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Reputation and Political Legitimacy: ITT in Chile, 1927–1972

  • Marcelo Bucheli and Erica Salvaj
Abstract

The literature on multinational corporations argues that a foreign firm can legitimize its activities, improve its reputation in a host country, and reduce the risk of hostile actions by the host government (including expropriation) by approaching and incorporating influential members of the domestic elite in its business. By using the concept of obsolescing political legitimacy, we argue that this legitimating strategy can lead to a loss of reputation and eventual illegitimacy when the host country undergoes significant social and institutional changes. When these changes take place, the domestic society can perceive that the multinational benefited from a previous social and institutional order increasingly considered as illegitimate. Under these circumstances, the new order will question the legitimacy of the multinational's operations, increasing the risk of expropriation. We illustrate our hypothesis with the case of the political strategies of the International Telephone and Telegraph Company (ITT) in Chile in the twentieth century.

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The authors wish to thank the Chilean government for generous funding of this research provided through the Fondecyt grant no. 11085048. We also thank Adoración Álvaro-Moya and Alfredo Enrione for their comments on previous versions of this article.

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4 Stephen Kobrin, “Foreign Enterprise and Forced Divestment in LDCs.”

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6 Acemoglu, Daron and Robinson, James, Economic Origins of Dictatorship and Democracy (Cambridge, U.K., 2006); Acemoglu, Daron and Robinson, James, “On the Economic Origins of Democracy,” Daedalus 136, no. 1 (2007): 160–62.

7 O'Donnell, Guillermo, El estado burocrático autoritario (Buenos Aires, 1982).

8 Ibid.

9 King, Brayden and Whetten, David, “Rethinking the Relationship between Reputation and Legitimacy: A Social Actor Conceptualization,” Corporate Reputation Review 11, no. 3 (2008): 192207.

10 Kostova, Tatiana and Zaheer, Srilata, “Organizational Legitimacy under Conditions of Complexity: The Case of the Multinational Enterprise,” Academy of Management Review 24, no. 1 (1999): 6481; Kostova, Tatiana, Roth, Kendall, and Dacin, Tina, “Institutional Theory in the Study of Multinational Corporations: A Critique and New Directions,” Academy of Management Review 33, no. 4 (2008): 9941006; Hillman, Amy and Wan, William, “The Determinants of MNE's Subsidiaries Political Strategies: Evidence of Institutional Duality,” Journal of International Business Studies 36, no. 3 (2005): 322–40; Mizruchi, Mark, “What Do Interlocks Do? An Analysis, Critique, and Assessment of Research on Interlocking Directorates,” Annual Review of Sociology 22, no. 1 (1996): 271–98; Podolny, Joel, “Networks as the Pipes and Prisms of the Market,” American Journal of Sociology 107, no. 1 (2001): 3360; Boddewyn, Jean and Brewer, Thomas, “International Business-Political Behavior: New Theoretical Directions,” Academy of Management Review 19, no. 1 (1994): 119–43; Podolny, Joel, “A Status Based Model of Market Competition,” American Journal of Sociology 98, no. 141 (1993): 829–72.

11 Rhee, Mooweon and Valdéz, Michael, “Contextual Factors Surrounding Reputation Damage with Potential Implications for Reputation Repair,” Academy of Management Review 34, no. 1 (2009): 146–68.

12 McKenna, Christopher and Olegario, Rowena, “Corporate Reputation and Regulation in Historical Perspective,” in Handbook of Corporate Reputation, ed. Barnett, Michael and Pollock, Tim (Oxford, 2012), 260–77.

13 History's Thirteen Most Hated Companies,” Daily Beast, last modified 22 06 2010, http://www.dailybeast.com/.

14 Fisse, Brent and Braithwaite, John, The Impact of Publicity on Corporate Offenders (Albany, 1983), 124–35.

15 Gustafson, Kristian, Hostile Intent: U.S. Covert Operations in Chile, 1964–1974 (Washington, D.C., 2007); Kornbluh, Peter, The Pinochet File (Washington, D.C., 2003); Qureshi, Lubna, Nixon, Kissinger, and Allende: U.S. Involvement in the 1973 Coup in Chile (Lanham, Md., 2009); Sampson, Anthony, The Sovereign State of ITT (New York, 1973); Sigmund, Paul, The Overthrow of Allende and the Politics of Chile (Pittsburgh, 1977); Sigmund, Paul, Multinationals in Latin America: The Politics of Nationalization (Madison, Wisc., 1980). For an analysis of the post-1980s period, see Coloma, Fernando and Herrera, Luis, “Análisis institucional y económico del sector de telecomunicaciones en Chile,” Cuadernos de Economía 27, no. 125 (1990): 429–72.

