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

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).