The role of market institutions is in part to reduce information and transaction costs and provide the predictability and certainty that market transactions require. Market imperfections are considered to be common in emerging economiesFootnote 1 and therefore the institutional perspective is particularly useful for explaining firm behaviour in these contextsFootnote 2 in general and in the case of multilatinas in particular.
According to the economic historian and Nobel Prize winner Douglas North,Footnote 3 institutions are ‘a set of rules, compliance procedures, and moral and ethical behavioural norms designed to constrain the behaviour of individuals in the interests of maximising the wealth or utility of principals’. Within the tradition of comparative institutional analysis, the ‘depth’,Footnote 4 permanence and durability of institutions are specifically emphasised.Footnote 5 This understanding of the aspects of institutions, however, stands in sharp contrast to the institutional measures used to perform much empirical analysis.
For example, variables listed in the International Country Risk Guide, such as law and order, bureaucratic quality, corruption, risk of expropriation by the government and risk of contract repudiation, appear to be highly volatile and lack the durability and permanence expected from institutional measures. Similarly, the World Bank index of government effectivenessFootnote 6 comprises subjective assessments of institutional quality and gives accounts of institutional outcomes instead of permanent rules, procedures and moral and ethical norms. This approach is also taken by the World Bank’s Doing Business initiativeFootnote 7 and by popular databases used by political scientists, Polity IVFootnote 8 and the POLCON index.Footnote 9 It seems that the variables that feature in these datasets can at best be interpreted as proxies for institutional outcomes, not institutions themselves. This important distinction, which is rarely taken into account, highlights the difficulty, if not the impossibility, of obtaining direct and faithful measurement of institutions.
Besides poor measurement, another major challenge to empirical institutional studies is endogeneity: most of the time it is hard to tell if institutions are the cause or the effect of some specific performance measure, such as GDP levels. While it is easy to recognise the positive correlation between favourable economic and institutional outcomes, demonstrating causality has proved difficult. A common strategy to tackle this problem is the use of instrumental variables, an applied statistics technique that is used to clarify the directionality of the relationship. The underlying question is usually whether better institutions, such as more predictable transaction rules, lead to higher levels of economic prosperity or whether rich countries with high GDP design better rules for market interaction. Unfortunately, it is not easy to find appropriate instrumental variables for institutions to prove the direction of causality. In the frequently cited work of Acemoglu, Johnson and Robinson,Footnote 10 for example, the authors explain current economic development in terms of differences in institutions, taking as their instruments settler mortality in colonial times, indigenous population density and legal origin.Footnote 11 This empirical strategy does not guarantee success, however, because the instrumental variable can be weak, as has been argued about settlers’ mortality.Footnote 12 Moreover, the interpretation of institutional outcomes as institutions is problematic. Thus, the methodological discussion in comparative institutional studies notes a need for better data and a clear distinction between institutions and institutional outcomes.Footnote 13 The approach taken in this book overcomes some of the shortcomings discussed here but is subject to others.
Self-reported perceptions of institutional outcomes are used to shed light on the largely under-studied internationalisation strategies of multilatinas. The specific internationalisation strategies of multilatinas are a result of both contextual and organisation-specific drivers. The self-reported perceptual data about the surrounding institutional context provide an opportunity to delve into strategists’ minds and also raise the question of a possible self-report bias.Footnote 14 Managerial perceptions about the institutional context are treated here as antecedents of organisational strategic behaviour, an approach that resonates with research conducted within the field of strategic management.Footnote 15 Capturing some of the institutional drivers on multilatinas’ internationalisation strategies is an ambitious endeavour. To simplify the task, a narrow focus was adopted and zoom in on the uncertainty that governments can bring to the business environment through two specific levers: price controls and the regime and enforcement of property rights.
Why focus on institutional uncertainty? Comparative institutional studies generally support the view that there are no universally superior market-supporting institutions. For example, both common law countries, such as the UK, and civil law countries such as France support advanced market transactions and facilitate the creation of value in their economies and societies. Market-based societies can even be facilitated by state planning and intervention, as is the case in China. Because there are multiple institutional designs that lead to market-supporting economic and social configurations, we have to be cautious about making mechanical and simplistic institutional transplants. However, no matter what the specific institutional arrangement, frequent changes in the rules of the game – that is, institutional uncertainty – are disruptive and damaging for market-based transactions. For instance, when companies can foresee and estimate the cost of dealing with institutional voids they are able to tackle the problem with a varying degree of success by employing non-market resources such as exchange of favours or even bribes. When the institutional problem introduces uncertainty in the total cost of company operation, however, enterprises are unable to estimate the cost of operation in a given market. This process has been studied in the case of corruption in foreign markets,Footnote 16 where it has been found that the arbitrariness rather than pervasiveness of corruption imposes most cost on investors, implying that the uncertainty associated with the institutional context is more damaging to economic transactions than ineffective but stable institutional designs. Because of the damaging effect of uncertainty on business dealings, we focus on government price controls and deficiencies in property rights regime and enforcement, as these generate considerable levels of uncertainty in the business dealings of multilatinas.
As stated earlier, institutions are the formal and informal rules of the game for doing business inside the borders of a specific country.Footnote 17 Because the quality of national institutions affects the costs of doing business, the relationship between institutions and emerging and developed country multinationals has been subjected to much attention.Footnote 18 When comparing emerging and developed contexts, both empirically and theoretically, authors have established that institutional characteristics such as political instability, corruption and arbitrary government interventions through taxation, pricing, exchange rates, production and ownership are much more prevalent governance characteristics in emerging markets.Footnote 19 Although most of these characteristics tend to be highly correlated, deficient property rights protection is probably the most basic and symptomatic of them all.Footnote 20 Well-defined property rights and their enforcement form the basis of all market transactions.
