The new global reality How the forces of globalization are reshaping business in Latin America Contents Introduction 2 Business responses to globalization: thriving in a globalized world Measuring globalization trends in Latin America 10 What’s next 19 The new global reality Fulfilling Latin America’s 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 world’s 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 & Young How the forces of globalization are reshaping business in Latin America 1 Introduction Over 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 increased and new export markets have come on stream The region now attracts around 7% of global FDI and accounts for 6% of global exports Latin America was not as badly affected by the global recession as OECD countries, though it performed worse than other emerging markets, notably India and China, which continued to grow strongly Real GDP fell by an estimated 2.3% in Latin America in 2009, compared with 3.4% in the OECD However, the aggregate regional figure disguises divergent trends, with a generally stark divide between countries heavily dependent on the US market (on the whole these performed worst) and those with stronger trade links 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 several strengths, including a high degree of diversity of export industries and markets, a solid and mostly domestically owned financial system with minimal exposure to subprime securities and a large state banking system Chile is a good example of a particularly well-managed economy; despite being acutely exposed to the downturn in world trade owing to the weight of the export sector, substantial fiscal savings enabled an effective counter-cyclical policy that restricted the contraction to 1.5% Mexico, the region’s second largest economy, accounting for a quarter of regional GDP, performed worst, posting a 6.6% contraction; it relies on the US for over 80% of export sales, the lion’s share of FDI and significant inflows of worker remittances; its weak public finances prevented it from undertaking meaningful counter-cyclical policies Recovery is at hand Latin America has long held huge promise as a prominent actor in the global economy With abundant mineral and hydrocarbon wealth, fertile land and the largest tropical forests in the world, the region boasts a rich and varied supply of natural resources Yet, until recently, it has been slow to capitalize on this wealth, thanks to a long history of economic mismanagement and a general suspicion of free markets The US remains the main export market outside the region, and still accounts for close to 40% of export sales But fastgrowing Asian markets, hungry for Latin America’s minerals and agricultural products, are consuming a growing proportion of exports For example, China’s share in trade has risen significantly in the past decade, approaching 10% of export earnings and import spending In 2009, the Brazilian and Chinese Governments signed a deal between Sinopec, the Chinese oil company, and Petrobras of Brazil, through which the Chinese would lend US$10b in return for 200,000 barrels of crude oil a day over the next 10 years John Ferraro Chief Operating Officer — Ernst & Young “In the coming decades, Latin America looks as if it will start to achieve its potential.” Intra-regional trade has also been growing, but integration remains relatively shallow Latin America’s difficult topography and decades of underinvestment in infrastructure contribute to high transaction costs But institutional weaknesses have also been to blame, and official trade groups within the region have a checkered history Mercosur, the Southern Cone customs union, has been plagued since its inception in the mid-1990s by trade and investment disputes between its two major economies, Brazil and Argentina, and the Andean Community has been split by factionalism As Latin America continues to open up to international trade and investment, companies in the region are growing in confidence and reach Some, such as CEMEX from Mexico and Embraer from Brazil, have already become sizable global players in their respective industries Others from Brazil, such as the mining firm Vale, the food manufacturer JBS Friboi and the cosmetics company Natura, are wielding increasing international influence Equally, multinationals from Europe and North America, facing stagnant growth prospects in their own markets, have been increasing their exposure to Latin American markets With a political and legal environment that is steadily improving, and a young population of 567 million people that is enjoying rising incomes, Latin America’s importance in global business is growing rapidly The new global reality About this report The new global reality: how the forces of globalization are reshaping business in Latin America is an Ernst & Young report, written in co-operation with the Economist Intelligence Unit, 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 The Globalization Index created by the Economist Intelligence Unit, published in the January 2010 Ernst & Young report, Redrawing the map: globalization and the changing world of business To view this report go to www.ey.com/globalization How the forces of globalization are reshaping business in Latin America Business responses to globalization: thriving in a globalized world Multinational companies have long had high expectations for Latin America, but many have been frustrated by the experience of investing there The region’s abundant natural resources, mostly democratic governments and large, middle-income