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Organizational Responses to Regional Integration Among MNEs in Latin America

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Abstract

  • Contingency theory predicts that companies facing increasing market integration within a region need to develop more centralized strategies that require greater harmonization of business structures, closer inter-subsidiary coordination and the adoption of managerial policies that support such an organization.

  • The political and economic reforms that took place in Latin America in the 1990s and led to greater market integration offer a natural experiment in which to study the response of multinational companies to changes in their competitive environment.

  • A survey of MNEs reveals that they undertook greater coordination of regional operations during the decade, as expected, but not along all dimensions and not always proportionally to the changes perceived by their managers. The linkages between different dimensions of perceived market integration and organizational responses are largely significant and in the predicted sense.

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Notes

  1. A measure of this globalization process is the ratio of total world trade to world GDP. This trade share of GDP remained essentially flat (below 10%) from the late 1940s until the Nixon shock of 1971 led to freely convertible currencies. It then rose dramatically to 21% by 1980. Next came the“lost decade” of oil shocks, rampant inflation, and currency crises that affected many countries during the 1980s, and the trade share of GDP remained at 20% by 1989. However, the rapid expansion of trade and foreign investment in the 1990s caused this ratio to rise to 27% by 2000.

  2. Doz and Prahalad (1991) state that contingency theory has been the most influential stream of organization theory to the study of diversified multinational companies, and they wonder whether that influence has been excessive.

  3. This strategy was first articulated by UNCTAD (United Nation’s Conference on Trade and Development) in the early 1950s. It was subsequently adopted and promoted by the Economic Commission for Latin America, an agency of the United Nations.

  4. These numbers correspond to an unweighted mean of the average tariffs imposed by 12 of the largest countries in the region accounting for over 90% of Latin America’s trade.

  5. Others included the 1993“G3” free-trade agreement signed by Colombia, Venezuela and Mexico; a free-trade pact signed between Mexico and Chile in 1993; the conversion of the Andean Pact from a custom union to a free-trade area in 1994; the Miami Summit in December 1994 proposing the creation of the Free Trade Area of the Americas; Chile and Bolivia signing association agreements with Mercosur in 1996; and so forth.

  6. By 2000, intra-regional trade accounted for the following percentages of national trade: Uruguay 55%; Argentina 49%; Brazil 26%; Colombia 22%; Chile 19%, Venezuela 17% and Peru 15%. The major exception was Mexico (3%).

  7. For Mercosur alone, intra-zone exports grew rapidly from less than 10% in 1990 to a high of 28% in 1998. However, the economic crises in 1999–2002 had a disproportionate effect on intra-zone trade, which dropped to 11.2% of total trade by the end of this period, only to recover partially in the 2003–2008 boom years to 14.9%. Annual increases in exports from Argentina to the other Mercosur partners were 27.1% from 1993 to 1998 (vs. an annual growth of 4.4% in GDP). Equivalent figures for Brazil were 13.0% for intra-zonal trade and 3.3% for GDP (IADB 2010).

  8. Data come from various reports by UNCTAD, The Economist and the U.S. Department of Commerce. Cross-border mergers and acquisitions by Latin American firms also increased dramatically during this period, from less than $ 5 billion in 1991 to over $ 60 billion in 2000 (Thompson Financial, Latin America Research Group).

  9. Other reforms such as price liberalization were implemented in many industries, tax evasion was vigorously fought and collections accelerated, while greater transparency was introduced into hitherto-closed governmental procurement processes. Inflation abated dramatically in most countries and indices of economic freedom such as those published by the Frazier Institute in Canada or the Heritage Foundation in the United States showed rapid advance as compared with similar scores of a decade earlier. Other critical reform processes, however, proved to be resistant to change. Labor market rigidities, civil service privileges, judicial system reform, official corruption and personal insecurity remained nearly intractable problems of Latin American society. Subsequent crises in Mexico (1994), Brazil (1998), Argentina (2001) and Venezuela (2002) proved that much work remained to achieve stable growth in the region.

