UNIVERSITY OF MARIBOR

FACULTY OF ECONOMICS AND BUSINESS

Work of diploma seminar


COMPARATIVE ANALYSIS OF BUSINESS
ENVIRONMENT AND RISKS IN BRIICS
COUNTRIES













February, 2014 Matej Domadovnik

UNIVERSITY OF MARIBOR
FACULTY OF ECONOMICS AND BUSINESS










Work of diploma seminar


COMPARATIVE ANALYSIS OF BUSINESS
ENVIRONMENT AND RISKS IN BRIICS COUNTRIES


Primerjalna analiza poslovnega okolja in tveganj drav BRIICS



















Candidate: Matej Domadovnik
Program: Professional higher education
Study field: International Business
Mentor: Romana Korez-Vide, PhD, Assistant Professor
Proofreading: Dayna Plummer, BA, ESL Instructor
Academic year: 2013/2014


Paris, February 2014

ABSTRACT
BRIICS's power is growing in the global economy and they have become very important
players in a political sense. Brazil, Russia, India, Indonesia, China, and South Africa represent
fast growing markets, which are potential markets for foreign investors. Risks, like political
risks, financial risks or corruption are always present, and they cause a lot of uncertainty in
investors eyes, since they can lose their input. The risks are much higher in developing
countries because their political and financial systems are not well developed or implemented.
In my diploma seminar I analysed in great detail the business environments and risks of
Russia, China and India. Analysis was backed up with many economic indicators which I
found relative. At the end of analysis, I pointed out a country which would be a good potential
market for RELIDEA ltd., a company that does digital marketing. My diploma seminar also
included possible scenarios of the BRIICS and their new challenges.
Key words: BRIICS, risks, business environment, potential markets, forecast


TABLE OF CONTENTS
1 Introduction ........................................................................................................ 1
1.1 Definition of the problem and description of the topic .................................................... 2
1.2 Purpose and aims................................................................................................................ 2
1.2.1 Purpose ...................................................................................................................... 2
1.2.2 Aims .......................................................................................................................... 2
1.3 Assumptions and limitations ............................................................................................. 3
1.2.1 Assumptions .............................................................................................................. 3
1.2.2 Limitations................................................................................................................. 3
1.4 Investigation methods ........................................................................................................ 3
2 Presentation of BRIICS ..................................................................................... 4
2.1 Brasil .................................................................................................................................... 4
2.2 Russia .................................................................................................................................. 5
2.3 India ..................................................................................................................................... 6
2.4 Indonesia ............................................................................................................................. 7
2.5 China ................................................................................................................................... 8
2.6 South Africa ........................................................................................................................ 9
3 Comparative analysis of Russia, China and India ......................................... 11
3.1 Business environment ...................................................................................................... 11
3.1.1 Consumers and their behavior ..................................................................................... 11
3.1.2 Labour force ................................................................................................................. 13
3.1.3 Government regulations and restrictions ..................................................................... 15
3.1.4 Comparison of business enviornments between the countries ...................................... 16
3.2 Risks .................................................................................................................................. 18
3.2.1 Political risks ................................................................................................................ 18
3.2.2 Financial risks ............................................................................................................... 20
3.2.3 Corruption .................................................................................................................... 22
3.2.4 Comparison of risks between the countries ................................................................. 24
3.3 Suitable investment location for a company that does digital marketing ................... 26
4 Future of the BRIICS in the world's economy .............................................. 28
4.1 Long-term scenarios ........................................................................................................ 28
4.2 New challenges ................................................................................................................. 28
5 Conclusion ........................................................................................................ 30
6 Literature and sources ..................................................................................... 31







TABLE OF FIGURES
Graph 1: Internet users per (per 100 people) from 2004 to 2012...17
Picture 1: Corruption amongst the BRIICS countries23
Table 1: Economic and Industry Risk24
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1 INTRODUCTION
1.1 Definition of the problem and discription of the topic
The countries like Brazil, Russia, India, Indonesia, China and South Africa are the countries
that have recorded the biggest economic growth in the last years. They used to be not very
competitive and they had many problems in the past. However, nowadays they have become
very important actors in international relations. Not only because of the economic strength but
also because of the demography for example their population represent more than 40 % of the
worlds total population and will grow even more in the future. They represented 30% of the
worlds BDP in the years 2000 and 2005 and they can achieve 60% of the worlds BDP until
2025. Some economists believe that until the year 2040 these countries will be as strong as G8
countries (Fondation mditerranenne dtudes stratgiques 2012, 106-120).

The BRIICS countries have no connection to each other in a political way like EU or other
economic integrations. The reason why we put them in the same group is a grace to their
extensive growth rates. Each of the countries has its own strengths, which makes it so
dominant in the world market. For example, Brazil is known as a worlds farm because of its
huge agriculture. China is called workshop of the world since there are produced huge amount
of products within its borders. India is known as an office of the world since they have huge a
focus on the tertiary sector.

All those new emerging economies are offering big opportunities for everyone. Those
countries are very attractive for foreign investors. Investors are interested for those countries,
due to their high economic growth. Investment in these countries could increase the
companys value much faster than in the other countries. However, when multinationals are
investing in these countries it also increases the technology in the country they invest.
Therefore, by doing so they are reducing the gap between the developed countries and the
emerging countries. Therefore, this is a good thing for both sides. For the company that is
investing and the host country.

The consequences of the fast development of BRIICS countries will be their higher control
position in the worlds economy in the future. This means that the competition will be even
higher between the developed countries and the emerging countries. The developed countries
still keep an advantage in terms of technology and infrastructure but this could change very
fast in the future. Therefore, the developed countries will have to take this more seriously, if
we do not want to lose strength in the world market.

Bad point as well for the BRIICS countries is that they are having still many international
conflicts regarding climate change or agreeing with other countries on military intervention.
Like the case in year 2013 when China and Russia did not allow military intervention in Syria
to stop the civil war. These actions are definitely not good for the worlds economy and
especially their own. In addition, they have no common ground in the future or a strong
political project, which could make them more connected. Some of the people still consider
BRIICS countries as uncertain areas. There is also a huge difference between the BRIICS
countries regards, their geographical position. This means that they have very different
climate, which can also play a huge importance in starting a business in a new country. It is
the key thing that distinguishes their business environment.
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1.2 Purpose and aims

1.2.1 Purpose
In the first chapter of my diploma seminar I will present the countries of BRIICS. I will give
brief description of those countries, since I believe it is important to know all the background
before you go any deeper into the analysis of business environment and risks. I will try to
show the strengths and political strategy of each country and present the things that are
making them so successful on the global market. Besides, I will try to present relevant
decisions that the successful countries have made in the past to boost their economic growth.

The main part of the diploma seminar will be comparative analysis in the BRIICS countries
and of course, I will try to go deeper and try to find the main risks, which we can encounter
when we are making business in those areas. There are many political and financial risks in
those countries but on the other hand higher is the risk we take more money we can earn.
Therefore, we need to do good analysis before entering the market. For that reason, my main
part here will be to find out which country could be the most attracting for the certain
business. Besides the risks in each of the countries of BRIICS, there is a different business
environment, which can be very important for the company that is trying to invest in certain
country. Since business, environment can play an important role in prospering at a foreign
market. At the end of the research, I will try to point out a country, which can be most suitable
investment location for a company that provides services of with digital marketing.
Personally, I believe that just for the marketing field it is hard to compete against emerging
countries since they can have things done much cheaper. Therefore, I will mostly focus on
digital solutions and systems, which require more knowledge. That is the area where the
company can be more competitive. I worked in such a company as a student intern and that is
the main reason why I wish to find out which market could be appropriate.

In the last part of my diploma seminar I will try to show the long-term plans for BRIICS
countries, in which direction they are moving and what the possible scenarios are in the
future. How they will catch up in technologies and innovations.

1.2.2 Aims
The objectives that I wish to present in my work are:
- Briefly present each country in the group of the BRIICS countries;
- Comparatively analyse of the business environment and risks in Russia, China and
India;
- Point out the most suitable investment location for a company that does digital
marketing.
- Present the possible development scenarios of BRIICS countries.
The facts that I wish to prove as well in my diploma seminar is that countries of BRIICS are
in a huge uprising, which is impossible for anyone to stop. In the next years they will become
even more powerful therefore it is necessary to consider them already now as a very important
players on the world stage.


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1.3 Assumptions and limitations
1.3.1 Assumptions

I assume that there will be no extraordinary events in the world or in the local environment of
BRIICS countries in the near future otherwise my forecasts for the future will be false. I also
assume that all the data, which I found online, are reliable. Therefore, I will make all my
conclusions based on that.

1.3.2 Limitations

The topic that I have chosen for my diploma seminar is very extensive. I will focus on the
detailed analysis of three countries in the group of BRIICS: Russia, India and China. I have
chosen them, since I think they could be the most attractive potential markets for me. When
describing the BRIICS I will describe just information that is relevant to my topic. Even in the
terms of risk indicators and business environment indicators, I will just focus on the main
indicators, which I will also describe in detail.
1.4 Investigation methods
The applied investigation methods include description and compilation method. Main source
of the diploma seminar will be foreign literature in English and French language that is
available in Bibliothque de Pompidou or in Bibliothque Nationale de France. Besides that, I
will also use all appropriate literature that I will find on the World Wide Web. I will mostly
use up-to-date literature and sources.




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2 PRESENTATION OF BRIICS
2.1 Brazil
Brazil is one of the BRIICS countries, which is dominating in South America, grace to its size
and the population in the area. Brazil is fifth largest country in the world, it represents 47% of
the territory in South America, and it has population of more than 200 million inhabitants.
Since the year 2005, their GDP has not been growing as rapid as other BRIICS countries. The
growth in Brazil was average 4% but in other BRIICS, it was from 8-10 %. The only
exception for Brazil was the year 2009 when there was an economic crisis in the world so
their GDP growth was negative. They recorded the biggest growth just 1 year after the crisis
in the year 2010 where they reached 7.5% increase (Gaulard 2011, 7).

