Country-level branding: What should be Brazil´s message?

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Brazil should be concerned with the message it sends to the world, in addition to the definition of regional targets for FDI (Foreign Direct Investment) and trade (link to previous post here). While some countries are stereotyped and a few others are not, many of them invest in very-focused, specific messages that they deliver to the world. An ordinary marketing expression applied to Brazil would be: The country needs to identify its brand and communicate it to global markets in order to facilitate business. Table 1 presents a simplified list of general strenghts and qualities associated with selected countries. From an international trade perspective, Brazil sends no clear message to investors worldwide.

Country Business strengths and messages associated with to country
India IT services, software programming, spiritual life
Germany Engineering, precision, rigor
Japan High technology, R&D, consumer electronics
US Innovation, capitalism, multinationals, top level universities, technology
UK Think-tanks, English language, Oxbridge, tradition, royalty, stability
France Aerospace  technology, wines, fashion, sophistication, gastronomy,
China Industry, multinationals, low-cost manufacturing
Italy Fashion, design, arts, gastronomy, history
Brazil Rain forest, exotic places.

Table 1: Messages delivered by several countries

CountryBrand Image

An interesting free report about country-level brands can be downloaded for free from FutureBrand (a consultancy) website. The material presents major points about the messages delivered by several countries and points out that Latin America has potential for strong country brands but currenly no country in the region developed a strong brand worldwide.

As usual, a question to my demanding readers: Do you know a country that positively changed its message over time?

Link to Country Brand Image report developed by FutureBrand here

Link to image of flags here

Image of country ranking taken from FutureBrand´s Country Brand Index 2014-2015.

Geopolitics of business: Where Brazil should go?

InternationalTradeThe economic science has taught that resources are finite. Therefore, prioritization is the name of the game for institutions, managers and even countries. Lourdes Casanova and Julian Kassum, in their great book “The Political Economy of an Emerging Global Power – In Search of the Brazil Dream” address the unfinished debate about the priorities of Brazilian foreign policy. The authors argue that Brazil needs to find its role on the global stage. Which regions or countries should Brazil focus its efforts to increase trade and invest in order to make a difference in the global arena?. As Prof Casanova and Mr. Kassum clearly puts: “Where Brazil should go?” The many geographical options include, but are not limited to, Brazil´s own neighbors – Latin America, Brazil´s traditional commercial partners – the US and EU, Brazil´s newest trade partner – China, other BRIC countries – Russia and India, and the newest trade frontier – Africa. Table 1 presents a brief, unilateral and unfinished comparison between the pros and cons for each option. As usual, this blogger kindly accepts any comments and criticism.

Pros Cons
Latin America Size of Brazilian economy compared to the economies of other countries; long history of intraregion trade; peaceful frontiers Diminishing intraregion trade over time, growing populism in the region; situation of Venezuela and Argentina
US Size of US domestic market; US as a source of technology and innovation Subsidies to local producers of steel and ethanol, among other items
EU Size of EU markets, strong presence in LatAm of EU multinationals from Germany, France, Italy, Spain and Sweden Subsidies to many agricultural products
China Size of Chinese domestic market Possible deceleration of chinese economy, very large CAGE distance
Other BRIC economies: Russia and India Size of market, alternative sources of technology (aerospace, computer science) Non-tariff trade barriers, large CAGE distance, different political agenda
Africa Potential trade frontier with the political and economic stabilization of the continent;  Brazil can be a source of technology and high-value services (expertise in large infrastructure projects, project management); strong cultural ties between Africa and Brazil Lack of knowledge of local markets, obscure regulations

Table 1: Brazil´s geographical options for investment and international trade

The crossroad that Brazil currently faces is not uncommon because many other countries had to make difficult decisions in the past. Japan became an industrialized country during the last century because it reshaped its foreign policy and South Korea is currently a rich country because invested heavily in education. It´s time for the latin giant to make choices. Brazil needs a plan to improve its position in the world and a strategy that answers a critical question: Where Brazil should go?

Brazil in Latam

As usual, I leave a question to the followers of this blog: Do you know any other country that survived a difficult scenario and succeeded after making hard choices?

