An uneasy internationalization--Are Brazilian multinationals branching

out while putting Itamaraty out on a limb?

By James Stranko

Contents

• Who are Brazil’s standard bearers?

• Whither Itamaraty and the Executive?

• A True Brazilian Multinational: is Vale becoming a BRIC itself?

• Is BNDES doing more to promote Brand Brasil than Itamaraty?

• Conclusion and Policy Recommendations

Who are Brazil’s standard bearers?

When U.S. President Barack Obama offered his highest praise and support for Brazil’s

continuing rise in his joint press conference with Brazilian President Dilma Rousseff, his

southern counterpart could not help but insert a few barbs into what was otherwise a

gracious speech. Obama’s words sanguinely weaved their way through comparisons of the

two nations’ colonial history, the countries’ common commitment to democracy, and

soccer rivalry references. Dilma instead followed the usual pleasantries with a call to

“tratar de nossas contradições”. She then continued on to speak about the reform of

international institutions, the need for the U.S. to eliminate domestic agricultural subsidies,

and her desire for Brazil to play a greater role in multilateral negotiations.1

Whether this was just a way for Dilma to push back a PT audience accusing complicity to

the American agenda or a way to reinforce serious policy divides, the moment showed

Dilma in a confident stride—a leader who knows her time is arriving. Brazil’s government

and private sector, be it via its national development bank BNDES lending more in Latin

America than the World Bank or an Olympic bid team that beat out a number of powerful

favorites (including Obama’s home city), is stepping out. But who in this group is stepping

up?

The more interesting conversations of the state visit likely took place behind the scenes,

with negotiations from American trading partners and executives increasingly frustrated

with the U.S.’s falling position in the bilateral trade league tables. But it is not just what 1 Obama Rousseff, 19 March 2011

they were talking about that would have been telling, rather it is who they were

approaching to address their policy issues. With Brazilian business maturing, while

growing domestically and internationally, it is increasingly carrying the Brazilian flag with

it as it goes abroad. This brings serious implications for an executive branch and foreign

ministry increasingly less in control of its overseas agenda—as well as for Brazil’s

continued internationalization and brand building abroad. These companies are, in many

cases, pioneers and standard-bearers in Brazil’s interaction with the world.

Brazil is unique in the context of other BRICs like China and Russia in that it is a market

economy that has come to eschew the centrally controlled enterprise model. Yet following

a complex privatization process and years of commercial success, the state still maintains

an active participation in large formerly state-controlled enterprises. For the Brazilian

government, striking a balance between public shareholding has been difficult and is

increasingly creating awkward moments for the government. It also begs the question of

who is running the agenda? And as leaders like Dilma Rouseff and Antonio Patriota,

Brazil’s Minister of External Relations continue to exude the confidence the world saw in

Obama’s state visit—are they also losing a level of control over the message? Or perhaps

are they risking a breach in the independence and business savvy that have made Brazil’s

internationally-focused companies so successful in the first place?

Through the example of Vale, and the interplay the state via Itamaraty and BNDES, this

paper will explore the stress points and opportunities that have arisen in these complicated

relationships. Employing first-hand interviews conducted with officials from the London

office BNDES and an international relations analyst at Vale, it will also focus on how this

is having an impact on Brand Brazil and foreign policy priorities and will conclude with

six concrete policy recommendations for Itamaraty.

Whither Itamaraty and the Executive?

The Ministro de Relações Exteriores (Itamaraty) possesses a world-class force of

diplomats that work in Brazil’s extensive consular network, but until recently, Itamaraty

could have been described as a “sleepy” place.2 This means that the international politics

and trade issues that Brazil faces in 2011 and beyond are challenging the old guard of

diplomats and consular staff. They face the daunting task of defining a global Brazilian

foreign policy for the first time in issues that may not be of immediate relevance to Brazil.

The task to approach more gingerly, though, is establishing policy and procedures that

keep up with the agile, mobile private sector in their actions abroad.