Brazil is also part of a big international integration MERCOSUR. It is an economic
integration in South America with Argentina, Paraguay, Venezuela and Bolivia. This
integration makes them more connected to each other and trading is simplified. It is also good
for any foreign investors when they invest in Brazil they do not have to limit themselves to
one country. Investments in Brazil are not always attractive, since the country is not enjoying
constant growth. However in year 2010 FDI have grown for almost 60 % then the year before.
In addition the unemployment has decreased drastically. The current unemployment in Brazil
is only 5.5%, which is very low if we compare it to European Union unemployment rate,
which is about 12% (EUROSTAT, 2014).

When comparing Brazil in terms of GDP per capita with other countries of BRIICS we can
see that Brazil is only behind Russia, but the gap between them is huge. Therefore, Brazils
life standard is much more similar to China. Brazils current GDP per capita is $11239. The
growth of Brazil was in the last two years minor comparing to the years before. However, it
will slowly improve in the upcoming years. It should go back to 3% growth annually.
Especially in the year 2014, it will be a huge change since Brazil is hosting a huge worldwide
event, the football world cup that will give many opportunities for the companies and create
more jobs (OECD, 2013c).

The important thing about Brazilian market is that the middle class is in huge uprising. Over
54% of the people in the country are in so-called middle class. Since year 2002 and until year
2010 middle class has extended for 11%. The rich class is growing as well in the past years
but it is a minor change. The class that is disappearing are people between poverty and middle
class (Gaulard 2011, 122).

Brazil is very depended on worlds trade. When we look at the balance sheet of Brazil, we can
see that it is making positive outcome in trade of goods. Brazil is focused in agriculture and it
produces so much that it can afford a huge exportation. Agriculture land represents 35% of
their total land and it is growing every year. Brazil is number one in exporting sugarcane,
oranges, pineapple and coffee. They are second in exporting beef, tobacco, soya and black
wheat. Even though it seems that Brazils agriculture plays a big part in their GDP structure it
only represents 6 % of the total GDP, but it employees 23 % of the population active in 2009.
However, when we look more in general and we add agribusiness. We get 37% of total GDP
in the balance sheet and 31% of all employments from the active population. Therefore, it is
justified to call Brazil the worlds farm, due to its huge food supplies for the world (Gaulard
2011, 62-63).
5


2.2 Russia

Russia is the largest country in the world, almost twice as big as Canada; however, its
population is very low considering the size. The population of Russia today is roughly around
143.5 million, which makes the population density very low. Furthermore, the majority of the
population is located in the European part of Russia next to the Ural Mountains. There are two
major cities in Russia: Moscow is the capital with over 10 million inhabitants, and Saint
Petersburg has 4 million inhabitants. The country is also very centralized, with the majority of
economic activates in Moscow (THE WORLD BANK, 2014).

Russia has the highest life standard among the BRIICS countries. The current GDP per capita
is $22,408, and the total GDP has been growing in the last decade constantly, with the
exception of 2008 2009 when Russia faced the world crisis and its GDP went down to 7.8%.
Nevertheless, Russia has made fast progress in reducing poverty and catching up with income
levels of advanced countries over the past decade. However, this progress has been largely
supported by rising oil prices rather than the reconstruction of their economy. To continue
improving living standards they will have to lower their dependence on natural resources and
modernise the economy furthermore. To succeed in the future, Russia can rely on their low
debt and high labour force participation (OECD 2013, 2-4; OECD, 2013f).

The key to the Russian economy is the energy sector; it represents half of the countrys
revenue. Energy exports represent 70% of the total export revenue. However, it is crucial for
Russia to modernise the energy sector, since the consumption of global gas and oil is
supposed to grow. They need to develop new oil and gas production sites and build a new
transmission infrastructure. Russia is among the top five energy consumers in the world, they
are consuming excessive amounts of energy for their needs. Russia is not being rational with
their natural resources; however they could cut up to 30 % of their energy consumption. The
main cause for this enormous consumption is the old infrastructure as well as the population,
since they consider oil and gas prices low so they do not pay much attention to saving energy
(Dubien, 2013, 89-91).

The most important investors for Russia are Germany and United States, followed by the
United Kingdom, Finland and Sweden. The main targets for foreign investors are real estate
and the automobile part industry, with the biggest investors being General Motors and IKEA.
The reasons why foreign investors find the Russian market attractive is its bigger GDP growth
than other European countries, it is relatively close to other European markets, and the
business environment is decent.

Russia has exactly 83 regions, and many of those regions are way below the average income
of the country. Only 15 regions have recorded higher than average GDP per capita income.
Therefore, there is huge imbalance between the regions, and according to OECD research,
only Mexico has a higher inequality across the regions. The reason for this lies in the
countrys size, which makes it harder to develop a quality infrastructure between the regions.
Especially in the north and eastern parts of Russia, the standard of life is far below average.
Not only are the wages are much lower, but also the prices of commodity goods are much
higher than average due to geographical and infrastructure limitations. However, the
government is trying hard to cut the differences between the regions by sending financial aid
to poor regions (OECD 2013, 25).
6



2.3 India
India is another country that is part of the BRIICS group. It has earned that position due to its
intensive growth rate. India is located in south Asia and has 1.237 billion inhabitants, which
makes it the second most populated country in the world just behind China. This makes India
the biggest democracy in the world. India still has a caste system, which makes very hard for
people that are born poor to become rich. In general, the population is very poor; therefore
29.8% of Indians are under the poverty line. Agricultural land represents 57% of Indias land,
and forested area represents 16 %. The capital city in India is New Delhi but the most
populated city is actually Mumbai, and it is also the city with the highest GDP in the country.
The official language is Hindi and is the primary language of 30% of the population. English
is an additional language, mostly used in business circles (EIU, 2014; THE WORLD BANK,
2014a).
Indias GDP per capita is currently $3,339 and it is the poorest country among the G20
countries, even though it is the worlds fourth largest economy in the world. However, there is
still a huge diversity between life in the provinces and the city. Therefore, India still has a lot
of potential to maintain its growth rate, since the people are increasing their quality of life and
are moving to cities. India has been enjoying a huge GDP growth in the last decade. Even in
the years of the economic crisis, India had solid growth compared to other emerging
countries. The biggest growth recorded was in 2010 where the GDP expanded to 10.4%. Its
average growth in the last decade was around 8% annually; however, this growth slowed
down in the year 2012 and it was just 3%. Therefore, investments are currently paying off less
than before. For instance, the most productive kind of capital investment, by private firms that
build factories and buy machinery, has dropped from 14% in 2008 to just 10% today (OECD,
2013e).
In India, GDP composition by sector of origin is very different from emerging countries. The
services contribution is very high in India, which is very similar to developed countries, but
on the other hand, industry contribution is very low. Industry represents only 17% of the total
GDP, agriculture is 16.9% and services 66.1%. The main sectors in industry are the textiles
industry, chemicals, food processing and steel, while the main products in agriculture are rice,
wheat, cotton, tea and sugarcane. The main export partners for India in 2012 were UAE
(12.3%), US (12.2%), China (5%), Singapore (4.9%) and Hong Kong (4.1%). The main
import partners were China (10.7%), UAE (7.8%), Saudi Arabia (6.8%), Switzerland (6.2%)
and US (5.1%) (CIA, 2014).

Offshoring services in India have greatly increased in the last decade. India invented service
offshoring and is now the world leader. They specialized so much in services that they are
now called the office of the world. Their trade in services is very important for their economy;
therefore they employ more than 2 million engineers and technicians, and it is rising
continuously. Most people believe that the services done in India are of low quality. On the
contrary, the main advantage that India has over other competing countries is that the high
quality of services as well as reliability, which are offered at low prices. Therefore, all the big
multinationals are offshoring activities in India. Nevertheless, in the future many things will
change so India has to adapt to its changes. The forecast for the service sector is supposed to
triple from 2010 to the year 2020. Since now, the main market for India is Western countries,
mostly the United Kingdom. However, in the near future emerging countries will create a
7

much bigger demand for services and they will be demanding much more complex services as
well. The market tends to more global solutions that are more innovative and more efficient.
Therefore, if India wishes to keep its leading position in the future, they will have to keep up
with those demands and even increase their share in the global market. There is great potential
in this sector in the future (Testard, 2010, 13-37).

2.4 Indonesia

Indonesia is the worlds third largest democracy and it is also considered to be a country in
BRIICS. In the year 2012, its population was 244 million inhabitants, and the population is
still growing rapidly. Ninety percent of the population is Muslim, which makes it the biggest
Muslim country in the world. Indonesia has a great potential to become a huge economy in
the world due to its population size. In fact, the government has made a long-term plan how to
become one of the ten largest economies in the world by 2025. Since the year 2009 when
Indonesia became a G20 member, the investments in the country rose by four times.
According to the latest A.T. Kearney FDI confidence index, Indonesia moved from the 20th
to the 9th most attractive FDI destination from 2010 to 2012. The air pollution in Indonesia is
very high, about the same as China per square meter. So the Indonesian government has
recently been promoting and trying to support the green economy, which is playing an
important role in growing tourism (A.T. Kearney, 2013).

The standard of living is not low in Indonesia compared to the other countries in the region
and there is huge potential for the country to improve. The current GDP per capita is $4,344.
In the past 10 years, the average growth rate of the Indonesia GDP was 5.5%. In addition, for
the year 2013, the growth was supposed to be 6%, which is still much lower that what was
planned in the year 2011. The government set the annual strategic growth rate at 7-9%. That
growth rate would bring them to their goal, which they set in 2011 to be among the top 10
largest economies in the world. At this point, it is crucial for Indonesia to enhance its
productivity, which will raise prosperity. The main drivers for growth are private
consumption and investment. According to the OECD overview of Indonesia, import growth
is likely to exceed export gains. These trends are concerning developing countries (OECD
2012, 3-8).

Indonesia will face huge problems as it expands; people have a bigger need for a social
security system and a more advanced infrastructure. These improvements require a high
amount of money, which can be obtained through taxation. However here lies the problem,
since Indonesia has extremely low taxation. The money they get from taxation represents less
than 12% of their total GDP. If they wish to develop their economy and improve the standard
of living, they will have to consider raising the amount of money gained through taxation. In
addition, they must generalise their taxation system more, since the biggest burden is
currently on the enterprises. In particular, high transport costs are huge disadvantage for
companies in Indonesia. This slows the trade process and lowers the countrys productivity.
Despite some improvements in recent years, the railway remains in poor condition and the
capacity of the seaports is limited (OECD 2012, 18-19).

