Stretching from the Rio Grande in northern Mexico to Tierra del Fuego on the southern tip of Argentina, Latin America is a vast collection of countries eager to become lands of opportunity as they go about the business of entering world markets. Recently, four of the HBS scholars who gave presentations at the research conference that formally opened the School's Latin America Research Center in Buenos Aires came together on the Business School campus to share their thoughts and perspectives with Working Knowledge. Professor Austin served as moderator.

Jim Austin: We all have strong research interests in Latin America, but they're also quite diverse. This is an opportunity to discuss what we think are a few of the critical issues facing managers in the countries of this important region. Laura, your recent work centers on Brazil, South America's largest economy.

Let's begin our discussion there.

Laura Alfaro: During the fifties and sixties, Brazil-along with much of Latin America-opted for industrial policy and import substitution and as a result experienced a period of considerable growth. But then a recession hit in the eighties, lasting a decade or more. During that time, Brazil started a new liberalization process. In another critical development, it established the real plan in 1994, a currency policy that allowed the country to defeat inflation while it fostered privatization and opened the economy to the benefits of international trade. Even though the real was devalued in January 1999, surprisingly no recession followed in its wake nor were there aftereffects in other parts of South America-a situation that helped outsiders understand that Latin America is not a monolith, but a collection of very different states and countries.

I would say that growth is the operative word in much of Latin America. But at the same time, income inequality and the need to provide more opportunities for education and the adoption of new technology are key issues to be dealt with in the new millennium.

Austin: I agree. In addition, the changing roles of government and the private sector are an important part of the picture. Let's focus on that a bit longer through the lens of your work, Alexander.

	...if you're trying to build an internationally competitive company in a generally uncompetitive domestic environment, it's easier to do so with a strategy that allows you to detach yourself from most of the negative aspects of the local economy. Pankaj Ghemawat

Alexander Dyck: I'm interested in large firms that operate, so to speak, in the shadow of the state-in particular, companies that supply oil, gas, electricity, water, and telecommunications. In post-World War II Latin America, the state dominated these firms as an owner. Although they're now privatized-first in Chile in the seventies and picking up pace in the wake of Argentina's privatization program under former president Carlos Menem in the early nineties-the state still looms large in their everyday business decisions.

My research mainly examines two post-privatization issues. One is managing within a new regulatory framework, which tends to be a moving target as it evolves over time; the second is corporate governance. The absence of well-functioning institutions to ensure that investors get something back for their investments is a problem across the region. Corporate governance is a concern in large privatized firms with their many minority shareholders or unwieldy consortia of initial investors.

Cases I've written on these matters figure prominently in my elective course, The New Private Sector: Managing Privatization, Regulation, and Deregulation. One of the advantages of studying Latin America is that it has some of the longest experience with privatized enterprises, unlike the United States, which has been almost exclusively private throughout its history. This allows us to see some of the larger dynamics at work that may have implications for other nations.

Pankaj Ghemawat: Your comment about the shadow the state casts over Latin American business relates to my current teaching and research on issues of globalization. Countries with a lot of administrative interference tend not to be good platforms for going global. But the pace of change that has swept through Latin America in areas such as privatization has been extraordinary, providing rich opportunities for research. In the last six months, for example, I've written a case on Embraer, a Brazilian aircraft manufacturer that has successfully entered the world marketplace with a top-selling regional jet, and another case on the most profitable international cement company in the world, Mexico-based Cemex. My goal in these and other cases is to get a better sense of what's happening in the region and understand what the broader implications are for issues associated with cross-border integration. Misconceptions about globalization abound these days, including suggestions that markets are perfectly integrated. In fact, if you look at the trade or investment data, you will find estimates suggesting that we're less than one-fifth of the way there. Yes, there has been a rapid increase in cross-border economic activity in recent decades. Just as clearly, however, national borders still matter. One of the things I find particularly interesting about Latin America is that some of the impediments to cross-border activity are much more obvious when one is looking across countries separated by cultural, administrative, geographic, and economic differences.

Austin: One of the challenges facing Latin American enterprises is the relatively high cost of capital. That is a force that drives a number of companies toward globalization, since they need to search out sources of lower-priced funding. However, this gets back to your comment, Laura, about the diversity of the region. The cost of capital is high in Venezuela, for instance, but low in Costa Rica.

