Multinational Enterprises in Latin America since the 1990s

Multinational Enterprises in Latin America since the 1990s 9780230100459_01_prexxiv.indd i 4/25/2011 11:43:43 AM 97...

Author: Pablo Toral

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Multinational Enterprises in Latin America since the 1990s

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Multinational Enterprises in Latin America since the 1990s Pablo Toral

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multinational enterprises in latin america since the 1990s Copyright © Pablo Toral, 2011. All rights reserved. First published in 2011 by PALGRAVE MACMILLAN® in the United States – a division of St. Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978–0–230–10045–9 Library of Congress Cataloging-in-Publication Data Toral, Pablo, 1971– author. Multinational Enterprises in Latin America since the 1990s / Pablo Toral. p. cm ISBN 978–0–230–10045–9 1. International business enterprises—Latin America. 2. Privatization— Latin America. 3. Investments, Spanish—Latin America. I. Title. HD2810.5.T66 2011 338.8'888—dc22 2010049482 A catalogue record of the book is available from the British Library. Design by MPS Limited, A Macmillan Company First edition: June 2011 10 9 8 7 6 5 4 3 2 1 Printed in the United States of America.

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“A Zuce”

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Contents

List of Tables

ix

List of Figures

xi

Acknowledgments Acronyms

xiii xv

1 Introduction 2 Theoretical Considerations and Development of the Model 3 Banking 4 Telecommunications 5 Public Utilities 6 Oil and Natural Gas 7 Conclusions

1 17 31 65 95 121 151

Notes

169

Bibliography

205

Index

229

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List of Tables

1.1 FDI outward stock, million US dollars at current prices in 2007

2

1.2 Top multinationals in the world, 2006

4

3.1 Main subsidiaries of Spanish banks in Latin America, 2008

44

3.2 Efficiency indicators

53

3.3 Appreciation of stock for a selected group of banks, Dec. 31, 1995–Dec. 31, 2009

64

4.1 Telefónica’s main subsidiaries in Latin America in 2009

79

4.2 Telefónica’s ownership in a group of selected Latin American firms

81

4.3 Appreciation of stock for a selected group of telephone operators, Dec. 31, 1997–Dec. 31, 2009

93

5.1 Main acquisitions of Spanish utilities in Latin America

104

5.2 Generation capacity added by Spanish utilities in Latin America until 2009, in MW

110

5.3 Average annual shareholder return, 1998–2006

119

6.1 Repsol’s main acquisitions in Latin America

133

6.2 Repsol-YPF net production of oil and gas by region (thousands of barrels of oil equivalent—BOEs)

137

6.3 Appreciation of stock, Dec. 31, 1991–Dec. 31, 2009

150

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List of Figures

1.1 Inward FDI flows in Latin America and the Caribbean, 1992–2004 (billions of dollars) 2.1 Development and application of the advantage

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2 26

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Acknowledgments

I wish to thank Eduardo Gamarra, Félix Martín, Nicholas Onuf, and Mira Wilkins at Florida International University (FIU) and Elisabeth Prügl at the Graduate Institute in Geneva for reading several drafts and providing thoughtful suggestions. Four anonymous reviewers from Palgrave-Macmillan made insightful comments and suggested ways to improve the manuscript. Without a doubt, this book is more solid thanks to their valuable observations. I also wish to thank Ralph Clem and Joaquín Roy at the University of Miami for their help to secure funding and for inviting me to present my work at the Miami European Union Center. Several friends read different parts of the manuscript and provided useful guidance: Arghyris Arghyrou (Montverde Academy), Roberto Domínguez (Suffolk University), César Francis (Universidad del Pacífico), Aart Holtslag (University of Massachusetts-Lowell), Renzo Honores (High Point University), Sandro Patrucco (Universidad Católica del Perú), Sebastián Royo (Suffolk University), and Laura Zanotti (Virginia Tech). Universidad Católica del Perú and Universidad del Pacífico in Lima gave me access to their collections. I am particularly thankful to Felipe Portocarrero and Cynthia Sanborn at the Centro de Investigación de la Universidad del Pacífico in Lima and Aldo Panfichi at Universidad Católica del Perú for giving me an office and a computer to work. Omar Awapara, Gabriela Camacho, and Eduardo Dargent at Universidad Católica made sure I had everything I needed. I am also indebted to the students at Universidad Católica and Centro Bartolomé de las Casas in Cusco for their support and comments. Their suggestions helped me see Spanish multinationals in a broader sociopolitical context. The following institutions provided generous funding for my research: the Mouat Chair and the Dean’s Office at Beloit College, the Department of International Relations, the Office of the Dean of Arts and Sciences, the Center for Transnational and Comparative Studies (TCS), the Latin American and Caribbean Center (LACC) and the Graduate Student

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xiv

●

Acknowledgments

Association (GSA) at FIU, the Miami European Union Center (Miami EUC), Fundación para el Desarrollo de la Formación en las Zonas Mineras del Carbón (funded by the European Union and the governments of Spain and Asturias), the Library Travel Grants of the Center for Latin American Studies at the University of Florida, the Minda de Gunzburg Center for European Studies and the David Rockefeller Center for Latin American Studies at Harvard University. My sincerest thanks go to the interviewees, who gave me their time and attention. I also wish to thank the Dirección General de Comercio e Inversiones at the Spanish Ministry of Industry, Tourism and Trade and the seven Spanish multinationals included in this study for sharing information. My sincerest thanks also go to students and colleagues at Beloit College for their endless support.

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Acronyms

ADSL AEG Afore AFJP

Astra or Astra CAPSA ATMs AT&T BAN

asymmetric digital subscriber line Allgemeine Elektrizitaets Gesellschaft Administradora de Fondos para el Retiro Administradora de Fondos de Jubilación y Pensiones Administradora de Fondos de Pensiones Asociación Hispanoamericana de Centros de Investigación y Empresas de Telecomunicaciones Administración Nacional de Electricidad of Paraguay Agencia Nacional de Energía Eléctrica of Brazil Argentaria Caja Postal, former state-owned bank Asociación de Empresas para la Explotación del Sistema Eléctrico Astra Compañía Argentina de Petróleo, S.A. automatic teller machines American Telephone and Telegraph Buenos Aires Norte

Banespa Banesto Bankinter BB BBV BBVA BC

Banco Banco Banco Banco Banco Banco Banco

AFP AHCIET ANDE ANEEL Argentaria ASELÉCTRICA

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do Estado de São Paulo Español de Crédito Intercontinental Español de Bilbao Bilbao Vizcaya Bilbao Vizcaya Argentaria Central

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xvi

●

Acronyms

BCH BCI BCL BCM BEX BF BG BHA BHE BHIF BIS BOE BOO BOT BP BS BSCH BT BV B2B CAMPSA

Banco Central Hispanoamericano Banco de Crédito Industrial Banco de Crédito Local Billion cubic meters Banco Exterior de España Banco Francés British Gas Banco Hispano Americano Banco Hipotecario de España Banco Hipotecario de Fomento Bank of International Settlements barrel of oil equivalent build-operate-own build-operate-transfer British Petroleum Banco de Santander Banco Santander Central Hispano British Telecom Banco de Vizcaya business to business Compañía Arrendataria del Monopolio de Petróleo, Sociedad Anónima CANTV Compañía Anónima de Teléfonos de Venezuela CAPSA Compañía Argentina de Petróleo, S.A. Caseg Geral do Comercio, Corretagem e Administração de Seguros CCGT Combined cycle gas turbine CECOEL Centro de Control Eléctrico CEG Companhía Estadual de Gas of Río do Janeiro in Brazil CEI Citicorp Equity Investment Celpe Companhía Energética de Pernambuco of Brazil Celta Compañía Eléctrica Tarapauca, S.A. of Chile Cemsa Comercializadora de Energía Mercosur, S.A. of Argentina CEPAL see ECLAC

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Acronyms

●

xvii

CEPM

Consorcio Energético Punta Cana-Macao, S.A. of the Dominican Republic CEPSA Compañía Española de Petróleos, Sociedad Anónima CEPT European Conference of Postal and Telecommunications Administrations CERJ Companhía de Electricidade do Estado do Río do Janeiro of Brazil CFE Comisión Federal de Electricidad of Mexico CHADE Compañía Hispano-Americana de Electricidad Cía Compañía Cien Companhía de Interconexão Energética S.A. of Brazil CLASSA Compañía de Líneas Aéreas Subvencionadas S.A. CLH Compañía Logística de Hidrocarburos of Spain CNE Comisión Nacional de la Energía of Chile Co. Company Cocelco Compañía Celular de Colombia Coelba Companhía de Electricidade do Estado da Bahía of Brazil Coelce Companhía de Electricidade do Ceará of Brazil Cointel Compañía de Inversiones en Telecomunicaciones, S.A. (Argentina) Corp. Corporation Cosern Companhía Energética do Río Grande do Norte of Brazil CPE Compañía Peruana de Electricidad, S.A. of Peru CPT Compañía Peruana de Teléfonos CRE Comisión Reguladora de Energía of Mexico CRT Companhía Riograndense de Telecomunicações CTC Compañía de Teléfonos de Chile CTE Comisión de Tarifa de Electricidad of Peru CTM Compañía de Transmisión del Mercosur, S.A. of Argentina CTNE Compañía Telefónica Nacional de España DEOCSA Distribuidora de Occidente, S.A. of Guatemala DEORSA Distribuidora de Oriente, S.A. of Guatemala DJIA Dow Jones Industrial Average Ebitda earnings before interest, tax, depreciation, and amortization

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xviii

●

Acronyms

ECLAC EDE EDECHI EDEMET EDENORTE EDESA EDESAL EDESAR EDESUR EDP EE EEB EEGSA EEP EFYCO EIP ELECAR Elfeo, S.A. Embraer Embratel Emdersa Emelec Emgesa EMOS EMU Enarsa Endesa ENE ENHER Enigesa ENRE ENTEL

United Nations Economic Commission for Latin America and the Caribbean Empresa de Distribución Eléctrica Empresa de Distribución Eléctrica de Chiriquí of Panama Empresa de Distribución Eléctrica Medio-Oeste of Panama Empreda de Distribución Norte of the Dominican Republic Empresa de Electricidad de Salta (Argentina) Empresa de Electricidad de San Luís (Argentina) Empresa de Electricidad de La Rioja (Argentina) Empresa de Distribución Sur of the Dominican Republic Electricidade de Portugal Empresa eléctrica Empresa de Energía de Bogotá, S.A. of Colombia Empresa Eléctrica de Guatemala, S.A. Empresa Eléctrica Piura of Peru Eficiencia y Costes European Interconnectivity Platform La Electricidad de Caracas of Venezuela Electricidad y Fuerza de Oruro in Bolivia Empresa Brasileira de Aeronáutica, S.A. Empresa Brasileira de Telecomunicações Empresa Distribuidora Eléctrica Regional of Argentina Empresa Eléctrica del Ecuador Empresa Generadora de Energía Eléctrica, S.A. of Colombia water company in Santiago de Chile European Monetary Union Energías Argentinas, S.A. Empresa Nacional de Electricidad, S.A. Empresa Nicaragúense de Electricidad Empresa Nacional Hidroeléctrica Ribagorzana Endesa Inversiones Generales, S.A. of Chile Ente Nacional Regulador de la Electricidad of Argentina Empresa Nacional de Telecomunicaciones

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Acronyms

●

xix

E&P EPR

Exploration and production Empresa Propietaria de la Red of the SIEPAC project in Central America EPSA Empresa de Energía del Pacífico of Colombia ESP Empresa de Servicio Público ESSAL Empresa de Servicios Sanitarios Los Lagos of Chile Etevensa Empresa de Generación Termoeléctrica Ventanilla, S.A. of Peru ETNO Association of Operators of European Public Telecommunication Networks ETSI European Telecommunications Standards Institute EU European Union EURESCOM European Institute of Research and Strategic Studies in Telecommunication Eurostat Statistical Office of the European Union FCC Federal Communications Commission of the United States FDI foreign direct investment FECSA Grupo Fuerzas Eléctricas de Cataluña FLACSO Facultad Latinoamericana de Ciencias Sociales GAP Grupo Aeroportuario del Pacífico of Mexico GASA Gas Argentino, S.A. GATT General Agreement on Trade and Tariffs GDP GESA GPRS GSM GT GWh Hidrola HSBC Iberener Iberinco ICE

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gross domestic product Gas y Electricidad general packet radio service Groupe Spéciale Mobile Generadora Térmica giga watt hour Hidroeléctrica Española Hong Kong Shanghai Banking Corporation Iberdrola Energía, S.A. Iberdrola Ingeniería y Consultoría Información Comercial Española

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xx

●

Acronyms

ICEM IDB IDP IDT Corporation IEs Inc INH INI IPEA ISO IT ITT ITU KLM KPN LAPE LDCs LNG LOSEN LOT LPG Ltd MCI MW NAFTA NGO NPL

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International Federation of Chemical, Energy, Mine and General Workers’ Union Inter-American Development Bank investment development path US provider of wholesale and retail telecommunications services international economics Incorporated Instituto Nacional de Hidrocarburos of Spain Instituto Nacional de Industria of Spain Instituto de Pesquisa Econômica Aplicada, Brasília, Brazil International Organization for Standardization information technology International Telephone and Telegraph Corp. International Telecommunications Union Koninklijke Luchtvaart Maatschappij (Royal Dutch Airlines) Koninklijke Posterij Nederland (Royal Dutch Post) Líneas Aéreas Postales Españolas less developed countries liquefied natural gas Ley de Ordenación del Sistema Eléctrico Nacional in Spain Ley de Ordenación de las Telecomunicaciones (Spain’s telecommunications law of 1987) liquefied petroleum gas Limited Microwave Communications, Inc. mega watts North American Free Trade Association Non Governmental Organization Non performing loans or default ratio

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Acronyms

OECD OHCH OLDELVAL OLI OPEC OPESSA OSINERG Pemex PEN PMR PPA PROES PT PTC PTT PURPA RBS R&D RECA REE REFAP REFINOR Refipesa Relapasa RENFE ROE S.A. S.A. de C.V. SAS S/C SCH

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●

xxi

Organization for Economic Cooperation and Development O’Higgins Central Hispanoamericano Oleoductos del Valle, S.A. of Argentina ownership-location-internalization Organization of Petroleum Exporting Countries Operadora de Estaciones de Servicio, S.A. of Argentina Organismo Regulador Existente of Peru Petróleos Mexicanos Plan Energético Nacional of Spain Plan de Mejora de Resultados purchase power agreements Plan by the Brazilian Central Bank to restructure the financial system in 1996 Portugal Telecom Peruvian Telephone Company Post, Telephone & Telegraph Public Utilities Regulatory Policies Act of the United States Participações Rede Brasil Sul research and development Repartidor Central de Cargas (Central Load Distributor) Red Eléctrica de España Refinería Alberto Pasqualini Refinerías del Norte, S.A. of Argentina Refinadores del Perú, S.A. Refinería La Pampilla, S.A. Red Nacional de Ferrocarriles Españoles return on equity (net income / average equity) Sociedad Anónima Sociedad anónima de capitales variables Scandinavian Airline System Sociedad en Comandita Banco Santander Central Hispano