The unemployment rate is very low in Indonesia just like the other countries of BRIICS. It has
dropped from 11% to 6% in the last six years. Indonesia has one of the highest minimum
wages compared to the countrys average wages, equal to 65% of the average wage. To gain
more productivity, the country has to raise the general level of skill in the workforce. At the
moment, the workforce often does not meet employers expectations. The downside of the
8

Indonesian labour market is that there are many children between the ages of 10 17 years
old engaged in employment. The child workforce represents roughly about 3.2 million. The
result of this is that many companies are afraid to do business in Indonesia, especially
garment companies where their reputation may fall by producing clothes in countries where
children are used in the labour force. The reason for that lies mostly in the thinking of
Western countries where a child workforce is seen as a violation, while in Indonesia it is not
an issue (OECD 2012, 23).
2.5 China
China is the worlds most populated country, with 1.355 billion people in the year 2014. Fifty
percent of the population lives in the huge cities that are located in the east part of China. The
capital of China is Beijing, with 16 million inhabitants. However, the most populated city is
Shanghai, with 16.5 million inhabitants. The main language in China is Mandarin and
majority of the population speaks it; however, China has many other official languages as
well, which are spoken by around 30% of the population. Therefore, in past years Chinas
government has been trying to generalize Mandarin in all parts of China, which will make the
country more connected, since the language differences are huge amongst them. The majority
of Chinas population is between 25-54 years old, which represents 46% of the total
population. However the interesting aspect of Chinas population structure is that there are
more males then females. It is one of the top three countries in the world with that kind of
ratio. The reason for the dominance of men lies in the previous laws: for a long time was an
allowance of one child per family. Therefore, many families in the countryside, where labour
was of high importance, decided to reject female children and send them to neighbouring
countries. However at the end of 2013, the government removed the law, mostly because of
the fear in the future that developed countries are facing when it comes to an ageing
population (OECD, 2013d).

China is the worlds second biggest economy just behind the USA, but they should overcome
them by the year 2016, according to an OECD survey report. Chinas economy was
expanding rapidly in the past, but in recent years it has experienced a slowdown. Despite that,
Chinas economy is still growing very quickly compared to the other countries of BRIICS and
the western world. Therefore, it will soon become the biggest economy in term of percentage
of the worlds total GDP. However, Chinas income per head will be only one quarter of the
USAs income due to Chinas population. The GDP per capita in China is currently $9,095.
However, the GDP per capita in the cities is much higher, so the migration from the
countryside to the cities and away from agriculture to industry and services is continuing to
rise. The real GDP growth in China was highest in the year 2007 where it recorded a 14%
rise. However, since then all the way to the year 2014, the growth has been on average 9%.
High GDP growth is mostly supported by a rapid and sustained expansion in the industry and
services. On the contrary, there is a huge excess of the labour force in agriculture where the
added value is very low or even non-existent (OECD 2013a, 5-19).

Nowadays the China has become very competitive in the world market, mostly because of its
liberalization that has given a chance to local and foreign companies to seek opportunities
worldwide. However, China remains very conservative compared to European countries.
Nevertheless, it is the number one exporter in the world if we do not count European Union as
one country. The main partners for China are the USA with 17.2% of total exports, Hong
Kong with 15.8%, Japan with 7.4% and South Korea with 4.3% from 2012. The main export
products are data processing equipment, apparel, radio telephone handsets and integrated
9

circuits. However, even though China is exporting a huge amount of products and is making 2
trillion dollars annually from exportation, it is definitely not making any difference in its
balance sheet, not directly at least. Their exportation almost matches the import of the goods;
they import as much as they export, but it makes them the second most importer in the world,
just behind the USA. The main import partners for China are Japan at 9.8%, South Korea at
9.2%, the USA at 7.1%, Germany at 5.1%, and Australia at 4.3% from 2012. The main
products of import are electrical and other machinery, oil and mineral fuels, medical
equipment, metal ores and motor vehicles (CIA, 2014a).
2.6 South Africa
South Africa is the last country in the group of BRIICS. South Africa has a population of 48
million, which gives it rank of the twenty-seventh most populated country in the world and
the fifth most populated in Africa. The majority of the population is black Africans, which
represents 79% and the white Africans represent 9.6%. White people in South Africa are
mostly in high level positions and come from rich families. The religion in South Africa is
72% Christian; the reason for this lies in the Dutch colonization of South Africa, which was
strategically important for them to be able to trade with the Far East. The major cities in South
Africa are Johannesburg with a population of 3.6 million, Cape Town with 3.3 million people,
Ekurhuleni with 3.1 million people, and Pretoria with 1.4 million inhabitants. Life expectancy
in South Africa is very low; in 2013 life expectancy at birth was 49 years. It is the second
country in the world with the lowest life expectancy at birth, just behind Chad. The main
reason for such a low life expectancy is mostly because of AIDS. South Africa has the largest
proportion of people living with HIV/AIDS in the world; eighteen percent of the total
population officially has HIV/AIDS (CIA, 2014b).

South Africa is an emerging market with abundant supply of natural resources. Its current
GDP per capita is $10,798, and the total GDP is $600 billion, which makes South Africa the
largest economy in Africa. The GDP growth compared to other BRIICS countries is
considerably low. The average GDP growth in South Africa for the year 2000 to 2010 was
just 3.5% annually. Unlike some emerging countries, South Africa felt the world crisis in year
2009 and its GDP fell by 2%. South Africa has experienced weak recovery since the year
2009, with post-crisis growth more similar to the OECD average countries than the BRIIC
group. South Africas biggest amount in the GDP composition by sector of origin is the
service sector with 68.4%; after that comes industry with 29% and agriculture represents only
2.6%. From 29% of the industry, the largest contribution is mining, since South Africa is
known to be the largest producer of platinum, gold and chromium in the world. Therefore, the
main commodities exported are gold, diamonds, platinum and other metal minerals. However,
recently the prices of several major export commodities have dropped. The key reason for that
is because South Africas main export partner is China, which has slowed down in its growth
and eventually reduced the need for certain commodities. The drop in prices led to lower
salaries and workers being unhappy, which led to strikes in the mining sector. However
according to the OECD, in 2013/14 the South African mining sector should recover, since
Chinas growth should be back on its former path of intense growth, which will increase the
need of goods provided by South Africa (OECD, 2013b, 11-17).

The labour market is another problem that South Africa has been facing for long time already,
with the employment rate being dismally low. Just over 40% of the working age population is
employed, compared to the OECD average of 65%. The unemployment rate in South Africa
has been over 20% for the last 16 years. The latest unemployment rate says that it is just under
10

25%. Comparing to the BRIIC group, again there is an enormous difference where countries
have the unemployment rate under control and are keeping it low. Unemployment is
especially high among the youth: 51% of them are unemployed, and a difference exists as
well between ethnic groups, where 28% of black Africans and only 5% of white are
unemployed. The gap is mostly because of the difference in the educational system, where
white people with higher living standards than Africans could afford better quality education.
Nevertheless, the majority of the labour force is employed in the service sector, while industry
employs 26% of the population and agriculture represents 9% (OECD, 2013b, 26).
11

3 COMPARATIVE ANALYSIS OF RUSSIA, CHINA AND
INDIA
3.1 Business environment
The examination of the business environment is very important for companies when trying to
enter new markets. This research gives us the necessary information to choose the right
market and be able to operate within it. A business environment consists of many indicators,
which gives us a clear picture of the selected market and makes it possible to distinguish
markets from each other.
3.1.1 Consumers and their behaviour
Not all consumers have the same way of thinking around the globe. Therefore, it is crucial to
know the consumers we are dealing with. Knowing the consumers better than our competitors
could help us be more successful, since we know exactly what they want. Consumer
behaviour is becoming more generalized due to globalization; however, it is still very
connected to religion and culture. Therefore, these still have to be taken into consideration
when entering new markets.

Russia is huge potential market for all companies due to its population and its growth, which
can provide long-term success. The population purchasing power is growing rapidly and the
standard of living is improving quickly. This causes people to look for more and more goods,
which are not basic anymore. However, about 73% of the population is urban and makes up to
85% of the purchasing power. Therefore, the majority of companies are trying to make their
way into the Russian market through the main cities, because this is where Russias power is
actually located. Russia is becoming more and more of a middle class country; nowadays,
82% of Russian households are middle class. In addition, poverty is reducing as well: in the
last decade, poverty levels have reduced from 29% to 13.3%, making it almost comparable
with Western countries. According to a survey done by Nielsen (2013), Russian consumers
are very open to new products and new technology, and when looking only at fast-moving
consumer goods, the Russians are very traditional. Around 53 % of Russian consumers shop
for the whole family compared to 45% globally. Russian consumers are especially brand
loyal; many of them already know which brand they will buy before entering a certain shop.
This especially applies to the accessories, technology and garment sectors. Russians in
general believe that services and products that come from the Western world are much better
in quality and are willing to pay more for them. This is the opportunity for all Western
companies to offer their products on the Russian market, because they will be wining the
consumers easier than domestic companies. On the other hand, Carrefour, the second largest
retailer in the world, failed to enter the Russian market. The main reason for its failure was in
the consumers rejection of more expensive goods. Carrefour wanted to be in the city centre
and bought a few expensive locations, which led to higher prices than what competitors had.
Therefore, Carrefour closed all its operations in the largest market in Europe. The potential
for the Russian market is not only in its size but also in the consumers purchasing power
considering percentages of disposable income for other spending. For instance, Western
consumers are left with around 40% of their total income compared to the Russian 70%. The
reason for this difference is mostly in cheap housing and utilities, which put more money in
the hands of the consumers (Thomas White International, 2014; Ernst & Young, 2014).
12

China has the largest population in the world, which leads to a great number of consumers.
Again, the huge economic growth that is present in China for the last two decades has
improved the standard of living, which leads to higher consumption. All of Chinas economic
activities are mostly located on the east side, close to the sea where the capital is located.
However when talking about consumers in China, they are still very different from the
European consumers. On average, Chinas workers spend much more time at work then
Western countries; therefore, at the time of major holidays in China, for instance, all of the
shops stay open. There are four major holidays in China, and people actually spend money on
those days, since during the work period they do not find the time. Therefore, the majority of
shops are open 365 days a year. In Europe, shops are strictly closed on the holidays or their
schedule is adjusted to times that are more casual, mostly because European consumers do not
consider going shopping on holidays. In China, the easiest way to reach consumers attention
is by advertising on TV. It is by far the most effective way of advertising in China. In
addition, Chinese consumers are disloyal to brands and are not willing to pay additional
money for the brand name. They usually have a very short list of brands which they will
prefer over others. From the technological point of view of consumption in China, I
mentioned above that China is the first exporter in the world, and exportation is mostly done
overseas. Therefore, China is building the worlds largest port, which is already operating, but
they are extending it. When it will be completed in a few years, it will become the busiest port
in the world. Therefore, I see huge potential for western European companies to develop
systems that are capable of efficiently running the worlds busiest port. Yangshan port is just
one of those potential ports that could use the latest technology and improve the flow of
goods. Not only do ports need the latest systems for operating more efficiently, but retail
companies themselves must readjust to growing internet consumption. Our companies already
have experience in tackling those tasks; therefore, they have a technological advantage over
local companies and are more likely to be successful (National Geographic, 2014).