population offered great promise to businesses seeking to expand overseas Yet, all too often, optimism led to disappointment as companies encountered a difficult operating environment and unfavorable political and economic policies Multinationals may have struggled with the unpredictability of Latin American business, but for local companies this environment is all they know As Donald Sull, Professor of Management Practice at London Business School, noted in our recent report Redrawing the map: globalization and the changing world of business (January 2010), emerging-market companies have turned the ability to thrive in a difficult environment into a key strength “Companies from developed countries, by and large, have the advantages of absorption — size, established brands, technology, diversification and so on,” he says “Lacking these advantages, emerging-market firms typically rely on agility To me the striking thing is how fast agility can trump absorption.” He points to the extraordinary rise of Brazil’s AmBev in global brewing as an example The key insights are: Local companies are becoming global players Companies based in Latin America are used to operating in a challenging business environment In recent years, they have been leveraging this experience to embark on an unprecedented phase of global expansion Foreign firms are re-engaging with Latin America Facing sluggish performance in their domestic markets, companies from a wide range of sectors are looking to Latin America as a key source of future growth But the new wave of 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 The new global reality Local companies are becoming global players Latin American companies that have grown up with a challenging business environment are now using this experience to guide them in a phase of global expansion Particularly in Mexico and Brazil, emerging-market multinationals are coming of age Boston Consulting Group’s 2009 list of Global Challengers — the emergingmarket multinationals that are evolving into global players — lists 14 firms from Brazil, seven from Mexico, two from Chile and one from Argentina Mexico’s CEMEX is a case in point In recent years, a series of overseas acquisitions has propelled the company from being a predominantly domestic manufacturer of cement to becoming one of the world’s largest Its acquisitions have included RMC in the UK and Rinker in Australia, although this buying spree left CEMEX with a significant debt burden that it was forced to restructure in 2009 During the recent downturn, Brazilian companies have remained among the most active players in the M&A market The Brazilian mining company Vale recently acquired assets from Rio Tinto and also increased its stake in the German steelmaker ThyssenKrupp, while food producers Perdigão and Sadia, also from Brazil, announced a merger to create the world’s largest poultry company by market value “If Brazilian companies not follow the internationalization path, they will not become competitive as a whole,” says Luiz Augusto de Castro Neves, Brazil’s ambassador to Japan Steve Howe Managing Partner, Americas — Ernst & Young “Latin America is starting to produce companies that are world-class Just think of names such as CEMEX or Petrobras.” Other Brazilian companies are also competing to become global players in the food industry JBS, with a mainly domestic market, is now the world’s largest food company in the beef sector, following acquisitions in the US and Australia “At some point you cannot only be an exporter,” says Marcus Vinicius Pratini de Moraes, an adviser to JBS “You have to become an operator.” Within the past five years, JBS has invested around US$2.5b overseas, and now operates in Argentina, Australia, the US and the European Union (EU) BNDES, the Brazilian development bank, has played an important role in financing JBS’s overseas expansion, particularly with its recent acquisition of the US company Pilgrim’s Pride, and holds a 20% stake in JBS “BNDES has been very innovative in financing investment from Brazilian companies abroad in order to stimulate more stable trade flows,” says Pratini How the forces of globalization are reshaping business in Latin America Foreign firms are re-engaging with Latin America Brushing off earlier disappointments with investments in Latin America, multinationals from the US and other developed markets are entering a new era of engagement with the region If anything, the financial crisis has accelerated this trend Facing sluggish performance in their domestic markets, companies from a wide range of sectors are looking to Latin America as a key source of future growth DuPont, the science-based products and services company, reported 2008 revenues of US$3.6b in Latin America, which represents 12% of its global total Fifteen of its 75 R&D centers are based in Latin America, with 11 in Brazil Globalization has “created much greater expectations for Brazil’s contribution to the company’s global portfolio,” says Roberto Hun, Vice President for Finance at DuPont Latin America “This share has been increasing, and the prospect in coming years is that a large part of the growth will come from markets such as Brazil.” Successful investment in Latin America depends on a thorough understanding of local preferences and tailoring products and services to suit customers in the region “As a science-based company, we need to develop products that meet the specific characteristics of the local market,” says Hun “In the past, we would tend to copy an existing model that we had in other parts of the world