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Multilatinas in the Global Multilatinas in the Global Economy:Economy:

Trends and IssuesTrends and Issues

OECD Expert Meeting

Paris March 27th 2006

Javier SantisoChief Development Economist & Deputy Director

OECD Development Centre

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The emerging multilatinas: a global The emerging multilatinas: a global trend and a global issuetrend and a global issue

The value of outward FDI stock from developing countries rose from $130 billion in 1990 to $860 billion in 2003.

South-South FDI accounts for one third of all FDI going to developing countries. These flows increased from 15 USD billion in 1995 to 50 USD billion in 2003.

In most cases, these deals involved direct investment in other developing countries. But South-North FDI is also on the rise up from 1 billion in 1995 to 7 billion in 2003.

In 2005, more than 50% of the M&A operations in Latin America have been driven by local firms. In Argentina, 60% of the 62 M&A operations conducted in 2005 8USD 3,5 bn) have been driven by local capital (36% from Brazil).

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According to the main stream of international business literature on the topic of multinationals from emerging countries, there are generally five motivations for multinationals to invest abroad;

They seek resources, technology, markets, diversification, and strategic asset (e.g., Dunning, 1993; Khan, 1986; Wells, 1983).

This strategy tend to pay: EMNCs on average perform better than their respective country market indices, a widely used EM benchmark, S&P500 and, global market index (MSCI-World) during the period 1996-2003 (Aybar et al., 2005).

These firms on average earn 13.21% return on assets, 8.97% return on equity, and 11.96% return on invested capital.

Emerging multilatinas and emerged Emerging multilatinas and emerged multinationals: more of the same?multinationals: more of the same?

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-3.000

-1.500

0

1.500

3.000

4.500

6.000

7.500

9.000

10.500

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Brasil MéxicoSource: UNCTAD

Foreign Direct Investment from Mexico and Brazil (in USD)

Brazilian and Mexican Firms have Brazilian and Mexican Firms have started to expand overseas only started to expand overseas only

recentlyrecently

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Number of firms in Forbes 2000

0

5

10

15

20

25

30

35

India Spain China Brazil Mexico Chile

Source: Forbes 2000

The emerging The emerging multilatinas: multilatinas: A lonely Brazilian and Mexican race? A lonely Brazilian and Mexican race?

The 50 more profitable firms19

16

7

3

1 1 1 1 1

0

5

10

15

20

Brazil Mexico Chile Argentina Colombia Ecuador Panama Peru Venezuela

Source: America Economia 2005

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Top 100 firms in Latin-America45

40

8

31 1 1 1

0

10

20

30

40

50

Brazil Mexico Chile Argentina Ecuador Colombia Peru Venezuela

Source: America Economia 2005

Brazilian Firms have started to expand Brazilian Firms have started to expand overseas: global or pure regional overseas: global or pure regional

players?players?

Rk Firm Sector Exports04 (US$ Mill) % of sales % of sales

3 Petrobras Petroleum 6.728,7 16,5 11,212 Vale do Rio Doce Mining 2.433,5 23,5 30,632 Grupo Votorantim Holding 1.544,6 26,6 18,948 Usiminas Steel 1.137,3 24,7 9,121 Gerdau Steel 1.066,7 14,4 11,663 Gerdau Açominas Steel 935,6 24,5 22,440 Telesp Telecom 821,7 16,4 -66 CSN Steel 746,6 20,2 20,2

144 CST Steel 611,9 31,9 53,594 Cemig Electricity 521,7 19,4 -20 Electrobras Electricity 487,2 6,5 -62 Embraer Aerospace 473,1 12,3 86,952 Ambev-CBB Drinks 437,6 9,7 -

208 Aracruz Celulose Paper 402,5 31,3 61,8102 Balgo Mineira Steel 391,6 15,5 -143 Cosipa Steel 363,2 18,8 33,531 Telemar Norte Leste Telecom 345,5 5,9 -16 Odebrecht Holding 320,2 3,9 -

Utility

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Why are Multilatinas expanding Why are Multilatinas expanding abroad?abroad?

Risk diversification versus market Risk diversification versus market seekingseeking

Push factors: Competition as a blessing in disguise.

Between 1991 and 2001, the ownership of the 500 largest companies in Latin America changed dramatically…

… With non Latin multinational ownership growing to 39% from 27%. The rising global competition pressured local Latin companies.

The most ambitious are aiming to compete with the world’s largest companies beyond Latin America. However to date only a very happy few local Latin firms have taken on the world or tried to create large multinationals.

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The cost of capitalThe cost of capital

Upon securing top positions at home, some Latin firms started to expand more aggressively abroad.

Typically they followed a multilatina cycle starting to increase exports to neighboring countries; then establishing alliances to obtain access to distribution channels; and subsequently setting up small operations abroad or making acquisitions.

But this ultimate stage hard to reach. With the exception of a very happy few (Cemex) multilatinas remain heavily constrained by the cost of capital to expand abroad.

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The Center and the PeripheryThe Center and the Periphery

Emerging Markets only represent 7% of MSCI…

… and 75% of world population.

… and 40% of world GDP.

The ratio of market capitalization / GDP is on average around 30% (80% in OECD countries).

More and more OECD companies are searching for yield in emerging markets. Some of them became true multilatinas (Spanish companies).

More and more non OECD companies are moving abroad and looking for M&A opportunities in investment grade countries. Mittal is only the tip of the iceberg.

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The biggest challenge posed by these up-and-coming rivals will not be in Western markets, but within developing nations. That's the arena of fastest global growth.

Through long experience working in a Third World commercial environment, companies such as India's Bajaj Group (transportation), Egypt's Orascom Telecom, and Turkey's Sabanci Holdings (packaging, tires) will have an advantage in supplying goods and services that are cheaper, simpler to operate, and more effectively distributed than those of many Western rivals.

But what about multilatinas moving ahead to tap the growing US-Hispanic market?

But what about M&A activity involving takeovers by non-OECD multinationals in OECD countries?

The Center and the PeripheryThe Center and the Periphery

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In recent years, South-South deals but also North-South and South-North deals have been growing in number and size.

Examples such as the merger between South African Breweries and Miller (and later the takeover of Bavaria by SAB Miller), the takeover of International Steel Group by Mittal of India, or the acquisition of the IBM PC business by Lenovo of China, bear testimony to the rapid emergence of true global players from emerging countries.

What are the main obstacles to increased flows of investment from developing to developed countries?

The Center and the PeripheryThe Center and the Periphery

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The search for global champions : a The search for global champions : a clash of civilizations or a brave new clash of civilizations or a brave new

world?world?

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Thank youThank youfor your attention!for your attention!