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Brazil Rawks

BEM Presentation for Week 8
by

Wesley Gan

on 25 August 2013

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Transcript of Brazil Rawks

Is it? or is it not?
Brazil -
A birthplace of MNC

Impact on firms
First, firms started or reinforced the restructuring and improvement of their technology and competence to be able to face foreign competitors.
Second, firms started focusing on foreign markets as sources of growth.
Impact on firms
1990 ~ 2000
'The Washington Consensus'
1982 ~ 1990
The Lost Decade
Oil shock led to high import costs
Foreign debt to finance domestic development & money printing to fund fiscal deficit (Toshniwal 2001)
Increasing international interest rate (OECD 1991)
Economy experienced stagflation
Attempts to control inflation and stimulate economy
1986 - Cruzado Plan (Price freezing)
1987 - Bresser Plan (Cut investment budget)
1989 - Summer Plan (Price freezing + privatisation)
1990 - Collor I & II (Freeze price + financial assets)
1990 - Brady Plan (US. denominated bonds)
Business Environment
Inflexible and volatile operating environment
Price control disrupts supply chain
Unstable currency
High inflation
Shrinking domestic market
Highly volatile & risky economic conditions
Domestic demand fall as unstable high inflation took place
Firms diversified to look for new markets and different sectors
Started with 'Natural Market' due to close physic distance ie: Latin America & North America
Diversified and expanded by acquiring near bankruptcy firms, some through vertical integration
COMPANY: GERDAU
INDUSTRY: STEEL
STRATEGY: OFFENSIVE
By 1980, had 50% of market share while other market shares were dominated by SOEs
Focus on domestic market meant being
exposed
to volatile market conditions
As a result, expanded & diversified to
nearby
regions:
1980: Acquired Uruguay's Laisa steel mill
1989: Acquired Canada's Courtice Steel Inc.
COMPANY: SADIA
INDUSTRY: AGRICULTURE & FOOD
STRATEGY: OFFENSIVE
Established 1942 in Southern Brazil
First served
nearby
markets ie: São Paulo in 1947
Transportation infrastructure was
poor
, lease & soon acquired and expanded airline group to transport products
1975: started exporting
1980s: hyperinflation + unstable currency,
focused
on
exporting
activities - Far East
(Market Seeking)
COMPANY: EMBRAER (SOE until 1994)
INDUSTRY: AVIATION (Strategic)
STRATEGY: OFFENSIVE (w/ gov't aid)
Born during military ruling, aimed at producing sovereign aircrafts
Mainly exported to middle east
Brazil economic declined in 1980s, profits declined but Ministry of Defence
protected
Embraer (Solingen 1998)
Fiscal discipline- strict criteria for limiting budget deficits
Public expenditure priorities
Tax reforms
Financial liberalization
Exchange rates
Trade liberalization
Increasing FDI
Privatization of state enterprise
Deregulation
Secure intellectual property rights (IPR)
Reduced role of the state
Trading Bloc
MERCOSUR
Promote free trade and the fluid movement of goods, people, and currency.
Argentina, Brazil, Paraguay, Uruguay, and Venezula
NAFTA (1994)
United States, Canada, and Mexico
Eliminate barriers to trade and investement.
Real Plan (Plano Real)
Intended to stabilize the domestic currency in nominal terms after a string failed plans to control inflation.
Introduced a new currency call the real (plural reais) on July 1994
Enacted a series of contractionary fiscal and monetary policies, restricting its expenses and raising interest rate.
Put a strong focus on the management of balance of payment
Setting the real at a very high value relative to the US dollar
Sharp increase on domestic interest rate to maintain a positive influx of foreign capitals to local currency bond market, financing Brazilian expenditures.
New Market Characteristics
Transformed from a closed economy to open economy
Liberalization of the economy and government that significantly reduced the barriers of trading
No longer been protected
Unprecedented exposure to international competitions
New Market Characteristics
Economic liberalization including privatizations (telecoms, utilities, gas and steel), market deregulation and price liberalization.
External side- reduction on initially high tariff and non-tariff barriers
Domestic side- wave of privatization and introduction of independent regulatory agencies.
LA abandoned the IS policies and adopted a more pro-market strategies.
New Market Characteristics
Increased the opportunities and activity-set available to firms for improving the allocation of resources to most efficient use.
Economic liberalization helps firms to improve their efficiency and competitiveness.
Changed the behavior of Latin American firms by providing them incentives to internationalize their activities.
CUERVO-CAZURRA, Alvaro (2008). The multinationalization of developing country MNEs: The case of multilatinas, Journal of International Management, (14) (2), 138-154.

ARBIX, Glauco (2010). Structural change and the emergence of the Brazilian MNEs, International Journal of Emerging Markets, (4) (3-4), 266-288.

