"Brazil Against the World" Minicase Study 2 International Business 3310.002 Dr. Habte G.

Woldu

Andre Southivong Jessica Santibanez Samuel Oh Thomas Graviett Tung Do Zihao Chen

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Information technology for the last decade has been a major source of outsourced work in the global economy. The relative simplicity of Information Technology based knowledge work and high cost of keeping IT related labor on shore for the extended hours, which are often required in the field, has often been identified in this sector as a key cost center that is ripe for paring down costs. There are numerous costs associated with this exportation of labor that must be included in the calculation of this move, such as a lack of quality control, infrastructural weaknesses that are inherent in the host country, and the overall environment in which the work will be completed. Developing countries in the global IT market, such as Brazil and India, have created names for themselves either through an already established infrastructure and as a common go to destination for the labor, or through the rapid development and support of governmental legislation that has created a friendly ecosystem for companies to move towards. Brazils Information Technology market has shown remarkable development in recent years. This development has caused changes moving away from industrial protectionist policies that the Brazilian government had established during the mid-1990s (Hanna, N., & Knight, P.). Starting around the turn of the century, Brazil has swiftly made changes in policy. The country moved away from protectionist legislation and pushed for more economic development, especially in IT growth to stay competitive in the world market. These policies were initially set in place in order to assure the protection of the domestic industry from global competition, which included import licensing, tariffs, quotas, import prohibitions, and direct government investment in key industries (Cardoso). These government policies have had an impact and an important role. Although import licensing in the global economy is often a way for the national government to control the authorization of sale for certain goods in the host country, import licensing was used by the Brazilian government as an import barrier. Prohibitive tariffs were placed on the importation and exportation of goods that the Brazilian government deemed a threat to domestic industry, in addition to the use of quotas, that were used as a means of limiting the imports and exports in the country. The protectionist policies were designed to protect industries such as tobacco, real estate, plastic products, clothing, footwear and textile products, perfumes, soap and candles, and transport material (Cardoso).

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These protectionist policies proved detrimental to Brazil in regards to its position in the global market. The reserved and isolationist approach to international business handicapped the countrys growth and left it with issues of debt and a centrally planned economy that was incapable of adjusting to the needs of a growing population (Cardoso). Their shift away from the state-owned industry and changes in policy towards a more open stance to international trade has led the country to become not only a viable market ready for expansion, but has also opened its doors to the world of IT outsourcing through progressive legislation (Cardoso). Since 1990, Brazil has improved international integration and opened markets via three routes: Unilateral liberalization (it substantially reduced tariff rates unilaterally, from an average of 51 percent to an average of 12 percent); Multilateral agreements (it participated in the Uruguay Round making substantial commitments to reduce import barriers and bind practically all tariff lines); and regional opening (it entered intra and extra-regional preferential trade agreements) (Cardoso). The Uruguay Round was a trade negotiation that included 123 different countries, intending to promote a more open and free trade environment with all countries that participated. By reducing international tax rates and introducing legislation that fundamentally changed the way that Brazils government approached intellectual property among other things, the nation has essentially opened itself to the rest of the world. The intra and extra-regional preferential trade agreements that Brazil participated in were, in large part, for the promotion of its burgeoning IT industry (Cardoso). The drastic changes in legislation towards more freedom in trade has proven beneficial for Brazil in financial terms. In the second half of the last decade the country has increased its IT industry by more than 200% and is still growing. The Brazilian Software Enterprises Association (Associao Brasileira de Empresas de Software ABES) estimates that the domestic software and services market totaled US $15.4 billion in 2009 (an increase of 157% since 2004), of which US $5.5 billion were software, and US $9.9 billion services (Fig. 2.4). Of the software market (1.7% of the global market), 29% was for software developed in Brazil, the remainder for distribution of imported software. There were 6,495 companies in this market, most of them were micro and small enterprises. Brazilian exports of software licenses was

