade was due toa larger workforce and only 25 percent to pro-ductivity gains. (For further detail, see “Bra-zil: Facing the Productivity Challenge,” BCGarticle, September 2012.) With the countryclose to full employment, future GDP gainswill depend on ensuring that the workforcehas the skills needed to drive increased pro-ductivity.Companies investing in Brazil will continueto be attracted by young and plentiful labor,but their business plans will nonetheless haveto incorporate the need for training and peo-ple development. This will allow them to tapthe Brazilian demographic bonus and turn itinto an asset.Physical InfrastructureBrazil is, at last, giving serious attention tostrengthening the weakest of its seven pil-lars, a physical infrastructure that has notkept pace with economic development andthreatens to choke growth. (See Exhibit 4.)For starters, Brazil ranks dead last in airtransportation quality compared with the 13other countries. One reason is that its mainairports are overcrowded and struggling toUrban mobilityQuality and cost oftelecommunicationsPower availabilityBasic servicesavailable to the urbanpopulation1International hubs Other developed nations Developing nationsBrazilChina GermanyFranceU.K.IndiaMexico Russia U.S.BrazilChile ChinaGermanyFranceU.K.Hong KongIndia JapanMexicoRussiaSingaporeU.S.BrazilChileChina GermanyFranceU.K.Hong KongHongKongIndiaJapanSouthKoreaSouth KoreaSouth KoreaMexico RussiaSingaporeU.S.BrazilChileChinaGermanyFranceU.K.IndiaJapanMexicoRussiaSingaporeU.S.SouthKoreaBrazilChileChinaGermanyFranceU.K.IndiaJapanMexicoRussiaSingaporeU.S.Poor Needs improvement Good ExcellentQuality of airtransportationSource: BCG analysis.Note: Information for some countries was not available for every indicator.1Based on projected data.Exhibit 4 | Physical Infrastructure Lags Behind Economic Development
The Boston Consulting Group • BRAiN | 11meet growing demand. São Paulo’s interna-tional airport is currently running at 146percent of nominal capacity. This capacity isprojected to increase by two-thirds, to 35million passengers, by 2014, but it will stillfall short of demand, projected at 40 million.Congonhas, São Paulo’s domestic airport,plans to expand by a quarter over the sameperiod, but it will fall further behind de-mand, forcing it to process 22 million pas-sengers through facilities designed for amaximum of 15 million.Furthermore, travelers are unlikely to enjoyjourneys across Brazil’s major cities to the air-ports. The 2010 IBM Commuter Pain Indexrated São Paulo the sixth-worst city for tran-sit, with a daily average (in 2008) of 114 kilo-meters of traffic jams, and Rio de Janeiroeighth, with an average of 95 kilometers.Among the handful of cities rated worse, Bei-jing and Mexico, which top the list, offer trav-elers and commuters more alternatives, nota-bly more extensive subway networks.These inadequacies are being addressed. Inmid-August 2012, the Brazilian governmentannounced the Integrated Logistical Plan,projecting investment over the next five yearsof more than $40 billion in roads and rail net-works, expanding roads by 7,500 kilometersand railroads by 10,000 kilometers. This fol-lows the auctioning off to private operators,in early 2012, of three of Brazil’s most impor-tant airports—São Paulo International,Campinas, and Brasília—which handlearound 50 million passengers annually. Air-ports in Rio de Janeiro and Belo Horizontewill likely follow suit.Both the airport concessions and theIntegrated Logistical Plan emphasize the roleof private companies as both builders andoperators, giving the private sector anoverdue role in investing in Brazil’s infra-structure in order to reduce bottlenecks andimprove efficiency. This fresh investmentcomes on top of earlier infrastructuraldevelopment. In 2007, the governmentintroduced the Accelerated Growth Program(PAC), which put $217 billion into projectsthat address issues such as energy, health,housing, transportation, and sanitation.3PAC2, running from 2011 to 2014, has morethan double the budget—$471 billion, ofwhich 34 percent was spent by June 2012.Brazilian cities are also expanding their met-ro systems in advance of the 2014 soccerWorld Cup and the 2016 Olympics. São Pauloplans to expand its subway lines from 74 kilo-meters to 104 kilometers from 2012 through2014, and Rio de Janeiro intends to provide55 kilometers by 2015, compared with thecurrent 42 kilometers.Companies will find youngand plentiful labor, buttraining will be necessary.All this represents an overdue correction toone area of economic life in which Brazil