Audrey Chaillet December, 7th 2010

Fall 2010/2011 2470 words

Winter semester

Business Climate in Emerging Markets:

The role of the state in the internationalization of

Brazil multinationals
Name some Brazilian multinationals. Even harder than ―famous Belgians,‖ isn’t it?1

—The Economist, September 23, 2000

This statement made by The Economist in 2000 is no longer valid. The explosive growth in
outward foreign direct investment from emerging market countries is an outstanding feature of
the new global economic scene, increased with the financial market, which was faced with more
resilience by emerging markets than for developed countries2. Multinationals (MNLS) are more
and more present through internationalization rather than exportation. Being for long the
monopoly of Europe, Japan, North America, these emerging markets are reversing the situation,
increasingly being the home bases for global enterprises. Companies from the BRIC nations, have
started to challenge the hegemony of American, European or Japanese MNLs. Some analysts ate
talking about a ―third wave of globalization‖. Brazil is one main actor in this new process. In 2009,
the Boston Consulting Group ranked 14 Brazilian companies among the world’s 100 ―new global
rivals‖, including names such as Embraer, Petrobrás, Odebrecht3. Brazilian companies are
establishing Greenfield operation4, bidding on the resources and commodities markets, breaking
into new export markets. Few attentions have really been drawn to the factors driving the
emergence of Brazilian corporations as truly global players, in particular the central role of public
policy in the process of internationalization.

We define internationalization as the ways and process by which a company expand its
operations beyond its country of origin, from export of products, to moving outside, towards the
establishment of representative offices abroad, or setting-up of full-fledged subsidiaries or joint
ventures, eventually integrating all operations. Hymer (1968) and Dunning (1993) have built an
influential theory of internationalization, the ―eclectic paradigm‖, stating that a company is in a
position of internationalization if it is in possession of some specific advantage, a technology or

1
Quoted in BRAINARD L, MARINEZ-DIAZ L, Brazil as an economic superpower ? understanding Brazil’s changing role in
the global economy, Brooking Institution Press, 2009.
2
See Annex 1
3
See Annex 3
4
A Greenfield operation refers to a “form of foreign direct investment where a parent company starts a new venture
in a foreign country by constructing new operational facilities from the ground up. In addition to building new
facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees.”
www.investopedia.com

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The role of the State in the internationalization of Brazilian multinationals
organizational model. Presuming this advantage, the company will have financial incentives to
exploit this advantage abroad, enabling it to gain profitable market share. Although it is often
suggested that the main motive for internationalization is technology, other factors are likely to
play an essential role in that process, as the eclectic paradigm states this. In the case of Brazil, the
seeking of natural resources and the access to markets was the main desire leading to outward FDI
by Brazilian MNLs. To follow the theoretical framework presented by Duninng, not only a strong
desire is needed, but also a competitive advantage that permit it, capabilities that certain Brazilian
enterprises have developed and are trying to capitalize on them abroad.

The emergence of these capabilities have been strongly conditioned by the actions of the
state, through public ownership as for the case of state-owned companies (SOEs), the initial
pursuit of Import substitution industrialization (ISI), the establishment of R&D institutes, creating
a favorable environment in which companies could build and strengthen technological
competence.

The state’s role as business manager and economic planner

The foundation of strong groups by the hand of the State

The state has historically loomed large in the economy. It has long been one country having
the largest public sector outside the former communist bloc. The role of the State is increasingly
acknowledged as critically influent in the internationalization of emerging markets corporations.
Through micro and macroeconomic public policies, governments can exercise strong stimuli on
the growth of enterprises, their investment decisions, their technological strategies. For Brazil, the
role of the state was prevalent in the formation of homegrown multinationals. It started in the
1930s and accelerated into the 1940s, 1950s and 1960s, undergoing a program known as import
substitution industrialization (ISI). This program led to a structural transformation, resulting in a
―full-fledged industrialized economy‖, creating the large domestic groups that are so prominent in
the Brazilian economic scene.

First, Brazil established series of state-owned enterprises (SOEs), in particular in intensive sectors,
such as steel making, mining, energy and telecommunication. Besides, it is worth noting that two
of Brazil’s top three multinationals nowadays –Petrobrás and CVRD- were at their wake, SOEs;
Petrobrás continues to be controlled by the state. In the early 1990s, the state role diminished in the
economy, with the abandonment of the ISI and privatization. But this did not lead to erase any
intervention of the state; public policy remains still nowadays a significant factor.

No clear and direct policy encouraging domestic companies to invest overseas has been set.
Public policies were implicitly assisting Brazilian corporations which were trying to expand
their operations internationally.