Unlike previous research that relies on secondary data to study the role of property rights and their protection by Latin American governments,Footnote 21 we rely on self-reported perceptions of institutional uncertainty related to both government price controls and property rights. For the purposes of our research we consider market-supporting institutions to be strong (i.e. predictable) if they provide appropriate conditions for doing business through the protection of property rights in general and the protection of intellectual property rights in particular (e.g. punishment of illegal imitation and non-infringement on intellectual property rights), as well as government abstention from using price controls. Weak market institutions are characterised by a high degree of uncertainty as they fail effectively to protect property rights against public and private infringement and introduce mechanisms for market interference through prices controls.Footnote 22
Table 8.1 contains evidence of the perceptions of managers of sixty-two of the largest Latin-American multinationals about the degree of institutional uncertainty associated with price controls and property rights protection. Individual perceptions are measured with a Likert scale, in which 1 indicates the lowest and 7 the highest degree of institutional uncertainty associated with each statement. The descriptive analysis shows that on average there is no acute perceived institutional weakness associated with government enforcement of property rights and price controls in the Latin American countries. The mean values for each of the questions range between 2.45 and 3, pointing to a rather low degree of perceived institutional uncertainty. The standard deviation in the responses is high, indicating that the perceptions of the managers vary significantly, even though most of them do not report acute preoccupation with institutional uncertainty in any of the six countries in our study.
Table 8.1 Managerial perceptions of key indicators of institutional uncertainty in home markets
| Mean | Standard deviation | |
|---|---|---|
| The government regulates the prices in your industry. | 3.00 | 1.765 |
| The risk of illegal imitation is high because of low protection of intellectual property rights. | 2.45 | 1.522 |
| The government enforces property rights in your industry. | 2.50 | 1.098 |
To grasp the degree of polarisation in the managers’ perceptions, we perform cluster analysis and group the answers. We report the group average perception of the home country institutional uncertainty in Figure 8.1.
Figure 8.1 Institutional uncertainty in the home country.
The data indicate polarisation in the perceptions of managers regarding the protection of intellectual property rights (e.g. product imitation) and price controls. One group of managers reports low perceived institutional uncertainty (the strong institutions group in Figure 8.1) while the other expresses perceptions of high institutional uncertainty (the weak institutions group). Importantly, all managers have rather similar perceptions about the ability of their respective governments to enforce property rights and do not see this as a major source of institutional uncertainty.
Figure 8.1 shows that a much more significant source of institutional uncertainty is price intervention by Latin American governments. Price interventions clearly limit multilatinas’ abilities to manoeuvre because government controls affect either the selling price of products or the input prices of resources like energy or raw materials. A number of Latin American governments directly or indirectly control the price of key resources in an attempt to limit inflation or secure the stability of public finances. Such interventions frequently hamper the ability of firms to allocate resources efficiently in their productive activities and introduce a lever through which governments can introduce huge disruptions in the operations of multilatinas. The main concern here is not price control per se, but the level of uncertainty that price control imposes on companies in the absence of credible government mechanisms to avoid abusing this lever for political reasons.
For a large number of multilatinas, product imitation represents an important source of concern and demonstrates government failure to deal effectively with the problem. Product categories that are especially vulnerable to imitation in Latin America are cement, alcohol, soft drinks, clothes, lubricants and pharmaceuticals. Multilatinas have significant exposure to imitation and perceive it as a key factor of institutional uncertainty.
Because previous research shows that institutional uncertainty can vary significantly from one country to another, data on the cross-country differences in the managerial perceptions of institutional uncertainty provide valuable insights. We explore the prevalence of perceptions of weak market institutions (characterised by high institutional uncertainty) and strong market institutions (characterised by weak institutional uncertainty) for our six Latin American countries and present the results in Figure 8.2. The prevalence of perceptions of strong market institutions is clearly present in Colombia. This result might seem surprising as in 2013, when the data were collected: Colombia, Peru and Mexico featured in the fourth quartile of the Heritage Foundation Property Rights International Index,Footnote 23 a rather unfavourable position. In the 2015 data from the same index, Colombia showed a marked improvement and fared better than Brazil in the country ranking of economic freedom. Arguably, the managerial perceptions of multilatinas and their managers’ predominantly positive attitudes towards the level of institutional uncertainty in Colombia in 2013 were indicative of a deeper and significant change in the institutional context that was reflected in international country rankings several years later.
Figure 8.2 Differences across countries on perceived institutional strength at home.
Chile, on the other hand, is frequently recognised as the undisputed regional frontrunner in supporting market-friendly institutions and the Heritage Foundation data on economic freedom confirm this. Our data collected in 2013, however, reveal that executives in Chilean multilatinas were remarkably sceptical about their government’s ability to suppress institutional uncertainty; the majority of them identified Chile as a country with weak institutions, a surprising perception given Chile’s status as a regional model with a working market economy. The executives’ scepticism was reflected in subsequent declines in international rankings, and – in fact – since 2013 Chile has shown a slight but steady decline in the index of economic freedom.
In the case of Brazil and Mexico, the managers of the largest multilatinas are split equally between one group that perceives market institutions to be weak and a second that perceives them to be strong. In both countries this split appears to be a strong signal of a gradual decline of the quality of market-supporting institutions and both countries have experienced a decline in the Heritage Foundation economic freedom index.Footnote 24
Our data on Peruvian and Argentinian multilatinas are somewhat limited and the results of our observations cannot serve as a base for a definite conclusion. Nevertheless, both Peruvian and Argentine executives express concern about institutional uncertainty. Ex-post, this appears to have been significantly more justified in the case of Argentina, which has seen a steady decline in economic freedom since 2011. The shift in political power at the end of 2015 and the election of a new president seems likely to change this, as numerous entrepreneurial and business personalities actively engaged in politics at that time.
A simple correlation between indicators of institutional uncertainty shows patterns of co-occurrence. In particular, perceptions of poor ability to prevent illegal imitation of products or services are accompanied by perceptions of strong price control and weakness in enforcing property rights (corr. = 0.68 and corr. = 0.73, p < 0.05, respectively). This result points to the complexity of the business environment for firms in Latin America, which under conditions of institutional uncertainty are pressed to respond simultaneously to challenges of a different nature that significantly limit their freedom and ability to generate economic benefits. This simultaneity of adverse institutional conditions also can be seen as evidence of the interconnected nature of institutional outcomes.