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xxii

●

Acronyms

S. de R.L. de C.V. SEMSA SG SGC SGM SIEPAC SING SMEs Solgás S.R.L. de C.V. SUERF TASA TDE TISA TLD TOE TPI Transquillota UF UK UMTS UN UNCTAD UNELCO Unesa UNESCO

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sociedad de responsabilidad limitade de capitales variables Servicio de Energía de México, S.A. Société Générale Sistema de Gestión Comercial (commercial management system) Sistemas de Gestión Medioambiental (Environmental Management Systems) by Endesa Sistema de Interconexión Eléctrica para los Países de América Central Sistema Interconectado del Norte Grande de Chile small and medium enterprises Compañía Peruana del Gas, S.A. see S. de R.L. de C.V. Société Universitaire Européenne de Recherches Financières Telefónica de Argentina, S.A. Transportadora de Electricidad of Bolivia Telefónica Internacional, S.A. Telefónica Larga Distancia (Puerto Rico) tons of oil equivalent Telefónica Publicidad e Información Transmisión Eléctrica de Quillota Ltda. of Chile Unión Fenosa United Kingdom of Great Britain and Northern Ireland universal mobile telecommunication system United Nations United Nations Conference on Trade and Development Unión Eléctrica de Canarias Unidad Eléctrica, S.A. United Nations Educational, Scientific and Cultural Organization

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Acronyms

UT UTE VaR WAP WTO WWI WWII YPF YPFB

●

xxiii

Unión Telefónica of Argentina Usinas y Transmisiones Eléctricas of Uruguay value at risk Wireless Application Protocol (mobile telephony) World Trade Organization First World War Second World War Yacimientos Petrolíferos Fiscales Yacimientos Petrolíferos Fiscales Bolivianos

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CHAPTER 1

Introduction Latin America is our natural market to expand.1 Camino Álvarez, Corporate Development Manager, Telefónica

T

he elimination of most restrictions on foreign direct investments (FDIs)2 by the Spanish government between 1977 and 19923 generated a process of outward capital flows that made Spain the seventh largest economy in the world by outward stock of FDI in 2007, only behind the United States, the United Kingdom, France, Germany, Hong Kong, and The Netherlands (see Table 1.1). These investments were very highly concentrated in two geographic areas, mainly the European Union (EU) and Latin America (see Figure 1.1). In Latin America, Spanish FDI flows even surpassed those coming from the United States in 1999 and 2000.4 After a round of early acquisitions in the 1990s, in 2009 the seven Spanish firms included in this study [Banco Bilbao Vizcaya Argentaria (BBVA), Santander Central Hispano (SCH), Telefónica, Endesa, Iberdrola, Unión Fenosa (UF), and Repsol-Yacimientos Petrolíferos Fiscales (YPF)] had assets worth $517 billion5 and 267 million customers in Latin America, and they had become prominent actors in the economies of the region.6 For the Latin American societies, the Spanish FDI during the 1990s was very important, not only because the amounts of money that came into their economies were large, but also because new firms came in from a country that until the 1990s had a very small presence in Latin America. These firms brought with them their own business culture, and operated especially in sectors that constituted the backbone of the Latin American economies, mainly in banking, insurance and financial services, electricity, oil, and telecommunications. For this reason, and because the entry of many of these firms occurred through the privatization of state-owned enterprises, their arrival was very visible, acquiring social and political significance.7

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2 Table 1.1 FDI outward stock, million US dollars at current prices in 2007 Country United States United Kingdom France Germany Hong Kong, China The Netherlands Spain Belgium and Luxembourg Switzerland Japan Canada Italy Sweden Australia Denmark Taiwan Province of China British Virgin Islands Singapore Norway Brazil Austria Ireland Finland China Korea, Republic of

1980

1990

2000

2007

215,375 80,434 24,910 43,127 148 41,867 1,931 6,037 21,491 19,612 23, 783 7,319 3,572 4,983 2,065 13,009 – 3,718 561 38,545 530 – 737 39 127

430,521 229,307 112,441 151,581 11,920 106,900 15,652 40,636 66,087 201,441 848,079 60,184 50,720 30,507 7,342 30,356 875 7,808 10,884 41,044 4,747 14,942 11,227 4,455 2,301

1,316,247 897,845 445,091 541,861 388,380 305,461 167,719 339,644 232,161 278,442 237,639 180,275 123,255 85,385 73,100 66,655 67,132 53,216 46,308 51,946 24,821 27,925 52,109 27,768 26,833

2,791,269 1,705,095 1,399,036 1,235,989 1,026,587 851,274 636,830 612,641 603,622 542,614 520,737 520,084 308,563 277,917 166,213 158,361 154,862 137,226 133,274 129,840 126,748 123,296 113,046 95,799 66,220

Source: UNCTAD, 2009.

80 70 60 50

Spain

United States

40 30 20 10 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Figure 1.1 Inward FDI flows in Latin America and the Caribbean, 1992–2004 (billions of dollars) Source: US Bureau of Economic Analysis and Spanish Ministry of Industry, Tourism and Trade (Dirección General de Comercio e Inversiones, Secretaría de Estado de Comercio y Turismo), 2009.

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Introduction

●

3

Their activities included the provision of credit, energy, or telecommunication systems. The competitiveness of many of the Latin American enterprises came to depend, to a certain degree, on the competitiveness of the products and services that the Spanish firms provided to them. The Spanish firms thus became direct participants in the new strategies of economic development implemented by the Latin American governments, based on the opening of markets that replaced the previous ones, based on import substitution industrialization (ISI).8 From the Spanish point of view, the FDI of Spanish firms in Latin America was an important phenomenon too, economic mainly and, to a lesser extent, political and social.9 Spanish FDI in Latin America relative to Spain’s gross domestic product (GDP) was very high by the turn of the century: 4.62 percent in 1999 and 3.97 percent in 2000. This led the Governor of the Bank of Spain, Luis Ángel Rojo, to warn about the risks that a general Latin American crisis could have, not only on the stability of these Spanish firms in the stock exchange, but on the Spanish economy as well. Ironically, their exposure in Latin America was one of the factors that allowed Spanish firms to survive the international crisis in 2008–2009 in better shape than other competitors, given that the crisis in Latin America was shorter and not as severe.10 The emergence of multinational enterprises (MNEs) headquartered in Spain (Spanish MNEs) in the 1990s was an important consequence of the process of liberalization and internationalization of the Spanish economy that began in the mid-1970s after the death of Francisco Franco in 1975. Trade and inward FDI grew from the 1970s, but outward investment did not reach significant proportions until the 1990s. This book analyzes the internationalization of Spanish firms through their investments in Latin America since the 1990s. Students of the processes of economic liberalization have mostly focused their analysis on the elimination of restrictions to trade and investment. Their emphasis has been on the measures adopted by the governments to accelerate the flow of goods in and out of the country as well as on the policies adopted to attract FDI. The reason for this bias is the assumption that the growth of exports and the attraction of foreign MNEs are the key factors to accelerate economic growth, while the contribution of MNEs to the development of their home country is not as clear. A full understanding of the liberalization and internationalization of the Spanish economy since 1975 will not be complete without a study of the emergence of the Spanish MNEs. Before 1975, very few Spanish firms made investments overseas in part due to legal constraints. One important exception was Compañía Hispano-Americana de Electricidad (CHADE), for roughly three decades the largest Spanish company. After World War I, CHADE acquired the installations of a subsidiary of Allgemeine Elektrizitaets

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4

Multinational Enterprises in Latin America

●

Gesellschaft (AEG) in Argentina, Uruguay, and Chile. CHADE was nationalized by the Perón administration without complaint from the Spanish Government after World War II.11 Many of the foreign ventures of Spanish MNEs from World War II to the 1980s were export companies that made investments overseas to strengthen their trade networks in order to facilitate their own exports from Spain. The amount of their investments was negligible by international standards. In the 1990s, however, Spanish firms began to make significant investments abroad, led by a small group of firms in the banking, energy, oil, and telecommunications sectors. Some of these firms became large MNEs (see Table 1.2). In 2006, three Spanish firms were in the world’s top 100 nonfinancial multinationals, Telefónica (number 11), Repsol-YPF (43) and Endesa (54), and two Spanish banks were among the world’s 50 financial MNEs, SCH (22) and BBVA (35).12 The rise to international prominence of this group of Spanish MNEs was a new phenomenon. The process of gradual isolation of Spain since the loss of its last Latin American colonies in the nineteenth century, accelerated by the autarkic Table 1.2 Top multinationals in the world, 2006 (millions of dollars) Finance Rank GSI Firm

Home economy

1 2

70 60

USA USA

1,884,318 543,665

337,000 81,000

3 4 5 6 7 8 9 10 11 12 13 14 15

60 58 56 56 55 55 54 54 54 54 53 52 51

Germany France France Italy Netherlands France Switzerland Germany Netherlands Italy Switzerland United Kingdom United States

1,357,702 1,898,186 939,841 486,429 1,297,604 1,261,478 1,961,327 1,480,984 1,606,735 1,077,209 351,186 1,857,520 979,414

166,505 132,507 76,339 63,770 107,535 115,134 78,140 68,849 119,801 139,061 52,286 300,920 106,000

16 17 18 19 20

50 45 44 43 42

Switzerland France Belgium/Netherlands France Belgium

351,186 1,662,600 1,020,096 1,662,600 747,045

52,286 77,063 59,747 77,063 21,490

Citigroup General Electric Capital Corporation Allianz Se Bnp Paribas Axa Generali Group Abn Amro Holding Nv Societe Generale Ubs Ag Deutsche Bank Ag Ing Groep Nv Unicredit Group Zurich Financial Services Hsbc Holdings Plc American International Group Inc Credit Suisse Group Credit Agricole Sa Fortis Nv Natexis Banque Populaire Dexia

Assets

Employees

(continued)

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5 Table 1.2 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

42 40 39 39 37 37 36 36 35 34 33 32 32 32 31 29 29 29 29

40 41 42 43 44 45

27 27 27 26 25 25

46 47 48 49 50

24 24 23 23 21

Continued Jp Morgan Chase & Company Banco Santander SA Merrill Lynch & Company Inc Kbc Groupe Sa Bank of Nova Scotia Royal Bank of Canada Standard Chartered Plc Skandivaiska Enskilda Banken Barclays Plc Nordea Bank Ab Intesa Sanpaolo Morgan Stanley Goldman Sachs Group Inc Aviva Plc BBV Argentaria SA Noura Holdings inc Mitsubishi Ufj Financial Group Danske Bank A/S Royal Bank Of Scotland Group Plc Manulife Financial Corp. Commerzbank Ag Rabobank Gmac Llc Mizuho Financial Group Inc Sumitomo Mitsui Financial Group Aegon Nv Prudential Plc Prudential Financial Inc Svenska Handelsbanken Ab Dz Bank

United States Spain United States Belgium Canada Canada United Kingdom Sweden United Kingdom Sweden Italy United States United States United Kingdom Spain Japan Japan Denmark United Kingdom

1,351,520 1,088,015 841,299 428,485 336,347 477,432 265,537 282,526 1,949,167 457,134 383,085 1,120,645 834,774 555,183 536,972 296,837 1,585,767 484,515 1,705,044

174,360 129,749 56,200 50,189 53,251 70,000 59,205 19,672 122,600 29,248 56,553 55,310 26,467 58,019 98,553 14,668 82,838 135,000 135,000

Canada Germany Netherlands United States Japan Japan

308,512 795,900 731,811 287,439 1,269,600 901,711

20,000 35,975 56,209 31,400 45,758 40,681

415,320 454,266 419,889 261,544 643,832

28,726 39,814 34,814 10,163 24,055

Netherlands United Kingdom United States Sweden Germany

Source: UNCTAD, World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge, p. 228.

Telecommunications Rank 1 2 3 4 5 6 7

TNI 7 37 86 73 6 38 41

Firm

Home Economy

Vodafone Group Plc Telefónica Deutsche Telekom AG France Telecom Liberty Global Inc TeliaSonera AB Singtel

United Kingdom Spain Germany France United States Sweden Singapore

Assets

Sales

144,366 39,021 143,530 66,367 171,421 76,963 135,876 64,863 25,569 6,488 29,047 12,342 21,288 8,575

Employment 63,394 224,939 248,800 191,036 20,500 28,528 19,000

UNCTAD, World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge, p. 220–222.

