Scouring Brazil abroad

Multinationals have always been synonymous with companies from rich countries. As they emerged in Brazil and in other emerging markets, the phenomenon took the world by surprise. The perplexity of seeing them challenging longstanding global corporations shortly gave way to a curiosity that academic books and the best business schools in the world weren’t ready to answer. Do these new giants from emerging markets have different characteristics to the classic multinationals we are used to seeing? What factors explain their competitiveness in global markets? To help answer these questions posed not only in the academic world but also among managers of companies, investors and public policymakers, a group of Brazilian researchers spent the last six years analyzing the question. This research has been led by the couple Afonso Carlos Correa Fleury and Maria Tereza Leme Fleury – Afonso is a professor of production engineering from the Polytechnic School of the University of São Paulo, while Maria is a director at the Business School of the Getúlio Vargas Foundation, in São Paulo. Afonso coordinated the Ginebra Project (Business Management for Internationalization of Brazilian companies), an extensive research program co-financed by FAPESP, with the aim of understanding the dynamics of the internationalization process of companies from emerging markets, in general, and of Brazilian companies, in particular. The research, which spawned 15 dissertations and 23 theses, was a watershed. Previously, there was little research on the topic in general – even less on the specific question of management and organizational capacity. The couple compare their work to scouring for gold. “When we started the project, in 2004, there were only 18 Brazilian multinationals – in other words, companies that, in our definition, were capable of adding value in their international operations”, says Fleury. “Since then, we have developed an empirical base signaling a list of one hundred Brazilian multinationals.” The couple spoke to PIB about the gigantic project that included Brazil in the field of relevant studies on multinationals from emerging markets, and whose main conclusions feature in a book to be shortly launched by the Editora Atlas publishing house.

What is the key point of your studies?
FLEURY – The most interesting thing is trying to grasp the logic of the game being played. From time to time, we see a major change in the global production structure. We can clearly see today what we call the “third wave of internationalization”. The first wave was led by companies from developed countries, especially the US, after World War II. A major inequality of resources and capacity between countries led to an almost spontaneous movement of internationalization. The second wave was led by Japanese companies, in the 1980s. In this case, the Japanese government figured prominently, implementing a series of programs and mechanisms suited to the situation in place at that time.

What characterizes this third wave of internationalization that we are currently experiencing?
FLEURY – It is led by companies from the so-called BRICs (Brazil, Russia, India and China). Since 1979, when it initiated its political and economic restructuring, China set a target of having 50 of the world’s 500 biggest companies by 2010. As of last year, there were 26. India and Russia have other logics, but the list of their international companies is starting to grow. In Brazil, the planning of this internationalization movement is different: the decision to go international is the company’s and the company’s alone.

Didn’t the fi rst movement occur in the changeover from the 19th to the 20th centuries?
FLEURY – Actually, the internationalization process dates back to the 17th century. But its relative importance was very small. Up until the 1950s, the term “multinational” didn’t even exist. The international operations of companies fell under the responsibility of one of their departments. It is important to highlight the pioneering stance of Ford. Its rapid internationalization, and that of other US companies at the start of the 20th century, should be credited to the fact that they had a new management model for the time: the so-called “American Manufacturing System”. What provides a sustainable competitive advantage in internationalization processes is a management model capable of producing a differentiated performance vis-à-vis other models of the same nature.

Is this what is happening now with the Brazilian companies that went international?
FLEURY Yes. Their main advantages are the organizational capacity that they developed and which supported their trajectories in the domestic markets, and a Brazilian-esque style of management. It is similar to what happened with Japanese companies – which, due to cultural and institutional characteristics and the country’s availability of resources, developed a specific profile of organizational capacity and their own style of management. This group of characteristics, in turn, produced competitive advantages in the 1980s that supported their internationalization process. The same thing is now happening with Brazilian companies. They have also developed a group of organizational capacities and a style of management that gives them a competitive advantage and supports their international expansion.

