SUMMARY Transnationality Ranking of Brazilian Companies

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2 SUMMARY METHODOLOGY...4 RESULTS...6 Overview...6 Overview of the top 20 transnational companies...6 Transnationality Ranking of Brazilian Companies...9 Geographical dispersion Market entry and exit in Main acquisitions The 2011 Ranking by indicator Transnationals evolution abroad Domestic x international performance Performance satisfaction A look to the future Performance expectation Entry modes into new markets Stakeholder management and sustainability in the internationalization process Stakeholder engagement in global operations Sustainability practices in foreign markets CONCLUSION The 2011 ranking and sustainable growth abroad FRANCHING SPECIAL EDITION Introduction and methodology The 2011 ranking of the most internationalized franchises Geographical dispersion of Brazilian franchising networks Main difficulties for franchising networks abroad Final comments RESEARCH TEAM... 52

3 Sustained and sustainable growth abroad: Good financial results and the sustainability practices of Brazilian transnational corporations in the international market INTRODUCTION This is the sixth edition of the Transnationality Ranking of Brazilian Companies, held annually by the International Business Knowledge Center of Fundação Dom Cabral (FDC), Brazil. This year, we bring new topics such as companies sustainability practices in global operations and foreign stakeholder management. The study presents the most relevant movements of companies in the international market in 2010, as well as their performance and trends regarding their internationalization process. The year of 2010 showed a reversal of the investment framework observed in 2009, when the global economic crisis had its strongest effect. The economic recovery has busted foreign acquisitions and branch openings by Brazilian companies, as well as attracted foreign investments to Brazil. The scenario, however, is one of conscious expansion as the recent economic turmoil demanded new forms of management and planning focused on the efficiency in resource allocation and relationship with various organizational stakeholders. It is time to grow again, yet there is a concern of this growth being sustained (in economic and financial terms) and sustainable (socio-environmental terms). This report presents an analysis of the current international scenario and discusses ways in which Brazilian companies have been maintaining sustainability while facing globalization challenges.

4 Millions of US$ The following graph shows the direct investment flows in Brazil: Graph 1 - Brazilian Foreign Direct Investment Outward Foreign Direct Investment (OFDI) Inward Foreign Direct Investment (IFDI) Linear (Outward Foreign Direct Investment (OFDI)) Linear (Inward Foreign Direct Investment (IFDI)) Source: Balance of Payments Central Bank of Brazil The Brazilian outward foreign direct investment 1 resumed the upward trend reaching US$ 11 billion. In 2010 the Brazilian capital flow to other countries was the third highest since 1994, only inferior to 2006 the year of Vale s acquisition of the Canadian Inco, and 2008, characterized by numerous foreign acquisitions by companies such as Gerdau, JBS-Friboi, Marfrig, Vale and Magnesita. The inward foreign direct investment was over US$ 48 billion reaching its peak since The trend line in graph 1 shows that Brazilian capital flows are likely to grow abroad. Inward foreign direct investments in Brazil may also maintain the growth tendency in the next years. The increasing amounts of foreign investments demonstrate that Brazilian companies incorporated global competiveness on its long term strategies and tend to maintain its growth in foreign markets. The study by Fundação Dom Cabral showed that the moderate pace and volume of investments abroad are often due to companies cautiousness in planning for accurate choices. The companies main challenge seems to be: how to transfer the domestic sustained and sustainable growth to foreign operations? 1 Includes: Intercompany Loan Equity Participation. Source: Central Bank of Brazil

5 METHODOLOGY The 2011 edition of the Transnationality Ranking of Brazilian Companies adopts a methodology developed by the International Business Knowledge Center at Fundação Dom Cabral based on UNCTAD s (United Nations Conference on Trade and Development) transnationality index. Using this index provides a comparative analysis with similar surveys conducted in other countries by FDC s partners business schools. We considered Brazilian controlled business groups and individual companies not controlled by other groups. Therefore, the data presented in this report regards to companies/groups consolidated numbers. While this makes it more difficult to compare individual companies in the same industry, it aligns the research with rankings produced by other institutions worldwide. Additionally, since one of the group s primary motives to internationalize is to diversify its holdings, analyzing individual companies presents the reader with an inaccurate picture of the overall variance of firms results. We started with a list of potential companies for the study, including all publically traded companies listed or not on the Bovespa (São Paulo Stock Exchange) and the private limited companies (Ltda.), totaling 400 companies. From the initial list, 78 groups with international operations were identified and considered eligible for the study. We consider internationalized a company that has physical presence abroad, such as: commercial offices, distribution centers, production and assembly unit, services (construction and aviation for example), research and development with constant personnel abroad, and banking agencies. Companies in the early stages of internationalization operating exclusively by sales representatives or exports are not eligible for the survey. The final population was asked to answer a questionnaire with information regarding their international activities in Fifty one questionnaires returned, 49 valid, what represents an increase of almost 20% of the sample compared to the previous edition, in which 41 companies participated. Two questionnaires were not used due to lack of data or export activities only. This year new companies/groups participated in the study: Agrale, Altus, Bradesco, BRQ, Gol, Itaú-Unibanco, Magnesita, Séculus, Tegma and Vulcabras/Azaléia. It is important to point out that Escolas Fisk, Localiza, Arezzo, Spoletto and Marisol companies that participated in 2010, were transferred to the Transnationality Ranking of Brazilian Companies Franchise Special Edition, once the methodology developed in this case is more adequate to the internationalization strategies adopted by them. Some companies did not participate due to difficulties in gathering the information needed for the survey. As for the questionnaire construction, a literature review was performed on the topic of internationalization, seeking an index that reflects companies transnationality and is applicable to the Brazilian context. Hence, the index used is based on the methodology developed by UNCTAD (United Nations Conference on Trade and Development), adopted in

6 more than 10 countries around the world and thus utilized in this research project for comparability reasons. The index consists of the assessment of three indicators, which form the degree of internationalization of the companies: - Revenues: revenues of foreign subsidiaries / total revenues; - Assets: foreign assets / total assets; - Employees: number of foreign employees / total number of employees. For each one of these three indicators, an index representing the proportion of foreign / total is calculated. Afterwards, these three indexes are combined and their mean reflects the transnationality index of each company. The multidimensionality of the index is adequate for comparisons between groups of different sectors, once each sector demands new forms of internationalization. For example, service companies have a large number of employees abroad but low level of assets. On the other hand, manufacturing companies can earn higher revenues abroad without necessarily having massive amounts of employees. Thus, the use of the three indicators balances the various forms of internationalization and emphasizes the overall performances of companies from all sectors. In order to understand thoroughly the internationalization process of Brazilian companies and to explain the main changes in international strategies in 2010, we conducted interviews with several groups and companies chosen due to their internationalization index or by presenting significant highlights in international activities in recent years. Therefore, this report not only contains quantitative results collected by questionnaire sent to companies, but also qualitative information obtained through semi-structured interviews. The interview provides valuable information about the major changes in international business enriching and contributing to a better understanding of the internationalization process of Brazilian companies. Besides the well known Transnationality Ranking of Brazilian Companies, published since 2006 the International Business Knowledge Center of Fundação Dom Cabral launches in 2011 the Franchising Special Edition. The particularities of companies that adopt the franchising system open a space for new lines of research and questionings about this mode of internationalization. It is important to extend the knowledge about expansions via franchising as it implies different challenges for companies compared to the ones that internationalize by FDI. We invite you to learn more about this new study in Brazil, which is presented at the end of this report.

7 RESULTS Overview Overview of the top 20 transnational companies The biggest highlight of 2010 was the effect of the economic recovery in investments from and to Brazil. The data from top 20 transnational companies (see table 1) shows that revenues, assets and employees grew in both domestic and international markets last year. Foreign revenues increased 27.3% compared to the previous year. However, a higher increase in domestic revenues (45.3%) was responsible for a decrease in the proportion of foreign revenues as compared to total. Table 1. Overview of top 20 Transnationals (R$ billions and # of employees) Δ10/09 Revenues Brazil R$ R$ R$ % Abroad R$ R$ R$ % Total R$ R$ R$ % % abroad/total 42.8% 41.4% 38.2% Assets Brazil R$ R$ R$ % Abroad R$ R$ R$ % Total R$ R$ R$ % % abroad/total 34.8% 31.6% 34.6% Employees Brazil 327, , , % Abroad 169, , , % Total 497, , , % % abroad/total 34.0% 31.2% 30.5% Foreign assets also increased (32.7%) and in this case in greater proportions than in the domestic market (16.1%). This meant that in 2010 the top 20 transnational companies had more than one third of its total assets (34.6%) abroad.

