Corporate Competitiveness in Latin America and the Caribbean Michael Mortimore and Wilson Peres CEPAL Review, 74, August 2001

Contents 1. Latin America and the Caribbean in the world markets in the 1990s 2. The transnationalization of the Latin American economies 3. Corporate strategies - Transnational corporations - Large domestic conglomerates 4. Conclusions and policies

Latin America and the Caribbean in the world markets in the 1990s The regional dimension

Is it a result of efficiency-seeking strategies in the context of globalization?

The great opportunity in the world market

Who caught the opportunity?

Index of technological specialization

Latin America and the Caribbean in the world markets in the 1990s The country dimension

25 competitors, only 8 winners

Source: CANPLUS The more successful countries have increasingly specialized in non NR-based manufactures

Pattern I: Manufacturing exports from Mexico and the Caribbean Basin Trade and financial liberalization. Export promotion through maquila and export processing zones. U.S. trade facilitation mechanisms: shared production (CBI), market access and NAFTA rules of origin. Main advantages: production costs (GPC) and geography. Greenfield investment in export platforms : automobiles, electronics and garments. The leading firms: U. S based corporations.

A stark structural transformation of northern LAC’s integration into the international market

Pattern II: Natural resources and services in South America Investment and trade liberalization fostered investment in oil, natural gas and mining. Natural resource-intensive manufacturing sectors; static comparative advantages. Investment in telecommunications, energy, banking and commerce. Acquisition of local firms: privatization and take-overs. The leaders: European corporations, mainly from Spain.

The flip side: in South America, weak links, no specialization

1. Efficiency seeking: Mexico & Caribbean Basin - Automobiles, electronics, garments - FDI from the U.S. - New production facilities, besides M&A. - Improvement in competitiveness - Poor linkages 2. Market seeking : South America - Telecomm, electricity, trade, banking - European FDI (mainly from Spain) - Acquisition of local firms - Increase in systemic competitiveness; better adaptation to local conditions? - Balance of payment deficits Two “worlds”

The transnationalization of the Latin American economies

World Foreign Direct Investment (FDI) Inflows (billions of dollars)

Net Inflows of FDI to Developing Regions, (millions of dollars)

Net FDI Inflows to Latin America and the Caribbean, by Subregion, (millions of dollars) Data for 2000 estimated by Unit of Investment and Corporate Strategies

Net FDI Inflows to Latin America and the Caribbean, LAIA Countries, (millions of dollars)

Latin America: Sources of FDI inflows, (billions of dollars)

TNCs and globalization 1. Foreign direct investment = 75% of world total flows are by TNCs 25% 75% 33% 34% 33% 2. International trade = 67% of total imports through TNCs

TNC strategies

The 15 biggest TNCs in Latin America, according to consolidated sales, 1999 CorporationCountry of originSectorSales 1Telefónica de España S.A.SpainTelecoms General Motors (GM)USAAutomobiles Volkswagen AGGermanyAutomobiles DaimlerChrysler AGGermanyAutomobiles Carrefour Group/ PromodésFranceTrade Ford Motor Co.USA Automobiles Repsol-YPFSpain Oil Fiat SpaItalyAutomobiles Royal Dutch-Shell GroupUK/Neth.Oil Exxon Mobil CorpUSA Oil IBMUSA Computers Endesa EspañaSpain Electricity The AES Corp.USA Electricity Wal Mart StoresUSA Trade NestléSwissFoodstuff 4 766

TNC strategies in Latin America and the Caribbean in the 1990s

National strategies, FDI and manufacturing exports

Strategies of the domestic conglomerates

Sales of the 500 largest corporations in Latin America (billion dollars)

Sectoral specialization

The 20 biggest Latin American groups

Main corporate strategies Retreat (sale of assets) Defensive Offensive - Specialization in the core - Moderate increase in diversification - Growth with extreme diversification (with specialization at the firm level) Entrepreneurship, power and ego.

Conclusions and policy considerations

Latin American international competitiveness did not increase in The region did not use the window of opportunity in non natural resource-based manufacturing exports. The competitiveness and technological specialization gaps vis-à-vis the Asian competitors increased. Only 8 of 25 countries increased their market share in the world market (6 from NAFTA and CBI). Fact I The lost opportunity

Fact II Two different “worlds”regarding FDI and international trade –Efficiency seeking: Mexico and the Caribbean Basin –Market-access seeking: South America

Fact III The challenges of the current specialization patterns “North of Panama”: low-tech processes integrated into global production chains. “South of Panama”: non-dynamic sectors in international trade, mature technologies. Exceptions: “third-generation maquila” and cases like Embraer and Techint.

Fact IV The new leadership Booming FDI flows to the region. 20 exporters do one fourth of total exports; 200, half. The new leader: TNC subsidiaries. Domestic conglomerates are still strong players; but, they are losing share.

Four policy lines FDI attraction, according to national priorities. Strengthening linkages to global production chains. Creation of linkages to global knowledge networks. Improvement of corporate governance, competition, and regulatory frameworks.

Attraction of new FDI Competition for FDI based on : –Incentives –Rules –Creation of production factors

Linkages to production and knowledge networks International negotiations to open new markets. Pro-active policies to attract higher value-added production processes. Development of domestic supplier networks. Research and development in natural resource sectors.

Changes in regulatory regimes Better corporate governance: protection of minority shareholders. Strengthening of competition policy and modernization of regulatory regimes in non-tradable sectors. Definition of goals at the sector level to better evaluate FDI impact.

Long-term issues Institution building to implement pro- active policies. The impact of trade patterns on the region´s economic development. The impacts of the new economic model with TNC leadership. The new leadership: feasibility, desirability and alternatives.