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only US $92 million, but growing rapidly (Hanna, N., & Knight, P.). Brazil possesses advantages that other emerging nations do not. Due to its close proximity to the United States, it is considered to be a near shore location for the US market, which is a huge advantage compared to others. "Most global companies and offshore service providers are looking to spread their facilities and investments on a global basis, rather than in just one location" (Brazil Exports IT). Brazil is at an advantage when organizations are searching for suitable offshore location because of the labor cost as well. " Brazil is cheaper than almost all other South American or European countries, with a 30% salary advantage cost over the US." (Brazil Exports IT). Brazil also has an advantage of specialized skills in the economy. This is seen through "industries such as automotive, aviation, energy, industrial machinery and finance sectors" (Brazil Exports IT). " Companies such as IBM, Unisys, HP, EDS, Accenture, Deloitte, Motorola, Intel and Nokia all have offshore centers in Brazil" (Brazil Exports IT). Although there are many advantages of outsourcing to Brazil, there are a few disadvantages that Brazil will need to work on in order to be considered to be on par with competitors such as India, China, and other top tier providers in IT outsourcing. For example, the language skills are significantly less developed when compared to competitors from other nations, which is a disadvantage to Brazil. While English is the second most spoken language in Brazil and among the IT professionals, there are very few that speak the language fluently. The communication barrier between Brazil and other countries, like the U.S., is still large enough to be considered a detriment to expansion in the country and as a potential hazard to quality of service for exporters (Janssen). Another disadvantage that Brazil faces is their security and privacy regulations. Although Brazil has laws and legal protections in place, they lack enforcement in the areas of intellectual property protection, the enforcement of anti-piracy laws, and the physical security (Vashistha). Data sharing, or piracy, is considered to be an ongoing issue in the country. In 2009, many files ranging from software to music and videos, was considered to have been illegally shared on the internet. If this trend continues, and data is stolen from large IT businesses in Brazil, piracy could potentially lead to serious losses of a company. Any venture that is outsourced to Brazil that would have vital information of a business and its

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customers, would have to strongly consider the risks associated with doing business there. These risks could possibility prevent future growth in Brazil (Vashistha). When starting or running a business in Brazil, high taxes and hurdles puts them at a huge disadvantage. Brazil has a total of 13 procedures and a time frame of 119 days to start a business, while OECD (Organization for Economic Co-Operation and Development) countries have 5 procedures and take 2 days to start a business. Businesses are required to pay a high amount of taxes, which include a mandatory labor tax and contribution and profit taxes, that represent roughly 63% of business commercial profits. However, considering the annual salary of knowledge workers, this may be a reasonable solution due to mounting costs in competing countries (Doing Business). Operating costs are an important factors that can't be ignored and is the start of the search for outsourcing. India has long been a favorite destination for IT outsourcing worldwide. However, the skyrocketing costs associated with doing business in India, is making it less favorable as time progresses. Companies have already began searching for more suitable destinations with lower overall operating costs. Brazil has become a perfect market for outsourcing labor. Over 90% of Fortune 500 companies (Amazon, AT&T, Cisco, HP, and IBM) are feeding their business to Brazil (Sabharwal). The state of a nation's economy also plays a significant role when it comes to costs. The steadier the economy, the steadier the operating costs will be. While India's economy has been troubled by declining foreign investment (Pasricha), Brazils economy has been increasingly showing signs of growth with foreign speculation (Richardson). This is not only an indicator signifying the strength of the respective nations economies, but also applies to the IT markets in India and Brazil (Crawford). Unlike India, where foreign investment shares dominate the IT market, Brazils IT market growth is supported primarily by the natural growth of the economy itself and the real opportunity, thus far, has been in servicing its own local market (Sabharwal). The progression and advancement in the Brazilian IT marketplace proves that Brazil is capable of fostering further growth, while also benefiting from its foreign investment. Brazil just started focusing on offshore IT investment recently, but has clocked revenues of $650 million last year and expected to grow

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25% this year (Sabharwal). Economically, Brazil has changed since the days of 2,000% inflation. Today the economy is much more stable, with a 6% inflation rate at the end of 2005. The IT sector itself is continuing to grow and is a $10 billion market, with an $8.3 billion multinational presence (Silva). Great infrastructure improves the quality of a societys labor force. The quality of a societys labor force can help build an even stronger infrastructure. With a population of 182 million, growing at 1.1% each year, Brazil has an estimated educated workforce of 83 million. Like India, the country clearly has great labor availability, which is a major strength when many offshore locations are rapidly overheating (Silva). There is no shortage of trained labor and Brazil has been able to sustain a qualified workforce that has led to increased stability. Moreover, the IT sector in Brazil also commands a great number of employees coming in to nearly 1.5 million workers (Sabharwal). Brazils IT labor supplies has grown to meet the demands and with the current economic stability in the region, it can only lead to a larger and a more qualified work force. This has been made possible by Brazils previously established IT infrastructure and a solid backbone supported by engineering schools available to the countrys population. Brazilian universities train thousands of engineering graduates for jobs in the information technology business (Benson). Many people in the industry have said that Brazil is more than ready take a good share of that market, considering that costs are lower and infrastructure is already available. Brazil also has a blooming domestic market for software services and new technology (Benson). The geographical location of Brazil is another factor to look at when choosing where to outsource IT services or products of a business. Brazil possesses only a single time zone difference to the East Coast and four time zones of the West Coast of the United States (Ball). The United States can benefit from this minimal time zone difference. Brazil has a greater advantage compared to other IT nations such as China and India because these countries are several hours ahead of the U.S. Idera, a software company from Texas that creates tools for managing and securing Microsoft Windows SQL Servers, illustrates how Brazil is becoming a bigger competitor in the IT market. Time zone overlapping proved to be one of the main influences for Idera to outsource in Brazil (Schwartz). Idera says, trying to manage an outsource

