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The new global reality: How the forces of globalization are reshaping business in Latin America

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The new global reality: how the forces of globalization are reshaping business in Latin America is an Ernst & Young report, written in co-operation with the Economist Intelligence Unit, examining the …

The new global reality: how the forces of globalization are reshaping business in Latin America is an Ernst & Young report, written in co-operation with the Economist Intelligence Unit, examining the degree of globalization in Latin America. Ernst & Young selected for analysis six of the eight countries (excluding Venezuela and Ecuador) that were included in The Globalization Index created by the Economist Intelligence Unit.

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  • 1. The new global realityHow the forces of globalization arereshaping business in Latin America
  • 2. Contents1. Introduction............................................................................. 22. Business responses to globalization: thriving in a globalized world.................................................... 43. Measuring globalization trends in Latin America..................... 104. What’s next. .......................................................................... 19 . The new global reality
  • 3. Fulfilling Latin America’s promise In recent years, the business and political worlds have been looking hopefully to the East. Eastern Europe, the Middle East and the emerging Asian economies have largely justified this hope through their rapid growth and development. In our globalizing world, economic power is not only shifting east, however, but also south. And when we look south to Latin America, we see a region that is starting to fulfill its vast promise. Blessed with plentiful natural resources, a young workforce and a thriving entrepreneurial culture, the region is quickly moving beyond the political and economic problems of the past and taking its rightful place on the world stage. As with any region, though, wide variations exist and generalizations about the whole can be misleading. In January, Ernst & Young, in cooperation with the Economist Intelligence Unit (EIU), published The Globalization Index, which looked at the relative levels of global engagement of the world’s 60 largest economies. Here, to coincide with the 2010 World Economic Forum on Latin America, we have focused on the Latin American countries that were part of our Index. We have examined the similarities and differences of these countries from a business perspective, and highlighted the implications of how globalization is affecting Latin America and, importantly, how Latin America is affecting globalization. James S. Turley Chairman and CEO Ernst & Young How the forces of globalization are reshaping business in Latin America 1
  • 4. 1. IntroductionOver the past two decades, Latin America has steadily deepened its integration with the global economy.Trade and investment regimes have been liberalized, foreign direct investment (FDI) has increasedand new export markets have come on stream. The region now attracts around 7% of global FDI andaccounts for 6% of global exports.Latin America was not as badly affected by the global recession asOECD countries, though it performed worse than other emergingmarkets, notably India and China, which continued to growstrongly. Real GDP fell by an estimated 2.3% in Latin America in2009, compared with 3.4% in the OECD. However, the aggregateregional figure disguises divergent trends, with a generally starkdivide between countries heavily dependent on the US market (onthe whole these performed worst) and those with stronger tradelinks to Asia (these proved more resilient).Of the latter, Brazil, the largest economy, barely contracted(falling by 0.3%), even against a strong base of comparison(GDP grew by 5.1% in 2008). This resilience reflected severalstrengths, including a high degree of diversity of export industries John Ferraroand markets, a solid and mostly domestically owned financial Chief Operating Officer — Ernst & Youngsystem with minimal exposure to subprime securities and a large “In the coming decades, Latin America looks as if it will start to state banking system. Chile is a good example of a particularly achieve its potential.”well-managed economy; despite being acutely exposed to thedownturn in world trade owing to the weight of the export sector,substantial fiscal savings enabled an effective counter-cyclicalpolicy that restricted the contraction to 1.5%. Mexico, the region’s Intra-regional trade has also been growing, but integrationsecond largest economy, accounting for a quarter of regional GDP, remains relatively shallow. Latin America’s difficult topographyperformed worst, posting a 6.6% contraction; it relies on the US and decades of underinvestment in infrastructure contribute tofor over 80% of export sales, the lion’s share of FDI and significant high transaction costs. But institutional weaknesses have alsoinflows of worker remittances; its weak public finances prevented been to blame, and official trade groups within the region have ait from undertaking meaningful counter-cyclical policies. checkered history. Mercosur, the Southern Cone customs union,Recovery is at hand. Latin America has long held huge promise has been plagued since its inception in the mid-1990s by