Last March, 3rd, Alfredo Martín Scatizza, gave us a talk about doing business in Latin America. This talk, included in the MaDI Talks “Doing Business in“, allowed us to understand the peculiarities of this country. In the following paragraphs you can find more details!
International panorama in Latin America
There is no doubt about the sustainable growth that Latin America is experiencing, as well as about its great potential. However, it is also internationally known for the worsening of its financial conditions and its high debt. Likewise, they have a delicate financial relationship with Europe, and an even more unstable and unpredictable relationship with the US, due to the recent election of Trump as President. Nevertheless, we are hopeful that the highly beneficial free trade agreements will stay as they are now.
However, Latin America, especially Brazil, Chile, Colombia, Peru and Mexico and, to a certain extent, Argentina, is a constantly growing market. In fact, after Asia, it is the second fastest growing market in the world, even faster than Europe and the US, which have reached saturation levels. A “tax resistance” is expected to appear, which means that the net tax position of the government (expenses minus taxes) may not cover the savings of the private economy. This leads to deflationary pressure, which could provoke the investments of European and other countries’ small and medium businesses.
What are the advantages for the investors? Firstly, an acceleration of the development of the middle classes has taken place in the last few years, which has improved the purchasing power, increased demand for and consumption of sophisticated products and services. Latin America is also very rich in natural resources, so production in the region is easily accessible, and therefore logistics are easier. Besides this, the infrastructure for the most relevant industries is settled, but still far from reaching its full potential.
Preliminary concepts: definitions
Internationalization: Gradual process where a company sets its objectives and defines a systematic plan to operate across national barriers.
It is also important to know the benefits that internationalization brings to a company. For example, avoid being absorbed by other bigger companies, obtaining a higher competitiveness, making the most of the market niches, overcoming tariff and non-tariff barriers, etc.
Internationalization of companies has a significant role: externalizing the consumption. This allows consumers to choose among different brands. The Government is also a key player when internationalizing companies, especially in countries such as Argentina. It has also encouraged the development of the local economy. The bigger the number of companies, the higher the development of local economies.
Internationalization is composed of a series of phases, which have to be implemented gradually:
There are many variables that affect internationalization in terms of risk and commitment of resources. Franchising and licensing have a lower risk, while production subsidiaries or assembly companies have a higher risk and commitment of resources.
The Upsala model is one of the most sophisticated internationalization models. It is a gradual process that takes into account all factors (human, financial, etc.) and that starts with the development of the local business with irregular exportations and finishes with a production subsidiary in the country of destination.
There are four types of internationalization companies: Exporting companies, whose exports are passive; multinational companies, which are an almost exact reproduction of the parent company; global companies, with a high concentration of activities and a big focus on international activities, and transnational companies, which mix economic efficiency and adaptation to local markets.
There are determining factors involved in internationalization: for instance, similarities with the local market (cultural roots, language), physical proximity or political, legal and economic stability.
Different difficulties may arise during the internationalization process. This happens for example when there is an innovation gap, when the product does not adapt to the demand, or when there are access difficulties (restrictions). It is very important to adapt to the changes, and to the international quality standards and rules, which will increase competitiveness.
Trans-Latin companies have experienced a high growth during the last decades, where we could highlight three different moments. This has been due to their development and the emergency to create new economies in these countries.
The first phase of this internationalization was led by countries such as Mexico, Brazil, Colombia and Argentina in the 60s and 70sm where the main sectors were mining, oil and engineering works.
The next stage took place until the 80s. The main internationalization event was the privatization of the public companies, where the Government made huge investments to redirect automobile and technological sectors, as local Latin companies had lost strength, but Asian countries such as Korea, Taiwan and China took place in the opening of their economies.
In the 90s there was a technology boom where Latin companies from countries like Mexico, Brazil and Chile started accumulating technology to expand abroad, lowering interest rates and capital costs to attract investment. The leading sectors at the time were mining, telecommunications, assembling and hydrocarbons.
Study Cases in Latin America: Brazil
During the 80s, the country suffers a severe economic and social crisis under the administration of inefficient Governments. Later on, public institutions were created in order to foster the internationalization process for Brazilian companies; due to this boost, as well as the State interventionism, the revenue of leading companies such as EMBRAER or PETROBRAS grew exponentially, helping the Brazilian economy to build astonishingly.
The critical point was the method used by the Brazilian Government in order to succeed in this project, as they took over processes, technology and resources, turning the selected companies into real monopolies. Their main strength was the reduction of interest rates, which benefitted the domestic market.