The growing presence of Argentine manufacturers in the global economy has resulted from an intensely collaborative effort. The partnerships during the various stages of this push into foreign markets is the major theme of a study entitled, “Three phases in the globalization of Argentine industrial markets: A history of pioneers, incursions and fragility,” by professors Bernardo Kosacoff, director of CEPA/United Nations in Buenos Aires, and Adrian Ramos, an economist in the same organization. In an interview with Universia Knowledge at Wharton, Kosacoff and Ramos discussed the study’s key findings.
Universia Knowledge at Wharton: What are the main conclusions of your study?
Adrian Ramos: From a long-term perspective, an analysis of the globalization of Argentine manufacturing firms in terms of their [direct investment in foreign markets] suggests that this process has not been the result of an isolated microeconomic phenomenon exclusive to a limited number of firms. Instead, it constitutes one of the distinctive phases in the evolution of [Argentina’s] industrial production, and its interactivity, within the restrictions and opportunities presented by the international situation. The most recent phase has involved a wider opening up to global trade currents; foreign capital and technology and intensified competition. Companies have been forced to reinvent and reposition themselves. Foreign Direct Investment is one of the central components in the process of restructuring and respecialization in the business world.
UKnowledge at Wharton: What are the most notable differences that you discovered in the behavior of the market and of Argentine companies during the various phases that you mention?
Bernardo Kosacoff: The current globalization process of a group of Argentine firms was foreshadowed by two approaches to industrialization and globalization made in the past. The first such approach began at the end of the 19th Century and it focused on producing primary products targeted at foreign markets. It was so dynamic that it led to an incipient industrialization process that targeted both export markets and domestic consumption of such goods.
That way, during the first decades of the 20th Century, a limited core of companies were created [in Argentina] which, in many cases, had ties with international financial capital, and which extended their operations into agribusiness and financial markets. This degree of internal diversification and international connections gave these companies significant economic strength and assured them international prestige. These factors enabled them to successfully deal with the ups and downs of the marketplace. They pioneered a phenomenon within the realm of agribusiness exports in Latin America: Some Argentine companies became the first companies from outside the developed world to make progress toward globalization by establishing industrial plants in foreign countries. Uruguay, Chile and Brazil were the first countries they moved into.
The second phase was marked by typical conditions in the process of import substitution. It began during the 1930s and ended during the 1970s. In this stage, about a hundred firms established Foreign Direct Investment strategies, adding up to the first “wave” of companies that globalized during their agri-export phase. Unlike the big economic firms that were tied to the previous model, which diversified their domestic production into other productive and financial sectors, the companies that drove this second wave of FDI generally maintained their original organizational structures — with scarcely any diversification and a reduced number of production facilities — while also, generally speaking, not extending their businesses into the financial sector. Their natural realm of operation remained the local [Argentine] market, and they undertook only a relatively small amount of economic activity in foreign markets.
These were family-owned companies rooted, in many cases, to the personal skills and vision of immigrants who arrived in Argentina at the beginning of the century. Their initial development was intimately associated with the regulatory restrictions of import substitution [including] high levels of protectionism; strong links to a system of public sector loans and promotional mechanisms. They managed to create their own technological heritage based on imitating production technologies and processes, while adapting those processes to the conditions of the local market. Their approach to production was tied to marketing initiatives that often operated at a high level of vertical integration as a result of the insufficient development of a local network of sub-contracting. Beyond the technological, productive and organizational advantages enjoyed by local firms, various aspects of their regulatory apparatus, as well as local society in other countries, played an important role in some cases.
UKnowledge at Wharton: How did these companies evolve?
Kosacoff: Brought together by changes on the international technological frontier and by local economic volatility and uncertainty, their process of economic opening gradually became deeper, and acquired a specialized character dominated by intensive activity in natural resources and capital. A combination of factors showed evidence of the restrictions that the local businesses faced in the process of globalizing their foreign direct investments. Among these were limitations in hiring and training human capital; problems getting access to international financing and operating in open markets with corporate transparency; a relative paucity of spending on research and development as compared with sales volumes; specialization in mature areas of production; barely any participation in leading-edge technological sectors; the aggressiveness of transnational enterprises in their competitive positioning and the asymmetry in their size in comparison with other global corporations.
As a result of these problems, many of the larger locally owned companies sold off their positions in the market to multinational corporations. Thus, the scale of the foreign investments made by Argentine companies has declined considerably in recent years. Nevertheless, so far, foreign investment initiatives made by [Argentine] industrial companies have not been all that restricted in their scope; they have taken various forms, and their dynamics vary in terms of areas of productive activity. One outstanding example is in the agribusiness sector. There have been a growing number of cases of FDI motivated by varied circumstances [including] as a search for [natural] resources and raw materials. New local business networks such as Los Globo and El Tejar provide examples of this behavior, with their investments in Brazil, Uruguay, Bolivia and Paraguay for the production of soybeans. The producers of this crop benefit from their capacity to adapt to changes in technology and to new ways of organizing agricultural activities based on the logic of networks.