8 R$ billions The following chart shows the evolution of revenues and assets abroad: Graph 2. Evolution of revenues and assets abroad R$ 250 R$ 200 R$ 150 R$ 100 Revenues Abroad Assets Abroad R$ 50 R$ In terms of absolute value, assets abroad exceed revenues in all years; this difference was most evident in It is possible that the appreciation of the Real against the dollar has contributed to slowdown foreign revenues growth, especially for companies that produce in Brazil and sell abroad. The valuation of assets also suffers the effects of the exchange rate, however, the appreciation of the real stimulates acquisitions and openings of manufacturing plants abroad. That compensates the devaluation of assets, even exceeding the amount in previous year. Besides, while revenues are generated every year and zeroed, incorporated investments add value to the existing assets, which helps explaining this growth.

9 # of employees Additionally, it is clear that, transnational companies as a whole have increased the number of employees both in Brazil and abroad (see graph 3). Graph 3. Evolution of employees 500, , , , , , , , ,000 50,000 0, Employees in Brazil Employees Abroad This finding shows that the top 20 transnational companies have increased hiring and/or incorporation of employees of acquired companies to their staff, both in domestic and international markets. Still, employee s growth rate in Brazil (12.8%) is higher than abroad (9.1%). This result challenges the assumption that internationalization causes a reduction in domestic jobs generation. This is an overview of the internationalization of Brazilian companies in Detailed results of the Transnationality Ranking of Brazilian Companies may be seen in the following topics. First, we present the, itself. Subsequently, we show an analysis of the geographical dispersion of Brazilian companies around the world, including information on entry and exit of markets in Additionally, the main acquisitions in 2010 are shown, as well as the ranking for each indicator, and the evolution of Brazilian companies internationalization. An evaluation of the transnational s performance follows, as well as an analysis of executives satisfaction with financial and operational results, and their performance expectations for We also discuss plans for future expansion and entry modes. Finally, we analyze global stakeholder management strategies, as well as transnational corporations sustainability practices abroad. At the end of this report, we also present the Franchising Special Edition launched this year with the ranking of the 15 most internationalized franchising networks.

10 Transnationality Ranking of Brazilian Companies The following table shows the Transnationality Ranking of Brazilian Companies: Table 2. - by index Position Company Primary Industry Transnationality Index Revenues Assets Employees 1 JBS-Friboi Food Stefanini IT Solutions Software and IT Services Gerdau Steel and Metal Ibope Market Research Marfrig Food Metalfrio Refrigerators Odebrecht Construction Suzano Pulp and Paper Sabó Autoparts Vale Mining Magnesita Refractory Products Tigre Building Materials Lupatech Parts and Equipment Artecola Chemical Products Votorantim Cement, Metal, Pulp and Paper Weg Electrical machines and equipment Brasil Foods Food Embraer Aeronautics Ci&T Software Software and IT Services Marcopolo Vehicles and Parts Camargo Corrêa Construction, Cement, Textiles and Shoes Tam Airline Agrale Vehicles and Parts América Latina Logística Logistics Natura Hygiene and Cosmetics Azaléia Shoes Petrobras Oil and gas BRQ IT Services Software and IT Services Cia Providência Rubber and Plastics Alusa Energy Continues

11 Table 2. - by index Position Company Primary Industry Transnationality Index Continued Revenues Assets Employees 31 Andrade Gutierrez Construction Minerva Food Bematech Software and IT Services Ultrapar Chemical Products and Fuel Distribution DHB Autoparts Eliane Building Materials and Furniture Gol Airline Politec Software and IT Services Randon Vehicles and Parts Seculus Real State and Watches Tegma Logistics Altus Software and IT Services Oi Telecomunications Cemig Energy M.Dias Branco Food Eletrobras Energy JBS-Friboi is the most internationalized company in the 2011 ranking. As the largest processor of animal protein, it operates in food, leather, biodiesel, collagen and cans. Currently, JBS-Friboi has 77.4% of its sales, 39.8% of its assets and 61.7% of its employees abroad. The company has 140 production units worldwide, operating in Argentina, United Sates, Italy, Australia, Uruguay, Mexico and Russia 2. In the second position we have Stefanini IT Solutions, emerging with great growth in 2010, especially abroad. The company, founded in 1987, started its internationalization process in 1996 with sales office in Argentina. Since then, it has established subsidiaries via Greenfield in Chile and Mexico in 2000, Peru, Colombia and United States in 2001, Spain, Portugal and Italy in 2003, United Kingdom and India in 2006 and in Canada in 2008, all of them part of the company s global expansion strategy. But it was only in 2010 that the company gave a leap in its internationalization process with the acquisition of two U.S. companies (TechTeam and CXI) and one in Colombia (Informática & Tecnología). Now, Stefanini has 36.1% of its revenue, 67.7% of its assets and 37.0% of its employees abroad. In the third position is Gerdau, the largest steel producer in Latin America, present in 13 countries besides Brazil. After several years serving the foreign market through exports, the 2 Research data and

12 company began its internationalization process in 1980 with the acquisition of Laisa steel in Uruguay, currently called Gerdau Laisa. This first experience taught the company that operating in another country involves major challenges of understanding local cultures. As a result, Gerdau decided to keep local staff in its operations rather than relocate personnel since the former know better the market, the suppliers and the legislation. Subsequently, the company expanded to other regions of the globe and gradually transferred its culture to its business operations, balancing cultural aspects with the Brazilian management system Gerdau Business System. With a sustained growth of 14.2% per year (between 1997 and 2010), the company has now 35.3% of its revenue, 58.0% of its assets and 45.3% of its employees abroad, and its transnationality index is 46.2%. One transnational that stands out for its gradual, or incremental, internationalization process is Randon. The company was founded in 1949 in Caxias do Sul, and operates in the commercial vehicles, transport and cargo industries, as well as in a division of auto-parts and systems, related to the automotive supply chain. Its foreign activities started with exports to neighbor countries such as Paraguay and Uruguay in the 1970s. In the beginning, sales were sporadic, depending on the demand. In a second stage, Randon used agents and trading companies to seek business abroad, such as import of raw materials and export of products. The third stage started as sales became regular and the company began operating via their own network of agents, representatives and dealers in countries in which they had greater penetration. Currently, with the maturity of the industry and the entry of competitors, the company started its fourth phase in the internationalization process through manufacturing facilities and assembly of products abroad. Sales abroad represent a significant portion of revenues in all business units. Outside Brazil, Randon has six manufacturing plants and three major distribution centers of components and systems for regional markets, present in Argentina, United States, China, Algeria, Kenya and Egypt. It also has sales offices in Chile, South Africa, Mexico, Germany and Dubai 3. Since the methodology used does not consider financial institutions, due to different aspects of the economic function of their assets, we present the information of the banks separately: Table Transnationality Ranking of Brazilian Banks - by index Position Company Primary Industry Transnationality Index Sales Assets Employees 27 Itaú-Unibanco Financial institution Bradesco Financial institution Banco do Brasil Financial institution Research data, in depth interviews and

13 If included in the main list, Itaú-Unibanco, Bradesco and Bank of Brazil would be in the 27 th, 36 th and 38 th position, respectively. Itaú-Unibanco has 9.0% of transnationality index. The merger of the two banks (Itaú and Unibanco) initiated in 2008 and finalized in 2010, created a holding that is among the world s 15 largest financial institutions. Last year, the company reached 5,000 units across the country under the Itaú brand and its international operations are concentrated in Latin America, North America, Asia and Europe 4. Meanwhile, Bradesco focuses on the domestic market having branches in all Brazilian municipalities. Still, the bank is present in seven countries as a way to attend Brazilian customers companies and citizens, throughout the world. In Japan, Bradesco has a representative office aiming to monitor and support agreements with the Bank of Tokyo-Mitsubishi UFJ and The Daito Bank (remittances to Brazil and investment funds). In the United States there s an agency focused on operations by institutional clients with emphasis on financing of the Brazilian foreign trade. Bradesco Security also operates in the U.S enabling share trade through ADRs as well as shares listed on local exchanges, and also working as a broker-dealer in the distribution of public and private bonds to international investors; Bradesco Security maintains units in London and Hong Kong. In Grand Cayman an agency with the same purpose as the U.S. unit is kept. The bank also has two subsidiaries, (i) in Argentina responsible for conducting operations of Brazilian companies that do business in the country and (ii) in Luxembourg, which conducts not only operations of Brazilian companies with counterparts in the region, but also conducts operations across Europe 5. Finally, the Bank of Brazil, with 200 years of experience at domestic level, operates now with more than four thousand branches and 40,000 ATMs, distributed in all Brazilian states. The bank began operations abroad in 1941, when it opened an office in Asuncion, Paraguay. But it was only in 1967 that the company began to actively expand its presence in the international market with the opening of new offices in Latin America and North America. Nowadays, the bank is present in 23 countries through subsidiaries, sub-branches and representative offices 6. 4 Research data and ww13.itau.com.br/portalri 5 Research data, in depth interviews and 6 Research data and

