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Paper for presentation at the 14th Conference of the Research Network Macroeconomics and Macroeconomic Policies (FMM) on "Stabilising an unequal economy? Public debt, financial regulation, and income distribution", Berlin, 29-30 October 2010. First draft.

Brazilian Pattern of International Integration and the Financial Capitalism 1Lidia Ruppert October 2010

Abstract: In the new regime of accumulation, known as financialization, financial logic

predominates on financing, competition, production and investment strategies of non-

financial companies, especially in developed countries’ firms, changing the international

production system, the insertion pattern of emerging economies and world corporate

governance. However, the relative better performance of developing countries than developed

ones during the recent international crisis raises the hypothesis that, since their patterns of

accumulation, international integration and corporate governance differ from central

economies, they probably build a less vulnerable environment to external financial crisis.

This paper discuss these hypotheses applied to the Brazilian economy and shows that the

growth model of the last eight years allowed firms to reduce their indebtedness and increase

their returns, which in a context of domestic economic growth changed their international

insertion pattern. This process, added by the less financialized logic of corporate governance,

minimized the importance of the transmission channels of the recent financial crises into the

Brazilian economy, from the productive point of view.

Keywords: Brazilian enterprises internationalization pattern, corporate governance,

financial crisis.

JEL classification: F21, F23, O11, O16.

1 Doctoral Student at The State University of Campinas (UNICAMP) – Brazil lidia.ruppert@gmail.com I am most grateful to Fernando Sarti for very helpful comments and discussion. Remaining errors are of course mine.

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1. Introduction

Since the crisis of the 1970s, the capitalist regime of accumulation has being

concentrated in the financial sphere and has reduced the importance of the productive and

commercial spheres, promoting important changes in the strategies and the structure of

governance of the Chandlerian corporation2 and in the active policies of aggregate demand.

In the new regime of accumulation, known as financialization, financial logic not only

predominates on finance strategies of non-financial companies – creating capital structures

even more fragile and an unstable economic environment – but also on performance

evaluation criteria of these companies (maximization of shareholder value), therefore,

determining competition, production and investment strategies. On a broad sense

“financialization means the increasing role of financial motives, financial markets, financial

actors and financial institutions in the operation of the domestic and international economies.”

(Epstein, 2005, p.3).

As first, this new accumulation pattern dominated non-financial companies’

corporative governance of developed countries, above all, American ones. With market

globalization, liberalization and deregulation, especially after the 1990s, peripheral economies

had been internationally integrated absorbing the logic of maximization of shareholder value.

However, such insertion was made on a very asymmetrical form. So it was the penetration of

the financial logic on developing countries corporate management. The peripheral pattern of

corporate governance did not converge to the Anglo-Saxon standard, presenting different

forms. Therefore, it could be expected that their asset structures have being also different,

probably resulting in less fragile structures.

The objective of this article is to evidence some of the reasons by which the Brazilian

economy was very little affected by the recent international crisis and it was one of the first

ones in the world to recover. For such, it will be discussed the Brazilian recent patterns of

international integration, corporative governance and finance of its corporations. The

hypothesis is that Brazilian companies were not as much subjected to the logic of shareholder

value maximization as advanced countries were (are). They established throughout the last the

30 years a governance pattern that made possible important accumulations (operational and

2 For more details, see Chandler, 1990 and 1992.

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financial) in the recent period (2004-2008), without having a narrow link between finance and

financial markets, which was usually promoted by the financialization.

Besides an introductory section and a conclusion, the article counts on three other

sections. The first one will make a brief explanation about how the fordist accumulation

regime was substituted by the financial one and it will expose the impacts of the logic of the

maximization of shareholder value on the competition strategies of the corporations and on

the structure of international production process. Later, it will be discussed the international

integration of emerging economies, their corporate governance and the possible results of

these configurations in term of stability of their respective national economic systems. In the

last section, it will be studied the recent international integration pattern of Brazilian non-

financial corporations and how this structure helped the country to not suffer as much impacts

as other economies did, especially the developed ones, by the American subprime market

crisis.

2. Financialization, Corporate Governance and International Integration

The disintegration of the conditions that ensured the growth cycle of the "golden age" and

the changes observed in the world economic order since the late 1970 triggered a profound

process of restructuration of large corporations. With Europe and Japan reconstructed an

intense competition emerge from their firms, hence U.S. corporations have witnessed a period

of huge decline in demand for its products, in profit margins and, consequently, in their

productivity earnings. However, to face this brutal increase in competition, corporations have

been forced to seek more intangible assets and capacity for innovation in product and process,

activities that require large amounts of capital. Thus, the end of the "glorious 30" forced large

companies (especially capital intensive American ones) to seek other ways of financing

besides reinvestment of retained earnings.

Simultaneously, there was deregulation and liberalization of capital markets primarily in

centre countries and, on second moment, in the peripherals. These changes have allowed

financial markets to be both destination for capital applications and source for funding of non-

financial companies, affecting their internal organization.

