The privatisation of state enterprises and the liberalisation of the economy were common features in Latin American countries in the 1990s and, for Pablo Toral, were two of the most important structural reforms in the region. Since then, there has been an expansion in inward investment by foreign companies. Interestingly, these same events occurred in Spain in the mid-1970s, and were responsible for the internationalisation of Spanish companies. For Toral, such similar economic and political experiences increased Spanish firms' knowledge of the Latin American market, thus boosting their investment in the region.
This book focuses on investments by Spanish companies in Latin America between 1990 and 2009, and shows that cultural proximity was also a major factor. Cultural distance is one of the most studied topics in the area of international business, and sees a close relationship between the countries selected for investment and the modes of entry into these countries, which include alliances and joint ventures, acquisitions and greenfield investments. It is also interesting to note that the reforms that brought many foreign companies to Latin America were also responsible for the reverse movement, that is, the internationalisation of Latin American companies.
Privatisation and market liberalisation started in Chile after 1973, and by the late 1980s and 1990s they had spread throughout the continent, modifying the environmental conditions and prompting local firms to enhance their competitiveness by improving their products and manufacturing processes to compete with foreign firms in the region and many others that were attracted by the new liberal environment. In so doing, many local companies developed capacities, experience and confidence that prepared them for international competition.
Toral uses a constructivist approach, developed by Nicholas Onuf, one of the most important scholars in international relations, to study seven firms in four sectors: banking, telecommunications, public utilities, and oil and gas. These were the largest firms in terms of market capitalisation in 2009, and were responsible for about 70 per cent of Spanish foreign direct investment (FDI) in Latin America since 1990. One important issue that the book analyses is the scope of Spain's competitive advantage in the region, at national, sectoral and firm-specific levels.
Data came from primary and secondary sources, such as interviews with managers, annual reports and other archival documents, academic papers and specialised publications. Most notable is the level of detail that the author found in the companies’ annual reports. These serve as a public means of communication with investors; therefore, they publish in full detail the reasons for investment in Latin America, the companies' strategies, objectives, results, expectations and so forth. This is a major difference with respect to Brazil, for example, where such detailed information is generally not available and significant efforts by researchers are required to obtain relevant information.
Onuf's model, as used by Toral, argues that agents and institutions constitute one another, that is, institutions are the rules that define how agents should behave in a given scenario. So companies are the institutions, governed by a set of rules created by their own managers and employees (agents). Outside the company, the market and the laws and regulations are the institutions, and companies become the agents. These are the formal institutions, according to Douglass North (Institutional Change and Economic Performance, Cambridge University Press, 1990), which together with the informal institutions form the basic concepts of institutional theory, widely used today in international business studies to explain the movement of multinational companies. Informal institutions are the limitations created by individuals, not formally codified, but embedded in the norms, shared values and beliefs of a society. Although tacit, they can impose heavy restrictions and persist even with changes in formal institutions. Hence, foreign investors need to learn how informal institutions work and how to operate under these conditions.
Toral discusses whether existing theories of multinational corporations (MNCs) could apply to Spanish companies, since ‘they were developed to explain American multinationals’. This is not completely true, because the famous Uppsala model was developed to explain the behaviour of Swedish firms. There is actually a vigorous debate about the need for new theories that focus on the expansion of emerging countries’ multinationals, because these firms challenge traditional models, as they usually do not possess competitive advantages. The peculiarity of these companies is that there are institutional voids present in their home countries, which represent a serious constraint on firms’ competitiveness by restricting access to funds or qualified human resources and hindering investments in research and development. Institutional voids can be defined as the lack of specialised intermediaries, of efficient regulatory systems and of mechanisms that guarantee the enforcement of contracts. Poor capital markets, deficient infrastructure, bureaucracy, corruption, high taxes, inflation and volatile economic and political environments can also be added. But even for MNCs from emerging countries, there is a group of academics that argues that no new theories are needed. Others, such as Tarun Khanna, Krishna G. Palepu and Álvaro Cuervo-Cazurra, say that, to advance theory, studies should focus on the conditions of the countries that the MNCs emerge from and how these influence their behaviour as multinationals.
There are initial arguments in chapter 1 about Spain becoming the seventh-largest economy in the world by outward FDI stock in 2007, after the removal of restrictions on FDI by the government between 1977 and 1992. After that, Spanish firms were able to compete immediately. This is a very different situation from most emerging countries, where economic liberalisation was only a first step towards globalisation, but not sufficient for most domestic companies to go abroad and face international competition. However, Spain cannot be considered an emerging country by any economic, cultural or institutional standards, although Toral mentions a ‘pervasive view of Spain as a lesser developed country’ by international politics practitioners and academics. The argument that Spanish firms perceived they had a competitive advantage in Latin American markets and therefore decided to invest in the region demonstrates that Spain was definitely at a higher stage of development than Latin American countries. The advantage was based not only on the similarities of the processes of political and economic liberalisation, but also, and mainly, on cultural similarities. In addition, US companies considered Spanish investments in Latin America rather insecure, or even strategically mistaken, because of political instability, absence of a law-abiding environment and even manipulation by local politicians. All of these factors confirm the aforementioned institutional voids.
Another important argument concerns the need for theories to explain the internationalisation of service sector firms, which constitute the majority of Spanish firms in Latin America. There is already a body of knowledge on service firms, such as the work by Robert Z. Aliber, Mark C. Casson, Jean M. Gray, H. Peter Gray and Herbert G. Grubel, among others, on the internationalisation of banks, and a significant literature on ‘born-global’ firms, centred on articles by Benjamin M. Oviatt and Patricia P. McDougall, several of which are in the information technology sector, in outsourcing activities.
In his conclusions, Toral suggests that a similar study could be done in relation to Portuguese investments in Brazil and mentions linguistic, cultural and institutional similarities. He is partly right, but the institutional voids certainly found in Brazil are not a characteristic of the Portuguese environment.