16 A further theoretical discussion on how long-term and gradual institutional changes can affect a corporation's legitimacy is found in Bucheli, Marcelo and Kim, Jin-Uk, “The State as a Historical Construct in Organization Studies,” in Organizations in Time, ed. Bucheli, Marcelo and Wadhwani, R. Daniel (Oxford, 2014), 241–62. An application of this concept for the case of multinationals operating in the agricultural sector can be found in Bucheli, Marcelo and Kim, Min-Young, “Political Institutional Change, Obsolescing Legitimacy, and Multinational Corporations,” Management International Review 52, no. 6 (2012): 847–77.

17 Wilkins, , Maturing, 130–31.

18 Sobel, Robert, ITT: The Management of Opportunity (New York, 1982), 1440; Calvo, Angel, “State, Firms, and Technology: The Rise of Multinational Telecommunications Companies—ITT and the Compañía Telefónica Nacional de España, 1924-1945,” Business History 50, no. 4 (2008): 455–59; Yustle, Antonio Pérez, “La Compañía Telefónica Nacional de España en la Dictadura de Primo de Rivera, 1923–1930,” Ph.D. diss., Universidad Politécnica de Madrid, 2004, 72–83, 150–74, 271–72; Álvaro-Moya, Adoración, “Redes empresariales, inversión directa extranjera y monopolio: El caso de Telefónica, 1924–1965,” Revista de Historia Industrial 16, no. 34 (2007): 6596; Álvaro-Moya, Adoración, “Inversión directa extranjera y formación de capacidades organizativas locales: Un análisis del impacto de Estados Unidos en la empresa española, 1918–1975,” Ph.D. diss., Universidad Complutense de Madrid, 2010, 163–64; Calvo, Ángel, Historia de Telefónica, 1924–1975 (Madrid, 2010); Wilkins, , Maturing, 7172.

19 Martínez, Gabriela, Latin American Telecommunications: Telefónicas Conquest (New York, 2008), 20.

20 Covarrubias, Julio, Un cable al cielo: Telefónica CTC Chile, 1880–2005 (Santiago, 2005), 68.

21 Donoso, Carlos, “De la Compañía Chilena de Teléfonos de Edison a la Compañía de Teléfonos de Chile: Los primeros 50 años de la telefonía nacional, 1880–1930,” Historia (Santiago) 33 (2000): 101–39.

22 Aylwin, Marianaet al., Chile en el siglo XX (Santiago, 1983), 122.

23 Blakemore, Harold, “From the War of the Pacific to 1930,” in Chile since Independence, ed. Bethell, Leslie (Cambridge, U.K., 1993), 8283.

24 Covarrubias, , Un cable, 6772; Donoso, “De la Compañía Chilena.”

25 Donoso, “De la Compañía Chilena.”

26 Pinto, Aníbal, Chile, un caso de desarrollo frustrado (Santiago, 1973), 168; Ffrench-Davis, Ricardo and Muñoz, Oscar, “Desarrollo económico, inestabilidad y desequilibrios políticos en Chile,” Estudios Cieplan 28 (06 1990): 127.

27 ITT-CTC, Memoria Anual, 19501958; Covarrubias, , Un cable, 78.

28 Monteón, Michael, Chile and the Great Depression: The Politics of Underdevelopment, 1927–1948 (Tempe, Ariz., 1998), 7375.

29 Schneider, Ben R., Business, Politics, and the State in Twentieth Century Latin America (Cambridge, U.K., 2004), 155.

30 Ffrench-Davis, Ricardoet al., “The Industrialization of Chile, 1940–82,” An Economic History of Twentieth-Century Latin America, vol. 3, ed. Cárdenas, Enrique, Ocampo, José Antonio, and Thorp, Rosemary (New York, 2000), 130–32; Douyon, Guy, “Chilean Industrialization since CORFO,” Ph.D. diss., American University, 1972, 8789.

31 ITT-CTC, Memoria Anual, various years.

32 Measured in 1995 dollars by purchasing power parity. See Braunet, Juanet al., Economía Chilena, 1810–1995 (Santiago, 2000), 310. Before 1945, the largest market was Argentina, but ITT sold its interests there that year. See, ITT, Annual Report (1945), 32; ITT, Annual Report (1946), 33; Wilkins, , Maturing, 304.

33 ITT, Annual Report (1947), 34; ITT, Annual Report (1949), 15.

34 ITT, Annual Reports (1950, 1951).

35 Braun, et al., Economía, 336.

36 Guajardo, Guillermo, “Nacionalismo económico y tecnología internacional: Estados Unidos y la industrialización de México y Chile,” in Ni éxito, ni fracaso: Ideas, recursos y actores en las políticas económicas latinoamericanas del siglo XX, ed. Guajardo, Guillermo (Mexico City, 2005), 104.