Our results also suggest that the executives in multilatinas do not share a common baseline against which to judge institutional uncertainty. As in previous research, we did not observe a strong correlation between the subjective perception of institutional uncertainty and the objective variable of market freedom.Footnote 25 For example, Colombian and Chilean executives clearly had different benchmarks, as most of them judged the Colombian institutional contexts to be strong and the Chilean weak, a judgement that does not correspond to the quality of the institutional environment of these countries when non-perceptual measures of quality are used.
More importantly, the data presented here suggest that the perceptions of multilatinas executives can help explain subsequent changes in the degree of institutional uncertainty in the region. Therefore, a systematic effort to collect data that are focused on these executives’ perceptions can add a valuable perspective for decision-makers working on issues of national and regional competitiveness and complement existing approaches. Multilatinas executives’ shared perceptions of the broader institutional environment are arguably good proxies for changes in institutional uncertainty because the connections between the economic and business elites in the countries of Latin America are particularly close, and frequently mediated by family ties. This puts the executives of multilatinas in a privileged position to notice and compare subtle differences between different institutional contexts and form well-informed opinions. For example, a study of the interaction between the economic and political elites in Latin America provides a detailed account of the consequences of these interdependencies on tax initiatives, highlighting the extremely privileged position enjoyed by the Chilean business elite as opposed to the comparatively weaker position of that in Argentina.Footnote 26
Any generalisation about institutions being similarly weak across Latin America is inappropriate. Chile still (2015) ranks seventh among the world’s most free economies, according to the Heritage Foundation, and even though the region shares many important common factors, such as religion, colonial background and language (with the notable exception of Brazil), the institutional outcomes differ substantially and complicate the task of performing a simple, comprehensive analysis. The perceptions of multilatinas executives can provide an informative shortcut by capturing all available information about the shifting degree of institutional uncertainty, tapping into sources of formal, informal, explicit and tacit information. This approach is not flawless, but it does contribute key insights into the understanding of how institutional contexts interact with economic decision-making in Latin America and to what extent this interaction affects decisions related to the internationalisation of business operations.
What is clear is that companies operating in Latin America, including the multilatinas, do so under significant degrees of institutional uncertainty and that many of their resources are employed in dealing with this contextual flaw instead of being used to strengthen their competitive position through innovation, customer responsiveness or production enhancement. The toll that legal uncertainty can take even on powerful global multinationals, to say nothing of multilatinas, is illustrated by the fact that Unilever Brazil, a leader in fast-moving consumer goods, employs more staff in its tax and legal department than in its marketing department. In such contexts firms necessarily channel much of their efforts towards building competitive advantage and creating innovative solutions in the costly and uncertain process that characterises their interaction with the institutional environment. Eliminating this waste can free up substantial resources and talent in the companies of Latin America and boost their competitiveness by employing them in more productive ways. In Chapter 9 we discuss strategically relevant resources whose quality could be significantly upgraded if multilatinas did not have to pay the price of dealing with institutional uncertainty.
Any research endeavour aimed at understanding the internationalisation strategies of multilatinas from a resource-based perspective requires information about the unique resources and core competences available in these organisations. One significant methodological feature of this chapter is that it uses a survey to gather this information, relying on the perceptions of top executives. This approach is advantageous because it provides direct perceptual measuresFootnote 1 for a number of important constructs for which there are no available objective measures, such as the degree to which multilatinas rely on non-market resources such as bribes and favours to compete in a foreign market. Perceptual measures are especially appropriate in such cases because managerial perceptions shape firms’ decision-making processes.Footnote 2 The use of perceptual measures also helps us to analyse the internationalisation of multilatinas by highlighting the priorities and challenges experienced by influential strategists, who might be considered key informants on the process of setting national competitiveness agendas in Latin America. Related to these, the resource base of multilatinas certainly reveals the realities faced by domestic competitors who do not pursue internationalisation strategies. After all, it is from this domestic base that multilatinas sprang into the international arena.
Following previous research,Footnote 3 a wide definition of resources was adopted to include all assets, capabilities, organisational processes, firm attributes, information and knowledge controlled by a firm that allow it to conceive and undertake actions in foreign markets. Because multilatinas are studied, distinguishing between market and non-market resources is especially critical. Market resources are the resources firms use to out-compete rivals in the market; examples include efficient production facilities, brand names and product innovations. Market resources can be technological and context-specific. Technological resources are transferable, knowledge-intensive resourcesFootnote 4 that allow firms to create superior products, improve existing products and gain effectiveness and efficiency in production processes; examples of these are R&D, patents and advanced production technologies. Context-specific resources are the business networks, brands or managerial market knowledge firms develop to fit into the unique market realities of their country of origin. Context-specific resources deliver the greatest benefits as sources of competitive advantage in a specific country or regional area. They cannot be transferred abroad at a reasonable cost and if they are transferred their value is greatly diminished, as their value is largely determined by unique local solutions. Food brands are a good example. Generally speaking, the food and beverage industry is highly culturally sensitive; different cultures have very different gastronomic practices and preferences for ingredients, colours, textures and cooking methods. This specificity affects the challenges these companies face when expanding abroad and the management of brands is only one aspect of this complex process. No matter how strong Alpina’s brands are in its home market in Colombia, there are serious questions about the market rationale of using the same brands in Ecuador, as consumers there have invested their trust in local brands for years and are largely unaware of the brands their Colombian neighbours buy from food retail outlets. In fact, the acquisition of local brands is one of the main reasons behind the successful internationalisation of Alpina in Ecuador. Choosing to use an existing local brand might not always be optimal but it certainly avoids building a new one from scratch, which is an extremely challenging endeavour in any internationalisation process.