14 Geographical dispersion The following table shows the location of Brazilian Transnational Corporations subsidiaries: Position Company Table 4. Geographic dispersion of BTNCs Total of South Central North Europe Asia Africa Oceania Countries America America America 1 Vale Andrade Gutierrez Votorantim Stefanini IT Solutions Banco do Brasil Weg Odebrecht Brasil Foods Marcopolo Marfrig Magnesita Camargo Corrêa Itaú-Unibanco Ibope Gerdau Petrobras Randon Tigre Minerva Natura JBS-Friboi Sabó Bradesco Metalfrio Suzano Artecola Embraer Ci&T Software Azaléia Ultrapar Continues

15 Position Company Table 4. Geographic dispersion of BTNCs Total of South Central North Countries America America America 31 Lupatech Alusa Oi Bematech Politec Altus M.Dias Branco Eletrobras Tam Agrale América Latina Logística BRQ IT Services Cemig Cia Providência DHB Eliane Tegma Seculus Gol 0 Continued Europe Asia Africa Oceania Vale is the Brazilian transnational with the greater presence abroad, with offices, operations, projects, exploration and joint ventures in 37 countries besides Brazil. The company s strong presence in Asia and Africa stands out with 37.8% and 24.3% of the regionality 7 index, respectively. Another highlight is Brasil Foods. Created from a merger between Sadia and Perdigão in May 2009, Brasil Foods currently has all foreign activities integrated, as well as financial management and trade policies. It is present in 20 countries in four regions. Before the merger, Perdigão, founded in 1930, already had a large network of international business, which began with exports in the 1970s, mainly to Saudi Arabia. Sadia, established in 1944, operated in Latin America, Europe and Asia 8. Nowadays, Brasil Foods has 18 7 Regionality index equals the number of countries in a given region, divided by the total number of countries where the company operates. 8 Research data and

16 commercial offices and one distribution center abroad, in addition to 60 industrial units in Brazil 9. The internationalization of the airlines has slightly different specifications applied to the sector. Tam and Gol are present in several countries through international flights, employees and partners. Its revenues abroad are directly connected to ticket sales in the countries they operate. Gol operates in nine countries without an international subsidiary 10. Tam is present abroad via international flights or partnerships in 25 countries 11 and has a commercial subsidiary in Paraguay. The following graph shows the regionality index of BTNCs: Graph 4. Location of Brazilian Transnationals Asia 17% Africa 10% Oceania 2% South America 31% Europe 21% North America 12% Central America 7% Brazilian TNCs maintained a strong presence in South America in 2010, with a regionality index of 30.9%. The geographical and cultural proximity to Brazil often makes the region attractive for investments, especially in the early stages of the internationalization process. Companies with offices and production units in South America can often have reduced transportation costs and understand culture and local regulations more easily. Tigre is an example of a company with primary focus in South America. Apart from exports to over 40 countries, the company of the building material sector is present abroad 9 Research data and 10 Argentina, Venezuela, Curacao, Chile, Bolivia, Dominican Republic, Panamá, Uruguay, Aruba, Barbados, Paraguay. Source: and research data. 11 Germany, Argentina, Bolivia, Belgium, Canada, Chile, Colombia, Denmark, Spain, USA, France, Netherlands, Ireland, Italy, Japan, Norway, Paraguay, Peru, Portugal, United Kingdom, Switzerland, Sweden, Uruguay, Venezuela, Austria. Source: and research data.

17 through subsidiaries in nine countries, eight in South America. Their internationalization process started in 1977 with the creation of a company called Tubopar, in Paraguay. Nowadays, Tigre has 12 overseas plants: one in Argentina, two in Bolivia, three in Chile, one in Colombia, one in Ecuador, one in Paraguay, one in Peru, one in Uruguay and one in the United States 12. Europe is the second region with the highest concentration of countries with Brazilian affiliates, with a regionality index of 21.1%. As Europe has a lot of countries with different cultures and consumer markets, Brazilian companies envision various opportunities for Brazilian products and services. Thus, 26 Brazilian transnational are present in 19 European countries. North America is a very popular destination for Brazilian companies. Of the 49 companies participating in the research, 37 have subsidiaries in at least one country in the region. However, due to the fact that the region has only three countries, its regionality index is reduced to 12.6%. Finally, Asia and Africa have been offering new business opportunities for Brazilian companies in recent years. In Asia, for example, the promising Chinese market has attracted investments from companies such as Randon, Sabó, Bematech, Ci&T Software, Bank of Brazil, Weg, Brasil Foods, Vale, Votorantim, Stefanini, Odebrecht, Marcopolo, Mafrig, Magnesita, Itaú-Unibanco, Suzano Papel e Celulose and Embraer. In Africa, strategic alliances between companies have been contributing to a larger Brazilian presence. For instance, some construction companies operating in Africa have been invited by mining companies. The strategy "follow the client" has also driven companies in the information technology industry to meet corporate customers in their subsidiaries abroad. The illustration below shows all countries where Brazilian companies have some type of physical presence: 12 Research data and

18 Figure 1. Brazilian Presence in the world North America Canada USA Mexico Central America Antigua Aruba Bahamas Barbados Cuba Costa Rica Curacao El Savador Honduras Cayman Islands Panama Puerto Rico Saint- Lucia R. Dominicana South America Argentina Bolivia Colombia Chile Ecuador Paraguay Peru Venezuela Europa Italy Germany Belgium Spain Portugal Denmark France Romenia Switzerland Poland England Turkey Holland Áustria Hungary Norway Greece Wales Northern Ireland Africa South Africa Mozambique Angola Mali Libya Liberia Mauritania Morocco Conacri Guinea Equatorial Guinea Tunisia Gabon Malawi Egypt Congo Zambia Cabo Verde Niger Algeria Kenya Cameroon Oceania Australia New Zealand New Caledonia Asia Russia China Japan Philipines Singapure India U.A.E. Kazakhstan South Corea Thailand Iran Indonesia Malasia Saudi Arabia Mongolia

19 Market entry and exit in 2010 Brazilian TNCs have been increasing geographical expansion of their activities in recent years. The year of 2010 was marked by several acquisitions, as well as new greenfield projects in many regions. Eleven companies have entered into 28 new countries in 2010, while only four companies closed or discontinued operations in a few countries. The following figure shows this amazing Brazilian breakthrough abroad: Figure 2 Entries and exits of new countries in 2010 Entries in new countries by Transnationals in 2010 Exits/interruptions of operations in countries bytransnationals in 2010 South Africa, Germany, Australia, Bahrein, China, Colombia, South Corea, Denmark, Egipt, Arabe Emirates, USA, Philipines, France, Guatemala, Conacri Guinea, India, Japan, Kuwait, Malasia, New Zealand, Poland, Portugal, Qatar, Romenia, Sweden, Switezerland, Tailand, Zambia Canada, Trinidad and Tobago, Paquistan, Germany. For example, Petrobras began operations in two countries in Oceania last year: Australia and New Zealand as a way of seeking new opportunities for gas in order to extend the possibilities of supplying the domestic market and reducing dependence on traditional sources. On the other hand, Petrobras exited Pakistan since the studies did not reveal potential exploration opportunities. In terms of future moves, the company considers expanding to Africa, in search for opportunities in the pre-salt layer given the similarity with the geological structures found in Brazil. In addition, the Gulf of Mexico is an interesting area for application of Petrobras expertise in deep waters 13. Vale consolidated its entry in Zambia and Malaysia in The Konkola North project in Zambia aims to contribute to the company's portfolio in copper, aiming to become a global player in this mineral production, as well as in fertilizers and coal. In Malaysia, Vale is 13 Research data, in depth interviews and

20 building a distribution center for iron ore in order to serve smaller customers in the region. Therefore, Vale s strategy is to approach Asian markets, increasing the competitiveness of the company's products 14. An interesting fact is that some companies, such as Stefanini IT Solutions and Marfrig had access to new markets by acquiring companies which were already internationalized. By doing so, Stefanini expanded its geographic areas of operation from 17 to 27 countries with the acquisition of the north American TechTeam. The company acquired was already present in ten markets: Australia, China, Denmark, Philippines, France, Poland, Romania, Sweden and Switzerland 15. As a result, the giant IT company is the one that has entered into more countries in The same happened with Marfrig in the food industry. The company bought the North American Keystone Foods, which provided access to nine new markets where the acquired company already operated. It is noted that Brazilian multinationals have sought greater exchange among employees of other cultures, with the goal of developing a global mindset in executives and aligning management practices within branches. Gerdau is an example: the company has been operating in India through a joint venture with Kalyani Group since Some executives from that country, as well as from other operations, have spent time in Brazil understanding the culture and the corporate governance system to later return to their country of origin. With this experience, they took abroad the company s values and left in Brazil what they learned about the Indian culture in the business environment. This experience exchange has helped Brazilian companies maximize local opportunities Research data, in depth interviews and 15 Research data, in depth interviews and 16 Research data, in depth interviews and