Finance-led accumulation regime has changed companies’ structure of control and

ownership by adding new actors in the management dynamics of large corporation:

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institutional investors (mostly pension funds, mutual funds and insurance associations). The

increased power of these financial players in the majority of industrialized countries is

explained by the importance assumed by financial accumulation of the families (who seek the

financial market mainly to finance their present consumption and their retirement) and the

growing role of collective management of savings (Plihon, 2005). The market for corporate

control, which was announced by Chandler (1990), consolidated the importance of the

company's portfolio administration, creating a clash of interests between the new owners of

the enterprises (shareholders) and the professional managers. This tension has changed

corporate interests, as Ribérioux and Aglietta (2005) state:

"(The companies’ objectives) are those which enable the managers to

perpetuate their position and strengthen their power. The growth of the firm

trough the investment of its profits is the primary source of this power.

Nonotheless, the treat of the market for corporate control obliges managers

to concern themselves with their survival." (Aglietta and Ribérioux, 2005, p.85)

It’s clear that the interests of corporate managers have changed. The preoccupation with

company growth characteristic of the Fordism has been replaced by the interests of

institutional investors or other stakeholders, which are the maximazation of shareholder value.

The patient capital defined by Penrose (1959) becomes impatient and promotes deep changes

in management of large enterprise and in their competitive strategies, which impacts

significantly on the process of international production. The financing of business activities

through the financial market becomes coercive and submits corporate governance to its logic,

on the grounds that the shareholders are the ones who are subjected to greater risks. Thus, the

principle of maximization of shareholder value is incorporated into the "objective function"3

of the capitalists (Braga 1997). More than that, this process characterizes the dominance of

the market view of the firm over the industrial one.

Through corporate activities (operational or financial), investors chase the highest return

in the shortest time possible building a structure of liabilities which provides mobility,

flexibility, innovative agility and speed in attracting lucrative opportunities in various

markets (Braga, 1997). Thus, non-financial enterprises becomes to search for more liquid

3 Braga (1997) points out that strategies in the capitalist system are guided by the following financialized objective function F: f (Fi, Ipt, X), where Fi represents general finance, Ipt denotes the investment technologically innovative and X sets marketable products. See Braga (1997, p. 215-218).

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assets, to immobilize less of their capital, to allocate more of their cash flow to financial

agents and to prefer activities that are more profitable in the short term. There is a

generalization of liquidity preference within companies’activities.

This new form of corporate governance has not only created a more vulnerable and fragile

system but also resulted in a different productive international integration, especially in

relation to companies’ internacionalization strategies. Among the forms of foreign direct

investment (FDI) by multinationals, there has been a preference for mergers and acquisitions

(M&A) at the expense of new projects (greenfield). This occurs primarily for two reasons.

First, new projects require a much larger amount of resources with a much longer return

expectation than M&A do. Moreover, companies are considered as financial assets by the

shareholders, constituting strategies for themselves.

Following this logic, the higher order is to maximize the value of the corporation. To

evaluate the efficiency of non-financial companies and, therefore, to determine their values, it

was created financial performance indicators such as EVA (Economic Value Aded). Those

index began to drive competitive strategies and asset and capital structures of the companies

and became the major emblem of shareholder sovereignty.

Under this new framework, the company gets out of the logic of “retaining long-term

profits and reinvest them” and now operates under the strategy of “downsize and

redistribute”, that is, to cut costs in order to enhance equity returns and redistribute profits to

shareholders (Lazonick and Sullivan, 2000). The rationalization is particularly true in

reducing the size of the workforce and the operational activities of enterprises, ie, focusing

the company on activities that it has more intangible assets (core business) and are more

profitable (Plihon, 2005). This strategy promoted over the past 30 years operating

deleveraging thought large corporations deverticalization – to a greater or lesser degree

depending on the activity sector in which it focuses – and activity specialization. Such

strategies can provide economies of scale and scope, sunk costs reduction and the

transference of fixed costs to suppliers.

Under the logic of the previous pattern of capital accumulation, multidomestic companies

were replicated in each new location, that is, the value chain was entirely rebuilt in each new

country. In the new capitalist model, downsize large companies’ structure led to the

fragmentation of value chain in different companies and different countries. The international

production process started to be composed by global production networks in which closer

relations and greater coordination between suppliers and customers has become crucial

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(Borrus and Zysman, 1997). The subsidiaries have become more specialized and responsible

for providing components or a particular product line for the rest of the network, which

ended up creating large manufacturing suppliers (Sturgeon, 2002).

The new countries, especially the periphery, were integrated in this modular

production network under certain conditions. Despite the fact that companies from emerging

countries have largely increased their participation in the production network and that the

production process has also been dispersed in the number of firms, market structures have

not been deconcentrated. By contrast, there has been more concentration and centralization in

terms of ability to control assets, productive resources and knowledge, but without the need

to repackage the Chandelerian corporate structure. Sarti (2010) states that in this structure,

the insertion of peripheral countries was therefore in a hierarchical and selective way.