While technological and context-specific market resources equip multilatinas to win in the market place, non-market resources are the tangible and intangible assets that are deployed to facilitate market transactions by reducing the frictions that the formal and informal institutions surrounding their business activities might cause. Previous research shows convincingly that firms use both market and non-market resources to compete at home and in the global arena.Footnote 5 The role of non-market resources is expected to be prominent among multilatinas because the institutional challenges surrounding them, particularly the substantial degree of uncertainty surrounding rules and enforcement, prompt companies to invest in facilitating mechanisms such as favour exchanges and bribes. This chapter analyses the evidence about the use of market resources and the discussion of the use of non-market resources by multilatinas is presented in Chapter 10.
Technological and context-specific market resources differ in a number of ways. First, while technological resources might be standardised on the basis of explicit knowledge, such as protocols or technical manuals, similar standardisation is difficult or even impossible in the case of many intangible context-specific resources such as brands or supply networks. Second, while legal mechanisms may be appropriate to protect technological resources (using patents, for exampleFootnote 6), applying the same mechanisms to protect context-specific resources, such as reputational capital, is difficult or even impossible. Present-day consumers and workers are highly informed and organised through social media, which have become venues where company boycotts are called on and off. In these circumstances company reputation is better protected by fast and effective public relations and media campaigns deeply embedded in the local context rather than by lengthy legal procedures. The case of leading Italian pasta producer Barilla is a dramatic illustration of how a reputational issue can affect a global brand. In 2013, Guido Barilla stated publicly that he favours traditional families, triggering a boycott of the company’s products by the lesbian, gay, bisexual and transgender (LGBT) community. In response, the company launched an effective media campaign that included an illustrated editorial in the New York Times.Footnote 7 The company was praised for the speed with which Guido Barilla apologised for his remarks. Barilla also moved on to create a diversity and inclusion board and contributed to LGBT causes.Footnote 8 This case vividly illustrates the means by which reputational capital is most effectively safeguarded. The Barilla story holds important lessons for multilatinas, firms whose competitive advantage is built in many cases on brand reputation.
Third, while technological resources are generally fungible across markets,Footnote 9 context-specific resources have low fungibilityFootnote 10 because they are developed for specific contexts. Fungibility is the property of assets to be equivalent at home and abroad. By design, context-specific assets lack this equivalence across different institutional environments.
Multilatinas that operate in comparable institutional environments but rely to a different degree on technology or context-specific resources face different costs of internationalisation and therefore follow a different strategic pattern. For example, if managers perceive that their company may lose its technological advantages because of the infringement of property rights, they have a strong incentive to defend the value of their asset as the property rights holdersFootnote 11 by choosing a host country with sound legal enforcement. However, because the protection of property rights in emerging countries is relatively weak, multilatinas that rely mostly on technological resources and fear imitation have incentives to avoid similar settings.
Multilatinas benefit from both technological and context-specific resources as sources of competitive advantage. Figure 9.1 shows mean values of multilatinas’ use of technological resources using a scale of 1–7, where the higher number indicates a stronger reliance on technological assets for building competitive advantage at home. The possession of advanced production technologies and own R&D units are the key technological resources under investigation here as these match best the technological sophistication of most multilatinas. Data for the period 1978–2001 show that out of a total of 2,636 Latin American patents, only 1,520 (56%) were owned by Latin American entities, the rest belonging to patent applicants outside Latin America, frequently multinationals from developed countries.Footnote 12 A remarkable exception here is Brazil with Embraco and Petrobras leading in the patent applications among multilatinas.
Figure 9.1 Technological resources as sources of competitive advantage for multilatinas.
Note: Mean values for technological resources as sources of competitive advantage in the full sample are M = 5.32 (S.D. = 1.99) for R&D and M = 4.81 (S.D. 1.77) for advanced production technologies.
It is worth noting that the average score of our sample for possession of advanced production technologies and R&D is greater than 4.5, indicating a higher than average reliance on technological assets as a source of competitive advantage, given our scale of measurement (1 indicating low reliance, 4 indicating neither high nor low, and 7 indicating high reliance). The mean value for advanced production technologies is 4.81 and even higher for own R&D, at 5.7. While recognising that patenting activity is very low in Latin America, it is important to note that as a whole the group of large multilatinas has some degree of technological sophistication. This result could be interpreted as a pledge by most multilatinas to create new knowledge and use it in the products or services they offer to build a source of competitive advantage away from generic resources and reliance on commodities. The diversity of the sample naturally leads to sizeable standard deviations for both advanced production technologies and own R&D units, suggesting that there are important differences in the degree to which individual multilatinas rely on technological resources for their business success. These differences can also be deduced from the country comparisons in Figure 9.1. The strongest reliance on own R&D centres is consistent with the leadership positions of Brazil and Mexico in patenting activity. Between 1968 and 2001 Brazil and Mexico had, respectively, 1,715 and 1,783 patents granted, according to the U.S. Patents and Trademarks Office,Footnote 13 and were by far the most prolific inventor countries in Latin America. Although data for later years are not immediately comparable, owing to the specificity of the reporting method, they appear to confirm the leadership position of these two countries. However, Argentina’s position is surprising. The country has had a strong tradition of invention activities, ahead of Venezuela but behind Mexico. It is possible that the prolonged period of political and economic uncertainty in Argentina since the turn of the century has reduced the reliance of its multinationals on own R&D. The contrast between Brazilian and Argentine multilatinas may also be because of differences between the economic sectors to which they belong. In Argentina, manufacturing, processing and agriculture represent a huge volume of economic activity, while in Brazil the main economic sectors include mining and biotechnology, industries in which the development of new knowledge is instrumental for building competitive advantage. Colombian and Mexican multilatinas also report high reliance on advanced production technologies as a way to build competitive advantage at home.
In general, all multilatinas report high reliance on own R&D or advanced production technologies as sources of competitive advantage. In the sample there is a positive and statistically significant correlation for the use of both, which suggests that multilatinas possibly look for synergies in the parallel development and use of both.
