Wednesday, November 5, 2014

Multinational Corporations (MNCs) in Latin America

Academic paper by: Prof. Dr. Badar Alam Iqbal* (
Department of Commerce, Aligarh Muslim University, India


Multinational Corporations (MNCs) are the drivers of globalization and internationalization. MNCs have substantially contributed to the world trade and development as has been identified by multilateral financial institutions such as IMF, World Bank, World Trade Organization and UNCTAD, to name a few. Latin American Region is home to emerging economies and is deeply integrated in the world trade. The paper presents an overview of Multinational corporations (MNCs) in Latin America.


Globalization in simple words stands for free flow of goods, services, people and ideas. Globalization started with the voyage of Christopher Columbus in 1492 and was later on followed by Vasco da Gama in 1497. Since then, artificial entities have treaded the path and have settled offshore for capturing the markets. One cannot deny the contribution of small trading firms and small investors in world trade and investment but it is the multinational corporations (MNCs) that are responsible for a lion’s share of world trade and investment. MNCs are such artificial entities having a common seal and perpetual existence. An MNC is an enterprise that owns and controls production or service facilities outside the country in which it is based. (United Nations, 1973). East India Company of England may be treated as the progenitor of modern day establishment of MNCs. Over the past century MNCs have boosted and contributed to the world trade substantially. Latin America comprises of South America, Central America and the Caribbean. Overall it is a conglomeration of more than 20 economies characterized by the presence of emerging economies to which MNCs are attracted due to presence of untouched markets and untapped resources. Thus, it becomes imperative to develop an overview of MNCs in Latin American economic region.

It is to be noted that Latin American economic region promises hope for MNCs. The period of 1990s in Latin American economic region is attributed to the second surge in multinationalization (Martinez & Ivan, 2003). This happened as major MNC acquired companies and consolidated their positions across the region. Basically it involved the following:-
  • · Privatization of State owned Industries: During the period 1991-2000, the MNC share increased by 13%. E.g. the Spanish MNC Repsol became one of the world’s biggest oil firms after purchasing Argentina’s state owned YPF to form Repsol YPF in 2002 (Martinez & Ivan, 2003). 
  • · Battle for regional dominance among global MNCs: Regarding this the following extract from “Multinationals Latin America’s Great Race, 2003” clearly states- “For instance, over a period of 10 years, Spain’s two largest banks, Banco Santander Central Hispano SA (BSCH) and Banco Bilbao Vizcaya Argentaria SA (BBVA), snapped up banks to become leaders in every major market in Latin America” (Martinez & Ivan, 2003)
  • · MNC led industry transformations: An example of the same is expansion of Wal-Mart (The Retail Giant of US) starting from Mexico and spreading towards south (Martinez & Ivan, 2003).

The following is the extract about involvement of MNCs in Latin America according to Casanova (2012:28):
“The decade of 1990s was marked by the transformation of Latin American economies through trade liberalization, privatization of the public sector, market deregulation and fiscal reforms. As a consequence, the region became during the period much more attractive to Multinational Corporations (MNCs), and the net Foreign Direct Investment (FDI) inflows in Latin America grew from US$ 18 billion at the beginning of the 90s to US$ 108 billion in 1999. In 2011, Latin America reached US$ 153 billion in FDI, which represented 10 % of the total FDI in the world. Thus, it is not surprising to note that Europe overtook the United States as the most important source of Foreign Direct Investment in Latin America in 1998 and has remained the most important investor since then. According to ECLAC (2012), in the last decade 40% of the investments came from European Union. The European Union remains today the leading source of FDI and official development assistance and the second biggest trade partner for the LAC region.”

The objective of this research paper is to present an overview of MNCs in Latin American Economic Region. The study is based on the limited data available on the official and international institutions websites. Reference to academic research papers is limited due to access to limited academic databases. MNCs code of conduct with special reference to Latin American economic region has not been dealt in detail.

Definitions and Theoretical Framework related to MNCs

MNCs are increasingly discussed in the international business circles both academic and professional but hardly a consensus is found on the definition of MNCs. Even the theoretical framework presents a number of different theories for understanding MNCs structure such as Chandler MNC structure (1962), International Division Structure, Area Division Structure, Product Division Structure, Global Matrix Structure. In addition to this, different organizational models have been propounded to understand MNCs such as Multinational Organizational Model, International Organizational Model, Global Organizational Model and Transnational Organizational Model.