Now, products are more adjusted to the local consumers’ needs as well as the local culture.” For example, DuPont has conducted in-depth research among the low-income population of Mexico to assess how it could better meet their dietary needs The company found that families in this socioeconomic group wanted to consume more beef, but could only rarely afford it “Putting beef on the table is evidence that they can take care of the family,” says Eduardo Wanick, Global Leader of DuPont’s Emerging Market Growth Initiative In response to this demand, DuPont created SoleCina™, a blend of texturized soy protein, wheat, gluten, mechanically de-boned chicken and flavorings “It is more nutritious than beef, it has less fat and it is 30% to 40% cheaper than second-grade beef in Mexico,” says Wanick SoleCina, which is now available in Mexico and Central America, will enter Brazil as the next market, although the program will need to be adapted to the local economy, because beef is cheaper in Brazil than in Mexico Multinational companies hoping to execute a broad-brush “Latin American” strategy are likely to be disappointed Instead, they need to adapt a more granular approach that takes into account the regional differences Countries such as Brazil are not homogeneous entities, but have highly diverse populations, cultures and topographies This means that local preferences can vary widely from one region to another “Brazil is a country of continental proportions with specific characteristics in each region,” says Alexandre Costa, Regionalisation Director of Nestlé Brazil Festivals form an important part of Brazilian culture, but are often regional rather than national affairs As part of its regionalization strategy, Nestlé is careful to align its marketing efforts with these local celebrations In addition to the famous Carnival in Rio de Janeiro, the company takes advantage of marketing and sponsorship opportunities at other local festivals, such as São João in Recife and the state of Pernambuco, and Farroupilha in the south of the country Products are also customized to suit local preferences For example, Nestlé recently opened a special plant in Feira de Santana, in the state of Bahia, to supply the region As local incomes are low, this factory produces versions of its products that are sold in fewer quantities and in cheaper packaging As we also noted in our Redrawing the map report, this is similar to an approach taken by Procter & Gamble (P&G) An estimated 80% of P&G’s customers in Mexico, for example, shop at informal stalls and kiosks, or “high-frequency stores.” In aggregate, these tiny outlets comprise P&G’s largest customer — bigger even than Walmart So P&G thinks first about what these customers can afford, and then works back Poor customers typically get paid daily and can’t buy in bulk So P&G sells its products in smaller packages and quantities, and prices them in rounded denominations that match local bills and coins Meanwhile, a network of local representatives supplies stallholders with stock and promotional materials The new global reality Case study: Renault Like many multinationals, Renault has been turning its attention to the faster-growing markets of Latin America, which generally offer better growth prospects than the more stagnant, saturated markets of Europe Although the car maker has been operating in the region for some time, it has recently ramped up its operations and sales Ten years ago, Brazil was Renault’s 15th largest market; today it is its fifth Renault manufactures its cars locally, partly to avoid expensive tariff barriers, but mainly in order to get close to its end customers Rather than sell the same cars in Latin America as in Europe, Renault recognizes that it needs to adapt its products to meet the specific needs and expectations of local markets “Once I decide to manufacture products away from my headquarters, I have to rethink my products, to look at them differently,” says Alain Tissier, Executive Secretary to the CEO of Renault Mercosur This means using common elements, such as seats, engines and gearboxes, to achieve economies of scale, but customizing certain features for each market Even within Latin America, adjustments are made for specific countries “In Brazil we insisted that the quality of the interior of the car is more visible than in Colombia,” explains Tissier Like any FDI, Renault has to contend with an unfamiliar operating environment and bureaucracy Although conditions for foreign businesses have improved significantly in the region over the past decade, challenges remain that require local knowledge and understanding to address “Manufacturing abroad is not only signing a check, setting up a plant and churning out cars,” says Tissier “We have to rethink logistics and rediscover bureaucracies.” Although Renault uses expatriates in its Latin American operations, Tissier believes that one must also build up and make use of local workforces “You have to resist the temptation to copy one model and paste it in a new country,” he explains “You have to integrate with the local environment.” Also important is the need to strike the balance between centralization and decentralization Over the years, the company has delegated an increasing proportion of responsibility to regional heads, but there continues to be a strong link with corporate headquarters “We are not totally autonomous, but we cannot be piloted only by the central organization when we sell 120,000 cars per year,” says Tissier “You have to find a new balance, but it is not that simple in terms of the decision-making