Researchers have distinguished between two classes of context-specific resources: created and endowed.Footnote 14 The former are the product of human action and intimately linked to the business strategy of the organisation. Examples are brands, networks, market knowledge or managerial teams. Endowed resources are created by random, historical or social circumstances and examples are abundant labour or the availability of natural resources such as oil and coal. Although endowed natural resources are context-specific, they are completely fungible; for example, crude oil and precious metals found in one place are completely equivalent to those found in a different place. They become context-specific through site specificity, that is, when they are available only at a specific location and moveable only at great cost.Footnote 15
Figure 9.2 reports top managers’ perceptions of the degree to which their companies rely on created context-specific resources such as managerial knowledge, brands and supply chain networks for building competitive advantage at home. Deep managerial knowledge of market forces, strong brands based on idiosyncratic features of their home markets, such as cultural identity, and networks of local suppliers that provide access to key resources all make multilatinas deeply embedded in the local context. Managerial knowledge of this context sits at the top of the created context-specific resources used by multilatinas. It is paradoxical that strategists claim global managerial knowledge is important for domestic market competitiveness, as in many cases this knowledge does not go beyond the boundaries of relatively small elite circles. The inequality and stratification of Latin American societies, coupled with a deficient education system, reproduce relatively stable social strata from the top ranks of which managerial talent is recruited. This process builds in a structural distance between top managers, their employees and customers and possibly precludes more innovative business approaches in many industries. As Fernando Fernandez, CEO of Unilever Brazil put it, ‘My managers know their customers but they do not experience their lifestyle’.Footnote 16
Figure 9.2 Created context-specific resources as sources of competitive advantage for multilatinas.
Note: Mean values for created-context-specific resources as sources of competitive advantage in the full sample are M = 5.16 (S.D. = 1.553) for Managerial knowledge; M = 4.82 (S.D. 2.33) for brands; and M = 4.94 (S.D. = 1.87) for supply chain networks.
The use of brands as a tool to gain domestic market competitiveness merits special attention because it is along this dimension that multilatinas differ the most. Brands as unique strategic resources are especially popular among Colombian multinationals but much less popular in Peru and Chile, as Figure 9.2 shows. Take the case of Totto,Footnote 17 a Colombian firm that became known for its bags and backpacks and currently sells fashion products to the youth market. Totto’s success can be attributed to managerial knowledge about the global market and a sophisticated network to assure access to raw materials. However, Totto’s strongest asset is its brand and the associated fresh and youthful product design, which is sold in many countries in Latin America and Europe.
Not all counties’ multilatinas rely so heavily on brands. For example, the approach of multilatinas in Mexico, Peru and Argentina is certainly conditioned by the industries in which they compete but they also have a strong strategic position in regional and global markets at a time when very large global brands and narrow niche brands have been putting pressure on middle-sized players, especially in fast-moving consumer goods. Multilatinas from these countries rely on managerial knowledge and supply chain networks rather than brands. In Chile and Brazil, reliance on all three types of created context-specific resources (brands, managerial knowledge and supply chain) seems to be balanced as their multilatinas do not show marked preference for one over the others.
Further analysis reveals a strong correlation between reliance on managerial knowledge and reliance on supply chain networks (r = 0.772; p < 0.05). This suggests that managers are able to integrate their market knowledge with their abilities to develop valuable local supply networks. The use of these context-specific assets appears to be an alternative to the use of brands as an essential strategic resource, an approach that certainly correlates with specific industries, such as mining, where brands have no relevance whatsoever. It is important to note that this reportedly high reliance on supplier networks comes at a time when leading experts are concerned about supply chain risk in Latin America.Footnote 18 The riskiest industries from a supply chain perspective are mining, agro-commodities, manufacturing and construction and the riskiest countries Brazil, Mexico, Colombia and Peru. Coincidentally, these are the industries to which many large multilatinas from these countries belong. The biggest sources of supply chain risk are labour rights, working conditions and legislation that makes investors liable for the misbehaviour of subcontractors. Local content and offset requirements, reputational risks derived from companies’ impacts on water reserves and biodiversity are central issues in the political agenda of many countries in the region. The most critically important issue, however, is still the capricious, uncertain and politically motivated enforcement of rules that impinge on the supply chain, creating institutional uncertainty, as discussed in Chapter 8.
The role of endowed resources is explored in Figure 9.3. The most remarkable aspect of the data is that managers of multilatinas report the least reliance on endowed resources for domestic competitiveness at a time when most observers would not see much merit in their operations if it were not for their access to labour or minerals. The crises in commodity pricesFootnote 19 certainly hit the biggest multilatinas hard but it is far from proven that their competitiveness, both domestic and international, is solely derived from their privileged access to raw materials. As the data imply, multilatinas can access a rich and diverse resource base, something that has not been widely acknowledged.
Figure 9.3 Endowed context-specific resources as sources of competitive advantage.
Note: Mean values for endowed context-specific resources as sources of competitive advantage in the full sample are M = 3.29 (S.D. = 1.46) for low-cost labour; and M = 4.66 (S.D. 2.31) for access to raw materials.
Figure 9.3 shows the cross-country differences in reliance on endowed resources as a source of advantage by large multilatinas. Mexican multinationals seem to be well diversified, relying to the same degree on oil and minerals and abundant and inexpensive labour. This level of diversification is not common in any other multilatina. Brazilian multinationals, for example, rely extensively on natural resources as a source of competitive advantage. Brazil is the homeland of Petrobras and Vale, which are two of the biggest global competitors in mining and oil.
