The recent election of Dilma Rousseff has been accompanied by varied reactions. One of them caught my attention, that of the ETH CEO, who claimed Dilma will strengthen National Champions and his company was ready to be one of them.
The idea of national champions is often associated with development economists as opposed to monetary theorists who for a long time ran Latin American economic policy. However there are many nuances involved that often escapes the unsuspecting.
Since Europe and the West led globalization, they never had to worry about creating their own national champions that will dominate the globe. It was the follower nations that had to worry. Korea and Japan are examples. Latin American economists seize on these examples on how National Governments nurtured their firms through protectionism. However they forget a major difference. These firms were exposed to international competition the way most Latin firms are not because they were usually operational in export led, value adding industries, unlike investment heavy process industries. We recognize Japanese cars and cameras, Korean white goods, where competitiveness was defined as a skill and not as priveleged access to resources.
Latin American like Telmex and Cemex have grown by seeking concessions in their home markets by increasing prices, persuading the Government to give them a monopoly status and avoid competition. Their expansion in to other markets have also relied on either similar markets where Capital intensity and scale will provide competitive advantage or their ability to form a Oligopolistic arrangement. The cement price increases in multiple markets where G3 ( Cemex, Lafarge, Holcim ) market shares reach 80-90 % is legendary. As a result, their ability to compete in truly competitive markets is limited.
In India and China, no single firm holds more than a reasonable market share in industries where they have created Global champions. IT services is very fragmented in India, and so is Pharmaceuticals. Capital Goods industry in China has many competitors. These Global champions are helped yes, by Government through promotion, tax incentives and some hidden subsidies. When they make acquisitions aborad and there are obstacles, Government does step in like when Mittal wanted to acquire Arcelor or Tata wanted to acquire Corus.
But at no point atleast in industries where they are competitive, Government tries to create a single large firm that represents the nation, effectively by reducing competitive intensity. Even in Japan, several companies like Sony, Panasonic, Mistubishi, Sanyo etc competed in the Camera industry for instance.
If Brazilian Government truly wants to create Globally competitive National Champion, it should act like a responsible parent- reward and protect your kids, but do not spoil them, demand they improve their grades and do their home work, demand performance. And often performance does not improve unless one is threatened by competition. If competition is reduced favoritism, corruption and in-efficieny sets in. That is the risk I am afraid of in the new Nationalistic Government by Dilma.
I am all for Nationalism provided it is accompanied by fierce competition among 7-8 National firms, and no one holding an oligopolistic prosition. Being a large market, the surplus needed to invest abroad can come from scale even if market share is smaller compared to say Sweden or even Italy. So by making sure market share is reasonable , one forces companies to also improve productivity in addition to achieving scale to generate surplus. Thus when they go abroad where they do not automatically have scale, their productivity will help them to compete.
