International Joint Ventures in Brazil´s Markets
Overcoming Market Entry Barriers and Expanding International Business into the Markets of Brazil
Table of Contents
1. International Joint Ventures (IJV) and Foreign Direct Investments (FDI)
2. International Joint Ventures (IJV): Advantages and Disadvantages
2.1 Legal Business Structure of the IJV
2.2 Advantages of the IJV for the host country and the local company
2.3 Disadvantages of the IJV for the host country and the local company
2.4 Advantages of the IJV for the participating MNC
2.5 Disadvantages of the IJV for the participating MNC
3. Three good examples of MNC's participating in Brazilian hosted IJV's
3.1 American Electric Technologies Announces Joint Venture in Brazil to 4 Deliver Turnkey Power Solutions
3.2 Oil States forges Joint Venture in Brazil
3.3 Ecometals signs Joint Venture Agreement in Brazil
4. Foreign Direct Investment (FDI): Advantages and Disadvantages
4.1 Legal Business Structure of the FDI business
4.2 Advantages of the FDI business for the host country and its economy
4.3 Disadvantages of the FDI business for the host country and its economy
4.4 Advantages of FDI for the investing MNC
4.5 Disadvantages of FDI for the investing MNC
5. Two good examples of MNCs doing FDI business in Brazil
5.1 Brazil/Germany: VW increases investment in Brazil
5.2 Brazil/USA: Ford Motors invests $2.9 bn in Brazil
6. Cultural business barriers encountered when entering the Brazilian market by means of IJV or FDI and possibilities to overcome them
6.1 Patriarchal Society and vertical hierarchies
6.2 Family oriented society
6.3 Relationally based trust
6.5 National pride
6.7 Class differences
6.8 Coffee invitations, small talk, sovereignty, acting cool
6.9 Pyramidal Corporate Governance practices in Brazil
8. Annex: The interesting story of a very old USA/Brazil Joint Venture
1. International Joint Ventures (IJV) and Foreign Direct Investments (FDI)
For several decades now, we have experienced an unavoidable and strongly growing market globalization. Beyond the traditional export business, industrial globalization keeps penetrating the world's countries and markets under many different forms of international businesses and strategic alliances. This term paper briefly describes, justifies and compares two forms of cross-border business expansion strategies that a Multi-National-Corporation (MNC) may resort to: Foreign Direct Investment (FDI) and International Joint Venture (IJV).
Since an IJV is a special form of FDI, it must be clear to the reader of this paper, that the term IJV is used for cross-border business expansions undertaken by a home country's MNC in a strategic business alliance with an existing enterprise of a host country. Whereas the term FDI is used for the case of a home country's MNC doing cross-border business expansion by means of establishing a subsidiary in a chosen host country. IJV is an international business expansion alliance strategy between two or more enterprises, whereas FDI is a single international business expansion strategy in the form of a MNC's subsidiary. Detailed differences between IJV and FDI are explained in the next chapter of this paper.
A priori, one may generalize, that the main difference between implementing FDI and IJV as a means of international business expansion can be found in the form of market that a MNC or MNC might want to enter in a chosen host country. If the host country possesses no similar national industry to that of the investor, then FDI is a very good strategy for establishing and expanding its business into the host country's market. On the other hand, if similar products but of inferior quality to that of the home country's investor are already being produced in the host country by a local industry, the strategy of forming an IJV is preferable for expanding business and entering the hosting market.
A common denominator of both international market entry modes is the obviously advantageous presence of interests of the involved MNC's when trying to expand their businesses into host countries. This direct presence in a host country means additional speed to market and provides the MNC's far more possibilities of establishing, conducting and controlling international businesses, than the traditional export business..
The generalizing statement made in the paragraph above is only meant to provide an introductory feeling on how the market of a host country determines the strategy for business expansion. Naturally, there are far more important facts and reasons to be considered that ultimately force investors into conducting extensive, deep and detailed analysis of not only the market conditions and structures found in pinpointed host countries of their interest, but much more must they make profound and accurate analyses of the socio-cultural and political dynamics that overlay the people which they will rely on, have to work and cooperate with in the host country. Only a very careful and detailed preparation of their business expansion plan under all aspects involved will enable them to enter, expand, subsist and succeed in a host country. Needless saying here is that there is no easy common way out, since most host countries have very diverse cultures and customs that are seldom known to the interested investors.