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Oil Rank TNI Firm

Home economy

1

United Kingdom 217,601 270,602

2 3 4 5 6 7 8 9 10

71 British Petroleum Company Plc 34 Royal Dutch/Shell Group 40 Exxonmobil Corporation 26 Total 90 ConocoPhillips 56 Chevron Corporation 72 Eni Group 66 Repsol YPF SA 100 Petronas-Petroliam Nasional 94 Statoil Asa

UK/Netherlands United States France United States United States Italy Spain Malaysia Norway

Assets

Sales

Employment 97,100

235,276 219,015 138,579 164,781 132,628 116,307 59,530 85,201

318,845 365,467 192,952 183,650 204,892 108,023 64,427 50,984

108,000 82,100 95,070 38,400 62,500 73,572 36,931 33,439

50,394

11,448

24,576


Public Utilities Rank

TNI

Firm

Home economy

Assets

Sales

1 2 3 4 5 6

96 77 36 84 81 22

Electricité de France E.On Suez RWE Group Endesa AES Corporation

France Germany France Germany Spain United States

235,857 167,565 96,714 123,080 71,234 31,163

73,933 85,007 55,563 55,521 25,819 12,299

Employment 155,968 80,612 139,814 68,534 26,758 32,000


policies of the Franco regime between the 1940s and the 1960s, reduced Spain’s role in international relations. Students of Spain’s process of reopening and reinstatement in international affairs have focused on the political efforts by the government to insert the country in the EU and to play an active role in the democratization of Latin America in the 1980s and 1990s, especially in Central America. An analysis of the international role of Spain’s economic agents has been missing. Academic Bias In Latin America, the 1980s were years of economic crisis and the 1990s the decade of the structural reforms that put an end to the strategy of ISI initiated in the 1930s as a response to an even greater crisis. Under pressure from international financial institutions and the United States, the governments

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of most Latin American countries took steps to privatize state-owned enterprises and to open their economies to international trade and investment and to deregulate economic activities. The privatization of these large state-owned firms, which by the 1990s had been developed over the course of 60 years, was part of the departure from ISI, and a clear sign of the commitment of the new Latin American governments to change the economic policies. The Spanish firms were the most active participants in the auctions of stateowned companies, taking advantage of this process of liberalization in Latin America to begin their internationalization. This aspect gave the investments of the Spanish MNEs important political sensitivity in Latin America, among those in favor and against the change of economic strategy. In those sectors where state-owned enterprises operated, privatization preceded deregulation. This was the case in airline, banking, mining, oil and natural gas, operation of highways and ports, postal services, public utilities (telephones, electricity, and water), television and radio, and transportation (mainly road transportation). Deregulation and liberalization were also important in trade, financial services, and insurance. Chile began its process of privatization, deregulation, and liberalization in 1973. Mexico began in the mid-1980s. The rest of the Latin American countries began after 1989.13 As Latin America liberalized under the auspices of the United States, it came as a great surprise to many in the US business, political, and academic communities that US MNEs did not take more advantage of the new investment opportunities, but the most active participants were new competitors in economic arenas. These Spanish firms, the new competitors, did not have experience abroad, had been inward-looking, and lacked the resources of their US, European, and Japanese counterparts. The reasons for this may be found in the dominant approaches to international politics, which did not provide an explanation for the emergence of MNEs, as well as to the pervasive view of Spain as a lesser developed country. The expansion of the Spanish firms in Latin America through FDIs generated interest among their competitors, mainly from the United States and Western Europe. Firms there looked curiously at the emergence of novel Spanish MNEs. Interest turned into concern when the executives of US and Western European firms realized that the Spanish MNEs were highly successful and had taken a huge lead in Latin America. However, during presentations at several conferences, US academics and representatives of US corporations that operated in the same sectors (some of which had been outbid by Spanish firms in Latin America) questioned the soundness of the strategy of the leading Spanish firms in Latin America. They believed Spanish firms had overpaid.

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Although they realized that the Spanish firms had made a lot of money in Latin America in the early years, they argued that Latin America as a region (they provided a rather uniform view of Latin America) was politically unstable, and they did not believe future administrations would respect the laws that were established to attract foreign firms through the auctions of the state-owned enterprises. Some even believed that the Spanish firms would be manipulated by the politicians for political gain. They also claimed that the low income per capita in Latin America (uniform view of the region again) would make it impossible for the Spanish firms to get back the large amounts of money they paid to acquire the state-owned firms. They regarded the investments of Spanish firms in Latin America as a strategic error, attributable to their lack of international experience. To many in the field of international relations, Spain is mainly a paradigmatic case of hegemonic decline.14 To political scientists, Spain is a successful case of democratic consolidation. The democratization literature of the 1980s and 1990s placed the study of the Spanish democratic transition in the same group as Portugal, Greece, and Latin America, in order to compare similarities and differences.15 However, this thematic similarity concealed many social, economic, cultural, and even political differences across cases, leading many to emphasize the similarities over the differences. One of the generalizations was the degree of economic development. Some of the US academics and executives that attended my talks tended to “Latin Americanize” Spain. That is to say, they regarded Spain as a low- or middleincome country, more similar in terms of economic development to Latin America than to the EU. Thus, these researchers could not predict the emergence of Spanish enterprises and their prominent involvement in Latin America. Rather, they imagined Spanish firms would fall prey to more competitive European and US firms. This book tries to overcome the academic biases that prevented a systematic analysis of the emergence of Spanish MNEs. It addresses the question of why Spanish MNEs invested in Latin America and in the Caribbean between 1990 and 2009. The argument in the book is that the decisionmakers in the Spanish MNEs perceived that their firms had a competitive advantage in these markets and therefore decided to invest there. Competitive advantage is an asset, tangible or intangible, capable of generating an income stream. Tangible assets are raw materials, technologies, qualified employees, capital, etc. Intangible assets are organization capabilities, market knowledge, links with suppliers, distributors, consumers, etc. The advantage of Spanish firms in Latin America came from the similarity of the processes of political and economic liberalization in Spain and

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Latin America, which allowed Spanish MNEs to learn to adjust and to operate in that kind of environments, thus developing a competitive advantage. In other words, the market conditions in Latin America in the 1990s were very similar to those in which Spanish firms operated in Spain since the late 1970s. This gave them market knowledge that firms in the host markets and non-Spanish MNEs did not have because they had not operated under those conditions before. This book also addresses the important theoretical issue of whether existing theories of MNEs, mostly developed to explain the case of US MNEs, applies to the case of Spanish MNEs. The largest share of US MNEs that first expanded outside of the United States was manufacturing firms. The Spanish MNEs in this book are service sector firms. The theories developed for manufacturing MNEs are not totally useful to explain MNEs in services, because the nature of the products they commercialize is different. Whereas manufactures can be produced in one location and sold in many, the services provided by the Spanish firms analyzed in this study require the firm to be present in the markets in which they sell their products to reach their clients and customers. This is an important difference that theories of MNEs need to account for. Finally, an appropriate theoretical approach must bridge the gap between the ideal type structural explanations, on the one hand, and voluntaristic explanations of MNEs, on the other. In other words, ideal type structural theories take the firm to be the result of a series of structural factors. Ideal type voluntaristic approaches focus on the firm, ignoring the constraints and incentives around it. In the first case, theories tend to regard the firm as a black box. These approaches fail to explain why some firms become MNEs and others do not. If the assumption is that internationalization through FDI is a function of the structures, all firms within the same structures should become MNEs. This does not happen. The second approach places the firm in a vacuum and fails to show how the decision of the firm to expand abroad is a result of its ability to develop a competitive advantage derived from its adaptation to a business environment. To overcome the limitations of these ideal types, this book focuses on the firm as the link between Spain and Latin America. Given a set of conditions in the home and the potential host markets, the Spanish MNEs decided to initiate a new venture abroad. More specifically, it is necessary to study, first, how the firm executives and managers perceived that their companies had a competitive advantage in Latin America and decided to develop ventures there, and, then, how those ventures evolved over time. This will also show that there are important sectoral and firm differences

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that need to be taken into consideration. Therefore, a serious inquiry into the emergence of Spanish MNEs can help to overcome these methodological and ontological constraints. At the same time, it sheds light on four related developments. First, it shows how the internationalization of Spanish firms contributed to the internationalization of the Spanish economy. This process was based on acquisitions of existing firms, not on greenfield investment (that is, the creation of a new venture from scratch). This historical pattern of internationalization is quite different from that of US, Japanese, and other European non-Spanish MNEs, which made FDIs earlier and expanded abroad mainly through greenfield investments, especially in the manufacturing sectors. Although US, Japanese, and European non-Spanish MNEs had also realized some acquisitions earlier, these takeovers were not a fundamental part of their early internationalization strategy, and they were a lot smaller in size than those undertaken by the Spanish firms. In the 1990s, however, a very large share of FDI occurred as a result of takeovers and mergers, mainly among firms from the most developed countries. Second, it becomes important to analyze how the processes of Spanish FDI went hand in hand with the processes of structural reforms and liberalization, both in the home and in the host economies. This book analyzes how liberalization occurred, and shows the link between liberalization and FDI. For each of the sectors, this book explains the timing of the liberalization program. By structural reforms I refer to the change of economic model from one based on protectionism and state involvement in the production of certain goods and services to one that emphasizes the role of the private sector as the main producer of goods and services. Such a change took place gradually in Spain from the 1970s to the 1990s, and more sharply in Latin America since the mid-1980s. Structural reform involved the privatization of state-owned enterprises and liberalization of economic activities, by allowing new entrants into an economy and the elimination of monopolies. The book examines what objectives the governments sought to accomplish with the elimination of monopolies, privatization, and opening of the economy. It also relates privatization to liberalization in order to provide a thorough analysis of the goals of governments with the implementation of the structural reforms and the function played by FDI. In most cases, privatization in Latin America preceded liberalization. This sequence gave the Spanish firms early entrant privileges, including a period of monopoly in which they could court the governments in order to lobby to try to influence the conditions of entry of newer operators into the market when the monopoly period expired.

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11

Third, the book also explains the role of “monopoly.” In certain sectors, the governments had earlier decided to allow a single operator. This book explains the reasons for these decisions, as well as the reasons for the elimination of the monopoly. In the 1970s, some governments believed that the market would not produce certain products and services under conditions of free competition. This provided the rationale for the creation of monopolies. Monopolies even undermined the ability of firms to facilitate certain services, such as those related to international activities like telecommunication. In the 1990s, technology made monopolies harder, because in some cases firms and consumers found ways to overcome the legal restrictions set by governments. Finally, this book highlights the differences among sectors and among countries. This distinction helps to overcome the danger of portraying Latin America in a monolithic way. The book shows how the history of Spanish investment in each industry and in each country is different, and how it proceeded at different paces as a result of the variations in privatization and liberalization policies. This approach also shows why there was no Spanish investment in these sectors in several Latin American countries. The competitive advantage of the Spanish MNEs in Latin America and the Caribbean was market knowledge. The process of economic growth, modernization, and liberalization of Spain in the 1970s and 1980s forced some firms to develop new products and services, along with the technologies and organizational techniques needed to create them. The key sectors affected by the changes were those related to the basic infrastructure of the economy, such as banking, telecommunications, energy, and oil and natural gas. The firms operating in these sectors had to work hard to keep up with the growing needs of a fast growing and modernizing economy. With the exception of banking, these sectors were controlled or heavily influenced by state-owned or partly state-owned companies, operating under conditions of monopoly. Banking was the exception, but it was a highly regulated sector, and therefore the government could influence the banks easily. The state played an important role in the development of the competitive advantage. The business-state connection facilitated timely interaction and exchange of information between the managers of the companies and the Spanish government through its representatives in these companies and through its appointees in the top managerial positions. By this process, the government could convey to the companies their long-term strategies and goals and the companies could translate to the government their needs and concerns. Both worked closely in devising the appropriate regulatory framework that allowed the firms to fully satisfy the needs of the economy while pursuing their goals, in accordance with the expectations of the government.

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At the same time, the Spanish companies could influence the Spanish government to adapt the process of gradual liberalization of these sectors so that they could be in a privileged position when restrictions to foreign entrants were lifted. The conditions in Latin America in the 1990s resembled those in Spain in the 1970s and 1980s. The governments decided to privatize many of the state-owned enterprises and to lift restrictions to the entry of foreign firms in critical sectors. The Spanish firms perceived that if they moved to Latin America at this point they would find themselves operating in quickly growing and modernizing economies involved in a process of structural reforms. The privatization processes gave them the key to enter the markets. The monopoly concessions gave them a period of time to adjust to the market and to develop their products and services, as well as to be well positioned when the economy opened up to new entrants. At this point, they had the option of starting anew through greenfield investments or to acquire local firms with on-going operations in the auction of state-owned enterprises. By buying the state-owned enterprises they would have to restructure them to adapt them to a new business philosophy. This is something they were learning through their own process of privatization in Spain. In other words, the conditions in Latin America and the Caribbean were very similar to those in which the Spanish MNEs had been operating in Spain, giving them the opportunity to replicate abroad what they were doing at home. Moreover, their expectation was that benefits for early entrants in some Latin American countries in the newly privatized sectors would be high, because they would operate under conditions of monopoly in the medium term. The Spanish firms became the lead foreign direct investors when the governments of Latin America implemented the structural reforms with which they hoped to overcome the economic crises of the 1980s. There were several reasons for this. One was that the managers of the Spanish firms believed they had the services and products that the markets needed and moved in to be well positioned in these markets and take the lead over other potential competitors. They also expected that, once inside, they would try to influence the host governments when negotiating some of the conditions for further liberalization of the sectors in which they operated. In some cases, such as Brazil, there was room for lobbying at the subnational regional level, especially in telecommunications and public utilities, because the state governments provided a regulatory framework. This was the result of the decision by the national authorities to constrain the operations of the new entrants within the limits of specific Brazilian states. Each company was granted

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13

a license to operate within the state, but could not expand to other states within Brazil. This policy had been applied in Spain in the energy sector. In the late 1990s the Spanish government authorized public utility firms to expand outside of their original area of operation. This had not occurred in Brazil yet in 2002. The similarity of the processes made the executives of the Spanish firms—primarily in telecommunications, power and light, and oil— feel familiar with the markets they were moving into. Not only did they know how to upgrade the existing infrastructure at a fast pace, they also knew what to expect from their interactions with the government and civil society. Methodology and Theoretical Considerations The model for the study of MNEs derives from the existing theoretical literature and tries to overcome the shortcomings of structural and voluntaristic approaches by looking at the intersection between the two, the firm. The model is applied in four sectors, banking, telecommunications, public utilities, and oil and natural gas. Seven firms that operate in those sectors are included in the study, Telefónica in telecommunications, BBVA and SCH in banking, Endesa, Iberdrola, and UF in public utilities, and RepsolYPF in oil and gas. These were the largest firms in Spain in terms of market capitalization in 2009, and they generated about 70 percent of the amount of FDI that Spanish firms invested in Latin America since 1990 (if we include “holding” societies). This is an important aspect, because it shows that Spanish FDI in Latin America was highly concentrated in the hands of seven companies, and that these seven firms mobilized a substantial amount of money.16 The high degree of concentration of Spanish FDI in the hands of these seven firms and the way these companies came to dominate sensitive and highly visible sectors of the Latin American economies made the Spanish wave of investment readily identified with their names. This turned some of the political complaints against structural reforms, adjustment, and liberalization into anti-Spanish cries of neocolonialism. Those people disenfranchised by the liberal reforms, some of the nationalists and part of the left, perceived these companies not only as the symbol of Spanish investment, but as the visible head of a new period of Spanish neocolonialism, and made them the target of their attacks. The main host markets for Spanish multinationals were Argentina, Brazil, Chile, Colombia, Mexico, and Peru. The focus on seven firms from four different sectors helps analyze whether the competitive advantage was national (it pertained to all of the Spanish firms), only sectoral (it applied in one or a few sectors, but not in