Restricting the discussion within the objective of the study, it is imperative to mention key definitions of MNCs. MNC is a business enterprise maintaining direct investment outside home country (the country to which it originally belongs or where its head office is based) and that has value added holdings in more than one country (Spero & Hart, 2003; Dunning, 2008). MNCs may also be treated as privately owned institutions that organize, through various means, interdependencies between individuals in more than one geographical territory (Hennart, 2008). Not only this, MNCs are economic organizations growing from its domestic origins and spreading across borders (Kogut & Zander, 2003).

With respect to benefits of MNCs, it has been observed that MNCs increase investment, income, employment; transfer technology and contributes to inventions and innovations (Heidenreich, 2012). Regarding strategic objectives of MNCs, global efficiency, flexibility and organizational learning have been identified (Bartlett & Ghoshal, 1992). It has been clearly identified that capital flow is not the distinguishing characteristic of MNC (Hymer, 1976). MNCs are the product of foreign direct investment that is defined as the effective control of operations in a country by foreign owners. From a sociological point of view, MNC is the mechanism by which organizational practices are transferred and replicated from one country to another (Kogut, 2003). Cuervo-Cazurra (2010) coined the term of Multilatinas referring to the companies coming from American countries possessing value added operations outside the places of origin. Casanova and Fraser (2009) has previously highlighted that Multilatinas have taken advantage of their domestic positions in order to expand their operations through Latin America. In addition to this, according to Cuervo-Cazurra (2007a), Multilatinas is the phenomenon of liberalization of eighties and nineties that forced Multinational enterprises to improve and progress on their levels of competitiveness so as to bear the challenges of internationalization. Multilatinas have smaller size, less technology and less sophisticated resources in contrast to developed country MNCs giving an edge to Multilatinas in domestic operations. Multilatinas enjoy the ability to manage difficult situations due to their challenging experiences at regional level. Rivera and Soto (2010) define Multilatinas as MNCs originating in Latin America that own and control access abroad through FDI and develop adding value activities. Other factors responsible for the internationalization process of Multilatinas are the population distribution, the education levels and Free Trade Agreements at intra-regional level. Gonzalez-Perez (2010) highlights that the competitive advantages of Multilatinas will allow them to broaden its internationalization process. Santiso (2008) stresses the role of Brazilian and Mexican enterprises in the appearance of new multinational corporations in the emerging markets of Latin America and Multilatinas came up due to the push and pull factors along with fall in the cost of capital in the region.

MNCs conflicts with home country and measures of control

The major sources of conflict of interest between the home country government and the MNCs are as follows:
  • · Large numbers of MNCs shift their profits to a tax haven country and then from there they invest in other home countries. MNCs at times hide their actual profits through transfer pricing technique in order to evade taxes.
  • · Due to the spread of R&D facilities among subsidiaries, the home country may remain deprived of such facilities.
  • · MNCs enjoy economies of scale due to large production. This makes them sell goods at lower prices. When selling in domestic market, it becomes a threat to the domestic firms of the home country.
  • The following are the measures of control taken up by the home country government:
  • · The home government can prohibit any investment or technical collaboration with a particular host country. E.g. the US Government had not allowed the transfer of the latest computer technology to East European countries during 1980s. 
  • · The home government can design fiscal and monetary disincentives to deter any outflow of investment. Discriminatory tax and exchange control mechanisms may be used. E.g. during the US Balance of payments crisis of late 1950’s, the government has restricted the outflow of its currency for overseas investment.
  • · The home government may tighten rules and regulations relating to approval of outward FDI. E.g. during 1970s and 1980s, foreign joint ventures and capital investment were allowed under restrictive policy in India. 
  • · The home government may introduce extra-territoriality provisions to interfere with the MNCs foreign subsidiaries. It can also use anti-trust laws against MNCs

MNCs conflict with the host government and the measures of control

The major sources of conflict of interest between MNCs and host-country government are as follows:
  • · MNCs take advantage of resources available in the host country but are not concerned with the environment or sustainability. MNCs on this count argue that they are utilizing the unused resources, catering to the demand of the local population and giving employment to the locals.
  • · Domestic firms try to isolate MNCs by political initiatives. The reason being that in view of the low price of MNCs, domestic firms cannot market the goods.
  • · Government monitor MNCs in view of MNCs gaining a monopolistic position that may become threat to the host government. 
  • · MNCs may involve in unethical practices, such as bribing the officials, encouraging cross border transfer of funds circumventing the exchange control regulations in the host country, etc. Through bribing the politicians, they cause threat to the very political setup in the host country. (Boatright, 1993)
The following are the measures of control taken up by the host country government:
  • · The host country government insists on appointing government representatives on the management board and on manning the senior positions with the local personnel who are expected to work in the interest of the host country. 
  • · The host country government insists on the domestic participation in the equity share capital. The profits are distributed among the local shareholders minimizing the outflow of scarce foreign exchange. 
  • · The host country government issues guidelines to the MNCs to purchase inputs from the domestic sources. In cases, subsidies may be given as incentive to purchase inputs from the domestic sources. 
  • · The host country government puts in restrictive clauses in the import rules and encourages strict surveillance in order to check unwarranted activities. 
Another important area related to MNCs is their code of conduct that has been a subject of much disagreement between developed and developing nations.