hasregressed rather than advanced. During the1970s, when numerous large projects wereimplemented, infrastructure spending wasaround 5.4 percent of GDP, but by the firstdecade of the twenty-first century, spendingdeclined to little more than 2 percent. Thiscontrasts sharply with China, which investedapproximately 11 percent of its GDP in infra-structure in 2010, and India, which plans toinvest 7.6 percent of its GDP from 2008through 2012.Financial InfrastructureInvestors in Brazil know that their money isprotected by a regulatory system equal to thebest in the world. (See Exhibit 5.) The WorldCompetitiveness Yearbook rates Brazilian finan-cial regulation ahead not only of otherBRICs—with India the only serious challeng-er—but also of global financial centers suchas the U.S. and the U.K.Brazil has entrenched rules requiring thatinvestment funds disclose their positions tothe regulator, that all derivatives transac-tions be recorded in a central database, andthat banks adhere to strict guidelines—in-cluding the maintenance of a Basel Index of11 percent, compared with the current glob-al norm of 8 percent. Brazil’s central banksays that Brazil-based financial institutions
12 | Charting a Steady Courseare well positioned to implement the BaselAccord III, which raises the bar to 10.5 per-cent, since their average is already around16 percent.As a result, Brazilian banks weathered theglobal financial crisis much better than theircounterparts from developed nations. WhileBrazilian banks’ average annual shareholderreturn of 6.2 percent from 2007 through 2011looks modest, it compares extremely favor-ably with annual losses of 13.8 percent in theU.S. and 16.3 percent in the U.K.In addition, corporate credit has grown morethan 15 percent annually since 2004, morethan doubling during that period. Marketcapitalization of traded companies grew 43percent per year between 2004 and 2007, re-maining essentially flat since then. Despitethese improvements, Brazil ranks well belowglobal benchmarks for corporate credit, listedcompany market caps, and, in particular, de-bentures—with a value in Brazil of only 1percent of GDP, compared with 9 percent inChina, 10 percent in France, and 36 percentin South Korea.Recognizing this deficiency, the government,in 2011, passed legislation to increase the li-quidity of secondary bond markets by loosen-ing restrictive debenture regulations. Al-though this has not yet unlocked thesecondary market, it has set the stage for fu-ture increases in liquidity, which should beaided by lower real interest rates that willEﬀectiveness ofﬁnancial regulationsStockexchangeAvailability of ﬁnancialservicesDebenturesStock exchange liquidityProjection as aninternationalﬁnance corporationCorporatecreditShare of regional andinternational companiesin the stock exchangePoor Needs improvement Good ExcellentInternational hubs Other developed nations Developing nationsBrazil ChileChina FranceU.K.IndiaJapanMexicoRussia SingaporeU.S.India Russia Brazil Mexico ChinaSouthKoreaSouthKoreaSouth KoreaSouthKoreaSouthKoreaSouth KoreaSouth KoreaSouth KoreaFranceJapanGermanyHong KongHong KongHong KongHong KongHongKongHong KongHong KongSingaporeU.K.U.S.BrazilChileChinaGermanyFranceU.K. IndiaJapanMexicoRussia SingaporeU.S.BrazilChile ChinaFranceU.K.IndiaJapanMexicoRussiaSingaporeU.S.GermanyBrazil ChinaGermanyFranceU.K.IndiaSingapore U.S.Brazil ChileChinaGermanyFranceU.K.India JapanMexicoSingaporeU.S.BrazilChileChinaGermanyFranceU.K.IndiaJapanMexico Russia SingaporeU.S.Brazil ChileChinaGermanyFrance U.K.India JapanMexicoRussiaSingaporeU.S.Use ofﬁnancialresourcesSource: BCG analysis.Note: Information for some countries was not available for every indicator.Exhibit 5 | Brazil’s Regulatory System Ranks Among the Best in the World
The Boston Consulting Group • BRAiN | 13drive investors to other investment vehicles,such as debentures.Finally, well-established companies have ac-cess to international capital markets and lo-cal stock markets for funding, but Brazil’ssmall and medium-sized businesses remainunderrepresented on the country’s stock ex-change.Global ConnectivityPotential investors will find Brazil still handi-capped, to some extent, by the legacy of a pro-tectionist past, but the country is increasinglyopen to foreign investment and other finan-cial engagements with the wider world. (SeeExhibit 6.) Brazil has made great progress to-ward full participation in the global economy,starting in 1991 with the creation of Mercosul,the Latin American free-trade pact (alsoknown as Mercosur). Since then, especially be-tween 2007 and 