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all of them), or firm-specific. The data came from several sources, including interviews with some of the managers of the firms, annual reports, and other archival documents from the firms, as well as academic and specialized publications. The interviews with the managers were based on open-ended questions. Their words show how their perceptions developed and how they came to believe that their firms had a competitive advantage in new markets in Latin America and the Caribbean, thus deciding to invest there. In the annual reports, each firm explains the reasons for their investments in Latin America, as well as the strategies, the types of businesses in which they engaged, their goals, targets, results, and expectations, etc. Because all of these firms are public, their managers want analysts and potential investors to know the state of their accounts and operations. For this reason, their reports are quite complete, because these documents are the firms’ main instrument of communication. Primary sources also included are speeches by the top executives of the firms, as well as opinion articles that they published in specialized and academic publications. Data also comes from reports and studies by analysts; Spanish state agencies such as the Bank of Spain and the Ministry of Industry, Tourism and Trade, and the Ministry of the Economy; and international organizations such as the United Nations Commission for Latin America and the Caribbean (CEPAL), the InterAmerican Development Bank, the Organization for Economic Cooperation and Development (OECD), United Nations Conference on Trade and Development (UNCTAD), and academic studies. To evaluate the performance of these firms in the host markets, the book relies on data on the returns on equity of the firms’ subsidiaries and their profits. Every company published this information in its annual reports. As will be discussed later, these indicators are not necessarily a measure of success. Success is a broader concept that also involves market penetration, long-term consolidation of business operations, overall strategy, application of business model and techniques, development of a set of products and services, etc. Therefore, the success of the Latin American ventures of Spanish firms needs to be looked at in the broader context of the firms’ strategies. The firms may be willing to sustain a low level of profitability in order to be present in a particular market. These issues will be discussed in depth in each of the sector chapters. However, the main reason why the Spanish firms invested in Latin America was to increase their profits. Structure of the Book The second chapter provides a review of several theoretical models and a very brief overview of existing models to emphasize their contributions and

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15

shortcomings. This serves as the foundation for the book’s original theoretical contribution. The second chapter also defines the concept of “competitive advantage” as it appears in the literature and shows how existing models fail to operationalize it. It then goes on to discuss what aspects of the existing theories are applicable to the service sector MNEs. The third chapter provides a brief history of each one of the Spanish firms included in this study. The chapters that follow are in-depth analyses of the sectors that received the largest amounts of Spanish FDI, namely, banking, telecommunications, public utilities, and oil and natural gas. Apart from the specifics of each industry, each chapter deals with some general aspects that apply across sectors. Every chapter analyzes how the executives of the Spanish firms perceived that they had developed a competitive advantage and how they expanded the operations of their firms in Latin America to apply their business culture. For each sector, there is an explanation of the differences between and among host countries and how the MNEs adapted to these differences. There is also a review of the characteristics of the investment, operations developed, performance in terms of profit and value creation for stockholders, impact of the investments on the home economy and host economies, interaction of the social and political actors within the host country, and prospects for the future. Each chapter also explains how the expansion of the Spanish firms was financed. The conclusion reiterates the main findings and ends with country-specific analyses of the FDIs of Spanish firms.

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CHAPTER 2

Theoretical Considerations and Development of the Model

T

he concept of “advantage” is at the core of several theoretical approaches to multinational enterprises (MNEs). It was first introduced by industrial organization theorists and theorists of the firm. Stephen Hymer was the first scholar to apply it to the study of MNEs. He argued that MNEs have an “advantage” that they bring to the host markets, allowing them to overcome the higher costs of operating in these markets.1 Hymer was trying to refute theories developed in the 1950s and 1960s such as international economics (IEs) and international trade. IE focused on the export of capital that occurred when a firm initiated a foreign operation and regarded the MNE as a mere arbitrager of equity capital from countries where its return was low to countries where it was high.2 “General equilibrium theory of international trade” understood MNEs as a function of a country’s “comparative” advantage. In this approach, factor endowments and trade flows are interrelated. Some countries have the endowments to become home bases for MNEs, while others do not have these endowments and become hosts. Stephen Hymer’s “industrial organization” approach made the firm the unit of analysis. The issue of “control” became central to his understanding of foreign direct investment (FDI), because it allowed him to introduce the concept of “advantage.” Having control over a foreign operation permits the firm to fully appropriate certain skills and abilities that other firms do not have. Those skills and abilities are the firm’s “advantage.”3 Raymond Vernon’s “product cycle theory” (developed also in the 1960s) and “location theory” (developed in the 1970s) focused on the firm’s “knowledge of the market.” Vernon argued that the development of new products requires the existence of effective communication between the potential supplier and the potential market. The firm internalizes and centralizes all of the functions involved in the development of a new product in the home

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market to facilitate communication among the departments involved. As standardization develops, factor costs become a concern, and the firm moves abroad the labor-intensive activities.4 Since the 1970s there was an explosion of studies of MNEs. The “Scandinavian School” explained that a firm’s foreign investments grew over time as the firm “learned” more about a particular market and became more “familiar” with it.5 The “theory of the firm” emerged out of the industrial organization approach, thanks to the work of scholars like Mark Casson, John Dunning, Mira Wilkins, and Oliver Williamson, among others. These theorists relied on internalization theory as developed by Ronald Coase in the 1930s and argued that the failure of arm’s-length transactions leads firms to bring under the hierarchical control of the firm the provision of intermediate goods and services across borders.6 They emphasized the concepts of “imperfect markets” and “internalization” and downplayed the importance of “advantage,” as explained by Hymer. Theorists of the firm claimed that the advantage might even be the result of FDI.7 They argued that market imperfections in goods markets and factors markets, distortions caused by government interventions, and internal and external economies of scale cause the firm to “internalize” functions that the market fails to provide efficiently, thus minimizing “transaction costs.”8 “Internalization” thus gives firms new advantages by increasing their ability to control and plan production, pricing, and transfer of knowledge and by avoiding certain forms of government intervention.9 With this change of approach, firms came to be regarded as transactors (firms that coordinate the use of intermediate assets across countries), rather than producers. Mira Wilkins complemented this approach with a five-parameter scheme. The firm must see an “opportunity” to sell and/or to obtain sources of supply in the host market. There are no “political” constraints there and the firm is “familiar” with it. The firm also evaluates investment opportunities in “third countries” before adopting a decision. Finally, the type of investment follows the firm’s “corporate” peculiarities.10 In the late 1970s, Dunning developed the eclectic ownership-locationinternalization (OLI) model to focus on the location-specific advantages of countries, the ownership-specific advantages of enterprises, the ability of firms to internalize markets, and their willingness to undertake further valueadding activities embodying their assets.11 Michael Porter emphasized country-specific location advantages such as (1) factors of production, (2) demand, (3) firm strategy, structure, and rivalry, and (4) related and supporting businesses.12 The new theories developed since the 1990s are complementary explanations to those developed earlier. They are country-, industry-, or firmspecific, and more multidisciplinary (until the early 1980s most were

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Theoretical Considerations and Development

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developed by economists).13 In the “new international trade school,” MNEs arise endogenously in equilibrium by combining ownership and location advantages. For example, in Elhanan Helpman’s model, the headquarters is separated from the production facility, which may be in a different country. In the absence of tariffs and transportation costs, the firm may never open more than one production facility.14 James R. Markusen argued that the decision to undertake multinational (multiplant) production is a tension between the added fixed costs of a second plant versus the trade costs of serving the foreign market by exporting.15 In the “theory of the firm” school, Oliver Williamson proposed to go beyond Ronald Coase’s concern with transaction costs. He argued that the organizing principle within the firm is “hierarchy,” as opposed to the “price system,” and pinpointed the need to operationalize the logic of economic organization.16 This is what Harold Demsetz and David Teece do. Demsetz’s model focuses on the management costs within the firm (as opposed to the transaction costs in the market).17 Teece claimed that in the knowledge industries there exists a law of increasing returns that amplifies the advantage of those possessing knowledge. The stress is then on the entrepreneurial side of corporate governance, how organizational structures can shape and reshape clusters of assets in distinct combinations needed to serve ever-changing customer needs.18 Several studies of MNEs focus on firm strategy and management. These are evolutionary models that explain how firms develop advantages over time. Alfred D. Chandler has emphasized the importance of the organizational setting of the firm for learning. He claimed that the leaders of each industrial revolution were those firms whose organizational structures allowed them to remain highly productive and profitable, by developing technical, functional, and managerial capabilities that are very difficult to trade in the market, especially in the knowledge industries.19 Different offshoots of the Scandinavian model look at the way MNEs enhance their capabilities over time by incorporating new value-adding activities and better modes of operations and locations. This model claims that firms diversify geographically thanks to the development of managerial skills and knowledge, and of organizational routines and processes. Other approaches study the mind-sets of the MNE’s senior executives by looking at the way they think about doing business around the world.20 C. K. Prahalad, Yves Doz, and Chris Bartlett put the MNE at a juncture between the pressures at the domestic level to satisfy the demands of local governments and to meet the needs of the local market, and the firm’s economic imperative toward global integration, to realize scale economies, reduce production costs, satisfy homogeneous taste, and maximize investments in technology.21

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John Cantwell argued that the firm has replaced the country as the agent of innovation and research and development (R&D). Technology is a pathdependent and cumulative process that results from the firm’s learning experience in terms of scientific knowledge and organizational skills. Since technology is cumulative, the geographic diversification of firms helps them develop new technological assets, which emerge from their experiences in geographically and culturally diverse settings.22 As Western European firms began investing abroad in the 1970s and 1980s, new models began to look for national patterns. When Japanese firms made significant investments abroad in the 1980s, Mark Mason, Dunning, and other scholars tested the theory of the firm for country and industry specificity. Early studies suggested that Japanese and US MNEs differed greatly. For example, Dunning argued that the main ownership advantage of Japanese MNEs is their ability to manage idiosyncratic human-intensive transnational relations, whereas US MNEs have a better ability to manage formalized, more technical, and standardized transactions.23 This advantage translates into the development abroad of keiretsu networks, which allow Japanese MNEs to source over 70 percent of their value-added from outside suppliers (US MNEs only source 30 percent), thus gaining greater flexibility of production.24 Other scholars such as D. Eleanor Westney affirmed that Japanese FDI in the 1980s was not a new phenomenon and showed how Japanese firms began to make direct investments outside of Japan in the 1880s, mainly in Taiwan, Korea, and China, in the creation of trading firms, banks, and service activities. Since the 1970s, their main hosts became the United States first, then Western Europe and Asia. She attributed the fascination of Western academics with Japanese MNEs to the fact that this was the first time that Japanese FDI caught their attention. Her study, however, concluded that the expansion of Japanese MNEs was grounded on an advantage based on process innovation and organization of work. As opposed to Western MNEs, which centralized their operations in the host markets in one production center, the Japanese tended to open up an array of subsidiaries within the same country to develop products that suited local customer needs more effectively and to expand their knowledge base by being present in the centers of science and technology.25 In the 1990s, a body of literature on direct investment in transition economies (mainly Eastern Europe) emerged. These scholars studied the process of privatization of state-owned enterprises and the reorganization that followed. The studies concluded that management, production, and products did not change much after privatization. However, the formerly state-owned firms did not do very well in the new economy. The most successful firms were start-ups led by new entrepreneurs such as

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scientists, former cadres with good connections, small business owners, and farmers, not the old state-owned firms.26 Political scientists have approached MNEs from several perspectives. Behavioral approaches have tried to evaluate the benefits and costs of national government policies. Some scholars conclude that governments are likely to impose discriminatory measures against MNEs for two reasons: foreign equity holders cannot vote in the host country and government officials resent foreign MNEs for their ability to circumvent the state’s regulations. This approach is based on the assumption that states seek to maximize real national income, distributional issues are separate from efficiency ones, each enterprise has a single “home base” country, both MNEs and states operate in a competitive environment, and policy making by governments can discriminate between foreign-based and home-based MNEs.27 “Strategic analysis” looks at issues such as the consistency between MNE goals and government goals, in both home and host countries, the main institutional elements determining MNE and government behavior (the firm’s strategy will depend on the dispersion of its advantages across countries, whereas the governments’ strategies will depend on whether the state is a net exporter of FDI, a net recipient of FDI, or a “dual” player with both outward and inward FDI) and the strategic examination by the MNEs’ managers of the degree to which government policy is endogenous (firms will devise a strategy to try to alter it in their own favor) or exogenous (the firm will work within the rules set by the public agencies).28 Some scholars in the field of international relations studied whether MNEs undermine state sovereignty, autonomy, and control. Raymond Vernon argued that the nation-state was finished as an economic unit. Robert Keohane and Joseph Nye claimed that the interdependence of the world economy after the Second World War constrained the state’s external sovereignty, which was forced to conform to rules devised by many international actors, including MNEs, etc. Structuralist scholars such as Immanuel Wallerstein argued that MNEs played a fundamental role in the international division of labor, channeling surplus value to the rich regions where they are located. The globalization literature has continued to explore these concerns since the late 1990s.29 Area studies experts have generated a very large body of literature since the 1980s on state-business relations and, in the case of Latin American studies, on the relation between economic reforms and regime type, inspired by the wave of democratization in Latin America that began in the 1980s and the ensuing economic reforms.30 The first academic studies of Spanish MNEs were based on Dunning’s theories.31 Juan José Durán Herrera argued that Spanish FDI in Latin America was due to factors and location economies in Latin America that

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became important in the 1990s, deregulation and technological advances that allowed for the internationalization of firms through FDIs and the capacity of the Spanish firms to generate resources and capacities in the 1980s.32 William Chislett emphasized the location advantages that existed in Latin America in the 1990s, especially the processes of privatization, market access and acquisition of market share, expectations of population growth, change of regulatory system, and similarity of macroeconomic environment between Spain and Latin America in the 1980s and 1990s.33 José Antonio Alonso concluded that macroeconomic stability, trade and financial opening, liberalization and deregulation of economic activities, the privatization of state-owned enterprises, and regional integration worked as important pull factors into the region.34 José Manuel Campa and Mauro F. Guillén (1996a, 1996b), and Cristina López Duarte and Estaban García Canal (1997) followed the “investment development path” (IDP) model developed by Dunning and Rajneesh Narula (1996), which analyzes the relationship between economic development and FDI.35 Mikel Buesa and José Molero (1992, 1998) applied this model to the industrial sector and emphasized the technological transfers from Spain,36 and Yolanda Fernández (2000) underlined the ownership advantages (common culture and oligopolistic situation) and location advantages (growth potential in Latin America).37 Adolfo Gutiérrez de Gandarilla Saldaña and Luis Javier Heras López (2000) applied the gradualist theory of the Scandinavian School. This theory posits that firms in small countries begin to make FDIs as a logical process of firm growth once they have developed their national markets, even though they may still be small.38 Several authors followed the theory of international trade: María Teresa Alguacil Mari and Vicente Orts Ríos (1998); María Teresa Alguacil Mari, Óscar Bajo Rubio, María Montero Muñoz, and Vicente Orts Ríos (1999); Eduardo Cuenca García (2001); and Carlos Rodríguez González (2001). They explored the relationship between exports and FDI, concluding that Spanish FDI in Latin America was the result of the substitution of trade by investment.39 Cristina López Duarte (1997) based her analysis of FDIs by Spanish industrial firms on industrial organization theory, as developed by Stephen Hymer (1976), and on theory of the firm, based on Oliver Williamson (1975, 1979). Duarte argued that the direct investments resulted from the impossibility of transferring a series of advantages through the market at arm’s length.40 There are important studies in the field of strategic management. Francisco Mochón and Alfredo Rambla (1999) and Miguel Ángel Gallo and José Antonio Segarra (1987) see the Spanish FDI as a strategic move by the managers of the firms to add value to their firms.41