Hierarchical because, although it has been segmented, the value chain still follows the

command of large corporations. Such enterprises thought downsizing their activities have

focused on maintaining and increasing their intangible assets (technological capabilities,

management, advertising and marketing), which allowed them to define the prevailing

standards and to capture most of the value generated by the chain. These corporations tend to

be concentrated in developed countries, while companies of developing countries, in general,

were integrated into the process through activities that aggregate less value to the chain. In

general, peripherical countries are responsible for standardized production, which is defined

by the key assets owners. This does not mean that these companies do not invest in research

and development and do not promote technological innovations. It means that they, in spite

of that, have no sufficient intangible assets to operate the chain. Therefore they capture a

smaller portion of the wealth generated by it.

The selectivity is in the fact that companies choose their host countries by seeking

locational advantages to each segment of the chair. Development countries/regions

characterized by cheap and abundant labor force and natural resources end up attracting

segments of the chain whose aggregated value is low while developed countries / regions

which dispose of specialized human capital and technological capabilities (among other

assets) becomes preferable to the installation of the nuclear sections of the value chain.

Competition between global conglomerates under this new financialized regime is

defined by how companies manage their asset, debit and credit structures and how they

position themselves inside the value chain, now modularized. The very process of M&A has

become a strategic element, not only because the company is an asset in itself, as discussed

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earlier, but also because there is the necessity of firms to act on all relevant markets to remain

competitive and this types of transactions constitutes on the most profitable way to do this in

this globalized and financialized regime.

Last but not least, it is important to point out that the organizational restructuring of non-

financial companies and the modification of their forms of governance have transformed the

macroeconomic environment. This became more volatile and uncertain and potentially more

creative systemic crises. However, large companies of some countries did not fully

internalized the principles of the financialization, especially the use of financial markets for

funding. These different types of international insertions built some kind of shield that

protected this enterprises and companies from the recent international crises. The following

sections will expose the international integration patterns of emerging countries companies in

the last decade highlighting the Brazilian case and will also make some propositions about

how the asset structure of Brazilian non-financial companies, their pattern of international

insertion and the economic policies established by the government were essentials for the

country to be much less affected by the subprime crises than others, especially the developed

ones.

3. Some considerations and hypotheses about the recent international

integration patterns of Emerging Economies

The financialized accumulation pattern has produced substantial modifications on

international production structure in the past 30 years, as seen in the previous topic. In this

new architecture developing countries have taken on greater weight on foreign direct

investment (FDI) outflows, especially in the recent period of economic expansion (figure 1).

FDI outward stock from emerging countries has grown 212% between 2000 and 2009, while

in developed countries the raise was about 126% (figure 2). Even though there are important

international insertion asymmetries between developing countries, as a whole the movement

of internationalization of their corporations has been fortified not only in absolute numbers

but also in relative terms. According to UNCTAD data, FDI outflow from developing

countries accounted for 10.9% of total FDI in 2000, while in 2009 this proportion was 20.8%

(table 1).

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The impacts of the increase in the internationalization of peripherical non-financial

companies can be seen in UNCTAD’s rankings of the top 100 non-financial transnational

corporations (TNCs) of the world. In 1994 there was not a single firm from emerging

economies, in 2009 this number changed to 7. However it is important to notice that there is a

geographical concentration of these businesses: six of them are from Asian countries (table 2).

Figure 1: Foreign Direct Investment Outflow; world, developed and developing counties; selected years; billions of dollars (current prices and current exchange rate).

0

500

1000

1500

2000

2500

1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

World Developed economies Developing economies

Source: Unctad online database (World Investment Report)

Figure 2: Foreign Direct Investment outward stock; total world, developed and developing counties; selected years; billions of dollars (current prices and current exchange rate).

0

5000

10000

15000

20000

25000

1990-1999 2000-2004 2005 2006 2007 2008 2009

World Developed economies Developing economies

Source: Unctad online database (World Investment Report)

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Table 1: FDI Outflow as percentage of total world, selected years

1990 1995 2000 2003 2004 2005 2006 2007 2008 2009

World 100 100 100 100 100 100 100 100 100 100Developed economies 94.5 84.6 88.8 90.1 85.4 84.2 82.1 84.8 81.5 74.5Developing economies 5.5 15.2 10.9 8.0 13.1 42.2 16.2 12.9 15.4 20.8Latin American Integration Association (LAIA) 0.5 1.0 0.7 1.1 1.9 2.0 2.9 0.9 1.8 1.0Eastern, Southern and South-Eastern Asia 4.9 12.5 6.6 4.3 8.9 8.0 8.9 7.9 8.6 13.9

Source: Unctad online database (World Investment Report)

Table 2: The top 100 non-financial TNCs, ranked by foreign assets; selected years