The Indian market has huge potential in the future. Consumers are getting richer, allowing
them to consume more. Like in all the emerging countries the middle class is on the rise. A
person in India is considered to be middle class when your earrings are between 101 to 485
per month; all those above 485 are considered the rich class. When looking at Indian
consumption we have to take into consideration that India is still much less developed than
other emerging countries, therefore we cannot generalize and make the same assumptions for
them. For instance, the population of China and India are about the same, but the market for
cars or other sophisticated consumer goods is 10 times smaller in India. India is a tough
market for all companies that decide to enter the market because of huge diversity, not only
the income diversity across the country and its regions, but also a huge diversity in culture.
India has 1,500 different dialects and a multitude of faiths which make the market more
complex. The percentage of internet usage in India is very low. According to The Economist
report in 2011, 10% of the total population is using the internet daily. If we turn the
percentage into a number, we come up with 122 million people that use the internet daily.
Two thirds of internet connections are done by mobile telephone. The number of people
connecting daily to the internet is of course growing, and people will feel the need to have
certain applications and technologies more and more. In the year 2014 and the following year,
connections to the internet will increase immensely due to lower smart phone prices in the
Indian market. Therefore, it is expected that the percentage of internet usage will soon go up
much faster. However, telephone applications should be adapted to the needs of Indian
consumers. Companies in India will start using internet channels to promote their products
more often and try to win consumers attention. This is where international companies can
come and offer their technology and knowledge to support the complex systems needed to run
13

a huge market like India. However, the issue that companies find in Indian consumers is a
lack of trust to buy online, and besides that even the percentage of people owning a credit
card is very low. Only about one fifth of Indians own a credit card, and the ones that use them
to buy over the internet are unsatisfied due to payment processes not working properly (The
Economist, 2011).

3.1.2 Labour force

Labour force is an important key factor when determining a new business environment,
especially for industrial companies and those that require high knowledge of the field. When
we open new facilities in a new country, it is crucial to have a qualified labour force that will
meet our requirements. It is quite common that new emerging markets are boosting their
educational systems to achieve a highly educated labour force which has higher added value.

Russia has the highest levels of educational attainment in the world. According to OECD
(2013) research, 88% of adults have attained at least an upper secondary education and the
ambition of students remains high. However, the problem remains in Russia to find the right
match for employers needs. Many graduates are struggling to find a job, and many
companies are complaining that they cannot find workers with the right skills. The fact that
they are highly educated does not mean that their performance is guaranteed. Surveys show
that Russian students performance at age 15 is much lower than the performance of western
European countries. Moreover, Moscow has recorded below average performance in Russia,
and most of the graduates are actually in Moscow. Therefore, we cannot assume that added
value by a student who has graduated will be the same as in other Western countries. Besides
that, the labour force in Russia is definitely not cheap as compared to other emerging
countries; Russia is much more developed and the wages are therefore set higher.
Furthermore, a problem for companies is they have to pay for additional workplace training
for the workers because their school education is wider and does not fit the companys needs
perfectly. Labour in Russia is spread out by occupation, very much alike in developed
countries. The total labour force is 75 million, and from that, 67% is working in service sector
27% in industry and 6% in agriculture. Distribution is the sector that employs the highest
amount of people at 13 million. However, the highest added value is done by extraction of
raw materials which employs just 1 million people. The total work force has not changed in
the last 3 years in Russia, but jobs were created and therefore Russia has reached a very low
unemployment rate of 5.6 % and is continuing to improve, which is very low compared to the
other Western countries. Work in the private sector has been rising as well, and it now
accounts for 60% of all employment. Agriculture and manufacturing employment has been
decreasing in the past 10 years; the reason for that lies mostly in the automatization which
decreases the need for a labour force in those sectors. Anyway, the Russian retirement age is
60 and it is rather low, but this is because Russian men are expected to die at the age of 59,
which means they do not reach retirement age according to statistics. This is also one of the
problems for companies when they train a worker well and he begins giving higher added
value to the company due to his experience, but there is a risk that he will die and the asset
will be lost. On the other hand, females are expected to live until the age of 76 on average.
One of the reasons for low life expectancy amongst the male population is a high percentage
of smokers that eventually leads to premature death. Besides that, the governments spending
is very low in the labour market, for instance, support for unemployed workers is very low.
The spending is currently 0.3 % of the GDP, when European countries spend around 2%.
Therefore, in this aspect Russia still has to invest more in workforce security, because some
people do not even register as unemployed since there are no benefits. Therefore, there is a
14

huge gap between registered unemployed and unregistered unemployment (OECD 2013, 29-
32; CIA, 2014c; Adomanis, 2013).
The labour force in China is 800 million people, making Chinas labour force largest in the
world. When looking at Chinas labour force by occupation, we can see that the country is
somewhere between developed countries and less developed countries, since in less
developed countries the majority is employed in agriculture and in developed countries the
service sector prevails. In China, agriculture employs 34%, services 36%, and 30% in
industry. We can see that agriculture and services are about equal according to the labour
occupation. However, the industry is the most important for China at the moment. It
represents a great deal of the total GDP and it is the engine of China. Moreover, many
companies are still under the impression that the labour force is cheap in China and that
offshoring would reduce their cost per unit greatly. However, those times have passed: China
has become very expensive to offshore nowadays. This is partly because of the higher
taxation, land prices and safety regulations, but mostly because of the labour force cost
increase. The wages in China have been increasing very quickly, on average 20% annually in
the past 4 years, which is a great expense for companies. One of the reasons for this high
wage increase in China is that worker productivity is increasing, so they are paid more
because they produce more. Therefore, manufacturing in China today is not as cheap as it
used to be. Companies are now considering moving their operations to neighbouring countries
where the labour force is much cheaper than Chinas. However, by moving the companies to
another country, you have to search for new local suppliers, which are more unreliable than in
China, and the cost of materials can be even higher due to economy of scale. Therefore, most
companies have decided to stay in China and automate more processes in the factory, which
leads to a lower dependence on an expensive labour force. The other fact why they remain in
China is the efficiency of workers. Currently Chinas unemployment rate is 6.5%, but it can
increase if companies decide to manufacture in other countries, so China has to be careful not
to scare companies away and try to hold advantages that they possess; otherwise the country
will face unemployment problems. The Chinese educational system is very well formed, and
the students at the age of 15 from Shanghai have scored the number one ranking in the world
in reading, science and math. The labour force is becoming more qualified and will be looking
for more and more high-tech jobs in the future (Kristie Lu Stout 2013; CIA, 2014a; The
Economist, 2012).

India on the other hand has a much smaller labour force with regard to its total population.
However, with 490 million it is the second largest work force in the world. Labour occupation
is very similar to underdeveloped countries, where more than half of the work force is
employed in agriculture. The unemployment rate at 8.8% is also rather high. However, the
potential of the Indian labour force is the average age of employees, 27 years, which is why
the labour force is currently very small. Many are going to enter the labour market in the near
future. Therefore, India is creating new jobs very rapidly to meet the requirements from the
market and to secure jobs for newcomers. Despite the growth of the labour force, India is
short of engineers and architectures and the need will be even bigger in the future. The
government is supporting education with constant financial support and is trying to encourage
the population to continue their education in universities, because improving the enrolment
rate of students is the key factor to increasing growth. On the other hand, quality of education
is at stake. Therefore, the unemployment rate among youth is 5 times higher than the rate of
adults, meaning that the transition from school to work is often hard. In addition, the problem
in India is that there is a lot of informal employment. Such employment is much higher than
in other emerging countries; in India it represents 85% of total employment. In a working
environment like that, workers experience low wages and weak job security, meaning extra
15

shifts and unsafe working conditions. A worrying fact is that female participation in the
labour force is falling, unlike in other developing countries. The female declaim is more
noticeable in rural areas of the country, while in cities, it is growing (OECD 2012a, 26-29;
The Economist, 2012a).

3.1.3 Government regulations and restrictions

Governments have the right to protect their own economy from global competitors by
enforcing different restrictions like quotas, tariffs or subsidiaries, etc. However protecting
your economy and closing your market from world trade does not always have good
consequences. Most of the time when such actions are taken, consumers are the ones hit
because competition in the country will be reduced and local companies that are protected
become sloppy and consumers no longer get the right product at the right price. Countries
mostly take those actions to protect local companies that are having problems adapting to
globalization, and by protecting them they preserve the local workforce.

