DRAFT

CRITICAL REVIEW

Multinationals in Latin America

by
Robert Grosse
Routledge: London, New York, 1989
I.Introduction
This paper offers a critical review of the book Multinationals in Latin America authored by
Robert Grosse, currently Director of the Global Leadership Development and Learning Unit at
Standard Bank in Johannesburg, South Africa, Adjunct Professor of International Business in the
School of Global Management at Thunderbird University in Arizona, and a Fellow of the
Academy of International Business. He teaches in executive programs worldwide, specializing in
emerging markets. He is also the author of several other books as well as numerous articles on
international business. This book was first published in 1989 by Routledge (London, New York)
and is 265 pages long. It features 16 figures and 84 tables.
A.Purpose
The author’s purpose is to present a non-biased view of multinational enterprises (MNEs)
operating in Latin America and their interactions with the respective governments of the region.
He describes and analyzes the relationships between these competitors and sometimes
collaborators in order to develop additional methods to predict business outcomes over time in
varying economic and political environments in Latin America.
B.Method
The author begins the development of his thesis by giving a historical perspective on the
business and political relationship of MNEs and Latin America, beginning with a description of
the pre-1800 colonial era which saw Spain and Portugal as the first foreign countries who made
economic forays into Latin America by establishing farms and investing in raw materials. He
moves through the industrial revolution, which began in the late 19th century and ran through the
beginning of the 20th century, and describes the changes its rapid development of industries,
technology, etc., eventually brought to the business activities of MNEs who invested in the
region. The author then shows how the United States and Great Britain became the two largest
sources of MNEs in Latin America, later to be joined by Japan, Germany, and other European
countries up to the current time.
The author introduces us to the bargaining theory, which under girds his thesis. “The
‘bargaining theory of the MNE’ is used to describe MNE activities in Latin America, from
competition with rivals to dealing with host governments. The bargaining theory considers
MNEs as actors in a multi-player game, in which governments set rules and seek to channel
company behavior into desired activities, while companies attempt to outcompete their rivals
in each market, and to minimize the burdens imposed by governments.” (p. 34) He uses
illustrations of foreign direct investment in countries such as Venezuela and the countries of
the Andean Pact, outlines the strategies of MNEs in reaching their financial goals, and
describes some specific industries, mainly the chemicals industry along with state-owned
industries, to analyze the bargaining theory.
The author concludes with analyses of current and future trends to prove the validity and
usefulness of the bargaining theory in predicting economic outcomes for MNEs in Latin
America. He presents an examination of the current economic climate, possible hindrances to
future mutually beneficial financial and political goals, and the future of competition among
varying MNEs in Latin America as well as competition between the MNEs and state-owned
industries.
C.Thesis
MNEs from industrial countries outside of Latin America as well as countries within the
region are very sensitive to the political and economic conditions of Latin America and must
create and develop careful relationships in order to obtain their respective economic and political
goals.
II.Summary
A.Organization of the Book
This book is divided into four parts and 13 chapters. Part I (Chapters 1-3) offers the historical
and theoretical background of multinational business in Latin America. Part II (Chapters 4-7)
is concerned with the current regulatory setting and macroeconomic environment. Part III
(Chapters 8-10) has a microeconomic scope, focusing on managerial issues and corporate
strategies. Part IV (Chapters 11-13) presents a broad view of MNE business in Latin America
by looking at two types of MNEs, concluding with an outlook on the future.
Chapter 1 begins with a historical review of multinational business in Latin America followed
by the presentation of the conceptual framework of the study in Chapter 2. Chapter 3
describes the conditions and trends facing MNEs in the region as of the late 1980s.
In Chapter 4, the author gives perspectives on the government-business relationship in Latin
America and the proper roles of the public and private sectors of Latin American
governments, mainly focusing on testing the bargaining theory of the MNE. Chapter 5
discusses Venezuela and the economic impact categories the government used during 1984-
1985, with Chapter 6 using the bargaining theory to study the transnational regulation of
MNEs used by the Andean Pact countries from 1971 to 1987. In Chapter 7, the author
analyzes the Latin American debt crisis of the 1980s.
Chapter 8 presents Fortune 500 companies that operate extensively in Latin America. Chapter
9 discusses the results of an empirical study conducted in Peru in 1981 that highlights inter-
industry differences in the strategy and structure of the industries. In Chapter 10, the finance
function of MNEs is examined, with an emphasis on the methods available to MNEs to
transfer funds from one country to another.
Chapter 11 investigates the chemical industry in Latin America, with Chapter 12 giving an
overview of the activities, performance, and outlook of Latin American MNEs operating in
the petroleum, transportation, and banking industries. Chapter 13 concludes the book with a
review and an outlook on the future.
B.Summary
The author presents his theme in the introduction: “The basic theme of this volume is a view
of multinational business that considers the MNEs as a [sic] goal-oriented actor (seeking profits
and growth), constrained by acts of government policy-makers and competing firms, each
seeking somewhat conflictive goals.” (p. 1) He develops this theme by presenting a bargaining
theory of the MNE. Conceptually, “[t]he MNE functions as to increase its own value, dealing
with regulators and competitors to obtain the best position for itself under the prevailing
conditions in each country.” (p. 1) The government controls access to its country’s market and
production inputs while the MNE controls sources of technology and access to foreign markets.
(p. 43) “The bargaining theory hypothesizes that…the government’s and company’s power
positions will lead to some outcome that favors one relative to the other.” (p. 46) This theory
“posits that both government and company are interested in maximizing their own gains from the
use of resources in business activities.” (p. 78)
The government-business relationship plays a very important role in Latin America, more so
than in the industrial countries. The author states that the government is the rule-maker as
well as the major competitor, customer, and supplier. “It cannot be overemphasized that
dealings with the government, all the way from obtaining necessary permissions and