Ranking Corporation Home Country Industry

52 Daewoo Corporation Republic of Korea Diversified88 Petroleos De Venezuela Venezuela Diversified/trading

14 Hutchison Whampoa Hong Kong, China Diversified76 Cemex Mexico Non-metallic mineral products92 LG Eletronics Republic of Korea Electrical & electronic equipment97 Petróleos de Venezuela Venezuela Petroleum expl./ref./distr.99 Petronas Malaysia Petroleum expl./ref./distr

20 Hutchison Whampoa Hong Kong, China Diversified55 Petronas - Petroliam Nasional Bhd Malaysia Petroleum expl./ref./distr.15 Cemex S.A. Mexico Non-metallic mineral products82 Singapore Telecommunications, Ltd Singapore Telecommunications 87 Samsung Electronics Co., Ltd. Republic of Korea Electrical & electronic equipment92 LG Corp. Republic of Korea Electrical & electronic equipment98 Jardine Matheson Holdings Ltd Hong Kong, China Diversified

22 Hutchison Whampoa Limited Hong Kong, China Diversified45 Cemex S.A. Mexico Non-metallic mineral products69 LG Corp. Republic of Korea Electrical & electronic equipment75 Samsung Electronics Co., Ltd. Republic of Korea Electrical & electronic equipment84 Petronas - Petroliam Nasional Bhd Malaysia Petroleum expl./ref./distr.87 Hyundai Motor Company Republic of Korea Motor vehicles88 CITIC Group China Diversified

1995

2000

2005

2008

Source: Unctad - World Investment Report, 2009, 2007, 2002, 1997.

The process of outsourcing and relocation of production – characteristic of the

financialization – gave to emerging countries the opportunity to increase their participation in

world supply chain. Their participation on world trade and industrial production has increased

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in quantitative and qualitative terms. The production configuration of these enterprises has

incorporated more of high value added segments (medium and high technology). As can be

seen in table 3, medium and high technology products represented 38.1% of total

manufacturing value added (MVA) of developing countries in 1993; ten years later this

percentage rose to 43.8. However this movement was very asymmetrical between developing

countries.

Table 3: Technology composition of MVA share, selected years, per cent*

RB LT MHT RB LT MHT RB LT MHT

World 33.1 19.3 47.6 31.6 18.4 50.1 32.3 17.5 50.2

Industrialized countries 31.0 19.1 49.9 29.1 18.3 52.6 29.9 17.5 52.6Economies in transition 48.2 22.9 28.9 49.5 20.6 29.8 50.4 22.3 27.3Developing countries 41.4 20.6 38.1 40.2 19.4 40.4 38.5 17.7 43.8

1993 1998 2003

Note: RB= Resource based, LT= low technology, MHT= medium and high technology Source: Unido IDR 2009. * MVA is in constant 2000 dollars

East Asia – even excluding China – has improved its weight in total world MVA at the

same time that Latin America had its share reduced (table 4). Moreover the movement

towards medium and high technology was mainly done by the first region. Even excluding

China, East Asia’s share on medium and high technology products has substantially increased

whereas Latin America has maintained the same percentage of participation (table 5). These

asymmetries in developing countries patterns of international insertion were due to the

combination of differences on economic and industrial policies with international forces.

Asian countries’ industrialization counted on the creation of large national conglomerates

(many of them State-owned), development of high technology through domestic and/or

foreign investments and the stimulus of centre countries, especially Japan. On the other hand

Latin American countries found the United States as an important competitor to their products

in world trade and industrial production, moreover its industrial and macroeconomic policies

drove the countries towards the lower segments of global value chain, with some exception to

Mexico (MEDEIROS, 1997). Even though the increase on manufacturing value added,

particularly on medium and high technology, was not generalized phenomenon in all

developing countries, higher aggregated valued production became more important on total

MVA of Asia and Latin America (table 6) showing the importance that this kind of

production still have among those regions.

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Table 4: MVA share by region and development level, selected years, per cent*

1980 1985 1990 1995 2000 2005

Industrialized countries 77.2 76.1 75.5 74.4 71.8 69.4Economies in transition 8.6 8.8 7.8 4.0 4.1 1.6Developing countries 14.2 15.1 16.7 21.5 24.1 29East Asia and the Pacific (excluding China) 2.7 3.3 4.6 6.1 6.8 7.7 China 1.4 2.0 2.7 5.3 7 10South Asia 0.8 1.0 1.3 1.7 1.8 1.8Latin America 6.7 5.8 5.3 5.4 5.2 5.0World 100 100 100 100 100 100.0

Source: Unido IDR 2009. * MVA is in constant 2000 dollars

Table 5: Developing countries/regions share on total world medium and high technology

products, percentage

1980 1985 1990 1995 2000

East Asia 3,2 4,4 6,2 10,9 13,6

China 1,3 1,9 2,4 4,9 6,8

South Asia 0,8 0,9 1,1 1,6 1,6

Latin America and the Caribbean 5,1 4,4 4,2 4,2 4,2

Source: Unido IDR 2004. In: Sarti (2010a)