  10. Carrefour, the first to operate in Latin America, entered Brazil in 1975, Argentina in 1982, Mexico in 1994, and Colombia and Chile in 1998. Wal-Mart entered Mexico in 1990, Brazil in 1995 and Argentina in 1996. Royal Ahold followed an acquisition strategy buying Bompreço in Brazil in 1996, Disco in Argentina and Sta. Isabel in Chile, both in 1998, and La Fragua in Central America in 1999 (Company annual reports).

  11. For a history of foreign investment in the region see, for example, Grosse (1989). MNCs participation in the region increased across all sectors and countries during our study period; they accounted for 220 of the region’s largest 500 companies in 2000, versus 135 in 1995. Robles, Simon and Haar (2003) provide a comprehensive look at the recent trends in the region and their implications for corporate strategies among both MNCs and local companies.

  12. A second set of hypotheses related to the changes that these firms have implemented in their coordination and integration policies during the decade as a response to the perceived changes in environmental conditions were also developed and tested. Given space constraints we report only on the first set here.

  13. Although not exhaustive (e.g., Miami’s World City Directory alone includes 750 company headquarters in South Florida with responsibility for Latin American operations), we feel that the final list was representative of all major firms across a wide range of manufacturing and service sectors. Listed firms involved in trading and export-import services were excluded from the sample for lack of substantial operations within the region.

  14. The authors would gladly supply copies of the full questionnaire in all three languages upon request.

  15. Latin American countries do not fare well in this index. None appear among the top 20. Panama ranks highest (#30), followed by Costa Rica (#39), Chile (#43), Mexico (#49), and Colombia (#50).

  16. For example, when asking about the R&D intensity of the sector, the questionnaire scale provided a specific range in terms of R&D expenses as percent of sales for each point in the scale.

  17. Whenever the responses raised doubts on the reliability of the data for the earlier period the company was contacted by telephone to clarify. If no satisfactory explanation was given for the source of 1990 data, the observation was dropped.

  18. As reported by Latinobarómetro, a regional political polling organization, economic integration is one reform that continues to gather significant popular support in all countries in Latin America (The Economist 2009).

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Acknowledgements

The research assistance of Paulo Albuquerque and Charlotte Ren, at the time PhD candidates at the Anderson School at UCLA, and Ivo Pereira at ISCTE is gratefully acknowledged. Nancy Hsieh and Jenna Radomile provided extraordinary help in generating questionnaire returns. Financial support was provided by UCLA’s Center for International Business Education and Research and by Portugal’s Foundation for Science and Technology (FCT-PTDC/GES/72859/2006). We are grateful for comments at seminars held at the Wharton School, UCLA Anderson, Baruch College, Harvard Business School and the U. of the West Indies, as well as by two anonymous reviewers and Anthony Roath, co-editor of this Special Issue. All errors are ours alone.

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Authors and Affiliations

  1. J. K. Batten Chair in Strategy, Emeritus, Florida International University, Miami, USA

    José R. de la Torre

  2. ISCTE Business School, Instituto Universitário de Lisboa, Lisbon, Portugal

    José Paulo Esperança

  3. ESE, Universidad de los Andes, Santiago, Chile

    Jon I. Martínez

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  1. José R. de la Torre
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  2. José Paulo Esperança
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Correspondence to José R. de la Torre.

Appendix: Interviews with Three MNEs Operating in Latin America

Appendix: Interviews with Three MNEs Operating in Latin America

Caterpillar

“The main change for us in Latin America is the enormous growth our business has experienced in the region over the past two decades. The economic resurgence of countries such as Brazil, Mexico, Chile, Peru and Colombia, for example, has meant that our sales have increased several fold since the mid-1990s (they tripled in just the past six years!). This has meant that Latin America commands a lot more respect at headquarters today than it did when the business was characterized by a “yo-yo” economic performance and permanent currency crises. As a result, we have expanded capacity dramatically in the last few years.