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Other authors used historical analysis. For Ramón Casilda Béjar (2002), Spanish FDI in Latin America was the result of several factors. Some were firm-specific, some were sectoral (liberalization), and some others were cultural (language).42 Santos S. Ruesga and Julimar S. Bichara (1998–1999), Rafael Pampillón and Ana Raquel Fernández (1999), and Guillermo de la Dehesa (2000) showed that Spanish FDI was the result of a push factor (the economic consolidation of Spain, which generated capital for the Spanish firms) and a pull factor (the change of policies in Latin America.)43 José Antonio Alonso and J. Manuel Cadarso (1982) underlined the importance of culture and language.44 María Teresa Fernández (2000) focused on the links that exist between Spanish firms and Spanish subsidiaries of non-Spanish firms through contracts and services, and concluded that these links led some Spanish firms to invest abroad to follow their foreign clients.45 The adoption of the euro by the European Union and the creation of the single European market generated discussions among Spanish academics in the 1990s who concluded that FDI was one of the best options for the Spanish firms to face growing competition at home. Such studies include Juan Velarde, José Luis García Delgado and A. Pedreño (1991), and Álvaro Calderón (1999a, 1999b).46 Following an institutionalist approach, Mauro Guillén (2001) compared three models of development, Spain, Argentina, and South Korea, to claim that globalization was not forcing the convergence of the organizational models of firms and countries. Instead, globalization pushes firms and countries to build on their peculiar economic, political, and social advantages. He argued that Spanish FDI was the result of the Spanish firms adjusting to the peculiar institutional context in Spain, characterized by a great degree of competition due to its open market and the cooperative character of the unions, which facilitated the negotiation of the development model between the government, the firms (Spanish as well as Spanish subsidiaries of foreign firms), and the workers.47 A Model to Explain the Emergence and Application of an Advantage This book proposes a rule-oriented constructivist approach to study MNEs, as developed by Nicholas Onuf. In proposing a mode of analysis for the social sciences, he tackled the agency-structure debate and explained that agents and institutions (he prefers to use this term instead of structures) coconstitute each other. That is, the agents construct the social institutions in which they operate and these institutions, in turn, constrain agency. In other words, they constitute one another.

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To understand this process of coconstitution, Onuf looked at social rules, which mediate between agents and institutions. The institutions are sets of rules that tell agents how to behave in a given setting. In this case, I regard the firm as an institution, governed by a series of rules created by its own managers and employees (the agents). Outside of the firm, the market and the regulations are the institution and the firm becomes the agent. The rules of the market are determined by the regulating agents and by the firms that operate in them. This normative framework is never fixed. As managers use rules and evaluate consequences, the rules are elected and the ensemble of rules adjusts accordingly.48 The main contribution of social theory to the study of MNEs is that it allows us to construct a dynamic model that explains how firms develop advantages, how advantages change over time, how these advantages are generated in the home and/or host market, or how sometimes they result from the direct investments. Social theory also allows us to see how the advantages result from the interaction of the firm with its environment, both in the home and in host markets. It highlights human agency, because it places the focus of analysis on how the decision-makers within the firms rationalize the relations of their firms with other actors in the market. This book argues that the managers of the Spanish firms that made the decision to invest in Latin America since the 1990s believed their firms had advantages over potential competitors in Latin America. Some of these advantages were sector-specific and others were firm-specific. They were developed by some Spanish firms in four sectors, namely, banking, telecommunications, public utilities, and oil and gas. The biggest advantage of Spanish firms in Latin America was their “knowledge of the market.” Their managers believed that they knew the needs of the Latin American markets and that their firms could provide the services and products to meet those needs. Common Culture This knowledge of the market was the result of two factors, the shared culture between Spain and Latin America, and the shared corporate experiences in Spain and in Latin America. The role of culture in FDI has been very important in marketing. One of the major issues of research in this field is the debate between serving several markets from one production source and shifting production facilities for greater efficiency. In the 1970s this debate was phrased in terms of “standardization vs. adaptation,” in the 1980s “globalization vs. location,” and in the 1990s “global integration vs. local responsiveness.”49 While this debate may seem similar to that of the international trade school (see Markusen), the marketing literature places greater

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emphasis on the effect of country of origin on consumer behavior, modes of entry into new markets and their performance implications (exports vs. joint ventures), marketing mix decisions (product policy, advertising, pricing, and distribution), and global strategy and strategic alliances.50 John L. Graham affirmed that executives claim that “cultural differences” are the most serious and persistent problem that affects the international sales and operations of firms, because they constitute a hidden barrier. He defined culture as values, expectations, and behaviors that are learned, shared by a group of people.51 Some examples of cultural factors are values; corruption; linguistic distance; interpersonal behavior; negotiating styles; language and nonverbal behaviors; thinking and decision-making styles; organizational structures; and selection, training, motivation, and evaluation and control of personnel.52 The managers of the Spanish firms included in this study argued that the shared culture between Spain and Latin America was due to the strong historical relations that existed for centuries between Spain and Latin America. They thought that the common language, the predominantly Catholic religion, and the similar educational systems were based on similar values and generated similar mindsets among the people on both sides of the Atlantic. The linguistic and cultural similarity would also facilitate the interactions with the employees of their potential Latin American subsidiaries, and it would make it easier to move employees between the parent and the subsidiaries. For all of these reasons, they concluded that transactions would be easier and less onerous.53 This is an important thesis, because businesses are conducted by people, but this human aspect is overlooked by many approaches (see Figure 2.1).54 Shared Corporate Experiences The managers also believed that the institutional context in which Spanish firms operated in Spain was very similar to the one they expected to find in Latin America. Entry into the Latin American markets took place through the acquisition of formerly state-owned firms that were privatized by Latin American governments. Many of the Spanish firms that made these investments had themselves been state-owned or were going through a process of privatization (with the exception of those in banking). Klaus E. Meyer studied the changes involved in a process of privatization and liberalization and concluded that the acquisition of privatized firms bears some peculiarities. Governments sell firms to pursue broader social objectives and continue to be involved with the privatized firm after the completion of the sale. The investor has to upgrade the managerial capabilities and the

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26 Shared culture

people’s mindset education

religion

culture

language

history

consumers

market knowledge

liberalization

privatization technology

managerial experience

globalization

heavy regulation

frequent interactions with the government

Shared institutional experiences Application market knowledge

processes within the firm (internal organization)

firm’s relations with regulators (external relations)

products and services patterned behavior (normative framework) corporate organizational culture

Belief that some Latin American markets are similar to Spain’s FDI in Latin America

Application of organizational culture in Latin America Figure 2.1 Development and application of the advantage

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technology of the firms. This involves a set of tacit know-how, which requires an interactive learning process. At the technical level, it involves new and specific techniques; at the systemic level, new systems and procedures (this requires coordination, teaching of new attitudes and value systems); and at the strategic level, senior managers have to change their cognitive framework for doing business and conducting the tasks of management (they need to reassess their criteria of business success and the factors that contribute to it). The acquisition and adaptation of this complex, and in many cases tacit knowledge, is inhibited by the cultural and institutional context in which it is transferred.55 The best way to transfer management knowledge is to adapt the new ideas to the reality that preceded the privatization of the firm. Bonding, networking, and informal agreements, as substitutes for legal institutions, are the norm.56 The following factors defined the institutional framework in which Spanish firms operated in Spain before making investments in Latin America. Their managers expected to find similar conditions in Latin America. Privatization Many of the Spanish firms had been state-owned and went through processes of privatization in the 1990s (with the exception of the two large banks). With the structural reforms implemented in Latin America, many state-owned firms were going to be privatized, opening the door to the entry of Spanish firms. The Spanish managers believed they had great expertise in how to participate in a process of privatization and how to operate the firms after privatization.57 Liberalization The Spanish firms in the sectors included in this study had been operating under conditions of monopoly prior to the 1990s, when the Spanish government lifted the restrictions to the entry of new firms. The Latin American countries went through a similar process in the 1990s. In some Latin American countries and sectors, the process of liberalization even preceded that of Spain, and the managers of the Spanish firms took this as an opportunity to learn how to operate in a new competitive environment.58 Technology The Spanish firms had to improve and modernize their services, technologies, and products at a very fast pace since the 1980s, due to the quick

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growth of demand in Spain. The growth expectations in Latin America in the 1990s led the Spanish managers to believe that it would be necessary to undertake a similar process of technological improvement there.59 Managerial Experience The conditions discussed above forced the Spanish firms to adopt the organizational structure that would help them succeed in these conditions and decided that their managerial know-how could help them operate equally well under similar conditions elsewhere.60 Globalization The decision of the European Union (EU) to create a single market forced the Spanish government to allow European firms to enter the market in the sectors discussed in this book. The Spanish managers decided that investing outside of Spain would be the best strategy to generate profits. They defined “liberalization” as “globalization” and thought that only the large firms would survive in each sector, thereby initiating their expansion overseas through FDI.61 Heavy Regulation Structural reforms and privatization of state-owned firms did not necessarily mean liberalization in Spain and Latin America. In fact, the Spanish government produced many laws to establish the new rules of the game in each sector, trying to smooth the transition from situations of monopoly to competition and seeking to prevent the emergence of oligopolistic behavior among firms. An analogous situation occurred in Latin America, where governments granted the newly private firms conditions of monopoly for many years.62 Frequent Interactions with the Government The rocky, gradual, and sometimes slow transition from state ownership to private ownership, and from monopoly to open competition, resulted in the production of a heavy legal corpus in each of the sectors. The managers of the firms continued to interact with the governments on a regular basis, lobbying for friendly legislation.63 In the 1990s, Spanish managers found themselves very comfortable in this environment in Spain, in part because most of them had been appointed by the government before the firms were

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privatized and remained in their posts after privatization to keep smooth relations with the government. The decision of these firms to invest in Latin America was thus based on the belief by the Spanish managers that they knew the Latin American markets better than other competitors. Their knowledge was based on culture as well as technical expertise in each industry. It was embedded in the institutional framework created within their firms to facilitate the process of acquisition of knowledge from the market, production of goods and services within the firm to serve those markets, and relations with the actors in the market to facilitate a continuous process of learning and delivery of services. Both internally and externally, the firms institutionalized patterns of behavior. Rule-oriented social theory defines institutions as sets of rules. These are the rules that shape the roles of employees within the firm. In other words, these rules constitute the internal organization of the firm. The firm’s external relations with other actors (their relations with regulators) are shaped by rules that embody the firm’s best practices in dealing with regulators and market forces. These rules tell managers and employees how to relate to other actors in the market. These rules embody the knowledge of the firms and create the conditions for learning. They institutionalize the advantage of the firms and coerce their employees to adjust their behavior to the firms’ best practices, so that it can produce the goods and services that their managers want (or “have”) to produce. This institutionalized behavior, externally and internally, constitutes the normative framework or corporate organizational culture of the firms. Once in Latin America, the Spanish firms transferred to their subsidiaries the same normative framework that they had developed in Spain. After the investments were made, they learned that there were important differences between Spain and each Latin American market, and as a result adjusted their corporate organizational culture (see Figure 2.1).64

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CHAPTER 3

Banking Iberoamerica is, for Spanish banks, a natural channel of expansion due to its cultural and historical affinities.1 Matías Rodríguez Inciarte, Vice Chairman, SCH Latin America, for its cultural affinity and its potential for growth, is one of the natural channels for this internationalization.2 Emilio Ybarra, Chairman of BBVA in 1999 In Latin America, the strategy of our group is based on a long-term commitment to consolidate a regional franchise, which already has great value, in which the entrepreneurial model, the automation, and the systems platforms that our business units have in Spain, are in an advanced stage of implementation.3 Emilio Ybarra, Chairman of BBVA in 1999 The processes of privatization, concentration and liberalization that we went through in Spain in the last twenty or twenty-five years were a great learning experience for Banco Santander and facilitated our internationalization in Latin America.4 Francisco Luzón, CEO, SCH

Introduction This chapter focuses on the investments of two Spanish banks in Latin America, Banco Bilbao Vizcaya Argentaria (BBVA) and Banco Santander Central Hispano (SCH). It argues that their managers believed that the characteristics of the Spanish market in which the banks operated between the 1970s and 1990s were very similar to those in Latin America in the

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1990s. These were financially underdeveloped markets in which they could be among the main financial institutions. Beginning in Spain in the 1970s, and in Latin America since the mid-1980s (in most countries in the 1990s) there was a process of liberalization of the financial sector, coupled with strong government efforts to develop more sophisticated capital markets. The result was concentration of the banking sector, due to the takeover of some of the weaker banks by the stronger ones. There was also a process of disintermediation (emergence of new financial institutions other than banks). Some of the new financial institutions were institutional investors, mainly pension fund management firms and mutual fund management firms, new securities traders, and insurance firms. In Spain, this process of disintermediation began in the late 1970s, and the Spanish banks had to adjust to the emergence of new players in the Spanish financial market, including foreign banks. As a result, they deepened their process of diversification to try to incorporate all of the new services and products. As this process was replicated in Latin America since the mid-1980s, the Spanish banks believed that the knowledge and expertise that they had developed in Spain could be applied in Latin America, where conditions and the needs of the market were similar. Therefore, they made direct investments in Latin America and brought with them their expertise in universal banking. Through their activities, they contributed to develop the financial markets in the countries in which they invested. In 2008, SCH was Latin America’s largest banking group, with 40 million customers, 96,405 employees, and assets worth $272.227 billion (larger than Colombia’s GDP of $240.832 billion). BBVA had 78,000 employees, over 25 million customers, and $153.691 billion worth of assets in Latin America (larger than Peru’s GDP of $127.462 billion).5 BBVA was the result of the merger of two banks in 1988, Banco de Bilbao (BB) and Banco de Vizcaya (BV), and the acquisition of Argentaria in 1999. BB was established in 1857 thanks to a concession given by the Spanish government to the Junta de Comercio de Bilbao (Bilbao Board of Trade) to issue currency.6 When this concession was granted exclusively to the Bank of Spain in 1874, BB became a business bank (along with the banks of Santander, Barcelona, and Reus).7 BB opened the first savings bank in Spain in 1878 and in 1896 took the lead in financing heavy industry, including the construction of the port of Bilbao, the development of railroad transport, and the mining and steel industries. In 1902 it became the first Spanish bank to open an office abroad in Paris. BV was established in 1901 in Bilbao by local merchants to finance trade and soon began to expand throughout Spain.8 BB and BV flourished during the First World War by funding industrial projects (chemical, textiles, paper, construction, machinery, and real estate)