Table 6: Share of medium and high technology products on total MVA, developing regions,

selected years, percentage

1980 1985 1990 1995 2000

East Asia 41.9 46.1 49.2 55.6 58.0 China 47.4 52.4 51.6 53.2 56.1South Asia 48.4 51.3 50.2 54.5 54.3Latin America and the Caribbean 41.5 43.1 45.2 45.1 47.4

Source: Unido IDR 2004. In: Sarti (2010a)

Internationalization via foreign direct investment comes exactly as a powerful

competition strategy in a more segmented world production. The huge lifting of developing

FDI on total FDI outflow and outward stock points out the efforts of emerging economies to

gain more space on supply chains by, for example, getting closer to final consumers, cheaper

work force or research and development centers. However the recent international integration

pattern of developing countries has changed over the last decade. Before the period of

international economic growth, developing countries’ enterprises appeal to

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internationalization as a strategy to offset their domestic market reduction, constituting a

much more defensive movement.

After 2003, this insertion pattern started to change into a less international unstable

and fragile structure than centre countries’ arrangement which helped developing countries to

not be so much affected by the recent international crises4. The hypothesis brought about here

is that economic growth between 2003 and 2007 was much more intense in emerging

economies (especially in East Asia) than in developed countries (table 7) due to domestic

aggregate demand growth. Since domestic market has an enormous weight on emerging

economies non-financial companies’ total sales, the acceleration of domestic economic

activity ended up raising significantly their returns and profits. This fact allowed them to

elevate self-financing capacity, decreasing indebtedness and improving their financial health.

Therefore the recent movement of these firms to foreign grounds was the result of more

actives strategies. The hypothesis of this paper is that because these companies have

accumulated so much in domestic markets and had access to superior financing conditions

(increase in self-financing, and better terms in bank loans, especially from public banks) non-

financial corporations from emerging economies aimed international market as a strategy to

expand their activities and revenues, differently from the previous integration pattern in which

enterprise internationalization occurred in order to compensate the losses in domestic market,

hence having a much more defensive character.

Table 7: Gross Domestic Product Growth; selected regions and countries, 2002-2009, (%) Countries/Regions 2002 2003 2004 2005 2006 2007 2008 2009World 1.5 2.7 4.1 3.6 4.0 3.9 1.7 -1.9Latin America and the Caribbean -0.5 2.1 6.2 4.6 5.6 5.7 4.4 - Brazil 2.7 1.1 5.7 3.2 3.9 6.1 5.1 -2,0 Chile 2.2 3.9 6.0 5.6 4.5 4.6 3.2 -1.5 Mexico 0.8 1.4 4.2 2.8 4.8 3.2 1.8 -6.5East Asia and the Pacific 7.9 8.8 9.0 9.1 10.1 11.3 8.0 - China 9.1 10.0 10.1 10.4 11.6 13.0 9.0 9.1 India 3.8 8.4 8.3 9.2 9.6 9.0 7.1 7.7 Hong Kong. China 1.8 3.0 8.5 7.1 7.0 6.3 2.4 - Korea. Repuclic of 7.0 3.1 4.7 4.2 5.1 5.1 2.2 0.2 Malaysia 4.1 5.7 6.8 5.0 5.7 6.3 4.6 -1.7 Singapure 4.2 3.1 8.8 6.6 8.3 7.7 1.1 -1.3 Source: World Bank

4 Domestic economic policies were definitely fundamental to explain the recovery of developing countries,

nonetheless the objective here is to show how the recent international integration pattern of emerging economies colaborated to preserve them, in some level, from the effects of international crisis.

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An important feature of this recent pattern of international integration is that non-

financial corporations of developing countries had not internalized the financialization logic

(maximization of shareholder value) as much as developed countries’ ones did, so they resort

primarily to retained earnings and, on a much lower degree, to bank loans from private

(domestic and foreign) and public institutions as forms of capitalization, almost not using

financial market to do so. This aspect together with better domestic credit access and

conditions (especially from public banks) and significant domestic demand growth were

crucial determinants for the reduction of the transmission channels of the international crises.

The decrease of indebtedness, the expansion of equity returns, the large importance of the

growing domestic market over the international one and the little use of capital markets as

capitalization channel built up a much less vulnerable pattern of international insertion of the

developing countries, therefore diminishing the effects of the subprime crisis and allowing

non-financial corporations from these economies to take advantage of the internationalization

process as a way to expand their consumer markets and not to substitute domestic demand, as

happened in the end of the 1990’s beginning of 2000’s.

Those economies were affected by the international crises, as their GDP end FDI

outflows numbers show. However the effects appeared on a more consistent way only in

2009, almost two years later that centre economies were hitten, and many of them (especially

Brazil and Asians) are already showing in 2010 great recovery. The next section shows why

the hypotheses brought up in this topic seems to explain recent Brazilian pattern of

international integration and the reasons why its non-financial companies were fairly shaken

by the international crises.