In the past, Itamaraty possessed a certain “monopoly of information” over international

disputes and broader Brazilian policy in international relations.3 The presence of

homegrown multinationals, however, has challenged this dominance because their

increasingly important business interests create foreign policy priorities for them. Further

complicating the matter are state-controlled or state-led companies that officially must pit

public sector goals against private sector business realities. Itamaraty can even trip up

businesses like Petrobras with top-notch management experienced in walking the public-

2 Isacson, full text 3 Marques, 3

private tightrope—such as when Evo Morales threatened to nationalize Petrobras holdings

in Bolivia. According to U.S. government correspondence, Itamaraty’s reaction was

muted, and to the chagrin of Petrobras “it took over a year since the May 1, 2006 surprise

nationalization decree for the Brazilian Government to begin to show signs of a stiffer

spine”.4

This episode aside, the best recent example of this complicated relationship between state

control, internationalization, and policy confusion comes in the form of Companhia Vale

do Rio Doce (Vale). Vale has been one of the most successful Brazilian companies abroad

while facing a crescendo of pressure at home to repatriate its success and use its

international advantage to create Brazilian jobs. Vale, a company borne out of state-led

industrial policy, proves how quickly the public-private relationship can turn from

symbiotic to dysfunctional. As an example, in 2010, President Lula Da Silva invited Vale

CEO Roger Agnelli to join him on a state visit to the Mozambique to highlight the

investment Vale and Brazil were making together in that country’s coal-mining sector.5 By

2011, Agnelli was being forced out of his position by a Brazilian government miffed at the

company’s lack of domestic investment.6

Vale’s case is not, of course, a unique instance in which government has been a part of the

internationalization of Brazilian business. The idea of “national champions”— businesses

(such as aviation giant Embraer) that are likely to raise the profile of Brazilian production

4 US State Department Cables, 2007-05-10 5 Grudgings, full text 6 Pearson, full text

abroad—has accompanied institutions like the BNDES as it expanded credit to Brazilian

business large and small. The difference with new actors like Vale, though, is the “push”

factor, or the fact that international capital markets are leading the way in

internationalization with the government reacting instead of provoking these changes. This

trend is challenging Itamaraty’s traditional monopoly of information and its established

control over raising the profile of trade and trade related issues. These are areas where the

private sector has been particularly critical of Itamaraty inaction over the years, but now

businesses may be getting what they want and the balance may shift to a more active

policy that interferes in the market.7

A True Brazilian Multinational: is Vale becoming a BRIC itself?

"These are well-run, profitable companies that don't need us meddling in their affairs," -José Mendonça Filho, a Brazilian congressman who summoned Mr. Mantega to testify about the [political ousting of Roger Agnelli from Vale].8

Companhia Vale do Rio Doce is brooding with confidence and capital as it continues its

international expansion. By the beginning of April 2011, when the company signaled plans

to acquire South African miner Metorex, Vale was already experienced in the sensitive

world of international acquisitions (from its acquisition of Canada’s INCO and Australia’s

AMCI, among others) and was about to enter the even more sensitive world of mining in

the Democratic Republic of the Congo. Since its privatization in 1997, company grown to

rank alongside the world’s largest mining and resources companies, like Anglo-Australian

7 Marques, 22 8 Wall Street Journal,

companies Rio Tinto and BHP Billiton. But as it becomes more audacious in its

acquisitions, Vale’s business creeps into the more politically tumultuous territory that has

plagued Rio Tinto and BHP’s operations for years.

In one sense, Vale’s acquisition picture is purely strategic: potash in Canada gives the

company a lucrative market for one of the world’s most sought after commodities in the

most stable of countries; copper in the Congo fills an important gap in Vale’s mining

profile; coal production in Mozambique is inexpensive. In another sense, their role is

expanding the footprint of Brazil abroad and directly or indirectly furthering key policy

priorities.9 Vale’s INCO operation in Canada expands commercial cooperation in the

Americas and uses that position to curry favor in a country increasingly closed to foreign

direct investment in natural resources; in the Congo Vale is creating an alternative source

of export copper to help challenge Chile’s state-owned monopoly (CODELCO) on

production; in Mozambique the company fosters luso-friendly trade links while heading

China off at the pass.