21 Main acquisitions In 2010, the flow of Brazilian investments abroad increased if compared to 2009, representing an grow in mergers and acquisitions, according to a report released by CEPAL. The following table shows acquisitions over US$ 100 million held by Brazilian companies and announced in Table 5 - Main acquisitions in 2010 Buyer Acquired Country Value of transaction US$ Industry Millions 1 Vale BSG Resources Guinea Ltd. United Kingdom 2,500 Mining 3 Camargo Corrêa Portugal SGPS Cimpor Cimentos de Portugal Portugal 1,894 Manufacturing 2 Gerdau Gerdau Ameristeel Corp. Canada 1,607 Manufacturing 4 Marfrig Alimentos Keystone Foods LLC United States 1,260 Food 5 Votarantim Cimpor Cimentos de Portugal Portugal 1,192 Manufacturing 6 Votorantim Metais Cía Minera Milpo SAA Peru 419 Mining 7 Petrobras Pasadena Refining System Inc United States 350 Manufacturing 9 Braskem Sunoco Chemicals Inc United States 350 Manufacturing 8 Petrobras Devon Energy Corp- Cascade United States 180 Oil and gas 10 Banco Bradesco IBI México México Mexico 164 Financial services Amongst the listed acquisitions, BSG Guinea Resources Ltd (United Kingdom) by Vale stands out for the amount of US$ 2.5 billion. Votorantim also sought the expansion through its business units in various sectors in which the group operates. Besides the acquisition of Cimpor Cement in Portugal and Cía Minera Milpo, the third largest zinc mining company in Peru, it announced the joint venture between Citrosuco and Citrovita (Votorantim Group), creating a worldwide leader in the market orange juice 17. As for Bradesco, the company recently bought Banco Ibi, both in Brazil and Mexico, controlled by the retail chain C&A. This movement enabled Bradesco a distribution contract of cardboard products in C&A stores, in addition to the expansion of its client base. It is important to note that this table brings together the major acquisitions of 2010, worth more than US$ 100 million. It is possible that other acquisitions that have occurred in the 17

22 period are not listed in the source consulted, for three reasons: (i) unannounced acquisitions, (ii) acquisitions started in 2010 but not completed and (iii) lack of sufficient information. The 2011 Ranking by indicator The following tables present the classification of Brazilian transnational corporations in terms of their levels of revenues, assets and employees abroad. Table 6 shows the ranking by revenues ratio in 2010: Table 6 - Top 20 by % of revenues abroad Company % revenues abroad 1 JBS-Friboi 77.4% 2 Suzano Papel e Celulose 77.0% 3 Magnesita 44.9% 4 Marfrig 39.2% 5 Sabó 36.7% 6 Odebrecht 36.7% 7 Stefanini IT Solutions 36.1% 8 Gerdau 35.3% 9 Tam 32.9% 10 Brasil Foods 32.6% 11 Votorantim 26.9% 12 Weg 26.6% 13 Ibope 26.0% 14 Lupatech 25.5% 15 Ci&T Software 24.5% 16 Vale 23.3% 17 Artecola 20.8% 18 Tigre 19.7% 19 Metalfrio 19.7% 20 Marcopolo 14.5% JBS-Friboi is the company with the largest proportion of revenues abroad in relation to the total, equivalent to 77.4%. In the second position is Suzano, whose revenues abroad corresponds to 77.0% of total revenue as a result of sales of Brazilian manufactured goods which sales are mediated by the companies commercial offices in the United States, England, Switzerland, Argentina and China. Another highlight is Magnesita, which has 44.9% of revenues abroad. The company from Minas Gerais, today a world leader in refractory solutions, is present abroad through production subsidiaries and head offices in Argentina, United States, Germany, France, Belgium, Taiwan and China as well

23 as commercial offices Colombia, Peru, Chile, Uruguay, Mexico, Australia, South Africa, England, Canada, Italy, Sweden and Malaysia. The next table shows the classification of Brazilian transnational corporations in terms of foreign assets ratio: Table 7 - Top 20 by % of assets abroad Company % assets abroad 1 Stefanini IT Solutions 67.7% 2 Gerdau 58.0% 3 Ibope 48.6% 4 Vale 43.5% 5 JBS-Friboi 39.8% 6 Marfrig 37.7% 7 Tigre 37.4% 8 Embraer 35.7% 9 Metalfrio 31.9% 10 Odebrecht 25.8% 11 Brasil Foods 25.4% 12 Artecola 24.6% 13 Magnesita 23.4% 14 Votorantim 21.4% 15 Agrale 20.7% 16 Sabó 20.5% 17 Lupatech 17.9% 18 Weg 17.5% 19 Camargo Corrêa 17.1% 20 Ci&T Software 15.8% Stefanini IT Solutions is the company with the largest ratio of foreign assets, equivalent to 67.7%, largely due to acquisitions made in 2010: CXI and TechTeam, both in the United States and Informática & Tecnología, in Colombia. In the second position is Gerdau with 58.0% of its assets in other countries due to acquisitions in recent years, for example, Gerdau Macsteel, Inc., in the United States, Sidenor, in Spain, and Corsa Controladora in Mexico, totaling almost R$1.8 billion in investments abroad only in Another highlight is Ibope that recently acquired the north American research institute Zogby International. The acquired company operates in the United State in the media research and intelligence industry 19. In addition, the company has facilities in 13 countries in Latin America. Petrobras stands out as the one with the greater volume of total assets, in absolute value. 18 Source: CEPAL - Comisión Económica para América Latina y El Caribe, 2009; Foreign Investment in Latin America and Caribbean, and Transnationality of Brazilian Companies Ranking 2010 Edition

24 Finally, the following table shows the classification of companies in terms of their ratio of foreign employees: Table 8 - Top 20 by % of employees abroad Company % employees abroad 1 JBS-Friboi 61.7% 2 Ibope 52.2% 3 Metalfrio 49.4% 4 Gerdau 45.3% 5 Marfrig 37.2% 6 Stefanini IT Solutions 37.0% 7 Sabó 36.0% 8 Odebrecht 35.6% 9 Lupatech 27.9% 10 América Latina Logística 27.6% 11 Tigre 22.0% 12 Natura 21.7% 13 Marcopolo 20.9% 14 Vale 20.9% 15 Artecola 20.6% 16 Magnesita 18.1% 17 Camargo Corrêa 17.0% 18 Weg 15.6% 19 Votorantim 13.1% 20 Petrobras 9.8% JBS-Friboi is the company with the higher percentage of employees abroad: 61.7%. In the second position is Ibope, with 52.2%. In addition, there is Metalfrio Solutions, the third largest commercial plug-in refrigerator manufacturer, well as the leader in Latin America. The company has production units in Brazil, Mexico, Turkey and Russia, as well as distribution centers in the United States and Denmark. Metalfrio has had a fast internationalization process, starting in 2006 mainly through acquisitions. When purchasing a new company, Metalfrio allows it to maintain certain differences in production as long as some requirements are met (e.g. quality control, processes, suppliers, research and development). Therefore, the company seeks to maintain or expand the existing structure with the belief that local people know more about their markets and operations. Although some expatriates are sent to align the new subsidiary to the Metalfrio culture the company generally prioritize for hiring local people Metalfrio case study accomplished by Fundação Dom Cabral, 2010 and research data.