Russia is huge actor in the world market, it was the worlds sixth importer and eleventh
exporter in 2011. After 18 years of negotiations, Russia took a huge step into the world
market in 2012 when it joined the WTO, which was a great success for everyone; it reduced
many trade barriers for the rest of the world. Nonetheless, Russia has maintained some
important trade barriers, which are restricting world trade and remains very protectionist. To
integrate even further into the market they should lower their tariffs that remain very high.
The border procedures are longer than average, so the increase of speed would improve the
flow of goods. Despite all the improvements Russia has made in the past years, in 2013 it was
still pronounced as the most protectionist country in the world. Furthermore, the high trade
restrictions are spread through all the Custom Union where Russia with Kazakhstan and
Belorussia has accounted for 15 times as many protectionist measures than China, which has
8 times more population. The main Russian protectionist policies are direct subsidiaries and
targeted bailouts for local companies. Together they represent 43% of all protectionist
activities. Nevertheless, by joining the WTO Russia has shown to the world that it wishes to
improve its business climate even more with which it will increasingly attract foreign
investors. However, 90% of the companies operating in Russia said that since membership
was granted nothing has changed. Environmental regulations are present in Russia, but not as
much as in Western countries. Since Russia is still emerging, its industry has to show
competiveness to the world that can be achieved with lower prices. However lower prices
come from low production costs, and to have low production costs in an underdeveloped
country the environment is at risk. Therefore, Russia is struggling to improve environmental
conditions and is launching regulations that will reduce pollution. Moreover, Russia has
around 4,000 regulatory documents that are very difficult for companies to follow, and
sometimes some of them even contravene. However, many companies cannot even apply all
those new environmental regulations since the technology they use is very old and it is
impossible for them to adopt them from a technical point of view. Therefore, the Russian
government is having many problems with enforceability, where Russian companies are
privileged and are less likely to be the target of an inspection (The Moscow Times, 2014;
OECD 2013, 16).
China is often accusing other economies of being protectionist and enforcing tariffs and
quotas on Chinese products, which could easily out-price most of the goods in developed
countries. China can achieve a very low production cost due to economy of scale, and this is
their main advantage when competing with other economies. Because of the protectionism
from other countries, China has begun negotiations to make a free trade pact with Japan and
16

South Korea, which will give it free access to two very important markets for its economy. On
the other hand, China uses protectionist methods as well, so even though they denounce other
countries for it, they are not much different. China is accused of giving subsidies to its local
companies in many cases, and by doing so it makes them even more competitive in the global
economy. Subsides were especially given to car companies and car parts production. Most of
that exportation went to the USA, which forced local companies to stop production and look
for opportunities overseas. Besides subsidies, China is also accused of playing with its
currency exchange. In many cases, they devalue the yuan compared to the dollar, which leads
to an increase of exports. Besides the obvious protectionism in China, there is also a hidden
example. If a company is trying to export to China they will be asked to fill in the document
where they have to include a full description of the product they are exporting. Therefore, it is
very risky to export high-technology products in China because there is a great possibility it
will be copied based on the description given. If you want to avoid giving them a full
description of your products they ask you to produce them locally where there is no need for
it. Due to this exportation protectionism, companies rarely decide to launch their latest
products in China, because the respect for intellectual property is very low. Moreover, China
has very strict regulations when it comes to internet freedom. Several applications and
internet sites that are available to the modern world are prohibited in China. For instance, we
cannot use Google ads as a communication channel because Google sites are actually banned
in China. Besides Google search engine, China has banned YouTube, Facebook, Twitter,
Vimeo and many other websites that can be used for internet sales, such as Google Appspot.
Those actions make it hard for Information Technology (IT) companies, especially those
focusing on internet technology, to benefit from the huge market in China. However, China
has some of its own applications such as Weibo, which is Chinas mixture of Facebook and
Twitter, and Baidu, their main search engine. These are meant to replace the ones that are
banned, so it requires companies to adjust their methods of distribution when entering Chinas
market (Qin, 2014; Plummer, 2012; The Economist, 2011a).

India joined the WTO in 1995 and it is one of the founding members. Therefore, nowadays it
is a very open country and an easy accessible market. In recent years they have signed trade
agreements with neighbouring countries such as China, Sri Lanka and Bangladesh to improve
the flow of goods amongst them. They have reduced their tariffs in almost all the sectors in
recent years. However, in the last few months India increased custom duties by 25% for high-
end cars. Most car companies see India as a very important future market, since more and
more people are able to afford a car. Therefore, India wants to make the most of it and apply
big duties on imported cars, or companies can just decide to produce locally and avoid them.
Besides the high-end car protectionism, there are many bureaucratic obstacles in cosmetics.
For instance, they demand cosmetic firms first register with the Indian government, and only
after they resister are they allowed to do marketing. India has enacted 33 trade-restricting
measures in the last 5 years. They are just following the global trend where everyone is just
adopting new restrictions in international trade. However, the Indian government is very soft
when it comes to internet technology. The only sites that cause problems in India are torrent
sites, which had been banned several times in the past but are now permitted again. The fact
that India has not applied any regulations or restrictions on internet access can give us many
advantages when it comes to generalizing and simplifying distribution. We can consider the
market as an open market for new technology and we can use the same distribution channels
as in Europe, which can greatly reduce our costs. The Google Play store for selling and
buying applications was released in India at the end of 2012, and its use has been increasing
since then. This also gave local producers in Bangalore, which is known to be Indias Silicon
Valley, a chance to sell their own applications and launch them into the world. Foreign
17

companies, same as local companies, can launch their products in the Indian market without
any obstacles by using Google Play (Pitts, 2013).

3.1.4 Comparison of business environments between the countries

Russia, China and India are the most important emerging markets for European companies
because they are relatively close. Even though they are all located in Asia, there is a great
difference between them when looking at business environments. Each of the countries has its
strengths and weaknesses that can affect our performance.

Consumer behaviour in Russia is very similar to European, so sometimes it might be easier
for European companies to understand their habits. From this aspect, the Russia has an
advantage over China and India, which are markets further away than Russia and are therefore
less known to us. However, one thing all of them have in common is that they are collectivist
societies.

The cost of labour force can play a significant role when trying to reach the optimum price for
a specific product. India has the lowest labour force cost by far, but when compared with
Russia they are much less educated and they are less qualified for the jobs that require more
knowledge than the Russians are. However, India and China are catching up with wages very
fast, so the advantage they have now is growing smaller each year. The main advantage that
Russia has over other countries is the proximity to natural resources. The supply chain for a
local company is considerably cheaper than supplying certain materials to India or China.
Prices of oil and gas are much cheaper as well in Russia.

India and China are much bigger markets than Russia, so your product can have higher sales
in those countries due to the high populations those countries have, especially if the company
considers selling products that are seen as basic products. However, when it comes to
products with a higher value which require higher revenue than the number of potential
consumers in India for specific product can be easily compared to Russia. Because the
Russian average consumer is wealthier than a consumer found in China or India, a bigger
amount of consumers can afford such products. The majority of economic activities in Russia
are based in Moscow, while in China and India they are spread over dozens of cities. So in
Russia you are basically forced to start your company in Moscow, otherwise you are not
considered to be a serious competitor, while in India and China you have much more freedom
and you can choose the city that best suits your production needs.

If we compare the business environment from a financial point of view, we can see that China
the leader by far with GDP growth; no other country has similar growth, even though it is
currently slowing down. The huge economy of scale in China helps lower the prices of all the
products found in the local market. The currency is stable, which is very important for local
trade. The business environment in China is prepared for every task, for any kind of
production, and no matter what scale of production you want to have, China can satisfy the
needs.

Protectionism is present in all countries, but all of them encourage local production over
exportation to create more jobs in the local environment. When it comes to internet freedom,
India is by far the most liberal country and allows file sharing sites and online trade.
However, the weakness is that Indian consumers have very low access to internet compared to
Russia and China, and internet sales will not reach the full potential of the countrys
18

population. The population in India is also much less comfortable with online transactions.
The amount of internet users in a country is a very important indicator for high technology
companies, where internet sales represent the main part of their income. However, this is
changing very rapidly, since India has a very young population which is more ambitious and
open to change (Graph 1).


Graph 1: Internet users (per 100 people) from 2004 to 2012

Adapted from: THE WORLD BANK (2014b)

3.2 Risks

For each investor, risks are of great importance to their decision making when it comes to
entering new markets. They are exposed to them and their main idea is to get a higher return
with small amount of risk. Countries with high risk are not attractive to investors, since their
return is not guaranteed and therefore they avoid them. In emerging markets, it is very
common that the risks are high, since the market is still trying to develop strategies on how to
reduce risks and make investors more comfortable for investing. However, the investors find
it difficult to resist investments in BRIICS; they are tempted due to their high economic
growth.

3.2.1 Political risks

Political risk refers to political changes in a country, meaning changes that a new government
could bring, endangering investments with new policies. The occurrence of an international
conflict is a political risk, and can also lead to instability or uncertainty in the country and
have a negative effect on business operations in the country. That is why it is sometimes
called a geopolitical risk (INVESTOPEDIA, 2014).

Russia has a lot of political interference in the key sectors of the Russian economy. The
government is authoritarian which tends to be more risky than democratic governments.
President Vladimir Putin encountered many demonstrations in Moscow when he was elected;
the public was under the impression that the vote results were out of place. The anti-Putin
demonstrations were shut down with force at the time, and the people generally still have bad
7.3
8.5
10.5
16
22.6
28.9
34.3
38.3
42.3
2 2.4 2.8
4 4.4 5.1
7.5
10.1
12.6 12.9
15.2
18
24.7
26.8
28.9
43
49
53.3
39.2
42.9
46.9
66.1
70.7 71.6
77.3
79.6 83
40.8
46.8
54
56.7 58
64
70
69
70
0
10
20
30
40
50
60
70
80
90
2004 2005 2006 2007 2008 2009 2010 2011 2012
Internet users (per 100 people)
China India Russia France Slovenia
19

opinion on Putin. New demonstrations could break out anytime and past decisions are not in
favour of Putin. The latest incident in which Russia participated in the capture of Crimea,
when Russia took back the part of Ukraine where the majority of the population are Russian,
Western countries saw that as an illegal invasion. The situation is still far from solved; the
USA is continuing to apply sanctions on the key sectors of the Russian economy, and by
doing so American companies are in danger as well as Russian. The European Union is
currently holding back and does not want to go the same way as the USA. European leaders
just do not want to risk the investments that they have made in Russia, with the biggest
European investor being Germany. Besides that, Russia is a very important exporter of gas
and oil for Europe, on which we are very dependant and we do not want to weaken our
relationship with Russia, which could potentially lead to higher prices. Even though no
serious sanctions have been applied to the Russian economy, companies could still feel the
tension in the Russian market and it can affect their performance. However, the Russians
have not yet finished their activities in Ukraine. The eastern part of Ukraine is very similar to
Crimea and the same thing could happen there. If Russia continues its operations in Ukraine
the situation might become much more serious than it is now. The West will be forced to act
to prevent further conflicts in this territory. However, personally I believe Russia will not
continue in this direction anymore and they will let the things calm down now. Russia is
known to have many political conflicts with other nations. Besides Crimea, there was another
conflict with Japan about the Kuril Islands: Japan wants to get them back under their control
while Russia refuses to give. Japan claims that they have the legal right to those islands while
Russia disagrees. Russia is also a very diverse country population wise; for instance, it has the
largest population of Muslims in Europe, and they are claiming their rights more and more
while the government does not act. Therefore, Russia is a target for numerous terrorist attacks
that are a great risk for the countrys stability. This is leading a growth of nationalism and can
consequently result in further conflicts between the ethnic groups. Those international
conflicts, minor or great, have an influence on economic activities and the countrys risk
evaluation (The Guardian, 2014).