The dynamic issue of industrial globalization and international business expansion gets overly well reported on, as well as commented and documented in the world wide Internet. For this reason I chose to compile and comment relatively recent information obtained over the Internet, complementing and concluding it with some backing and legitimizing information derived from the UNCTAD and OECD annual reports.
2. International Joint Ventures (IJV): Advantages and Disadvantages
2.1 Legal Business Structure of the IJV:
An IJV is a contractual business undertaking between two or more parties or partners also known as co-venturers, being entirely governed by the legal agreement that brings it into existence. IJV's are normally not legal entities of their own and get entirely controlled by the co-venturing partners. IJV's are governed by contract laws exclusively and not by any corporate business or property laws. Therefore the IJV does not file and pay income taxes, own assets, enter in contracts or hire employees. The IJV's revenues, expenses, risks and assets are directly shared by the co-venturing parties.
As contractually agreed, the co-venturers have mutual rights to control the enterprise, and sharing in the profits, as well as a duty to share in any losses incurred. Each party of the IJV has a fiduciary responsibility, owes a standard of care to the other parties, and has the duty to act in good faith in matters that concern the common interest or the business venture. A fiduciary responsibility is in this case, the duty to act for all co-venturers' benefit while subordinating one's personal interests to those of the business venture's interests. 
2.2 Advantages of the IJV for the host country and the local company:
Developing host countries that have some national industry and an established market of similar products of lesser quality or imported origin, give IJV's a preferential treatment. This is due on one side, to the desired foreign capital and technology involvement that can help in further developing the host country's industry and market. On the other side, IJV's are mostly very advantageous to a host country and local company, because they guarantee local management and a very effective technology transfer. 
Some of the advantages of this strategic alliance are:
- A legitimate way to gain product related technological and managerial know how. o A means of developing and creating new processes and related supplier industries in the local value chain.
- A source of training and furthering skills of local employees. o A possibility to raise local employment o A chance to create sustainable return streams in the country o A chance for growth in the local and cross-border markets
2.3 Disadvantages of the IJV for the host country and the local company:
A host country needs to offer excellent market conditions in order to become an interesting candidate for an industrial strategic alliance, foreign investment and international forms of business cooperation. Many countries do not offer the required infrastructure of law and order that complies with the standards of international business law. 
Some of the disadvantages of this strategic alliance are:
- A MNC will not risk entering the market of a host country that is perceived as being politically and economically unstable
- A MNC will not risk entering the market of a host country that does not comply with international business rules and contract laws
- The company of a favorable, safe host country runs the risk of allying with a MNC of dubious intentions and lacking business responsibility, which may hurt it financially, while also ruining its credibility and image in the host country's market.
2.4 Advantages of the IJV for the participating MNC:
Many MNCs use joint venture partnerships to eliminate the “drawbacks of foreignness”, their unfamiliarity with local rules, culture, and business practices. IJVs are sometimes the best way to expand business into capital investmentl restricting cross-border markets. India for example restricts FDI equity participation by foreign firms in local operations to 40%. Many Western companies are resorting to strategic business alliance in the form of IJV's in order to enter “difficult” Eastern European markets. In the former Soviet Union, 49% foreign equity ownership in IJV's is now possible after recent economic reforms. 
Some of the advantages of this strategic alliance are the chances and opportunities of: 
- Expanding its business cross-border by increasing new market penetration.
- Circumventing high tariff market entry barriers.
- Accessing local resources and achieving advantages of scale, scope and speed.
- Becoming eligible for normally restricted local government contracts.
- Enhancing competitiveness in domestic and global markets.
- Selling technology, equipment, processes and consulting services.
- Investing long term capital and establishing sustainable return streams.
- Gaining access to local market expertise of the host country's co-venturer.
- Enhancing product development, diversifying and creating new businesses.
- Reducing the market entry costs and risks by using the assets of local co-venturers.
- Economical accessing and local processing of natural resources from the host country.
2.5 Disadvantages of the IJV for the participating MNC:
One important reason for a MNC to participate in IJV's is the establishment of sustainable return streams and low risk, long term capital investment. Another important reason is sustained business growth in crossborder markets with a safe future in a stable market.
Some of the disadvantages of this strategic alliance are:
- Financial losses incurred to the MNC by a suddenly or rapidly changing political and economic environment in the host country of the allied co-venturer. Examples for this being the nationalization of indispensable natural resources or the expropriation of corporate equipment by a new and unexpected form of government.
