By ROBERT GOLDSMITH
INSEAD Knowledge (http://knowledge.insead.edu)
A lot of attention has been focused on the remarkable economic success of China, India and other Asian countries. So much so that the rise of Latin American companies as major players on the international economic scene has almost gone unnoticed.
"Latin American companies have fallen through the cracks," says Lourdes Casanova, a lecturer in strategy at INSEAD and author of "Global Latinas: Latin America's Emerging Multinationals." "While other emerging market economies have been oversold, Latin America has been undersold. This book wants to celebrate the success of the region and its multinationals."
Since 2002, while the spotlight has been on Asia, Latin American firms have expanded aggressively on a global scale and Latin American investment in foreign countries has jumped accordingly. In addition, commodities (which historically have taken up the majority of Latin America's export basket) now account for less than 30 percent. A highly diversified range of products now accounts for the rest -- from IT services and technologies to steel, electricity, wine, cosmetics and oil and gas.
In "Global Latinas," Casanova examines the factors that made it possible for Latin America's large and medium-size companies to succeed internationally.
Until 1980, Latin American countries were the emerging market of choice. Brazil and Mexico had China-like growth of 7-10 percent for 25 years. But during the 1980s (the so-called "lost decade" because of the debt crisis that afflicted much of Latin America) the region's stunning growth stalled. And in 1989, the fall of the Berlin Wall saw the re-emergence of economies such as Russia, China and India, potential competitors with Latin America for the same resources and attention.
Prompted by the strict policies imposed on the region in the 1990s by the International Monetary Fund and World Bank, Latin American governments began to liberalize their economies. These policies required the privatization of state-owned companies, deregulation and the reduction of tariffs. They also brought a new wave of foreign multinationals to compete against domestic firms. To survive, Latin American companies had no choice but to grow in scale and expand internationally.
"These companies had been growing in a protected environment before this," Casanova says. "Now they felt threatened by foreign multinationals competing against them in their own region. The best defense was to attack."
During the 1990s, Latin American firms grew domestically and expanded within their natural markets, that is regions in geographical proximity and/or with the same language and shared history. One factor that smoothed the way for this international expansion was the North American Free Trade Agreement, which not only facilitated trade between Mexico, the U.S. and Canada, but also enabled cross-border acquisitions.
Then beginning in 2002, Latin American companies went global. This expansion was largely driven by a small number of major transactions, such as Mexican building materials giant CEMEX's takeover of U.K.-based RMC group in 2004 for $5.8 billion, and Brazilian mining company Vale's acquisition of Canadian nickel producer Inco for $17.8 billion in cash.
As a result of the economic growth of the last six years, Latin America has developed a rapidly growing middle class, and from 2003 to 2007, Latin American economies averaged growth rates of 5 percent. In 2008, Forbes magazine named Carlos Slim, founder of an empire of companies such as the Mexican mobile telecom company America Movil, as the world's second richest man, ahead of Microsoft billionaire Bill Gates.
Casanova identifies a number of drivers that have contributed to the success of Latin American multinationals. Besides looking for more stable markets to balance the volatility of the region, Latin American companies excel at innovating new business models and in setting up efficient operations. Some of this knowledge is based on what they have learned by cooperating with Asia.
Beyond that, Latin American companies have developed certain capabilities as a result of their unique domestic experiences, such as an understanding of the needs of those at the bottom of the pyramid (that is, the world's poor). These companies also have a tradition of strong and enduring leadership with one eye on long-term growth and another on short-term profits. And, perhaps most importantly in today's economy, a resiliency developed after surviving turbulent times for the last 20 years.
"In the West we sometimes thought it was normal for Mexico or Argentina to have this kind of crisis and we never thought that it would happen to us," Casanova says. "I think if we look more at Latin America, at how the region and these companies have survived a number of major crises, maybe there is a lesson or two for us."
COMING FULL CIRCLE
Latin American companies had looked for the stability that was lacking in their own region by expanding internationally into the stable markets of the U.S., Europe and Asia. But that stability has proved to be a chimera. "The current economic crisis has illuminated the international nature of financial instability," Casanova says.
On the other hand, Latin America still offers advantages not found in more mature economies, such as a large, expanding internal market, along with a young and growing population. Also Latin American economies are still growing despite the economic downturn. Brazil's economy, for example, is predicted to grow by 2 percent in 2009.
Paradoxically, the comparatively attractive business environment of their domestic markets could motivate global Latinas to focus on their own region again. And by doing so, they may be able to contribute to solving some of the enduring problems there.
"More than ever, there is a need for a partnership between governments, private companies and civil society to work together to reduce poverty and inequality in the region and contribute to the expansion of the internal markets," Casanova says.
While the world tries to sort out how to get out of the international economic mess, Latin America's global players are using this period as a window of opportunity to focus on matters back home.