Brazil as one of the hubs of Latin America's new business network by BRAiN Brasil

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK d e c e m b e r 2 0 1 0

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK d e c e m b e r

2010

Table of Contents Table of Contents

01 Introduction

02 Executive summary

03 The global scenario

04 Opportunities for a new architecture in Latin America

05 Brazil as one of the regionâ&#x20AC;&#x2122;s investment and business hubs

06 The case of the financial sector and its role in the business network

07 Growth without artificialisms: an evolution for Brazil, a vision for the region

08 The strategic benefits of a stronger business network in Latin America

09 Necessary conditions for success

10 BRAiNâ&#x20AC;&#x2122;s role

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

01 introduction This report summarizes the vision and proposals developed during the Omega Project, which articulated a perception regarding strengthening the business network in Latin America, and the role Brazil plays in this process. This led to the creation of BRAiN (Brazil Investments and Business) as the vehicle for catalyzing its implementation. The Omega Project was developed between September 2008 and May 2009 through the initiative and under the leadership and financing of ANBID (today ANBIMA, Association of Brazilian Entities of the Financial and Capital Markets), BM&FBovespa (Securities Commodities and Futures Exchange) and FEBRABAN (Federation of Brazilian Banks), with the support of The Boston Consulting Group and active participation of the public and private sectors. Arising from the involvement of its idealizers in BEST (Brazil Excellence in Securities Transactions), a public and private initiative geared towards promoting Brazil’s capital markets abroad, the project is the evolution of ideas about the value of initiatives in partnerships involving the government and private institutions. During the Omega Project, the following market entities joined the idealizers and helped found BRAiN: Banco do Brasil, Banco Votorantim, Bradesco, BTG Pactual, CETIP, Citibank, Fecomercio, HSBC, Santander and Itaú. During the project, nearly 300 people from more than 70 public and private institutions were involved, with the participation of opinion makers from several sectors. The project was presented to company directors and executives, class entities, economists and renowned technicians, as well as local authorities and representatives from the federal, state and municipal spheres of government, including the Ministry of Finance, Brazil’s Central Bank, Brazil’s Securities and Exchange Commission, the National Bank of Economic and Social Development, the City Halls of São Paulo and Rio de Janeiro, and their respective state governments. Interaction with the most varied sectors during the process made it very clear that focusing the discussion only on the financial sector would not be very compatible with the size and diversity of Latin America and Brazil – regional development and the international situation generated a more ample and encompassing emerging perspective. As a result, a multisectorial perspective of Latin America was drawn up like a strongly interconnected regional business network, as exposed herein, and today supported by BRAiN. For more information about this perspective and about BRAiN, visit (www.brainbrasil.org).

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

“This project comes at the right time for the country.” Henrique Meirelles, president of the Brazilian Central Bank

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

02 Executive summary The main regions in the world are structured in business networks. Networks are comprised of four types of hubs, in accordance with their operational scope: global, regional, local and specialized1. North America, Europe and Asia concentrate most of the global economic activity and already organize themselves in articulated business networks with several types of hubs. However, this configuration is undergoing change. The most developed regions are undergoing crises and transformations that create a new scenario of challenges and opportunities for Latin America and, especially, Brazil. Latin America has the chance to transform and improve its still incipient business network architecture. The region has size and growth potential that have been attracting the world’s attention, but the links between its local business centers are quite often intermediated by large global centers like New York and London. This is the moment for Latin America to leverage its great potential and its important strategic advantages, such as its weight in international trade and its Multilatinas2 , to create a more connected network between countries, minimizing intermediaries for access to capital and generating new business opportunities, income and jobs through direct ties strengthened with other regional networks. Several countries in the region have already begun this process, but there is still a long way to go which requires consistent effort on the part of Brazil and the rest of Latin America. This is the moment. Brazil has the necessary qualities to become one of the hubs in this new regional architecture. The country has an important role to play on a continent which should grow vigorously over the coming decade, strengthening its ties with its neighbours and with the rest of the world. Our view is to consolidate Brazil as a regional hub for investments and business with global connectivity that, together with the other countries in the region, operates at creating a strong regional network that is more connected to the world. This view is possible, but ambitious, and in order to achieve it, Brazil must explore its advantages to overcome several challenges such as its excessive bureaucracy and an infrastructure that is not very competitive. It is fundamental for the country to maintain and reinforce the solid foundations for its economy and its regulation, providing the bases for the international expansion of its companies. 1 2

Classification of growth hubs elaborated during the Omega Project. Multinational companies from Latin America with a significant proportiion of business in other countries.

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

The service sector in general and the financial industry in particular are essential catalyzers for establishing a regional network in Latin America. The region is experiencing a window of opportunity in which it is possible to establish an encompassing, multisector vision. A developed financial sector is vital for catalyzing the formation of this network, attracting foreign investors, bringing capital liquidity and financing growth for the entire region. The strength and solidity of the banking system and capital markets in some of the Latin American countries serve as a starting point for this journey. The idea of a business network with Brazil as one of its hubs does not require artificial movements of liberalization and imprudent exposure. It is not necessary to be inconsistent with the profile of the region’s countries, with solid and diversified economies and growing international positive image projection. For example, it is not a project that requires total exchange convertibility or fiscal advantages. The vision is of an adaptable and diversified economy with rapid capacity for recovery, and an internationalized service sector that supports the positive image projection of the Multilatinas and generates benefits for the diverse sectors of the economy and for the Latin American society as a whole. A stronger regional network in Latin America will bring great benefits for every country in the region. Greater access to international capital should strengthen local growth. The region’s companies will have more favorable conditions to expand and internationalize, creating demand for internationalized services and generating jobs throughout the entire economy. Without coordinated effort, success is not guaranteed. Other countries with similar or greater potential have missed their window of opportunity. Success requires a coordinated, strategic, longterm public-private and multiple front action that includes simplification of tax systems and bureaucratic regulations, development of education and an increase in international and government cooperation with private enterprise. BRAiN was created to help catalyze needed change for the formation of this regional network in Latin America, with Brazil as one of the regional hubs. BRAiN seeks to fill the current gap in coordination between public and private sector representatives – a task already carried out by equivalent entities in other hubs. This report is one of the entity’s first contributions and it is aimed at crystallizing the vision of a business network in Latin America and promoting dialogue with all those who share in this vision for the region.

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

The global scenario The main regions in the world are structured in business networks The world is becoming more and more integrated. Flows of capital, people, knowledge, investments and business are intensifying between countries, bringing nations and cultures closer together. Companies and people in London invest in Latin American companies. Executives throughout Latin America get their MBAs in the United States. Professionals from around the planet participate in events in Beijing or Hong Kong. Business decisions from branches in Asia, Latin America and around the world pass through company headquarters in London, New York or other large global business centers.

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

operation between them. These hubs facilitate the exchange of capital, business and people of the entire region with others and with other regional and global hubs. Examples of regional hubs are Dubai, Hong Kong and Singapore. • Local hubs concentrate investment and business flows in their country or market. This encompasses not only the flows themselves, but also the presence of an enabling structure that includes organized markets for services, products, capital and employment. It is important to underscore that the presence of this sort of hub does not imply less growth for other cities or regions in a country that benefits both directly and indirectly from the

investment flows channeled through the hub. As examples, we can cite Paris, Milan, Tokyo, Mumbai, São Paulo, Rio de Janeiro, Santiago and Mexico City. • Specialist hubs operate as an international reference for a type of product, service or specific segment. This is the case of Zurich (Insurance), Chicago (Commodity Trading), Silicon Valley (Technology) and Mumbai (IT Outsourcing). Regions like North America, Europe, Asia and the Middle East, which concentrate a great amount of global economic activity, have already organized themselves in networks with diverse types of hubs co-existing in synergy. (see Diagram 1)

DIAGRAM 1

The world is structured around regions with articulated connections – example of the financial industry

