Doing Business in Brazil

Brazil is the biggest country among the nations that belong to Latin America. The economy of the country is rather stable. Advanced production and an extensive service sector, a high level of development of agriculture and export of products, as well as processing and extraction of various minerals ensure stable economic growth in Brazil and consolidate its position in the world market. The state is also one of the industrial leaders of Latin American together with such countries as Argentina and Mexico. Therefore, there are good conditions for doing business in the country. Moreover, the government of Brazil considers it necessary to attract foreign capital into the economy of the state and tries to create favorable conditions for people who wish to run business in this country.

Being the largest country in Latin America, Brazil occupies practically half of the continent. It is the fifth largest state in the world after Russia, Canada, China, and the United States (Grivoyannis 107). Except for some islands, the whole territory of the country is an uninterrupted land. The population of Brazil is more than two hundred million people, and, thus, it occupies the fifth place in terms of demographics among all world countries after China, India, the United States, and Indonesia (Grivoyannis 107). Despite this fact, the density of the population in the state is comparatively low. The majority of its citizens are rather young, and, hence, 60% of people are younger than 30 years old (Grivoyannis 108). The number of economically active working force is approximately 56 million people (Grivoyannis 108). 25% of workers are engaged in agriculture, 22% work in construction industry, and 51% are employed in the service sector (Grivoyannis 108). In the marketplace of other Latin American countries, a situation is different, and the number of young working people is extremely small in some of them. Therefore, people want to invest in Brazil, as there is enough labor force in the country that is also relatively cheap.

Brazilian economy develops extremely rapidly. Today, the country is one of the major economies in the modern world and a leader in Latin America. Several years ago, Brazil was ranked the sixth in the world by volume of GDP (Grivoyannis 110). Economists predict that by 2050, the country will be on a list of the top five largest economies of the world (Grivoyannis 110). Additionally, the economy of the country demonstrated sustainability during the crisis of 2008. A significant characteristic of the Brazil economy is an extremely low percentage of unemployment. This is a rapid sign of the development that is due to two Brazilian presidents. A profitable policy of the government of Presidents Luiz Lula and Dilma Rousseff brought more than 40 million people out of poverty in the country. Lower unemployment rates produced the first great results in combating socioeconomic inequality in Brazil. The economy of Brazil during the reign of Luiz Lula reached the pinnacle of its development for the first time in history. Because of the changes in terms of international trade, in particular the increase in commodity prices due to the demand of China, Brazil could increase substantially its exports of goods to China. In addition, the country received an opportunity to pay a high external debt and became a state with the largest currency and gold reserves in the world. Accordingly, it gave the country a status of a reliable destination for foreign investment. Despite all the positive aspects, the country is currently experiencing certain problems. The major issues of the Brazilian economy include high bank spread (19 % for legal entities and 32 % for individuals), the deep socioeconomic inequality in the country, and the inconsistency of fiscal and monetary policies (Grivoyannis 113). Nevertheless, Brazil is a country with favorable conditions for doing business.

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For the most part, the industry in Brazil is concentrated in the South-East region of the country. The industrial park of Brazil is varied producing an array of commodities ranging from high-tech products to consumer goods. The major industrial sectors in the country include the petrochemical and automotive industry, the production of food, chemicals, soy, minerals, footwear, and clothing, as well as the technical, metallurgical, and textile industries (Pereira et al. 51). Analyzing GDP of the state, it is necessary to mention that its growth has slowed since 2011 (Pereira et al. 74). It is possible to predict that because of the unstable political situation, GDP will continue to decline and the country will lose its popularity among investors. Despite this fact, the percentage of consumption in Brazil is rather high, which is a positive phenomenon. Nonetheless, taking into account the historically intrinsic characteristics of the Brazilian economy and structural insufficiency of the aggregate supply, the percentage of investment is low, and, thus, it needs a boost from the government. It is a closed country that does not participate in international trade. Commodities constitute 70% of the country’s exports (Pereira et al. 77). In such a way, there are both advantages and disadvantages of doing business in Brazil.

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When planning to start a business in a foreign country, it is also necessary to consider a political situation in the state. As for Brazil, its status quo is extremely unstable today. As mentioned above, the previous president Dilma Rousseff managed to stabilize the economy and strengthen the indicators achieved earlier. However, everything changed when the prosecutor general’s office had charged her with corruption. Subsequently, this scandal caused a surge of protest actions across the country. Many public services and organizations demanded the resignation of the president. Ultimately, Dilma Rousseff was impeached (Watts 2016). This event led to the fact that many sectors of the economy began to reduce their performance. When Michel Temer became a president, the political and economic situation in the country only kept worsening. Soon, the prosecutor general’s office charged a new president with corruption as well (Brazil’s Michel Temer Charged with Corruption). Temer, in his turn, urged citizens not to believe in the accusations against him. Nevertheless, people doubted his innocence, and hundreds of thousands of residents of large cities went to the streets demanding early elections and his resignation (Brazil’s Michel Temer Charged with Corruption). Despite the fact that Michel Temer managed to stay in the post, a political situation is now highly unstable and frequently unpredictable.