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and survived the slump that affected Spain in the 1920s, when many banks went bankrupt.9 Between 1941 and 1953 BB opened branches around Spain, strengthened its offices in Paris and London, and sought new partners in North and South America. Thanks to economic liberalization, the Spanish economy experienced phenomenal rates of growth in the 1960s and BB and BV benefited by financing the process of industrialization. In the late 1960s and early 1970s both banks invested heavily in technology, automating their services, adopting electronic processing data centers, and introducing credit cards and automatic teller machines (ATMs) into the Spanish market in 1970.10 The government adopted the concept of universal banking in 1974, unleashing a radical transformation of the financial industries. Between the mid-1970s and mid-1980s both BB and BV went on a buying spree, taking over other banks. They also implemented aggressive campaigns to expand credit and strengthened their services in the main financial centers of Europe, North America, and Latin America, and expanded into new services such as insurance. With the opening of the Spanish banking market to foreign firms in 1978, both banks adopted some of the practices of the main foreign banks, such as publication of independent audit reports. A banking crisis hit Spain in the mid-1980s, as Spain prepared to join the European Communities in 1986. BB and BV decided to merge in 1988 hoping they would be able to compete successfully in the new European market. The new institution, Banco Bilbao Vizcaya (BBV), had assets worth $50 billion.11 Initially, the senior positions and management strategies were split between the two banks but by 1992 the BB executives managed to impose their style and the former BV executives left for other banks.12 In 1999 BBV completed its takeovers in Spain by acquiring a state-owned bank called Argentaria, privatized by the Spanish government, and Banco Hipotecario. The resulting BBVA had assets worth a10.46 billion, becoming the secondlargest bank by assets in Spain and one of the top ten in the euro zone.13 SCH was also the result of mergers and takeovers involving some of Spain’s largest banks. Banco de Santander (BS) was established in 1857 by a group of businesses from the city of Santander to finance local and colonial trade. It remained a small local bank until Emilio Botín Sáenz became President in 1930 (management has been in the hands of the Botín family since the bank’s founding).14 He began to open offices around Spain and in 1946 began a process of large acquisitions. Santander’s managers proved to have a special ability to capture national attention through campaigns to expand credit, like the one launched in 1957 to expand in Barcelona. BS agreed to finance the construction of F. C. Barcelona’s new soccer stadium (one of the most popular soccer teams in the country) and asked the club’s

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managers to require season ticket holders to open an account in the bank. Santander has tried to be perceived as a leading innovator, and in 1965 it created a joint venture with Bank of America (BofA) called Banco Intercontinental Español (Bankinter), to introduce new financial practices in Spain. BS also expanded heavily through takeovers in the second half of the 1970s and first half of the 1980s. In 1987 Emilio Botín Ríos took over from his father and launched a new high-interest account in 1989, paying 11 percent interest to those who opened an account with more than 500,000 pesetas (aprox. $4,000). The campaign was broadly publicized in the media and helped the bank double its market share in terms of deposits.15 Banco Central (BC) was founded in 1919 in Madrid by a group of business people to finance emerging industries, especially coal, iron and steel, shipping, and paper making and remained more involved in the industrial sector than the other banks discussed in this chapter. BC was very aggressive from the beginning, taking over several ailing banks in the 1930s that were affected by the economic crisis. BC involved itself heavily in the 1940s and 1950s in the process of reconstruction of industries after the Spanish Civil War by providing the capital and the managerial expertise needed to run these new firms, including strategic sectors such as energy, construction, and oil. BC could seat its managers on the boards of directors of the companies it financed.16 The economic crisis of the 1970s gave BC an opportunity to expand by acquiring some ailing institutions. Between 1970 and 1975 BC doubled its number of operating offices and provided financial support to many troubled industrial companies, thereby increasing its influence. In the 1980s, BC was the largest bank in Spain but its operating costs were too high and the bank became the target of potential takeovers. It merged with Banco Hispano Americano (BHA) in 1991, creating Banco Central Hispanoamericano (BCH). BHA, founded in 1900, had been the leading Spanish bank for a long time but a series of costly acquisitions in the 1980s weakened its profit margins and precipitated its merger with BC as an attempt to promote major reforms. BCH managers fired over 10,000 employees and closed down one-fifth of the combined branches, generating large profit again.17 The 1990s became a critical period for BS’s expansion in Spain. BS took advantage of the financial trouble of some of Spain’s largest banks to acquire them through a very aggressive campaign of acquisitions. It began in 1994 by taking over Banesto, the second time it took over a bank that was larger than itself in terms of assets. One of the goals of this acquisition was not only to increase BS’s customer base and its broad distribution network, but

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to profit from its intangible assets, mainly the technical and managerial know-how of Banesto’s executives that had come from BV, after the merger between BB and BV.18 In 1999, BS took over BCH, creating the largest bank in Spain with more than $330 billion worth of assets. Since 2002 Emilio Botín is the bank’s CEO.19 This chapter will continue with an analysis of how BBVA and SCH adapted to a particular set of institutional constraints in Spain through the 1990s. Then it analyzes how the conditions in Latin America in the 1990s resembled those of Spain. The similarity of conditions and the opening of the Latin American financial systems in the 1990s facilitated the entry of Spanish banks in Latin America. The chapter then explains how the Spanish banks applied their advantage in the host Latin American markets. Then it reviews the reorganization of the enterprises they took over, as well as the products and services that they introduced. It also evaluates their contribution to the development of financial systems in Latin America. The chapter concludes with an evaluation of the impact of their Latin American expansion on both banks.20 Development of the Advantage in Spain The Spanish financial system of the early 1980s was terribly underdeveloped by European standards as a result of the policies devised by the Spanish government since the early twentieth century to direct financial resources to certain economic activities.21 The modernization of the banking system began with the enactment of the Banking Law of 1962 and others that followed. Some of these measures included the liberalization of interest rates and the normalization of the operations of the different financial institutions (banks, cajas—Spanish savings and loans institutions—cooperatives, et cetera), regularization of the insurance of deposits, and reforms on accounting procedures. In all cases, the goal was to increase competition. The international crisis that began in 1973 affected tourism, property investment, construction, and heavy industry in Spain. Since the banks had invested heavily in these areas, the banking system eventually went into a crisis. Of the 110 banks that were in operation in 1977, 52 found themselves in difficulty between then and 1985, especially the smaller banks, whose capital and deposits represented 30 percent of the whole sector in 1980, employed 27 percent of the industry’s workers and owned 19 percent of the banking offices. The public sector bore 77 percent of the cost of the bail-out programs.22 However, no bank disappeared thanks to the salvage operation devised by the government.23

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A series of reforms began in 1977: ●

● ● ● ● ● ● ●

● ●

● ●

A conservative monetary policy forced by the economic crisis of the late 1970s, high inflation, lack of solvency of the banking institutions, and lack of control instruments by the state; Financing of the public deficits through market mechanisms; Development of a body of regulations and institutions to cope with the banking crises, including a Fondo de Garantía de Depósitos; Strengthening of the state’s capacity to oversee the activities of financial institutions; Internationalization of the Spanish financial institutions; Market-based exchange rate policy; Liberalization of interest rates and reform of the deposits that the financial institutions had to keep in the Bank of Spain; Elimination of legal restrictions that barred banks, savings and loans, cooperatives, and other financial institutions from competing among themselves; Elimination of restrictions for the opening of bank offices in 1985, for cajas in 1988;24 Authorization of entry to foreign banks since 1977, but with restrictions until 1993, when the European Union (EU) forced states to eliminate restrictions. However, foreign banks were unable to gain a large share of the Spanish market in terms of deposits, only 5.87 percent in 1993;25 Gradual liberalization of the commissions that financial institutions charged for their services between 1975 and 1987; and Gradual elimination of the investment requirements for financial institutions between 1989 and 1992.26

Banks and cajas responded to these reforms by opening 18,275 new offices between 1975 and 1995 and hired 25,000 people between 1975 and 1980 alone. To cut down costs, they closed down 700 of them between 1992 and 1994 and between 1981 and 1995 the number of employees fell by 35,000. Banks were more eager to close down offices than cajas, because a new law in 1989 that allowed cajas to grow outside of their home province led them to increase the number of offices by 6,900 between 1980 and 1995, and the number of employees by 25,000 over the same period of time.27 As a result, Spanish financial firms faced higher operating costs and lower productivity ratios than other European firms. In 1996, credits and deposits per office were $19.1 million (a24 million) in Spain, $79.8 (a100) in the United Kingdom, and $103.8 (a130) in Germany. At first, this was in part compensated in Spain by higher mediation margins, but these began

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to fall with liberalization by as much as 30 percent between 1987 and 1995, while the reduction in the United Kingdom was 16 percent and 15 percent in France. The banking crisis affected almost every bank, some more than others, and they had to undertake processes of internal reforms, restructuring, and modernization. This was coupled with the process of disintermediation, by which the banks and cajas had to face competition from new financial institutions, mainly the institutional investors.28 One of the most important learning experiences for Spanish banks was how to network with politicians and government officials. In a heavily regulated industry, the banks’ top officials understood that it was crucial to influence the outcome of regulatory reforms to their advantage. The Revell Report of 1987, commissioned by BV, argued that banks could profit from scale economies and recommended growth through a policy of mergers. The government believed that Spain needed to have large banks to be able to play a decisive role in the construction of a united Europe, and thus adopted a policy that promoted mergers among the top Spanish banks.29 In 1987, BB and BC tried to take over Banesto but failed. BB later merged with BV to create BBV and BC with BHA in 1991, creating BCH. The Spanish government also played its role in this process of consolidation, bringing together all of the state-owned financial institutions under a single holding company, Argentaria, Corporación Bancaria de España in 1991. In 1993 the Bank of Spain took over ailing Banesto under accusations of mismanagement of funds and brought in independent managers for a process of restructuring prior to its auction (BS took over Banesto). In 1995, the five largest banks in Spain held 78.16 percent of total banking assets and the top ten, 84 percent. Between 1985 and 1995, their share of credits grew ten points.30 In 1999, BBV acquired Argentaria Caja Postal and Banco Hipotecario S.A. from the Spanish government, creating BBVA. BS and BCH merged in 1999. The resulting bank, SCH, became the largest bank in Spain at that time.31 The banks developed their own lobbies to try to influence the decisions of the government. BBVA participated actively in the discussions to draft the Basel II agreement on capital requirements for banking institutions, drafted documents and position papers and sent them to the Bank of Spain and to the Basel Committee.32 Another important lesson came through the participation of Spanish financial firms in the capital of nonfinancial enterprises, which grew since the mid-1990s. In countries where the stock exchange is not very well developed, banks are a very important source of funds for firms and governments. The government needed them for the implementation of national industrial policies. Firms relied on them for funds, especially small and medium enterprises that did not raise funds in the stock exchange. This role allowed them to build strong networks within the national business

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community as well, and gave them knowledge of the state of the economy. Emilio Ybarra y Churruca, CEO of BBV in 1997, stated that “we have carried out a serious process of functional diversification into the insurance sector to develop a package of non-financial participations that, managed under certain criteria, has allowed us to develop an alternative source of income to that of traditional banking.”33 The percentage of stocks held by banks in Spanish nonfinancial firms decreased between 1983 and 1987 as a result of the banking crisis, but grew by 163.42 percent between 1992 and 1998. Both banks and cajas invested in construction, computer science, energy, and telecommunications (part of this growth came when banks took over ailing small and medium firms that could not repay their loans. These firms used the banks rather than the stock exchange to raise funds.). This number was overshadowed by an increase of 212.05 percent in the number of securities traded in the Spanish market in that time period.34 The share of banking debts over total debt in Spanish firms was higher than average among the industrialized countries, lower than Japan’s, but higher than Germany’s and Italy’s, and more than double the United States’ and France’s. The Spanish banking model was closer to that of the German, Italian, and Japanese banks because the lack of sophisticated capital markets made the banks the main sources of capital for nonfinancial firms.35 The Spanish government encouraged both banks and cajas to participate in the privatization of formerly state-owned firms to become part of the “núcleo duro” (hard nucleus) of the newly privatized firms. This was a strategy devised by the administration of Felipe González and continued by the administration of José María Aznar to keep control over the strategic decisions of these firms after privatization. Both the state (who kept a “golden share”) and the financial institutions were overrepresented in the board of the new firm, thus exercising a high degree of power over the corporate strategy. BBV, Argentaria, and La Caixa (Catalonia’s largest caja) were part of the núcleo duro of Repsol, Telefónica, Gas Natural, Iberdrola, and Endesa. BS and BCH were both members of the núcleo duro of Unión Fenosa and Cepsa.36 To keep the power to veto some decisions after privatization, the state appointed the chairperson and a number of board members before privatization. The chairperson also elected some of the board members.37 Banking Systems in Latin America Two severe banking crises affected Latin America prior to the investments of Spanish banks, one in the 1980s, the other in the mid-1990s. The so-called debt crisis of 1982 raised nonperforming loans over 20 percent in

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some countries and reduced access to foreign funds. The crisis was especially severe in Argentina, Chile, Colombia, Mexico, and Uruguay.38 Although until the 1980s the Latin American banking systems were highly regulated (governments set interest rates, directed credit, and insisted that banks hold a large share of bank deposits as required reserves), there were major problems, including there was lack of an adequate supervisory framework; disclosure of information was minimal; the quality of the loan portfolio was not analyzed by bank employees; external auditors were seldom required to inspect the books in detail, and the rollover of questionable loans was allowed; and the governments provided free deposit insurance, regardless of the soundness of the bank portfolios; and provisions for bad loans were rarely made.39 When the crisis hit, many governments implemented financial reforms to increase the degree of financial diversification and to raise the efficiency of investment. These reforms included relaxation of barriers to entry, promotion of securities markets and institutional investors, implementation of supervisory legislation, liberalization of interest rates, elimination of direct credit allocation rules, reduction and harmonization of reserve requirements for commercial banks (in compliance with the recommendations of the Basel Committee), mandatory information disclosure to the public, partial public guarantee of deposits, and strict separation between the core business of banks and their subsidiaries.40 One of the main consequences of these reforms was the growth of the Latin American stock markets. Between 1980 and 1994 alone, they grew tenfold in US dollar value in Argentina, Mexico, and Venezuela.41 Another consequence was a credit boom that led to another wave of bank failures in the mid-1990s. This new banking crisis affected Mexico in late 1994 and spread to other Latin American economies thereafter. The reforms implemented by governments across the region to respond to the crises comprised two stages. The first was the rescue package, which included takeover of nonperforming loans, recapitalization of banks, and liquidations and mergers, usually involving foreign institutions. Argentina implemented these changes in 1995 and Brazil in 1995–1996. The second stage included new regulations and supervision mechanisms, including greater transparency and information, and sometimes deposit insurance. Argentina entered this second stage right after the early reforms, and Brazil after 1999, while Mexico remained in 2002 in the first stage.42 In Argentina, the government responded to the deterioration of the quality of bank assets and to the loss of deposits by increasing liquidity, by reducing the reserve requirements, and by selling dollar-denominated bonds. Moreover, the authorities realized that domestic banks were more vulnerable than foreign banks, and that its own monetary policy was