However, this integration is not a homogenous movement in which all countries simultaneously get closer to each other. Geographic, cultural and economic distances also interfere greatly. These differences still steer the logic behind the formation of integrated regional networks that characterize the investment and business flows around the globe. Investment and business flows tend to create strongly integrated networks. Some of the cities in these networks emerge as hubs for these flows, with a greater or lesser degree of connectivity with other such cities. We can segment these hubs into four types based on their role in the global business network: • Global hubs, today limited to New York and London, have strong connectivity with the different regions of the world and their hubs, and these two cities have become veritable hubs for international flows of investments and business, providing all types of services and products to the world. • Regional hubs stimulate development of connections between diverse countries in a region, and make them feasible, providing the most diverse types of products and services to these countries. By creating these connections, they increase investment and business flows between countries, and as a consequence, the degree of coSource: Experts interviews; Press search; BCG analyses

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

“Global centers are moving, hence we cannot consider the game won. We need to view it as an incentive for competitiveness.” Fábio Barbosa, president of FEBRABAN

Thus, the configuration of these networks is fluid and in constant evolution. The United States, United Kingdom and countries in the Euro Zone have recently undergone deep crises and transformations. The combination of these crises since 2008 – from the liquidity crisis of American banks to the Greek sovereign debt crisis – has had an impact on growth perspectives in those countries. Structural aspects of their economies3 do not point to short term solutions and regulatory precepts are being reviewed to reduce fragility to other crises4. At the same time, and to the surprise of many, a large part of Latin America has been resisting these movements with great capacity for adaptation, with solid prudential models shaped by the diverse crises faced over the past three decades. The unequal impact of these crises on different regions of the world has shifted investment funds and businesses from those most affected to other regions, thus creating a scenario of opportunities for accelerating the development of hubs and investment and business networks in regions like Asia, the Middle East, and particularly in Latin America.

3 4

For example, adoption of the Euro in several countrires For example, financial regulation in the USA

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

DIAGRAM 2

04 Opportunities for

Number of Multilatinas with operations in each region of the world by country of origin in 2007

a new architecture in Latin America Latin America has the chance to transform and improve its fledgling network architecture Unlike North America, Europe and Asia, Latin America still has a fledgling business network, with an architecture that is strongly tied to large global hubs. The region’s investment and business hubs are essentially local and focused on their domestic economies, interacting with each other and the world through global centers like New York and London. Even its foreign exchange operations are intermediated by the dollar. This architecture hampers regional operations making them less efficient. Indeed, over the past few decades there have been important advances on behalf of regional cooperation: the development of commercial and investment agreements like Mercosur and the Andean Pact, and the regionalization of diverse Multilatinas operations have been transforming the region (see Diagram 2). However, Latin America still does not have regional hubs like Hong Kong, Dubai or Singapore. Nor has it seen a perceptible evolution in its regulatory harmony or in the development of its regional infrastructure like that which has been occurring in Europe for some time now. The moment has never been so favorable for Latin America to review its regional architecture. In a global setting with little growth and great uncertainty, Latin America stands out as an attractive region, with strategic advantages and opportunities to develop a new business topology: Source: Companies’ anual reports and websites, press search, BCG analysis

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

• The region has a combined GDP of US$ 3.5 trillion, comparable to that of China and greater than that of Russia, India and Eastern Europe (see Diagram 3). • The region has abundant natural resources and is a heavy player in the international commodities trade. It is responsible for almost half the world’s production of soybeans and sugar, 40% of the world’s copper and silver and 20% of the world’s iron, bauxite, zinc and gold. • The total population for the region is 440 million people, trailing only China and India, and exceeding the United States and the Euro Zone. This fact rep-

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

resents enormous potential for consumption, labor, and development. • The region’s historical and projected growth rates are consistently higher than the global average and those in developed countries (see Diagram 3).

GDP 2009 (US$ T)

Population 2009 (Million)

Market Cap Dec. 09 1 (US$ T)

3,5

China

Russia

Eastern Europe1

DIAGRAM 4

Current and aimed structures of Latin America Network

Economic growth potential

India

4,9

Latin America

USA

-2,6

-2,5

Japan

United Kingdom

Euro Area

-5,2

-4,9

-4,0

0,7

0,6

2009

1,2

1,3

1.335 437

We understand that Latin America can redefine its regional investment and business architecture, creating a network with stronger direct ties between its countries and other regional networks (see Diagram 4). The region must become a veritable multipole network, distancing itself from the current, radial model, where all the local hubs depend

• At a moment when large global banks reveal they are vulnerable, the Latin American banks remain

DIAGRAM 3

Latin America

• Finally, the growth of Multilatinas, Latin American multinationals with great regional and international presence (see Diagram 2 again), and of trade between the countries creates momentum for greater regional integration.

• Five countries have already achieved investment grade status: Brazil, Mexico, Colombia, Chile and Peru, and their combined GDPs represent 80% of the region’s total GDP.

Latin America is a very important region with great potential for economic growth

Importance compared to other emerging countries

solid, presenting levels of capitalization and liquidity to face great financial challenges, and operating within regulatory frame-works known to be better designed to avoid crises5.

1,3

Real Variation of GDP (%)

4,0

3,3 1,7

1.166 141

2010 E

116

3,6 2,2 0,73

0,3

1,3

Credit/ GDP 2 (%)

249 146

150

154

1. Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Macedonia, Poland, Romania, Slovakia, Slovenia. 2. Private credit, EIU estimates. Total data for the Euro Area not available, numbers shown for Western Europe. 3. MICEX, Russia’s largest stock market. Source: World Federation of Exchanges, The Economist Intelligent Unit, Individual stock exchanges

Source: Interviews e Omega Project workshops

For exemple, the obligation to keep greater reserves than indicated in Basel index

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

“BRAiN is like a big rock hitting the center of a lake: its effects go far beyond the initial point of impact – the capital market – spreading out further and further from the center like concentric waves that move the entire surface of The economic activity.” Abram Szajman, President of Fecomercio

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

directly on services offered by the large global hubs in London and New York. The strength of this network depends on the strength of each one of its members, and its impact should grow along with the competitiveness of each member.

There are several challenges to overcome, however: • The region still does not have an interconnected payment system (like those that exist in northern Europe) and there are still obstacles for developing a regional capital market that is more representative and stronger than the individual local exchanges (creating a co-trading network like NOREX, for example). • The region’s air travel grid is not dense, making multiple stopovers necessary when traveling. • The region’s main universities still focus on partnerships and exchanges with the main European universities, leaving opportunities for greater integration within the region on the back burner. • The region’s countries have made limited efforts to simplify and harmonize their regulations, a movement that must be reinforced. • The transportation and communication infrastructure in the region needs to be optimized and better integrated. Overcoming these challenges could create conditions for the region to finally become home to regional hubs with distinct profiles and degrees of specialization. Several countries in Latin America are moving towards strengthening their investment and business hubs. The exchanges of Chile, Peru and Colombia have already signed agreements. Chile has mainly been leveraging its macroeconomic stability and the qualification of its workforce to position itself as headquarters for IT and process outsourcing companies, and also as the best place for regional headquarters. Panama is trying to establish itself as specialized center for off-shore investments. Uruguay is trying to become an off-shore and service hub, developing university and technological centers. There is still much to be done, but the moment is now – the window of opportunity will not stay open indefinitely. Other hubs like New York, London, Madrid and Miami already perceive the region’s strategic value and seek to serve it remotely, in search of growth opportunities. With its economic importance, Brazil can be one of the great catalyzers for this new architecture.