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A serious political crisis has led to the economic crisis. The president has adopted a number of reforms that have a negative effect on the economy of the country. In 2015, Brazilian GDP declined by 3.8%, while in 2016 – by 3.6% (Grivoyannis 154). It is the longest and strongest decline in the history of the biggest Latin American state. In addition, the country experiences the crisis stemming from the fall in prices for energy resources, the export of which depends greatly on the nation’s revenue (Grivoyannis 155). The recession deepened the already noticeable abyss between the poor and the rich. In such a way, political instability in the country generated significant economic problems. Therefore, it is possible to conclude that unless the situation in the country stabilizes, doing business in Brazil is extremely risky. In the future, the country may face other political and economic challenges, such as further protests of the population that can even lead to the revolution resulting in a GDP and production decrease. Therefore, it is not advisable to invest in Brazil until a political situation in the country becomes stable.

Nevertheless, if people want to start a business in Brazil, there are several most promising industries. To illustrate, the mining industry is considered one of the most fertile and profitable areas for business development in the country (Trebat 130). International auctions are engaged in the realization of minerals. In Brazil, more than 50 kinds of minerals are mined, and most of them are both non-ferrous and ferrous metals (Trebat 130). Forest growing is a large-scale project that involves many people. In addition, there are favorable conditions for the launching of this business, such as loans on preferential terms and low prices for land plots (Trebat 131). Furthermore, provision and realization of meat represent a good solution for people who cannot decide on the type of business to open in Brazil. Export of meat is considered one of the major directions of the country’s foreign economic policy (Trebat 133). Therefore, these business opportunities can be useful for people who want to start a business in Brazil.

Nevertheless, there is one problem. The branches of the Brazilian economy, which are open to the average foreign investor, are not profitable. It is connected with the fact that everything that is highly profitable in the country is practically unaffordable for small and limited private foreign investments. All lucrative sectors of the economy and Brazil’s enterprises are monopolized and managed by closed groups, mainly with the participation of the country (Vasconcellos 116). In fact, it is practically impossible to join this group. This fact is connected with the history of the development of power and statehood in the country. Notably, Brazil has a highly efficient government, which has never had a powerful police-repressive apparatus (Vasconcellos 116). At the same time, it was able to escape from devastating revolutions and wars. Therefore, in a greater degree, the most profitable production in Brazil belongs to the closed groups that emerged by virtue of the public state power.

There are still certain areas of activity that remain accessible to foreign investors in the country. Speaking of the official version of foreign investment, they are attracted to Brazil to create new jobs for the local population. In general, these are unstable sectors of the economy with high risks that are dependent on global financial fluctuations. For example, it may refer to the tourism industry in Brazil (Vasconcellos 119). The majority of hotels and other tourism infrastructure in Brazil belong to foreigners. Moreover, the Argentines account for most of the foreign investments in the tourism sector followed by the English and French investors (Vasconcellos 119). The Argentines made many monetary contributions based on the traditionally large number of tourists from Argentina to Brazil. They basically placed their investments in Brazilian restaurants, hotels, and different clubs. There are also many real estate agencies that serve the tourist purposes in a hot season. Speaking of the right time for investments, the majority of the foreign funding in the Brazilian tourism sector was in a period when one American dollar was equal to three Brazilian reals (Vasconcellos 120). After substantial strengthening of the Brazilian real, the flow of foreign tourists to Brazil declined or changed qualitatively (Vasconcellos 120). This fact resulted in the considerable reduction in profits and even losses. In such a way, many objects of Brazilian tourism infrastructure are currently sold. Nonetheless, tourism is regarded as one of the most promising investment sectors in the country. The problem lies in the fact that taking into account the hostile attitude of the unwieldy Brazilian bureaucratic machine, this perspective seems rather remote.

It is also necessary to take into consideration all possible risks connected with the provision of tourist services for the public. From the point of view of investments, investing money in a certain business requires a great deal of personal involvement and systematic control of this activity (Neto-Advogados 104). If there is no possibility of personal participation, a person can lose all their investments and, in addition, face different lawsuits. If financial resources are invested in the country’s production, the possible risks are minimal. Nonetheless, the time of receiving the first significant profit will increase greatly. It is mainly connected with a rather limited domestic consumption market where a large part of the population buys only essentials, as people live below the poverty level. It is obvious that it is better when this production goes for export. In this case, the investor can even receive some benefits from the Brazilian government.