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constrained by the Convertibility Plan that pegged the peso to the dollar. To respond to these limitations, the government tried to inject more capital to the banks, promote mergers and acquisitions, and attract foreign banks. Through the “Fondo fiduciario de capitalización bancaria,” approved in March 1995, the government gave incentives for the acquisition of banks in trouble. The “Fondo de garantía de depósitos,” approved in May 1995, was a deposit insurance funded by private funds that worked as a safety net for the banking sector. New reserve requirements were introduced, increasing the reserves from 10.8 percent of total deposits in 1994 to 15.8 percent in 1995. The “Programa contingente de pases” in December 1996 created a new program to attract foreign banks, through which the Argentinean Central Bank sold dollar-denominated bonds and mortgage-based securities to foreign banks.43 The Brazilian banking crisis predated the Tequila crisis of 1994. With the success of the “Plano Real” stabilization program of the first half of the 1990s in abating inflation, banks increased credit. The high interest rates and rising unemployment led to a rise of nonperforming loans. Of 271 banks that existed in Brazil in 1994, 40 were taken over by the government. 29 of those were liquidated, 4 failed, 6 were placed under temporary administration, and 1 continued to operate. Thirty-two more went under restructuring that resulted in mergers and acquisitions, some of them through the government’s PROES program. Through this scheme, approved in 1996, the Brazilian Central Bank provided loans to federal and state banks to speed up their reforms and, in some cases, their privatization or liquidation.44 The government also increased capital requirements for the establishment of new banks and introduced new central bank regulations to promote accountability. The central bank was given authorization to preventively restructure financial institutions in distress. The government also authorized the entry of foreign banks.45 In Mexico, the government took over 15 banks. The authorities also devised a process of mergers and acquisitions and reprivatization of the banks that had been previously nationalized. Among the new regulations, there was a new deposit insurance scheme, new accounting standards that increased the transparency of credit operations, new standards for handling past due loans, increased loan-loss provisions, new laws on credit transactions to improve lending practices, and stricter rules on capital quality. To prevent increases in currency exchange mismatching, the government set ceilings on foreign currency liabilities. In spite of these reforms, the Mexican banking system improved very slowly after 1995.46 Barbara Stallings and Rogerio Studart believe that the reforms strengthened the Latin American financial systems, because they grew in size and

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depth since the 1990s. They base their analysis on five points: (1) Loans as a share of GDP grew in the largest Latin American economies. (2) Liberalization allowed existing banks to enter new activities such as securities trading, insurance, and real estate, creating universal banks. (3) Foreign banks became significant actors. The share of foreign bank assets grew considerably. (4) The number of banks fell. (5) There was some diversification. For instance, the volume of debt securities issued in domestic markets nearly trebled, mainly in Brazil. However, they conclude that to achieve a sound financial system, these measures needed to be coupled with a sound macroeconomic policy (as in Chile), a supportive international environment, and the right regulatory framework and supervisory mechanisms.47 In the second half of the 1990s, the Latin American banking sectors offered favorable conditions for foreign investors, as compared to other regions of the world. The relation of credit and deposits over GDP was very low (23.5 percent for deposits and 22.9 percent for credits, compared with 68.2 percent and 71.2 percent in Spain in 1996).48 The number of accounts per capita in Chile, the Latin American country with the highest number, was 0.9 in 1998, vis-à-vis 1.9 in the United Kingdom and 2.6 in the United States.49 The privatization of state-owned firms, the reforms of the pension systems and the issuing of public bonds to finance state deficits provided new opportunities for banks. Over 27 million people had private pension plans in Latin America in 1998. In 1997, pension funds managed over $136 billion in Latin America, the equivalent of 8 percent of the region’s GDP.50 Mediation margins in Latin America were higher than in the more developed countries (5 percent on average for the period 1993–1996), Eastern Europe (3.5 percent), and Asia (3.2 percent). Operating costs were also higher in Latin America. The relation between expenses and revenue was 78 percent, 47 percent in Southeast Asia, and 51 percent in Eastern Europe. This created the opportunity for productivity gains with the application of new technology and management techniques.51 Matías Rodríguez Inciarte, Vice Chairman of SCH, argued that reforms were crucial to make Latin American markets more appealing to foreign investors, especially the lifting of trade barriers, fiscal discipline and macroeconomic stability, and privatization. As a result, the share of FDI in the private capital inflows grew from 21.9 percent in 1992–1993 to 53.7 percent in 1997, and the share of savings over GDP grew from 17.7 percent in 1992 to 18.5 percent in 1997.52 BS’s decision to make direct investments in Latin America was motivated by the small size of the Spanish economy in the European context (Spain only represented 8 percent of the Euro area). BS executives believed that the “cultural and historical ties” that united Spain and Latin America, and the “opening-up” of Latin America’s financial

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markets “made these countries the ideal candidates for accumulating the size and strength needed to compete in the international financial system.”53 Learning The large investments made by Spanish banks in the 1990s were preceded by an early period of learning in Latin America itself through small investments mainly in whosale banking. BBVA began opening offices in Latin America in the 1970s in Mexico City and Rio de Janeiro.54 BS began in 1987 in Argentina and Mexico55 and served as lead manager in the issuing of debt by Latin American companies, helped firms raise funds in the stock exchange, and provided financial consulting services. SCH diversified away from wholesale banking into pension fund management and securities tradeing in Argentina.56 However, the big wave of investments took place between 1996 and 2000. For both banks, this was a process of geographic diversification that began with small investments in Western Europe, mainly in Portugal. BBVA’s overall strategy was to “create value” for its stockholders by focusing on three pillars: (1) business growth, (2) profits, and (3) capitalization in the stock exchange. Its investments outside of Spain were consistent with these principles and sought to develop a strong position in Spain and Portugal, selective presence in Europe, and a large base of banking business in Latin America. The foreign investments were also based on three principles: (1) high level of profitability of its subsidiaries, (2) investments only in countries where the bank could exploit its advantages, and (3) leadership position in each market (in 1998, all of the markets in which BBV had been present for over a year, its subsidiaries had market shares of over 6 percent).57 SCH’s managers also based their expansion philosophy on three principles: (1) equilibrium across business activities and across regions, (2) a majority stake in every subsidiary to guarantee control over management and a large share of profits,58 and (3) leadership in terms of profitability, market share, equity, and assets in each activity.59 BS’s Chairman, Emilio Botín, explained: “Iberoamerica offers to us new opportunities to obtain high profitability and high growth rates. We try to minimize risks through strict control of credit and by diversifying across countries.”60 This strategy comprised several stages. The goal of stage one was to make the bank a leader in Spain and Portugal. The second stage was expansion in Latin America, at a time when expansion in the EU was nearly impossible because national governments tried to prevent takeovers of key national banks by foreign institutions. The third stage, since 2003, focused on Europe.

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Although retail banking was SCH’s main area of operation, its managers diversified into pension funds, institutional investment, mortgages, insurance, et cetera. SCH emphasized the largest markets of Latin America, Brazil, Mexico, Argentina, and Chile.61 Alliances played an important role in the expansion of Spanish banks in Europe and Asia but not so much in Latin America. Spanish banks used alliances at an early stage because they helped the banks share risks in markets that they did not know very well, and helped the Spanish banks learn from their partner institutions. The best example in Latin America was BCH’s alliance with Grupo Luksic of Chile. This alliance was the cornerstone of its strategy of expansion in Latin America, until its takeover by BS in 1998. BCH sought to share risks and costs, and to profit from its partner’s knowledge and connections in local markets. The joint venture was called Corporación Financiera O’Higgins Central Hispanoamericano S.A. (OHCH), and each party held 50 percent of the capital. Both partners brought together their subsidiaries into this new group. Grupo Luksic contributed Banco de Santiago in Chile, Banco Tornquist in Argentina, and Banco del Sur and Banco del Libertador in Peru. BCH’s subsidiaries were Banco O’Higgins in Chile, Banco de Asunción in Paraguay, and Central Hispano Banco S.A. in Uruguay.62 BCH also agreed to buy 98.42 percent of Bancosur (the result of the merger of Banco del Sur and Banco del Libertador), and OHCH bought 50 percent of Banco Tornquist in Argentina. BCH and Grupo Luksic set up Inversiones Aurum S.A., in which both parties held 50 percent of the capital. Inversiones Aurum bought 50.07 percent of the capital of Banco de Santiago.63 Another example was SCH’s partnership with BofA in 2002. SCH sold 24.9 percent of its Mexican subsidiary Serfín to BofA for $1.6 billion. SCH needed BofA’s connections with US firms to bring some of the 5,000 US subsidiaries in Mexico to Serfín’s corporate banking division, and BofA needed SCH’s know-how in retail banking to attract the millions of Mexicans living in the United States to its offices.64 Banks Taken Over The Latin American banks taken over by the Spanish banks were very different: state-owned, partly state-owned, ailing private banks nationalized by the governments, private banks of domestic capital, and subsidiaries of foreign banks. Table 3.1 provides a list of the main banks taken over by BBVA, SCH, and BCH. An example of a state-owned bank is Banespa in Brazil. Banespa was established with French capital in 1909 as Banco de Crédito Hipotecário e Agrícola de São Paulo to finance the growing coffee

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Multinational Enterprises in Latin America Table 3.1 Main subsidiaries of Spanish banks in Latin America, 2008 BBVA Country

Subsidiary

Argentina Bolivia Chile * Colombia * Ecuador Mexico * Panama Paraguay Peru * Uruguay Venezuela

BBVA Banco Francés, S.A. AFP Previsión BBV AFP Provida BBVA Chile, S.A. BBVA Colombia, S.A. BBVA Horizonte AFP Génesis BBVA Bancomer S.A. de C.V. Afore Bancomer BBVA Panamá BBVA Paraguay, S.A. AFP Horizonte S.A. Banco Continental BBVA Uruguay, S.A. Banco Provincial S.A.-Banco Universal

% 76.00 80.00 64.32 68.18 95.43 99.95 100.00 100.00 100.00 98.92 99.99 100.00 92.08 100.00 55.60

Source: BBVA, Annual Report (2008), pp. 160–168.

SCH Country

Subsidiary

Argentina Brazil * * Chile Colombia Mexico Puerto Rico Uruguay Venezuela

Banco Banco Banco Banco Banco Banco Banco Banco Banco Banco

Río de la Plata S.A. Santander S.A. ABN AMRO Real de Pernambuco Santander Chile Santander Colombia, S.A. Santander (Mexico) Santander Puerto Rico Santander (Uruguay) de Venezuela, S.A., Banco Universal*

% 99.30 97.93 97.93 97.93 76.91 97.85 99.99 100.00 100.00 98.42

*Sold to the state of Venezuela in 2009. Source: SCH, Auditor’s Report and Annual Consolidated Accounts 2008, pp. 155–159.

industry in the state of São Paulo. From the beginning, the state of São Paulo was one of the major stockholders. In the 1920s, its name changed to Banco do Estado de São Paulo, and it began to finance trade and industry. The state became the major stockholder. In the 1960s, it began to take over some of its competitors. The Brazilian federal government took over in 1994, and by 1996 it controlled 51 percent of its stocks. In 2000, the Brazilian government sold Banespa to SCH.65

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Some of the best examples of banks taken over by governments during the banking crisis were in Venezuela and Mexico. Banco de Venezuela was established in 1890 as a private bank, but collected taxes for the state and served as its financial institution, keeping the gold reserves of the Venezuelan state in the 1930s. Its loans to the private sector were directed to firms in trade and agriculture. In 1994, the state took over Banco de Venezuela and sold it two years later in public tender to SCH.66 Banca Serfín S.A. was established in 1970 in Mexico, as a result of a merger of several Mexican banks that provided finance for trade and industry. The Mexican government took over and sold to SCH in 2000 in public tender.67 The customer business of Banco Cremi, S.A. and Banca del Oriente S.A. were acquired by BBV from the Mexican government in 1996 and merged into Grupo Financiero BBV-Probursa S.A., which, at the time, was following a process of financial restructuring and recapitalization with the assistance of the Mexican government.68 Banco de Santiago in Chile and Bancomer in Mexico were two cases of banks that were only partly owned by the state. Banco de Santiago was established in 1977 by Chilean industrial group Luksic as an industrial bank that provided finance for small businesses. It merged with Banco O’Higgins, Chilean subsidiary of Spanish BCH, in 1997. O’Higgins worked with large corporate customers and firms involved in foreign trade. In 2002, SCH bought 35.45 percent of the stocks of the bank still held by the Central Bank of Chile.69 Bancomer was established in 1932 in Mexico City to finance trade. It was nationalized by the Mexican government in 1982 and sold in part to a group of Mexican investors in 1991, who in turn sold it to BBVA in 2000.70 The acquisitions of other banks were the result of negotiations between the Spanish banks and their main stockholders. The strategy that both BBVA and SCH followed in Puerto Rico (BBVA and SCH included their Puerto Rican subsidiaries under their Latin American operations until they took over banks in the United States in the late 2000s. At that point, their Puerto Rican subsidiaries were included under US operations.) was slightly different, and rested on early investments and organic growth. Both banks acquired a Puerto Rican bank in the late 1970s and began to expand by taking over other banks thereafter.71 Reorganization of Subsidiaries After taking over a bank in Latin America, BBVA and SCH introduced reforms that reflected their know-how. As discussed above, this know-how resulted from a process of learning that took place in Spain in the 1970s and 1980s, where the managers of BBVA and SCH believed they faced