4. The current internationalization process of Brazilian corporations and

financial capitalism

In the past six years, Brazilian corporation gave a huge impulse on their

internationalization process. The average of foreign direct investment outflows between 2004-

2008 has increased in almost 2,000% when compared to the average of 1990-2000, a high

variation even when compared to China (924.6%) and Hong Kong (134.4%). The average of

the recent Brazilian internationalization boom (2004-2008) was even higher than the Indian

outflow average for the same period (table 8). FDI outflow from Brazil jumped from the

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baseline of US$ 625 millions in 1990, which represented 0.003% on world outflow, to US$

20,457 millions in 2008, 1.1% of the total. In terms of outflow over inflow proportion Brazil

moved from 8.7% a.a. in the 1990’s to 51.7% a.a. between 2004-2008. This amount is still

much lower than several Asian countries and much lower than developed ones, however it

does show an important intensification on Brazilian enterprises’ internationalization process

in the past six years.

The expansion of the movement towards other countries can also be seen on Dom

Cabral (2007, 2008, 2009 and 2010)’s studies about Brazilian multinationals. The research

among other things compares foreign employment, foreign revenues and foreign assets of

those companies to their, respectively, total employment, revenues and assets amounts. Is also

brings data about the variation of each variable from one year to the following one. The result

(tables 9 and 10) is that international operations are indeed gained proportion when compared

to total companies’ operations due to augment more than proportional in foreign employment,

assets and revenues than the domestic increase in the same items. Valor Economico (2010)

shows that the top Brazilian multinations’ internationalization index have been growing in the

last four years, which corroborates to the argument that internationalization process has been

amplified (table 11). Nonetheless, although the advances have been being crescent and

consistent, the numbers are still very low and they make clear the enormous weight that

domestic markets still have for Brazilian multinationals.

It is also important to highlight that the bulk of Brazilian foreign direct investment is

concentrated in traditional and less technology intensive sectors such as meats, minerals and

pulp, having a lot to improve in order to achieve higher segments of the value chain. To do so

it is indispensable higher financing volumes, especially from public banks and from the

Brazilian developing bank (BNDES). However improvements on that matter have been done

in the past recent years with information technology companies (Totvs, Etefanini, Politec and

Bematech).

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Table 8: Evolution of FDI flows to/from selected countries/regions

Argentina 1,334 103 1,456 1,172 679 - 0,3 0 0,1Brasil 1,048 158 13,610 4,213 -10,084 8,500¹ 0.2 0 0.9Mexico 591 2183 5,121 2,035 7,598 - 0.1 0.4 0.4

China 2,195 4,086 22,708 7,892 48,000 - 0.4 0.7 1.6Hong Kong, China 20,393 11,433 47,787 26,187 52,269 - 4.2 1.9 3.3Taiwan, Province of 3,777 5,349 8,394 5,24 5,868 - 0.8 0.9 0.6India 110 1,652 10,893 3,191 14,892 - 0 0.3 0.8Russia 1,294 5264 29,601 9,37 46,057 - 0.3 0.9 2.1Korea, Republic of 3,101 2,821 9,100 4,635 10,572 - 0.6 0.5 0.6

World 490,009 615,211 1,441,960 760,291 1,100,992 1,200,000² 100 100 100 Developing Countries 52,929 59,355 207,326 94,574 229,159 - 10.8 9.6 14.4 Asia 37,509 36,545 152,455 67,606 176,795 - 7.7 5.9 10.6 Economies in transition 1,346 6,024 32,434 10,266 51168 - 0.3 1 2.2 Developed Countries 435,734 549,833 1,202,200 655,451 820,665 - 88.9 89.4 83.4

Argentina 7,141 1,989 6,051 6,040 54,700 - 1.5 0.3 0.4

Brasil 12,000 16,397 26,335 16,467 25,949 12,100¹ 2.4 2.4 1.9Mexico 9,373 23,333 22,825 15,117 12,522 - 1.9 3.5 1.7

China 30,104 51,042 79,517 46,413 95,000 - 6.1 7.6 5.8Hong Kong, China 13,841 15,694 46,014 22,6 48,449 - 2.8 2.3 3.4Taiwan, Province of 1,774 2,002 4,830 2,614 2,803 - 0.4 0.3 0.4India 1,705 5,141 20,079 7,082 34,613 - 0.3 0.8 1.5Russia 1,941 4,723 36,685 11,524 38,722 - 0.4 0.7 2.7Korea, Republic of 3,062 3,956 6,233 4,038 5,844 - 0.6 0.6 0.5

World 49,0159 671,755 1,369,097 750,132 1,114,189 1,200,000² 100 100 100 Developing Countries 13,0741 19,1783 440,706 221,949 498,349 - 26.7 28.5 32.2 Asia 76,328 110,683 277,608 134,721 303,23 - 15.6 16.5 20.3 Economies in transition 4,602 13,639 64,206 21,714 548,297 - 0.9 2 4.7 Developed Countries 354,817 466,332 864,185 506,469 565,892 - 72.4 69.4 63.1