tradeas a prominent actor in the global economy. With abundant and investment disputes between its two major economies,mineral and hydrocarbon wealth, fertile land and the largest Brazil and Argentina, and the Andean Community has been splittropical forests in the world, the region boasts a rich and varied by factionalism.supply of natural resources. Yet, until recently, it has been slow As Latin America continues to open up to international trade andto capitalize on this wealth, thanks to a long history of economic investment, companies in the region are growing in confidencemismanagement and a general suspicion of free markets. and reach. Some, such as CEMEX from Mexico and EmbraerThe US remains the main export market outside the region, from Brazil, have already become sizable global players in theirand still accounts for close to 40% of export sales. But fast- respective industries. Others from Brazil, such as the mininggrowing Asian markets, hungry for Latin America’s minerals and firm Vale, the food manufacturer JBS Friboi and the cosmeticsagricultural products, are consuming a growing proportion of company Natura, are wielding increasing international influence.exports. For example, China’s share in trade has risen significantly Equally, multinationals from Europe and North America, facingin the past decade, approaching 10% of export earnings and stagnant growth prospects in their own markets, have beenimport spending. In 2009, the Brazilian and Chinese Governments increasing their exposure to Latin American markets. With asigned a deal between Sinopec, the Chinese oil company, and political and legal environment that is steadily improving, andPetrobras of Brazil, through which the Chinese would lend US$10b a young population of 567 million people that is enjoying risingin return for 200,000 barrels of crude oil a day over the next incomes, Latin America’s importance in global business is10 years. growing rapidly.2 The new global reality
  • 5. About this reportThe new global reality: how the forces of globalization arereshaping business in Latin America is an Ernst & Youngreport, written in co-operation with the Economist IntelligenceUnit, examining the degree of globalization in Latin America.Ernst & Young selected for analysis six of the eight countries(excluding Venezuela and Ecuador) that were included in TheGlobalization Index created by the Economist IntelligenceUnit, published in the January 2010 Ernst & Young report,Redrawing the map: globalization and the changing world ofbusiness. To view this report go to www.ey.com/globalization. How the forces of globalization are reshaping business in Latin America 3
  • 6. 2. Business responses to globalization:thriving in a globalized worldMultinational companies have long had high expectations for Latin America, but many have beenfrustrated by the experience of investing there. The region’s abundant natural resources, mostlydemocratic governments and large, middle-income population offered great promise to businessesseeking to expand overseas. Yet, all too often, optimism led to disappointment as companiesencountered a difficult operating environment and unfavorable political and economic policies.Multinationals may have struggled with the unpredictability ofLatin American business, but for local companies this environment The key insights are:is all they know. As Donald Sull, Professor of Management Practiceat London Business School, noted in our recent report Redrawing Local companies are becoming global playersthe map: globalization and the changing world of business Companies based in Latin America are used to operating in(January 2010), emerging-market companies have turned the a challenging business environment. In recent years, theyability to thrive in a difficult environment into a key strength. have been leveraging this experience to embark on an“Companies from developed countries, by and large, have the unprecedented phase of global expansion. advantages of absorption — size, established brands, technology, diversification and so on,” he says. “Lacking these advantages, Foreign firms are re-engaging with Latin America emerging-market firms typically rely on agility. To me the Facing sluggish performance in their domestic markets, striking thing is how fast agility can trump absorption.” He points companies from a wide range of sectors are looking to Latin to the extraordinary rise of Brazil’s AmBev in global brewing America as a key source of future growth. But the new wave of as an example. investors must tailor products and services to suit customers in the regions, rather than merely import western products. The availability of technical and managerial skills remains a concern Public education is poor across much of the region, and a shortage of skilled workers bumps up managerial salaries to unrealistic levels. Government policies protecting the local labor force restrict the ability to import key skills.4 The new global reality
