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

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32 Outward Foreign Direct Investment by Enterprises from Brazil E. OFDI policies Box 5. Natura: the Brazilian perfume in Saint-Germain-des-Prés In 2005 Natura opened its first “Maison” in Paris. It has plans to expand its brand in Europe, from its base in France. France is a strategic country for the company’s international learning process because it is the most sophisticated cosmetics and perfumery market in the world and because of the intense rivalry among competitors in the market. All of the large global players of the industry are present in France. According to Natura’s CEO, Alessandro Carlucci, the store, located in Saint-Germain-des- Près, in Paris’ commercial city centre, was conceived not only to sell products, but also to present to the customers Natura’s values and concepts. He explained that “We sell in our store well-being associated with our brand”. This model adopted in Europe, which includes the objective of developing a global brand, also has the effect of strengthening Natura’s brand in Brazil. On one hand, the company’s Brazilian consumers who enjoy the opportunity to know the glamorous French store, place higher value on the company and its products after the experience. On the other hand, when selling Natura’s products, its consultants can say that they are appreciated and sold in Paris, which is very appealing to new customers. Source: Natura planeja expansão da marca na França. DCI – SP, Comércio, A-14 http://www.abevd.org.br/htdocs/index.php?secao=noticias&noticia_id=786, accessed on 30 March 2006. The lack of policy support and measures, including other constraints faced by Brazilian firms, had limited OFDI from Brazil (box 6). However, a number of policy efforts had been undertaken by the Government, which had contributed to improving the environment for OFDI. A positive and noteworthy recent effort made by Banco Central do Brasil (Brazilian Central Bank – or BC) to simplify the formal procedures and controls of foreign investments and debts is a case in point. In March 2005, BC issued a policy that facilitated outward investment by companies located in Brazil. Regulations dealing with foreign currency exchange and foreign currency inflows and outflows were simplified while, at the same time, the limits of investments transactions were removed. Excessive red tape was eliminated as well as the need for previous authorizations for investments. Foreign exchange regulations. An exchangerate operation is needed for a direct investment abroad. Companies investing abroad had many restrictions which have been progressively removed. �� Prior to 2000, the Free Exchange Rate Market (MCTL), also known as commercial market, was part of the foreign exchange market charged with exchange transactions related to foreign investments and international loans. This was the leastflexible part of the exchange market. The chief feature of this market was the need for previous approval from the Brazilian Central Bank. Such approval was valid for specific operations only. Circular Nr. 1.280 (18 January 1988) demanded that foreign-currency remittances for Brazilian investment abroad be previously authorized by the Brazilian Central Bank through sale of a gold amount equivalent to the intended investment. �� In the year 2000, the legislation reformed the process. It made the OFDI regulation on the Free Exchange Rate Market (MCTL) more flexible. Brazilian companies were henceforth authorized to freely carry out these investments, up to a $5 million limit, for a 12-month time period. Prior authorization from Brazil’s Central Bank would be needed only if the investment exceeded such amount or surpassed this time period. Yet, despite all this, the defined mechanism remained complex and dependant on submitting several documents for the investment exchange-rate operation to be performed. It is important to point out that all the demands and procedures would apply only to investments not surpassing the $5 million top limit and not remaining abroad for longer than 12 months. For investment plans outside these targets, the situation was even more complicated, inasmuch as the investment hinged on previous approval from the Brazilian Central Bank. �� In March 2005, a resolution from the National Monetary Council (CMN) unifying the Brazilian foreign exchange market encompassed all exchange operations, regardless of amount or purpose. The new resolution suppressed the Brazilian Central Bank’s rigid controls on exchange-rate operations and on trade transactions related to it. Brazil’s Central Bank intended to minimize
Box 6. Brazil: Some constraints on OFDI CHAPTER III 33 A number of constraints had limited Brazilian firms from venturing abroad. These include the absence of government policies and support for companies that want to expand abroad, the stickiness of some of the Brazilian TNCs competitive advantages and management ethnocentrism. • Lack of policies measures to support OFDI. In spite of the Government’s declared intentions of creating 10 Brazilian TNCs, this has not been translated into concrete government policies and programmes that support the internationalization effort involving OFDI. While this laissez-faire position may not have a great influence in larger companies, it becomes an obstacle for SMEs, which lack the resources to expand their activities abroad and to compete successfully in international markets. Modernization of the legal framework, in order to adapt to the new reality imposed by globalization is fundamental for Brazilian companies’ competitiveness in the international market. Even though recent changes have considerably reduced the red tape faced by companies expanding their international activities, the legislation restricts the consolidation of results generated abroad. Furthermore, changes to modernize legislation must be comprehensive. Often this is neglected and ad-hoc reforms in one area do not canvass effects in other fields. • The stickiness of the competitive advantages of Brazilian TNCs. Larger Brazilian TNCs built their advantages in the domestic market becoming leaders in their industries. By internationalizing, they try to exploit their competitive advantages and distinctive assets and capabilities that they have long developed in the Brazilian market. To be effective in international markets, however, these capabilities must be transferable. In the Brazilian case, where, with some exceptions, most of the competitive advantages are linked to process technology, access to raw materials and low labour cost. Process technologies are in general “sticky” – deeply ingrained in the routines and tacit know-how of managers and qualified workers. While there are ways to manage tacit knowledge for competitive advantaga a , it needs a conscious effort in order to organize information into best practices, develop mobility and invest in support systems to transfer knowledge. Low cost labour and raw materials are comparative advantages – and, as such, location-specific. In order to overcome market failures and institutional voids, Brazilian TNCs have in the past relied on internalized activities and transactions creating strong vertical integrated companies – an advantage difficult to transfer to new settings without incurring in huge investments and risks – surely a shortcoming for Brazilian companies. The main challenge for Brazilian TNCs is to adapt and reconfigure their business model abroad, and to organize their knowledge and transfer mechanisms in order to add value to the foreign operations. This has been the case of Gerdau (box 4). Before investing abroad, Gerdau has focused on the upgrading of their process technology and operations management to upgrade them to international best practices. • Managerial Ethnocentrism. Most boards and top management do not have experience in managing cultural diversity. Being predominantly composed of Brazilian natives lacking a robust international experience, top management tends to be biased towards an ethnocentric approach. Because of that, domestic issues – that for most companies still represent the most representative part of their business – are favoured over international issues. Usually, the international ventures are segregated in an international department, which acts as an interface between the affiliates and the headquarters. Usually, they are perceived as simple implementers of operating policies – not as business units, with the need and autonomy to adapt to local circumstances and even contributing to global solutions. Most of these companies are still controlled by second and third generation family, and their exposure to international financial markets is limited. Most of the Brazilian TNCs rely, for the implementation of their international strategies, on expatriates with international experience, a scarce resource that limits international expansion. International capabilities (including language knowledge) are still scarce in most companies. Companies are overcoming this obstacle by recruiting new managerial talent with international skills and experience, and learning to work with local talent in the countries in which they operate. Source: Authors. a Cemex, the Mexican company in the cement industry, has been a successful case of transferring their best practices to their cross-border acquisitions. Strongly backed by information technology, they were able to organize the accumulated tacit knowledge and, with the development of teams, manage to integrate it in their network of subsidiaries. For more details, see: Marchand, D., Kettinger, W. and Chung, R. (2005). The Cemex way: the right balance between local business flexibility and global standardization. IMD - International Institute of Management Development Case, Lausanne, Switzerland. IMD-3-1341.Ghemawat, P. (2002). “The Globalization of CEMEX”, by Pankaj Ghemawat. Harvard Business School Case. 9.701.017.
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