1990-00 2001-03 2004-08 1990-2008 2009 2010

(%) (%) (%) (%) (%) (%)

Argentina 18.7 5.2 24.1 19.4 1.2 -Brasil 8.7 1.0 51.7 25.6 -0.04 70.0¹

Mexico 6.3 9.4 22.4 13.5 60.6 -

China 7.3 8.0 28.6 17.0 47.3 -Hong Kong, China 147.3 72.9 103.9 115.9 107.8 -Taiwan, Province of 212.8 267.2 173.8 200.4 209.3 -India 6.4 32.1 54.3 45.1 43.0 -Russia 66.7 111.5 80.7 81.3 118.9 -Korea, Republic of 101.3 71.3 146 114.8 180.9 -

Developing Countries 40.5 30.9 47.0 42.6 45.9 - Asia 49.1 33.0 54.9 50.2 58.3 - Economies in transition 29.3 44.2 50.5 47.3 9.3 - Developed Countries 122.8 117.9 139.1 129.4 145.0 -

(Outflow / Inflow)

Share on total inflow (%)

1990-00 2001-03 2004-081990-00 2001-03 2004-08 1990-2008 2009 2010FDI Inflow (US$ millions)

Share on total outflow (%)

1990-00 2001-03 2004-08FDI Outflow (US$ millions) 1990-00 2001-03 2004-08 1990-2008 2009 2010

Source: Unctad and Brazilian Central Bank. Elaboration: NEIT - UNICAMP ¹ From january to june/2010. Brazilian Central Bank's estimative for Brazilian FDI outflow in 2010 is US$ 15 billions. ² Unctad's estimative for 2010.

16

Table 9: Top 20 Brazilian Transnational Corporations

Foreign/total (%) 2004 2005 2006 2007 2008 2009

Revenues 15 19,8 23 23,9 26,4 25,87Assets 13 19,15 29,4 25,02 27,3 23,5Empoyees 10 11,5 14,1 24,3 29,8 31,4

Source: Dom Cabral Foundation - Brazilian Transnationals Corporations, several years. Table 10: Top 20 Brazilian Transnational Corporations

∆06/05 ∆07/06 ∆08/07 ∆09/08Revenues

Foreign 14% 50,0% 27,0% -15%Total 14% 32,0% 21,0% -14,0%Assets

Foreign 112% 29,0% 32,0% -12,0%Total 29% 36,0% 19,0% 2,0%Employees

Foreign 87% 55,0% 40,0% 13,0%Total 23% 41,0% 14,0% 7,0%

Top 20 Brazilian Transnational Corporations

Source: Dom Cabral Foundation - Brazilian Transnationals Corporations, several years.

To complete, Brazil is not alone overseas. Most developing economies are stepping up

their international investments, particularly East Asian countries. An important competitor to

Brazil is China, whose “go global”strategy, with support of Chinese government in terms of

financing, technology development and diplomatic issues, brings about on the international

competitive scene eagered large companies for domestic markets and global recognition. On

the other hand, Chinese growth also represents an opportunity for Brazilian companies in food

and energy sectors to insert themselves on international supply chain on a deeper and more

consolidated way.

Nonetheless, it is undeniable the enlargement of Brazilian international integration

through business internationalization since 2004. Moreover, Brazilian firms expanded their

going abroad movement on a period of economic growth (2004-2010) driven by domestic

demand, which set a new pattern of insertion based on different determinants and corporate

strategies than the previous model (figures 3 and 4). This new structure not only made

possible the expansion of Brazilian companies on international supply chain but also

collaborated to construct a much less vulnerable domestic environment, therefore helping the

17

country to not be so affected by the subprime crisis than other economies were, especially the

developed ones.

Figure 3: Gross Domestic Product and Gross Fixed Capital Formation Growth Rates, 1991-2010, per cent

Source: IBGE-SCN. In Sarti (2010b)

Figure 4: GDP – Decomposition of growth

Source: IBGE. In: Carneiro (2010)

18

Brazilian economic policies under Lula’s government have been prioritizing the

increase on workers income and employment level. Income distribution, real wage boost and

public investments were the main tools used by government to improve aggregate demand.

The result was the strong and sustainable economic growth between 2004 and 2008. Such

expansion made substantial positive impacts over Brazilian companies. The boost on

domestic aggregate demand augmented revenues and profits, amplifying self-financing

capacity of firms. As shown before by Dom Cabral and Valor Economico’s data (tables 9 and

11), domestic markets are extremely important for Brazilians multinationals’s operations,

therefore the increase on internal aggregate demand had strong impacts on these firms. This

lead to a situation of higher equity returns and lower onerous indebtedness (figure 5),

improving corporation’s financial health. The wealth accumulated during the economic

expansion period along with lower indebtedness improved the competitive muscles of

Brazilians TNCs which overflowed abroad.