In the majority of cases, low-cost labour appears to be a weak source of advantage domestically. However, this fact cannot be assessed without taking regional labour productivity into account as well. When these two factors are considered, labour costs also emerge as a weak source of global advantage.Footnote 20 According to a 2015 report by the Global Economic Governance Initiative at Boston University, manufacturing goods from Latin America face fierce direct competition from China. From 2008 to 2013, 75% of Latin American manufactured exports were directly threatened by Chinese manufactured products, compared to 83% between 2003 and 2008. According to the report, this 12% decline in the threat from Chinese manufactured exports could not be attributed to better labour productivity in the Latin American manufacturing sector, because China’s labour productivity outperformed it between 2000 and 2011. Moreover, specific country sectors, especially those with higher value added, sustained a serious blow in terms of international competitiveness.Footnote 21 Mexico’s household and office electronics sector (computers, televisions, radios and telecom equipment) contributed 14% of Mexico’s exports between 2008 and 2013, a fall from 22% between 2003 and 2008. Argentina’s vehicles sector – comprising cars, trucks, motorcycles, aircraft and ships – fell from 23% to 8% during the same periods, and Peru’s clothing sector decreased from 47% to 33% of its exports.Footnote 22
In fact, the sizeable Chinese demand for natural resources in Latin America over this period is the most plausible explanation for the declining trend in the direct threat Latin American exports face from Chinese goods. Latin American exports to China are almost entirely concentrated in agriculture and extractive industries (China imports only 2% of Latin American manufacturing exports). Because Chinese imports from Latin America represent 15% of the region’s agricultural and extractive exports, they also generate fewer jobs in the local economy and have a greater environmental footprint than other exports with higher local value added. These facts are frequently discussed in conjunction with regional regulatory policies on minimum wages, which all six countries studied here have. Despite these regulations, countries such as Mexico where, according to our data, the domestic competitive advantage is significantly reliant on low labour costs, exhibit only low wage increases.Footnote 23
The competitiveness issue raised by the data on Latin American exports and multinationals’ key resources should be discussed in conjunction with viable and actionable measures, such as industrial policies.Footnote 24 Industrial policies are interventions that pursue objectives unattainable by reliance on pure market forces; they often establish goals, such as increase in competitiveness, growth and productivity, supporting them through innovation, employment or the production of high value-added goods. There is no broad agreement on whether industrial policies achieve their goalsFootnote 25 but the implementation of even the best-intentioned industrial restructuring appears to be challenging. Also, softer industrial policies, such as free trade zones, industrial clusters and infrastructure upscaling, are significantly less controversial than tariffs and domestic content requirements.Footnote 26
According to the perceptions of the decision-makers of sixty-two of the biggest multilatinas, they are self-reportedly reliant on a sophisticated resource base, which includes both technological resources, such as own R&D centres, and context-specific resources, such as brands and supplier networks. Some of these resources have been established through substantial and continuous government intervention in the form of state-subsidised R&D; this, for example, was instrumental in the rise of the Brazilian aircraft manufacturer Embraer to become the third-biggest player in an industry that generally receives large government subsidies. In 2016 Embraer fared extremely well in the commercial aircraft industry, behind Boeing and Airbus but ahead of Canadian, Chinese and Russian competitors, extending its reach with final-stage assembly facilities in the United States and China. The 2015–16 context, with record-low commodity prices and deep currency devaluations (with possible overshooting in Brazil and Colombia) inevitably puts competitiveness very high on national agendas. Multilatinas have a special role to play in this process as they are the front-runners and are best positioned to mobilise their existing resources and competences. Understanding the reasons behind the consolidated competitive advantage of multilatinas, which arises in conditions of sometimes significant institutional deficiencies, informs the agenda of industrial policy formulated in Latin America.
Non-market resources
The success of multilatinas in domestic and foreign environments does not depend solely on the market forces to which they are exposed. Because multilatinas have to deal with a substantial degree of institutional uncertainty at home, they develop capabilities and build resources that help them deal effectively with the non-market environmental forces shaped by the social, political and legal factors in emerging contexts.Footnote 1 In more institutionally mature environments, non-market forces operate in a highly structured and stable way and some are subject to explicit rules, for instance, lobbying activities. In emerging markets, however, these forces are highly uncertain and unstable and where there are rules they apply in environments where law enforcement is generally deficient. The uncertainty and unpredictability of these contextual non-market factors make it more difficult to do business in emerging than in developed marketsFootnote 2 and force companies to equip themselves with a sophisticated set of resources, competences and general organisational solutions that their counterparts from more stable institutional environments might find unnecessary. This chapter focuses on the use of non-market resources and competences such as the ability to bargain with public officials, pay bribes and exchange favours and highlight the importance of belonging to a business group. There is no attempt to judge the morality or legality of the activities undertaken by the multilatinas and their competitors but to characterise the resource base on which their business success is constructed.
Because all classes of emerging multinationals face volatile environments at home, they have developed or learnt to use specialised non-market resources to survive and prosper.Footnote 3 Non-market resources are intangible assets (e.g. the ability to bargain, pay bribes or ask for favours from influential people) that firms develop to deal with the external forces that surround their business activities.Footnote 4 These resources are the result of a deep understanding of the non-market setup at home, and of careful identification of the appropriate mechanisms to manage the social, political or legal pressures that act on them.
Non-market resources facilitate the international expansion of multilatinas because they bring a number of advantages to firms. First, their use might avoid institutional deficiencies in host countries. For example, by exchanging favours or bargaining, some firms avoid or reduce the amount paid in bribes to private entities or public officials.Footnote 5 These resources may also help firms obtain cheaper funding in countries where financial markets are underdeveloped, give timely access to policy-related information and manage their dependence on external agents like government officials and regulators.Footnote 6 In Latin America, for example, the prominence of big business groups is explained in part by the close personal ties between their owners and public policy makers.Footnote 7 These ease the international expansion of multilatinas because they offer resources unavailable to stand-alone firms.