25 Transnationals evolution abroad The following table shows the international evolution of BTNCs: Table 9 - Transnationality Index - Evolution of prior 3 years 2010 Δ10/ Δ09/ Δ10/08 JBS-Friboi % % % Stefanini IT Solutions % % % Gerdau % % % Ibope % % % Marfrig % % % Metalfrio % % % Odebrecht % % % Suzano % % % Sabó % % % Vale % % % Magnesita % % % Tigre % % % Lupatech % % % Artecola % % % Votorantim % % % Weg % % % Brasil Foods % % % Embraer % % % Ci&T Software % % % Marcopolo % % % Camargo Corrêa % % % Tam % % % Agrale % % % América Latina Logística % % % Natura % % % Azaléia % % % Petrobras % % % BRQ IT Services % % % Cia Providência % % % Alusa % % % Andrade Gutierrez % % % Minerva % % % Bematech % % % Ultrapar % % % DHB % % % Eliane % % % Gol % % % Politec % % % Randon % % % Seculus Tegma % % % Altus Oi % % % Cemig % % % M.Dias Branco % % % Eletrobras % Itaú-Unibanco % % % Bradesco % % % Banco do Brasil % % % Overall Top Transnationality Index All

26 In the context of economic recovery, 23 firms increased their degree of internationalization. The 49 companies participating in the 2011 Ranking have increased, in average, 17.4% of the Transnationality Index, considering variations by company (Δ10/09 column). For the top 20 transnational companies the general index rose from 0.29 in 2009 to 0.30 in 2010, an increase of 4.9%. If we consider all companies, the index remained stable. Amongst the top 20, Stefanini IT Solutions was the company with the highest growth abroad between 2009 and 2010, increasing 223.0% in the internationalization index, while the average of the rest was 12.9%. The company has plans to further expand its international operations, with a new M&A (Merger and Acquisition) board that intends to asess new markets and new opportunities abroad. The company's main focus remains on the United States and despite the risk involved Stefanini considers acquisitions in Europe as well, since the post crisis offers assets at attractive prices 21. Among the 49 respondents, the fastest growing company between 2009 and 2010 is Cia. Providência (with variation of 521.2%). The company, a Brazilian leader in the production of nonwovens (such as hygiene and medical/hospital disposables), started its international operations in 2010, when it opened its first factory in the United States. The subsidiary was planned to meet customers who were previously supplied via exports. Also, it served as an open door to entry in Mexico. This meant a large increase in assets and employees abroad compared to the previous years. Cia. Providência is already planning new investment for Another company that stands out for the growth in the internationalization index is Embraer, with an increase of 70.9%. The company operates abroad since 1979 and owns production units in Portugal, in China and in the United States, besides commercial offices in France and Singapore. In all countries where the company operates it offers maintenance services, tech support and spare part commercialization as well as pilot and mechanics training, if needed. Being located in strategic points, often within airports, the company can promptly meet its customers in the Asian, European and American market. Currently, Embraer is building two excellence centers in Évora (Portugal) which will bring together the most modern aircraft manufacturing system in the world. In addition, Embraer is targeting a new greenfield project to install a factory in the United States. Those ventures account for the increase of 143.3% of assets abroad and consequently a grow in the transnationality index while foreign revenues remained stable since new units are not yet in operation. Finally, Azaléia has sales subsidiaries in Argentina, Chile, Colombia, Peru and the United States, besides the Argentinean footwear factory, Indular Manufacturing, acquired in The company, on the ranking for the first time, showed 63.7% increase in the internationalization index in The company intends to continue its internationalization 21 Research data, in depth interview and 22 Research data and

27 project in the coming year, having already announced the acquisition of a shoe factory in India in 2011 as a way of increasing their market competitiveness abroad and diversifying its production base 23. Domestic x international performance When assessing the performance of transnationals it is clear that 2010 results were superior to the previous year, mainly regarding foreign operations. The average of companies that provided EBITDA 24 margins of foreign operations in 2010 (55.1% of the sample) was 15.6%. This impressive result revealed to be very close to the domestic EBITDA margin, which was 15.8%. It is important to note that although domestic operation margins were slightly higher than foreign operations, there was no significant difference. Therefore, for the first time since the study is conducted, Brazilian transnationals performed as well abroad as in the domestic market in terms of profitability. The tremendous growth in profit margins abroad is a clear indication of BTNC s ability to manage its international operations and to obtain good results even with all challenges and barriers faced by them. The economic recovery may also have contributed to this result, but to a lower extent since the European and North-American markets did not recover completely and the appreciation of the real against the dollar has hindered the re-sales abroad. Indeed, foreign revenues have not increased in the same proportion as profit margins (27.3% versus 124.5%, respectively), which points out that companies have been effectively reducing costs and managing risk to achieve superior performance abroad. 23 Research data and 24 Earnings before taxes, interest, depreciation and amortization.

28 The following illustration shows the changes in profit margins: Graph 5. Profit margin 16% 14% 12% 10% 8% 6% 4% 2% 0% 15.8% 13.9% 6.9% % Domestic profit margin Foreign profit margin One of the companies that stressed sales and profitability enhancement was Vale, that experienced "a remarkable recovery compared to 2009," year in which operations were strongly affected by the global crisis 25. It is important to highlight that there may be bias in this number, since the companies that had negative EBITDA are generally more reluctant to answer this question than companies with positive profits. Moreover, it is important to consider that changes in the exchange rate may contribute to this result. To minimize interpretation biases of these numbers, Fundação Dom Cabral asked corporate executives about their satisfaction with 2010 performance, both at domestic and international level. Thus, questions such as the following can be answered: Is the scenery as optimistic as it seems? Has other performance measures (such as sales growth, market share, etc.) showed positive results? 25 Research data and in depth interview

29 Performance satisfaction The companies surveyed were satisfied with the performance both in the domestic and international markets in The following chart illustrates: 5 Graph 6. Transnationals' satisfaction with performance Domestic market International market 1 1 = Very disatisfied / 5 = Very satisfied The item with higher levels of satisfaction in the domestic market was brand image (4.3), while the one executives were more satisfied with in the international market was products/services quality (4.0). On the other hand, the item that presented lower satisfaction rates in the domestic market was profitability (3.6) and ROA/ROI (3.6), and in the international market was also profitability (3.1). However, even the smallest values observed are above 3.0, indicating moderate satisfaction rather than dissatisfaction. In all

30 cases, transnational corporations evaluate Brazilian performance higher than international performance, the largest difference being of brand image. In fact, as several interviews with executives indicate, is more difficult for a company to have brand recognition abroad than in their home country. But do companies expect an even higher performance this year? A look to the future In order to explore trends for 2011 and the near future, Fundação Dom Cabral research also assessed executives expectations regarding performance of operations in 2011, as well as intentions for foreign investments and the most likely entry modes in case the company plans new international movements. The following topics show the results. Performance expectation The expected business performance for 2011 was measured using three indicators: sales, market share and performance relative to competitors. Each dimension received a score of 1 to 5, the latter being the highest level of expectations. 5 Graph 7. Performance expectation in Domestic market International market 2 1 Sales Market Share Relative to competitors 1 = Low expectation / 5 = High expectation

31 In general, TNCs have higher expectations regarding the domestic market than abroad. Some difficulties and barriers encountered in the international market, as well as superior performance in the domestic market in the last three years, could be responsible for uncertainties in performance abroad, which is reflected in their expectations. However, it is important to note that for both domestic and international market levels are above 3.0, which shows moderate to optimistic expectations for performance this year. Sales expectations in the domestic market (4.2) and in the international market (3.8) are superior to the other measures. The next edition of the ranking will show whether these expectations were indeed confirmed. Entry modes into new markets The most considered entry mode when planning new expansions is Joint Ventures (38.3%) or Merger and Acquisition (27.7%). According to the interviewed companies, the great advantage of entering a market through acquisitions is to incorporate the market share, existing human resources and production processes that are already in operation. On the other hand, the greenfield strategy calls for greater challenges in terms of adaptation to a new place, culture and legislation. Joint Ventures are considered less risky for activities abroad as it does not involve major commitment of resources and risks for companies. The following graph shows preferences in case of future expansions: Graph 8. Entry mode in case of future international expansion Does not consider expanding 13% Greenfield (Sales subsidiary) 17% Greenfield (Production subsidiary) 4% Alliances and Partnerships 38% Mergers and Acquisitions 28%

32 A company that has been known in recent years by its foreign acquisitions is Marfrig, accounting for more than 40 acquisitions over the past four years, including companies, assets and brands. In 2010, the company acquired Keystone Foods, one of the largest suppliers of processed meat in the world. The Chinese market is a promise for the group future investments because of the growing consumer demand in the food industry. The subsidiary Keystone China is the gateway to increase activity in the country 26. Another company that has continuously expanded its international activities through acquisitions and greenfield is WEG. The company has recently increased its presence among emerging economies with the establishment of an Indian unit and the acquisition of ZEST Group in South Africa. It s important to point out that ZEST, a trading company of electronic products for industrial use, was already an important partner of WEG for years. Its interest in the BRICs did not prevent the company's expansion in Latin America in WEG took control of Pulverlux S.A share in Argentina, and increased equity participation in the Mexican company Voltran S.A to 60% 27. Stakeholder management and sustainability in the internationalization process Stakeholder engagement in global operations Companies of different sizes and industries around the world have increasingly internalized the importance of managing their relationship with stakeholders effectively. Understood as all those who influence and are influenced by the company s activities, stakeholders include groups directly linked to business interests, such as shareholders, suppliers, customers and employees, and groups whose relationship is external to the business, such as governments, communities, unions, NGOs and activist groups. When going to international markets, companies may deal with even more diverse stakeholders, which represents an important challenge for transnational corporations. The study of the sought to identify how companies have been considering different stakeholders in their decision-making processes, and also examined the scope of participation of different interest groups. 26 Research data and 27 Research data and