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

DIAGRAM 5

05 Brazil as one

Brazil is a big world producer of commodities

Consumption per capita in Brazil (US$)

Share of world production (2006)

6.000

Brazil

+16%

4.000

2.000

0 2000

2002

2004

2006

2008

Coffee Ethanol Sugar Soy Bean Meat Iron Bauxite Oil Zinc Gold Copper Silver

Rest of Latin America

Rest of world

29%

38%

33% 33%

38%

30%

14%

56%

24%

20%

17% 17%

10%

56% 73%

80%

12% 14%

74%

3% 11%

87%

2% 19%

79%

2% 17% 1%

82% 40%

59%

42%

57%

Brazil is the world’s fifth largest country both by geographical area and by population. The country is already one of Latin America’s main hubs in the eyes of several multinational firms that have established their regional headquarters here, as well as international investors who participate in its capital markets. Over the past 15 years, Brazil has undergone a transformation process, achieving macroeconomic stability and institutional maturity, which are the fundamental platforms for international positive image projection. Brazil’s achievements during this period have been countless: it has controlled inflation, established a mature democracy, accumulated ample international reserves, opened its domestic market to the world, adopted a solid monetary regime, reinforced its institutions and its regulatory framework and been awarded investment grade status, among many other accomplishments. Brazil stands out due to its domestic market which is in broad-based expansion – driven by the increase in income and the ascension of a “new” middle class – and its increasingly more important position in international trade. Besides its celebrated prominence in commodity trading, it is also exporting increasingly more sophisticated products like aircraft, cars and industrial equipment (see Diagram 5). Over the last few decades, Brazil has ascended to a position of growing importance on the world and region stages, and it currently accounts for nearly half the population and economic output of Latin American’s main countries (see Diagram 6). The Brazilian economy has recognized potential, and it has shown great resilience in light of the severe financial crises which have impacted the entire world. It could become one of the world’s five largest economies during the next decade.

Source: The Economist Intelligence Unit, CEPAL, USGS, FAO

DIAGRAM 6

Brazil has great importance in Latin America

Nominal GDP of the 7 main economies of Latin America (2009, US$ M) 127 163 231

Peru (3%) Chile (4%)

Population of the 7 biggest countries in Latin America (2009, M inhabitants) 30 17

Peru (6%) Chile (4%)

Colombia (10%)

Argentina (9%)

Venezuela (6%)

309

Colombia (6%) Argentina (8%)

325

Venezuela (9%)

875

Mexico (24%)

111

Mexico (24%)

1.573

Brazil (43%)

194

Brazil (42%)

Source: The Economist Intelligence Unit

Minerals

The country has the necessary qualities to become one of the catalyzing hubs for this new regional architecture

Consumption by Brazilian population growing at a fast pace

Agribusiness

of the region’s investment and business hubs

Growth of commodity consumption and production are Brazilian highlights in the international scenario

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

Even with its growing international visibility and its increasingly stronger economy, Brazil can still go much further. We believe the country is a keystone for catalyzing needed transformations in Latin America’s business topology and architecture and these transformations will provide a firm foundation for the ongoing expansion and strengthening of national economies throughout Latin America. With that in mind, we have identified three levers of opportunity that will help Brazil to continue expanding its strategic positioning (see Diagram 7): • Uninterrupted growth of the local market, supported by stimulus for increasing competitiveness, an effort which has been, and will continue to be the basis for the country’s development. • The reinforcement and expansion of regional connections in Latin America itself. Given the geographical, cultural and commercial proximity of its countries, it is natural for the region to move toward greater economic integration. Brazil has what it takes to be one of the hubs and catalyzers of this more integrated network, operating as a platform for operations in Latin America and facilitating the re-

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

gion’s access to other markets throughout the world. • The development of positive image projection and global connections. It is also important for Brazil to reinforce its position in the global business network, establishing closer ties with hubs like Paris, Singapore and Hong Kong. These hubs are vital in the global business network, but today their direct investment and business flows are relatively limited to Brazil (unlike the global hubs of New York and London). Greater global connectivity will permit Brazil and Latin America to have broader and more direct access to the world’s existing financial resources. These three levers of opportunity provide BRAiN with the basic framework for its proposal to make Brazil one of the regional hubs of global connectivity for Latin America’s new investment and business network (see Diagram 7). After all the advances Brazil has experienced, turning it into a regional hub for investments and business is the next natural step. However, the country should not try to become a specialized hub, because such a move would ignore its weight and vocation as a country with a more diversified economy.

DIAGRAM 7

Three levers outline BRAiN’s vision.

Global Hubs International Hubs

Regional Hubs

Local Hubs

Catalyze the creation of a regional network

Brasil Source: Interviews and Omega Project workshops

Specialized Hubs Increase connectivity with international hubs Develop the local market reinforcing the ecosystem’s competitiveness

BRAiN’s vision would position Brazil as a hub for diversified development that contributes towards the articulation of a Latin American network, attracts investments and generates jobs throughout the region. This vision can be broken down into multiple components (see box A for actual examples of the vision in several dimensions).

BOX A

What Brazil’s vision as a business hub means to the region

The vision articulated by BRAiN – “make Brazil one of the regional hubs with global connectivity for Latin America’s new investment and business network” – can be broken down into several components and examples to help understand what the institution desires for the region: • Improve conditions for company internationalization. With agreements, regulatory standardization and lower barriers for international operations in general, the region should naturally become home to a growing number of multinationals, and at the same time, become an increasingly more attractive destination for operations by multinationals from other continents. • Reinforce service exports. For such, the region needs modern and efficient infrastructure and regulations. Thus, several sectors, like professional services (i.e. auditing, consulting, legal advice), technology and outsourcing of processes can develop in the region, offering services for clients the world over in a competitive manner. • Capacity to train and attract talent with experience at an international level. At the same time, it is necessary to offer excellent living conditions and mobility in order to attract talent from other countries and establish a network of universities geared towards the world ecomomy, with partnerships and ex-

change programs that are reinforced both regionally and globally. • Regionalization and reinforcement of the financial system in all its segments. Stronger capital markets with greater presence of international companies and assets, with Latin banks and insurance companies operating throughout the region, are vital elements for supporting the development of a regional network. • Modern transportation structure. This is a critical condition for any business network, especially air transportation, facilitating the flow of executves and professionals. This depends of course on the construction of a greater number of larger and more efficient airports, which together with more modern regulations and agreements will create a much denser air travel grid, with more airlines and direct flights between Latin American countries. • More emphasis on business tourism. In addition to reinforcing the air travel grid, this vision must also include greater availability of regional hospitality infrastructure like cutting edge hotels and convention centers. The country should be an attractive destination for holding increasingly more important global and regional fairs and events for multinationals, helping attract business and increasing the region’s global visibility.

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

This is an ambitious vision, and the journey to establish Brazil as a regional hub for investments will be a long one: the country has significant gaps in its competitiveness when compared to the world’s leading hubs (see Diagram 8). • The excessively complex tax system is one of the most pressing challenges that Brazil faces today.

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

There is a proliferation of taxes and contributions with different bases for calculation and spheres of incidence (federal, state and municipal), generating disproportionate labor and cost burdens that have a direct negative impact on companies, which spend an average of 2600 man hours filling out tax forms. This is 26 times more than the 100 man hours spent by similar companies in the United Kingdom.

DIAGRAM 8

Brazil has significant gaps in competitiveness when compared to the world’s main hubs

Global USA

Regional HKG

FRA

Specialist CIN

EAU

SUI

Local ALE

JAP

COR

BRA

INDICATOR Economic importance Real economy Country risk Strength of financial system Air transportation Infrastructure and Internet Broadband quality of life Quality of Life Safety Attraction of foreigners Workforce Experience abroad Specialized local training Labor Ease in opening a business Bureaucracy Perceived level of corruption Financial regulation Regulation Incentives for foreign investments Taxes % GDP Taxes Complexity of tax system Governance Dedicated entity 1. Top 33% of countries in global ranking. 2. Bottom 33% of countries in global ranking / Source: EIU; World Competitiveness Yearbook (WCY) – IMD; OECD; Bacen; World Bank; Euromonitor; GMI; GMAC; World Economic Forum; Ease of Doing Business; Unesco Best 1