- Differences in corporate culture, in management and leadership styles that might lead to severe problems between the co-venturers when it comes to valuating and sharing liabilities and assets, to claiming benefit shares, to making decisions.
- Adverse publicity based on negative local environment impacts, low wage employment, exploiting intentions or even child slavery will cause severe image damages to the MNC in the host country and all over the world. A MNC might not always know the local suppliers involved by the local co-venturing company, whom they employ and at which conditions, or even the ecological safety of the processes implemented in order to supply the IJV at attractive prices.
3. Three good examples of MNCs participating in Brazilian hosted IJVs
Not only corporations from all over the world join their resources and efforts to achieve the common goal of making and improving business profit. Also governments participate in IJV's, mostly by providing infrastructural and financial support in big projects of strategic national importance. The following examples of Brazilian hosted IJVs are directly quoted from news articles published in the internet. For the sake of informative completeness regarding the dynamics of the IJV business trend, they were not abbreviated or edited by much.
3.1 American Electric Technologies Announces Joint Venture in Brazil to Deliver Turnkey Power Solutions
(Press Release Source: American Electric Technologies, Inc. On Tuesday May 4, 2010, 9:00 am EDT) 
HOUSTON, May 4, 2010 (GLOBE NEWSWIRE) - “At today’s 2010 Oilfield Technology Conference, American Electric Technologies, Inc. the premium supplier of custom-designed power delivery solutions for the traditional and alternative energy industries, announced that the alliance agreement with Five Star Services Ltda. of Macae, Brazil has received approval from the Brazilian government, enabling the alliance to move forward in delivering products and services to a growing market.”
The newly formed joint venture, AETI Alliance Group Brazil ("AAG"), designated José Octavio as its General Manager. Among the strategic advantages of this nomination are Octavio's years of product and services experience in the Brazilian offshore, marine, and industrial industries. Moreover does Octavio hold a BS in Electrical Engineering and Electronics and will shortly complete his post-graduate degree in Business Administration. His 11 years of experience in the manufacturing and service business with ABB will certainly guarantee a successful business alliance.
"Jose Octavio is well known and respected by the customers in the Brazilian Oil and Gas Exploration and Marine industry for his knowledge of electrical service," said Doug Williams -- AETI's Vice President -- International. "He has proven to many customers that his team is reliable and customer-service oriented while at ABB, and we look forward to Jose leading AAG to successful growth and profitability by offering the Brazilian customers high quality products and services."
In Octavio's own words: "The Brazilian Chemical Oil & Gas (COG) market is booming especially due to Petrobras investments planned for the future. The discovery of the pre-salt in Brazil boosted the national and international investment in this segment. AETI has a long, successful history in the oil and gas business in the U.S. and international markets. I look forward to helping make AAG a strong player in the Brazilian COG market as a solution provider ofproducts & services for new vessels and rigs."
AETI Alliance Group Brazil (AAG) will provide full power distribution and control systems design; manufacturing of custom electrical - low voltage and medium voltage switchgear and distribution; motor control centers, AC and DC drives; consoles, and automation products and offshore services (electrical construction, electrical testing, electrical installation, and electrical start-up) to the Brazilian offshore and marine markets. AETI will support the technology and manufacturing processes. Construction and installation services will also be available on a local basis by AAG. Additionally, Five Star and AAG are capable to produce steel modules and] to completely outfit drilling and marine electrical systems for cost effective installations.
AAG's business expansion plans in Brazil also include providing product manufacturing and services in the industrial, land drilling, and alternative energy markets. Manufacturing will occur at AAG's 10,000 sq.ft. manufacturing and service facility located in Macae, Brazil, and Five Star's 570,000 sq. ft. facility. The products will be commissioned and supported by local Brazilian technical service staff of AAG.
American Electric Technologies, Inc. is the premium supplier of custom-designed power delivery solutions to the traditional and renewable energy industries. AETI offers M&I Electric(TM) power distribution and control products, electrical services, and E&I Construction services, as well as American Access Technologies zone enclosures, and Omega Metals custom fabrication services. South Coast Electric Systems L.L.C., a subsidiary, services Gulf Coast marine and vessel customers.
AETI is headquartered in Houston and has global sales, support and manufacturing operations in Beaumont, Texas, Keystone Heights, Fla. and Bay St. Louis, Miss. In addition, AETI has minority interests in three joint ventures, which have facilities located in Xian, China, Macae, Brazil, Singapore and Jakarta, Indonesia.