  • 7. Local companies are becoming global playersLatin American companies that have grown up with a challengingbusiness environment are now using this experience to guidethem in a phase of global expansion. Particularly in Mexico andBrazil, emerging-market multinationals are coming of age. BostonConsulting Group’s 2009 list of Global Challengers — the emerging-market multinationals that are evolving into global players — lists14 firms from Brazil, seven from Mexico, two from Chile and onefrom Argentina.Mexico’s CEMEX is a case in point. In recent years, a series ofoverseas acquisitions has propelled the company from being apredominantly domestic manufacturer of cement to becoming oneof the world’s largest. Its acquisitions have included RMC in the UKand Rinker in Australia, although this buying spree left CEMEX with Steve Howea significant debt burden that it was forced to restructure Managing Partner, Americas — Ernst & Youngin 2009. “Latin America is starting to produce companies that areDuring the recent downturn, Brazilian companies have remained world-class. Just think of names such as CEMEX or Petrobras.”among the most active players in the M&A market. The Brazilianmining company Vale recently acquired assets from Rio Tinto andalso increased its stake in the German steelmaker ThyssenKrupp,while food producers Perdigão and Sadia, also from Brazil,announced a merger to create the world’s largest poultry companyby market value. “If Brazilian companies do not follow theinternationalization path, they will not become competitive as awhole,” says Luiz Augusto de Castro Neves, Brazil’s ambassadorto Japan.Other Brazilian companies are also competing to become globalplayers in the food industry. JBS, with a mainly domestic market,is now the world’s largest food company in the beef sector,following acquisitions in the US and Australia. “At some pointyou cannot only be an exporter,” says Marcus Vinicius Pratini deMoraes, an adviser to JBS. “You have to become an operator.”Within the past five years, JBS has invested around US$2.5boverseas, and now operates in Argentina, Australia, the US andthe European Union (EU). BNDES, the Brazilian developmentbank, has played an important role in financing JBS’s overseasexpansion, particularly with its recent acquisition of the UScompany Pilgrim’s Pride, and holds a 20% stake in JBS. “BNDEShas been very innovative in financing investment from Braziliancompanies abroad in order to stimulate more stable trade flows,”says Pratini. How the forces of globalization are reshaping business in Latin America 5
  • 8. Foreign firms are re-engaging with Latin AmericaBrushing off earlier disappointments with investments in Latin Multinational companies hoping to execute a broad-brushAmerica, multinationals from the US and other developed markets “Latin American” strategy are likely to be disappointed. Instead,are entering a new era of engagement with the region. If anything, they need to adapt a more granular approach that takes intothe financial crisis has accelerated this trend. Facing sluggish account the regional differences. Countries such as Brazil areperformance in their domestic markets, companies from a wide not homogeneous entities, but have highly diverse populations,range of sectors are looking to Latin America as a key source of cultures and topographies. This means that local preferencesfuture growth. can vary widely from one region to another. “Brazil is a country of continental proportions with specific characteristics in eachDuPont, the science-based products and services company, region,” says Alexandre Costa, Regionalisation Director ofreported 2008 revenues of US$3.6b in Latin America, which Nestlé Brazil.represents 12% of its global total. Fifteen of its 75 R&D centersare based in Latin America, with 11 in Brazil. Festivals form an important part of Brazilian culture, but are often regional rather than national affairs. As part of itsGlobalization has “created much greater expectations for Brazil’s regionalization strategy, Nestlé is careful to align its marketingcontribution to the company’s global portfolio,” says Roberto Hun, efforts with these local celebrations. In addition to the famousVice President for Finance at DuPont Latin America. “This share Carnival in Rio de Janeiro, the company takes advantage ofhas been increasing, and the prospect in coming years is that a marketing and sponsorship opportunities at other local festivals,large part of the growth will come from markets such as Brazil.” such as São João in Recife and the state of Pernambuco, andSuccessful investment in Latin America depends on a thorough Farroupilha in the south of the country.understanding of local preferences and tailoring products and Products are also customized to suit local preferences. Forservices to suit customers in the region. “As a science-based example, Nestlé recently opened a special plant in Feira decompany, we need to develop products that meet the specific Santana, in the state of Bahia, to supply the region. As localcharacteristics of the local market,” says Hun. “In the past, we incomes are low, this factory produces versions of its productswould tend to copy an existing model that we had in other parts that are sold in fewer quantities and in cheaper packaging.of the world. Now, products are more adjusted to the localconsumers’ needs as well as the local culture.” As we also noted in our Redrawing the map report, this is similar to an approach taken by Procter & Gamble (P&G). An estimatedFor example, DuPont has conducted in-depth research among 80% of P&G’s customers in Mexico, for example, shop at informalthe low-income population of Mexico to assess how it could better stalls and kiosks, or “high-frequency stores.” In aggregate, thesemeet their dietary needs. The company found that families in this tiny outlets comprise P&G’s largest customer — bigger evensocioeconomic group wanted to consume more beef, but could than Walmart. So P&G thinks first about what