Review of Literature

For qualifying as an MNC the number of countries where the firm operates must be at least six (Vernon, 1971; United Nations, 1978). At the same time, the firm must generate a sizeable proportion of its revenue from the foreign operation, although no exact percentage is agreed upon. This entirely means that the firm should be big enough to have its stronghold in many countries through branches and subsidiaries. MNCs stronghold in the host countries is evident from the fact that in 2002, 57.5 percent of the total sales, 48.1 percent of the total assets and 49.1 percent of the total employment in top 100 MNCs were accounted for by the host countries (United Nations, 2004).

According to the behavioral definition of MNCs given by Vernon and Wells Jr. (1986), MNCs represents a group of subsidiaries located in different countries that are:
  1. Linked through common ownership
  2. Draw upon a common pool of resources
  3. Respond to a common strategy
  4. Highly integrated
On the basis of strategic features, MNCs are grouped as ethnocentric, polycentric and geocentric (Perlmutter, 1969; Perlmutter & Heenan, 1974). Ethnocentric MNCs are those that adopt home-market oriented policy and seldom distinguish between the domestic operation and the global operation policies. On the other hand, polycentric MNCs operate in the foreign country just to cater to the demand in those countries. They follow a host-market oriented policy. The geocentric MNCs maintain a balance between the home-market and host-market oriented policies. Punnett and Ricks (1997) differentiates between a multi-domestic company and MNC. According to them, the former is concerned more with the market of the host country where it operates; the latter is concerned with the global market. Bartlett and Ghoshal (1989) differentiate between a MNC and a transnational company. In the former, decision making is normally decentralized and the activities of the firm are not strongly coordinated. In the latter, the global business activities of the firm are perfectly configured, coordinated and controlled so as to achieve global competitiveness.

The review of existing literature shows growing involvement of MNCs in Latin American economic region. Last thirty years have witnessed the development of global strategies by MNCs dramatically (Adler, 1997; Bartlett & Ghoshal, 1998). The present global integrated world has accepted MNCs as the main players of global knowledge based economy in transforming the current global business environment. MNCs are obliged to operate in different national contexts (Heidenreich, 2012). The phenomenon of the rise of multilatinas is a consequence of the process of economic liberalization in Latin America in the period of 1980s and 1990s (Cuervo-Cazurra, 2007). For MNCs important factors influencing efficiency includes productivity, economies of scale, learning curve effects and a company cost culture (Adler, 1997). MNCs over a period of time have paid emphasis on these key issues and have gained substantially. MNCs have a flexible approach that means ability to explore opportunities and manage risks arising on part of diversity and volatility in global business environment (Bartlett & Ghoshal, 2000). Due to MNCs cross country presence, knowledge and competencies have transferred to foreign markets from home country (Mabey & Salaman, 1995). It has been observed in the past literature that same has happened to the Latin American Region. MNCs competitive moves are integrated across nations (Albrecht, 2001). MNCs have gradually matured enough and to compete efficiency they have achieved global advantages by remaining globally competitive in due course (Shah & Yusaff, 2012). MNCs in Latin American continent have fostered and profited from Latin America’s vast market potential (Martinez & Ivan, 2003). After 2001, the ownership of 500 largest companies in Latin America changed with Non-Latin multinational ownership growing to 39% from 27 %. In 2000, there were 166 merger and acquisition (M & A) deals initiated by MNCs for a total value of $102.6 billion (Martinez & Ivan, 2003). The trend has continued since then due to unmatched competence of MNCs.

Regarding future of MNCs, their fate depends on the response of economies as governments are rethinking about globalization and open door policy after the 2008 World economic Crises (KPMG, 2012). MNCs expand their businesses through FDI mode that has been identified as a competitive way in comparison to exporting for operating in international markets as it generates the highest profit levels ( Lu and Beamish, 2000; Tang and Yu, 1990). According to Eiteman, 2004 a joint venture is usually the best option when a company wants to get immediate understanding of the market and wants to enter the market through a less capital intensive approach. Latin American Region has witnessed steep rise in joint ventures initiated by MNCs. In the long run, MNCs can generate value in Latin acquisitions in two ways: by increasing productivity and by capturing synergies (Martinez & Ivan, 2003).