Middle

Worst 2

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

• Excessive bureaucracy, which is not restricted to the tax system, affects the most diverse productive activities. The Federation of Industries of the State of São Paulo (Fiesp) estimated that the cost of bureaucracy in the state is R$ 46 billion per year. A clear example involves foreign exchange operations, which are hampered by legislation that, despite recent advances, still imposes a series of distortions that affect the foreign exchange markets, increasing the company’s transaction costs abroad. Day-to-day business operations, such as opening and closing companies, contesting contracts, importing and exporting are hampered and made more expensive by complex procedures that involve multiple instances of approval and execution (see Diagram 9). • Limited availability of professionals with the capacity to operate in global markets is another challenge. The population, including university students, has limited international experience and fluency in foreign languages – the total number of TOEFL tests taken in the country is less than 1% of the number of graduate students who are currently enrolled in college courses (see Diagram 10). The aforementioned bureaucracy also aggravates the country’s talent problem, making the mobility of foreigners difficult due to slow and complex processes for issuing visas and permanent resident documentation. • The country’s limited competitive infrastructure reduces its attractiveness as a regional hub: cargo transportation suffers in all modds with deficient ports, railways and highways. In a survey conducted by the World Economic Forum that evaluated 139 countries in 2010, Brazil’s highway system was considered the 35th worst and the port system the 17th worst in the world. This poor infrastructure reduces competitiveness, especially in terms of industrial and commodity exports. The underutilized air travel grid together with the well known traffic and security problems in its large cities makes it more difficult for Brazil to attract foreign talent, company decision centers and large international events to the country. The Telecom infrastructure is also far from ideal. It is expensive and lacking in quality compared to developed countries, mainly weakening the technology and service sectors. • The fact that the country’s image is not aligned with that of a business center poses another major challenge. Despite the growing prominence that has been attained by Brazil and its burgeoning economy, the country’s long established image as little more than a tourist destination still prevails (see Diagram 11). Transforming Brazil into a regional hub requires a perception aligned with its new positioning as a business center. • The country’s juridical security needs to be reinforced. The constant change of norms and the disparities in legal decisions about matters of the same nature generate unpredictability and institutional insecurity. Furthermore, Brazil’s extremely slow legal system for resolving contractual, labor and other business disputes is another obstacle for the attraction of foreign investments and for the economy as a whole.

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

DIAGRAM 9

Bureaucracy in several activities hampers doing business in Brazil

Days for opening a business

Singapore Hong Kong USA France Mexico United Kingdom Korea Arab Emirates Germany Colombia Japan Chile Brazil

Years for closing a business

Ranking 3 6 6 7 13 13 14 15 18 20 23 27 120

3 14 15 25 52 53 63 67 79 88 96 109 176

Japan Singapore United Kingdom Hong Kong Germany Korea USA Mexico France Colombia Brazil Chile Arab Emirates

Total number of documents for exporting and importing1

Ranking 0,6 0,8 1,0 1,1 1,2 1,5 1,5 1,8 1,9 3,0 4,0 4,5 5,1

2 4 14 17 20 29 25 37 40 85 118 133 145

France Korea Singapore Hong Kong United Kingdom Germany USA Japan Switzerland Mexico Chile Colombia Brazil

Ranking 4 6 8 8 8 9 9 9 9 10 13 14 15

1. Sum of documents needed to import and export goods Source: World Bank: Ease of doing business research, MD – World Competitiveness Yearbook

DIAGRAM 10

University students with limited international exchange

% of university students with international academic experience1 Hong Kong Arab Emirates Switzerland Germany France Japan England Mexico Chile Brazil Argentina USA

21,3 6,7 5,3 3,1 2,5 1,4 1,2 1,0 1,0 0,4 0,4

1.Annual flow of superior education students between 2005 and 2008 Source: Unesco- Global Education Digest 2008

0,3 0%

1 6 9 10 11 16 21 27 28 31 75 103 112

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

DIAGRAM 11

Brazil’s image abroad not aligned with that of a regional hub for investments and business

Brazil has strong position image projection in sports and leisure...

... BUT stands below international average in business terms

Tourism1

Culture2

Hospitality3

Product innovation4

Government 5

Investment and Immigration 6

Italy

France

Canada

Japan

Switzerland

Canada

Iran

Nigeria

Iran

Best country

Average

Worst country

1. Interest in visiting the country, richness in natural beauty, historical monuments and exciting cities. 2. Has success in sports, cultural enheritance and contemporary history. 3. Has hospitality, people one would like to be friends of work opportunities for qualified people. 4. Contributes with science and technology, has impact in its “made in..” tags, has advanced ideas. 5. Has honest and respect ful government, respcets educational qualification, has interesting businesses. Note: interviews conducted in 50 countries Source: The Anholt-GfK Roper Nation Brands IndexSM 2008 50 country Report

Fortunately, these problems are not the whole story, because in addition to this list of challenges, we can also point out a series of clear competitive advantages that can help propel Brazil to the position of a regional hub: • The ever more dynamic Brazilian economy is perhaps the country’s main and most essential strength. We have already mentioned the strength of its domestic market, its importance in Latin America and the impact its commodities have had on the global market. But in addition to its importance and dynamism the Brazilian economy is also becoming increasingly more robust and resilient. In 2009, Brazil’s GDP remained stable while global GDP shrank 2% in the wake of the crisis, and in 2010, the GDP is predicted to grow by 6% or more, even though the effects of the crisis still linger around the world. This dynamism and robustness have helped Brazil assume a prominent position in the global investment scenario. • A solid financial sector, founded on prudent financial regulation and self-regulation is another competitive advantage that has been helping protect Brazil from financial crises. The financial regulation functions like a foundation for a banking system that is solid (95% of the Basel Committee recommendations have already been implemented and

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

capitalization levels are above international standards), diverse (with the important presence of local and international banks) and innovative (with payment, custody and liquidation systems that are references even in developed countries, see Diagram 12). A solid and reliable regulatory base for the financial sector allows the real economy to develop without fear of financial crises, and that is why this foundation must be cherished and reinforced. • Brazil has well developed capital markets which are of great importance in Latin America and around the world. This is a benefit for the local and international expansion of financing for companies through the stock market, and for the possibility of derivative markets being skilfully used to help companies overcome uncertainties and volatilities through hedging. Furthermore, these capital markets also help attract investments and the eyes of the world to Brazil, assisting in its global positive image projection. • Despite the difficulties that still exist in its educational system, Brazil can take pride in its internationally renowned institutions of higher learning like the University of São Paulo. These institutions stand out not only in Latin America, but also around the world due to their production of

DIAGRAM 12

Brazilian regulations already comply with several G30 recommendations for financial stability

Prudential regulation coverage

Supervision of prudential regulation

• Prudential regulation and supervision of banks

• Regulatory structure

• Consolidated supervision of other FIs

• Role of the Central Bank

• Supervision of money market mutual funds

• International coordination

N/A

• Supervision of private capital • Government sponsored entities

N/A

Greater transparency in markets • Confidence in securitized credit markets

Reinforcement in regulatory standards • Regulatory standards for governance and risk management • Cyclical regulatory standards for required capital • Standards for risk management of liquidity

• Rating agency reform

N/A

• Supervision of OTC and CDS markets • Resolution mechanism for FIs • Transparency of structured products

• Fair value accounting To be developed Source: G30 Jan/2009

Already exists

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

knowledge and to their formation of highly qualified professionals. They are already receiving students from around the world - accelerating the attraction of international talent to the country. • The existence of several Brazilian multinational companies and others which are in the process of internationalization (see Diagram 13) helps pave the way to a broader positive image projection of the country by identifying barriers, creating national expertise that surpasses other markets, reinforcing the country’s image as a place where global champions emerge, and by creating strong precedents and examples of successful internationalization. In addition to these large Brazilian multinational firms which are known around the world as leaders in their segments, the country is also home to dozens of Multilatinas which are active in a variety of sectors ranging from textiles to industrial equipment. • Brazil’s open, inclusive and receptive culture integrates the country to the rest of the world and facilitates the exchange of people. These attributes help attract international talent while at the same time limiting ethnic conflicts and the threat of terrorism. By leveraging and reinforcing the aforementioned advantages it will be possible to overcome the challenges and increase the country’s competitiveness and international positive image projection, benefiting all economic sectors.