process in a fastchanging market.” How the forces of globalization are reshaping business in Latin America The availability of technical and managerial skills remains a concern In our Redrawing the map report, several interviewees highlighted the importance of hiring locals and ensuring that there was not an over-reliance on expatriate workers Brian Wilkinson, a board director at Randstad, a recruitment company, notes that the focus on locals “has helped us shape a much more cosmopolitan, international management team that’s more in tune with the business wherever we it.” But the availability of managerial skills can be a concern in Latin America With a few salient exceptions, the public education system is poor and, given weak public finances across much of the region, is likely to remain so in many Latin American countries In addition, a short supply of highly skilled workers in many countries can lead to salaries for senior managerial positions that are higher than in the developed world In Ecuador, for example, foreign businesses find it difficult to identify specialized labor to fill senior and management positions The problem is similar in Peru, and is compounded by the legal situation regarding recruitment By law, 80% of the labor force must be Peruvian and there is a 30% ceiling on the portion of the payroll distributed to foreign workers In combination, this skills shortage and regressive measures regarding the hiring of foreign workers are likely to hold Peru back from moving up the global value chain and attracting FDI Jorge Menegassi Managing Partner, South America — Ernst & Young “When you try to discuss the downturn with Latin American business leaders their usual response is, “Downturn? Let’s talk about the recovery.”” In the region’s larger economies, especially Brazil and Mexico (which together account for 66% of the region’s GDP), the private sector is beginning to play a crucial role in upgrading the skills base through public-private cooperation on targeted training programs But across Latin America, there is considerable progress still to be made, and this factor could hamper FDI over the medium term The new global reality How the forces of globalization are reshaping business in Latin America Measuring globalization trends in Latin America The Globalization Index developed for this report measures and tracks the performance of the world’s 60 largest countries according to 20 separate indicators that capture the key aspects of cross-border integration of business The indicators fall into five broad categories: Openness to trade Capital movements Labor movements Exchange of technology and ideas Cultural integration These factors have been weighted (ranging from 17% to 22% for each) based on the significance placed upon each factor by 520 surveyed senior company executives doing international business Subsidiary indicators are also given sub-weightings within each category Indicators chosen include both quantitative data and qualitative scores from a range of trusted sources The performance of countries is measured over time, so that progress toward greater or lesser globalization since 1995 can be observed, with a forecast of likely performance until 2013 The key insights are: Globalization remains slow Although the overall trend in Latin America has been toward a gradual opening up of markets and greater engagement with the global economy, there is considerable variation across the region Of the eight Latin American countries that appear in The Globalization Index of 60 countries, only one, Chile, makes it to the top half of the Index Technology adoption lags A general trend among the eight Latin American countries is their weak performance on the Index for the exchange of technology and ideas Encouraging steps in some countries include funding for R&D and the growth of public-private partnerships The Index measures “relative” rather than “absolute” globalization This means that a country’s trade, finance and capital investments, labor, technology and cultural integration with other countries is measured relative to its GDP rather than by the absolute value of these elements being exchanged As a result, smaller countries that depend on international integration will tend to have a high level of globalization, while larger countries that can rely on a big domestic market will tend to have a lower level, even though the total amounts exchanged internationally may be much greater The Index, therefore, reflects the degree to which the global integration of a country is observable or experienced from within that country 10 The new global reality Globalization remains slow Although the overall trend in Latin America has been toward a gradual opening up of markets and greater engagement with the global economy, there is considerable variation across the region Out of the 60 countries that appear on The Globalization Index, eight are from Latin America: Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru and Venezuela Among these eight countries, only one, Chile, appears in the top half of The Globalization Index The remainder are clustered in the bottom third of the list, with Venezuela bringing up the rear in 59th position, just ahead of Iran Despite these relatively low scores, progress on globalization has generally been positive in the region since the 1990s All eight countries have improved their overall score during the period of analysis, with the exception of Argentina and Venezuela And while the global trend was toward a small dip in globalization during the current economic