Political risk is fairly low in China compared to other emerging countries. The leadership is
very stable because of the one-party-system. Business is mainly interrupted due to internal
instability such as riots, strikes or the interruption of the energy supply. However, because of
the governmental system, transparency is very low and regulation laws can be passed very
fast, which can be a great risk for certain companies. There is a unique form of political risk
present in China. The country has one central government, one provincial government and
one local government; therefore there is a constant misunderstanding of governmental laws.
Companies are very often confused which laws are enforced. Besides governmental issues
there is also a huge difference between the courts deepening on their locations. For instance,
the court in Shanghai operates at higher standards than courts in less developed cities. The
east side of the country is considerably more stable and safe while the western side can be
more problematic, especially Xinjiang province where Uighur separatists are under huge
governmental pressure. Xinjiang has now about 40% Han Chinese and 45% of the Uighur
ethnic group, of which the majority are Muslims. Due to the rising population in China, the
government is encouraging its population to relocate to the western provinces and the Uighur
ethnic group feels threatened, since the population of Chinese in Xinjiang province is rising
and they fear a loss of their culture. To warn the government of its actions they are holding
demonstrations and even attacks on the local Chinese population. The most recent attack was
when Uighur terrorists attacked the train station in Kunming. The attack was very brutal with
knifes, and 130 people were injured and 30 killed. In the past five years the region has been
under constant pressure of separatists which has caused instability in the region. These attacks
20

are throwing a bad light on Chinas safety, especially on the western part of China that is
considered undesirable for business. Another conflict that might have a great influence on
Chinas economy is with Japan. A few islands between China, Japan and Taiwan have caused
a lot of military tension in recent months, and it is possible that the situation will escalate. The
reason why China wants those islands is symbolic: They wish to demonstrate their superiority
in the region by planting a flag on those islands, and by doing so claiming them for
themselves. This move could start a war and would cripple all the economic operations in the
region (Blodget, 2014; China Risk Management, 2014).

Politically, India is a very stable country due to its democratic system. The national elections
are coming up in May and a few positive changes can be seen already. The number of parties
entering the battle is higher than previous elections; therefore the competition is much tougher
and the people are being informed on the current situations of the candidates. Narendra Modi
has the biggest chance to win, and comes from the BJP party. Modi has a lot of support from
the youth class and he had promised to unite the youth all over India and fight corruption in
the country. BJP is also known to not be positively aligned with the USA. Whoever will be
elected or even if the government falls in the near future and if the party changes, laws related
to business will continue at the same pace, especially because of liberalization. Safety in India
is another point and it could present a huge risk for companies. The north-west area is very
unstable in India; the border between Pakistan and India is very risky and is even considered
to be the most dangerous border in the world. The main city in that area is Kashmir, and
conflicts have been going on with Pakistan for the last five decades. However, in 2006 a truce
was signed between India and Pakistan. Everything was looking like it would calm down,
however in recent months the situation has worsened. The main reason for conflict here is the
religious differences between Hindi and Muslims. Because of the conflict it is not only that
area that suffers the consequences but also all of India. Terrorist attacks have been reported
even in Mumbai. Some analysts fear that war can easily brake out between those two
countries, which would endanger the countries economies and weaken their reputation. The
current situation is not stable and neither side wishes to ceasefire. The situation on the border
with Pakistan is serious but will probably not advance to a full scale war. India has the
situation under control in this case so it should not represent a great risk for future
investments, especially because most of the investments are focused in the major cities of
India which are located in safe areas (Overdorf, 2013; Sonia Jaspals RiskBoard, 2014).

3.2.2 Financial risks

Financial risk can be associated with many types of risks connected to finances. For instance,
financial risk can be an unstable currency of the country, which could lead to further financial
losses by investors. Another financial risk could be unstable public finances that are making
the country uncertain because the country could collapse due to huge debt. In addition, an
unbalanced balance sheet could lead to higher taxations in the country and could have
potential impact on our activities.

The banking system in Russia has been restored very well since the economic crisis in 2008
due to the quick reaction of the central bank of Russia that provided liquidity and prevented
the major failure of the banks. However, Russia has too many banks for its market size and
many banks have very small capital size, and they are taking their licenses away to cut the
number. For comparison, Germany has in total 251 banks while Russia has 970. The
government is shutting down banks to make the other banks larger and more confident, which
will make them more stable. The majority of bankers have welcomed this decision; most of
21

the banks that were driven out of the business were operating with serious deficiencies in their
credit issuance policies. These actions by the government to raise minimum capital of the
banks did put some fear in the smaller banks, but the Russian banking system still remains
stable. However around 50% of the banks are state owned in Russia and only 11% of the
banks are foreign owned, and out of 48 banks that are loss-making banks, 13 of them are
foreign. This number is quite high when we consider the small presence of foreign banks.
Moreover, state owned banks are the top five rankings by size, giving them a dominant
position. However, the privatization of the second largest bank is on the way and is supposed
to be finished in the year 2017. The Russian ruble is considered as a stable currency, much
more stable than in other emerging markets. However for some companies, currency risk
remains and it is a normal case, especially if they make their main revenue outside of the
country. The Russian ruble has weakened in the past months against the dollar as well as
some other emerging countries, but the Russian central bank has managed to reduce
depreciation. The Russian central bank is spending 200 million USD every day to support the
ruble; by doing so, they have managed to keep the loss of 8% against the dollar. For instance,
Brazils currency fell by 21%, Indian by 18%, South African by 15% and Indonesian by 12%.
Russias external debt is low when compared to the EU, the USA or even some other
emerging countries, and the main buyer of their debt is actually Russia. Low external debt
really helps to keep the market currency more stable. Therefore, the currency fell even more
in emerging countries with imbalanced government finances. According to Goldman Sachs
Group, the ruble will continue to depreciate against the dollar. One of the reasons for ruble
depreciation is the situation in the Ukraine where there is still huge uncertainty about the
political situation. Russian reserves are shrinking because the banks are selling their reserves
to support the ruble. In the last year, the Russian reserves have fallen by $40 billion and are
now at $493 billion (Voice of Russia, 2013; Hartley, 2014).

Nowadays China has huge financial problems mostly because of their huge debt. Everything
started in the year 2008 when the world was suffering from the global economic crisis. The
crisis affected China because they were very dependent on exports, especially in the USA.
Many factories closed and workers were fired, therefore less than two months after the
Lehman collapse, the government decided to fight the crisis with massive investments, which
eventually did help and made Chinas economy grow even during the crisis. The investments,
which were already considerably high at 40% of the GDP, went up to 50% of the total GDP
when everybody expected investments to drop at the time. To support the investments, the
government was borrowing the money from banks and only a small part came from taxes and
reserves. In the last five years, the increase in total Chinese bank assets rose to $15.4 trillion,
which is seven times more than the USA in the same period. Chinas total assets are now at
$24 trillion, two and a half times the size of Chinas GDP (Global Research, 2014).

In addition, credit is rising twice as fast as the GDP. When the government gave the order to
stop lending money to developers and state owned companies because they saw a financial
threat, shadow banking started to become more prominent. Therefore, it is hard for the
government to stop the lending since the lending was not going through the big banks. Over-
indebted local governments and institutions felt the consequences of the rising capital costs,
which will probably endanger Chinas future GDP growth. Moreover, the Chinese premier
has announced that GDP growth, which was targeted at 7.5% this year, can be more
flexible, meaning the growth can be even below 7.5% in 2014 because of the financial
problems they are facing. However, Chinese authorities are claiming that they have the
resources to bail out the banks if needed, thanks to existing savings and foreign currency
reserves. Moreover, Chinas external debt is also very low, only around 7.2% of the GDP,
22

which gives the government financial power and stability. However, the transparency in
China is very low so it is really difficult to know the real situation of the government finances,
because they tend to show a better picture of the situation than what is actually true.
Therefore, investors are having second thoughts when it comes to investing in China. The
growth will still be present this year in China but it will be much less than previous years, and
upcoming years are not certain that China will preserve its economic stability. If the same
scenario occurs in China as the collapse of the Lehman Brothers in the USA, the
consequences would be comparable. Chinas currency, the yuan, fell beyond 6.2 to the dollar
in March and it is expected that the central bank will keep the currency weak because of the
slower economic growth. The yuan has fallen to the lowest exchange rate in the last year and
is expected to drop even further. The expectations are that the yuan will not strengthen this
year at all, but in 2015 it is believed that China will be back on track again and the yuan will
appreciate (Chen, 2014; Fontevecchia, 2013; CNBC, 2014).

Indias currency is the rupee and the average exchange rate for the US dollar is 53 rupee for 1
US dollar. India is facing huge problems with its currency because the rupee has hit a record
low of 62 per dollar, and it has been the weakest emerging-market currency lately. Due to the
devaluation of the exchange rate, exports are more competitive on the world market.
However, inflation is more likely to occur since the import products are more expensive.
Anyway, inflation in India looks less scary even though wholesale prices rose by 4.7% in
May, 2013, year on year (The Economist, 2013b).

