The modern emergence of Spanish multinational enterprises (MNEs) in Latin America is a story often untold. But it has had profound economic effects both in Spain and in the region.
Following the death of Francisco Franco in 1975 and the start of efforts to liberalize the Spanish economy, Latin America was the first and most obvious destination for Spanish outward capital flows, given the economic and cultural affinities. By 1999, Spanish foreign direct investment (FDI) in the region surpassed that of the United States—a development unimaginable just a decade earlier.
Today, investors who bet on Latin America are considered shrewd by most scholars and industry analysts. But in the 1990s, Latin America was associated with financial crises, banking collapses and political meltdowns. Today, with Spain in crisis, the region, like other emerging markets, looks increasingly like a safe bet for investment. As a result of international decisions made in the 1990s, Spanish multinationals find their incomes and risk profiles relatively well positioned.
Pablo Toral provides us with important context and background for these remarkable developments in Multinational Enterprises in Latin America since the 1990s. He writes that the expansion of Spanish firms was a result of their “market knowledge” and the distinct competitive advantage they brought to their ventures in Latin America. Toral, the Mouat Junior Professor of International Studies at Beloit College, addresses important theoretical issues; but above all, he avoids stereotypes of the region by highlighting the differences among sectors, firms and strategies.
The book begins by looking at how market conditions in the region were similar to those of Spain two decades earlier. Both experienced similar “processes of political and economic liberalization,” though at different times. Spanish firms that developed strategies following Spain’s period of economic liberalization found that they could easily adopt those same methods to the transforming economies of Latin America. Managers concluded that “in Latin America it would be easier to replicate their firms’ corporate cultures and transfer their advantages,” Toral writes.
Toral explores the four most important investment destinations for Spanish MNEs: banking; telecommunications; energy; and oil and natural gas. Here, Toral specifically focuses on the investment decisions of seven Spanish firms before each would go on to expand (the names have since changed): Banco Bilbao Vizcaya Argentaria (BBVA); Santander Central Hispano (SCH); Telefónica; Endesa; Iberdrola; Unión Fenosa (UF); and Repsol-Yacimientos Petrolíferos Fiscales (Repsol YPF).
But new sectors—Spanish venture capital, private equity and textiles—and companies have emerged even more recently, most notably the Inditex Group (the owner of 5,154 stores worldwide, including Zara and Zara Kids).
The firms examined in Toral’s book reaped massive success in Latin America. Some, like Telefónica, have gone on to become major global players in their industries. Now one of the largest telecommunications groups in the world, Telefónica became the largest single private investor in Latin America, having poured more than $100 billion into the region over the past two decades.
By 2009, Toral notes, its customers in Latin America had grown from zero in 1988 to more than 167 million. A rapid rise in fixed-line and cellular demand was complemented by a smart business strategy that prioritized geographic expansion, a focus on individual consumers and diversification.
It is interesting to read this book in the context of the Spanish (and European) economic crisis. The year 2010 was a particularly bad year for the Spanish economy, which contracted 0.1 percent. This year looks to be better (with 0.7 percent estimated growth)—but still weak.
The economic crisis is further accelerating the transformation of Spanish corporations, which are now increasingly looking outward for investment opportunities. Multinationals are significantly raising their profile, precisely because—as Toral shows—they invested massively in Latin America. Santander and Telefónica alone invested a fresh $14 billion in the region in 2010.
But Spanish interests are not confined to Latin America: in September 2010, Santander acquired a 70 percent stake in Bank Zachodni WBK for $3.7 billion, Poland’s third-largest bank in terms of branch offices. The construction group Actividades de Construcción y Servicios, S.A. (ACS) successfully acquired a majority share in Hochtief, Germany’s largest construction company, in early 2011.
This international expansion is reflected in the positive showing of Spanish corporations in the IBEX 35, the benchmark stock market index of Spain’s principal stock exchange. In the first quarter of 2010, almost 53 percent of the IBEX 35 revenue came from overseas—an increase of almost 3 percent from the previous year.
In some cases, overseas income greatly outweighed that from the domestic market. For example, the food processing group Ebro Foods, S.A., saw 94 percent of its total income originate abroad in 2010, while Gamesa Corporación Tecnológica, a manufacturing company focused on wind energy, generated 80 percent of its income from overseas. This trend will increase: 95 percent of Inditex Group store openings are now overseas, especially in Asia.
With the deepening of the crisis, there was mounting concern that Spanish FDI to Latin America might suddenly grind to a halt.
It is true that the record levels reached in previous years are unlikely to be seen again soon. As Toral notes, FDI peaked in 2002, when Spain accounted for 22 percent of all FDI stock received by Latin America. But by 2009, Spanish FDI stock in Latin America fell to 13 percent of total global outflows, and FDI destined for Latin America accounted for barely 10 percent of all investment outside Spain.
However, this does not mean that Latin America has lost its appeal. Far from it.
Spain’s comparative loss of weight is due to the upsurge in new Asian investors arriving on the scene—plus the investment boom by Latin Americans in their own continent. While Banco Santander was taking complete control of its Mexican subsidiary, Telefónica was doing the same with Vivo in Brazil. Together, the two companies invested a respectable $10 billion in Mexico and Brazil last year.
On the energy front, the oil company Repsol YPF announced plans to continue investing in Latin America with some $5 billion in prospective oil projects in Brazil.
And that’s not all. Today’s crisis in Spain may prompt many firms whose presence in Latin America is still rather limited to speed up their overseas expansion plans. One such company is Indra Sistemas, S.A., an information technology company that multiplied its contracts in the region in 2010, particularly in Brazil, Peru and Chile. In the energy sector, Acciona Energy last year signed the largest-ever loan in Latin America for renewable energy—$375 million—while Abengoa announced a $180 million investment to build Mexico’s largest cogeneration plant.
As Toral reminds us, interpreting the next wave of Spanish investments requires an understanding of the first wave. This makes Toral’s book a very timely read. Readers without much background knowledge will find it readable and easy to understand, but regional scholars will also find it informative. The book also nicely complements
previous studies, in particular The Rise of Spanish Multinationals: European Business in the Global Economy (2005), Mauro Guillén’s milestone on the issue of Spanish corporate internationalization.
In the new decade, Latin American investors are poised to return the favor. With Brazilian, Mexican and Chilean companies making inroads in Europe, Spain is a lucrative target. The Spaniards would be well advised to keep their attention focused on the region, and encourage an even greater two-way connection with Latin American MNEs when they arrive.