DA SILVA, Jorge Ferreira & DA ROCHA, Angela (2009). The Internationalization of Brazilian Firms: An Introduction to the Special Issue, Latin America Business Review, (10) (2-3), 61-71.

OLAYA, Juanita C., OLAYA, Juliana C. and CUÉTER, Indira J. (2012). The Internationalization Patterns of Multilatinas, (21) 33-54.
Core References

Portfolio risk allocations driven:
market
-&
natural-resource
-
seeking
to
hedges against exchange rate risks
&
commodity price fluctuations
, &
diversified
the
location of assets
in order to
improve access to capital

To up their investments improve their financial (& industrial) profile further their capital costs
E.g,:
Marco Polo
: manufacturing units in Argentina, Colombia, Mexico, Portugal & South Africa, & exports to more than 60 countries
Conglomerates
between
Votorantim
& the mining giant
Vale

Ability to tap local & international capital & financial markets at low cost
E.g,:
In 2008,
Vale
have reached a market capitalization of over US$ 100 billion
Vale are able to access financial markets on the same terms & conditions as their OECD-based competitors


- Brazilian firms turned to external markets & evolved into MNEs
expand into particular parts of the continent, concentrating on MERCOSUR or the Andean area
developed a region-wide strategy
sought emerging markets in Africa and Asia

-
Vale
, Brazil’s leading enterprise in mining sector, made 33% of total sales outside the country
Impact on firms

Competition within Brazil ↑
Low interest rate of OCED countries
Lowering of capital costs
High volatility of economic environment
economies have been highly volatile & unstable, especially after the “lost decade”

Post- 2000

Brazilian firms ↑ their
acquisitions
in home markets & abroad

M&A
and
Greenfield projects
are becoming increasingly popular, since firms allowed to make quick moves & build up market share in a single operation
Post-2000
(Source: UNCTAD 20
13)
South-South FDI as a percentage of total world, 2000-2012
1. Expansion & diversification of sales, markets & production bases
2. Own market capitalization ↑
3. Large access of capital
4. Aiming to become established in OECD countries
5. Risks diversification
It’s time for some classroom activities!
What now....?
What do you think is the factors that resulted in Brazil being birthplace of MNEs?
The period of ISI
The Lost Decade
Neoliberalisation era
Post 2000
1929s- first textile operator to make its own cotton yarn
1964s – government stabilized the currency, leading to a crisis in the textile industry (volatile economic condition)
1970 – restructured due to crisis into larger mills with new equipment, enabling better production
1972s – diversified into food industry
1980s – price freezing caused massive lost
Company: Cia Hering
Textile Industry
Large domestic market
Lack of proper infrastructure
No competition due to import restriction
Structural obstacles to international expansion
Anti-Inflation policies prevented inflation to turn into hyperinflation.
Late 1970s, oil shock led to crisis
(Oil price $2.80 (1973s) ↑ $11.10 (1974s)
Business Environment
1930s – Unstructured Import substitution, growth 17% to 25.9%
Low import volume
Government tries to restrict interaction with the world economy
This policies were maintained and in the 1950s became as Import Substitution Industrialisation (ISI)
1948s – Import finally surpassed their real level in 1930.
1930-1980 - ISI
Require knowledge to expand in home country
Family owned local companies only expand domestically
Lack of incentive to grow
Unstable inflation resulted in need to diversify
Impact on firm
Factors contributing to Brazil as the Birthplace of MNEs

Continuous institutional changes (since ISI)
Perceived/imminent saturation in domestic markets
Spreading of Risk (starting 1980s)
Volatile economic conditions (starting 1980s)
Increased taxes
Foreign competition (starting 1990s)

Use of surplus capital/access to cheaper sources of capital
Entrepreneurial vision (i.e.: Gerdau & Sadia)
Removal of barriers to entry (via FTAs & globalisation)
Knowledge spillover by FDI (starting 1990s)
Push Factors
Facilitating factors
Pull factors
Unexploited markets (natural markets)
Pre-emption of rivals
Higher profit margins (saturated home market)
Consumer market segment not yet exploited
Access to new management
Rise of South-South Trend
Impact on Firms
Impact on Firms
Impact on firms
Impact on Firms
52 %
(Source: Cepal Review 2008)
-high flexibility, avoiding bureacracy of formal processes
Structure
- family owned companies
Importation barriers
-Motivated to engage FDI
Entrance of foreign multinational
-forcing local companies to intrnationalize
Limited Internal market
-firms have to go abroad due to small and saturated markets
Opportunism
- take advantage from economic crises of other countries
Management
-Strong and dynamic leadership
Macroeconomic environment
-diversifying the risks of their operations
Common market condition
-common language, geographical proximity and similar socio-economical characteristics
-be natural market for its enterprises
Full transcript