This role has been played mainly in aircraft manufacturing, biofuels, petrochemicals, where
were the state owned the businesses. As for informatics, this is called as a ―midwife‖, since the
State tried to assist in the emergence of new entrepreneurial groups or to induce existing groups to
venture into and challenging kinds of production, combined with protective tariffs, subsidies,

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targeted credit, government help for local entrepreneurs negotiating with foreign investors. The
state-led development policies were driven in order to make the country self-sufficient and
independent. When developing new products and technology, the costs of failed experiment were
often socialized, in other words, passed on to the public budget, generating a considerable overall
cost. Yet, according to Schneider, as for the case of the former state-owned mining giant Vale, the
company was able to leverage its legacy of scale and competent management to diversify
geographically and along product line after its privatization in 1997.

Public policies export-oriented

Brazil trade policy was also consistent in the process of internationalization of Brazil
multinationals, benefiting from a high level of protection, resisting to negotiating tariff reduction
in parallel to public policies to foster exports, in particular in such sectors as automobiles, electrical
and electronic equipment, textiles…This ―protective industrialization strategy‖, an application of
the education protectionist, had for objective to ―neutralize‖ external factors that might have
jeopardized national economic development and to consolidate the domestic industrial capacity.
This was seen as the indispensable condition for the country to act autonomously in international
markets. Although Brazil participated in trade negotiations, it always adopted defensive stances.

Since 1990, Brazil adopted an active policy of fostering and diversifying its exports, by
taking advantage of fiscal and credit tools, such as an exemption of tax for exports. With the
consolidation of financial mechanisms it contributed to the increase of profitability of Brazilian
exports. What is now criticized in Brazil trade policy, is its two-side ambiguous attitude: as long as
Brazil has only defensive interests, it tries to prevent damages, mitigating external threats,
adopting a defensive attitude. When it has strong interest to trade, it adopts a strong-offensive
attitude and trade negotiation should be.

If those past policies were indeed costly, Brazil now is benefiting from its legacy, providing
paradoxically a strong foundation for the country’s current generation. It helped to stimulate some
key sectors, such as agribusiness, biofuels sectors and engine industry. Brazilian has been able to
translate it into strong competitive advantage in global market now that the country is orienting
outward. Added to this, the State created incentives to export strengths to new sectors, pushing
firms to go into sectors that they might have entered otherwise, mainly in energy sector,
consequently to the oil shocks of the 1970s. They equally make efforts to render the development
and security strategy sustainable, in particular providing high public investments in hydroelectric
power or biofuel energy sector for the production of an indigenous, renewable, relatively cheap
energy source. This strategy is appearing to be successful and different from other developed and
developing countries. Eventually, those public policies at first designed to protect Brazil from
external oil-price shocks gave the country a strong competitive advantage in energy, in a world of
increasingly expensive energy resources.

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 Facilities of financing induced by the State

A favorable macroeconomic environment for internationalization

One way in which Brazilian state implicitly encouraged outward FDI is through the
improvements of its macroeconomic situation. The orthodox fiscal and monetary policies since the
Real stabilization plan of 1993 have driven annual inflation at a very low rate and allow therefore
interest rates to sharply decrease over time. Support policies have been made, inducing a
substantial appreciation of the Real against the USD and other major currencies since 2002. Added
to this, reforms have been engaged to improve financing conditions in Brazilian equity, therefore
improving access to domestic capital markets. This clearly contributes first and foremost to
enhance the ability of Brazilian firms to finance research and development. All that taken, such
improvements encourage enterprises to pursue foreign acquisitions, to initiate Greenfield
investments and to inject capital abroad.

One main channel of this assistance was created through the Brazil’s National Economic
and Social Development Bank (BNDES), which helps to finance exports, contributing directly to
the internationalization of Brazilian enterprises (Fiocca, 2006). Between 1996 and 2005, the BNDES
financed export disbursements from US$890 million to US$5.86 billion, an increasing part related
to financing overseas capital goods sales. The BNDES also finances export sales which are related
to overseas infrastructure projects in which Brazilian construction enterprises are involved.

The role of the state in innovation conduct

Innovation, a key concern for the State

For the first time ever in Brazil in 2006, the amount of outward FDI exceeded the amount of
inward FDI5. This growth of outflows is driven by a wide range of sectors, from mining to
manufacturing to construction. The data provided by the UNCTAD show that Brazil has the fourth
highest stock of FDI among developing or emerging market countries, after China, Singapore and
Taiwan6. The number of 7parent companies based in Brazil is increasing, as shown in the Annex 4;
emerging-market multinationals are growing in size and global reach (Annex 4). But when
looking at worldwide ranking, we have to observe that few Brazilian multinationals are listed. The
Fortune 500 2009 report ranked 6 companies from Brazil. In the UNCTAD’s 2006 World
Investment Report, only three Brazilian companies were listed among the twenty largest in their
respective sectors, CVRD, Petrobrás, Gerdau (ranking by revenue 2005).