DIAGRAM 13

Brazil is already the headquarters for several companies with worldwide operations

Source:Thomson Financials

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

06 The case of the

financial sector and its role in the business network The service sector, especially the financial segment, is an essential catalyzer for establishing a stronger regional network Despite the impact of the recent crises on the financial services of developed countries, this segment has continuously expanded and reached new levels of prominence in Brazil and the region. It was in this context that the Omega Project emerged in 2008. When it emerged, the initial idea of the project was to recognize and begin to fill the gaps that were keeping Brazil from becoming an international financial center. Its idealizers – ANBIMA, BM&FBovespa and FEBRABAN were already working together with BEST (Brazil Excellence in Securities Transactions), a public and private initiative geared towards promoting Brazil’s capital markets abroad. BEST proved that a partnership initiative between multiple private institutions and government representatives was a valuable tool. Based on this experience, the three institutions decided to jointly create an ambitious project to establish the vision of creating a Brazilian financial center, kicking off an ample and inclusive process for designing the vision that lasted almost all of 2009. In this process, nearly 300 people from more than 70 public and private institutions were involved along with other business leaders and opinion makers. The project was presented to company directors and executives, class entities and economists in Brazil and in other countries throughout the region. It was also presented to local authorities and representatives from the federal, state and municipal spheres of the Brazilian government. After listening to the most varied sectors during this all encompassing consultation and discussion process, it became clear that focusing exclusively on the financial sector was not compatible with the size and diversity of the Brazilian and regional economies. The development of the country and the international financial situation created a

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

window of opportunity for a broader and more encompassing vision: Brazil’s multisector vision as part of a stronger and more connected regional network for investments and business. This is the vision that is defended by BRAiN and carefully laid out in this report.

as a hub. It also ensures future growth opportunities for the region’s banks given the high degree of penetration already achieved in some of the main Latin markets. The initial focus on Latin America permits the region’s banks to better support the regional expansion of the Multilatinas through differentiated financial products and services, comprising an integrated offer of services like cash management and project finance at a regional level. The banking system can also assist in country development as a hub by constructing greater global connectivity to strengthen the financing of companies by distributing assets and attracting resources from other hubs. This depends on the reinforcement of institutional ties with companies from other hubs and from distribution networks (for example, through broker dealers) in hubs that today see little penetration by Brazilian banks, especially those in Asia.

However, this broader vision does not change the fact that the financial services sector is an integral and fundamental part of the whole. Brazil’s growth in recent years has been supported by a robust financial segment that is expanding and in the process of internationalization. This strong market serves as a platform for greater international insertion by Brazil in the regional and global investment scenario, and it helps the country pave the way towards the construction of a more integrated regional network. The financial sector is an example of how improvement is needed for shaping a regional, Latin American hub. The four main financial service pillars in Brazil still have a long way to go to become truly international and really compatible and capable of supporting and catalyzing Brazil’s vision as one of the main hubs in a regional Latin American network (see Diagram 14):

• Brazil should make its capital markets an investment entry platform for the entire region, permitting papers – shares, debentures, derivatives – from all of Latin America to be traded on the Brazilian market and vice-versa. Diagram 15 shows how the country’s stock exchange

• The banking system must continue its ongoing internationalization process. This movement is vital for ensuring the connectivity of the Latin American network and Brazil’s international positive image projection

DIAGRAM 15

The São Paulo Stock Exchange has few foreign companies listed compared to regional and global hubs

DIAGRAM 14

Four pillars of financial services must continue to develop to catalyze the vision of Brazil as a regional hub

Regional

Banking System

Capital Markets

Asset Management

Insurance

Internationalization of banks in Latin America

Regional hub for shares and futures

Regional hub for resource management

Internationalization of insurance and reinsurance in Latin America

Reinforce Brazil’s insertion in the international network of financial centers (international distribution network, institutional ties....)

Connections

Local

Penetration of the local market

Distribution in retail and new product development

Increase Variable Income, multi-markets, alternative assets

Penetration of the local market 1. Of these, only 2 have foreign capital; 7 are national companies with headquarters outside Source: WEF; EIU; The Economist; Bloomberg

Source: Workshops projeto Omega

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

still has little presence of international companies. It is vital to alter this in order for Brazil to act as a regional hub. • The Latin American asset management segment should also be strengthened and regionalized. These markets should be strengthened through an increase in penetration and strong management of already existing traditional assets, such as shares and fixed income, and also through the expanded use of alternative assets, such as Private Equity and Venture Capital. The regionalization of this sector should occur by attracting management of Latin American assets back to Latin America. Today, this is mainly carried out through international centers in other locations. Management of these assets in the region removes the intermediation of access to savings and global capital, generating high value-added jobs. • Like the banking sector, the insurance sector should internationalize over the mid and long term. This will occur as a parallel movement to the internationalization of banks through the Bancassurance model, as well as through movements by independent insurers to guarantee growth and competitiveness. This movement will also benefit greater integration of Latin American economies and companies, permitting an aligned offer of insurance products, especially project insurance and make the regional growth of companies more viable. The enhancement of this sector will bring more investments and capital into Brazil and the region, financing the growth of countries and their companies. It will also generate high value-added jobs, improve the region’s image and visibility as a business destination, strengthen the network of direct and indirect services and promote innovation and knowledge (see Diagram 16). Infrastructure – airports, hotels, telecommunication networks – and the formation of talent demanded by a stronger and a more international financial service sector are also important enablers for developing other areas like tourism (especially business tourism) and professional services, like outsourcing, legal support and consulting. This development should and can be carried out in an organic and controlled manner, avoiding excessive exposure and the type of external focus that contributed towards the propagation of the current international financial crises that are taking place in other countries and regions.

DIAGRAM 16

Internationalization of the financial services sector can benefit the economy as a whole

EXPANSION OF THE FINANCIAL SECTOR

Agribusiness

Industry

Derivatives closer to the needs of agriculture reality

Reduction of seasonal and volatility risks

• greater liquidity for local and regional contracts • contracts related to Brazilian harvests • smaller contracts

• protection of local and regional business

More sophisticated regional products

Support for large investments and the international expansion of Brazilian companies

• project finance • cash management

Trade

Infrastructure

Source: Interviews

POTENTIAL BENEFITS

Greater availability of capital at a lower cost

Financing of growth and the possibility of accelerations

Trade finance products with regional and international scope

Reduction of foreign trade risks, acceleration of growth and simplification of processes

Diversification of financing sources

• private equity • investment banking

Financing of key infrastructure works at a national and regional level to improve the flow of goods and people

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

“The financial sector has great potential to contribute to this process, with each of its segments playing important roles in this vision.” Marcelo Giufrida, president of ANBIMA

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

07 Growth without

artificialism: an evolution for Brazil, a vision for the region Artificial movements are not needed to make the BRAiN proposal feasible The path Latin America should follow to reinforce its regional network of investments and business, as well as the vision of what it will be after reaching this goal, fit in the natural evolution of countries in the region. It is a coherent path is aligned with the progress already achieved and aligned with the progress still to come. The vision of regional hubs is in keeping with the consolidation of a diversified economy. Several points seen in preceding chapters correspond to improvements that have been gradually occurring, refining competitiveness in areas like basic and technological infrastructure, fiscal regulation, talent availability and an improved situation for companies in every sector of the economy. Regional operations are facilitated for local companies and multinational operations, and this tends to promote greater economic resilience for all. This vision offers direct benefits to the economy of countries as a whole. The internationalization of service sectors can generate thousands of direct high value-added jobs in segments like financial services, outsourcing and consultancy, with a high capacity for generating income and developing highly specialized professionals. But the impact goes far beyond that. Increasing competitiveness in Brazil and other regional countries as a platform for doing business and strengthening financing lines for companies, especially capital markets, should accelerate economic growth and could lead to the generation of millions of additional jobs throughout the region. This vision does not assume any artificial movement that could