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approvals to paying taxes and complying with other statutory provisions, are crucial aspects
of competition in Latin America.” (p. 69)
The beginning of multinational business in Latin America began with Spanish and Portuguese
forays into the region before 1800. As they colonized the area, they obtained investments in
the form of farms and raw materials. After the independence of Latin American countries
from Spain and Portugal in the early 1800s, capital inflow into the region began with long-
term investments in the form of bonds issued by these newly independent countries.
Concurrently, Spanish and Portuguese entrepreneurial foreign nationals supported by
companies formed to find gold and silver in countries like Mexico, Peru, and Chile also
participated in direct investment. As the Industrial Revolution, which was dramatically
changing the western world, reached Latin America, expatriates, primarily from Great
Britain, began investing in Latin America, albeit without transferring knowledge or skills to
the host countries. (p. 9) In the 20th century as its own industrial strength increased,
investment in the region by the United States outpaced Great Britain’s investment.
Three policy waves swept through Latin America after World War II. During the post-World
War II period, the first wave saw Latin America welcome foreign investment. The second
wave emerged in the 1960s as nationalism swept over Latin America, with very negative
views on foreign investment erupting throughout the region. The third wave was brought in
through Latin America’s 1980s debt crisis, which ushered in more leniency toward foreign
MNEs. During this entire time period, countries in the region developed economic
development strategies that emphasized export promotion and import substitution. (pp. 28,
29)
The author elaborates on his bargaining theory by comparing the MNE’s advantages with the
host country government’s advantages. The foreign firm’s advantages are greater where
proprietary knowledge is more important (e.g., pharmaceutical companies, computer
companies, other electronic companies), where marketing skills play a large part in the
businesses, where economies of scale are important, and where the firm can easily shift its
facilities from one facility to another. The government has its advantages where raw
industries are needed for the foreign industry, where the market is entirely in the host country,
where there is wide media publicity regarding the dealings between the MNEs and the
government, in highly competitive industries, and if the state of the Latin American country’s
economy is good. (p. 82) The author does grant that further testing to isolate the relative
importance of these bargaining factors and to find additional ones is needed. (p. 85)
A case study of Venezuela’s manufacturing sector is used to explain the economic impacts of
MNEs in host countries. The author offers the hypothesis that foreign direct investment will
increase local employment and the country’s economic growth, improve the balance of
payments position, transfer more technology, and will have an overall positive impact on the
country’s industrial structure. (p. 89) His findings were positive: foreign direct investment
appears to offer net benefits to the host country. However, these positive findings must be
balanced against the difficulty of obtaining sufficient data to perform comparisons across a
wide range of benefits and costs. Therefore, the results are tentative at best. (p. 109)
The author presents the model of the Andean Foreign Investment Code to demonstrate the
constraints faced by MNEs as they try to do business in Latin America. The Andean Foreign
Investment Code, also called Decision 24, was enacted on December 31, 1970 by the Andean
Pact, which was comprised of Bolivia, Chile, Colombia, Ecuador, and Peru. Decision 24
(entitled “Common Regime of Treatment of Foreign Capital and of Trademarks, Patents,
Licenses, and Royalties”) was a detailed package of rules and limitations for the entry and
operation of MNEs within the Andean Pact. “Any foreign investment project must be