these customersonly rarely afford it. “Putting beef on the table is evidence that can afford, and then works back. Poor customers typically getthey can take care of the family,” says Eduardo Wanick, Global paid daily and can’t buy in bulk. So P&G sells its products inLeader of DuPont’s Emerging Market Growth Initiative. smaller packages and quantities, and prices them in roundedIn response to this demand, DuPont created SoleCina™, a blend denominations that match local bills and coins. Meanwhile, aof texturized soy protein, wheat, gluten, mechanically de-boned network of local representatives supplies stallholders with stockchicken and flavorings. “It is more nutritious than beef, it has and promotional materials.less fat and it is 30% to 40% cheaper than second-grade beef inMexico,” says Wanick. SoleCina, which is now available in Mexicoand Central America, will enter Brazil as the next market, althoughthe program will need to be adapted to the local economy, becausebeef is cheaper in Brazil than in Mexico.6 The new global reality
  • 9. Case study: RenaultLike many multinationals, Renault has been turning its Like any FDI, Renault has to contend with an unfamiliarattention to the faster-growing markets of Latin America, operating environment and bureaucracy. Although conditionswhich generally offer better growth prospects than the more for foreign businesses have improved significantly instagnant, saturated markets of Europe. Although the car the region over the past decade, challenges remain thatmaker has been operating in the region for some time, it has require local knowledge and understanding to address.recently ramped up its operations and sales. Ten years ago, “Manufacturing abroad is not only signing a check, setting up aBrazil was Renault’s 15th largest market; today it is its fifth. plant and churning out cars,” says Tissier. “We have to rethink logistics and rediscover bureaucracies.”Renault manufactures its cars locally, partly to avoidexpensive tariff barriers, but mainly in order to get close Although Renault uses expatriates in its Latin Americanto its end customers. Rather than sell the same cars in operations, Tissier believes that one must also build upLatin America as in Europe, Renault recognizes that it and make use of local workforces. “You have to resist theneeds to adapt its products to meet the specific needs and temptation to copy one model and paste it in a new country,”expectations of local markets. “Once I decide to manufacture he explains. “You have to integrate with the local environment.”products away from my headquarters, I have to rethink my Also important is the need to strike the balance betweenproducts, to look at them differently,” says Alain Tissier, centralization and decentralization. Over the years, theExecutive Secretary to the CEO of Renault Mercosur. company has delegated an increasing proportion ofThis means using common elements, such as seats, responsibility to regional heads, but there continues to be a engines and gearboxes, to achieve economies of scale, but strong link with corporate headquarters. “We are not totally customizing certain features for each market. Even within autonomous, but we cannot be piloted only by the central Latin America, adjustments are made for specific countries. organization when we sell 120,000 cars per year,” says“In Brazil we insisted that the quality of the interior of the car Tissier. “You have to find a new balance, but it is not that is more visible than in Colombia,” explains Tissier. simple in terms of the decision-making process in a fast- changing market.” How the forces of globalization are reshaping business in Latin America 7
  • 10. The availability of technical and managerial skills remains a concernIn our Redrawing the map report, several interviewees highlightedthe importance of hiring locals and ensuring that there was notan over-reliance on expatriate workers. Brian Wilkinson, a boarddirector at Randstad, a recruitment company, notes that thefocus on locals “has helped us shape a much more cosmopolitan,international management team that’s more in tune with thebusiness wherever we do it.”But the availability of managerial skills can be a concern in LatinAmerica. With a few salient exceptions, the public educationsystem is poor and, given weak public finances across much of theregion, is likely to remain so in many Latin American countries. Inaddition, a short supply of highly skilled workers in many countries Jorge Menegassican lead to salaries for senior managerial positions that are higher Managing Partner, South America — Ernst & Youngthan in the developed world. “When you try to discuss the downturn with Latin American In Ecuador, for example, foreign businesses find it difficult to business leaders their usual response is, “Downturn?identify specialized labor to fill senior and management positions. Let’s talk about the recovery.””The problem is similar in Peru, and is compounded by the legalsituation regarding recruitment. By law, 80% of the labor forcemust be Peruvian and there is a 30% ceiling on the portion of thepayroll distributed to foreign workers. In combination, this skillsshortage and regressive measures regarding the hiring of foreignworkers are likely to hold Peru back from moving up the globalvalue chain and attracting FDI.In the region’s larger economies, especially Brazil and Mexico(which together account for 66% of the region’s GDP), the privatesector is beginning to play a crucial role in upgrading the skillsbase through public-private cooperation on targeted trainingprograms. But across Latin America, there is considerableprogress still to be made, and this factor could hamper FDI overthe medium term.8 The new global reality