37 ITT, Annual Report (1953), 28; ITT, Annual Report (1954), 31; Aylwin, et al., Chile, 235; Braun, , et al., Economía, 336.

38 Moulian, Tomás, Fracturas: De Pedro Aguirre Cerda a Salvador Allende, 1938–1973 (Santiago, 2006), 168–69.

39 Fórmula para la ampliación del servicio telefónico,” El Mercurio, 3 01 1958; 40 millones de dólares serán invertidos en ampliación de servicio telefónico en Chile,” El Mercurio, 6 02 1958.

40 ITT justified this increase, arguing that Chilean rates were still relatively cheap for international standards; see ITT-CTC, Memoria Anual (1957), 11; ITT, Annual Report (1956), 43; ITT, Annual Report (1958), 4344.

41 Covarrubias, , Un cable, 100108.

42 Navarrete, Bernardo, “Un centro excéntrico: Cambio y continuidad en la Democracia Cristiana, 1957–2005,” Política 45, no. 1 (2005): 117; Moulian, Luis and Guerra, Gloria, Eduardo Frei M. Biografía de un estadista utópico (Santiago, 2000), 4755.

43 Cardemil, Alberto, El camino de la utopía: Alessandri, Frei, Allende (Santiago, 1997), 133.

44 Marquéz, Luis Corvalán, Del anticapitalismo al neoliberalismo en Chile: Izquierda, centro y derecha en la lucha entre los proyectos globales, 1950–2000 (Santiago, 2001), 1718; Cardemil, , El camino, 133; Navarrete, , “Un centro excéntrico,” 118.

45 Drake, Paul, “Chile, 1930–1958,” in Chile since Independence, ed. Bethell, Leslie (Cambridge, U.K., 1993), 128; Aylwin, et al., Chile, 245–47.

46 Cardemil, , El camino, 2629; Drake, , “Chile,” 142.

47 Ffrench-Davis, , et al., “The Industrialization of Chile,” 133.

48 Chile Forbids Dollar Payments for Foreign Products until Jan. 6,” Wall Street Journal, 29 12 1961, 4.

49 Value of Chilean Escudo Drops as Much as 30 Percent after Exchange Ban Ends,” Wall Street Journal, 17 01 1962, 4; Chile's New Dual Rate Foreign Exchange Plan Clouds Trade Picture,” Wall Street Journal, 22 01 1962, 12.

50 Interesantes observaciones en la junta de accionistas de la Compañía Chilena de Teléfonos,” El Mercurio, 2 04 1957.

51 ITT-CTC, Memoria Anual, various years.

52 Chile, Cámara de Diputados, Boletín de Sesiones, 17 07 1962.

53 ITT-CTC, Memoria Anual (1962, 1963).

54 Guajardo, , “Nacionalismo económico,” 105.

55 Chile, Cámara de Diputados, Boletín de Sesiones, 28 08 1963.

56 Ibid., 3817.

57 Ocho sociedades con cuñas en diez poderosos bancos,” Vistazo 569 (1963): 11. The information from the firm's corporate reports do not show a clear benefit in cheap loans from the financial sector (see, ITT-CTC, Memoria Anual, various years). The Vistazo article, however, added more questions about the firm's board's legitimacy.

58 ITT-CTC created links through its board of directors with several corporations. Its strongest links were with Empresa Nacional de Electricidad, with which it shared three directors and with Cementos Bío Bío, with which it shared two. ITT-CTC also shared one director with Compañía Chilena de Fósforos, Compañía General de Electricidad, Empresas COPEC, Empresa Nacional de Telecomunicaciones, Empresas CMPC, Banco Continental, Gildemeister, Empresa Pesquera Eperva, Philips Chile, Cementos Polpaico, Banco de Crédito e Inversiones, Plásticos Nacionales, Compañía de Seguros Francisco de Aguirre, Tejidos Caupolicán, Agencia Graham, Chilena Consolidada Seguros de Vida, Banco de Chile, Compañía de Cervecerías Unidas, and Industria Nacional del Rayón. Those firms with links to ITT-CTC also had links with each other. The ones sharing one director were Agencia Graham, Banco Continental, Banco de Chile, Banco de Crédito e Inversiones, Cementos Bío Bío, Cementos Polpaico, Chilena Consolidada de Seguros de Vida, Compañía Chilena de Fósforos, Compañía de Cervecerías Unidas, Compañía de Seguros Francisco de Aguirre, Compañía General de Electricidad, Empresa Pesquera Eperva, Empresa Nacional de Electricidad, Empresas CMPC, Empresas COPEC, Gildemeister, Industria Nacional del Rayón, Philips Chile, Plásticos Nacionales and Tejidos Caupolicán. Those sharing two directors included Agencia Graham, Banco de Chile, Banco de Crédito e Inversiones, Cementos Bío Bío, Chilena Consolidada de Seguros de Vida, Compañía de Cervecerías Unidas, Compañía de Seguros Francisco de Aguirre, Empresa Nacional de Electricidad, Empresa Nacional de Telecomunicaciones, Empresas CMPC, Industria Nacional del Rayón, Plásticos Nacionales and Tejidos Caupolicán. Corporations sharing three directors included Compañía de Cervecerías Unidas, Banco de Chile, Chilena Consolidada de Seguros de Vida, and Agencia Graham.