3
approved by the ‘competent national authority’…. which is instructed to reject investments
that fail to follow Decision 24 and other Andean development guidelines.” (p. 114) He
hypothesizes that the Code 1) discourages MNE activities within the Pact countries and 2)
alters their practices in their foreign affiliates. (p. 115) His analysis found that the evidence
gave support to Hypothesis 2 but the evidence for Hypothesis 1 was less clear. (p. 126) As a
result of the 1980s foreign debt crisis in Latin America, Decision 24 was replaced by
Decision 220, which gave equal treatment of foreign and domestic capital by Andean Pact
governments to stimulate foreign direct investment to aid in the generation of income and
employment. The author sees the trend for MNEs in Latin America for the rest of the 1980s
will be to follow an Andean-type model. (pp. 227, 228)
The 1980s saw a massive debt crisis emerge in Latin America. At the heart of this crisis was a
transfer problem. “The transfer problem refers to their need to generate outflows of real
purchasing power in the form of foreign currency or resources such as exports and/or
ownership of domestic assets…sufficient to equal debt-servicing charges.” (p. 132) The
resolution to the transfer problem in Latin America will be carried out through trade surpluses
and foreign direct investment, partially inflated away, and partially renounced by borrowers
(p. 150)
The author describes strategies used by MNEs in Latin America to maximize their
advantages. The most consistent competitive advantages are proprietary technology and
brand name goodwill consistent with performance (p. 172) In Peru, MNEs that were more
market-bound were more integrated into the Peruvian economy. MNEs in Peru that are
wholly owned have tended to succeed as market leaders (p. 189)
The author examines the competitive environment of the chemicals (mostly petrochemicals)
industry in Latin America. The industry is comprised of multinational companies and local
firms. (p. 209) The world’s twenty largest chemical producers have subsidiaries in the region.
The primary MNE competitors are from the United States, Europe, and Japan. Much of the
chemical production takes place outside of Latin America. He further examines the
competitive environments by offering the description of the characteristics of specific
companies: Dupont, ICI (Imperial Chemical Industries, Dow Chemical, and Rohm & Haas.
Additionally, a group of subindustries compete also with the MNEs and local firms. The
external foreign debt crisis is causing foreign MNEs in the chemicals industry to experience
more favorable treatment by host governments. (p. 228)
The largest state-owned MNEs (SMNEs) in Latin America are concentrated in oil, metals,
and chemicals, as well as the raw materials industry. (p. 229) The main SMNEs are Petrobras
(Brazil’s national petroleum company), Pemex (Mexico’s national petroleum company), and
PDVSA (Venezuela’s national petroleum company). Family-owned businesses also make up
a large share of the SMNEs in Latin America. (pp. 232, 233) The SMNEs naturally have
some competitive advantages. They include ready access to natural resources and local
markets, access to government subsidies, their large size, and lower production costs (pp.
238, 239) Despite these advantages, SMNEs do not show impressive performance records.
The author concludes that Latin American SMNEs tend to be large companies in raw
materials industries that perform poorly financially yet will likely remain in business, often
through government subsidization. (p. 245)
The author offers predictions of regulatory and economic environment trends in Latin
America. One trend is the allowance of more private sector participation in the economy from
both domestic and foreign firms. (p. 50) Another trend sees foreign bank lending as the
largest segment of international business in Latin America. Foreign bank lending was almost
$400 billion in the late 1980s. (p. 51) A further trend sees the United States as the dominant

4
 foreign business presence in Latin America with foreign direct investment concentrated in the
largest countries of the region, especially Brazil and Mexico. The author sees the short-term
[late 1980s through early 1990s] future for economic conditions in Latin America as bleak
due to greater competition, increased protectionism, and the lingering results of the foreign
debt crisis. (pp. 63, 64)
However, the author has an optimistic long-term outlook for foreign MNEs in Latin America.
Because of the foreign debt crisis in the region, in the short-term, banks will not extend much
new credit so the MNEs show lower rates of investment in the mid-1980s. However, in the
late 1980s, foreign direct investment is growing due to the renewed confidence in project
viability. (p. 248) The author states that more Latin American countries will continue to
permit a major role for MNEs.
As shown by the government-foreign business relation in Latin America, the author has
proven that the bargaining theory works. The success of high-tech firms operating in Latin
America and their lack of success in raw materials operations are examples of the
confirmation of theory. (p. 251) The author states that the real test is to see if the bargaining
theory can help predict and anticipate future conditions and show MNEs and governments
how to deal with these conditions.
The author gives little information on MNEs and social and cultural issues. However, he does
offer two well-known criticisms of MNEs: 1) they fail to improve income distribution in
Latin American countries and 2) the Americanization of the region by American MNEs
(American customs and styles tend to be transferred to the region, oftentimes replacing long
held cultural patterns). (pp. 255-257)
The author predicts that competition between foreign MNEs and local firms in Latin America
are likely to intensify. He also foresees the larger presence of European and Japanese firms in
the region. (pp. 257, 258)
Only a handful of MNEs comprise the bulk of income, employment, exports, and other types
of economic impact in Latin America. The author is confident that the bargaining theory
model is a good predictor of what can be expected economically over time in Latin America.
Basically, during economic expansion in Latin America, the regulation of MNEs also expands
as their bargaining capabilities weaken. During economic recession in the region, the
regulation of MNEs softens and their bargaining capabilities strengthen. The author expects
this to continue into the future.
III.Critique

DID I LIKE THIS IN GENERAL? WHY?