Figure 5: of the top 1000 larger Brazilian non-financial corporations, 2000-2008

0

10

20

30

40

50

60

70

80

90

-5

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 2007 2008

Indebtness ( %)

Return ( %)

Equity Return Onerous Indebtedess Source: Valor Economico. In: Sarti (2010a)

19

Hence the recent international integration of Brazilian companies is based on total

different determinants than the previous one. First, the late 1990’s and begin 2000’s was

marked by lower and more unstable economic growth driven mostly by exports, which is an

unsustainable model for Brazil due to the importance of domestic markets for its enterprises,

the countries’ income-elasticity of imports and the lack of significant number of specialized

export companies with competitive skills and integrated with the rest of domestic supply

chain, therefore reducing the spillovers to other segments of the economy. Hence,

international insertion between 1998 and 2003 was motivated by a defensive strategy.

Multinationals in order to compensate the losses on domestic market expanded their

operations abroad. Due to the reasons stated above, the recent period of Brazilian FDI

enhancement reflected a much more aggressive and active corporate strategies, which were

the expansion of international markets in a complementary way to domestic markets and the

consolidation of global competitiveness.

Another important feature of the recent international integration pattern of Brazilian

companies is the fact that the share of self-financing and loans from Brazil Development

Bank (BNDES) on total companies’ financing sources has grown over the last eight years

(figure 6), representing about 75% of the total. Moreover, the share of international loans and

capital markets on total capitalization has decreased over the years. It is important to highlight

that financial markets are very little used by Brazilian companies to finance their strategies

while self-financing is the most important source of financing, showing that the logic imposed

by the financialized regime of accumulation of maximization of shareholder value was not

internalized by Brazilian corporate governance as much as it was by developed countries,

especially United States. Most of Brazilian enterprises use capital markets as a destination for

part of their wealth not as (main) source of capitalization for their investments, fact that

actually contributed to the increase of their revenues since they were able to take advantage of

the high interest rates of capital markets, improving their financial and competitive muscles.

This particular form of capitalization – also shared by most of developing countries –

added by the Brazilian economic growth model, framed a new pattern of international

insertion over the last eight years whose determinants and results built some important

protections against international crises by diminishing their transmission channels (losses on

capitalization via capital markets, international credit crunch and reduction of foreign

aggregate demand).

20

Figure 6: Financing sources of Brazilian corporations, 2001-2009.

Source: BNDES/APE.

Although Brazilian GDP and FDI outflow were negative in 2009 (which indicates capital

repatriation), this effect of the international crisis did not represent a switchover in the models

of Brazilian economic growth and international integration. Gross domestic product, gross

fixed capital formation and foreign direct investment outflow returned in 2010 to pre-crisis

levels, or even higher. Of course the way that the government conducted fiscal, monetary and

income policies in 2008 and 2009 were of extremely importance to the economy recovery.

Nonetheless the success of those policies also prove that the pattern of international insertion

is more sustainable and helped to build a less vulnerable domestic environment to external

shocks.

5. Concluding Remarks

Financialization has changed corporate governance, firm’s internal and productive

structures and the international production process. Supply chain segmentation allowed a

higher participation of emerging countries in the production system, opportunity that was

absorbed by different ways between developing countries (or regions). Despite this fact,

foreign direct investment outflows from emerging countries as a whole had their weight on

total world FDI outflow significantly increased in the last six years, exactly when they have

showed a high economic growth (even higher than developed countries). This fact evidences

21

changes in the internationalization process of developing countries’ firms, which became a

much more active process. Moreover, the recent financial crisis does not look like it will

change the importance of developing countries’ FDI on the world, on the opposite, emerging

economies were less affected by the crisis than developed countries and were the first

economies to recover, increasing their participation on internationalization process. The

hypothesis raised here is that the recent international integration pattern of developing

countries’ firms set up some condition that helped to construct a less vulnerable

macroeconomic environment, from a productive point of view, in this economies than it was

built in developed countries.

The study about Brazilian non-financial corporations pattern of international insertion

seems to prove the hyphothesis. Companies have grown substantially on the last eight year,

based on domestic aggregate demand growth, taking advantage of higher equity returns and

being able to reduce their indebtedness. The better financial health pushed those firms to

international markets, in a way to expand their markets and to gain global competitiveness –

strategies quite different from the previous period of internalization when Brazilian firms

went abroad in order to compensate the losses on domestic market. Moreover, Brazilian firms

did not internalized completely the logic of financialization in terms of funding. The main

sources of financing of Brazilian companies are self-financing and loans from the public

developing bank (BNDES). Capital markets are almost not used by Brazilian firms as

capitalization form.

This new pattern of international integration diminished the transmission channels of

international crises and together with government policies reduced the possible affects of the

American subprime crisis on the Brazilian economy. The results of FDI outflows and

economic growth of 2010 evidences that the recent pattern of international integration has not

changed by the crises and it already shows successful outcomes.

22

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