Forward Looking Statements
This press release contains forward-looking statements, as defined in Section 27A of the Securities Exchange Act of 1934, concerning our anticipated future revenues, profits, plans and objectives. While the Company believes that such forward-looking statements are based on reasonable assumptions, there can be no assurance that such future revenues, profits, plans and objectives will be achieved on the schedule or in the amounts indicated. Investors are cautioned that these forward-looking statements are not guarantees of future performance. Actual events or results may differ from the Company's expectations, and are subject to various risks and uncertainties, including those listed in Item 1A of the Form 10-K filed with the Securities and Exchange Commission on March 25, 2010. The Company assumes no obligation to publicly update or revise its forward-looking statements even if experience or future events make it clear that any of the projected results expressed or implied herein will not be realized.
Personal comments on this IJV:
This outstanding news article describes and illustrates the advantages of the IJV as an effective cross-border business expansion strategy. AETI takes advantage of José Octavio's long years of locally respected premium technical and business oriented experience. The General Manager is respected and well known in Brazil's booming oil drilling industry. This strategic alliance also allows AETI to profit from Five Star's local manufacturing facility and infrastructure. Brazil's Five Star Services profits from AETI's technological expertise and worldwide premium business reputation.
Disadvantages could arise from the fact, that José Octavio is a well known and respected member of the powerful pyramidal family structures that govern Brazil's business scenarios. AAG will be as profitable only, as the strongly hierarchical family owned businesses are willing to cooperate in business and share the market with it. This also means that bribing and corruption might play decisive roles in AAG's success and survival in Brazil's booming market. This is a very well known cultural risk for enterprises operating in Brazil.
The Forward Looking Statements make it clear to all interested business associates, that there are no guarantees that AAG will actually achieve the intended results in the future.
 “Joint Venture” Answer.com (no publication date). Web. 2 June 2010.
 “Joint Ventures Information” Cooper.edu (no publication date). Web. 2 June 2010.
 “Strategic Alliances” Smallbusinessnotes.com 2009. Web. 2 June 2010.
 Encyclopedia of Business, 2nd ed. “Joint Ventures” Referenceforbusiness.com (no publication date). Web. 6 June 2010.
 GLOBAL NEWSWIRE, “American Electric Technologies Announces Joint Venture in Brazil to Deliver Turnkey Power Solutions” Press Release Source: American Electric Technologies, Inc. Tuesday May 4, 2010, 9:00 am EDT, Houston, Texas. Web. 4 June 2010.
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- Foreign Direct Investment in Brazil Traditional Export Business Multinational Corporations Crossborder Business Expansion Entry Barriers Brazilian Market Legal Structure of the JV International Joint Venture in Brazil Advantages of IJV Disadvantages of IJV Expanding Business into Brazil Socio-Cultural Characteristics of Brazilian Business OECD Business Report UNCTAD Business Report intercultural business experiences cross cultural communication consultants Interkulturelle Markt-Eintritts-Barrieren internationale Geschäfts-Erweiterung Joint Ventures in Brasilien traditionelles Export Geschäft Grenzen überschreitende Geschäfts-Erweiterung Brasilianischen Märkte legale Strukturen der IJV in Brasilien Vorteile der IJV Nachteile des IJV soziale und kulturelle Eigenschaften der Brasilianischen Geschäfts-Umwelt interkulturelle Geschäfts-Erfahrungen Interkulturelle Kommunikation International Joint Venture Foreign Direct Investment in Brasil International Business Manangement International Business Strategies internationale Geschäfts-Strategien Internationale Unternehmensführung Latin American Markets Lateinamerikanische Märkte International Marketing Marketing Strategies Barry Leach Strategic Barry Leach & Kollegen Strategic Advisors GmbH Vivien Hotter Madeleine Hotter Advantages of FDI Disadvantages of FDI International Joint Ventures Foreign Direct Investment Brazilian Markets Mercados Brasileros Mercados del Brasil Expansión de negocios y de empresas Geschäfts-Internationalisierung negocios internacionales estructuras legales del IJV cracterísticas sociales y culturales del negocio y comercio en Brasil desventajas del IJV ventajas del IJV ventajas y desventajas del FDI estrategias internacionals para el expandimiento de empresas comercios negocios y mercados international joint ventures in Brazil international joint ventures in brasil markets in brazil markets in brasil