Brazil - TNCs and the NSI

1. Brazil - TNCs and the NSI José E Cassiolato RedeSist - www.redesist.ie.ufrj.br International Seminar on Innovation and Development under Globalization: BRICS Experience Trivandrum, 19-21 August 2009

2. Structure of the paper • What are TNCs and what is role of their innovation activities • The historical evolution of FDI in Brazil, particularly after the end of World War II, • Analysis of the role TNCs are playing in the evolution of the Brazilian NSI: • Outward FDI

3. What are TNCs? • represent a category of firms on their own, based upon a centralization of financial assets and a specific organiza­tional structure • as part of globalization, non-financial TNCs have significantly transformed their strategies, which are reflected • in the governance of global value chains, • in a decline in their direct production activities and • an increase in appropriation of value of intangible assets (which includes R&D).

4. The example of GE

5. Technological innovative activities in TNCs are transformed, in relation with their financialization, as evidenced by the rise of their intangible assets (which includes R&D, patents, trademarks) • Increase in rent appropriation • Reorientation of R&D expenditures towards non-scientific activities and very downstream development.

6. 1 – What is R&D of TNCs? • “from a strict R&D standpoint, it’s somewhat questionable to count the two-thirds of the pharmaceutical spending that is dedicated to the execu­tion of clinical testing. • Similarly, nearly 85% of automotive spending is principally dedicated to the development of tooling for the year’s new models. • When combined, clinical trials and automotive production tooling account for about 45% of the total spending of the top 25 TNCs. They are mostly related tolow- or non-technical items” • Source: (R&D Magazine,, “R&D funding forecast 2008: Slowing economy dampens research and development spending”, 2008, p. 14).

7. Estimated Intangible Investments in the United States, 1947-2003 (Per cent of business output) in the US (Corrado, Hulten, Seichel, 2006); intangible assets have risen faster than tangible assets, among intangible assets, non-traditional types of intangible capital such as non-scientific R&D, brand equity and firm-specific resources (worker training and strategic planning and reorganization costs) together account for almost 60% of intangible capital deepening since 1995

8. The historical evolution of FDI in Brazil

9. FDI in Brazil: the early years • Foreign capital, basically British, was important to the Brazilian economy of the 19th century in mining and in railways. • In the 1920s, several key TNCs of the emerging technological paradigm, such as Ford, General Motors, Philips and Rhone Poulanc, set up subsidiaries in Brazil to “assemble” their products; these subsidiaries mostly organized imports, distributed their goods and were responsible for maintenance and technical assistance in the local market. • Up to the early 1950s, the vast majority of TNC subsidiaries in Brazil were responsible for activities in the energy, transport and communications infrastructure. • In 1955, 95% of the FDI stock belonged to the energy sector. • But the amount of FDI was not significant: FDI stock was only about 2% of GDP.

10. FDI in Brazil: 3 booms after the 2nd world war • First boom: • during 1956-1960 and was part of a development strategy that brought the second industrial revolution to Brazil. • yearly flows of FDI were multiplied by 35 times as compared to the previous five years • Second boom: • during 1968 and 1973, the so-called “economic miracle” in Brazil (the economy was growing 9.5% per year • average yearly inflow of FDI was more than twice of what was achieved during the Target Plan of 1955-1960. • The expansion of TNC subsidiaries in Brazil was so impressive that in 1974, 50% of all FDI directed to the developing world (or 6.4% of all FDI) came to Brazil • All of this was achieved with the support of a very liberal legislation, a permissive foreign exchange regime and expressive fiscal advantages

11. Policy regime towards FDI • Brazil has had an open door policy vis-a-vis foreign capital, after Law 4390 was passed in August 1964 imediately after the military coup. • Exceptions, up to the mid-1990s were exploration, extraction and refining of oil, domestic airlines, communications, publishing and coastal shipping (which were restricted to 100 per cent Brazilian-owned enterprises) while only partial foreign participation was permitted in mining, fishing, hydroelectric power, banking and insurance. • From the late 1970s until the early 1990s foreign-owned firms were also prohibited to manufacture some products in the IT sector, namely small computers and peripherals.

12. 3rd boom of FDI • In the mid 1990s deregulation, privatization and liberalization of the economy propelled a third FDI boom in Brazil. • Government policy played a key role: • approval of constitutional amendments that terminated public monopoly in sectors such as telecommunications and oil and gas (allowing almost unrestricted participation of foreign capital in the new privatized ventures) • Removal of earlier distinction between Brazilian firms of local capital and of international capital. • Liberalisation of profit remittances and easened up the control regarding payments for imported technology, particularly the allowance for subsidiaries to send payments to their parent firms for technology (which was forbidden since 1971). • Restrictions to foreign investment were lifted in the few sectors were they existed in the past such as banking and parts of the IT complex. • removal of the old the industrial property code that was replaced by a liberal industrial property legislation.

13. 3rd boom of FDI • Differently from the previous wave of FDI – which concentrated in the manufactured industry - his new FDI by TNCs in Brazil mostly targeted the services sector, particularly the privatized infrastructure sector (telecommunications and electricity). • Concentrated in operations of mergers and acquisitions of local firms with an insignificant amount representing new greenfield investment.

