Technology Industry Risk in the BRIC – Where Should Your Firm Invest i…
Without a doubt the BRIC countries (Brazil, Russia, India and China) – four of the worlds largest emerging economies, have enormous economic and investment possible, especially within the technology industry. According to Euromonitor International if the BRIC countries are able to continue their current growth rate, the combined economies of these four global powerhouses could be worth more in US dollar terms than the G6 (Germany, France, Italy, Japan, UK and the US) by 2041. Both the Gross Domestic Product (GDP) and the Personal Disposable Income (PDI) have developed exponentially among the BRIC nations over the last decade. This growth has fueled numerous Public-Private Partnerships (PPP) across each country making Foreign Direct Investments (FDI) a great business venture for any major corporations. PPP deals can often be complicate, financially demanding and extremely time consuming with projects lasting several years. However, under the right economic conditions and proper business strategy, they can offer meaningful benefits to the private business sector, the consumer and national governments. Each country may present a different risk and the success of these projects would largely depend on the countrys ability to manager such risks and minimize interruptions to the projects. Our paper examinees the comparative risk, opportunity, overall economic climate, comparative industry market possible and structure within each BRIC countries and ultimately making a recommendation on which country to invest within the technology sector.
According to data compiled by the Economist Intelligence Unit, Brazil is currently at a score of a BBB in its overall country risk assessment. This is otherwise known as an investment grade position. Based on this assessment, Brazil is considered to be a low-moderate risk country to invest in depending on agency rating. Brazil is abundant in natural resources like quartz, diamonds, chromium, iron ore, phosphates, petroleum, mica, graphite, titanium, copper, gold, oil, bauxite, zinc, tin, and mercury. According to Bloomberg Media Its natural riches have since propelled this nation of 200 million people to the top tiers of global markets. Brazils economy has ascended the ranks of the worlds largest, from 16th in 1980 to 6th today. Brazils large government debt and economic deficits in the 1990s facilitated private investment in various industries. The Brazilian Privatization Program from 1990-2002 led to privatization of 33 companies, an calculate 105 Billion in national revenue and increment in the investment opportunities, particularly within the technology pushed telecommunications industries which represented 31% of this movement.
Reports regarding Brazils economic future have varied widely. Despite unstable performance results across Brazils five regions reported this year, the economic outlook for Brazil is fairly positive. The Wall Street Journal recently reported Standard & Poors downward revision in Brazils outlook to negative from stable. According to the Economist Intelligence Unit long-term growth forecast anticipates more rapid average annual GDP growth over the next 19 years (3.8%) than over the past 25 (2.8%). Improvements in infrastructure and education, trade expansion, a broader presence of multinational business, a reduction in the debt-service burden and the development of Brazils huge oil reserves will mitigate slower labor force growth and help to sustain labor productivity growth at 2.7%.
The current political focus In Brazil is rapidly shifting to next years general election. President, Dilma Rousseff (of the leftist Partido dos Trabalhadores) who became the first female president in the nations history in 2010, announced her bid for another four-year term this past February. President Rousseff remains extremely popular despite corruption scandals, ineffective economic growth and a resurgence of inflation, particularly due to the fact that unemployment remained low at 5.8% when compared to historical trends. With respect to political risk Brazil is moderately stable in comparison to other BRIC nations. Campaigning for the October 2014 elections in Brazil has already begun, President Dilma Rousseffs popularity has helped reduce the scope for sensitive reforms and contaminating the policy ecosystem, according to the Economist Intelligence Unit.6 Furthermore, President Rousseff was ranked by Forbes Magazine as the #2 most powerful woman in the world. Many International investors are attracted to Brazil because of its stable political and economic ecosystem; however they do confront very high levels of bureaucracy, taxes, crime and corruption that typically are far greater than in their home markets.
Brazils economy is slowly recuperating from the 2011-12 downturns, but Brazils possible growth rate is much lower than in 2004-10, when it grew by 4.5% yearly. According to the Economist Intelligence Unit The financial sets sector will grow above the overall rate, but it will lose some dynamism as credit growth slows. Credit has more than doubled since 2003 in GDP terms, to 53% as of February 2013.
With respect to financial risk, the Brazilian financial system is exposed to the effects of volatile international markets, especially for commodities and capital. Over the past decade, Brazils financial sectors assets have doubled particularly due to expansion of the securities and derivatives markets, and heavy investments from home and oversea.
According to the Economist Intelligence Unit With an estimated population of 195m and GDP of US$2.3trn in 2012, Brazil has the largest financial sets market in Latin America. However, income and wealth keep highly concentrated. A continued trend towards formalization of businesses and the labor force will sustain financial deepening. Rising incomes will lift need for financial sets, but Brazils labor-market dynamics are becoming less popular than in the past decade.