2011, the country’s globaliza-tion has moved quickly, as has that of LatinAmerica as a whole. Latin American trade—imports and exports of goods and services—grew faster than the global average, and Bra-zil outgrew its neighbors. Brazil’s exports ofgoods and services grew at an annual rate of12.5 percent (Latin America’s grew by 12.4Poor Needs improvement Good ExcellentInternational hubs Other developed nations Developing nationsBrazilChile China GermanyFranceU.K.India JapanMexicoSingaporeU.S.Brazil ChileChina GermanyFranceU.K.IndiaJapanMexico RussiaSingapore U.S.Brazil ChileChinaGermanyFranceU.K.IndiaJapan MexicoRussia SingaporeU.S.BrazilChileChina FranceU.K.India JapanMexicoRussiaSingaporeU.S.Brazil ChileChinaGermanyFranceU.K.India JapanMexico Russia SingaporeU.S.MexicoIndiaRussia U.K.Chile U.S.Brazil FranceChinaJapanGermanySingaporeBrazil ChileChinaGermanyFranceU.K.IndiaJapanMexicoRussia SingaporeU.S.BrazilChileChinaGermanyFrance U.K.IndiaJapanMexico RussiaSingaporeU.S.BrazilChileChinaGermanyFranceU.K.IndiaJapanMexicoRussiaSingaporeU.S.BrazilChile ChinaGermanyFranceU.K.IndiaJapanMexicoRussiaSingaporeU.S.BrazilChile ChinaGermanyFranceU.K.Hong KongHong KongHong KongHong KongHong KongHong KongHong KongHong KongHongKongHong KongIndiaJapanSouth KoreaSouth KoreaSouthKoreaSouth KoreaSouth KoreaSouth KoreaSouthKoreaSouth KoreaSouthKoreaSouth KoreaSouth KoreaMexicoRussiaSingapore U.S.Openness tointernationaltrade in goodsTrade in goodsInternationalagreements allow-ing capital ﬂowsOpenness toimmigrantsNational regu-lations supportinginternationalcapital ﬂowsExpansion ofthe countrysmultinationalsTrade in servicesCapital ﬂowsEase of entryfor foreignmultinationalsMobility of peopleTradeCapitalOpenness tointernationaltrade in servicesBusinessesPeopleSource: BCG analysis.Note: Information for some countries was not available for every indicator.Exhibit 6 | Brazil Has Opened Itself to the Global Economy but Still Has Some Way to Go
14 | Charting a Steady Coursepercent annually), and imports expanded at19.7 percent (16.7 percent for Latin America).This growth took off, however, from a verylow base. Brazil’s share of global trade ingoods and services is still only 1 percent, wellbelow its 3 percent share of the world’s GDP.Latin America as a whole continues to lagbehind, accounting for only 6 percent ofglobal trade in goods and 4 percent in servic-es, compared with 8 percent of global GDP.One reason is that tariffs remain high. Bra-zil’s import tariffs average 22.1 percent,compared with a global average of 14.1 per-cent. Duties imposed on Brazilian goods arealso just above the global norm of 12.1 per-cent. A further handicap is Brazil’s limitedparticipation in the General Agreement onTrade in Services (GATS). The country hasonly 17 GATS agreements, compared withregional leader Mexico’s 30 and world lead-er Vietnam’s 50. It rates 105 out of 141 coun-tries in the Fraser Institute’s Openness to In-ternational Trade rankings—behind China,Mexico, India, and Chile, which ranks ninthworldwide.Brazil suffers from a lack ofeffort to promote it as a placeto live or do business.Brazil receives more foreign investment thanany other Latin American economy, but thisreflects the country’s size rather than itsopenness to capital flows. When investmentis weighted by GDP, Brazil is far outpaced byChile, whose regional lead reflects participa-tion in 51 bilateral investment treaties—withpartners including the U.S., Canada, and In-dia. Brazil participates in only 14 investmenttreaties, all with Mercosul partners.The broader context is formed by limited Lat-in American investment participation. The re-gion’s share of investments both by outsidersin Brazil and by Brazil in other countries hasincreased since 2007, but these levels are stillsmall compared with other regions and com-pared with the country’s contribution to glob-al GDP. Investors are hampered by a lack ofstandardized continentwide regulatory prac-tices, but this is being addressed—in account-ing, at least. In 2011, Brazil adopted the Inter-national Financial Reporting Standards. Thismove should facilitate comparison and inte-gration with the global competitive landscape.ImageBrazil has an open, welcoming image that ap-peals to the rest of the world. Among thecountries we compared it with, not one ismore open to new ideas, according to interna-tional executives surveyed for the World Com-petitiveness Yearbook. The country ranksamong the best in terms of culture and at-tractiveness to tourists—scoring tenth andthirteenth, respectively, out of the 50 coun-tries included in the Anholt-GfK Roper Na-tion Brands index.That positive image is reflected in the coun-try’s success in attracting international events.