  • 11. How the forces of globalization are reshaping business in Latin America 9
  • 12. 3. Measuring globalization trends inLatin AmericaThe Globalization Index developed for this report measuresand tracks the performance of the world’s 60 largest countries The key insights are:according to 20 separate indicators that capture the key aspectsof cross-border integration of business. The indicators fall into five Globalization remains slowbroad categories: Although the overall trend in Latin America has been toward1. Openness to trade a gradual opening up of markets and greater engagement2. Capital movements with the global economy, there is considerable variation3. Labor movements across the region. Of the eight Latin American countries4. Exchange of technology and ideas that appear in The Globalization Index of 60 countries,5. Cultural integration only one, Chile, makes it to the top half of the Index.These factors have been weighted (ranging from 17% to 22%for each) based on the significance placed upon each factor by Technology adoption lags520 surveyed senior company executives doing international A general trend among the eight Latin Americanbusiness. Subsidiary indicators are also given sub-weightings countries is their weak performance on the Index forwithin each category. Indicators chosen include both quantitative the exchange of technology and ideas. Encouragingdata and qualitative scores from a range of trusted sources. The steps in some countries include funding for R&Dperformance of countries is measured over time, so that progress and the growth of public-private partnerships.toward greater or lesser globalization since 1995 can be observed,with a forecast of likely performance until 2013.The Index measures “relative” rather than “absolute” globalization.This means that a country’s trade, finance and capital investments,labor, technology and cultural integration with other countries ismeasured relative to its GDP rather than by the absolute value ofthese elements being exchanged. As a result, smaller countriesthat depend on international integration will tend to have a highlevel of globalization, while larger countries that can rely on a bigdomestic market will tend to have a lower level, even though thetotal amounts exchanged internationally may be much greater.The Index, therefore, reflects the degree to which the globalintegration of a country is observable or experienced from withinthat country.10 The new global reality
  • 13. Globalization remains slowAlthough the overall trend in Latin America has been toward a Figure 1. The Globalization Index 2009 — Latin Americagradual opening up of markets and greater engagement with Overall Country Change inthe global economy, there is considerable variation across the Globalization scoreregion. Out of the 60 countries that appear on The Globalization (1995-2009)Index, eight are from Latin America: Argentina, Brazil, Chile, 27 Chile 0.55Colombia, Ecuador, Mexico, Peru and Venezuela. Among theseeight countries, only one, Chile, appears in the top half of The 39 Mexico 0.52Globalization Index. The remainder are clustered in the bottom 44 Colombia 0.37third of the list, with Venezuela bringing up the rear in 59thposition, just ahead of Iran. 45 Peru 0.36Despite these relatively low scores, progress on globalization has 47 Brazil 0.36generally been positive in the region since the 1990s. All eight 48 Argentina -0.07countries have improved their overall score during the period ofanalysis, with the exception of Argentina and Venezuela. And while 54 Ecuador 0.15the global trend was toward a small dip in globalization during the 59 Venezuela -0.20current economic downturn, Latin American countries bucked thetrend, with all except Ecuador and Venezuela seeing an increase in Source: The Globalization Index 2009 their overall score. Figure 2. “A brief pause” — average annual overall level of globalization1 (Y axis shows average overall Globalization score) 4.25 4.00 3.75 3.50 3.25 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Actual scores Predicted scores 1 The level of globalization continued to rise until its peak of 4.12 in 2007, declining in 2009 to 4.07, with a slow recovery forecast to 4.19 in 2013. Source: The Globalization Index 2009 How the forces of globalization are reshaping business in Latin America 11
  • 14. Technology adoption lagsA general trend among the eight Latin American countriesis their weak performance on the Index for the exchange oftechnology and ideas. The strongest among the Latin Americancountries, Chile and Mexico, still have a score that is only 25% ofthe leading technology performers on the Index, such as Ireland,Sweden or Denmark. This seems particularly relevant given thatErnst & Young’s Redrawing the map report, identified the exchangeof technology as the most important driver of globalization.Chile has the most developed telecom infrastructure for mobilephones and broadband access in the region, while Colombia hasachieved relatively high IT capabilities thanks to foreign investmentfrom Spain, and Telefónica in particular. In Brazil, internet usersaverage 44 hours per week, one of the highest rates in the world,according to IBOPE Nielsen Online.But in general, the