So far, authorities in India merely stroked the rising sense of panic in the financial markets
through their latest batch of policies, where they included a promise to inject liquidity into the
financial markets. They are trying their best to calm investors down and not lose their
confidence, since India is very dependent on foreign investments. Besides the currency
problem, India also has an upcoming problem with public finances. In the past when India
was had higher GDP growth, the government could afford to borrow a bigger quantity of
money without any severe consequences. But now with slower growth, increasing levels of
debt and debt interest are becoming unsustainable, which eventually can lead to debt default.
The government sees the problem; therefore they are cutting spending. For instance, they
started by cutting the subsidies on oil, and the state is selling its public shares in public
companies. The government had reduced public spending by 9%. In India, taxation is very
low and the government is trying to improve tax collection. There is a lot of space for taxation
in the agricultural sector where farmers are privileged. A lot of businesses in the services
sector are taxation free because it is informal. The property market is overrun with black
renting customs. Big companies are highly taxed and they follow the rules, but small
companies fall under the regime of personal tax, where the outtake for the country is small.
Public finances in India are a serious problem: they have to get balanced, and better taxation
is one way to reach that. The country does not have huge problems yet, but if actions are not
taken in the near future, the economy will suffer and potential investments could be
endangered (The Economist, 2013a).

3.2.3 Corruption

Corruption comes from people who are in high positions and have the power to return the
favour. It can be a manager in a company or a government official. In countries with high
corruption levels, people in high positions receive bribes, unreasonable gifts or just some
kinds of deals that do not make sense. Those countries have become less attractive for
investors since they are afraid of these obstacles, which can be expensive and can have a bad
23

influence on the companys brand name worldwide if the media finds out about corrupt
activity.

In Russia, the corruption level is considerably high for any potential investors. Even though
the country is the most developed among the BRIICS, its corruption level is the highest. A
current corruption perceptions index done by Transparency International puts Russia in 127th
place out of 177 countries (Picture 1).

In 2010 the Russian corruption index was much higher. The country was ranked at 154th
place out of 178 countries, meaning the country has reduced corruption in the last three years
quite well. However, large companies still see corruption in Russia as the biggest obstacle. It
is known to be a most problematic factor for doing business in Russia. The occurrence of
irregular payments and bribes is a normal case, and companies who refuse to go along with
that will have a hard time in the Russian market. This is the reason why some big companies
refuse to enter the market, and if Russia wishes to realize its full potential they must reduce
the corruption levels and reduce the risk for companies. According to the World Bank and
IFC survey (2014), over 20% of companies do unofficial payments to avoid complications
and to gain unfair competitive advantage over other companies. However, in April, 2012,
Russia became a member of the OECD anti-bribery convention, and this is considered to be
an important step in reducing corruption in the country. In addition, government has launched
several laws that tend to reduce corruption and improve transparency. Corruption is highly
present in the public sector; it has been estimated that each year corruption costs the country
$32 billion or 20% of the total government expenditures. Despite the recent anti-corruption
efforts, the general perception of corruption among Russians is also very poor. For instance,
Transparency International (2014) reveals that 57% of Russian households consider
government actions to fight corruption are ineffective. In addition, 50% believe that levels of
corruption have increased in Russia over the past two years. The latest incident that came into
the public eye was the Sochi Olympic Games. The games were the most expensive in history,
around $50 billion, but the media reported that one third of the amount was because of
corruption. Work was given to contractors even though they were the wrong choice when
looking at quality and price. The Olympic Games showed the world what companies are
facing all the time in Russia (GLOBAL ADVICE NETWORK, 2014).

In China corruption is much lower than in Russia, but in the last three years it has worsened.
The same corruption perceptions index in 2010 placed China in the 78th position out of 178
countries, and today China is positioned in 80th place out of 177 countries. The change is
minor, but the fact that corruption rose means trouble in the future (Picture 1).

China has developed a strategy to fight corruption by enacting laws and enforcing integrity
systems. For instance, since the year 2011 Chinese authorities have started to regulate gift
cards as a part of anti-corruption efforts. This regulation should fight money laundering, tax
evasion, illegal cash withdrawals and bribery. China is also trying to reduce internal
corruption, especially amongst military officials. Therefore, they prohibited the use of
military plates on luxury cars, because in the past military officials were buying luxury cars
with public money and using them for private needs. In addition, on the 27
th
of August 2013,
China joined an international group for combating tax evasion, and by singing it they became
the 56
th
signatory to the convention. The major problems in China are in sectors regulated by
the government, such as banking, finance and construction, which dominate the countrys
corruption (GLOBAL ADVICE NETWORK, 2014b).

24

Same as in other countries, corruption rose in India as well. Since the year 2010 when India
was ranked on the 78th place amongst 178 countries the situation has worsened greatly.
Nowadays India has slipped down the scale 16 positions and landed at the 94th place in 177
countries (Picture 1).

India has launched a very interesting solution to fight corruption that has increased trust in
the Indian business environment. The government believes that reducing physical contact
with government officials will reduce the amount of corruptive actions in the public sector.
Therefore, they are trying to simplify the contact with government officials by communicating
mostly through the internet, or so-called e-governance. The solution sounds very promising
since they will not only reduce corruption but also costs will be reduced in the public sector.
However, the Indian government is working on a proposal to criminalize private sector
bribery and impose them in the current law. In addition, funding for organizations that fight
corruption is very low and they lack qualified staff. Therefore, there is a lot of space to
improve the current uprising of corruption in India, but it has to be well supported by the
government (GLOBAL ADVICE NETWORK, 2014a).

Picture 1: Corruption perceptions index from 2010 to 2013


Adapted from: Transparency International, 2014
3.2.4 Comparison of risks between the countries

We can see that all of the emerging countries have a high political risk due to their uncertain
government relations with neighbouring countries. Russia is trying to ease the crisis in eastern
Ukraine, but this has already done enough economic damage in the area and will continue to
be a very risky area. Russia is by far the most politically risky country, and when we are
evaluating the attractiveness of emerging markets Russia would score low. Moreover,
conflicts in Russia are not only hurting the companies in the area but also the companies far
25

away in Moscow; therefore negative economic influence is felt all across Russia. However,
the situations in India and China are different. Political tensions have the most influence in the
areas of conflict where establishing a business is tougher. There are no economic sanctions
enforced on each of the countries where the economy would suffer. However, China still
appears to be less politically risky than India. China is far more powerful and has more
resources to fight off the political instability in the west. In addition, Chinas government is
very stable and strong because of its political structure, and this puts China in a better position
than India.

The financial situation is very serious in China, where the government has huge debt and their
reserves are falling, which can lead to a great crisis in China or globally. Growth in the first
quarter of 2014 was below expectations already: It has been reported that growth was 7.4%
while the expected was 7.5%. The difference is minor, but this is still very serious for China
since they were always exceeding expectations in the past. However, the government is trying
very hard now to lower the risk of major banks crashing; therefore they are leaving the GDP
growth in uncertainty. Currencies are very weak in all emerging countries and there are many
manipulations with them as well. The most unstable currency is definitely in India where the
country is having problems with balancing public spending, and with slower GDP growth is
becoming more difficult. The country is also trying to improve taxation rates, which can put a
greater burden on foreign companies that are playing by the rules (BBC, 2014).

According to Standard & Poors (2013), the country with the highest risk when looking at the
countrys banking system is Russia. The banking situation in Russia can be compared with
Slovenia, where both countries score 14, when we combine Economic Risk with Industry
Risk. However, Russia has a lot of financial assets and many oil and gas firms that are owned
by the country, and the income from these companies is very high. The laws that Russia is
currently enforcing will help improve the stability of the banking sector, and therefore
financial risks should be reduced. In addition, the currency is more stable than in other
emerging countries, so the risk of currency exchange loss is much lower, while in India the
currency variation is much larger (Table 1).

Table 1: Economic and Industry Risk
India Russia China France Slovenia
Economic resilience High High Intermediate Low Intermediate
Economic imbalances Low Intermediate High Intermediate
Very High
Credit risk in the economy High Very high High Low High
Economic Risk on scale
from 1 to 10
( 1 being the best) 5 7 6 3 7
Competitive dynamics High High High Low High
Institutional framework High Very high High Low High
Systemwide funding Low High Very low Low High
Industry Risk on scale
from 1 to 10
( 1 being the best) 5 7 5 2 7
Risk overall
10 14 11 5 14
26

Adapted from: Standard & Poors, 2013
Russia is by far the most corrupt country to establish a business in amongst the BRIICS.
Corruption is present in every sector and represents a serious problem in Russia. The
countries with the lowest corruption level amongst the BRIICS are Brazil and South Africa. In
the last three years, South Africas corruption level has grown very fast, and this should
continue since the government is having a hard time fighting corruption activates. Brazil
should be less corrupt in the year 2014. However, when we compare only Russia, China and
India, the lowest corruption level is in China. On the other hand, the transparency level is very
low in China and it was ranked to be the worst amongst the BRIICS. Therefore, it is hard to
say if the corruption level is evaluated accurately, because companies rarely show the real
picture on the outside. Around 60% of the companies in China do not wish to disclose their
contribution to the government. Comparatively, India has a very high transparency and
companies have to report on any contributions, and therefore the corruption level index
does seems higher than Chinas, but in reality the corruption level could be lower than
Chinas. Therefore, India is a better choice when evaluating corruption.
3.3 Suitable investment location for a company that does digital
marketing

After the business environment evaluation, we can choose an investment location for our
company. In my case, I have chosen digital marketing company RELIDEA ltd.
(www.relidea.com), which is thinking of expanding its activities on the foreign market. They
are especially interested in BRIICS because they see the potential in those countries, since
they will be in a great need to adopt its technology to be competitive in the global economy.
The main service that RELIDEA can offer to emerging markets is the design and layout of
web portals and shops. Once the web shop is established, RELIDEA offers to boost sales by
improving search engine optimization, and furthermore through the implementation of
synchronization of the companys products that are offered online. At the end, they offer a
content management system that allows customers to modify the contents by themselves. The
service that they offer is very high-tech and local competitors will not be able to compete
against the knowledge and experience they possess.

