The eyes of the world are on Brazil as the country hosts one of the largest international sporting events of the decade – engaging a massive global audience in games of triumph and tragedy. The first 32 games of this year’s World Cup have reached over 54 million total viewers, already surpassing the scope of the entire 2010 World Cup, and millions more will tune-in between now and the event’s culmination on July 13th. While sports fans may shift their focus from Brazil following the conclusion of the World Cup, the business world should keep its eye on the country’s robust and promising economy.

Brazil’s Market Opportunity

In 2013, Brazil’s economy grew 2.28% and its gross domestic product (GDP) reached $2.243 trillion, due in large part to the country’s reliance on small and medium enterprises (SMEs) for both jobs and growth. Of the total number of businesses in Brazil, 98% are SMEs that provide 96% of the country’s employment opportunities.

An abundance of natural resources, rapid growth in the manufacturing and service sectors, strong consumer spending, and recent domestic investments have made the country an increasingly popular destination for foreign investment. Until 20 years ago, Brazil was a relatively closed market with limited engagement with foreign companies. Since opening its market, the country has relied heavily on foreign investment to drive industrialization. In order to attract foreign companies for capital intensive projects in mining, telecommunications, IT, and chemicals and petrochemicals, Brazilian legislation has traditionally accommodated multinational organizations and international investors.

In March 2014, Brazil’s Purchasing Manager’s Index (PMI) was 50.6, representing the seventh successive monthly rise of manufacturing production. Reports of increased demand and business expansion plans continue to encourage manufacturers to hire additional employees, steadily increasing the rate of manufacturing employment since February 2014 and reinforcing the economy’s upward growth trends.

Brazil Manufacturing Industry: Representative Sample

Industry 2013 Market Trends
Electronics 8% growth to $156.7 billion Positive market outlook with expected revenue growth of 7.28% in 2014.
Automotive 1.6% production decline and 0.9% decrease in sales Sales are falling but capacity is expanding. By 2017, car makers will build 6 million vehicles/year but domestic sales may not exceed $4 million.
Home Appliance 4% growth to $21 billion Changes in cultural norms will drive sales for traditionally poor-selling home appliances.
Industrial 10% growth to $22.7 billion Strong construction performance and events like the World Cup and Olympics are bolstering demand, with a 12% annual growth rate for imports.
Source: Hanover Research, Brazilian Protective Packaging Market Assessment, May 2014

Challenges to Brazilian Expansion

Brazil’s dynamic, expanding economy certainly offers new business opportunities, but there are reasons to be apprehensive. While Brazil’s GDP grew at an annual average of 4% during the previous decade, numerous structural issues threaten to hold back economic growth. High taxes, outdated regulations, poor infrastructure, an underperforming education system, and corruption continue to plague the country, and the World Bank has placed Brazil in the bottom third of countries in its 2013 “Ease of Doing Business” rankings.

Many of the challenges that go along with establishing operations in Brazil stem from major structural problems related to the Brazilian macroeconomic and policy environment – including the length and complexity of the startup process, legislative and cultural bias, bureaucracy, and access to financing.

A shortage of skilled labor is another barrier to growth in Brazil’s labor-intensive manufacturing industries. As the government works to reduce the tax burden, more industrial surveys are saying the lack of skilled workers is deterring growth. In 2012, the overall cost of manufacturing increased 6.6% while the cost of labor grew 11.2%

Unquestionably, these obstacles in market entry pose a challenge for SMEs looking to capitalize on the growth and opportunity of Brazil’s manufacturing-friendly economy. As The Economist notes, “The World Bank’s annual report on doing business in various countries reads like a productivity to-do list for Brazil: make it simpler to start up and wind up companies; cut and streamline taxes; [and] increase domestic savings and investment.”

Overcoming the Barriers to Entry

Brazil’s legislation and Brazilians’ mindsets tend to favor: 1) multinational corporations that are willing to do a major upfront investment in the market, and 2) small and medium enterprises that achieve market entry through acquisitions and strategic local partnerships. Joint ventures provide organizations with valuable knowledge of the country and help international companies navigate the intricacies of the bureaucratic requirements of conducting business. To demonstrate this business strategy, payroll services company Paychex, recognizing Brazil’s vibrant market of small businesses and evolving regulatory requirements, announced its expansion into Latin America via a partnership with Semco in early 2014This June, the Brazilian Minister of Finance announced new measures to expand access to the Brazilian capital market that will continue to build the country’s economy in anticipation of the 2016 Olympics. As such, other companies will likely follow in Paychex’s footsteps to explore what the Brazilian market has to offer.

Despite these encouraging steps, successful expansion cannot be achieved through partnerships alone. As CBS Money Watch reports:

“The message for investors is, don’t treat (emerging markets) as one…It is very important to do your homework at the country level.”

Businesses must conduct thorough market evaluations to assess the size, opportunities, and demand drivers of each market of interest. Further, market validation often requires a combination of both secondary and primary research to garner additional insights. Surveys to employers and consumers evaluating the needs or gaps in current services, or in-depth interviews with executives from adjacent organizations that have achieved prior success in the market of interest, serve to supplement market research with data that is not available through secondary sources. Applying research to develop market strategy allows businesses to validate opportunities, make data-driven decisions, and maximize future revenue potential.

So while World Cup fever may fade in the next month, the promise in Brazil’s emerging economy will continue to grow.