33 The following graph illustrates the results: Graph 9. Degree of Stakeholder engagement in the transnationals decision making Shareholders and investors Joint venture and alliances partners Customers Employees Suppliers Governments Domestic Market International Market Trade associations Regulatory authorities Local Communities Labor unions NGOs and activist groups Label 1 = No relationship with this stakeholder group 2 = Dialogue with this stakeholder group for operational and/or managerial decision making 3 = Direct participation of this stakeholder group in operational and/or managerial decision making 4 = Dialogue with this stakeholder group for strategic decision making 5 = Direct participation of this stakeholder group in strategic decision making Brazilian transnational corporations in general take their management style abroad. As graph 9 shows, the degree of stakeholder engagement in the company s decision making is very similar in the domestic and international market, with a little more intensity in the former. Lower levels of stakeholder engagement in the international market may reflect barriers abroad, often summarized by the words "liability of foreignness 28. That means that being a foreign company may limit, somehow, the intensity of which the stakeholders are involved in the decision making. Still, the numbers demonstrate a significant relationship abroad. 28 The costs of doing business abroad that result in a competitive disadvantage for an MNE subunit. These costs are due to lack of knowledge, cultural, political and economic differences and to the need of coordination between geographically distant locations, among others. Source: ZAHEER, Srilata, Overcoming the liability of foreignness. Academy of Management Journal, 38(2):

34 The survey results also points out that Brazilian transnationals have a greater degree of engagement to stakeholders directly related to the business than to external stakeholders. Shareholders and investors is the group with the higher level of dialogue, followed by partners in alliances and joint ventures, customers and employees. In fact, 66% of companies indicated that there is a direct participation of shareholders and investors in defining strategies for the domestic market and for 60% of the companies the same is applied for the international market. The greater involvement of shareholders and investors in strategic decision making can be interpreted as an adoption of advanced corporate governance practices. Despite being a closed capital company, Odebrecht, for instance, has an investor relations department, which goal is to be transparent and provide strategic and financial information. This enhances relationships with banks as well as rating agencies, ensuring that the information given is always aligned with what is done, even regarding foreign operations. We also draw attention to the similarity of costumer s involvement abroad and domestically. A somewhat obvious conclusion can be drawn: customers are important for companies regardless of their location. An interesting example of this is Embraer, a company that operates in the airline engeneering industry which is, by definition, global. As a result, most of companies from the sector have a great international exposure, and Embraer was able to differentiate from competitors by its interaction with passengers and airlines. Innovations such as small aircraft with four doors, capable of a quick take off and landing, or with more internal space to please the passengers were brought up from the dialogue with customers. That is, Embraer does not manufacture the aircraft that it plans, but the plane that the customer considers most appropriate. This is one of the main reasons for the company s international success 29. Companies in the early stages of the internationalization process may have a greater tendency to involve with stakeholders directly related to the business, to help them understanding the international market. For example, DHB Automotive Components operates with a subsidiary in the United Arab Emirates, with a sales office for the products manufactured in Brazil. In addition to customer contact, the company s involvement in the country is mainly with government bodies, local authorities, businesses and chambers of commerce, because of the business of re-selling. That is, the degree involvement with the various types of stakeholders can be interpreted as a result of the volume of investments from the company each country 30. In the case of stakeholders external to the business, it is interesting to point out that overall governments have direct influence on the transnational s operational and/or managerial decision making, domestically and abroad. In addition, it is notable that companies have at least a dialogue with other stakeholders. The graphs 10, 11 and 12 below detail the scope of involvement with groups of stakeholders that showed the lowest rates regarding 29 Research data, in depth interviews and 30 Research data, in depth interviews and

35 international market, according the responses of transnational corporations. Although the degree of involvement with local communities abroad is not high (2.5 on a scale from 1 to 5 explained in the graphs caption), only 8.3% companies do not have any kind of relationship with this group of stakeholders. In 75.0% of cases, the communities participate in the dialogue or operational and/or managerial decisions, and 16.7% of transnational corporations have a dialogue to take strategic decisions. The lack of relationship abroad is greater when it comes to NGOs and activist groups, what may be considered an interesting challenge for transnational corporations to overcome their "liability of foreignness". Graph 10. Foreign Labor Unions Graph 11. NGOs and activist groups 11% 0% 19% 8% 0% 17% 33% 25% 45% 42% Graph 12. Local communities abroad 17% 0% 8% 23% 52% Label 1. No relationship with this stakeholder group 2. Dialogue with this stakeholder group for operational and/or managerial decision making 3. Direct participation of this stakeholder group in operational and/or managerial decision making 4. Dialogue with this stakeholder group for strategic decision making 5. Direct participation of this stakeholder group in strategic decision making

36 An important issue highlighted by some companies is the difficulty to generalize the degree of stakeholder s engagement in the case of a highly diversified conglomerate. For instance, Odebrecht operates in industrial engineering, energy, infrastructure, oil and gas, real estate, environmental engineering, ethanol and sugar, chemicals and petrochemicals, transportation and logistics, among others. Decentralization is one of the management pillars in the company, and the intentioned delegation makes each one of the more than 160 works of construction almost a micro-enterprise. The degree of stakeholder engagement depends on the social and environmental impact of each project and in-depth studies are carried out accordingly. In operations with high social and environmental impact, such as families resettlement, the community is naturally involved. Regulatory agencies and local governments are also important partners to obtain environmental authorizations. When the company does not have a local partner, employees and local suppliers can help understand the reality of the country. That is, the level of relationship with stakeholders depends upon context, whether in Brazil or abroad. And if a company within the group decides to internationalize, it can benefit from previously made contacts 31. Petrobras also tries to adjust the participation of stakeholders in accordance to the characteristics of the company's operations abroad. In Colombia, for example, the company s relationship with its stakeholders favors a permanent systematic dialogue, as a mechanism to communicate and disseminate critical processes of the company s business management. The company has always sought to involve communities in the areas where they have significant impact (such as in the Guando field). Also, the company invests in social and environmental projects, based on a respectful, transparent and harmonious relationship. As examples, there are programs to enhance community participation in the establishment of a environmentally sustainable culture, that seeks to protect natural resources. Additionally, there are projects to develop local infrastructure and provide training order to improve quality of life. In New Zealand, despite having just entered the country to analyze seismic data, Petrobras has sent a team with the goal to establish dialogue channels with local stakeholders. During the meetings, there are opportunities to clarify the project, highlighting the company's commitment to sustainability and respect for human and cultural diversity - even though there is a local debate about New Zeland s energy strategy. Its international division has a specific team for social responsibility, which is responsible for deploying practices and policies abroad similar to those adopted in Brazil. Still, there is a concern to not replace the government, and therefore, they focus on demand identification, stakeholders finding, relationship links and channels 32. The interviews with Brazilian transnationals highlight that stakeholder management is a way to enable sustainability practices in foreign operations. Sustainable development has been finding a space in the internationalization agenda, and this motivated this year s edition of the Transnationality of Brazilian Companies to further understand how 31 Research data, in depth interviews and 32 Research data, in depth interviews and

37 companies have been practicing sustainability in its operations both in Brazil and in the international markets. Sustainability practices in foreign markets The sustainability issue has been getting more and more attention in the business environment. Society's interest in the subject is also growing. Today companies are more concerned with the future of generations and, therefore, social and environment issues are taken into account when making strategic and organizational decisions. The internationalization process had caught special attention to this matter, given the expectations that companies should be able to meet the sustainability agenda broadly. More than simply adopting a sustainability speech, there is a clear interest in what companies have actually put into practice. Thus, the Transnationality Ranking of Brazilian Companies included in the 2011 edition an analysis of 20 sustainable practices adopted by BTNCs both in the domestic and the international market. The practices include social and environmental aspects and were adapted from a study validated in New Zealand 33 (41). Graph 13 shows the results. 33 Collins, Eva; Lawrence, Stewart; Pavlovich, Kathryn; Ryan, Chris. Business networks and the uptake of sustainability practices: the case of New Zealand. Journal of Cleaner Production, 15 (2007) 729 and 740.