Vale may not be able to entirely attribute its current success to its birth as a former state-

owned enterprise working in a strategic field, but there are clear signs that these origins

affected Vale’s approach to growth. Established principally to process Brazil’s vast iron

ore establish greater control of domestic natural resources, Brazil’s brand of ISI and later

privatization allowed Vale to look abroad after privatization to market their comparative

advantages and scale up their operations. According to Edmund Amann, “the Vale case

9 Grudgings, full text

demonstrates…how competencies established in the domestic sphere under an inward-

oriented industrialization strategy can later be deployed to good effect internationally”.10

The broader question is whether the state has fostered this process or if the

internationalization process has happened because the state lessened its involvement.

Now that it is all grown up, the interplay between Vale and the Brazilian government can

be trying at times. Almost like an old colonist whose colony has grown more powerful,

Itamaraty and domestic politicians struggle to weigh free market values alongside state

corporate interests. Vale, in turn, has had to deal with this dynamic—possibly taking

advantage of it—by being ahead of the government in many relevant areas in the countries

where they operate. This shows up in everyday business decisions, including in 2008 when

Vale ordered 12 large iron ore carriers with Jiangsu Rongsheng Heavy Industries, one of

China’s largest shipbuilders. This simple sourcing transaction irked a government that has

been looking to Vale to repatriate its know-how and international experience to foster

industrial growth within Brazil.11

While Vale has a reasonably solid reputation, industry issues like labor rights, work

conditions and environmental degradation are endemic to mining operations. Vale operates

in a space that can implicate Brazil’s government if conflicts and disputes escalate. In

Canada, Vale action to counter creeping Canadian resource nationalism in its large

operation Vale Inco took the form of intense lobbying at the provincial and national level,

and a campaign wholly out of the hands of Brazil’s foreign policy establishment. And

10 Amann, 12 11 Murphy, full text

according to one analyst in Vale’s international relations department, who spoke with me

on the condition of anonymity, there are many instances where they are “many steps

ahead” of Itamaraty in their dealings with foreign governments. Particularly in Asia,

“Vale’s actions set the agenda” and create challenges for a diplomatic staff that are not

experienced in the new types of relationships that companies are forming.12 It is still not

clear how the Brazilian government’s attitude towards Vale will evolve after the

replacement of Roger Agnelli, but it is clear that the company is not waiting for Itamaraty

to weigh in on its disputes and brand-building activity abroad.

The BNDES—is it doing more than Itamaraty and Dilma to boost Marca

Brasil?

“Não acho que o BNDES precise ter esse tamanho. Se você tiver só o BNDES, o nível de risco vai ficando cada vez maior em cima dele. Outra coisa: o BNDES não vai ter capital para fazer frente a toda a demanda.” -Dilma Rousseff, in an interview with Estado de São Paulo13

In an interview I conducted with Jaime Gornsztejn, the head of the BNDES office in

London and his visiting colleague Valdimir de Souza from Rio de Janeiro, it was easy to

see the challenges of coordinating policy even in a state-owned organization. According to

Gornsztejn, BNDES opened an office in London two years ago to take advantage of the

growing interest in the country and to expand the view on Brazil beyond commodities. He

is confident that British and European investors are getting to know Brazil and he feels that

12 Vale International Relations, Interview 13 Estado de São Paulo, interview

there is a significant amount of interest in diversifying FDI flows into manufacturing and

other major sectors—but further prodding revealed a whiff of frustration around BNDES’s

relationship with Itamaraty.

De Souza also showed a level of moderated skepticism towards the working relationship of

BNDES and Itamaraty, saying that in the recent past, “there was no communication…and

neither party knew what the other was doing—creating problems for one another”.

