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Multilatinas: Continued Prosperity?

Will multilatinas continue investing outside their home countries? Four experts share their insights.

Inter-American Dialogue 

Brazil-based companies recently announced new investments in Peruvian steel and fertilizer plants that exceed a billion dollars combined, and similar announcements of multinational Latin American companies extending their reach into non-domestic markets have been increasing. Will Latin America continue to become an originator of capital and investment—as opposed to primarily a destination for it? What factors have been driving the trend, and what do the "multilatinas" look for when making investments abroad?

Abraham Lowenthal, Robert F. Erburu Professor of Ethics, Globalization and Development and Professor of International Relations at the University of Southern California: Even as foreign investment for Brazil continues to flow in at impressive levels—$34.6 billion in 2007—Brazil's outward investment has gained attention since the country became a net source of FDI in 2006. Brazilian-based companies such as Petrobras, Vale, Embraer, Gerdau and Ambev are vigorously expanding their activities abroad. The same drive outward is occurring in Mexico, Chile and Argentina, and even in Colombia, Peru and Guatemala. Multilatinas are not only competing throughout Latin America; many are holding their own and some are growing fast in North America, Europe, Asia and Africa. Brazil's Odebrecht is one of two companies jointly building the Miami Airport. Embraer is selling commuter aircraft in the United States and Europe but expanding quickly in the Middle East. Cemex is the now largest building materials company in the United States, but is also growing fast in China. These companies are competing on products ranging from aircraft to passenger bus manufacturing and from cement to steel, and in services from construction to telecommunications. The impressive growth of multilatinas owes partly to the consequences of economic liberalization, which brought in global competitors and forced Latin American companies to compete effectively with them, first at home and ultimately abroad. But the growth of multilatinas owes a lot to innovative leadership in companies like Cemex, Embraer, Bimbo and Techint. As the global downturn deepens, falling commodity prices and international recession will certainly hurt some multilatinas, especially as North America and Europe curtail imports. Still, most analysts predict that Latin America will continue to grow at a region-wide rate of more than 4 percent over the next two years. In that case, international investment and expansion will surely continue.

Kevin Gallagher, Professor at Boston University and writer of a monthly column on globalization and development for The Guardian: It is good news that many Latin American companies are extending their reach to non-domestic markets, but there's a lot of catching up to do, and it's not clear that the region has the right policy environment to do so. According to research by the Economic Commission for Latin America and the Caribbean, the number of transnational corporations from Latin America and the Caribbean lags far behind Asia—and the historical record. ECLAC finds that only seven of the 50 largest transnational firms from developing world are from Latin America, the majority of the difference is from Asia. In 1977, Latin America was home to 14 of the 30 biggest developing country transnational firms. Today's 'trans-Latins,' as they are also called, are mostly concentrated in natural resource based companies in a handful of countries, namely Argentina, Brazil, Chile and Mexico. The big movers are in mining (CVRD), steel (Techint, Gerdau), oil and gas (Petrobras), and cement (CEMEX). The driving factors behind the surge in non-domestic investment are the need to access more natural resources to capitalize on the commodities boom, and because of over-exploitation at home. In addition, many of the trans-Latins' domestic markets are saturated or lack solid demand growth. These firms also invest abroad to diversify their risk. What is interesting is that the majority of these firms received great deal of state support in their founding and many of them remain state-owned companies. Many bilateral investment treaties and other international commitments precisely outlaw the support these firms once enjoyed.

Alexis Rovzar, Executive Partner in charge of the Latin America Practice of White & Case LLP: It has been fascinating to work closely with companies in Latin America for the last 30 years, first as a legal advisor to their foreign lenders, then to their foreign partners, later to domestic ones and lately as counsel to many of them and even as an independent Board member. In my view, what we experience today is not circumstantial, as it would appear to tourists or newcomers. Latin American entrepreneurs leading these 'multilatinas' are as prepared as their counterparts in North America, Europe or Asia, if not more, given the difficulties of doing business in the region. Banco Itau, Grupo Bimbo, FEMSA, CVRD and many others are a clear example of world-class management teams. Shareholders and professional managers throughout the region have not only guided their companies out of the 'conglomerate' approach of the seventies (when a holding company was involved in many unrelated industries from tourism and carpets to steel) and into a highly specialized and focused fields where companies in a group are generally interconnected and make business sense. Also large companies are better capitalized than ever, and debt is dealt with respect and limitation derived from lessons learned during successive financial crises that gave Latin America a bad reputation; no longer. Even countries, at least most of them, learned to apply market-oriented financial policies, embracing democratic regimes—those that have done a better job are cashing in on the benefits (just take Chile as an example). But let's focus on Brazil, no longer the country of the future, it is creating jobs and new industries ranging from ethanol and biofuels to world class aircraft, attracting investment, listing more companies last year alone than the rest of Latin America put together and growing its economy to the envy of its neighbors to south and north. Mexico is struggling behind; Colombia and Peru are working to close the gap. Others will follow. Governance has played a big role, inasmuch as many of these giants are still controlled by families or groups, many have listed in local and international stock exchanges and adopted corporate best practices, transparency, accountability and respect for minority rights. Although there may be exceptions, the trend is irreversible. Those companies with better corporate governance command a premium in their valuations. The challenge remains to have privately owned companies adopt these standards. So when these well-run companies dominate their local markets, many have looked to the neighborhood and beyond for growth, mainly in their core business areas. Quite a journey, and it can only get better.

Jerry Haar, Associate Dean and Professor in the College of Business Administration at Florida International University:  Mexican retailer Elektra plans to open 1,500 more stores in Brazil and a branch of their Banco Azteca over the next five years. The Venezuelan pharmacy chain Farmatodo has agreed to buy Farmacity, an Argentine chain that also operates in Colombia. Brazil's Magnesita plans to pay 277 million euros in cash and stock to buy LWB Refractories, a German company that makes products used in the steel industry. These are but a few examples of the reach of multilatinas in global markets. In addition to the first wave of Latin American multinational giants such as Embraer, Cemex, Corona, Vitro, Gerdau, and Techint, a new cohort of Latin American firms are expanding their trans-border presence. Market liberalization in the region has created both threats and opportunities within domestic markets; and cash-rich firms are fortifying their presence in their home markets (a defensive posture) as well as expanding into foreign markets (offensive posture)—including those of their competitors. Like all multinationals they seek a new source of customers, knowledge, resources, technology, financing or a combination of these drivers. As existing and new multilatinas plant their flags around the globe, closer and deeper integration with their local suppliers will allow these smaller enterprises to enhance their competitiveness and move on their own into international markets in addition to serving their multilatina clients. 

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.



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