downturn, Latin American countries bucked the trend, with all except Ecuador and Venezuela seeing an increase in their overall score Figure The Globalization Index 2009 — Latin America Overall Country Change in Globalization score (1995-2009) 27 Chile 0.55 39 Mexico 0.52 44 Colombia 0.37 45 Peru 0.36 47 Brazil 0.36 48 Argentina -0.07 54 Ecuador 0.15 59 Venezuela -0.20 Source: The Globalization Index 2009 Figure “A brief pause” — average annual overall level of globalization1 (Y axis shows average overall Globalization score) 4.25 4.00 3.75 3.50 3.25 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 Actual scores Predicted scores The level of globalization continued to rise until its peak of 4.12 in 2007, declining in 2009 to 4.07, with a slow recovery forecast to 4.19 in 2013 Source: The Globalization Index 2009 How the forces of globalization are reshaping business in Latin America 11 Technology adoption lags A general trend among the eight Latin American countries is their weak performance on the Index for the exchange of technology and ideas The strongest among the Latin American countries, Chile and Mexico, still have a score that is only 25% of the leading technology performers on the Index, such as Ireland, Sweden or Denmark This seems particularly relevant given that Ernst & Young’s Redrawing the map report, identified the exchange of technology as the most important driver of globalization Chile has the most developed telecom infrastructure for mobile phones and broadband access in the region, while Colombia has achieved relatively high IT capabilities thanks to foreign investment from Spain, and Telefónica in particular In Brazil, internet users average 44 hours per week, one of the highest rates in the world, according to IBOPE Nielsen Online But in general, the picture across the region has been one of low public investment and an absence of policies to support publicprivate partnerships In Argentina, the capital inflows of the 1990s have produced some technology transfer, but the contribution of foreign firms to local R&D activities has been limited The picture is similar in Brazil, where standard measures of innovation, such as R&D and patents, remain poor In Mexico, decades of low public investment have been a major constraint on innovation There are some encouraging trends that suggest a stronger future for technology in the region In Argentina, some limited financing for R&D has become available through technology and science funds, and some tax incentives are in place for R&D in the software industry Meanwhile, Mexico and Brazil are both building partnerships with the private sector and local universities to increase the competitiveness of high-tech and other manufacturing industries These are positive steps, and will be necessary ones if the region is to fulfill its potential as a significant player on the global stage 12 The new global reality The Globalization Index: selected Latin America country profiles Chile The spread of the eight countries on the Index is in large part a reflection of their highly varied performance on trade openness Chile, in 27th position, benefits from one of the world’s most liberal investment regimes, which has made the country a top destination for foreign investors For the past 30 years, the Government has pursued a policy to integrate the country with the global economy, and has set an unusually low tariff dispersion of between 0% and 6% It also has one of the world’s largest networks of bi-lateral and multi-lateral trade agreements These factors have helped the country to post the biggest improvement in the overall Globalization score among the eight Latin American countries in the study As well as boasting the highest score for trade openness, Chile also ranks in the top for the movement of capital and finance by a considerable margin Despite more austere times around the world, Chile’s prospects of attracting FDI in the medium term remain strong mainly due to the country’s wide range of opportunities in mining, energy, forestry, telecommunications and agro-industry Chile has been the favorite destination for copper mining investment for over two decades, making it the world’s largest producer, accounting for over 33% of world copper output Figure Change in scores of key globalization dimensions for Chile Source: The Globalization Index 2009 In recent years, Chile’s importance as a regional investor has increased, particularly in the airline, shipping and retail sectors FDI outflows totalled US$8b in 2009 and are expected to grow steadily as Chilean companies continue to expand across Latin America Retail chains already have a significant presence in Argentina and Peru, and will seek to expand in Brazil, Colombia and Mexico Similarly, in international transport services, the national airline LAN and the CSAV shipping holding company are fast-growing global companies with leading positions in South America How the forces of globalization are reshaping business in Latin America 13 Mexico Like Chile, Mexico has seen a significant improvement in its Globalization score since 1995 It is Latin America’s largest exporter, with US$230b in gross sales in 2009 Although a trend of trade diversification has gathered steam in the past five years, 80% of Mexico’s export sales are still directed toward the US market It also relies strongly on the US for foreign investment, worker remittances and tourism Taken together, this has left the country particularly exposed to the economic downturn, and in 2009 its economy contracted by 7.1% Figure Change in scores of key