38 Graph 13. Sustainability Practices of Transnationals Consideration of diversity in hiring decisions Provision of job training Contribution to charity Management of the environmental impact of products, processes and/or services Adoption of measurable targets for water/energy reduction Adoption of measurable targets for waste reduction Implementation of environmental management systems Implementation of family friendly policies Donation of time or money to local community projects Implementation of a recycling program Implementation of environment-focused supplier Assistance for employees to obtain tertiary education Systematization of a company environmental policy Adoption of measurable targets for employee training programs related to the social and/or environmental Production of a public sustainability report Implementation of stress management initiatives Adoption of flexible working hours Participation in voluntary environmental programs Marketing or image based on environmental claims Membership in environmental groups or networks 1 = Not develped at all / 5 = Very well developed Domestic Market International Market

39 Similarly to other matters, sustainable practices are more developed in the domestic operations than abroad. Yet, the results reveal that for the majority of items show a level of development superior to moderate. In addition, the management style adopted domestically seems to be taken to international markets in regards to sustainability, although with a slightly lower intensity. An interesting case that illustrates the challenges faced by transnational corporations in the internationalization of sustainability practices is Randon. For them the entry into any international market begins with three indicators: (1) the target market potential, (2) the entry mode (ex: acquisition, Greenfield, partnership) and (3) the business sustainability. According to the company, a business is only sustainable if it is economically feasible, socially fair, and environmentally respectful. In Brazil, Randon aims to exercise these principles as well as they can. On the other hand, in the foreign market this transfer is gradual. This is mainly because the company must comply with local standards and adapt to the culture of the host country, besides understanding the risks and opportunities in each region. In time, Randon takes its beliefs and experiences to other places, but this may require some time to mature. The company s recognition in Africa, for example, is a result of 20 to 25 years of persistent work 34. Another highlight on graph 13 is that the most developed sustainability practices in the international market are: diversity consideration in the hiring process, with an average of 3.8, and employee training, with an average of 3.6. This suggests a concern with foreign human resource management, being a critical factor of success. The third most developed practice is the philanthropy, followed by a set of practices focuses on reducing negative environmental externalities with regard to production, energy consumption, and waste generation. Embraer is a transnational that has adopted innovative practices to reduce the impact of its products. The company seeks to build lighter plane structures as a way to reduce fuel consumption. In addition, they created the first Alcohol-powered plane, which is a 100% renewable biofuel. As a result Embraer won the SciAm 50 award from Scientific American in 2004, for developing one of the top 50 innovations of the year. Currently, Embraer is conducting a study along with the General Electric and Azul in order to launch a flex-fuel, which will enable to use the biodiesel in aviation Research data, in depth interviews and 35 Research data, in depth interviews and

40 Graph 14 shows the overall results (social and environmental dimensions) of sustainability practices of the BTNCs both internationally and in the domestic market. 5 Graph 14. Sustainability practices abroad Domestic Market 2 International Market 1 Social Practices Environmental practices 1 = Not developed / 5 = Very developed As noted earlier, there are no major disparities between domestic and international sustainability practices, and graph 14 illustrates that differences between social and environmental actions are not significant as well. The companies concern with employees and the adoption of corporate social responsibility practices, on the light of Brazilian historical tradition helps to explain why social aspects are slightly more developed. Yet, the Brazilian environmental regulations, as well as a growing concern about this issue in the country, contribute to balance the two pillars. Together, these results support the conclusion that multinationals have taken abroad their sustainability policies and concerns, making the necessary adjustments to overcome the challenge of operating in the international market.

41 Some aspects of these trends are noteworthy. By aggregating the data by industry, the 2011 ranking identified that BTNCs companies in natural resources industry have, on average, higher rates of sustainability practices abroad, as the graph 15 shows. A logical explanation is the high level of impact caused by the sector, what implies a greater sense of responsibility towards society and environment. In addition, BTNCs in this industry are usually large companies with extensive experience in Brazil and worldwide. 5 Graph 15. Sustainability Practices abroad - by industry Environmental Practices Social Practices 2 1 Natural Resources Manufacturing Services 1 = Not developed / 5 = Very developed Two relevant examples of BTNCs in the natural resources sector are Petrobras and Vale. Petrobras commitment with the quality standards in Brazil is taken abroad. The company has a major concern with health, environment and security, providing all the necessary investments in this direction, being responsible and balancing their actions 36 (44). Vale also adopts sustainable practices in all places where it operates. The need to deal with the impacts of its mining operation increases the role of sustainability in the company, which operates from three pillars: (1) as an sustainable operator, Vale seeks sustainability of its operations from conception to its eventual closure, (2) as a catalyst for local development, the company promotes partnerships with government and society in order to build a sustainable regional legacy, and (3) sustainability as a global agent, Vale supports good practices worldwide. In addition to having specific departments to deal with this 36 Research data, in depth interviews and

42 matter, the company believes that each area must act in a sustainable way, seeking to extend these principles in all its actions 37 (45). Another important issue investigated by the 2011 Transnationality Ranking is the perceived benefits of sustainable practices. More and more sustainability is being perceived by companies as a fundamental part of its strategy, and this approach requires a clear understanding of the interactions among the economic, social and environmental dimension. Interestingly, having the relationship with stakeholders and the company s image or brand value improved are the most relevant benefits according to BTNCS, followed by the generation of competitive advantage (see graph 16). As expected, the degree of perceived benefit is slightly higher in the domestic market, yet it is possible to identify very similar trends in international market. Graph16. Benefits of sustainability initiatives 1 = No benefit / 5 = Great benefit Enhanced stakeholder relations Improved company image or brand equity Source of competitive advantage Product, service, or market innovation Business model or process innovation Domestic Market International Market Effective risk management Employee satisfaction and retention Cost savings New sources of revenue or cash flow The main benefits perceived by BTNCs confirm that sustainability enables companies to achieve superior return through both risk management and by creating new opportunities, even if indirectly. Some companies have reported, for instance, that their sustainable 37 Research data, in depth interviews and

43 investments work as a preventive action, since not having problems with stakeholders is already a great benefit. That is, sustainability helps preventing and managing sociopolitical risks in companies field of work. Furthermore, some companies claimed to have been invited to operate in other countries as a result of their good image, since they developed sustainable practices in countries they previously operated. This bonus can therefore be interpreted as a source of competitive advantage, demonstrating that sustainability can also generate new business opportunities for companies. These benefits were considered relevant for companies operating in the natural resources industry, (see graph 17). According to companies, the adopting sustainable practices abroad is very important when the operation has social and environmental impacts. And although some companies reported that shareholders not always consider sustainable commitment when making investment decisions, this concern may eventually make a difference. Graph 17. Benefits of sustainability practices - by industry 1 = No benefit / 5 = Great benefit Enhanced stakeholder relations Improved company image or brand equity Source of competitive advantage Product, service, or market innovation Business model or process innovation Natural Resources Manufacture Services Effective risk management Employee satisfaction and retention Cost savings New sources of revenue or cash flow The results from the reveal, therefore, that both stakeholder management and sustainability practices are already incorporated on the agenda of multinationals. Despite the inherent challenges to the internationalization process, Brazilian companies have been taking their sustainable attitude abroad, what is seen as a differential in an increasingly globalized world.

44 CONCLUSION The 2011 ranking and sustainable growth abroad The showed that the economy recovery contributed to the international movement of Brazilian companies. BTNCs have, in general, increased assets, revenues and employees abroad, besides the clear domestic growth. In addition, there have been several acquisitions and greenfield entries, enabling access to new markets and growth opportunities. The appreciation of the real against the U.S. dollar has affected firms that operate primarily through sales offices to support exports of products manufactured in Brazil. An alternative found by some companies was the internationalization of its production line, taking advantage of relatively cheap assets in developed markets. This strategy has also been used in order to maintain the competitiveness of some companies in the Brazilian market, which reinforces fears about a possible denationalization process of Brazilian industrial production. Even with all the well-known competition challenges, Brazilian companies managed to increase profit margins both in the domestic market and abroad, what was also clear by their levels of satisfaction with performance. For the first time, the financial and operational results achieved are practically identical in both scenarios. Beyond the resumption of business, this evidences a special ability of companies to deal with uncertainties and to adopt strategies to increase efficiency and reduce unnecessary costs. One of the ways that transnational companies have found to increase their competitiveness and boost operational efficiency is to invest in relationships with all its stakeholders, gradually taking their sustainability practices to foreign markets. As a result, Brazilian companies have enhanced competitive advantage and clearly improved its image abroad, avoiding conflicts with the various stakeholders involved. Not to mention contributions to social development and environment preservation in the countries where BTNCs operate. The 2011 Ranking shows a scenario of "conscious expansion" since the foreign direct investment decisions of some companies are only taken after a careful planning and analysis of financial, social and environmental impacts. This shows the maturity of Brazilian companies to conquer place in the world and, at the same time, preserve it.