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

generate economic disequilibrium or deviate countries from their current positive trajectories, nor does it liberalize the market in an imprudent manner. So with this in mind, the vision that BRAiN has for Brazil and Latin America follows some key directions: DO NOT overexpose the economy and the financial sector. At the peak of their overexposure in 2008, it is estimated that the three largest banks in Iceland held debt of up to six times greater than the country’s GDP. The subsequent crisis was a natural consequence of excessively elevating the economy’s dependence on the financial sector. Any country that keeps the real economy on the back burner in order to focus mainly on the financial sector will quickly become vulnerable and unsustainable. This option goes completely against BRAiN’s vision. The financial sector can and should be used to stimulate the real economy, and in our vision the development of a strengthened regional network is the right fit. DO NOT make the country a tax haven or an off-shore banking center. Excessively flexible regulations with reduced taxation and unparalleled confidentiality privileges can facilitate the attraction of funds, but it also weakens prudent practices. From any angle you look, this approach will not be found in BRAiN’s vision for a regional hub. Even if tax regulations in Brazil and other countries can be improved, the objective is to strengthen the competitiveness of every sector of the local economy in a sustainable manner. DO NOT create a free zone for finances. Some hubs, like the Dubai International Financial Center (DIFC) make the process easier for the entry and exit of resources – free zones with greatly reduced taxes in order to promote the local capital market. BRAiN believes that Brazil and Latin America already attract capital in a sustainable manner and that together they have a sufficiently encompassing economy which makes it unnecessary creating free zones avoiding the negative effects if can generate. DO NOT demand total convertibility of the currency as a precondition for developing a business platform in the country. Convertibility is not a sine qua non for our vision of a regional network. What is most needed in order to bring this vision to pass is a simple and efficient foreign exchange regulation that permits greater efficiency when conducting international operations. DO NOT dollarize the economy. The movement of adopting the American dollar as the official currency is not compatible with countries that have diversified economies and stable macroeconomics. Currently, the few advantages in such a move, like the elimination of foreign exchange depreciation and appreciation risks, inflation control and reduction in local interest rates are already being gradually achieved by the countries in this region without adopting the dollar as the

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

official currency. These advantages would be more than offset by the countless disadvantages of dollarization, such as the loss of control over monetary policy, subjection to structural problems in the USA, and the irrevocability of the decision, among others. BRAiN believes that the dollarization process goes against the economic evolution that is currently being experienced in Brazil and throughout the region. DO NOT create excessively leveraged societies. The recent experiences of the United States and Ireland point to excessive leverage as one of the key factors at the heart of the current financial crisis. A slightly greater or lesser degree of leverage does have a positive or a negative effect on the establishment of a regional hub. However, an excessive degree of leverage can threaten the real economy and as a consequence the vision of a stronger and more connected Latin America. Based on natural evolutionary movement within the country and the region, and the avoidance of any artificialism, we believe the emergence of Brazil as one of the regional investment and business hubs will support and catalyze growth throughout Latin America.

“I think the model is absolutely perfect because we do not want a hypertrophied model, a financial supermarket or free zone. We do not want any artifitialism. What we want is a model rooted in the development of Brazil and the region.” Luciano Coutinho, president of BNDES

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

08 The strategic

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

tinations, the promotion agencies of the diverse countries would begin to present their countries as part of an integrated investment network, thereby promoting the region as a whole. The creation of institutional ties to investors from other regions, such as sovereign funds, would also be simplified by the vision of a more united Latin America.

benefits of a stronger business network in Latin America

The region would not only have more capacity to attract the foreign investments it needs, but its local capital markets would also be strengthened. Companies from sectors with little liquidity in their local stock markets would gain from the increase in liquidity and the volume of resources invested in a market that would encompass the region and not just an individual country. Companies that are already listed would grow in value and companies that are still unable to open their capital could gain access to this important source of funds.

Every country in the region will gain with greater regional connectivity

Increasing the importance and connectivity of capital markets would expand those markets available to the Latin American segment of asset management in terms of the variety of available assets for investment and open them up to a new universe of accessible clients, thus enabling growth and making the region stronger.

A more interconnected business network in Latin America will facilitate the generation and growth of high value-added businesses and services throughout the region, and with this will come more jobs and income.

The benefits resulting from the expansion of the financial sector are potentially significant for the region’s economy as a whole, but the advantages of greater regional integration go far beyond the financial market and its benefits for the real economy.

Latin America’s growth potential over the midterm tends, however, to be limited by its low investment and savings rates. Although some countries, like Chile, have a greater savings capacity, the key will be its capacity to attract foreign investments in sufficient volume and quality to make all its growth potential possible. But, Latin America does not have this well-developed capacity for attraction, as can be seen by its limited connection to nations in Asia and the Middle East, which currently have a great portion of the world’s production and generation of wealth. Latin America’s access to the capital of other regions still depends greatly on intermediated flows mainly through New York and London. Greater regional integration would permit investors interested in the region, in terms of capital markets as well as direct investments, to apply their resources in multiple countries with much greater ease, with the region acting more like a large, connected market, with an alignment of requirements to access each country, such as operations, teams and licenses. Greater connectivity would not only increase the region’s intrinsic attractiveness to foreign investors, but it would also increase the impact and reach of asset distribution networks and promotion of the region’s investments: the banks’ international networks would begin to function as channels to invest in the entire region, attracting capital to all the countries. Besides promoting their own countries as attractive des-

Regional operations of companies from every sector would benefit from a standardization of regulatory frameworks, creation of systems and integrated registries and improvements in infrastructure and services needed for this vision. This would not only increase the region’s attractiveness for expansion and installation of new operations by large multinationals, but it would also reduce transaction costs and enable the generation of gains in economy of scale at Multilatinas, making the region an even more attractive platform for internationalization for companies to begin their expansion outside their markets of origin, generating the basis for their future global expansion. With international expansion and a reduction in barriers, competition would increase among the region’s companies, benefiting consumers and stimulating continuous training within their companies, leading to improvements in long term productivity and stronger economies. Greater connectivity in Latin America also means an improved air transportation structure, and greater ease for people to move about. This would not only facilitate the lives of executives at companies with increasingly more integrated operations in the region, but also strengthen the appeal of regional tourism for leisure and business. Regional talent development would also gain force with greater integration. Greater proximity of the countries and integration of the com-

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

panies’ regional operations plus greater ease for the flow of professionals between different countries should generate more international exposure of professionals in the region, which is so vital today. However, greater regional connectivity should go further and universities throughout the region should have more exchange programs with each other with greater focus on studying the whole region, its economies and its companies. This would increase the international exposure of professionals starting with their education, better preparing them to operate outside their countries of origin

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

and manage business with an international reach within their own region and around the world. All of these movements - strengthening of financial markets, integrating companies within the region, strengthening education and the international transportation system - reinforce the countries’ service sectors, creating a virtuous circle for generating jobs and wealth in the companies that internationalize and generating results throughout the entire economy (see Diagram 17).

DIAGRAM 17

Internationalization generates jobs throughout the economy

GROWTH AND INTERNATIONALIZATION

SUPPORT INDUSTRY JOBS

JOB GROWTH IN THE GENERAL ECONOMY

• IT / Telecom • media • air transportation • civil construction

• public services • industry and trade • taxes

PROFESSIONAL SERVICES

ENTERTAINMENT, CULTURE, EDUCATION...

DIRECT JOBS • corporate functions • products and services • support functions

• accountants • consultants • auditors • advertisers • lawyers

Source: Interviews with experts; City of London “Financial Services Clustering and its significance for London”

• schools • sports • cinema • theater • tourism

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

09 Necessary conditions for success

Without a coordinated effort, success is not guaranteed In the preceding chapters, we explored how the establishment of a regional hub for business and investments in Brazil is part of the natural evolution of the country and the region. However, this process is not guaranteed. Other countries with this potential - like Germany and Japan – let their windows of opportunity to participate more actively in international business and investment networks pass them by. Today, Frankfurt and Tokyo only operate as local hubs, reducing the capacity of their economies to diversify and attract investments and business (see Diagram 18).