globalization dimensions for Mexico In 2009, inflows of FDI fell to an estimated US$12b, the lowest in a decade and a mere 1.4% of GDP However, Mexican manufacturing has become increasingly integrated into US industrial production chains and could reap substantial benefits in coming years from an ongoing process of cost-cutting and industrial restructuring north of the border Since mid-2009, many US manufacturers have announced a partial or wholesale shift in operations to Mexico Source: The Globalization Index 2009 14 The new global reality Colombia Colombia has also been hit by the slowdown in the US, its largest trade partner, although to a lesser extent than Mexico The significant trade restrictions imposed by Venezuela, its secondlargest market, have compounded this problem In 2009, export sales to Venezuela fell by 33.5%, reducing its share of total exports from 17.5% to 12.3% Figure Change in scores of key globalization dimensions for Colombia Despite these setbacks, Colombia has consistently increased its overall Globalization score during the downturn In the short term, trade will benefit from an increase in demand for Colombia’s commodities and a US rebound this year But progress could be further accelerated if exporters pick up diversification efforts (both with export markets and products) This will help to support stronger and sustained growth, as well as the creation of employment Source: The Globalization Index 2009 Figure Change in scores of key globalization dimensions for Peru Peru Peru may be half way down the rankings of Latin American countries on The Globalization Index, but its score for the movement of trade and services is above average for the group Over the past decade, the Government has actively pursued a program of trade liberalization Today, Peru boasts free trade agreements with its main trading partners: the US, China, Canada and most recently, the EU Macroeconomic stability and the improvement of the investment regime in Peru have paved the way for large increases in FDI inflows The Government has ambitious plans to deepen this investment, and estimates that it will secure US$10b worth of investment in mining, energy and petrochemicals projects between 2009 and 2014 Peru’s admission in 2008 into the ranks of Latin American countries with investment-grade status (alongside Chile, Mexico and Brazil) lends credibility to this claim Source: The Globalization Index 2009 How the forces of globalization are reshaping business in Latin America 15 Brazil At first glance, it may seem surprising that Brazil did not score more highly on The Globalization Index Although it has made steady progress in its overall Globalization score since 1995, it ranks fifth out of the eight Latin American countries on the Index, and 47th overall As a major exporter with a diverse range of trade partners and an investor-friendly policy environment, Brazil is one of the most open economies in the region; this large domestic market means that it does not have to rely as heavily on overseas trade as some smaller countries For example, its exports of goods and services are just 14% as a share of GDP Figure Change in scores of key globalization dimensions for Brazil Brazilian companies are at the forefront of a trend toward the rise of emerging-market multinationals Outward FDI has risen strongly, averaging US$13.6b annually between 2004 and 2008, although the economic crisis led to a repatriation of US$10b in 2009 The downturn caused a fall in inflows of FDI from an average of US$33b in 2006-2008 to US$25b in 2009 In the medium term, this is likely to rise again, with foreign investors attracted by investment needs in the oil sector and market opportunities related to the staging of the 2014 World Cup and 2016 Rio Olympics 16 Source: The Globalization Index 2009 The new global reality Argentina Argentina is the only country in the region apart from Venezuela that has seen its overall Globalization score fall since 1995 During the 1990s, a process of market liberalization saw a rapid expansion of FDI But since the country’s 2001-2002 financial crisis this has been replaced by a more interventionist policy stance that has deterred FDI flows and failed to support trade openness Protectionist measures, including export bans, quotas and taxes, have become commonplace, and there has been little progress made on the liberalization of trade In 2009, exports of goods and services represented just 21% of GDP, despite the country’s abundant natural resources and significant export potential Policy uncertainty and a deterioration of the legal framework are also discouraging FDI flows In 2009, FDI plummeted to just 1.1% of GDP, and prospects for recovery in the medium term are complicated by an unstable political scene and a weakening policy environment A deterioration of the legal framework is reflected in growing favoritism toward domestic companies and increased expropriation risk (private pension funds were nationalized in 2008 in an attempt to secure a guaranteed source of financing) Figure Change in scores of key globalization dimensions for Argentina Source: The Globalization Index 2009 How the forces of globalization are reshaping business in Latin America 17 The Globalization Index — indicators, sources and weightings The Globalization Index was created by identifying the key indicators of globalization most relevant to business The table below shows, for each of the headline categories, the individual indicators used and their source The categories were then weighted according to the views captured in a survey of 520 