the new global reality: how the forces of globalization are reshaping business in latin america

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  1. 1. The new global realityHow the forces of globalization arereshaping business in Latin America
  2. 2. Contents1. Introduction............................................................................. 22. Business responses to globalization: thriving in a globalized world.................................................... 43. Measuring globalization trends in Latin America..................... 104. Whats next. .......................................................................... 19. The new global reality
  3. 3. Fulfilling Latin Americas promise In recent years, the business and political worlds have been looking hopefully to the East. Eastern Europe, the Middle East and the emerging Asian economies have largely justified this hope through their rapid growth and development. In our globalizing world, economic power is not only shifting east, however, but also south. And when we look south to Latin America, we see a region that is starting to fulfill its vast promise. Blessed with plentiful natural resources, a young workforce and a thriving entrepreneurial culture, the region is quickly moving beyond the political and economic problems of the past and taking its rightful place on the world stage. As with any region, though, wide variations exist and generalizations about the whole can be misleading. In January, Ernst & Young, in cooperation with the Economist Intelligence Unit (EIU), published The Globalization Index, which looked at the relative levels of global engagement of the worlds 60 largest economies. Here, to coincide with the 2010 World Economic Forum on Latin America, we have focused on the Latin American countries that were part of our Index. We have examined the similarities and differences of these countries from a business perspective, and highlighted the implications of how globalization is affecting Latin America and, importantly, how Latin America is affecting globalization. James S. Turley Chairman and CEO Ernst&YoungHow the forces of globalization are reshaping business in Latin America 1
  4. 4. 1. IntroductionOver the past two decades, Latin America has steadily deepened its integration with the global economy.Trade and investment regimes have been liberalized, foreign direct investment (FDI) has increasedand new export markets have come on stream. The region now attracts around 7% of global FDI andaccounts for 6% of global exports.Latin America was not as badly affected by the global recession asOECD countries, though it performed worse than other emergingmarkets, notably India and China, which continued to growstrongly. Real GDP fell by an estimated 2.3% in Latin America in2009, compared with 3.4% in the OECD. However, the aggregateregional figure disguises divergent trends, with a generally starkdivide between countries heavily dependent on the US market (onthe whole these performed worst) and those with stronger tradelinks to Asia (these proved more resilient).Of the latter, Brazil, the largest economy, barely contracted(falling by 0.3%), even against a strong base of comparison(GDP grew by 5.1% in 2008). This resilience reflected severalstrengths, including a high degree of diversity of export industries John Ferraroand markets, a solid and mostly domestically owned financial Chief Operating Officer Ernst & Youngsystem with minimal exposure to subprime securities and a largeIn the coming decades, Latin America looks as if it will start to state banking system. Chile is a good example of a particularly achieve its potential.well-managed economy; despite being acutely exposed to thedownturn in world trade owing to the weight of the export sector,substantial fiscal savings enabled an effective counter-cyclicalpolicy that restricted the contraction to 1.5%. Mexico, the regions Intra-regional trade has also been growing, but integrationsecond largest economy, accounting for a quarter of regional GDP,remains relatively shallow. Latin Americas difficult topographyperformed worst, posting a 6.6% contraction; it relies on the US and decades of underinvestment in infrastructure contribute tofor over 80% of export sales, the lions share of FDI and significanthigh transaction costs. But institutional weaknesses have alsoinflows of worker remittances; its weak public finances preventedbeen to blame, and official trade groups within the region have ait from undertaking meaningful counter-cyclical policies.checkered history. Mercosur, the Southern Cone customs union,Recovery is at hand. Latin America has long held huge promisehas been plagued since its inception in the mid-1990s by tradeas a prominent actor in the global economy. With abundantand investment disputes between its two major economies,mineral and hydrocarbon wealth, fertile land and the largest Brazil and Argentina, and the Andean Community has been splittropical forests in the world, the region boasts a rich and varied by of natural resources. Yet, until recently, it has been slow As Latin America continues to open up to international trade andto capitalize on this wealth, thanks to a long history of economic investment, companies in the region are growing in confidencemismanagement and a general suspicion of free markets. and reach. Some, such as CEMEX from Mexico and EmbraerThe US remains the main export market outside the region,from Brazil, have already become sizable global players in theirand still accounts for close to 40% of export sales. But fast- respective industries. Others from Brazil, such as the mininggrowing Asian markets, hungry for Latin Americas minerals and firm Vale, the food manufacturer JBS Friboi and the cosmeticsagricultural products, are consuming a growing proportion of company Natura, are wielding increasing international influence.exports. For example, Chinas share in trade has risen significantly Equally, multinationals from Europe and North America, facingin the past decade, approaching 10% of export earnings and stagnant growth prospects in their own markets, have beenimport spending. In 2009, the Brazilian and Chinese Governmentsincreasing their exposure to Latin American markets. With asigned a deal between Sinopec, the Chinese oil company, andpolitical and legal environment that is steadily improving, andPetrobras of Brazil, through which the Chinese would lend US$10b a young population of 567 million people that is enjoying risingin return for 200,000 barrels of crude oil a day over the next incomes, Latin Americas importance in global business is10 years.growing rapidly.2The new global reality
  5. 5. About this reportThe new global reality: how the forces of globalization arereshaping business in Latin America is an Ernst&Youngreport, written in co-operation with the Economist IntelligenceUnit, examining the degree of globalization in Latin America.Ernst&Young selected for analysis six of the eight countries(excluding Venezuela and Ecuador) that were included in TheGlobalization Index created by the Economist IntelligenceUnit, published in the January 2010 Ernst & Young report,Redrawing the map: globalization and the changing world ofbusiness. To view this report go to the forces of globalization are reshaping business in Latin America 3
  6. 6. 2. Business responses to globalization:thriving in a globalized worldMultinational companies have long had high expectations for Latin America, but many have beenfrustrated by the experience of investing there. The regions abundant natural resources, mostlydemocratic governments and large, middle-income population offered great promise to businessesseeking to expand overseas. Yet, all too often, optimism led to disappointment as companiesencountered a difficult operating environment and unfavorable political and economic policies.Multinationals may have struggled with the unpredictability ofLatin American business, but for local companies this environmentThe key insights are:is all they know. As Donald Sull, Professor of Management Practiceat London Business School, noted in our recent report Redrawing Local companies are becoming global playersthe map: globalization and the changing world of business Companies based in Latin America are used to operating in(January 2010), emerging-market companies have turned the a challenging business environment. In recent years, theyability to thrive in a difficult environment into a key strength. have been leveraging this experience to embark on anCompanies from developed countries, by and large, have theunprecedented phase of global expansion. advantages of absorption size, established brands, technology, diversification and so on, he says. Lacking these advantages, Foreign firms are re-engaging with Latin America emerging-market firms typically rely on agility. To me the Facing sluggish performance in their domestic markets, striking thing is how fast agility can trump absorption. He points companies from a wide range of sectors are looking to Latin to the extraordinary rise of Brazils AmBev in global brewing America as a key source of future growth. But the new wave of as an example. investors must tailor products and services to suit customers in the regions, rather than merely import western products. The availability of technical and managerial skills remains a concern Public education is poor across much of the region, and a shortage of skilled workers bumps up managerial salaries to unrealistic levels. Government policies protecting the local labor force restrict the ability to import key skills.4The new global reality
  7. 7. Local companies are becoming global playersLatin American companies that have grown up with a challengingbusiness environment are now using this experience to guidethem in a phase of global expansion. Particularly in Mexico andBrazil, emerging-market multinationals are coming of age. BostonConsulting Groups 2009 list of Global Challengers the emerging


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