picture across the region has been one of lowpublic investment and an absence of policies to support public-private partnerships. In Argentina, the capital inflows of the 1990shave produced some technology transfer, but the contribution offoreign firms to local R&D activities has been limited. The pictureis similar in Brazil, where standard measures of innovation, suchas R&D and patents, remain poor. In Mexico, decades of low publicinvestment have been a major constraint on innovation.There are some encouraging trends that suggest a strongerfuture for technology in the region. In Argentina, some limitedfinancing for R&D has become available through technologyand science funds, and some tax incentives are in place forR&D in the software industry. Meanwhile, Mexico and Brazilare both building partnerships with the private sector and localuniversities to increase the competitiveness of high-tech and othermanufacturing industries. These are positive steps, and will benecessary ones if the region is to fulfill its potential as a significantplayer on the global stage.12 The new global reality
  • 15. The Globalization Index: selected Latin America country profilesChile Figure 3. Change in scores of key globalization dimensions for ChileThe spread of the eight countries on the Index is in large part areflection of their highly varied performance on trade openness.Chile, in 27th position, benefits from one of the world’s most liberalinvestment regimes, which has made the country a top destinationfor foreign investors. For the past 30 years, the Government haspursued a policy to integrate the country with the global economy,and has set an unusually low tariff dispersion of between 0% and6%. It also has one of the world’s largest networks of bi-lateraland multi-lateral trade agreements. These factors have helpedthe country to post the biggest improvement in the overallGlobalization score among the eight Latin American countries inthe study.As well as boasting the highest score for trade openness, Chilealso ranks in the top for the movement of capital and financeby a considerable margin. Despite more austere times aroundthe world, Chile’s prospects of attracting FDI in the mediumterm remain strong mainly due to the country’s wide range of Source: The Globalization Index 2009 opportunities in mining, energy, forestry, telecommunications andagro-industry. Chile has been the favorite destination for coppermining investment for over two decades, making it the world’slargest producer, accounting for over 33% of world copper output.In recent years, Chile’s importance as a regional investor hasincreased, particularly in the airline, shipping and retail sectors.FDI outflows totalled US$8b in 2009 and are expected to growsteadily as Chilean companies continue to expand across LatinAmerica. Retail chains already have a significant presence inArgentina and Peru, and will seek to expand in Brazil, Colombiaand Mexico. Similarly, in international transport services, thenational airline LAN and the CSAV shipping holding companyare fast-growing global companies with leading positions inSouth America. How the forces of globalization are reshaping business in Latin America 13
  • 16. Mexico Figure 4. Change in scores of key globalization dimensions for MexicoLike Chile, Mexico has seen a significant improvement in itsGlobalization score since 1995. It is Latin America’s largestexporter, with US$230b in gross sales in 2009. Although a trendof trade diversification has gathered steam in the past five years,80% of Mexico’s export sales are still directed toward the USmarket. It also relies strongly on the US for foreign investment,worker remittances and tourism. Taken together, this has left thecountry particularly exposed to the economic downturn, and in2009 its economy contracted by 7.1%.In 2009, inflows of FDI fell to an estimated US$12b, the lowest in adecade and a mere 1.4% of GDP. However, Mexican manufacturinghas become increasingly integrated into US industrial productionchains and could reap substantial benefits in coming years from anongoing process of cost-cutting and industrial restructuring northof the border. Since mid-2009, many US manufacturers haveannounced a partial or wholesale shift in operations to Mexico. Source: The Globalization Index 2009 14 The new global reality
  • 17. Colombia Figure 5. Change in scores of key globalization dimensionsColombia has also been hit by the slowdown in the US, its largest for Colombiatrade partner, although to a lesser extent than Mexico. Thesignificant trade restrictions imposed by Venezuela, its second-largest market, have compounded this problem. In 2009, exportsales to Venezuela fell by 33.5%, reducing its share of total exportsfrom 17.5% to 12.3%.Despite these setbacks, Colombia has consistently increasedits overall Globalization score during the downturn. In the shortterm, trade will benefit from an increase in demand for Colombia’scommodities and a US rebound this year. But progress could befurther accelerated if exporters pick up diversification efforts(both with export markets and products). This will help tosupport stronger and sustained growth, as well as the creationof employment. Source: The Globalization Index 2009 Peru Figure 6. Change in scores of key globalization dimensions for Peru Peru may be half way down the rankings of Latin American countries on The Globalization Index, but its score for the movement of trade and services is above average for the group. Over the past decade, the Government has actively pursued a program of trade liberalization. Today, Peru boasts free trade agreements with its main trading partners: the US, China, Canada and most recently, the EU. Macroeconomic stability and the improvement of the investment regime in Peru have paved the way for large increases in FDI inflows. The Government has ambitious plans to deepen this investment, and estimates that it will secure US$10b worth of investment in mining, energy and petrochemicals projects between 2009 and 2014. Peru’s admission in 2008 into the ranks of Latin American countries with investment-grade status (alongside Chile, Mexico and Brazil) lends credibility to this claim. Source: The Globalization Index 2009 How the forces of globalization are reshaping business in Latin America 15