global business leaders Category and indicators Source Movement of goods and services Business leader weighting: 22% Total trade (exports + imports) as % GDP National accounts Trade openness (5=very high) Scored on 1-5 scale by EIU analysts Tariff and non-tariff barriers (5=low) Scored on 1-5 scale by EIU analysts Ease of trading (cross-border) (5=very easy) Scored on 1-5 scale by EIU analysts Current-account restrictions (5=low) Scored on 1-5 scale by EIU analysts Movement of capital and finance Business leader weighting: 21% FDI flows (in and out, % of GDP) National accounts Portfolio capital flows (in and out, % GDP) National accounts Government policy towards foreign investment (5=very encouraging) Scored on 1-5 scale by EIU analysts Expropriation risk (5=non-existent) Scored on 1-5 scale by EIU analysts Investment protection schemes (5=good) Scored by EIU analysts Domestic favoritism (5=no favoritism, level playing field) Scored by EIU analysts Exchange of technology and ideas Business leader weighting: 21% R&D trade (in and out, as % GDP) Balance of payments; EIU estimates Broadband subscriptions (per 100 people) International Telecommunications Union Internet subscribers (per 100 people) International Telecommunications Union Movement of labor Business leader weighting: 19% Net migration (% of total population) Balance of payments; EIU estimates Current transfers (in and out, as % GDP) International Telecommunications Union Hiring of foreign nationals (5=easy) International Telecommunications Union Cultural integration Business leader weighting: 17% Tourism (in and out, per 1,000 population) World Tourism Organization International communication International Telecommunications Union Openness of national culture to foreign influence Scored by EIU analysts 18 The new global reality What’s next After decades of underinvestment and policies that deterred foreign investment, Latin America is stepping ever more confidently onto the global stage Although there is marked variation among the eight countries that appear on The Globalization Index, the general trend is toward a deeper integration with the global economy through openness of trade, capital movements and FDI, labor movements, the exchange of technology and ideas, and cultural integration Although the lion’s share of trade takes place with the US and within the region itself, diversification is gradually under way Commodity-producing countries are forging stronger links with resource-hungry countries in Asia, especially China Meanwhile, stronger macroeconomic fundamentals and a more predictable business environment are serving as a strengthening platform for FDI But perhaps the biggest change in relation to globalization is the confidence of leading businesses within the region itself Latin American companies have expanded beyond their borders, and there is a growing cohort of global players, particularly from Brazil and Mexico, that occupy leading positions in their respective industries Although challenges remain, not least a large external financing requirement, the slow adoption of new technology and an inadequate skills base, Latin America will become an increasingly important player on the global business stage How the forces of globalization are reshaping business in Latin America 19 Ernst & Young — building a borderless business Shifts in demographics and capital flows are marking the global economy and society as a whole These trends are also having profound effects on our profession Our response is to be the most integrated professional services organization in both our mindset and our actions We have one strong global leadership team that sets one single global strategy and agenda To help ensure we are efficient and effective, we have organized our legal entities into similarly sized business units in terms of both people and revenues These business units, almost all of which are purposely not single countries, are grouped into geographic Areas across the Americas, Europe and Asia-Pacific Each business unit’s leadership team works directly with their Area and global leaders to help ensure flawless execution This structure is streamlined — it allows us to make decisions quickly, and helps to ensure that we execute our strategy and provide high-quality service wherever in the world our clients business Creating our global mindset and structure are ongoing processes We’ve been working with our partners to bring down the barriers to working together seamlessly across borders, and we have succeeded in realigning our previously country-focused organization into a more integrated global one This organization means our clients get faster response and more tailored services They get broader, more experienced teams, with deeper industry knowledge Our people get greater opportunity to pursue the global careers they desire And our regulators see our structure as helping us deliver consistent, high-quality service across the globe 20 The new global reality Contacts James S Turley Chairman and CEO Tel: Email: +1 212 773 4300 james.turley@ey.com John Ferraro Chief Operating Officer Tel: Email: +44 20 7980 0044 john.ferraro@uk.ey.com Steve Howe Managing Partner — Americas Tel: Email: +1 212 773 3258 stephen.howe@ey.com Jorge Menegassi Managing Partner — South America Tel: Email: +55 11 2573 3702 jorge.l.menagassi@br.ey.com Alberto Tiburcio Managing Partner — Mexico and Central America Tel: Email: +52 55 5283 1319 alberto.tiburcio@mx.ey.com Beth Brooke Global Vice Chair — Public Policy, Sustainability and Stakeholder Engagement Tel: Email: +1 202 327 8050 