45 FRANCHING SPECIAL EDITION Introduction and methodology Brazilian companies have used different types of activities abroad. As the 2011 Transnationality Ranking showed, some companies, depending on their industry and strategic objectives prefer to open commercial offices to support sales from Brazil, whereas others avoid transport costs by exporting parts of products and finalizing those in foreign markets. Some others see opportunities for acquisition or opening of production plants to carry out all stages of the value chain in the country of destination. Services providers usually have a support branch and displace its staff, whether for operations or for direct contact with customers. Another type of internationalization that has attracted attention of Brazilian companies, especially those who already work with this model in Brazil, is franchising. This industry has shown an amazing growth in recent years. According to the Brazilian Franchising Association 38 the number of networks grew from 600 in 2001 to 1,855 in 2010, an increase of 209.2%. The number of franchised units in Brazil rose from in 2001 to in 2010, an increase of 69.3%. With the maturing of the industry, companies also began to see opportunities for franchising abroad. However, the internationalization of franchises requires unique strategies and involves different challenges if compared to business units operating on their own, through direct investment abroad. Franchising entails the transfer of intangible assets like brand, knowhow and business system to a third party, the franchisee. In return, the franchisor collects royalties, and/or additional charges and/or sells its products to the franchisee. Thus, new research questions arise and require new metrics to understand this modality. The questions made are: How do Brazilian franchises internationalize? What is the outlook for their international operations? Which markets do they seek? What are the major difficulties encountered? What are the most internationalized franchising networks in Brazil? In order to answer these questions Fundação Dom Cabral (FDC) is launching a new study in Brazil: The Transnationality Ranking of Brazilian Companies Franchising Special Edition. 38

46 For such, the International Business Center at FDC developed a methodology to reflect the reality and the internationalization degree of companies that adopt the franchise system. From studies on the subject and discussions with experts on the field, four indicators were reached in order to measure the foreign presence of the franchising networks relative to total: - Franchised units: franchised units abroad/ total franchised units. - Revenues from royalties and fees: foreign revenues from royalties and fees / Total revenues from royalties and total fees. - Revenues from products sold (if there is any): revenues from products sold to franchisees abroad / total revenues from products sold. - Revenues from wholly owned units (if there is any): revenues from foreign wholly owned units / total revenues from wholly owned units. From the data provided by the companies, the average of the four indicators is calculated in order to get to the transnationality index of franchising networks. The franchised units indicator assesses the number of units abroad in relation to the company s total units. The indicator revenues from royalties and fees evaluates the financial results of company abroad, in relation to the total. However, personal interviews with some companies revealed that each country s legislation vary in regards to royalties and fees, which often complicates the company s adjustment to the regulation of each market. Instead, some firms choose not to charge royalties from its franchisees, and as a counterpart they charge on products sales or fees for establishing the franchise agreement. With that in mind, we added the item revenues from products sold in an attempt to encompass companies that operate in a differentiated system in which franchisees exclusively buy certain products from the franchising network, for instance, shoes and clothing or teaching materials. Finally, revenues from wholly owned units was used in order to identify and value the companies that work with a dual system based on franchising and wholly owned units. In the last two cases the answer was optional, because it does not apply to some companies in the sample. The companies were contacted by a team of researchers from Fundação Dom Cabral and asked to answer a questionnaire with information regarding their international activities in The following pages show the results.

47 The 2011 ranking of the most internationalized franchises The following table shows the 2011 ranking of the most internationalized franchises: Table Transnationality Ranking of Brazilian Franchising Networks - by index Position Company Primary Industry Transnationality Index Units Royalties and total taxes Revenues from products sold Revenues from wholly owned units 1 Via Uno Personal Accessories and Shoes LinkWell Communication Showcolate Food Localiza Car Rental Fábrica di Chocolate Food Spoleto Food Escolas Fisk Language School Vivenda do Camarão Food Koni Store Food Arezzo Personal Accessories and Shoes Hering Apparel Marisol Apparel Morana Personal Accessories and Shoes Puket Apparel Giraffas Food Via Uno is the most internationalized franchising network in Brazil. The manufacturer of footwear and accessories is primarily focused on female audiences and operates abroad through franchises and wholly owned units. Out of Via Uno s 276 total units, 116 are abroad, distributed in 20 countries: Argentina, Chile, Peru, Colombia, Panama, Venezuela, Mexico, France, Spain, Italy, Portugal, Australia, South Africa, Philippines, United Arab Emirates, Jordan, Guadeloupe, Dominican Republic, Costa Rica and Cuba. With over 20 years of experience, the company exports shoes to more than 100 countries and finds wide acceptance of the Brazilian brand abroad. Despite the unfavorable exchange rate between 2009 and 2010 the company managed to increase its sales volume, reaching a 28.6% growth in revenue from products sold to franchisees abroad 39. In the second position is Linkwell, a company from the corporate image and graphic solutions industry. The company from Paraná started the franchising system in 2006 and is 39 Research data, in depth interviews and

48 present in seven Brazilian cities. In addition, the company has franchisees in the United States and France, as well as wholly owned units corresponding to 40.6% of its revenues 40. In the third position is Showcolate, which opened in 2003 in Belo Horizonte, Minas Gerais, bringing the concept of express fondue. Two years later, the company expanded to the U.S. and Portugal and in 2006 it entered Spain. Showcolate has more than 40 units in operation, and has recently established new franchise agreements in Oman, Dominican Republic and Colombia 41. In the fourth position is Localiza, a car rental company founded in 1973 with a fleet of six Beetles. During the second oil shock, in the 1980s, the company sought to expand through acquisitions of domestic competitors. In total, 11 companies from northeastern Brazil were bought. In the midst of economic instability Localiza developed a franchising focused strategy as a way to expand its market presence and strengthen the brand. In 1991, the franchise system expands abroad and today, the company operates in seven Latin American countries with more than 200 agencies in total 42. Another highlight is Spoleto, created from the partnership of 2 friends who launched a new concept of fast food: the client chooses the ingredients and assembles the dish, mainly of pasta, as desired. The first store is opened in 1999 in Rio de Janeiro and in two years they decided to expand through franchising given the high demand. Today the company has over 200 restaurants in Brazil, as well as stores in Mexico and Spain 43. Created in São Paulo in the 1950s, Fisk Schools was idealized by an American entrepreneur later Brazilian naturalized. Because of its teaching methodology developed for Brazilian students, the interest in the school started to grow and by 1962 the first franchise was opened. The expansion to the international market began in Buenos Aires, Argentina in the 1980s. Today, there are schools in North America, South America, Africa and Asia, reaching close to franchises 44. Vivenda do Camarão started its operations in 1984 in São Paulo with the concept of selling express dishes with shrimp. In 1997 the company joined the franchising model and is now present in Paraguay and Dominican Republic 45. Another example of a company seeking to internationalize through franchises is Tostare. The cafeteria is seeking to differentiate both in Brazil and abroad, by its product quality, expertise in the art of serving coffee and by valuing the franchisee. Tostare is not 40 Research data and 41 Research data and 42 Research data and 43 Research data and 44 Research data and 45 Research data and

49 among those classified for this year s ranking because they have just established a franchising contract abroad: February 2011, in Luanda, Angola 46. Geographical dispersion of Brazilian franchising networks The next table shows the geographical dispersion of franchising networks around the world: Table 11 - Geographical dispersion of Brazilian franchising networks Total of South Central North Position Company Europe Asia Africa Oceania Countries America America America 1 Via Uno Showcolate Fábrica di Chocolate Localiza Escolas Fisk Hering Arezzo Marisol Morana Vivenda do Camarão LinkWell Spoleto Giraffas Koni Store Puket 1 1 Via Uno is the company with the greatest geographical dispersion, with franchises and wholly owned units in 20 countries in all regions analyzed. Initially, the company operated abroad via exports, sales representatives or distributors. Later, it chose 10 markets where it wanted to operate according to their purchase potential and brand acceptance. Therefore, customer s identification is focused on selected countries, mostly in Latin America and Europe. Yet, Via Uno has recently diversified its locations, opening four stores in Australia via franchising in The second company with a wider geographic dispersion is Showcolate with franchised units in 13 countries. Also, Fábrica di Chocolate, from the same sector, was founded in 46 Research data and 47 Research data, in depth interviews and

50 2003 in Santa Catarina, and has altogether 37 units present in eight countries: Mexico, Venezuela, Dominican Republic, Puerto Rico, Spain, Japan, Australia, and New Zealand 48. Subsequently is Localiza present in seven countries and Fisk School in five countries from four regions. Hering, a company created in Blumenau in 1880 by a German family, started exporting in 1964, the same year as its IPO. Today the company has more than 400 franchised units in total, some of them in Bolivia, Paraguay, Venezuela and Uruguay 49. Arezzo, in the footwear industry, was founded in 1972 as a family business originally from Belo Horizonte, Minas Gerais. In the 1990s the brand begins its expansion phase with more aggressive investments in franchising and in R&D. Still aiming its expansion the company decided to relocate to the state of Rio Grande do Sul keeping its shares trading in São Paulo. Today, the company has 267 franchises spread across 140 cities and 29 wholly owned stores. Outside Brazil Arezzo has seven stores distributed in Bolivia, Paraguay, Portugal and Venezuela. The graph below shows the location of the companies foreign franchises: Graph 18. Geographic Dispersion of Brazilian Franchising Networks Asia 9% Africa 3% Oceania 4% South America 43% Europe 14% North America 11% Central America 16% 48 Research data and 49 Research data and