Second, multilatinas maximise their growth opportunities by using non-market resources. For example, multilatinas use favours to secure bureaucratic preference in obtaining contracts, physical goods, business permits and introductions to potential customers, suppliers and partners.Footnote 8 Favours or bribes reduce the liability of foreignness in a new market (that is, the disadvantage of being non-local); arguably multilatinas use them to gain advantages over firms from developed countries that do not have experience competing in developing markets.Footnote 9 Petrobras, for example, used the ‘political friendship’ between the Brazilian government and the governments of other developing countries, such as Iraq and Angola, to establish its operations in these countries, while other oil companies were not given permission to operate.Footnote 10
Third, non-market resources can reduce uncertainty about changes in public policy and the reaction of key stakeholders and interest groups to firms’ activities. Bribes and favours are a speedy way of obtaining reliable and timely information to forecast the behaviour of the policy-makers and interest groups that determine the business rules that affect multilatinas’ interests. In essence, these non-market resources allow multilatinas to shape their environment.Footnote 11 For instance, during the waves of privatisation in the 1980s and 1990s in several Latin American countries, strong ties with government officials allowed local business groups to receive privileged treatment in the form of subsidies, the availability of public funds and special government loans.Footnote 12 Non-market resources have also allowed multilatinas to learn about new policies sooner than their competitors and to take advantage of political changes during social upheavals.
There are two main explanations for the use of non-market resources by multilatinas. First, for purposes of synergy and efficiency, multilatinas apparently exploit across countries the business practices that reflect their superior knowledge about markets in specific institutional environments, in this case their ability to deal with high levels of uncertainty at home.Footnote 13 Thus, multilatinas can use their deep understanding of the tacit and complex rules of the game that govern business activities in other equally uncertain emerging contexts. Multilatinas that use non-market resources are likely to be familiar with bargaining, favours and bribes as institutionalised social norms of running a business in their home context.Footnote 14
Second, the use of non-market resources could be motivated by the excessive regulation of foreign direct investments (FDIs) that multilatinas face in some of the countries in which they operate, especially other countries in the region. Mexico and Brazil, for example, have scores of restrictive norms that govern FDI, much more than the average in OECD countries. Restrictions imposed on foreign investment are reflected in laws and regulations that affect ownership or impede flows of capital across markets.Footnote 15 The more rules there are, the more confusing the institutional framework for foreign investment becomesFootnote 16 and the greater the chances that the rules will be contradictory, which reduces effective enforcement, gives regulators greater discretion in interpreting and applying them and increases the likelihood that bribes, bargaining and favours will be used to get preferential terms.Footnote 17 The following sections describe the rationale behind companies’ use of three types of non-market resources: negotiation with public officials, exchanging favours and bribes.
Negotiating with public officials
When the discretion of public officials is high, businesses face a greater risk that the rules that affect their activities will change frequently and unpredictably. In these circumstances uncertainty creates difficulties in assessing accurately the advantages and disadvantages associated with crucial managerial decisions, such as those affecting the volume of investment.Footnote 18 Negotiation skills are critical for influencing the business-friendliness of the context.Footnote 19
Favours
Favours are exchanges of outcomes between individuals who typically have a relationship or are embedded in a network of relationships (e.g. family, friends and business partnerships). Business people are usually involved in multiple networks that give them access to policy makers and private or public regulators. These influential decision-makers are able to facilitate or hinder the activities of companies by slackening or tightening the formal rules of doing business. Through favours, one party in a relationship uses its status, influence or connections to help the other party to get round or even flout formal regulations and processes that impede business activities.Footnote 20
Bribes
Finally, bribery is an informal payment that induces someone to act in favour of the money giver.Footnote 21 Private or public regulators are bribed to encourage them break the rules and facilitate the business activities of the briber. In the context of international business, bribery enables firms entering a foreign country to compensate for the connections they lack in this new host market.Footnote 22
Table 10.1 shows perceived competitors’ reliance on non-market resources for sixty-two large multilatinas on a scale of 1 to 5, where 1 indicates that competitors never make use of non-market resources to facilitate business in the most recent host country they invested in and 5 that competitors use non-market resources very frequently. It was not feasible to ask respondents directly about their use of non-market resources, as these practices present important ethical dilemmas and are subject to prosecution. Therefore, the results reported are probably a very distant measure of the use of non-market resources; however, they certainly reflect the rules of the game in the markets in which multilatinas choose to operate. It is highly unlikely that multilatinas will engage successfully in business activities in countries where non-market resources are important for competitors without using similar mechanisms to reduce the institutional uncertainty they face in the same market. Our results show that the most common non-market resource is the ability to negotiate with the regulatory authorities in host countries; negotiations are critical for Mexican, Brazilian and Argentine multilatinas but less important for those in Colombia, Chile and Peru. In all countries, decision-makers recognise the use of favours as non-market resources, most frequently in Mexico, Brazil and Colombia. Bribery is reportedly more frequent among competitors of Brazilian, Mexican and Argentine multilatinas.
Table 10.1 Perceived reliance on non-market resources (62 large multilatinas)
| Non-market resources | Mean (1= never; 5 = very frequently) | Standard deviation |
|---|---|---|
| Request favours from influential decision-makers | 2.40 | 1.42 |
| Engage in negotiations with regulatory agencies to obtain favourable conditions for business | 3.89 | 1.943 |
| Offer money to government employees or regulators to obtain favourable conditions for business | 2.68 | 1.566 |
The need to develop and use non-market resources hinges on the degree and nature of institutional uncertainty in the host market. If a multilatina invests in a country with high institutional uncertainty, it might use negotiation, bribes or favours to compensate for the weakness of host country institutions. Conversely, if a multilatina invests in a country with low institutional uncertainty the need to use non-market resources diminishes; what’s more, they might threaten the legitimacy required to compete successfully in the host market. The reported perceptions of multilatinas’ managers about the drivers of institutional uncertainty in their host market are used to explore simple correlations between these three types of non-market resources and the main drivers of institutional uncertainty described in Chapter 8, this time related to the host market.
Our correlation analysis reveals some patterns and common circumstances under which multilatinas use specific kinds of non-market resources to respond to institutional uncertainty in host countries. The data reveal that favours correlate strongly with a higher risk of product imitation (r = 0.60; p < 0.05) and government price controls (r = 0.391; p < 0.05) in host countries. If formal institutions and enforcement cannot provide protection against illicit product imitation or safeguard against politically motivated price controls, favours enable firms to circumvent formal controls or informal threats to protect the viability of their business. A significant positive correlation between favours and bribery suggests that bribes possibly play a key role in safeguarding the effectiveness of favours. Negotiation, on the other hand, appears to be strongly related to poor property rights protection by governments in host countries (r = 0.656; p < 0.05). This suggests that under conditions of deficient property rights protection, multilatinas tend to engage in negotiating more favourable terms for doing business in host countries. A strong and significant correlation between the use of negotiation and bribery (r = 0.629; p < 0.005) suggests a possible additional channel to circumvent poor definition and enforcement of property rights.