Ghemawat: The high cost of capital is clearly one of the major disadvantages that would-be multinationals from this area face. And while they display a lot of creativity in this regard, it continues to dampen their international expansion in sectors with heavy capital requirements. In addition, some of the corporate globalization that's gone on has drastically reduced liquidity in local capital markets, as firms look beyond local stock exchanges to meet their needs. Both Embraer and Cemex, for example, have done their initial public offerings on the New York Stock Exchange. What we are seeing, some would say, is the death of equity markets in Latin America. That may be a bit of an overstatement, but this trend certainly doesn't make the challenges for these companies any easier.

Dyck: Another reason why there's so much emphasis on cross-listings on foreign exchanges is that there are no effective corporate or securities laws in place in a number of Latin American countries. Under these circumstances, investors come to the conclusion that either the government or some other controlling shareholder will take advantage of them. The decline of equity markets that Pankaj mentions is not only reflected in cross-listings; it is also seen in widely held privatized companies. It turns out that taking a firm private and creating the dispersed ownership structure that looks like that of a company in developed markets is not a sustainable process. In many privatized firms you get a pattern of consolidation of ownership followed by outright acquisition, largely by Spanish companies but by some U.S. firms as well.

Austin: Another point to consider is the role of foreign direct investment (FDI). That's another one of your areas of expertise, Laura.

Alfaro: I've been looking at that from a macro point of view. Countries in Latin America seek out FDI because it's supposed to provide not only capital but managerial skills as part of the package when a factory from a developed nation sets up an operation. I'm trying to figure out whether FDI actually brings these so-called externalities along with funding. It seems clear to me at this point that foreign direct investment is not a panacea for the ills that afflict the economies of Latin America; thus, its well-publicized benefits may be oversold. As Alexander was saying, there are many things that countries themselves need to do regarding infrastructure, legal restrictions, corruption, and so on.

As part of my research, I'm studying competition among various states in Brazil that are vying for FDI support. Among other things, I've looked at several automakers. Car companies have been eager to go to Brazil for decades, since it offers such a huge market-half of South America, one-third of all Latin America. When the government jump-started the economy in 1994 with the real plan, competing Brazilian states offered auto manufacturers "x" number of years of tax incentives and a certain amount of money. Subsequently, the deals kept getting sweeter with more and more incentives. There are companies now that don't have to pay taxes for thirty years. Ironically, most of them had already decided to locate in Brazil regardless of the additional incentives.

The bottom line is that these circumstances create problems. The resources that go to the car companies, after all, compete with those that are needed for infrastructure, human capital, and a host of other things that Brazil must pay attention to in order to be competitive in the global arena.

Ghemawat: My conversations with policymakers in the region are in sync with these observations. Among the critical problems they identify is the limited linkage between FDI and job creation. Some of the energy companies I've talked to have also begun to discuss some sort of regulatory backlash if the promised fruits of a more open economy, foreign investment, and privatization continue to prove so illusive. Furthermore, this lack of linkages may not be an easy problem to solve. Research I've done in Latin America and other parts of the world suggests that if you're trying to build an internationally competitive company in a generally uncompetitive domestic environment, it's easier to do so with a strategy that allows you to detach yourself from most of the negative aspects of the local economy.

Austin: Whether we're talking about airplane manufacturing in Brazil or Intel's entry into Costa Rica, a common factor in these types of operations is the need for a highly educated population. Enabling workers to improve their knowledge base and attain higher skill levels has become a source of competitive advantage in creating viable international businesses. All this raises questions about where governments should place their investment priorities. It may not be in businesses; rather, it may well be in trying to create the best educational systems. Instead of funding an army, it might be argued that it's better to support universal education.

The intersection of social sector investments with purely economic ones becomes an interesting piece of the equation when it comes to the dynamics of Latin American development. Some of the research I've been doing under the aegis of the School's Initiative on Social Enterprise relates to this. It involves strategic alliances in the United States between corporations and nonprofit organizations-or as they're referred to in most developing countries, nongovernmental organizations (NGOs). The objective is to create an ongoing relationship that will result in significant benefits for both the corporation and the NGO, in that combined capabilities generate more social value than individual entities.

In a project I intend to launch in Latin America, I want to see to what extent this phenomenon is replicable within various cultural milieus and different traditions regarding the roles of government, society, and the corporate community. This project, along with others in progress or planned by a number of other HBS faculty members, is the kind of comparative research that we hope to do in a collaborative way with sister institutions in Latin America.

In closing, let me say that the challenges and opportunities in the hemisphere are enormous, the managerial issues, complex. All this makes for an exciting and important area for the School's research efforts. With the assistance of the new Latin America Research Center, we hope to gain many invaluable insights in the years to come.

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Edited by James E. Aisner