Some economists have suggested that Brazil may become a victim of its own success. The gross public debt ratio remains high forcing the governments borrowing requirement to also stay high. According to Dimitri Demekas assistant director in the IMFs Monetary and Capital Markets department Rapid credit expansion in recent years has supported domestic economic growth and broader financial inclusion, but could also create vulnerabilities. Nevertheless a series of additional infrastructure improvements, its growing population, abundant natural resources and expected investments from the forthcoming 2014 world Cup and 2016 Olympics potential to keep Brazil at the top of global financial strategies for the years to come.
According to the Economist Intelligence Unit, using the average industry risk rating for the technology sector in 2013, Brazil scores a 43.5. In order to examine the risk vs. return, we pair this with the Economic Intelligence Units business ecosystem score. Given on a extent of 1-10, we multiply this by 10 for purposes of comparison throughout this paper; we get 66.9 for Brazil, representing an excellent opportunity within the technology sector.
According to data compiled by the Economist Intelligence Unit, Russia currently is scores a C value, (54 points) in its overall risk assessment. Based on this assessment, Russia is considered to be a moderately risky country to invest in. Some of those risks include the opaque and corrupt administration, over-reliance on commodities production and the ill-functioning judiciary.
With respect to political risk, Russia scored a C value (55 points) according to the Economist Intelligence Unit. President Vladimir Putin has seen various protests during his many terms, however; the country is not booming as it was in the decades closest following the Cold War. It is apparent that the government is intervening more in the economy now, causing more of a further disconnect for the working middle class. According to the Economist Intelligence Unit, there are signs that disillusionment is spreading among ordinary Russians. With the country potentially lacking political stability, investors and other countries will not want to continue to do business with Russia.
With respect to financial risk, Russia scored a value of C (58 points), according to the Economist Intelligence Unit. Russia lacks heavy involvement from the government in the banking sector; consequently, it has been difficult to unprotected to any sort of reform for the baking industry. Furthermore, there is uncertainty in the position of the banking sector and its regulation and supervision by the government. When investors and business partners cannot trust the countrys central bank, it creates many issues for the country. Access to external financial and a weakened ruble, certainly do not attract companies to conduct business in Russia.
Just like the rest of the world, Russia suffered from the economic crisis that had a ripple effect on the complete global marketplace. GDP decreased by 7.8% during 2009, which affected the country in many ways. Russia saw a decline in the external need for various commodities. While the economy and GDP fluctuated during the years following, Russia was nevertheless not seen as a popular country to invest in partly because of the large uncertainty towards the political sector in addition as the without of confidence in the government nor financial stability.
Russia scored a 52.475 average risk on the Technology sector while the country scored a 58.6 on business ecosystem. This combination of higher risk and lower opportunity makes Russia the least popular country of the BRIC for technology investment based on the current economic and risk factors.
The Economist Business Intelligence unit estimates that real GDP growth (on an expenditure basis) slowed to 3.4% in fiscal year 2012/13. The Business Intelligence unit believes that Indias economy has bottomed out. The country is currently at a low point in their economic cycle with the slowest growth in ten years having taken place in the 12 months preceding March 2013. This however is good news for future investments in the country as recent economic reforms, lower interest rates and wholesale price inflation are expected to cause a real GDP growth of 6.2% in fiscal year ending 2014.
From this point on by 2030, India is expected to be a hot bed for economic growth, making this an excellent target for global investment. India is forecasted to grow at an average of 6.4% from 2012-2030, making the country the fastest growing large economy in the world during this time. However with this growth, India will confront some new challenges that could be a cause for concern.India is depending more on external investments as it continues to open its economy. This could be a risk factor for the country as it has before been a closed economy and has enjoyed the protections from the economic downturn of 2008-2009 because of this. With the new global investments, this protection from outside influences will no longer be as strong. There is also some concern that foreign investments have recently slowed after a strong 2012 due to investors waiting to see how political uncertainty plays out.
India benefits from a comparatively healthy debt to GDP ratio with the sovereign risk of the country falling between 45 and 48 for the 12 months preceding June 2013. The country has low non-performing loan (NPL) ratios and enjoys a Banking Sector risk of 49-51 during this same time. Though if the country adhered to international criteria for defining NPLs, this number would be higher. The money is trending upward from 44-47 in the last 12 months due to economic reforms following Indias fiscal and trade deficits in addition as high inflation.
In addition to Indias new need for capital infusion, the country has suffered political scandals revolving around corruption in the last three years. The country has also lost several meaningful western allies as speculation rises that Congress will call elections early before their term ends in 2014.1 This political risk makes investment in the short term unadvisable until the political fallout surrounding the election can be determined.