  • 18. Brazil Figure 7. Change in scores of key globalization dimensions for BrazilAt first glance, it may seem surprising that Brazil did not scoremore highly on The Globalization Index. Although it has madesteady progress in its overall Globalization score since 1995, itranks fifth out of the eight Latin American countries on the Index,and 47th overall. As a major exporter with a diverse range of tradepartners and an investor-friendly policy environment, Brazil isone of the most open economies in the region; this large domesticmarket means that it does not have to rely as heavily on overseastrade as some smaller countries. For example, its exports of goodsand services are just 14% as a share of GDP.Brazilian companies are at the forefront of a trend toward the riseof emerging-market multinationals. Outward FDI has risen strongly,averaging US$13.6b annually between 2004 and 2008, althoughthe economic crisis led to a repatriation of US$10b in 2009.The downturn caused a fall in inflows of FDI from an averageof US$33b in 2006-2008 to US$25b in 2009. In the medium Source: The Globalization Index 2009 term, this is likely to rise again, with foreign investors attractedby investment needs in the oil sector and market opportunitiesrelated to the staging of the 2014 World Cup and 2016Rio Olympics.16 The new global reality
  • 19. Argentina Figure 8. Change in scores of key globalization dimensionsArgentina is the only country in the region apart from Venezuela for Argentinathat has seen its overall Globalization score fall since 1995.During the 1990s, a process of market liberalization saw a rapidexpansion of FDI. But since the country’s 2001-2002 financialcrisis this has been replaced by a more interventionist policystance that has deterred FDI flows and failed to support tradeopenness. Protectionist measures, including export bans, quotasand taxes, have become commonplace, and there has been littleprogress made on the liberalization of trade. In 2009, exportsof goods and services represented just 21% of GDP, despitethe country’s abundant natural resources and significantexport potential.Policy uncertainty and a deterioration of the legal frameworkare also discouraging FDI flows. In 2009, FDI plummeted to just1.1% of GDP, and prospects for recovery in the medium term arecomplicated by an unstable political scene and a weakening policyenvironment. A deterioration of the legal framework is reflected Source: The Globalization Index 2009 in growing favoritism toward domestic companies and increasedexpropriation risk (private pension funds were nationalized in2008 in an attempt to secure a guaranteed source of financing). How the forces of globalization are reshaping business in Latin America 17
  • 20. The Globalization Index —indicators, sources and weightingsThe Globalization Index was created by identifying the key indicators of globalizationmost relevant to business. The table below shows, for each of the headline categories,the individual indicators used and their source. The categories were then weightedaccording to the views captured in a survey of 520 global business leaders.Category and indicators SourceMovement of goods and services  Business leader weighting: 22%Total trade (exports + imports) as % GDP National accountsTrade openness (5=very high) Scored on 1-5 scale by EIU analystsTariff and non-tariff barriers (5=low) Scored on 1-5 scale by EIU analystsEase of trading (cross-border) (5=very easy) Scored on 1-5 scale by EIU analystsCurrent-account restrictions (5=low) Scored on 1-5 scale by EIU analystsMovement of capital and finance  Business leader weighting: 21%FDI flows (in and out, % of GDP) National accountsPortfolio capital flows (in and out, % GDP) National accountsGovernment policy towards foreign investment Scored on 1-5 scale by EIU analysts(5=very encouraging)Expropriation risk (5=non-existent) Scored on 1-5 scale by EIU analystsInvestment protection schemes (5=good) Scored by EIU analystsDomestic favoritism (5=no favoritism, level playing field) Scored by EIU analystsExchange of technology and ideas  Business leader weighting: 21%R&D trade (in and out, as % GDP) Balance of payments; EIU estimatesBroadband subscriptions (per 100 people) International Telecommunications UnionInternet subscribers (per 100 people) International Telecommunications UnionMovement of labor  Business leader weighting: 19%Net migration (% of total population) Balance of payments; EIU estimatesCurrent transfers (in and out, as % GDP) International Telecommunications UnionHiring of foreign nationals (5=easy) International Telecommunications UnionCultural integration Business leader weighting: 17%Tourism (in and out, per 1,000 population) World Tourism OrganizationInternational communication International Telecommunications UnionOpenness of national culture to foreign influence Scored by EIU analysts18 The new global reality