Business groups in Latin America
Business groups are some of the largest businesses in Latin America and among the largest multilatinas. Business groups are a collection of firms linked through both formal and informal ties.Footnote 23 They are seen as a solution to market failures in emerging economies, where firms seek to internalise transactions that cannot be carried out in competitive markets outside the boundaries of the firm. From a sociological perspective, business groups are also a reflection of vertically structured social and authority relationships, where clusters of firms operate under the authority of a single entrepreneur.Footnote 24 Business groups are also seen as a form of privileging private interests over those of the state, enabling a few individuals with special interests to obtain rents across various industries.Footnote 25 From a resource-based perspective, business groups are advantageous organisational arrangements where only some domestic entrepreneurs have access to valuable domestic and foreign resources simultaneously, which can give rise to capabilities that become key success factors in multiple industries.Footnote 26 For example, the key competitive capability in developing countries is sometimes identified as the capability to leverage contacts and match foreign technology to local markets. This capability is more valuable than any other in developing countries, where business success is explained by different technological and organisational capabilities from those responsible for business success in industrialised economies.Footnote 27 Business groups are also expected to enjoy economies of scope related, for example, to human capital, finance, technology and innovation.
In Latin America, a few dominant shareholders or families often exercise tight control over business groups, whose competitive advantage is explained by their dominance over domestic distribution channels and risk management through industry diversification.Footnote 28 Owners see industry diversification as an effective risk-reducing strategy in highly volatile environments. In particular, the simultaneous diversification in pro-cyclical and counter-cyclical industries – even in industries that share no resource or technological base – can be seen as a strategy for survival in conditions of high environmental uncertainty. Macroeconomic and political volatility in Latin America has been proved to be ‘high and enduring’.Footnote 29
Besides the use of non-market resources, multilatinas can expand the resource pool to which they have access by forming business groups, which studies have shown are pervasive in many emerging markets.Footnote 30 Of the firms in our sample, 53% are part of a business group (see Table 10.2). Figure 10.1 may be explained by the historical presence of business groups in the economic activity of the region’s countries and by the close personal ties between big business owners and public policy-makers, who have traditionally favoured local champions. For instance, during the privatisation waves in the 1980s and the 1990s, the strong ties local firms had with Latin American governments meant that they received privileged treatment that eased the acquisition and consolidation of groups of enterprises across a number of industries. Subsequent benefits, such as subsidies, public funding and special government loans, facilitated the consolidation of their economic power by participating in regional markets.Footnote 31
Table 10.2 The prevalence of business groups among 62 multilatinas
| Survey question | ||
|---|---|---|
| Does the company belong to a business group? | Number of firms | % |
| No | 29 | 46.8 |
| Yes | 33 | 53.2 |
Figure 10.1 Perceived use of non-market resources by country of origin.
From this perspective, the affiliation of a multilatina to a business group certainly shapes its strategic behaviour during the internationalisation process. Privileged access to resources controlled by a conglomerate may enhance firms’ international performance. Additionally, the social ties that characterise business groups enable affiliated firms to identify and exploit business opportunities in foreign markets that are not available to stand-alone firms, giving them, for example, the financial muscle and confidence to benefit from fleeting business opportunities. As a result, affiliated firms may start new business ventures abroad at a lower cost than stand-alone companies, taking advantage of the capability of the business group to combine resources and to reduce transaction costs.Footnote 32 Moreover, business groups act as internal markets for affiliated firms.Footnote 33 These internal markets could offer affiliated firms enough tangible (e.g. finance, talent) and intangible (e.g. social ties, R&D) resources to perform acquisitions or undertake greenfield investment in foreign markets. Entering countries where a business group has established operations puts a set of context-specific tangible and intangible assets within the reach of an entering firm; these can help a firm overcome the liability of foreignness much more rapidly.
Market integration and political factors present important challenges to business groups.Footnote 34 For example, some see political corruption as a result of differences in political systems, which incentivise business groups to bribe parties and politicians to vote for regulatory arrangements that provide private economic benefits for them.Footnote 35 Political instability can work to the advantage of Latin American business groups, although multiple factors also work against them and challenge their survival. These include the globalisation of product markets, which magnifies the benefits of specialisation, reliance on U.S. financial markets and the dominance of U.S.-style management training. Political changes, such as the rise of socialist parties, are also expected to put a check on the power of business groups. Nevertheless, their resilience has been remarkable and has been attributed to the economic logic of relying simultaneously on concentrated block-holding, family control and multi-sectoral diversification.Footnote 36 By taking this approach, Latin American business groups have enjoyed privileged access to capital, to information about the local economy and to policy-making, against which stand-alone companies cannot compete. These advantages are especially relevant in the context of high institutional uncertainty and the macroeconomic volatility that has characterised many of these countries.
Finally, while the number of companies in our study that belong to a business group is smaller than previous studies have shown, it is not surprising that it still comes to more than half. This organisational form offers substantial advantages, mostly to do with the importance of scale in securing access to low-cost capital, as well as information and political leverage. Risk-diversification for family-controlled businesses is also a prominent factor in the prevalence of business groups in Latin America, unlike the United States or Canada. The development of capital markets and the quality of property rights protection appear to be the critical variables that explain the resilience of business groups. Greater capital market liquidity and macroeconomic and political certainly are therefore expected to put Latin American business groups at a disadvantage compared to stand-alone companies that can reap greater advantages of specialisation. For the moment this appears to be a distant scenario for most Latin American companies and business groups, which continue to offer a generous mix of valuable resources to boost multilatinas’ competitiveness.