DIAGRAM 18

Some countries allowed important opportunities for greater insertion in the global business network slip by

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

“The international crisis showed a new Latin America, more solid and dynamic. This strong and promissing continent deserves to have a more integrated financial system to serve the economies in the region.” Ricardo Lagos Ex-President of Chile

Source: Interviews, press search

In order to be successful, Brazil must focus on strengthening certain prerequisites and differentials: • Expanding the scope and effectiveness of bilateral and regional agreements will always be a vital part of any effort to increase cooperation between various countries. It is important for the agreements to always seek a more ample scope than just liberalizing the trading of goods. They should also include measures to stimulate the trading of services and the mobility of talent and capital. • Defining greater regional regulatory alignment, with accounting and tariff rules and demands for similar documentation and information is an important step towards simplifying the regional operations of companies and investors in Latin America, benefiting the flow of business in the region. In addition to this alignment, it is important for regulations of the region’s countries to continue evolving towards a greater openness to the world. Given that many of the existing regulations were designed for a Latin America that mainly sought to avoid capital flight, which is now a risk that has been pretty much delegated to the past by this region’s major economies. • Facilitate the regionalization of the banking sector, simplifying the expansion of local banks among the region’s various countries. This would create value by permitting the offer of aligned financial products and services throughout the region for the Multilatinas. Furthermore, it would also make it possible to disseminate initiatives in the region that prove positive in one country or another, such as an expansion of alternative low-income channels, advanced technological management and the sophistication of capital market and asset management products. • Create greater harmony in capital markets, expanding access to international assets in the Brazilian market and vice-versa. This move would bring new investment options to all of the region’s stock markets and over-the-counter markets, which would project the Latin American markets internationally and attract new investors and capital. • Stimulate the development of innovative products that are important to the region. In particular those related to Latin America’s natural resources which make the region a potential center for financial products based on commodities, biofuels and carbon. • Reinforce forums, regional collaboration entities, and international commissions. This would catalyze greater regional integration and the other aforementioned initiatives. The creation of institutions like BRAiN in other Latin American countries and greater participation of these countries in entities like the Latin American Federation of Banks (Felaban) would stimulate more dialogue and greater alignment in order to address key issues for the creation of a regional network. An example of which would be the standardization of prudential regula-

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

tions for (disclosure, taxation and the opening of subsidiaries), as well as for payment, foreign exchange and other systems that need to communicate consistently.

regional environment. This is aligned to already existing projects, such as the Investe SP agency of the government of the state of São Paulo, which focuses on developing local industry and promoting foreign trade.

• Establish connections with other hubs. Institutions in Brazil and Latin America already have strong ties with New York, London and Chicago, but they should use this opportunity now to also create ties with business generation and funding centers like Paris, Tokyo, Singapore and Hong Kong (see Diagram 19), building a wider and stronger overall network.

• Minimize tax complexity. As mentioned in the previous chapter, the complexity of the tax system is one of the great barriers to doing business in Brazil. The system should be refined by identifying redundant taxes, reducing the amount of required documentation and by simplifying and consolidating taxes and contributions on service activities.

• Support the expansion of Multilatinas and attract multinational decision centers from around the world, creating a globally competitive

• Reduce business bureaucracy. This does not imply the weakening of legal and regulatory standards, but rather the improvement of processes in order to reduce the aforementioned work load and excessive number of man hours spent by companies on bureaucracy. An example of a specific project with this objective in mind would be a concerted effort to reduce the volume of documents, and the number of different regulators and authorities who are involved in establishing timeframes and deadlines for opening and closing businesses by creating a central organization for corporate operations.

DIAGRAM 19

Potential targets for the creation of connections

• Expand urban transportation infrastructure, reducing traffic and improving the quality of life in order to attract international talent. As with the improvements in the Brazilian air travel infrastructure, this movement also aligns with the efforts of PAC, the 2014 World Cup, the 2016 Olympics and other plans proposed by the state and city governments of São Paulo and Rio de Janeiro. • Expand the infrastructure for air transportation by expanding Brazil’s airport capacity, modernizing the main airports, improving highway and subway connections to those airports, increasing the frequency of flights throughout Latin America, improving immigration procedures and reduce lines. In Brazil, government projects included in the PAC and preparations for the 2014 World Cup should help push forward several of these items. • Improve telecommunication infrastructure increasing coverage and speed and reducing costs, especially for broadband. This would expand interconnectivity of countries within the region and around the world and promote the development of high valueadded sectors that are technology and information intensive. • Improve urban security, which is one of the main gaps pointed out in comparative diagnostics between international hubs. This requires the broad-based efforts by every sphere of government and society.

1. Excluding Japan Source: BCG Global Wealth Market-Sizing Database, 2008; International Monetary Fund, 2008

• Strengthen professional services that reinforce and enable the regional investment and business hub. In the specific case of an environment for professional services like the outsourcing of IT services and business processes, this will only be made possible by ensuring a regulatory framework that offers competitive conditions and security

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

for these types of operations, and by encouraging the training of professionals to work in these sectors. • Invest in the creation of a university network of high quality and connectivity throughout the region, by encouraging exchange programs especially among countries in Latin American. This will create a regional pool of international talent that is ready for the global job market. • Study and implement policies that facilitate talent mobility to the region as well as within it, such as the process for obtaining visas and permanent resident documentation for foreigners. • Expand fluency in foreign languages, especially English, and in the case of Brazil, Spanish, reviewing the curriculum for the different levels of education and encouraging the extracurricular study of languages. • Expand and promote cultural and leisure activities that are directed not only to tourists, but also to the inhabitants of large Brazilian urban centers. • Finally, do not forget about the image of the countries in the region, which needs to be communicated abroad in a focused manner in keeping with this new positioning. Brazil projects a strong image in leisure, but it has yet to achieve a business image compatible with its size and potential as a hub, notwithstanding all the efforts of entities like Embratur, APEX, BEST, Rio 2016 and Investe SP, and the fact that it has investment grade status. This image needs to be actively shaped through specific campaigns and a better alignment between the diverse efforts to promote Brazil abroad. In the case of Brazil numerous projects have already been set in motion by the public and private sectors, which will contribute to the development of the right conditions to help this country become one of the region’s hubs (see Diagram 20). However, an integrated vision is still lacking on how to make the best use of these efforts and create greater synergy. Given the scale and range of needed changes, a deep and continuous dialogue between private and public sectors is of vital importance, because the establishment of Brazil as a hub for a new network will not occur spontaneously through a huge number of multidirected and uncoordinated efforts. The effort demands a degree of alignment and efficiency that still does not exist. The task demands the coordinated involvement of companies and the diverse spheres of the federal, state and municipal governments in order to accelerate the execution of this full slate of projects focused on the multiple opportuni-

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

“The vision of this project is broader, eMcompAssing the all sectors of the Economy and generating enormous benefits for the country and the region.” Edemir Pinto, CEO of BM&FBOVESPA

DIAGRAM 20

In Brazil, public sector initiatives contribute towards development of the country as a hub for the region

Federal Government Program

• Increase quality and capacity of Brazilian infrastructure

State governments and private sector

• Increase quality and capacity of the transportation system (air, port, railway) • Modernize soccer stadiums • Restructure street and avenue traffic

State and municipal government initiative

• Promote city’s institutional image

Investe SP: public-private agency

• Develop local industry and promote foreign trade • Promote São Paulo as an international destination for business • Promote public policies favorable to business • Improve technological infrastructure, logistics and labor • Stimulate tourist activity

Plan goals for the city of São Paulo

• Revitalize downtown and improve safety in the streets • Expand the subway • Modernize event and expo spaces • Expand green areas and spaces for leisure • Conduct punctual actions to reduce traffic in the city

Planning of the city of Rio de Janeiro

• Revitalize the port zone and industrial districts • Stimulate the service industry

Source: Brazilian government, Rio 2016 candidacy, São Paulo state government, Rio de Janeiro city hall, media

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

ties and converging objectives which have been outlined in this report. Furthermore, an analysis of existing hubs has allowed us to learn several lessons about the pre-requisites and differentials (see Diagram 21 and box B). Any country or region that seeks to develop its hubs and create a more connected network architecture must keep these lessons in mind. What is still lacking in this context is a single entity that will assume the mission of catalyzing these actions and bringing to pass the vision of Brazil as an investment and business hub for Latin America – and that is BRAiN’s role.