What differentiates this capacity and Brazilian-esque management style?
FLEURY – It is important to differentiate between organizational capacity and management style. This is determined by the company’s track record, the location where it developed its operations and reveals the company’s character. Companies operating in environments of major political and economic turbulence develop unique organizational capacity, termed “wait mode”: they don’t engage in long term planning, but they are able to respond rapidly and efficiently to unexpected events; this gives Brazil a competitive differential versus a company from a stable and transparent country.

What concrete examples can you give?
FLEURY Embraer was a company that responded rapidly to the changes that emerged after the attack on the World Trade Center. Ambev, Votorantim, CSN, Weg, etc, gained international renown for their production capacity. Organizational capacity has more to do with capacity to mobilize, integrate, transfer know-how, resources and talent. Here the benchmark is the competition rather than the country: a company only survives if its capacity is equal to or superior to its international competitors.

What explains the growth in Brazilian multinationals?
MARIA TEREZA – There is a very important historical and situational element, which began in the 1990s with the restructuring of Brazil’s productive system and the privatization of some of its companies. This change gathered steam in the following decade, to the point that in 2006 the value of direct investments by Brazilian companies abroad exceeded the value of foreign investments in Brazil. I believe companies went through a learning curve, whereby they started to realize that if they didn’t do something they would suffer from such strong competition that the chance of surviving in Brazilian territory would be more difficult. It was an economic, cultural and even political movement, since the Brazilian government started to provide more support to internationalization. This expansion, thus, results from a group of factors. FLEURY – This institutional aspect is very important. In the current government, the question only started to be positively assessed after 2005, with the change in the board of the BNDES (Brazilian National Development Bank). In the government of Fernando Henrique Cardoso, there was a prevailing idea that Brazil didn’t need industrial policy. Since industrial policy necessarily involves several ministries, there was a certain degree of “demobilization”. With no integration, each party was left with its own piece of the pie. Now we are seeing that, gradually, government entities are starting to get involved.

Recently, Ipea (Institute of Applied Economic Research) itself announced that it will start to operate abroad in order to support Brazilian companies in their internationalization process.
FLEURY – Not just Ipea. Several ministries are taking moves, at national level, to support the internationalization of Brazilian companies. This is a major effort, which needs to untie some knots before it can really be effective. We are currently seeing an effort to reorganize this inter-ministerial network to verify the type of support to be given to the internationalization of Brazilian companies. This has emerged as a crucial question to our future.

Looking back, what drove this movement of internationalization?
FLEURY – At the start of the 1980s, the then minister Antônio Delfim Neto tried to resolve Brazil’s balance of payments problems by creating a program called “Exporting is what Matters”. This led Brazil to export anything, with no concerns over quality. Literally, anything! Brazil exported thermometers to Peru that had no reliability in terms of accuracy. Meanwhile, Japan was implementing a very rigorous quality control program for its exports, with the aim of upgrading the Made in Japan seal. So, either our own Made in Brazil seal had value or we were doomed to failure. From 1984 onwards, we coordinated a major project financed by the World Bank and organized by the Trade Ministry, to understand how to introduce industrial quality into Brasil. Thanks to this study, the first studied into quality in Brazilian industry appeared, and later resulted in the creation of the Brazilian Quality and Productivity Program. This is at the heart of Brazilian companies’ competitiveness nowadays.

So this isn’t an overnight phenomenon?
FLEURY – Absolutely not. Once again, Brazilian companies’ internationalization process is similar to what Japan did. The Japanese geared up for a long time before spreading their wings and going international. Today, the major discussion when analyzing Chinese companies’ internationalization is the perception that their transition was very swift. Brazilian companies, in contrast, had time to learn which criteria qualify them as multinationals. How do companies evolve as they go international? FLEURY First, they need to do their homework, which in itself poses a certain challenge. Second, there is a moment in the internationalization process featuring a massive internal change. We’re talking about the transition between two states – being totally national and starting to go international. The third is the challenge of expansion. We started analyzing these moments and the challenges that internationalization poses to companies in terms of the management process. It’s impressive. It’s one thing playing the São Paulo soccer championship. It’s another thing wanting to play in the Champions League. This process is very important to improve our capacity. Just going international won’t necessarily trigger a superior financial performance in a rapid space of time. It’s much slower, but it’s a process of learning and developing new skills, which makes the company much more competitive in its country and the countries where it sets up shop. This is a major lesson. Much of what these companies learn internationally ends up being repatriated and reinserted into the management system in Brazil. What are the examples of this transfer? MARIA TEREZA – In the technological arena, we have the case of Sabó, from the auto parts industry, which bought a company in Germany to develop new products and processes. Upon refining this capacity, it brought them back to Brazil. Sabó won the Finep Innovation Award for its international learning curve in the area of retainers. Its interest in buying the German company came from the fact that this com­pany had strong interaction with universities that carried out re­search of interest to the Brazilian operation.