“Our Mexican plant is more integrated into the North American markets. Our Brazilian plant was originally conceived to supply 50% of its output to South America and the rest to other Caterpillar locations throughout the world. Now, in spite of several large expansions, it is mainly focused on growing regional demand, plus it makes three product lines developed in Brazil for the world markets.

“Our dealers in the region used to be very domestic oriented due to the many country restrictions. We used to work with them on a country-by-country basis. Now, as international competition has increased and trade agreements and markets have expanded, there is a very different attitude among them. We meet regularly to exchange best practices and to plan new strategies for the region and not just for one country.”

José Brousset, Regional Director, Latin American Division

Nokia

“Ours is a relatively new industry, barely 20 years old, so that changes in Lain America have paralleled our own development. We have seen a real boom in the past 5 years and the large markets of Brazil and Mexico deserve special attention, but we’ve had good experiences in other countries such as Chile, Colombia, Costa Rica and Panama.

“We operate two major manufacturing operations in the region—Manaus, Brazil, and Reynosa, Mexico. The former supplies most of the region whereas the latter supplies both the US and the region. Although we have considerable tariff advantages from these plants (for example, Brazil can export duty-free to Argentina, and Mexico has numerous free-trade agreements with other countries in the region), Latin America is still subject to populism and protectionism. Recently, for example, the Argentinean government has decreed that unless we manufacture products in Tierra del Fuego, all telecom companies will have to pay an incremental excise tax of 20–30% on imports, regardless of provenance.

“Our sales and distribution operations are mainly domestically focused, although some support functions transcend national borders. We do coordinate marketing campaigns and product offers to the two largest operators in the region—Telefónica and América Móvil—and we try to harmonize our consumer campaigns through regional guidelines. In addition, we often move executives from the countries to regional offices here in Miami and back, and sometimes we tap key talent in one country for promotion to another country, even outside the region.”

Olivier Puech, Vice President, Nokia Latin America

Novartis Pharmaceutical Corporation

“The pharmaceutical industry has changed dramatically in the last 20 years. The need to insure compliance at an ever increasing level has forced greater centralization of many critical processes such as product development, pricing, product positioning, promotional messaging, advertising, manufacturing, treasury, legal and tax issues, etc. Whereas in the 1970s and 1980s a country manager would get budgetary approval and report back a year later on results, now all these processes are subject to close and continuous scrutiny at a global level. The degree of entrepreneurship at the local level needs now to be balanced with the need for global consistency. Just as good, as the harmonization of policies across markets means that you can move people from country to country and, aside from certain local idiosyncrasies, the way to do business is very similar. This contributes to the interconnectivity of talent. We now have large numbers of Latin American executives in senior positions, not only in their home countries, but also in the region and globally.

“Prior to 1990 import substitution policies dictated that most pharma companies had to invest in small manufacturing operations in virtually every country in Latin America in which they operated. Unless you did so, you were at a disadvantage in tenders, were denied import licenses for critical finished products or were subject to draconian price controls. With the liberalization came a radical transformation of these arrangements. The industry either closed inefficient plants, or sold them to local manufacturers (which increased the quality standards of domestic industry substantially), or scaled them to satisfy regional demand. Mexico and Brazil were the main beneficiaries of this process as they typically had the largest plants.

“The biggest change of the past two decades is in terms of how we approach planning and investment in the region. In the 1980’s it was customary to have a 3 or 5-year horizon at best, due to the prevalent volatility conditions in Latin America and the poor protection to intellectual property at the time. Currently, we look at the region for the long-term and Latin America is a critical component of our emerging markets strategy. We also have created management clusters for back office functions in areas such as logistics, supply chain management, IT, customer relations management, call centers, new business development and the like (areas where there is no direct customer interface). Experimentation with new policies and ideas can occur in any country (often the smaller ones are better suited to do this in a controlled way) and, if successful, we can cascade results to other countries.”

Carlos García, Regional Head, Latin America

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de la Torre, J., Esperança, J. & Martínez, J. Organizational Responses to Regional Integration Among MNEs in Latin America. Manag Int Rev 51, 241–267 (2011). https://doi.org/10.1007/s11575-011-0073-4

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