beth.brooke@ey.com For more information on how Ernst & Young can help you in a globalized world, please visit us at: www.ey.com/globalization How the forces of globalization are reshaping business in Latin America 21 Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality We make a difference by helping our people, our clients and our wider communities achieve their potential Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients For more information about our organization, please visit www.ey.com © 2010 EYGM Limited All Rights Reserved EYG No DK0049 This publication contains information in summary form and is therefore intended for general guidance only It is not intended to be a substitute for detailed research or the exercise of professional judgment Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication On any specific matter, reference should be made to the appropriate advisor [...]... globalization are reshaping business in Latin America 17 The Globalization Index — indicators, sources and weightings The Globalization Index was created by identifying the key indicators of globalization most relevant to business The table below shows, for each of the headline categories, the individual indicators used and their source The categories were then weighted according to the views captured in a.. .How the forces of globalization are reshaping business in Latin America 9 3 Measuring globalization trends in Latin America The Globalization Index developed for this report measures and tracks the performance of the world’s 60 largest countries according to 20 separate indicators that capture the key aspects of cross-border integration of business The indicators fall into five broad... peak of 4.12 in 2007, declining in 2009 to 4.07, with a slow recovery forecast to 4.19 in 2013 Source: The Globalization Index 2009 How the forces of globalization are reshaping business in Latin America 11 Technology adoption lags A general trend among the eight Latin American countries is their weak performance on the Index for the exchange of technology and ideas The strongest among the Latin American... challenges remain, not least a large external financing requirement, the slow adoption of new technology and an inadequate skills base, Latin America will become an increasingly important player on the global business stage How the forces of globalization are reshaping business in Latin America 19 Ernst & Young — building a borderless business Shifts in demographics and capital flows are marking the global. .. continue to expand across Latin America Retail chains already have a significant presence in Argentina and Peru, and will seek to expand in Brazil, Colombia and Mexico Similarly, in international transport services, the national airline LAN and the CSAV shipping holding company are fast-growing global companies with leading positions in South America How the forces of globalization are reshaping business. .. across the region Of the eight Latin American countries that appear in The Globalization Index of 60 countries, only one, Chile, makes it to the top half of the Index Technology adoption lags A general trend among the eight Latin American countries is their weak performance on the Index for the exchange of technology and ideas Encouraging steps in some countries include funding for R&D and the growth of. .. half of The Globalization Index The remainder are clustered in the bottom third of the list, with Venezuela bringing up the rear in 59th position, just ahead of Iran Despite these relatively low scores, progress on globalization has generally been positive in the region since the 1990s All eight countries have improved their overall score during the period of analysis, with the exception of Argentina and... predictable business environment are serving as a strengthening platform for FDI But perhaps the biggest change in relation to globalization is the confidence of leading businesses within the region itself Latin American companies have expanded beyond their borders, and there is a growing cohort of global players, particularly from Brazil and Mexico, that occupy leading positions in their respective industries... with investment-grade status (alongside Chile, Mexico and Brazil) lends credibility to this claim Source: The Globalization Index 2009 How the forces of globalization are reshaping business in Latin America 15 Brazil At first glance, it may seem surprising that Brazil did not score more highly on The Globalization Index Although it has made steady progress in its overall Globalization score since 1995,... global reality The Globalization Index: selected Latin America country profiles Chile The spread of the eight countries on the Index is in large part a reflection of their highly varied performance on trade openness Chile, in 27th position, benefits from one of the world’s most liberal investment regimes, which has made the country a top destination for foreign investors For the past 30 years, the Government ... airline LAN and the CSAV shipping holding company are fast-growing global companies with leading positions in South America How the forces of globalization are reshaping business in Latin America. .. of globalization are reshaping business in Latin America 17 The Globalization Index — indicators, sources and weightings The Globalization Index was created by identifying the key indicators of. .. are reshaping business in Latin America Foreign firms are re-engaging with Latin America Brushing off earlier disappointments with investments in Latin America, multinationals from the US and other