UKnowledge at Wharton: Most recently, how have businesses dealt with the new era of globalization?
Ramos: The latest phase in the globalization process of Argentine companies reveals the combination of elements that characterize the transition these companies are undergoing. This process requires companies to make organizational reforms and make strategic adjustments in their hiring and training of personnel. At the same time, it promotes the introduction of new financing instruments, and participation in global capital markets. This process is challenging these companies to provide growing transparency and modern criteria for corporate governance. In addition, they are rethinking their competitiveness by building stronger links between their production, distribution, marketing and [customer] support services. By merely enumerating the various aspects involved in the realm of production, we can show the complexity and multiplicity of determining factors.
Yet, the positioning of Argentine companies in future foreign markets will not expand naturally over a long time. There is a growing need to evaluate the possibility of taking action in the public and private arenas to strengthen the FDI process and enabling the convergence of its private and social benefits.
UKnowledge at Wharton: In your view, how much potential do Argentine companies have in Asia?
Kosacoff: Neighboring countries were the main destination of foreign direct investment activities [by Argentine companies]. While the investment substitution approach was rooted in countries that were relatively undeveloped, Brazil gradually became the central focus of foreign activity during the latest phase. Investments in the NAFTA [North American Free Trade Agreement] countries [the United States, Canada and Mexico] stand out because of some significant operations, while the presence in Asia was very limited. In any case, the recent international crisis made it even more obvious that it is important to win over Asian markets in the global context; especially when it comes to the internationalization strategies of companies.
UKnowledge at Wharton: Did the so-called ‘corralito argentino,’ which took place in 2001, affect this process significantly? In that event, Argentina almost completely froze bank accounts and forbade withdrawals from U.S. dollar-denominated accounts.
Ramos: Looking at it from the perspective of a long-lasting impact, the weakness in the structure for financial intermediation is a fundamental characteristic in the evolution of the Argentine economy. During that crisis, physical volumes fell by about 20%, with an abrupt re-composition of cash flows. Companies significantly reduced the length of their payment periods, achieving a situation in which they almost exclusively sold at a cash price. Over a prolonged period, the firms’ operational costs [including] salaries, public service rates, taxes and rents were maintained at a practically constant level in nominal terms.
In contrast, prices of goods that were traded [rather than set by the government] increased significantly. The result was a notable improvement in the margins of profitability that, along with a re-composition of the cash flow, enabled the self-financing of investments and the restructuring of the debt. This process of corporate self-financing is widespread, and it will very probably continue. To grow on a sustainable basis, however, Argentina needs a new leap forward in its rate of investment. This higher rate of capital accumulation needs to be financed. In this sense, there seems to be an inevitable trend toward the creation of long-term financial markets and a greater orientation in the credit system toward the selection and financing of investment projects.
UKnowledge at Wharton: What are the distinctive elements in the management of these sorts of Argentine companies compared with other multinationals based in other countries?
Kosacoff: During the transition from a semi-closed economy toward an open economy, the [Argentine-based] subsidiaries of transnational companies had very different problems when it came to acquiring access to financing than the large locally owned companies had. The [Argentine] subsidiaries of multinationals had greater access to international capital markets; empirical evidence reveals the problems that the [the local firms] experienced. In some cases, these problems also meant that locally owned large companies sold their positions in the market as a result of the imperfections of [Argentine] capital markets, more than because of any limitations in the technology and productive capacity [of the locally owned firms]. In other cases, it became impossible for local companies to disassociate their [Argentine] country of origin with the sovereign risk of Argentina [which suffered on global markets]. Financing limitations were one of the most important factors that limited the success of Argentine companies’ globalization efforts.
UKnowledge at Wharton: Who will the Argentine firms be competing against?
Ramos: [Among Argentine companies] there are three distinct strategies for internationalization:
1) Globalized Argentine companies, such as Techint, which [produces] seamless steel tubes. Other companies that are less significant companies in that regard include IMPSA (in renewable energy) and Arcor, which makes candies.
2) Latin America-focused companies, including Bago and Roemmers, with their lines of pharmaceuticals.
3) Companies focused on targeting the other Mercosur nations [Brazil, Uruguay, and Paraguay], and the other countries that border Argentina [Chile]. This is the case for most companies that internationalize their operations through FDI.