Brazilian MNLs are strongly linked to natural-resource-based activities, oil, gas, mining
steel. This does not mean that strategies of natural resource seeking are predominating over those
of technology exploitation or acquisition, since 80% of firms emitting outflows had equally
engaged in product innovation. Furthermore, those companies investing overseas tend to hardly
involve in innovation processes. Indeed, we are at a time when new mineral and oil deposits are
less and less accessible, becoming an increasingly technologically intensive activity. But in this
sector, Brazil has been successful in developing and absorbing cutting-edge technologies. There are

5
See Annex 3
6
See Annex 1
7
See Annex 5 & 6

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plenty of evidences of a close relationship between innovation and internationalization, not only in
NRB activities, but also in manufacturing.

Since the 1960s, the Brazilian government had led policy initiatives in order to build
technological capabilities in the public as well as in the private sector8. The objectives were to
create comparative advantages in higher-value-added activities, notably by diversifying activities
and improving the terms of trade. Governments have relied on diverse initiatives. A special
funding body was created, the FINEP, aiming at distributing financing and grants to public and
private organizations which are pursuing research projects. This FINEP became one of the most
important funding committee. Its activities are besides supplemented by the FINAME, which
provides financing packages, in association with the BNDES, in order to support the sale of
technological goods.

Another striking feature of the state support for corporate R&D was the in-house research
institutes, at the origin founded by the SOEs. For instance, Petrobrás created an in-house research
center, CENPES, which is aimed to help the company to develop the offshore oil exploration and
production technologies, eventually making Brazil a leading oil producer. In the
telecommunication sector, Telebrás –former SOE- established the CPQQd Institution, responsible
for the development of the first digital telephone exchange. In electricity, Eletrobrás created the
CEPEL research institute, which managed to make advances in high-tension power distribution.
Even after the privatization, those research institutes remain operational.

The innovation network and cooperation encouraged by the State

Another decisive element is the cooperation developed between universities, publicly

funded research institutes and enterprises working in collaboration on research projects. In
particular, the State played a central role in the technological capacity of the Brazilian companies
and in investing in research and development. For instance, in the 70s, the EMBRAPA, Brazilian
Agricultural Reseach Company was established by the government. This state-owned company,
linked to the Ministry of Agriculture, is still devoted to pure and applied research on the
agricultural sector, on many topics from animal agriculture to crops. Its scientists have been
notably able to develop an acidic-soil adapted soybean plant, helping Brazil to become a leader in
soybean. Similarly, in the aerospace technology was created in 1953 the CTA, Brazilian General-
Command for Aerospace Technology, a national military research center for aviation and space
flight, subordinated to the Brazilian Air Force. It is in charge of the coordination of all scientific
and technical activities linked with the aerospace sector, susceptible to interest the Ministry of
Defense. One of the institutes composing the CTA is the ITA or Aeronautical Institute of
Technology, a public institution of advanced research and high education in aerospace science and
technology. It offers engineering diplomas. Since its foundation, more than 4,600 engineers
graduated from ITA. One peculiar realization of ITA’s alumni was EMBRAER, which nowadays
employs hundreds of engineers from ITA, generating 150 times the yearly investment put by the
government in ITA. ITA is working hand-in-hand with the CTA and the government, forming the
next managers and engineers of the leading industries. Another famous example would be the

8
See Annex 7

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Institution of Technological Research (IPT), of the University of São Paulo, associated with the
innovation in the engineering sector.

Referring to the work of Dunning about the causes of internationalization of corporations,

the precondition required, thanks to which companies are able to compete internationally were
largely brought or pushed to a larger export by the State. It is clear that some Brazilian companies
have indeed developed such capabilities and went abroad to capitalize them, largely supported for
the beginning to the end of the process by the State, building the adequate environment for
building such technological competence. What would be interesting to study is, under the current
policy of decreasing public expenditures for R&D, whether there will be a future generation of
Brazilian multinationals emerging from this changing context. Probably, we could be optimistic,
seeing the capital markets reforms led and the macroeconomic stabilization, creating an easier
environment to raise capital for example.

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Annexes:

Annex 1

Annex 2

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Annex 3

Annex 4

Annex 5

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Annex 6

Annex 7

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