DIAGRAM 21

Pre-requisites and differentials in large hubs

Main lessons learned in each hub Trade and macroeconomic stability are key

Pre-requisites

Developed infrastructure is on the critical path Fluency in english is a competitive advantage Talent can be attracted from abroad Hub development can be a common public/private objective Government proactivity is crucial for developing a hub

Low taxes can be a competitive advantage Favorable regulation for business is an important requirement

Differentials

Safe haven in a risky area can be an important attraction Focus on innovation is key to sustain competitive advantage Regional and niche strategies as complementary and synergic Growth of domestic market feeds the establishment of a hub Offshore zone can be a starting point for a hub Source: Entrevistas com experts

NYC

LON

SGP

HKG

DUB

PAR

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

BOX B

Pre requisites and differentials for a hub

The analysis of different countries suggests pre-requisites for business hubs

The analysis also suggests other topics that could benefit a hub, albeit not mandatory.

• Free trade and macroeconomic stability. All of the hubs are inserted in the global trade flows and have solid macroeconomic essencials

• Low taxes. Low taxes are attractive, as Singapore and Hong Kong show, but apply more to smaller and less differentiated hubs with less organic growth potenctial.

• Infrastructure. Basic structure is necessary. Hong Kong and Singapore are small economies that grew by developing their infrastructures

• Safety for investments in regions with high perceived risk. Singapore, Hong Kong and Dubai are seen as safe portals for investments in riskier destinations within the region.

• Fluency in English. This languages is globally used for business besides being the official language for global and regional hubs such as New York, London, Hong Kong and Singapore.

• Attraction of foreign talent. Foreign talent covers defficiencies in the local market and expands the vision of local companies, as London, New York, Dubai an Hong Kong show.

• Government proactivity. In regional and global hubs, all government bodies actively commit to increase the competitiveness of the region.

• Coordinated action between the public and private sectors. Strategies and actions must be shared between both sectors, as can be seen in multisector entities of London and Dubai.

• Off-share zone. Dubai used this strategy as a starting point, showing an option for regions with lower global relevance. • Growth of the domestic market. New York is an example of strong domestic market that led to the natural establishment of a hub. • Favorable regulations for business. London has been able to out maneuver New York based on simpler regulation and a less litigious legal system. Singapore and Hong Kong also have prudent and favorable regulations for business. • Focus on innovation. Innovation is key to sustain competitive advantages, particularly in the global hubs of New York and London. • Regional and niche strategies. Singapore acts both as a specialized hub of asset management and as a regional hub in Asia. These pillars reinforce one another.

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

10 BRA N’s role

• In London, TheCityUK, is a committee for promoting British financial and professional services that was created within national and international ambits. The institution is an independent and politically neutral structure comprised of public stakeholders, such as the City of London, and private stakeholders, such as leaders of the country’s main financial and professional service institutions. Through studies, events and interactions among the diverse stakeholders, TheCityUK supports efforts to develop the British environment for national and international business.

BRA N was created to help catalyze the necessary changes for Brazil to work with the other Latin American countries to strengthen the business network in the region

• In Paris, the Paris Europlace was created. It includes members of government, financial institutions and industrial groups, with two main objectives: promote Paris as a regional hub and increase its competi-

DIAGRAM 22

BRAiN is an entity that was created to articulate and catalyze the implementation of the vision of Brazil as one of the investment and business hubs that will strengthen the connection among Latin American countries. In this sense, it is also fundamental that the other countries in the region create similar initiatives to promote the development of their positioning through the coordination of public and private efforts and the formation of a regional collaboration network. Operating in five permanent axes (see Diagram 22), BRAiN is a private association with the direct involvement of the public sector. It is the result of the Omega Project, a diagnostic and discussion process with diverse representatives from the public and private sectors that lasted nearly 18 months. The vast majority of interlocutors involved in the project demonstrated significant receptiveness to the idea of drawing up a vision of a more connected investment and business network in Latin America that has Brazil functioning as one of its hubs. This is coherent with the country’s longterm trajectory, which follows an evolutionary path and promotes its positive image projection and its global competitiveness. With the vision laid out, an action plan was established to support the Brazilian evolution towards this new level. Given the scale and range of the changes needed and the importance of continuous dialogue among sectors, it became evident that it would be obligatory to consider a permanent entity to align, catalyze and coordinate these efforts that help design Brazil’s future. During the Omega Project, various other successful hubs were observed to have structured entities dedicated to the promotion of their position and competitiveness in the international scenario.

Permanent axes of action for BRAiN

AXES

DESCRIPTION

Cooperation

• Promote the benefits of having business hubs in Brazil and in other countries of Latin America • Catalyze regional and global integration projects

Competitiveness

• Map and articulate proposals to improve Brazil’s competitiveness as a business platform

Talents Intelligence

Image

• Support education and research initiatives • Attract, educate and retain human capital compatible with Brazil’s demand as a business hub • Map and promote Brazil’s progress vs. other hubs • Monitor global metrics and specific projects • Help project an image of Brazil compatible with an international investment and business hub

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

tiveness in the global scenario. Paris Europlace coordinates several activities like roadshows and promotions, work groups and support for academic research. Paris Europlace simultaneously collaborates with competitiveness clusters sponsored by the government that have the objectives of establishing Paris as a European platform for financial information, facilitating the development and capitalization of startups, promoting research and innovations in sectors like risk hedging and climate indexing, developing international level education and creating links with social innovations through partnerships on topics like socially responsible investments and sustainable finance. • In New York, the private entity FSR (Financial Services Roundtable) is comprised only of financial sector companies and, although it advises the government, it has limited integration with the public sector. The reduced coordination between public and private sectors has provided opportunities for others to establish themselves as differentiated options. While in the USA sometimes excessive regulatory rigidity hampers potential and increases costs for all participants, London’s rationalized approach reduces litigiousness in its environment. The result is that in 2005, four times more capital was obtained from IPOs of foreign companies in London than in New York. • In 2009, Russia’s government approved incentives for the development of a hub in Moscow to increase commercial trade in rubles with former USSR countries.

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK

“This is an ambitious proposal worthy of Brazil’s potential and the level it has reached today is based on the vigor and diversity of our economy.” Maria Helena Santana, president of CVM

• In 2009, China initiated measures with the goal of stimulating the development of Shanghai as a strong international hub to support the country on its path towards becoming the second largest economy in the world by 2020. • In Latin America, similar initiatives exist to enable the creation of a regional network. Santiago, Chile, has already moved in this direction by declaring its ambition and plans to become a regional hub for services, including capital markets. In 2007, the creation of a public-private entity called the Capital Markets Advisory Council aligned these goals of attracting investors with new products and improving regulations. And what about Brazil? As a product of the dialogue established during the Omega Project, BRAiN – Brasil Investimentos & Negócios – was created with the objective of supporting those institutions already building Brazil’s future, mapping the opportunities, coordinating the elaboration of studies and proposals, articulating joint movements and promoting dialogue between the public and private sectors. We have the comprehensive and effective participation of public and private

institutions, the support of representatives from diverse sectors of society, and the sponsorship of various private Brazilian entities. BRAiN is deeply honored by the trust and support deposited by all its sponsors and supporters in this vision and in the institution itself. We are committed to the task of articulating the implementation of this longterm, ambitious, yet highly viable project which will bring benefits to every sector. We hope to count on the support and open dialogue of all concerned. This is a project for the country and for Latin America and it will only be truly successful with the involvement of society as a whole. BRAiN and the establishment of its vision can only gain from the efforts of other countries towards the creation of a business network in Latin America.

We invite you to visit our website (www.brainbrasil.org), read more about our objectives and contact us.

BRAZIL AS ONE OF THE HUBS OF LATIN AMERICA’S NEW BUSINESS NETWORK