Spanish Internationalization: A Model for New Multinationals

The fall of communism in Eastern Europe. Globalization of trade and the creation of new trading blocs. The threat of international terrorism. Devastating financial crises. All have helped transform the economic and political landscape in the last two decades.

What’s the next phenomenon to be recognized as crucial in the future? According to Mauro Guillén and Esteban Garcia-Canal, it’s the rise of new multinational corporations from upper-middle-income economies, developing countries, and oil-rich countries. And these new multinationals have a successful model in the experience of Spanish multinationals, as Guillén and Garcia-Canal point out in their new book, The New Multinationals – Spanish Firms in a Global Context.

Guillén, director of Wharton’s Lauder Institute, and Garcia-Canal, of the University of Oviedo in Spain, stress that such companies do not have skills comparable to those of traditional multinationals from technologically advanced nations. But they can become major players through international acquisitions and foreign direct investment.

Known as "multi-Latinas" or "dragon multinationals," these companies have taken many academic observers by surprise. Until a decade ago, many were considered second-rank competitors. Guillén and Garcia-Canal took interest in them in 1992, when Spanish companies took their first steps toward internationalization. The main lesson of their analysis, Garcia-Canal stresses, is that “companies don’t need to have access to very advanced technologies or brands that are internationally renowned in order to commit themselves to a process of globalization.” They have less obvious skills, such as “excellence in execution and manufacturing; experience in managing alliances and acquisitions; skill in dealing with countries that have weak institutional environments; and experience in specific market niches. All of these skills are factors behind the accelerated globalization of Spanish companies, which are now competing as equals with global leaders in these industries.”

The authors emphasize the concept of accelerated globalization “because the traditional vision of globalization as a slow and gradual process is no longer feasible in a globalized world.” Telecom giant Telefónica; construction firms ACS, FCC, Ferrovial and Albertis; and even Pronovias, the clothing firm, are examples of Spain’s 2,000 multinationals that have succeeded despite doubts that they were strong enough to jump into new markets.

Geographical and Sector Expansion

Before 1986, Spanish companies undertook few major investments in foreign markets. But that year, Spain became a member of the European Economic Community (now the European Union), and the situation changed radically. With expanding political and economic alliances among European nations, barriers began to fall and Spain began to compete with the rest of Europe. With the introduction of a single currency at the end of the 1990s, Spanish firms — able to borrow at interest rates that were practically unimaginable before the euro — began to launch new global business ventures. One example: Repsol’s acquisition in 1999 of YPF, the Argentine oil company, in an estimated €5 billion cash deal. Because it was a euro zone company, Repsol could access European debt and capital markets to make the deal.

Geographical and industrial concentration has been another important characteristic of Spanish companies’ foreign investments. “About 90% of them were in Latin America and Europe, and about 80% were in the infrastructure or financial service sectors,” the authors note. Latin America’s cultural and linguistic affinity with Spain was a big reason. Another was the privatization taking place in Latin America. Spanish companies’ goals were to grow larger, with larger profit margins, to defend themselves from powerful European competitors. Once they had strengthened themselves in Latin America, they turned toward Europe, which became the chief destination of Spanish investors starting in 2001.

The evolution of Spanish multinationals illustrates the peculiarities of the “new multinationals.” Not only was their expansion not based on technological skills, but their activity was focused on just one or two regions. They tended to avoid the risky, expensive strategy of opening their own foreign plants. Instead, they moved into alliances, joint ventures and acquisitions. “The local partner, whether in a joint venture or in a distribution contract, provides them with quick access and enables them to save capital,” explains Guillén. Nevertheless, he says, “the disadvantage is that the partner can have its own goals, and they can be contrary to the goals of your company. In addition, you have to share the profits. It is always better to go it alone. However, in the beginning, that is hard to do.”

Still, many Spanish companies were late getting into markets in Europe, Guillén explains, “because there is a lot of competition and also protectionism in regulated sectors such as water, electricity, energy, transportation, telecommunications, and so forth.”

Beyond Minority Ownership   

Guillén notes that Spanish firms “have moved beyond working with minority ownership and alliances with local partners to operating alone or with majority ownership. This has been the most important change in recent times. Clearly, when they started out Spanish companies did not have either their own brands or reputations. Now the country has companies that have their own personalities.”

While companies elsewhere may be reluctant to have their governments play a role in their country’s industrial development, Spanish companies prefer to tap into government know-how. “In the 1980s and ’90s, public sector companies followed the directives of the government, although that doesn’t happen anymore today,” Guillén notes.

His research reveals that some companies have deliberately chosen to operate in markets where governments have significant power. ALSA, which operates bus and coach services in Spain, has a presence in China. Its strategy was laid out in 1990 when the Chinese government granted foreign companies the right to operate in the bus market. Later, through a joint venture with local partners, ALSA expanded step by step, gaining a presence in big cities and covering important routes from smaller cities to Beijing and Shanghai.

With slow or even no economic growth forecast for Spain for the coming months, experts stress the importance of moving into foreign markets whose economies offer greater opportunities. Drawing on decades of know-how built with Spain’s economic development, Spanish multinationals can position themselves as leading European companies. “Companies that have ambitions outside their own borders should manage to expand rapidly, gaining invaluable experience and building skills that make them stronger and more competitive. In a rapidly growing economy, the risks of remaining behind or, even worse, waiting too long before emerging from the local market, are greater than the risks inherent in the globalization process,” Guillén notes.

Diverse, Malleable and Dynamic Skills

On the other hand, Garcia-Canal says, the strategies that Spanish companies have used can be deployed on a day-by-day basis with slight adjustments to speed global expansion with the domestic market significantly weakened. That lesson can be especially valuable for small and midsize companies. Many of the companies analyzed in the book “went from being small companies to multinational firms in just a brief period of time,” he says.

These companies have used Latin America for rapid international expansion. “Our position is that the key to efficiently accelerating your international expansion is not only to quickly penetrate regions of equal or lower economic development than your company but also to target countries that have a lower level of economic development (although in a more selective way), with the goal of compensating for deficits of any technological or commercial nature that the company might have; for example, through alliances and acquisitions. This is a common step for the more successful Spanish, Asian and Latin American companies.”

In the book, Garcia-Canal says another critical decision is “whether to become a ‘niche player, the sort of company that exploits a segment of a specific market, rather than a generalist that competes in every segment [of that market]. Normally, companies begin their expansion by entering more accessible segments, and then later expand their range of movement, or remain global specialists in one niche.”

The new multinationals are a heterogeneous group, moving in a new setting of global segmentation with niches that are increasingly differentiated. The authors identify the key variables that drive these new multinationals’ strategies. Some opt to serve specific market segments while others choose to be more generalist. Some adopt a “multi-domestic” approach, adapting their strategies to the characteristics of each country. Others adapt a global focus, using the same strategy to compete in each location.

What truly reveals how much these multinationals have grown is that under some conditions, the resources owned by local partners in emerging markets can become a solid basis for building a multinational corporation; providing skills for the organization, management, project execution, policy making and networking that promote and support the company’s internationalization process. These skills are transformed into the foundation for developing technological and marketing skills, whether internally or externally, especially if the firm is exposed to established markets that are sophisticated and multinational.

The book concludes that “the growth of these new multinationals reveals the specific skills of a company are diverse, malleable and dynamic. Their future as successful global competitors will depend entirely on their skill at continuously transforming and recombining their skills.”

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