  • 21. 4. What’s nextAfter decades of underinvestment and policies that deterredforeign investment, Latin America is stepping ever moreconfidently onto the global stage. Although there is markedvariation among the eight countries that appear on TheGlobalization Index, the general trend is toward a deeperintegration with the global economy through openness of trade,capital movements and FDI, labor movements, the exchange oftechnology and ideas, and cultural integration.Although the lion’s share of trade takes place with the US andwithin the region itself, diversification is gradually under way.Commodity-producing countries are forging stronger links withresource-hungry countries in Asia, especially China. Meanwhile,stronger macroeconomic fundamentals and a more predictablebusiness environment are serving as a strengthening platformfor FDI.But perhaps the biggest change in relation to globalization is theconfidence of leading businesses within the region itself. LatinAmerican companies have expanded beyond their borders, andthere is a growing cohort of global players, particularly fromBrazil and Mexico, that occupy leading positions in their respectiveindustries. Although challenges remain, not least a large externalfinancing requirement, the slow adoption of new technologyand an inadequate skills base, Latin America will become anincreasingly important player on the global business stage. How the forces of globalization are reshaping business in Latin America 19
  • 22. Ernst & Young — buildinga borderless businessShifts in demographics and capital flows are marking the globaleconomy and society as a whole. These trends are also havingprofound effects on our profession. Our response is to be the mostintegrated professional services organization in both our mindsetand our actions.We have one strong global leadership team that sets one singleglobal strategy and agenda. To help ensure we are efficient andeffective, we have organized our legal entities into similarly sizedbusiness units in terms of both people and revenues. Thesebusiness units, almost all of which are purposely not singlecountries, are grouped into geographic Areas across the Americas,Europe and Asia-Pacific. Each business unit’s leadership teamworks directly with their Area and global leaders to help ensureflawless execution. This structure is streamlined — it allows us tomake decisions quickly, and helps to ensure that we execute ourstrategy and provide high-quality service wherever in the worldour clients do business.Creating our global mindset and structure are ongoing processes.We’ve been working with our partners to bring down thebarriers to working together seamlessly across borders, and wehave succeeded in realigning our previously country-focusedorganization into a more integrated global one. This organizationmeans our clients get faster response and more tailored services.They get broader, more experienced teams, with deeper industryknowledge. Our people get greater opportunity to pursue theglobal careers they desire. And our regulators see our structure ashelping us deliver consistent, high-quality service across the globe.20 The new global reality
  • 23. ContactsJames S. TurleyChairman and CEOTel: +1 212 773 4300Email: james.turley@ey.comJohn FerraroChief Operating OfficerTel: +44 20 7980 0044Email: john.ferraro@uk.ey.comSteve HoweManaging Partner — AmericasTel: +1 212 773 3258Email: stephen.howe@ey.comJorge MenegassiManaging Partner — South AmericaTel: +55 11 2573 3702Email: jorge.l.menagassi@br.ey.comAlberto TiburcioManaging Partner — Mexico and Central AmericaTel: +52 55 5283 1319Email: alberto.tiburcio@mx.ey.comBeth BrookeGlobal Vice Chair — Public Policy,Sustainability and Stakeholder EngagementTel: +1 202 327 8050Email: beth.brooke@ey.comFor more information on how Ernst & Youngcan help you in a globalized world, please visit usat: www.ey.com/globalization. How the forces of globalization are reshaping business in Latin America 21
  • 24. Ernst & YoungAssurance | Tax | Transactions | AdvisoryAbout Ernst & YoungErnst & Young is a global leader in assurance, tax,transaction and advisory services. Worldwide,our 144,000 people are united by our sharedvalues and an unwavering commitment to quality.We make a difference by helping our people,our clients and our wider communities achievetheir potential.Ernst & Young refers to the global organizationof member firms of Ernst & Young Global Limited,each of which is a separate legal entity.Ernst & Young Global Limited, a UK companylimited by guarantee, does not provide servicesto clients. For more information about ourorganization, please visit www.ey.com.© 2010 EYGM Limited.All Rights Reserved.EYG No. DK0049This publication contains information in summary form and istherefore intended for general guidance only. It is not intendedto be a substitute for detailed research or the exercise ofprofessional judgment. Neither EYGM Limited nor any othermember of the global Ernst & Young organization can acceptany responsibility for loss occasioned to any person actingor refraining from action as a result of any material in thispublication. On any specific matter, reference should be made tothe appropriate advisor.

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