Source of image of “International Trade” here; source of image of Brazil here

Development Banks and the Latin America and Caribbean region

international_offshore_bankingModern literature shows that development banks have supported the development of Latin America and the Caribbean (LAC) region, a part of the world with insufficient infrastructure and non-efficient capital markets. However, multilateral development banks could do better as market developers. Musacchio and Lazzarini (Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond) present evidences from a very large development bank (Brazil´s BNDES) that this kind of financial institution causes mixed effects in the development of the recipients of loans and grants. Multilateral banks help governments and private sector when offer knowledge to governments, when spread best practices among debtors and when provide low-cost credit to the countries of the LAC region. However, the criticism about multilateral development banks includes: i) self-established risk-management policies that severely limit potential support to national governments, and ii) their preferred selection of companies with good political connections.   

How about the differences between the many multilateral institutions in the LAC region? Brief explanations are listed bellow together with some of their characteristics and contexts.

World Bank: The World Bank is a source of financial and technical assistance to developing countries around the world, not only the ones in the Latin America and Caribbean. An institution which is part of the United Nations, the World Bank provides low interest loans and credits as well as grants to developing countries. In additional to its financial services, the organization provides policy advice, research, analysis, and technical assistance. The World Bank has been criticized by the conditions imposed on borrowing countries and its bias towards a neoliberal model of growth. Despite the criticism, the World Bank is one of the most highly-regarded financial institutions in the world. In addition, its environmental standards for project evaluation became benchmark for project evaluation worldwide.

BNDES (Brazilian Development Bank) is the second largest development bank operating in Latin America, with US$ 303,3 Billion in assets and net income of US$ 3,2 Billions (as of Dec 14). Although the bank supports social initiatives in education, mass transportation, basic sanitization and small agriculture, this heavily subsidised development bank usually finance large-scale industrial groups. For example, 62% of the 2014 disbursements of US$ 79 Billion targeted large enterprises (defined by revenues above US$ 100 million).  Historically an important player in the industrial development of Brazil, a late-industrialized country, BNDES has been criticized for supporting the international expansion of “National Champions”, i.e. large, private companies that were cherry-picked but the Federal Government to receive large amounts of subsidized credit lines in order to increase the international relevance of Brazilian multinationals.

IDB (Inter-American Development Bank), a financial institution  focused on Latin American and Caribbean countries. IDB is an organization affiliated to the Organization of American States. The IDB makes loans to the governments of its member countries and has preferred creditor status, meaning that borrowers will repay loans to the IDB before repaying other obligations to other lenders such as commercial banks. According to its own website, IDB is not only the oldest and largest regional multilateral development bank but also the main source of multilateral financing for economic, social, and institutional development in Latin America and the Caribbean. The bank supports governments, private sector and small to medium-sized business.

CAF (Corporación Andina de Fomento, Development Bank of Latin America) was established to promote Andean development and integration serving public and private sectors. According to Financial Times (link) CAF funds more infrastructure projects In Latin America than World Bank and IDB together but is accused of opacity and low lending standards.   

CABEI (Central American Bank for Economic Integration) is Honduras-based development bank with total assets of US$ 8 billion, focused on lending to its founding member countries: Guatemala, Honduras, El Salvador, Nicaragua and Costa Rica. Due to its high portfolio concentration in only five countries and their low borrower quality of its members, CABEI holds the lowest credit rating among the multilateral development banks in the region.

FLAR (Fondo Latinoamericano de Reservas) and CDB (Caribbean Development Bank) are the smallest development banks of in Latin America and Caribbean region.  Both organizations maintain very strong capital position and ample liquidity to balance their negative aspects: the high concentration and credit risk embedded in their loan portfolio.  

In order to understand multilateral institutions, Figure 1 shows the differences between them. The x-axis presents the return-on-assets of the development banks, the y-axis their equity-to-loans ratio and the area of the circles shows their total assets.

Dev Banks 1Figure 1: comparison of multilateral banks in LAC. (Source: author)

As we can see from the graphic above, BNDES is more profitable (compared to total assets) than IDB and World Bank. This is explained by the fact that both multilateral banks are more risk averse (i.e. have better rating) than their Brazilian counterpart, as shown by Table 1.

Development banks

S&P
IDB
AAA
World Bank
AA+
CDB
AA
FLAR
AA
CAF
AA-
CABEI
A
BNDES
BBB-

Table 1:  S&P ratings for development banks in Latin America.

bank-of-international-settlements-warns-against-further-loose-monetary-policy

Regarding lending policies, BNDES disbursed almost eighteen times the total amount disbursed by the Word Bank and eight times the amount IDB did in 2014. This is explained by the aggressive lending policy pursued by BNDES to support Brazilian multinationals and the creation of Brazilian “national champions”. Picture 2 illustrates total lending compared to its counterparts.