MNCs in Latin America

According to World Trade Organization, Latin America in 2012 witnessed GDP growth rate of 2.2% and Gross Capital Formation of 21%. GDP at current prices (US$) was 5.343 trillion and GNI per capita (current prices) was US$ 8999. According to CEPALSTAT, 2012 annual GDP of Latin America at current prices (millions) was 5701 US$. Annual GDP per capita at current prices stood at 9489 US$ (millions) and growth rate was established at 3%. The balance of Current Account stood at 99914 US$(millions). This overview makes a strong case for Latin America as an economic region with untapped potential for Multinational Corporations (MNCs). For an overview, it is necessary to show the data related to the growth in MNCs in past few years. The following graph highlights the same:-

Source: América Economia (1991-2001)
Chart 1 shows the growth of MNCs in the largest 500 Companies in Latin America. From 27% in 1991 it has gone up to 30% in 1995 and from 30% in 1995 to 39% in 2001. If simple growth rate is calculated it comes out to be 11% for 1995 and 30% for 2001. If overall growth rate is calculated from 1991 to 2001 it comes out to be whooping 44%. The data highlights the growing presence of MNCs in Latin America. On the other hand, eventually the domestic companies of Latin American region have declined from 53% in 1991 to 52% in 2001 at a negative growth rate of 0.18%. With respect to Latin American MNCs this trend has discontinued; according to Fortune 500, 2006, 14 Latin American companies have been placed in global 500 companies. Due to unavailability of updated data on the ownership of largest 500 MNCs in Latin America another data related to top 500 companies is presented below to show an overview. The following data relates to top 10 MNCs of Latin America among Latin 500:-

Table 1: Top 10 MNCs in Latin America (in millions of dollars)
% change
% change
Petrobras, Brazil
Pemex, Mexico
PDVSA, Venezuela
America Movil, Mexico
Vale, Brazil
Telefonica, Spain
BR Distribuidora, Brazil
Ecopetrol, Colombia
Odebrecht, Brazil
JBS, Brazil
Source: LBC 500, Economatica,

In order to analyze present position of MNCs in Latin American economic region, foreign direct investment (FDI) in Latin America needs to be studied. According to UNCTAD report, 75% of foreign direct investment (FDI) is pumped by the MNCs in the global economy. This acts as a base for developing our understanding. Another important point is highlighted in the data, share of government owned companies have declined and that is the benefit for MNCs in Latin America. It has declined from 20% in 1991 to 9% in 2001. Data related to FDI Inflows is reproduced here from UNCTAD Interactive Database:-
Table 2: FDI Inflows in Latin American Continent
US Dollars at current prices and current exchange rates in millions
      Central America
      South America
. Source: UNCTAD Interactive Database, 2013
Table 2 represents the data of FDI Inflows for five years i.e. from 2008 to 2012. The whole of Latin America is divided into three parts, popularly named as LAC (Latin America and Caribbean), namely Central America, Caribbean and South America. This has been done in order to analyse the FDI Inflows. The data would be analyzed with the help of Simple Annual Growth Rate (SAGR) and Compounded Annual Growth Rate (CAGR). Simple Annual Growth rate is calculated by dividing the change from previous year to current year divided by the previous year as base. Thus, first year is excluded as previous year data is not available. Simple Annual Growth rate shows the yearly growth on the principal investment of the previous year as base. This is more appropriate in case of changing economic environment. On the other hand, compounded annual growth rate (CAGR) shows the change over the initial invested amount with a compounded rate. The following tables will highlight both the growth rates:
Table 3: Simple Annual Growth Rate of FDI Inflows (%)
Economic region

Central America
South America
Source: Calculated by the author
An analysis of table 3 clearly indicates that the growth rate has declined in the Caribbean economic region eventually, though it has shown a correction increment from 2010 to 2011. With respect to Central America, in year 2011 the growth rate has been negative which is alarming but has been corrected by a positive growth rate of 5.83 % in 2012. In regard to South America, eventually it has decreased to 5.58 % from year 2009 but has again gained few points to reach to 7.73% in 2012.It is to be noted that South America has failed to achieve the golden rate of 2010 in the succeeding years ending in 2012.
Table 4: Compounded Annual Growth Rate of FDI Inflows (%) from 2008 to 2012
Economic Region
CAGR (%)
Central America
South America
                                    Source: Calculated by the author

An analysis of table 4 makes it crystal clear that South America has outperformed Caribbean and Central America in terms of the compounded annual growth rate. South America shows a CAGR of 19.19 % while Caribbean shows 18.86%. Central America has showed the least CAGR that is 8.75%. This shows the superiority of South America in the compounded growth of FDI inflows. This leads us to the point that overall in the last few years the economic environment has not been favorable for multinational corporations in Latin America. The obvious reason may be the global economic crisis and the slowdown witnessed in the aftermath. This signal needs to be properly read out by the policymakers for Latin America in case the aim is to attract Multinational corporations (MNCs) in general and Foreign Direct Investment (FDI) in particular.