14. 6.000 50% 45% 5.000 40% 35% 4.000 30% 3.000 25% 20% 2.000 15% 10% 1.000 5% 0 0% 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Total FDI in Brazil Percentage FDI the world Percentage FDI in Developing economies Brazil – FDI inflows US$ bi 2006 – 1970-1989

15. 40.000 50% 45% 35.000 40% 30.000 35% 25.000 30% 20.000 25% 20% 15.000 15% 10.000 10% 5.000 5% 0 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Percentage FDI in developing economies Total FDI in Brazil Percentage FDI the world Brazil – FDI inflows US$ bi 2006 – 1970-1989

16. FDI inflows as a % to GDP – Brazil and developing and transition economies

17. Section 3 • spillover effect; • empirical analysis - using novel data from the Brazilian Innovation Survey - of innovation and R&D expenditures and the R&D/employee indicator which • (a) compares at ISIC two digit level of TNC subsidiaries and local firms with more than 500 employees; • (b) compares at ISIC two digit level a set of 150 TNC subsidiaries in Brazil with their parent country (using data published by the European Union); • a series of interviews with representatives of TNC subsidiaries regarding their R&D and innovation strategies.

18. Spill overs now (after merger and acquisitions) • (1) there are sectoral specificities: • when locally-owned firms are treated as a whole, it is not possible to demonstrate the occurrence of significant impacts both positively or negatively of the presence of TNCs; • (2) if there is a control of local firms by sector and by level of productivity local firms with higher capabilities suffered negative impact of the presence of TNC subsidiaries in their sectors, or negative horizontal spill overs;

19. Spill overs now (after merger and acquisitions) • (3) the larger is the presence and power of TNCs in a given market, the more limited is the technological effort accomplished; in other words, the larger the foreign control over a particular sector, the smaller the relative technological effort developed by firms in that sector; • (4) local firms tend to invest more in R&D when they are in the few sectors where TNC subsidiaries invest significantly in R&D in Brazil.; (5) market seeking strategies of TNC subsidiaries have a negative effect on the productivity of local firms. • (5) local firms acquired by TNCs: downgrade of technological capabilities (Biobrás, telecom firms) with few remarkable exceptions (Embraco)

20. Brazil – Relative technological effort and foreign control by sector - 2000 * - Relative technological effort is the R&D intensity of the sector in Brazil over the average R&D intensity of EU countries; ** - Foreign Control is the % of net revenues by MNCs subsidiaries in different sectors. Source: Zucoloto and Junior (2005)

21. Analysis of TNC subsidiaries and local firms with more than 500 employees

22. Analysis of TNC subsidiaries and local firms with more than 500 employees • (1) with few exceptions, in all sectors, R&D expenditures over total innovation expenditures of locally –owned large firms (with more than 500 employees) spend are bigger than those of TNC subsidiaries; there is a huge concentration of R&D expenditures of large TNC subsidiaries in one sector (the auto sector TNCs are responsible for 48% of total R&D expenditures of large TNC subsidiaries); • (2) with few exceptions, R&D/net sales ratio of large local firms tend to be higher than R&D/net sales ratio of large TNC subsidiaries; • (3) R&D/employees ratio of subsidiaries of TNC tend to be higher than those of locally owned large firms in half of the sectors.

23. Brazilian manufacturing firms with more than 500 employees by origin of capital - Sectoral distribution (%) of R%D expenditures and R%D/net sales ratio by sector - 2005

24. Brazilian manufacturing firms with more than 500 employees by origin of capital - R%D/net sales ratio by selected sectors - 2005

25. 150 large TNCs and their subsidiaries • (1) with the exception of non metal – minerals (where one TNC set up one key R&D lab in Brazil) R&D/net sales ratio of subsidiaries are immensely smaller than that of parent company: on average these 150 subsidiaries spend 0.59% of sales on R&D while the average of their parent companies is 5%; • (2) R&D per employee of subsidiaries is much lower than R&D per employee of parent company for all firms in the sample: on average subsidiaries R&D expenditures per employee is about 10.37% of what parent companies spend; • (3) however the ratio of net sales/employee is not significantly different when Brazilian subsidiaries are compared to their parent companies: on average this ratio for Brazilian subsidiaries is 76% of the same ratio of parent companies.

26. 150 large TNCs and their subsidiaries in Brazil – R&D\sales - 2005 Parent co. Subsidiaries in Brazil

27. R&D/net sales (%) – 150 TNCs and their subsidiaries in Brazil - 2005

28. R&D/total number of employees – 150 TNCs and their subsidiaries in Brazil – (US$ million) 2005

29. 6 firms interviewed: • (1) firms believe that there are advantages to concentrating investments in R&D at the headquarters office, particularly when this concerns radical innovation. This is one of the reasons that explain the lack of investment in this type of innovation in Brazil. • (2) their strategy, for coming to Brazil, is based on opportunities connected with the size of the local/regional market or access resources (mineral and other) and not in developing new products or processes; • (3) one important issue affecting the decision to locate in Brazil more knowledge intensive innovative efforts is the lack of qualified or trained personnel; • (4) Brazilian public policies are inadequate to deal with the issue.

30. FDI outflows – total (US$ bil 2006) and % of world total and developing and transition economies

31. FDI outflows • Although there was already some Brazilian FDI in the 1970s it has been, up to the early 2000s almost insignificant and mostly financial investment in tax heavens. The only significant exceptions happened in oil (with Petrobrás) and other government-owned firms. • Recently there has been an important increase with Brazil having three TNCs among the 2000 largest of the world (Petrobrás, Embraer and Vale do Rio Doce). • But Brazilian TNCs are still small in number if compared to China and India. • Recently Brazil started to implement policies to support transnationalization of local (large) firms (successes in meat processing, for example)

32. Conclusions • 1 – What is R&D by TNCs? • 2 – What has been the contribution of TNCs to local technological development ? • 3 – What have been the results of an open door policy towards TNCs? • 4 - What are the perspectives of Brazilian TNCs