59 For a detailed study explaining the position of ITT-CTC in Chile's corporate world, see Salvaj, Erica and Lluch, Andrea, “Estudio comparativo del capitalismo argentino y chileno: Un análisis desde las redes de directorio a fines del modelo sustitutivo de importaciones,” REDES: Revista hispana para el análisis de redes sociales 23, no. 3 (2012): 4379.

60 Chile, Cámara de Diputados, Boletín de Sesiones, 13 11 1963, 1330.

61 Ibid.

62 Ibid., 1337.

63 Aylwin, et al., Chile, 255–57.

64 Ibid., 258.

65 Cardemil, , El camino, 190.

66 Lundahl, Mats, “El camino a la dictadura: Desarrollo político y económico en Chile, 1952–73,” in Economía y política durante el gobierno militar en Chile, 1973–1987, ed. García, Roberto (Mexico City, 1989), 2729; Dooner, Patricio, Cambios sociales y conflicto político: El conflicto político nacional durante el gobierno de Eduardo Frei (1964–1970) (Santiago, 1983), 27; Moulian, and Guerra, , Eduardo Frei, 129–30.

67 Gross, Leonard, The Last Best Hope: Eduardo Frei and Chilean Democracy (New York, 1967).

68 United States Senate, Select Committee to Study Governmental Operations with Respect to Intelligence Activities, Covert Action in Chile (Washington, D.C., 1975), 9.

69 United States Senate, Covert Action, 1112.

70 Covarrubias, , Un cable, 108–10.

71 Galal, Ahmed, “Chile: Regulatory Specificity, Credibility of Commitment, and Distributional Demands,” in Regulations, Institutions, and Commitment: Comparative Studies of Telecommunications, ed. Levy, Brian and Spiller, Pablo (Cambridge, U.K., 1996), 122–24.

72 Guajardo, , “Nacionalismo economico,” 106.

73 Corvalán, , Del anticapitalismo, 103.

74 Dooner, , Cambios, 3536.

75 Aylwin, et al., Chile, 261.

76 Ibid., 263–70.

77 Corvalán, , Del anticapitalismo, 101.

78 Chile, Cámara de Diputados, Boletín de Sesiones, 11 05 1966, 8174.

79 Chile, Cámara de Diputados, Boletín de Sesiones, 12 07 1966.

80 Chile, Cámara de Diputados, Boletín de Sesiones, 11 05 1966.

81 Corvalán, , Del anticapitalismo, 108.

82 Aylwin, et al., Chile, 276–82.

83 Ibid., 280–81.

84 Corvalán, , Del anticapitalismo, 78.

85 United States Senate, Select Committee on Foreign Relations, The International Telephone and Telegraph Company and Chile, 1970–71 (Washington, D.C., 1973); Anderson, Jack, The Anderson Papers (New York, 1974); Korry, Edward, “The U.S.A. in Chile, Chile in the U.S.A.: A Full Retrospective Political and Economic View (1963–1975),” Estudios Públicos 72 (Spring 1998): 148; Kornbluh, Pinochet; Qureshi, Nixon.

86 United States Senate, Covert Action, 16.

87 From Korry to Kissinger and Johnson, 5 Oct. 1970,” United States Department of State, CIA Chile Declassification Project Tranche III (1979–1991) (Washington, D.C., 1991).

88 United States Senate, Covert Action, 13.

89 Chile, Secretaría General de Gobierno, Documentos Secretos de la ITT (Santiago, 1972); MacDonald, Antonio Vargas, ITT: Documentos de una agresión (Mexico City, 1973).

90 Guajardo, , “Nacionalismo economico,” 106.

91 Chile, Cámara de Diputados, Boletín de Sesiones, 30 08 1972.

92 Allende, Salvador, “Address to the United Nations General Assembly, 4 Dec. 1972,” in Salvador Allende Reader: Chile's Voice of Democracy, ed. Cockcroft, James (Melbourne, 2000), 200221.

93 O'Brien and GOP Clash Over IT&T,” New York Times, 14 12 1971, 36.

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95 King and Whetten, “Rethinking.”

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