-did not like the book
-too technical
-bargaining theory is very simple and seemingly obvious; seems unnecessary to try to prove
the obvious – of course MNEs and governments in Latin America are working with each
other in order to make sure their respective best interests are met; it begs the question, would
they do anything that is not in their best interests?; and of course, not all goals are mutual and
are often in conflict
WHAT SPECIFICALLY DID I LIKE/DISLIKE? WHY?

5
DID I AGREE WITH THE MAIN THEME/PURPOSE? WHY OR WHY NOT?
-agreed with the theme; simple, logical, and easy to approve or disprove

DID THE AUTHOR DO A GOOD JOB? WHY OR WHY NOT?

DID THE BOOK ACHIEVE ITS GOAL?

WHAT POSSIBILITIES DOES THE BOOK SUGGEST?

WHAT HAS THE BOOK LEFT OUT?

WHAT SPECIFIC POINTS ARE NOT CONVINCING?

HOW COULD IT BE IMPROVED? WHY WOULD PARTICULAR CHANGES HELP?

WOULD I RECOMMEND THIS BOOK TO OTHERS?

HOW DOES THE BOOK COMPARE TO OTHERS ON THE SUBJECT?

WHAT PERSONAL EXPERIENCES HAVE I HAD THAT ARE RELATED TO THE

SUBJECT?

It was quite thorough and detailed. The use of the figures and many tables greatly helped to
illustrate the author’s data and present his analyses. That data was presented very well
throughout the book, e.g., the description of the bargaining model, the design of the research,
the presentation of various firms and their characteristics, the presentation of the author’s
hypotheses as well as limits to his analyses.
The author did an excellent job of supporting his thesis through the use of empirical evidence.
[give examples]. He successfully proved his bargaining theory. [examples?]
The author successfully achieved his goals of showing the aims of the MNEs balanced
against the limits of theirs actions when interacting with Latin American governments and the
competition from other firms, national and international. [give examples; show how the
goals were accomplished]
The author presents possible trends in the operations of MNEs operating in Latin America.
[list]

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While the author did a good job of presenting his bargaining theory and supporting it with
solid data, there were other issues that could have been mentioned. In his explanation of the
history of MNEs in Latin America before the 1800s, he failed to mention the violence
involved in the colonization process and how this was central to Spain and Portugal’s
amassing of wealth in the region. They did not conduct civil business transactions. Millions
of the indigenous population were killed and dislocated. Wealth was obtained through
deception, theft, and force.
Also omitted is an analysis of the social costs and benefits of MNE firms’ operations in Latin
America. He makes only a minor mention of the social impact. However, he does concede
that economic tools or business strategy theories offer little help in tackling these issues. (p.
255) It would be useful to see the bargaining theory used to analyze these issued using social
measures as well as business measures of profits and growth. [offer some social measures
and how the bargaining theory could be applied to them]
It would have been interesting to see information on measures such as inflation, especially in
regard to Brazil, which historically has had the worst inflation problem in Latin America, and
how MNEs in the country were affected by this unstable sometimes-unpredictable inflation.
In his thesis, the author states that MNEs are very sensitive to the political and economic
conditions in Latin America yet his focus is on the economic conditions over the political
conditions. The thesis would be more developed with information on the political
environment in the countries of the region. Particularly, it would have been helpful to know
the policies of specific political leaders, parties, and regimes in different Latin American
countries and how they helped to create environments that affected the bargaining between
the MNEs and respective governments.
It would have been interesting if the author had presented cases in which the bargaining
theory did not work, despite the fact that its premise is that the actors presumably work for
mutually beneficial outcomes. Perhaps examples could be found among the family-owned
business in Latin America or in military regimes where it appears that they are working
against their own economic and/or political interests in support of a cause or tradition.
This book would be useful to those who seek useful analyses of the relationship
multinationals in Latin America and the governments of the region. The data analyses are
comprehensive and offer useful information for those who want a good overview of the
microeconomic relationship between MNEs in Latin America and countries of the region. In
this vein, the book is written for academicians, researchers, those studying international
business, and micro-economists, as well as for those who conduct or plan to conduct business
in Latin America.
CONCLUSION: Close with a direct comment on the book, and tie together issues raised in
the review.