(See Exhibit 7.) It hosted 304 internationalcongresses and events in 2011, up from 133 in2003—an increase of 11 percent per year thatmakes it seventh in the world overall. It willstage the 2014 soccer World Cup, and Rio willbe the host city for the 2016 OlympicGames—events projected to attract 600,000and 380,000 foreign visitors, respectively.But Brazil’s image is weaker in other respects.Despite its high scores for culture and tour-ism, its overall Nation Brands rating is belowaverage, reflecting low international opinionof Brazilian goods and of the country as aplace to live. The Economist IntelligenceUnit’s study of the best cities to live in 2012rated São Paulo and Rio de Janeiro 42 and 43,respectively, out of 70, well below LatinAmerican peers Buenos Aires, Santiago, andLima. For personal safety and asset security,the World Competitiveness Yearbook rated Bra-zil low, not far ahead of Mexico and well be-hind India, Chile, and the U.S.Not all of these misgivings about Brazil areill-founded, but they are compounded by thelack of a concerted attempt to promote thecountry as a place to live or do business. Im-ages of poverty and violence go unchal-lenged. São Paulo has reduced its murder
The Boston Consulting Group • BRAiN | 15rate by 82 percent in the past ten years to 8.9homicides per 100,000 inhabitants, a levelcomparable with large cities in the U.S.—butthis news has received little publicity. Inves-tors and immigrants will find that Brazildoes have problems, but the country’s imageas an appealing spot for international eventsreveals more than images of unrelieved pov-erty and violence.notes1. EMBI+, an index maintained by J.P.Morgan, tracksreturns on each country’s traded external debtinstruments.2. According to the World Bank’s Doing Businessdatabase (2010).3. The $217 billion figure is derived from an exchangerate of 2.03 Brazilian reais per $1.00 (July 5, 2012).Image as a placeto do businessForeign interest in thecountry’s investmentand businessAttractiveness forinternational eventsSustainabilityQuality of lifeCultural opennessPersonal safety andasset securityTourism and leisureVolume of tourismPoor Needs improvement Good ExcellentInternational hubs Other developed nations Developing nationsBrazilChile ChinaGermanyFranceU.K. IndiaJapanMexicoRussiaSingaporeU.S.BrazilChileChinaGermanyFranceU.K.IndiaJapanMexicoRussiaSingaporeU.S.BrazilChile ChinaGermany FranceU.K.Hong KongHong KongHong KongHong KongHong KongHong KongIndiaJapan South KoreaSouth KoreaSouth KoreaSouth KoreaSouthKoreaSouth KoreaSouth KoreaSouth KoreaSouth KoreaMexicoRussiaSingapore U.S.BrazilChileChina GermanyFranceU.K.IndiaJapanMexicoRussia SingaporeU.S.BrazilChileChinaGermanyFranceU.K.IndiaJapanMexicoRussia SingaporeU.S.BrazilChileChinaGermanyFranceU.K.IndiaJapanMexicoRussiaSingaporeU.S.BrazilChile ChinaGermanyFranceU.K.IndiaJapanMexico Russia SingaporeU.S.BrazilChileChina GermanyFranceU.K.IndiaJapanMexico RussiaSingapore U.S.BrazilChileChinaGermanyFranceU.K.IndiaJapanMexicoRussiaSingapore U.S.Source: BCG analysis.Note: Information for some countries was not available for every indicator.Exhibit 7 | A Welcoming Image Has Attracted International Events
16 | Charting a Steady CourseImmense PromiseThe Brazil of today is an increasinglyattractive place to do business. Thecountry has vastly improved political andlegal systems and appealing demographicdynamics, all of which offer huge opportuni-ties to employers willing to invest in trainingtheir employees. Its infrastructure is stillsubpar, but the government’s increasedopenness to private investment bodes wellfor future development in this area. Thefinancial market as a whole is solid, veryprofitable, and underpinned by world-classregulation. The country is increasing itsconnections with the world and has showngrowing receptivity to foreign investment andother forms of engagement. Culturally, it isseen as possessing unmatched openness tonew ideas and, as it hosts the World Cup andOlympics, it will have the chance to furtherimprove that perception.Even though Brazil is starting to attack itschronic bureaucratization, its creaking infra-structure, and the relics of a protectionistpast, these challenges will not be eliminatedovernight and must be reckoned with by any-one planning to work or invest in Brazil. Thebottom line is that investing in Brazil is notfor the uncommitted or faint-hearted but of-fers immense promise to the well-informedinvestor.
