Former Tinker Visiting Professor Glauco Arbix (Fall 2010) was recently appointed by the Djilma Roussef administration (new President of the Brazilian Federal Republic) as President of the Brazilian Innovation Agency (FINEP), which promotes the economic and social development of Brazil through the stimulation of investment in science, technology, and innovation in universities, businesses, research institutes, and other public and private enterprises. Arbix wrote the following article with Luiz Caseiro.
Brazilian Multinationals Invigorate the Economy
By Glauco Arbix and Luiz Caseiro
As has been recently highlighted in the media, Brazilian multinationals have reported large transfers of funds from overseas subsidiaries to their headquarters in Brazil. Just from January to September of this year the sum reached US$ 23.4 billion, which reflects the dynamic potential of the process of internationalization of Brazilian companies to domestic economy. This movement, however, is not exactly new, since it has occurred for the last five consecutive years.
From 2007 to 2011 (September), Brazilian multinationals brought in US$ 108.6 billion in investments from abroad. More importantly, contrary to what some analysts have claimed, the transfer does not represent an ebbing of the internationalization process. Even in 2009 and 2011, when internalization of investment exceeded the amount of money sent abroad, Brazilian companies expanded their foreign assets.
There are differences between the incoming and outgoing investment. While 63% (or US$ 80.1 billion) of the Foreign Direct Investment (FDI) made by the Brazilian headquarters in these five years was allocated to the acquisition of companies abroad, only 15% of the resources that returned to Brazil were originated from selling of assets. The remaining 85% (US$ 92.1 billion) were loans made by Brazilian subsidiaries to headquarters here. That is, at the same time they bought more participation in foreign firms, Brazilian companies have raised, through subsidiaries, new resources to invest in the domestic market.
By September of this year, Brazilian headquarters sent US$ 8.3 billion net for partial (above 10%) or total purchase of overseas companies. It is still a challenge to identify and map in detail what are the targets of these actions and their impacts on the country.
However, even without precise information, it is possible to say that some myths have been shattered. While it is true that the movement is recent and still lacks more consistent historical data, the trend already revealed serves to counter fears that internationalization would occur at the expense of domestic investment. Rather, the history of internationalization of Brazilian companies since the 1970s shows that the periods of greatest growth in stock of Brazilian FDI were those times when the national economy was thriving.
Although a group of Brazilian multinationals started its expansion during the 80’s — a so called decade of stagnation in Latin America — most just opened commercial subsidiaries in order to promote exports. This means that the accumulated internationalization during the 1980s accounted for little in terms of FDI. In fact, the stock of Brazilian OFDI increased more in the 1970s than in the 1980s.
More recently, bolstered by resumed of domestic economic growth, foreign investment has started to grow again. Only this time, it is on a scale unprecedented in history, covering a much wider array of companies and supply chains. This phenomenon shows that OFDI is not a tactical move for Brazilian companies, but a strategic one. Rather than invest abroad at the expense of domestic investment, they have done so in a complementary manner, strengthening the interconnections of the Brazilian economy to global networks of production, finance and knowledge.
In the last decade, the internationalization of commodity producers like Vale, Petrobras and Gerdau has grown exponentially. These companies are today global players that have increased revenues from exports, taxes, generated thousands of direct and indirect jobs, and contributed to a broad repositioning of Brazil in the international geopolitical stage.
Other major companies such as Embraer and Braskem, which possess enormous potential for innovation, have also become important international actors, with the ability to compete for technological and commercial leadership in their respective markets. In addition to these, dozens of other companies in the mechanical sector (WEG), vehicles (Marcopolo), auto parts (Sabó), software (Totvs), hardware (Bematech) and cosmetics (Natura and Boticário), just to name a few, have significantly expanded theirs presences abroad, this time, however, not limited to Latin America. They boldly sought the largest and most dynamic markets worldwide, including those in Asia, as a way to win new customers, generate and absorb competencies and gain competitiveness.
It is not only through new financial resources that internationalization of companies benefits the Brazilian economy. There are several studies that show a high correlation between internationalization and capacity for innovation, as well as an increase in productivity, productive diversification and increased exports.
More than this, when obstacles and difficulties prevail and companies are not able to incorporate internationalization as an integral part of their corporate strategies, far from finding protection in the domestic market, they only see increased risk of stagnation and loss of momentum. At such times, the siren song of protectionism emerges as almost irresistible temptation.
The current government support for internationalization is therefore associated with the search for a dynamic international insertion of Brazilian companies. Encouraging companies to systematically strive for increased productivity, based on the expansion of the technological content of their activities and giving more value to knowledge-intensive initiatives, is the only way to raise the standard of economic competitiveness and sustain a long growth cycle for the country.
Glauco Arbix is president of the Brazilian Innovation Agency (Finep).