Development Bank 2

Figure 2: Total disbursements 2014. (Source: author)

In conclusion, the current debate about multilateral development banks includes, but are not restricted to:

  1. Real vs. potential impact on regional growth due to the conditions imposed by such organizations to countries;
  2. Pro-market bias mostly by World Bank and IDB, and
  3. Focus on large and well-connected corporations in the case of BNDES, which is called “Lender of the first resort” for supporting national champions and the internalization process of Brazilian multinationals

Final question for the curious minds: How could multilateral companies mitigate currency and operational risk?

References:
  1. Center for Global Development:  Why Multilateral Development Bank Practices Are So Far from Their Potential
  2. Investors Relation websites: World Bank, IDB, BNDES, CAF, CABEI, CDB, FLAR
  3. Musacchio, A. Lazzarini S.G. Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond (Harvard University Press, 2014)

Link to picture of globe and bills here; link to picture of bank here

A Dragon far from home: The rise of Chinese influence in Latin America and the reasons for South-South collaboration

article-logoOver the last years the world witnessed an impressive rise of the Chinese influence in Latin America, not only thru high-profile contracts but also large-scale investments: oil-for-cash deals with Venezuela, huge imports of commodities from Brazil and Argentina, billion-sized foreign direct investments in Brazil, Peru, Argentina and Ecuador. Taking into consideration that until recently Latin America has not been a traditional zone of Chinese influence such as Central and Southeast Asia, important questions arise: What are the reasons for such geopolitical and strategic movement? What does China seek in Latin America?

First, China is filling the void of the diminishing United States´ influence in the region. ISIS, Russia and Israel-Palestine conflict demand much more energy and attention that the southern countries in the American continent.  Second, weak local leadership provides additional explanation for Chinese growing influence because neither Brazil – Latin America´s main economy, nor Mercosur – regional trade bloc – has provided growth opportunities for Latin economies. This way, China is taking advantage of empty spaces left by region´s traditional historical leaders. Third, there is the center–left bias of current governments: Venezuela, Argentina, Ecuador, Bolivia and even Brazil turned their backs to US approaches. Fourth, Multinational companies from China follow the well-known theory of Eclectic Paradigm of internationalization, developed by John Dunning in the 90´s: China looks for new markets and new sources of resources in order to secure iron, oil, soybean, meat and rare earths, an effect Dunning called resource-seeking strategy. The demand from Chinese companies created what is commonly known as “The Latin American commodity boom”, which, as we just explained, was largely driven by new trade China, and concentrated in the petroleum, mineral extraction, and agricultural sectors. Figure 1 presents current Chinese investment and contracts in Latin America.

China Trade with LatAm

Figure 1: Chinese Chinese Investments and Contracts In Latin America 2005-2014, in US$ Billions, Source: American Enterprise Institute

A bold bet or a calculated risk?

Although China deals with somewhat risky country, both politically and financially, Chinese investments seem to be well-reasoned for two reasons: countries in the region desperately need to improve its crumbling infrastructure and China is an important destination for Latin America´s commodities. Therefore, a radical decision is unlikely from Latin countries. Table 1 presents main destinations of exports of several Latin countries.

 Brazil Argentina Venezuela Peru Colombia Chile Ecuador
 China Brazil China China US China US
 US Chile India US China US Chile
 Argentina China Singapore Switzerland Spain Japan Peru
 Netherlands US Spain Canada Panama South Korea Colombia
 Japan Spain US Japan Venezuela Brazil Venez´la
Table 1: Main destinations of exports of several Latin countries. Sources: Data from Globaledege (Michigan State University), except for Venezuela, from Observatory of economic complexity.

In conclusion, The chinese dragon has extended its zone of influence and Latin America is one of its targets. Global powers take advantage of voids and China is no exeception. In our next article we will discuss the sustainability of the Chinese strategy and its long-term impact in the Latin region.

Source of the picture: Evolving Globalization: http://evolving-globalisation.org/2014/03/24/an-overview-of-china-latin-america-economic-relations-who-are-the-winners-and-losers/