And what about people management?
MARIA TEREZA – It’s possible to learn about people management in developed countries where the unions are usually much stronger. All this is a learning curve. The company even starts reviewing its practices in Brazil. There are lots of examples, such as the Votorantim group, which bought companies in developed countries (US and Canada) and started to undergo a very important learning process, which ended up being reflected in its Brazilian operations. Odebrecht, for example, in working with situ­ations of operational and political risk, uses know-how and knowled­ge that ends up becoming part of the company’s common knowledge and is used by the parent company itself and its subsidiaries around the world. This produces new ca­pacities. Our studies have shown that internationalization will not necessarily trigger a better finan­cial performance in a short space of time. It’s much slower. But it is a process of learning and developing new abilities. That’s a great lesson to learn.

What are the sectors with the best chances of achieving success abroad?
FLEURY – We performed a study to compare the activity sector of Bra­zilian, Indian and Chinese compa­nies with those from companies of developed countries. The intersec­tion is small. In the 1990s, this dis­cussion sparked the idea of “sunset industries” and “sunrise industries”. The “sunset industries” were more laborand resource-intensive, whi­le “sunrise industries” were those with new technologies, in which innovation is a crucial competiti­ve weapon. In general, companies from emerging markets are gene­rally part of the “sunset industries” group. Indian companies dominate steel, the Chinese are trying to monopolize natural resources, etc. And Brazilian companies (such as Friboi and Marfrig) are located in sectors in which some local factors are more conducive.

Is starting the process in Latin Ame­rica, due to physical and cultural pro­ximity, still the best path?
FLEURY – It used to be. This has changed now, since the challenges that arise when moving to less de­veloped countries don’t necessari­ly result in significant experience. What we currently have is, to say the least, a mixture involving si­multaneous investments in less economically developed countries, such as Africa, and in developed countries which is where this enti­re learning process lies. As soon as it dips its toes abroad, the company needs to start moving on the so-called “value scale”. You’d be hard pushed to see a company that ven­tures abroad, makes an acquisition and then does nothing. You have to rapidly improve capacities to move on to higher value-added types of production. It’s what happened to companies from developed coun­tries – i.e. there is a new rule of competition.

Is the internationalization of Brazi­lian companies a path of no return?
FLEURY – It’s paradoxical. In the history of our economic develop­ment, the importance of the sub­sidiaries of foreign multinationals has always grown. Currently we have around 420 of the 500 largest companies in the world operating in Brazil. To enter into the process of international negotiation, it is abso­lutely vital that our companies have international renown and presen­ce. We can’t continue to be seen as a major market to be explored and exploited by foreigners. We need world-class companies producing goods to serve global markets, ma­naged in accordance with the best practices, that innovate in products and processes, and with whom fo­reign multinationals can compete and cooperate.

What interest does the international academy have in the research carried out by Brazilian universities?
MARIA TEREZA For the first time, we had the opportunity to hold in Rio de Janeiro, in June, the Acade­my of International Business – the largest congress in this area. It was a difficult thing to organize, but we managed to carry it out via a group of schools. This is a sign that we are also in the debate not just as liste­ners but as active agents, producing know-how and knowledge.
FLEURY – The questions that the international community is asking us are: “Is the internationalization process of Brazilian companies di­fferent from other multinationals? What contribution do these stu­dies make to general knowledge on multinationals?”. Gradually, we are managing to respond to these questions. Clearly, we are producing know-how and knowledge that is increasingly appreciated abroad. But it’s a long process. We have to be persistent.