Chart 2 makes it crystal clear that except Central America, FDI Inflows have increased which gives the signal of increasing involvement of MNCs in Latin American continent. The decline is found with respect to the Central American region that shows a decline starting from 2011 but it has again gone up to $397292.29 million in 2012 from $375409.85 million in 2011. This again shows a revival in the region regarding MNCs investment. It is to be noted the South American region which comprises of Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Falkland Islands, Guyana, Paraguay, Peru, Suriname, Uruguay and Venezuela have performed far better than Caribbean and Central American region. This is the reason that MNCs are more in South America as compared to the other two regions. Data related to FDI Inflows in respective economies is also important to specifically know the position. The following charts will highlight the same:-

Chart 3: FDI Inflows in 2011 for Caribbean economies (US $ millions)

Source: UNCTAD Interactive Database
Chart 4: FDI Inflows in 2011 for Central American economies (US $ millions)

Source: UNCTAD Interactive Database

Chart 5: FDI Inflows in 2011 for South American Economies (US $ millions)

Source: UNCTAD Interactive Database

Chart 3, 4 and 5 shows the economy wise FDI Inflows in Caribbean, Central America and South America, respectively. With reference to Caribbean, Anguilla has attracted highest FDI representing the increased presence of Multinational Corporations and Barbados the lowest. Belize in Central America has attracted highest FDI inflows in 2011 again suggesting the involvement of MNCs and Nicaragua the lowest. Brazil one of the emerging economy of Latin American continent has attracted highest foreign direct investment (FDI) inflows in 2011 in South America and Guyana the lowest. Thus, on the basis of data it can be said that the emerging economies of Latin American continent are still witnessing the growth of MNCs supporting the trends of 2001 as recorded by America Economia, 1991-2001. It would be imperative under the study of MNCs to highlight the top most MNCs in Latin American continent. The following is the list of top 25 MNCs present in Latin American continent:-
Table 5: Top Latin American MNCs (with ranking)
2. Microsoft
3. Kimberly Clark
4. Telefónica
5. Accor
6. McDonald's
7. Dell
8. Diageo
9. Belcorp
10. Oracle
11. BBVA
12. Directv
13. Mapfre
14. Royal & SunAlliance
15. FedEx
16. SC Johnson
17. Grupo Falabella
18. Monsanto
19. Nextel
20. Novartis
21. Atento
22. The Scotiabank
23. Coca-Cola Company
24. Grünenthal
25. IBM

Table 6: Top 10 Latin American Publicly Traded Companies
Company Name
Coal & Gas
Banco do Brasil
Financial Services
Financial Services
Itau Unibanco
Financial Services
Vale do Rio Doce
America Movil
Metalurgica Gerdau SA
Gerdau Acos Longos
Wal-Mart de Mexico
Cemex SA
Source: LATIN TRADE, 2009;

Table 7: Top 10 Latin American Private Companies
Company Name
Petroleos de Venezuela
Oil & Gas
Oil & Gas
Pemex Exploracion
Oil & Gas
Pemex Refinacion
Oil & Gas
Organizacion Techint
Holding Company
Petrobras Distribuidora
Oil & Gas
Comision Federal
Pemex Gas
Odebrecht SA
Holding Company
Source: LATIN TRADE, 2009;


In the end it would be deemed fit to summarize the study. The study has highlighted the growing importance of MNCs in Latin American economic region by presenting the data related to FDI Inflows. As 75% of the FDI in the world is through MNCs, the presence of MNCs is felt all over Latin America. Several emerging economies in Latin American economic region has attracted huge foreign direct investment (FDI) by MNCs and thus envisage the future potential of Latin America. Therefore, the academic contribution of the paper is an overview of MNCs in Latin America particularly the activities of MNCs related to investing in the Latin American Economic region. The paper also highlights areas that needs to be studied further in order to search for causality in opposition to correlation so as to have insights for future decision making. It would be interesting to see what pattern is followed in the coming years with the presence of world’s most innovating MNCs in Latin American economic region who would be facing competition by the home MNCs: the mutilatinas of Latin America. Further research is required for analyzing the mergers and acquisitions (M & A’s) by MNCs in Latin American economic region.


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