Global Players from Emerging Markets: Strengthening ... - Unctad

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30 Outward Foreign Direct Investment by Enterprises from Brazil • Following the leaders of productive chains. Some of the Brazilian large and medium sized companies have chosen to internationalize to follow their main clients in the international markets. In the automotive sector, the globalization of first rank suppliers has been a traditional business practice (box 3). For the Brazilian companies, it has also been an opportunity to tie strong links with suppliers and to develop new capabilities and resources abroad, including brands, technological and marketing capabilities, while learning how to operate in international settings. • Resources-seeking investments. In some industries, the resource seeking activities are the main drivers for internationalization. This has been the case of the oil and mining industries and some areas of the agribusiness. In Brazil, investments by CVRD (mining) and Petrobras (oil) illustrate the first trend. The search for new sources of natural resources has pushed Petrobras to Africa, Argentina, North America and the Middle East (box 1). CVRD extended its operations to Africa, and is planning to invest in Argentina to identify and assess mineral deposits in the province of Neuquen. • Reducing the risk of overdependence from domestic markets. Most of the large Brazilian companies that have developed good corporate governance practices and are already listed in stock exchanges of developed countries need to reduce the risk perception by international investors (Mork and Yeung 1991). Brazilian companies used OFDI to reduce such perceived risks associated with a dominant exposure to the Brazilian market. While this is not usually the main drive, risk reduction helps a company to access funds in more favourable conditions. Gerdau is an example of obtaining better investment grades than companies that operate solely in the Brazilian market (box 4). • The acquisition of complementary assets. Most Brazilian TNCs are generally leaders in their domestic markets; however, some of their assets are difficult to transfer internationally. This has been the case with brands, marketing skills and technological capabilities that do not meet international requirements. Therefore, in addition to focusing on exploiting and adapting their assets and competencies developed in their home base, companies are increasingly using their international operations to tap (Doz, Williamson and Santos 2001). Learning assets are not only consequences of the internationalization process, but a drive by itself (Bartlett and Ghoshal 2002). Natura, a leading Brazilian company in the cosmetic industry, is an example of the use of internationalization for learning purposes. In establishing an affiliate in Paris, it plans to gain access to up-to-date fashion and market trends, while taking advantage of the proximity to the Paris region’s luxury goods cluster (box 5). Box 3. Sabó Autopeças- getting closer to the customer Sabo has served important foreign clients, such as Ford, for which it manufactured car mirrors and assembled wheel oil seals for trucks. It has 100 per cent Brazilian ownership. It developed as a supplier of large automobile companies, and decided to internationalize its operations to serve large TNCs as a global supplier. In 1992, it acquired two oil seals plants in Argentina. In the next year, it acquired the ownership control of Kaco, the second largest manufacturer of oil seals in Germany, with three plants, including the headquarters, and another plant in Austria. This expansion was derived from a careful analysis of the global automobile industry. Germany is considered the technological centre for plastics and rubbers. By taking over Kaco, which had a well-known technology asset, Sabo acquired the Kaco’s brand. The increasing presence of Sabo in Europe led to the construction of a production plant in Hungary. With this new unit, Sabo duplicated, in two years, its production capacity to serve the European market. After expanding to Germany, Austria, Hungary and Argentina, Sabo plans to establish a new plant in the United States. According to the company’s General Director, Antonio Carlos Bento de Souza, the decision to build an oil seal plant in the United States was driven by the demand for Sabo products in the country. “It is the largest automobile market in the world, and they know our brand in the U.S. There, among many automobile companies, we supply General Motors that produces 8 million cars per year. Being close to the customers is an important differential in market competition”, stated the company’s director. Source: Sabó, uma admirável história de liderança. www.nitriflex.com.br/template.asp?pag=nitrinews_06_02 .
D. OFDI and implications for enterprise competitiveness The effects of enterprise internalization on the competitiveness of the 1,000 largest Brazilian companies have been acknowledged in a survey conducted by Fundação Dom Cabral in 2001 (Cyrino and Oliveira Junior 2003). When asked to evaluate which dimensions of economic performance have been most affected by their internationalization (including exports), these companies ranked, in order of importance, the positive effects on scale and scope economies, reduction of overdependence of country risks, overall improvement on bottomline performance, learning effects and, with a lesser emphasis, increasing the company’s market value (this result was probably influenced by the fact that there are few listed companies among the 1,000 Brazilian firms). From the contribution to growth, it seems clear that Brazilian TNCs, which are among the largest in their markets, have profited from their investment abroad. As markets outside Brazil present higher Box 4. Gerdau S.A. CHAPTER III 31 Gerdau developed its activities in Brazil benefiting from the country’s comparative advantages in steel production, including the wealth of energy resources and low labour costs. Gerdau operates mini-mill and integrated-steel facilities in Brazil, Argentina, Chile, Colombia, Uruguay, the United States, Canada and Spain. With a crude steel production capacity of 18.7 million tons in 2006 and a gross revenue of 25.5 billion reais ($11.1 billion) a in 2005, the company holds in Brazil a 48 per cent market share in the long steel segment and a 22 per cent share in the crude steel market. In the early 1980s, with the saturation and low growth rates of the domestic market, Gerdau started investing abroad. The main motivation to expand within the region was the regional economic integration of Mercosur and the Chilean markets strength. In North America, where the annual demand of steel products is more than 150 million tons, investment was market seeking. However, it also took into consideration the high capital costs in Brazil – a disadvantage in relation to other industry’s global players. Investment in the United States gave Gerdau the access to capital of lower cost to raise funds in developed financial markets without paying the premium associated with the Brazilian risks. The company pursued the same strategy developed in Brazil: a decentralized production of long-steel products in mini mills, using scrap iron or steel as raw material for the production process. It expanded through acquisitions - a rather rational consideration in an industry plagued with overcapacity. In 2002, Gerdau and Co-Steel merged forming Gerdau AmeriSteel Corporation in North America. In the same year, Gerdau’s entered the flat steel market, with a 50 per cent acquisition in the joint venture Gallatin Steel based in the United States. New important acquisitions followed in 2004, including North Star Steel, and Gate City, RJ Rebar and Potter Form & Tie which had reinforcing steel facilities. The acquisition of North Star Steel for $308 million consolidated sales into the Midwest. The company also expanded in South America, with the acquisition of 59.8 per cent of the assets of the Colombian Grupo Diaco. In 2005, Gerdau signed an agreement to acquire 40 per cent of the capital stock of Corporación Sidenor S.A., the largest long specialty steel producer, forged parts and foundry in Spain and one of the major producers of stamped forged. Source: Interviews by the authors. a At a foreign exchange rate of R$2.287 per dollar on 23 May 2006. growth rates, companies that are well placed in rapid growth markets tend to present better performance than those companies that rely exclusively on the domestic market. As for the learning effects, international exposure has had an important effect on the competitiveness in the domestic market. Having to deal with more demanding customers in different institutional and cultural settings, these companies have been stimulated to search for new approaches and solutions that can be later on be incorporated in the whole network, included at headquarters. However, reliable quantitative data on international performance of Brazilian TNCs are scarce, which makes the effect of OFDI difficult to assess. Some of the positive effects of OFDI on internationalized Brazilian firms as explained in the earlier company cases include expansion of markets (Azeleia, Sabo, Natura, Petrobas), maintain cost competitiveness (Azeleia), access to technology (Sabo), brand awareness (Natura), better control of value chain (Petrobas) and access to natural resources (Petrobas).
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