Organizational Responses to Regional Integration Among MNEs in Latin America

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.

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.

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.

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.

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.

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%).

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).

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.

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).

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.

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.

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.

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

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).

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.

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.

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).