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development team across an 18- to 24-hour time difference would be a daunting task that would have to change the way Idera's teams work. (Schwartz). Having closer time zones to the United States will improve the companys efficiency and ability to work closer with its outsourcing partners (Schwartz). Cross-cultural negotiations are more complex than mono-cultural due to cultural factors, environments, languages, ideologies, and customs (Ball). Because many representatives can lack understanding of these cultural differences, they are often ineffective at reaching an agreement (Ball). The positive aspect of Brazils culture is that it is fairly similar to that of the U.S. Unlike like India, Brazil shares many beliefs and values of the American people (Schwartz). The culture of one's country has a great impact on the ideologies and the way its society thinks. Plezco, CEO of Idera, states that a Brazilian team will say something like, "we understand what you are trying to do, but we think you will be better off to do this another way" (Schwartz). In conclusion, Brazils governmental policies have opened up new opportunities in the IT sector of its economy by allowing more free and open trade policies. This new direction has grown the IT industry by three times as much as it was in 2004. Brazils time differential has given the IT sector t he advantage of being as close as one time-zone away from United States thereby giving US businesses easier access and coordination with Brazilian companies. Brazil also has a cost advantage against the US and European nations. Brazil is setting its focus on training tomorrows workforce in Information Technology and has exceeded demands in the IT outsourcing industry. The cross-cultural differences between the US and Brazil are not as drastically different as the country of India, a leading IT outsourcing competitor. Brazil has an opportunity to give American companies a better understanding of their outsourcing need compared to India and China where cultural differences are major problems to overcome. While the limitations of language can be considered a hindrance as only a handful of IT professionals speak the English language, it is the second most spoken language in Brazil. With adequate intensive training, similar to what is done for well funded companies in India, there is potential in the future IT workforces language abilities. The disadvantages in the security and privacy of the IT industry could compromise confidence in

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Brazils outsourcing ability and are completely surmountable when compared against the advantages. Brazil still stands out as a great alternative to competitors in IT outsourcing as the IT industry continues to develop on the global scale. As with any multinational organization, there will be hurdles to face that can be surmounted with right outlook and a solid business plan.

Information technology markets in the BRIC countries

Information technology markets in the BRIC countries, 2009 (billions of US$). Source: Associao Brasileira de Empresas de Software (2010), original data from IDC

Brazilian market for software and IT services

Fig. 2.4 Brazilian market for software and IT services, 20042009 (Billions of US$). Source: Associao Brasileira de Empresas de Software ABES (2007, 2008, 2009, 2010)

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Works Cited Ball, Donald A., J. Michael Geringer, Jeanne M. McNett, and Michael S. Minor. International Business: The Challenge of Global Competition. New York: McGraw-Hill Professional, 2012. Print. Benson, Todd. "Brazil aims to be outsourcing giant." The New York Times. 18 May 2005. Web. 2 Feb 2014. Cardoso, E. (2009, March 27). A Brief History of Trade Policies in Brazil: From ISI, Export Promotion and Import Liberalization to Multilateral and Regional Agreements. The Global Trade and Financial Architecture Project . Retrieved January 28, 2014, from http://www.tulane.edu/~dnelson/PEBricsConf Crawford, Dan. "Two BRICs: India vs. Brazil." Angry Bear. 14 Jan 2010. Web. 2 Feb 2014. "Ease of Doing Business in Brazil." Doing Business. Web. 2 Feb 2014. <http://www.doingbusiness.org/data/exploreeconomies/brazil/>. Hanna, N., & Knight, P. (2011). Seeking transformation through information technology strategies for Brazil, China, Canada and Sri Lanka. New York and London: Springer. Janssen, Robert. "Brazil as an outsourcing destination." Brazil Exports IT. 11 Nov 2008. Web. 2 Feb 2014. Pasricha, Anjana. "India Worried About Declining Foreign Investment ." Voice of America. 23 Jul 2013. Web. 2 Feb 2014. Richardson, Hadley. "Brazil economy achieves highest growth in 25 years ." IT Decisions. 4 Mar 2013. Web. 2 Feb 2014. Sabharwal, Shruti. "The Economic Times." Indian Outsourcing vendors are not very competitive in Brazil. 12 Apr 2011. Web. 2 Feb 2014. Schwartz, Ephraim. "Brazil: IT's next India?" InfoWorld. N.p., Nov.-Dec. 2010. Web. 29 Jan. 2014. Silva, Marcio. " Brazil as an Outsourcing Destination." Outsourcing Mag. 15 Dec 2012. Web. 2 Feb 2014. Vashistha, Atul. " Outsourcing to Brazil: Seeing the Complete Picture." Nearshore Americas. 19 July 2011. Web. 2 Feb 2014. White Paper. "Doing B usiness in Brazil : How to reduce your risks through IT infrastructure outsourcing." Alog. 12 Dec 2012. Web. 2 Feb 2014.