In any case, when investing in Brazil, it is necessary to consider possible risk factors. The first factor lies in the lack of responsible and skilled workers in the country. It is connected with a low level of development and scarcity of qualitative preparation. Moreover, Brazilians do not always practice accountability, and they are not punctual. Although the Brazilian labor force is one of the cheapest, it also presupposes a number of pitfalls connected with a frivolous attitude of Brazilians to work. Another risk factor is an extremely high level of bureaucratization of the Brazilian society accompanied by many negative consequences. According to the ratings of various consulting companies, its bureaucratic system is recognized as the largest in the world (Neto-Advogados 87). For example, registration of companies in Brazil occupies an average of at least two months. Considerable problems appear with the timing of changes in the statutory documents. Law firms take advantage of inexperience and ignorance of foreigners overestimating the cost of their services without the guarantee of quality. The choice of an incompetent lawyer in the business organization who has the power to sign documents by proxy may lead to unreasonable costs. In addition, a process of registration of the business in the country is multistage and quite complicated. Brazilian legal proceedings are characterized by extreme slowness and unnecessary legal obstacles (Neto-Advogados 89). In the first several months of the company’s existence, one more difficulty can occur – a person without a permanent residence permit in Brazil cannot be a director of the company. Thus, a zits-chairman should hold the position of a director for the time being. It can be an auditor, a lawyer, or a trustee who is a non-resident with permanent residence in Brazil or a citizen of Brazil. Moreover, this service is chargeable (Neto-Advogados 89). At the same time, to secure business, the company’s charter should be formulated in such a way that there is an explicit limit on the rights of this director.

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Large cultural differences also require attention. In fact, cultural background has a direct effect on the efficiency of business processes. In the case of hiring a local top manager, misunderstanding of such differences can result in serious unpredictable consequences. The use of services of an international recruitment agency does not always help to avoid such eventualities. Without personal contact and interviewing of candidates, it is impossible to provide favorable conditions for the future stable work. Moreover, further joint work of employees with incompatible cultural differences may result in severe disagreements.

Another risk factor is associated with the tax system. The country has a highly complicated tax system. There is a single federal tax rate for all legal entities that constitutes 15% of the profit (Neto-Advogados 97). For partner organizations and individuals, there is a different taxation system. A business owner must pay a pension contribution of 8% of the profit every month. The state tax is 5% of the federal tax (Neto-Advogados 97). The amount of the value-added tax depends on the laws of the state where the business operates. Particularly, it ranges from 17 to 25% (Neto-Advogados 97). If the investor does not understand the Brazilian tax system, it can result in the discrepancies in the accounting. Additionally, the erroneous appointments of the accountants of an enterprise may force to incur substantial costs for external auditors to correct mistakes. The committed tax errors can provoke inspections that lead to a danger of larger material damage. Before starting a business in Brazil, it is recommended to consult a business expert. In general, it is an axiom since entering and doing business in the territory of another country is connected with great risks, which the business owner should skillfully eliminate with the application of the previous experience of other companies and consultants. Entering the market without such help is possible but will inevitably result in losses of funds and time, as well as creation of future risks that can worsen the business results and even put it in jeopardy.

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In spite of these factors, there are also a number of advantages for investments in Brazil. Firstly, Brazilian bureaucracy is not particularly aggressive in terms of application of any sanctions (Castro-Fontoura 119). A country has a high level of state services available on the Internet (Castro-Fontoura 119). It is a valuable additional benefit for foreign investors. Corruption in the country exists but with its peculiarities. It mainly manifests itself through the existence of a legal structure of professional messengers-intermediaries that can accelerate the process of legalization of the business at an additional cost.

Brazil is the largest state in Latin America. Over the past ten years, the country has made incredible progress in the creation of modern industrial production becoming an industrial-agrarian state. The economic and political situation in the country has undergone the evaluation in relation to other states of Latin America. Therefore, a comparative analysis is crucial when discussing Brazil as the country for investments. The economic performance of the country is rather noteworthy for the region, as Latin America still retains the features of internal political instability, and there are frequent changes of governments and oppositional sentiments among the part of the population. The same situation is in Brazil. The previous president of the country was impeached, and the current leader also has troubles with the prosecutor general’s office of the country. Consequently, people lost confidence in the president leading to the decline in economic performance. Despite this fact, the Brazilian economy has high rates in comparison with other countries of the region. In such a way, there are both advantages and disadvantages of doing Business in Brazil. However, before starting the business in this country, it is advisable to familiarize oneself with all possible risks.

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