The Boston Consulting Group • BRAiN | 17The Boston Consulting Group pub-lishes other publications that maybe of interest to decision makersand investors interested in under-standing the Brazilian economicand business environment. Recentexamples are listed here.Allies and Adversaries: 2013 BCGGlobal ChallengersA report by The Boston ConsultingGroup, January 2013Brazil: Confronting theProductivity ChallengeA report by The Boston ConsultingGroup, January 2013From Wealth to Well-Being:Introducing the BCG SustainableEconomic DevelopmentAssessmentA report by The Boston ConsultingGroup, November 2012Capturing PaymentsOpportunities in RapidlyDeveloping Economies: LessonsFrom Brazil and IndiaAn article by The Boston ConsultingGroup, October 2012for further reading
18 | Charting a Steady Coursenote to the readerAbout the AuthorsAndré Xavier is a partner andmanaging director in the São Paulooffice of The Boston ConsultingGroup. You may contact him bye-mail at firstname.lastname@example.org.Masao Ukon is a partner andmanaging director in the firm’s SãoPaulo office. You may contact himby e-mail at email@example.com.Juliana Abreu is a principal inBCG’s São Paulo office. You maycontact her by e-mail at firstname.lastname@example.org. Frederick Pierruis a principal in the firm’s MexicoCity office. You may contact him bye-mail at email@example.com.João Moreira is a project leader inBCG’s São Paulo office. You maycontact him by e-mail at firstname.lastname@example.org. Paulo Oliveira isthe CEO and Pedro Guerra adirector of Brasil Investmentsand Business (BRAiN). You maycontact them by e-mail email@example.com firstname.lastname@example.org.AcknowledgmentsWe would like to thank many cur-rent and former BCG colleagueswithout whom this report would notbe possible: Antonio Riera, BrunoAntunes, Camila Penazzo, Carlo Ca-labro, Cristiana Oashi, Daniel Zon-enschein, David Michael, DéboraMayer, Diana Gerbase, DuncanMartin, Flavio Magalhaes, FrankieLeung, Giuliano Giordano, HenriqueSinatura, Ignacio Pena, Jorge Becer-ra, José Shintate, Juliana Barbosa,Luis Figueira, Marcos Aguiar, PauloNakamura, Philippe Dutheil,Philippe Morel, Rafael Zuana, Sil-mara Costa, Thiago Miskulin, TjunTang, V. Chandrashekhar, and Wal-ter Piacsek.We extend further thanks toBRAiN’s executives and staff mem-bers: Luiz Roberto Calado, AndréLuiz Sacconato, José ManoelMoulin Ribeiro Netto, Daniel PeresRosenfeld, Eduardo Oliveira Limei-ra, Filipe de Oliveira Pelepka, Dani-lo Corrêa Vivan, Juliana DibRezende, and Sandra de SouzaLima.We would also to acknowledge HuwRichards for his writing support, aswell as Katherine Andrews, GaryCallahan, Sarah Davis, AngelaDiBattista, Belinda Gallaugher, andSara Strassenreiter for contribu-tions to the editing, design, and pro-duction of this report.For Further ContactAndré XavierPartner and Managing DirectorBCG São Paulo+55 11 3046 email@example.comMasao UkonPartner and Managing DirectorBCG São Paulo+55 11 3046 firstname.lastname@example.orgJuliana AbreuPrincipalBCG São Paulo+55 11 3046 email@example.comFrederick PierruPrincipalBCG Mexico City+52 55 5258 9999pierru.Frederick@bcg.comJoão MoreiraProject LeaderBCG São Paulo+55 11 3046 firstname.lastname@example.orgPaulo OliveiraCEO BRAiN+55 11 email@example.comPedro GuerraDirector BRAiN+55 11 firstname.lastname@example.org