I believe it is not necessary for RELIDEA to expand locally into India at this point. The
Indian market can be accessed by the internet since the country is open and the potential
internet applications can be sold on international app stores. In addition, the population in
India speaks English very well, because it is used in business circles and it is mandatory to
know English. Therefore applications do not have to be translated into other languages and
they could be launched the same as for the European market. Besides the applications, I do
not see great potential in the local companies that would invest in the high-tech enterprise of
internet sales and improvement of their web sites to enhance their sales, since the population
is not currently very familiar with the newest method of product distribution. Therefore, local
Indian companies do not feel the necessity to invest in such technology yet. However, other
companies such as big multinationals in India already have partners which will adapt the
systems for the Indian market when the time comes. Therefore, it is too early for a company
such as RELIDEA to go locally in India.

The most appropriate market where RELIDEA could go locally and would do very well is
Russia. The market is ready for the improvement of internet sales, and companies are
investigating how to launch their products globally. The development of enterprises in Russia
already requires web services with high added value, which is the main target of RELIDEA.
27

Business habits are very similar to European; therefore the adaptation to different
environments would be minor. The costs of developing in the Russian market will be low as
well, since all the web solutions have already been created for the European market, and again
minor changes need to be done to launch the same services in the Russian market. The
knowledge and skills in all segments of marketing communications would be a great
advantage for RELIDEA. The services they offer range from just an idea to fully functional
websites, and ongoing maintenance also represents great strength over competitors. Because
of the local complexity of developing business and the high risk of corruption, RELIDEA
would be smart to find a business partner in Russia who could reduce the risks of the
companys interests.

The biggest threat for RELIDEA in the Russian market would be that companies would not
recognize the value of their services. The Russian market is full of small companies that offer
very similar web services as RELIDEA and they do it at ridiculously low prices. Companies
that are unaware of the differences between low budget services and high-tech internet
solutions will just pick the cheapest provider. That is where RELIDEA can face major
problems in finding customers due to their high price on the market. Therefore, they will have
to inform companies exactly of their services, and prove to them that the outcome will be
much better than the outcome that cheap local companies provide.

28



4 FUTURE OF THE BRIICS IN THE WORLDS ECONOMY
4.1 Long-term scenarios

The growth of BRIICS will come to an end sooner than we think. By the year 2020, the
BRIICS will not be as attractive as they are today. The reason for that is their higher wages
have made them less competitive, and therefore companies are searching other emerging
markets, which would have this advantage. However, China is expected to remain competitive
due to their different strategies. They are investing a lot in better technology and higher
capital. Russia, South Africa and Brazil are suffering from the Dutch disease, which means
they are exporting many natural resources, making their currency strong, therefore
manufacturing companies are being less competitive in the export business. Outsourcing IT
work in India will become less and less profitable as well due to rising wages in India;
therefore in the near future many companies will see opportunities outside BRIICS countries,
for instance in Africa where poor countries look for opportunities to improve standards of
living (SNBCHF. 2013).

By 2020 the BRIICS will have the biggest and third biggest economy in the world. India and
China together accounted in 1980 for less than 5% of global output. Now they represent over
20% of the global GDP. By the year 2050 they are expected to have more than a 30% share of
the total global GDP. China is to stay the most attractive destination until 2015, with the USA
just behind it, and Indonesia will become very attractive as well and will reach rank four
amongst the most attractive investment destinations in the world. The growth of India and
China summed together in 2012 was the lowest in the last 20 years. The GDP growth
forecasts for India and China are very promising until the year 2020. A forecast done by IMF
believes that both China and India will rise on average 7.5% until the year 2020, while the
worlds growth average until 2020 will be 4.1%. The forecast looks very promising for the
emerging markets as well, where it is estimated they will grow annually by 6.2% (The
Economist, 2013).

China is in a very similar stage of development to Japan in the 1970s, South Korea in the
1980s and Taiwan in the 1990s. All those countries moved to a more developed area but at a
slower pace. China seems to be the only country among the BRIICS which will break out
from the middle-income trap. If its GDP continues to rise as predicted, they will reach
$20,000 GDP per capita in the next 10 years. Some believe that China is rushing too fast to
achieve its economic dream; if they reduce the growth to 6% annually, they could reach a
higher income status risk free. Now the risks persist because of their over-extensive growth,
which can lead to a global crash of the economy (PTI, 2013).

4.2 New challenges
The connection and cooperation amongst the BRIICS can be easily seen since they have a lot
in common. For instance, all the BRIICS countries have taken the same position against trade
protectionism. All the BRIICS countries were part of the global crisis, and therefore they are
trying to improve international financial systems to ensure stability. In most cases, they have
common ground in international agreements or decisions. It is very important for them to stick
together and have one say for the international questions, since this will give them greater
29

power. It would be very helpful if the countries could connect further and form bigger
political connections amongst themselves; however, the geographical dispersion of the
countries makes it harder to do so. South Africa and Indonesia are relatively new and small
members in a group of emerging markets originally called the BRIC, therefore they do not
play an important role in the BRIICS. The most common connection between the BRIICS is
China and Russia who are very connected, even when it comes to military questions. This is
where the real strength of BRIICS countries lies.
The relationship between the BRIICS economies and other developing countries is becoming
very important. Because of the huge expansion of BRIICS countries, they have the potential
to help countries in Africa and invest in them to increase their exports and improve standards
of living. By doing so, they would also benefit from the high growth of other developing
markets and improve their own growth. There are also investments amongst the BRIICS
themselves; a very nice example is China and Brazil. China is the biggest investor in Brazil
for mutual investments (NGOs Russia, 2013).
The recent meeting of the leaders of Brazil, Russia, India, China and South Africa (BRICS)
have developed some new goals. They have made the first step in creating BRICS institutions.
One of the institutions they wish to create is BRICS development bank, which would be a
rival to the IMF and World Bank. This would represent a huge link amongst the BRICS and
would give them more influence in the global economy (Desai, 2013).



30

5 Conclusion
In my diploma seminar, I analysed the countries of BRIICS of which I extensively evaluated
Russia, China and India. The description of Brazil, Indonesia and South Africa is brief, but I
still tried to involve relative information as much as possible, which could show the basic
condition of the countries. Brazil is very dominant in South Africa and plays a big part in
global trade. The market is very big and the people are ready for a change. However, the
Brazilian market does not seem to have many connections with the EU, and we consider the
market to be very far. The same goes for South Africa and Indonesia, as the markets are
relatively new and not many trade connections have been established with them yet.
Therefore, starting a new business in those countries could be more difficult than in Russia
and China, which are relatively close to Europe, and many trade agreements have already
been made.

In Russia, the economic situation is very stable and the government is making efforts in
reducing risks, where they are mainly targeting Russias above-average levels of corruption.
Besides corruption, Russia has to be careful with international conflicts that could lead to an
internal economic crisis. India can also be a very good market for companies that are
dependent on low labour costs. The country is a democracy and it is considered to be very
stable. The forecast for India is looking good: The country should come out of its slowdown
soon. On the other hand, China is in big financial trouble. The credit taken in the last five
years is becoming unsustainable and China must be very vigilant if they wish to remain on the
right course. China and Russia are approaching a high development stage, and therefore will
soon result in a slowdown of their GDP growth. Other emerging markets will become more
attractive due to their lower labour costs and more open market conditions. Nevertheless,
growth in China and Russia should still remain over the worlds average for the next six
years.

Although I thought at the start of my diploma seminar that the markets are very different from
what we know in Europe, I realized that the markets such as Russia, China and even India are
very similar to European markets. Nevertheless, cultural differences are still visible and they
should be considered if we wish to be respected in foreign markets and gain the trust of
consumers. However, globalization has done its job, and people in emerging markets tend to
aspire to a better life; therefore they are responding very similarly as consumers in the
developed world, which makes it easy for our companies to adopt since the gap is getting
smaller.

The influence of BRIICS is rising and their voice is being heard much more than in the past.
They will become even more important as their economic power grows. The connections
between BRIICS are growing and they are trying to speak as one to have bigger influence in
global decisions.

The subjects that I have not described and could play an important role in the future are the
supply of energy and environmental care. This, I believe, should be very well examined since
the stability of power supply has a great impact on our competiveness in the world. In
addition, institutions which are adopting green technology are putting pressure on countries
with high pollution, and it is possible that they will have to change energy production
methods. The evaluation of the business environment and risks is a varying process. Business
31

climate can change very quickly in emerging countries; therefore the evaluation should be
done more often because old data might mislead us in our future decisions.

6 LITERATURE AND SOURCES
1. Agustino Fontevecchia. (2013). Credit Bubble in China. Accessed March 27, 2014:
http://www.forbes.com/sites/afontevecchia/2013/06/17/china-massive-credit-bubbled-fueled-
by-shadow-banking-and-securitization-could-collapse-banks/

2. Amy Qin. (2014). Chinas internet network. Accessed March 10, 2014:
http://sinosphere.blogs.nytimes.com/2014/01/22/chinese-web-outage-blamed-on-censorship-
glitch/?_php=true&_type=blogs&ref=internetcensorship&_r=0

3. ATKearney. (2013). Confidence Index. Accessed February 20, 2014:
http://www.atkearney.fr/research-studies/foreign-direct-investment-confidence-index

4. BBC. (2014). Chinas economy growth slows down. Accessed April 24, 2014:
http://www.bbc.com/news/business-27045527

5. Cebr. (2013). China should avoid crash. Accessed March 28, 2014:
http://www.cebr.com/reports/risk-in-chinas-financial-markets/

6. China Risk Management. Chinas political risks. Accessed March 20, 2014:
http://www.chinariskmanagement.com/Political.html

7. CIA. (2014). Countrys profile: India. Accessed February 18, 2014:
https://www.cia.gov/library/publications/the-world-factbook/geos/in.html

8. CIA. (2014a). Countrys profile: China. Accessed February 25, 2014:
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html

9. CIA. (2014b). Countrys profile: South Africa. Accessed February 26, 2014:
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