Particularly egregious, he said, were ambassadors in lower-income countries in South

America that would make promises of BNDES financing that would not necessarily pass

muster with the bank. It apparently took time to communicate that BNDES was not simply

giving away money. Be that as it may, part of the issue is that the BNDES “does not

consider itself to be representative of the whole government”. De Souza admits how this

may be a problem, but that it also gives “protection from departments that might have

other priorities”.

But with internationalization key to BNDES’s success and continued growth, the line

between national interest and pure investment interest can be difficult to draw. According

to Gornsztejn and de Souza, “there was a big discussion in both 2002 and 2005” within the

bank as to what “national interest” meant in the context of BNDES’s continued

internationalization. While a case-by-case analysis, the law applying to them does not “go

into detail about what we can and what we cannot do…‘national interest’ is written just

like that. So when a company comes to us, our concern is whether we can get that project

financed, so we look at how good the project is and how we can defend it to the bank. But

[with other parts of government] there is still a strong national interest question present”—

even though the BNDES cannot always interpret what that means.

The BNDES, of course, faces questions abroad, with some accusing the BNDES of going

too far to promote Brazilian suppliers overseas.14 Odebrecht, a Brazilian multinational in

the infrastructure sector, can count on cheap financing from the BNDES when bidding for

projects or concessions across South America and around the world, and this support often

makes them more competitive than pure free-market operators.15 In a world of cheap

Chinese state capital to compete against and a strong real though, the cheap capital can

make the difference between winning and losing contracts.

But just as importantly, BNDES still faces questions at home as it continues to expand

operations—de Souza fears that Brazilian companies along with state and municipal

governments see internationalization as “exporting jobs and supporting companies abroad

but not investing in Brazil”. He continues, “We have done studies on internationalization

and accept that getting Brazilian companies to go abroad is good for the economy…but

within Brazil we still have not had this discussion”.16 Like Vale’s experience with Roger

Agnelli, the national interest question is starting to have repercussions on the independence

of Brazilian business (and even branches of its own government) to create value abroad.

The discord is also creating a piecemeal national investment brand—a clear departure from

what its partners in Asia and elsewhere can offer investors.

14 Economist, Full Text 15 Cabello, lecture 16 De Souza, interview

Conclusion and Recommendations

Branding, particularly for a country in flux like Brazil, transcends the realm of marketeers

or advertising executives. It is present in every business transaction, every tourist visit, and

every diplomatic exchange. At a time when Brazilian business is expanding, and its

political clout is increasing, the efforts to create a message around what Brazil can offer is

key to strengthening inward investor confidence and building up a strong brand for its

products and companies around the world.

With a world-leading development bank, a professional foreign service, and pioneer

international industries like Vale, Brazil should be exceptionally well placed to strengthen

its outward expansion and, in the process, consolidate Brazil’s brand. The country’s

“national champions” (Embraer as an example) alongside the organic, private businesses

like Odebrecht that have made their mark abroad are increasingly what “marca Brasil”

looks like. Their actions are setting the tone and establishing a reputation for all Brazilian

business, and the relations that they have with Itamaraty are coming to define what type of

landscape other Brazilian companies might face as they set up shop abroad.

As we have seen through the private-sector example of Vale, both Itamaraty and BNDES

are facing changing landscapes that could create conflict in further private sector

internationalization. Democracy is messy and bureaucratic supervision of dynamic

companies in a democracy can engender conflict. But the real challenge is avoiding the

“halfway house” effect where the state’s lack of involvement allows well-oiled private

companies to expand but consequently restrict their activities because they are not acting in

the interests of the state. This is a point when Brazil’s foreign service must decide what

role it will play in the world—does it ally to political interests? Does it act solely in the

executive’s definition of national interest? And finally, does it defend commercial or

political clients?