Though India as a country has a lower risk ranking and an excellent forecast for economic growth, the technology sector will have to navigate some new ground in order to continue growth. Indias Technology sector risk averages 52.6, likely due to the saturation of Indias IT sets within the US. As Indias service providers look for ways to add value and take advantage of cloud computing technology offerings, they must also look for customers outside of the US, which is not an easy task, especially considering that 9% of the 55 Asian companies in the list of the top 500 Global firms utilize outsourcing as a strategy. When weighted against the countries modificated business ecosystem rating of 60.4, India becomes the third rank in BRIC investment targets.
Chinas economy is the second largest and an important source of revenue for most multinational firms. Chinas growth has held up better than Brazil and India and the economys expansion is expected to be 7.8% in 2014. Tightening labor markets and supportive government policy are expected to sustain rapid income growth in the next two years.
Although major political reforms are not expected, meaningful fiscal changes may be unveiled in late 2013 and in the meantime, authorities have tightened monetary policy. While economic growth rates are trending downward, real GDP growth in 2013 is nevertheless expected to be 8.5%.
The degree of government interference in the economy remains a worrying factor although the private sector is increasingly important. Chinas domestic need of goods is expected to grow faster than its export markets. Although government has lowered man trade barriers in order to encourage more imports, nevertheless access to some sectors remains difficult.
Chinas leaders want continuing sustainable economic growth in addition as lasting political control. The past emphasis on economic development is now being changed in favor of social priorities. Another challenge facing the government is to rebalance the economy, which is dependent on high levels of investment spending. Income growth will little by little raise the contribution of domestic consumption to economic expansion, but difficult reforms (particularly in the financial sector) will be required if household spending is to be fully unleashed.
Chinas business ecosystem will become more popular in the future, with its scores for most categories in the Economist Intelligence Units business ecosystem rankings form improving. The biggest improvements are in categories that will assistance from the governments efforts to reform the financial sector and open the capital account but a number of other categories continue to score poorly by global and regional standards. Risks to Chinas political stability, continue to drag down the political ecosystem score. The only category for which the countrys score worsens is macroeconomic conditions. Its economys enormous size and rapid growth method that China boasts one of worlds highest scores for market opportunities.
Although they are going by economic and social changes that threaten political stability, their security risk is fairly low and the overall risk of doing business in China is moderate to high. Popular discontent has been on a rise due to the rising costs of living, income disparity, urban unemployment, land seizures and corruption. Major reforms to address these issues look doubtful as the Chinese Communist Party will keep in strength for the foreseeable future. They without national standards and regulatory consistency is ineffective, enforcement is poor and political interference makes the legal and regulatory risks high. For this reason, foreign-invested enterprises avoid taking disputes to domestic courts if they can go to international arbitration instead.
Progress on the financial sector reform has begun to accelerate, Chinas banking and capital markets are immature but foreign-invested enterprises have generally good access to loans.
Infrastructure is improving fast and reaching progressive standards in some parts of the country. Mobile telecommunications are extensive. Internet penetration is high for a developing nation. Air transport networks are well developed and the logistics industry is growing rapidly.
China has an excellent outlook when comparing risk and opportunities. By weighing average technology industry risk of 44.9 against the modificated business ecosystem rating of 64.4, China becomes an excellent option as shown on the bubble chart found by following the link at the end of this article. With large disposable incomes, China also has enormous growth possible.
Based on the research relating to the economic opportunity in the BRIC countries in addition as the political and economic risk of entering each country, Brazil shows the strongest possible currently for firms looking to invest in the technology industry. Though there is excellent growth projected in India, 6.2% average by 2030, the technology sector is saturated. U.S. companies are bringing Information outsourcing sets back with on shoring, while Asian companies predominantly keep their information sets in house. This combined with the near term political uncertainty makes India a higher risk investment. There are nevertheless opportunities in India no doubt; however this was not the most opportune BRIC country to target.Russia was the least popular country based on business opportunity and risk factors; consequently we can also eliminate investment in Russia. China meanwhile has excellent opportunity and risk ratings in addition as a large and growing economy. China does not, however, have excellent systems in place to protect patents. In fact, China has the worst policies and enforcement of any of the BRIC counties as it pertains to technology, making any investment in technology a difficult decision.
Though China has a large economy and popular economic and risk indicators, based on Chinas higher comparable risk to that of Brazils and the lower business ecosystem rating as compared Brazil, there is a higher likelihood of success investing in Brazil in 2013. Brazil maintains the highest measure of business opportunity as weighed against risk of any of the BRIC countries as illustrated in the bubble chart found by following the Bubble Chart link at the end of this article. The growth projected in Brazil, low risk in comparison to other BRIC countries and the stabilizing political ecosystem, we feel confident in recommending an investment in Brazils growing technology industry. There will be bureaucratic processes to navigate, however the possible for excellent growth in technology and with minimal risk related in comparison to other BRIC countries make this an excellent investment target.