The last question will be a crucial one, and Itamaraty cannot neglect its role as trade

promotion agent and as a potential motor of growth for the Brazilian economy. Are

Brazilian interest rates doing the same job now? Potentially. But Itamaraty has extensive

networks to boost Brazil’s trade profile abroad and carry the flag of Brazilian innovation

and economic ascendancy in a way it has been up until recently loath to do.17

Despite this, Brazil has managed privatization of its major state industries in a way that has

created value for the state, for shareholders, and for society as a whole—certainly more so

than most of its Latin American counterparts (save Chile). In other fractious democracies

in the region that embarked on large privatization projects, the results have been messy

(Bolivia), topsy-turvy (Argentina), or rent-seeking (Mexico). But perhaps Latin

Americanists too often fall into the trap of grouping Brazil with its regional partners.

Given its larger emerging-market competitors, and in particular the BRICS, the division

seems clear: Brazil’s privatization example for a large emerging power is a pluralistic but

17 Marques, 18

orderly (in contrast with India), supervised but not micromanaged (in contrast with China),

transparent and market-oriented (in contrast with Russia) and easily scalable to world-class

size (unlike South Africa). But increasingly, the aggressive presence of the BNDES

(particularly in the region) alongside the meddling of the central government in cases like

Vale’s, are creating confusion over exactly what type of public-private dynamic Brazil is

aiming for.

There is little doubt that Brazil possesses the necessary tools to promote its business at a

global scale, the question is around how the tools work together and collaborate to create a

unified message. The BNDES and Itamaraty can have a conflictive relationship;

particularly around foreign accusations that Brazilian private sector uses BNDES unfairly

to gain cheap capital for foreign expansion or questions of what constitutes ‘national

interest’. Itamaraty, in turn, may have different priorities for Brazilian businesses looking

to create controversial business abroad. Still, businesses are clients of Itamaraty, and it is

plausible that in the near future the foreign ministry may become progressively obsolete in

its current form as it looks to regulate the business of pioneering multinationals.

Concluding this paper are six recommendations that could help facilitate the relationship

between Itamaraty and the other public and private sector groups while promoting the

interests of both sectors.

Recommendations for Itamaraty – Building Brand Brazil

1) Hire advisors from Brazilian multinationals: More than anything, Itamaraty must

attract advisors from Brazil’s largest foreign-oriented companies. This would allow the

ministry to understand large Brazilian businesses from the inside, and more importantly

what their pressures and reward mechanisms look like, so as to effectively design policy

that fits a national agenda while securing support from these large businesses.

2) Clearly communicate the role of the BNDES: As a democratic institution, the BNDES

needs to clear the air abroad on its increasing international role in financing the expansion

of Brazilian business. The government should not put the brakes what has been a very

positive run for BNDES but it must understand what its model is and what pressures this

places in recipient markets.

3) Foster internal sector knowledge: Corporate international affairs offices are growing,

along with the demand for foreign contractors to navigate government relations. Itamaraty

should be allotting resources to selecting foreign service officers with experience or

training in fields related Brazil’s major industries (such as geologists, engineers, and

business managers).

4) Boast about 2014 and 2016: The Brazilian government organizing committee for the

2014 World Cup and the 2016 Olympics must make Brand Brazil a priority—not just in

showy, Beijing-style fanfare but rather in the Brazil that it wants to construct beyond the

Olympics and the World Cup. It should emphasize the role that Brazilian business plays in

the world-class building projects and the organization of one of the world’s largest events.

5) Hire foreigners: Reform key labor policies that restrict most foreign hiring at places

like Petrobras or the BNDES. Investment promotion agencies like UK Trade and

Investment have been using a local hire strategy for years to get closer to markets. This is

not to say that Petrobras or the Bank should favor foreigners over Brazilians but it should

mean that the badly-needed trained workforce that Brazilian companies keep complaining

should be at closer reach than they are now.

6) Boast Brazil’s exceptionalism within Latin America: Do not neglect the

complementary nature of Brazil’s powerhouses: (eg: airplane manufacturing, oil, mining,

industrial services, etc) to underscore the seriousness of Brazilian business and the long

history of private and public excellence that sets Brazil apart from the region. Investors,

often looking at the region as a whole, will see even more clearly what sets Brazil apart

and makes its true competitors global BRICs instead of its neighbors.

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