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similar conditions to those they found in Latin America in the 1990s. This know-how shaped their strategy and manifested itself in the following rules, discussed in the remainder of this chapter. Appointment of New Managers To facilitate integration in each market, the Spanish banks selected local managers for the top positions of their subsidiaries and only sent expatriates for the second rank and below to work out strategies to reduce risk, improve quality of products and service, information, technology, et cetera. Having local managers also helped them learn the local culture and ease relations with the government and with other key domestic business players. Reorganization of the Banks’ Structures Another priority was to reorganize the internal structures of their new subsidiaries.72 Until the creation of a specific area to encompass all of its Latin American subsidiaries in 1999, BBV changed its internal organization several times. In 1996 the Latin American subsidiaries reported to the retail banking division, in 1997 to a new area called “banks abroad,” in 1998 to “the Americas and Europe,” and in 1999 to “banca en América.”73 BS’s Latin American subsidiaries reported to “commercial banking abroad” originally and to “commercial banking in America” since 2002.74 Clean Up Balance Sheets Cleaning up the balance sheets of the banks they took over in Latin America was one of the early priorities. To generate the funds, BBVA and SCH undertook capital increases and sold assets. In Mexico, BBV undertook capital increases of $172 million in 1997 and $53 million in 1998.75 BS used the $1,535.5 million generated by the sale of its stake in First Union of the United States for amortization of goodwill in consolidation and for provisions in Latin America to cover potential losses.76 Adoption of a Homogeneous Image BBVA adopted a homogeneous corporate image across subsidiaries and across divisions, combining local brand names with the “high strategic value of belonging to a global group”: BBVA Bancomer S.A. de C.V. in Mexico, Banco Francés in Argentina, Banco Hipotecario de Fomento (BHIF) S.A., in Chile, BBV Banco Ganadero in Colombia, Banco Provincial in Venezuela,

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BBV Panamá in Panama, and BF Uruguay in Uruguay. Even the offices had the same design.77 SCH followed a mixed model, unifiying its name under Banco Santander in some countries, keeping the names of its new subsidiaries in others to benefit from the prestige and market recognition of the institution taken over, such as Banco Río de la Plata in Argentina, and combined the local name with that of Santander in others, such as Mexico, where it used both Banco Santander Mexicano and Banca Serfín. Its wholesale business name, however, was “Santander” across Latin America.78 Know-How Transfer A vital aspect for both banks was the unification of management models across the Americas, adopting the same management techniques and strategies that they had applied in Spain. This decision was based on the assumption that the organization, processes, products, and services that their banks had developed in the Spanish context until the 1990s were suitable for Latin America. The managers of the two banks argued that in the mid-1990s, the Latin American economies were growing rapidly, their inflation rates were falling, and their banking systems were less sophisticated than those of Europe. For instance, the percentage of people who used banking services in most Latin American countries was less than onequarter that of Spain’s and in some cases barely reached 10 percent. Therefore, they concluded that they had large potential for development. These conditions were similar to those in Spain between the 1970s and the 1990s. Both BBVA and SCH played a key role in the modernization of banking and financial services in Spain during those decades, and their managers concluded that they could use their expertise in Latin America since the 1990s, where they believed conditions were very similar.79 BBVA’s Chairman, Emilio Ybarra, explained that expansion in Latin America would enable to “fully exploit BBV’s competitive advantages. [BBVA] will be a Group, based in Spain and Europe, which is capable of transferring our technological and management capacity to markets with high growth potential, thereby becoming undisputed partner for customer business between Europe and Latin America.”80 “In Latin America, the Group’s strategy is based on a long-term commitment and translates into the consolidation of a regional franchise, already of great value, in which the management model, automation and systems platforms which our business units enjoy in Spain are in an advanced phase of implementation. We have taken very important steps in constructing our franchise in the area. We have continued to lay the foundation for a single technological platform, and have worked on the development of the bank management

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model, both in its commercial aspects as well as in the sphere of management control and monitoring procedures.”81 SCH’s Chairman, Francisco Luzón, said in 2002 that “in the last twenty or twenty-five years in Spain, we developed risk management tools, we had to internationalize our enterprises in Latin America, we faced privatization, market concentration and liberalization. Banco Santander has a lot of experience operating in that kind of environment. Latin America offered us the opportunity to put our experience to work there.”82 “The key to success was to place at the disposal of savers and investors the products, services and distribution channels in which we have a competitive advantage.” In other words, in the “ability to transfer to new markets the products and services which create customer value.”83 “The development of businesses in emerging markets requires, in general, specialized techniques for evaluation, follow-up, and control of the risks that the Group is taking up, from very developed systems for global risk management, to the utilization of products that provide coverage for our interests, or hiring national experts in the local markets.”84 Both banks transferred their core products and services, risk policies, and credit policies, as well as other core activities. Some examples of the most successful products include BBV’s “El Libretón,” a savings account introduced in Spain in the early 1990s that promised high returns. It was introduced in Mexico and Peru in 1996 (called “Superdepósito” in Peru),85 in Argentina (there was no product in Argentina that rewarded savings until then)86 and Venezuela in 1997 (“El Libretazo”),87 and in Colombia in 1998.88 Santander introduced “Supercuenta,” a high-remuneration current account, and “Superhipoteca,” mortgage credit, which were developed in Spain in the late 1980s.89 These products and services had to be adjusted to each country. “Adapting to the cultural, legal, and regulatory peculiarities of each of the Latin American banks, we have gradually developed our range of products and services.”90 In addition, both banks also developed some new products, specifically designed for each market, such as BS’s “Supercheque” in Brazil.91 BBVA transferred its advertising products and techniques from Spain, and developed a single advertising model for all of Latin America to cut advertising expenses. The human resource model for evaluation of the employees’ potential, wage, formation, and selection that it began to apply in Latin America was also based on the one developed in Spain.92 SCH emphasized customer segmentation and establishment and/or development of specific value-added proposals per segment in its retail activities, adoption of the same technology across subsidiaries and same risk policy.93 In 2001, SCH launched “Proyecto Da Vinci,” comprising several reforms that

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were to be applied across all of its subsidiaries. The reforms included creation of two different types of offices, one for individuals and another one for businesses; division of physical space in the bank’s branches into three sections: transactions, consulting, and self-service; and promotion of laborsaving access channels such as Internet and ATMs.94 Follow a Universal Banking Model One of the policies implemented by the governments of Latin America to respond to the banking crises of the 1980s and 1990s was to eliminate restrictions in finance and banking so as to promote competition and development of financial services. The managers of the Spanish banks believed that their background as universal banks in Spain put them in an ideal position to introduce new financial services, mainly in retail (residential customer and small and medium enterprises), wholesale (corporate lending), investment banking (money markets, foreign currency, capital and derivatives), institutional banking (public sector), private banking (wealthy individuals), asset management (mutual funds, pension funds, et cetera), and corporate activities (the banks’ own investments in industrial firms). Innovation Both banks tried to capitalize on the bad image of the local banks due to the past banking crises and presented themselves as “new,” “innovators,” and “modern.” SCH used “Santander” as its trademark and only kept the names of some of the most recognized subsidiaries it took over, such as “Banespa BSCH.” In this case, the backing of a large international institution gave people confidence and helped SCH attract deposits. SCH made important investments in technology, developing its own internal intranet and an on-line bank called Patagon-Open Bank. It also developed strategic alliances in e-commerce with America Online and business to business (BtoB) Factory.95 BBVA launched an aggressive campaign to educate people on new banking products, such as a program supported by Argentina’s Central Bank to spread the use of traditional banking, as a result of which Banco Francés doubled its number of customers.96 BBVA also reached out to firms and employees to promote payment of salaries through direct deposit. These plans were especially successful in Brazil, Peru, and Argentina. In Argentina BF became the market leader in 1998 and deposits grew by 95 percent in Peru.97 BBVA and SCH tried to gain first-mover advantages in each financial activity. SCH developed 50 new funds in 1999 alone and participated in

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the creation of Latibex in Spain’s stock exchange (a venue for Latin American firms to raise funds).98 BBVA was actively involved in the launch of Mexder, Mexico’s derivatives market. In 2002, Bancomer launched “Project Customer” to increase levels of customer satisfaction. It focused on identifying operational problems and improving customer satisfaction, with a focus on issues such as shorter waiting time in branches, security, and politeness of the employees, among others. BBV used the slogan “a new banking culture” in Mexico, to promote itself as “the bank of innovation, customer rather than product driven, a model not seen in the country until now.”99 Transparency Both banks presented themselves as honest, transparent, and independent in order to convey an image of solid financial institutions. They used their past history of mergers and acquisitions within Spain to highlight how the reorganization that followed these takeovers was conducted quickly, successfully, and openly, and how the process of adjustment of the Latin American subsidiaries after acquisition would also be swift and successful. For example, SCH’s officials highlighted how the adjustment that followed the BSBCH merger was transparent because the new structure was announced from the first day. All of the employees knew their place in the new firm so that they could focus on business and generation of income and efficiency gains. A common information technology (IT) platform was implemented, 425 branches closed, and 11,000 employees were fired. Soon after their Latin American takeovers, SCH’s and BBVA’s subsidiaries began to publish reports with their financial results, as well as their audited accounts. They invited the press to many activities, including the annual meeting of stockholders, and improved customer relations by responding to questions from analysts and investors and by making presentations to individual and institutional stockholders and analysts. BBVA’s annual reports also included the remuneration of senior executives.100 Both banks embraced the UN’s recommendations on corporate social responsibility and supported some social, cultural, educational, and environmental programs in the countries where they operated and approved rules preventing the use of their services and products to support illegal activities, including money-laundering and terrorism.101 Increase Efficiency Both Spanish banks believed their new Latin American subsidiaries could achieve significant efficiency gains and made this one of the cornerstones

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of their strategy, which rested on two pillars. The first one was to generate more revenue, mainly by increasing market share and product diversification. The second pillar was to lower costs. These pillars were based on their experience in Spain, where both banks went through mergers that resulted in significant efficiency gains. To raise revenue, a critical part of the strategy of both banks was to gain a large share of the market in the host countries in deposits (and loans). In 2003 BBVA had a sizeable market share in clients’ loans and deposits in some of the larger markets, especially in Mexico (31 percent), Peru (25 percent in loans and 3 percent in deposits), and Venezuela (14 percent).102 In 2008, SCH also had sizeable shares of over 10 percent in loans and deposits in the largest markets, especially in Argentina (10 percent), Brazil (10 percent), Chile (20 percent), Mexico (15 percent), and Venezuela (11 percent). Both were among the leading banks in each of these markets.103 Another strategy to increase revenue was product diversification into mutual fund and pension fund management, insurance, mortgages, and brokerage services. Diversification sought two goals. The first one was to increase commission charges and fees for these services. BS increased its revenue from commissions by 52.9 percent in 1996, 124.88 percent in 1997, 99.54 percent in 1998, and 25.5 percent in 1999. BBVA increased commission charges by 21 percent in 2000 (excluding Mexico), thanks mainly to pension fund and mutual fund management.104 Second, the promotion of new products to existing customers sought to develop customer loyalty. BBVA’s experience in Peru can serve as an example. Between 1997 and 1998, BBVA Banco Continental launched new services, including insurance, mortgages, new savings plans, and new credit programs for preferential customers, and began an aggressive campaign to promote its pension fund and mutual fund management firms among its customers. In 2001, it created a brokerage firm, BBVA Continental Bolsa.105 To facilitate the sale of new products to existing customers, both banks divided up their clientele into groups, so that they could market different products to different customers in each income bracket.106 During the economic boom of the mid-2000s in Mexico, BBVA focused on penetrating previously unbanked sectors, giving loans to small and medium enterprises and attracting customers whose salary was credited through a bank account (payroll accounts or payslip accounts).107 The second pillar to gain efficiency relied on reducing costs. To achieve this, BBVA and SCH took four steps: (1) adoption of a single technological platform across their Latin American network, (2) reduction of the workforce, (3) promotion of less labor-intensive banking channels, alternative to the office, and (4) reorganization and centralization of functions. Both

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banks implemented a single computer system (“Plataforma Unificada de Sistemas” for BBVA and “Altair” for SCH) across all of their subsidiaries by 2003. The core of this program was the same as the one developed in Spain, but had some small local adaptations in each country. Other technological developments that helped both banks present themselves as innovators allowed them to provide banking services via the Internet, cellular phones, and television.108 The number of employees grew considerably as a result of takeovers, and both banks decided to reduce their workforce to increase productivity per employee (see Table 3.2). Between 2000 (when both banks had already made their major acquisitions) and 2002, SCH reduced its workforce in Latin America from 72,241 to 57,358 (20 percent),109 and BBVA from 72,314 to 59,293 (18 percent).110 SCH’s experience in Banespa was a good example. While the ratio of employees per office in Spain ranged between five and a half and six, it was as high as thirty-six in Banespa when SCH took over. SCH devised a plan to encourage employees to leave, which included training programs for new jobs and a full year of pay to those willing to leave the bank (Latin American firms paid the equivalent of three months of work as a compensation for layoffs). Between 2000 and 2001, 8,300 Banespa workers decided to leave.111 The promotion of alternative banking channels such as ATMs, Internet, telephone, and television sought to reduce the number of transactions conducted in the branches, so as to close down some of them and reduce the number of employees in each branch.112 This strategy was so successful that over 200 million transactions were undertaken through SCH’s alternative channels, worth a72 billion in 2001, and the number of customers who used channels other than the branch grew by 23 percent in 2001, to 2.7 million. Use of these alternative channels was higher in Latin America than in Spain itself. BBVA closed down 20 percent of its branches in Latin America between 2000 and 2002, from 4,865 to 3,886, and SCH 10 percent, from 4,638 in 2000 to 4,183 in 2002 (see Table 3.2). However, both banks opened new branches in locations they deemed strategic. BBVA opened over 1,700 new branches between 1998 and 2002, more than half of them in Mexico, and over 635 ATMs. Between 1995 and 1998, SCH opened 83 new branches in Mexico, 70 in Argentina, 43 in Brazil, 21 in Colombia, and 16 in Venezuela.113 Reorganization and centralization of functions helped the banks focus on the most profitable activities and allowed them to achieve synergies. While the main goal of BBVA and SCH in the 1990s was entry into Latin American markets, since 2000 they focused on “rationalizing” their operations by concentrating on the most profitable markets and activities.114 In 2002, SCH decided to focus on Argentina, Brazil, Chile, Mexico, Puerto Rico, and

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3.25 5.06

140.8 128.3

4.22 12.56

114.3 82.0

103.6 111.3

2.65 5.68

55.0

15.4 14.2*

1997

115.3 115.7

2.32 5.63

55.4 55.5*

18.1 14.0*

1998

135.1 150.1

1.76 4.43

54.6 60.7

21.9

1999

2001

189.5 205.7

1.96 4.64

53.3 57.6

221.6 252.0

1.71 3.73

50.4 48.9

21.1 18.0 15.0 10.4**

2000

169.2 164.3

1.85 5.44

47.2 44.9

13.7 20.2

2002

184.9 140.5

1.37 4.46

47.2 45.5

18.4 22.2

2003

* BBV America and Europe. ** net attributable profit/average equity. *** South America only since 2004. Source: BBVA’s annual reports.

% Assets in L.Am. 23.00 25.50 19.1 33.24 36.00 31.64 25.69 % of net attributable 7.9 3.9* 38.1* 39.4* 24.9 21.1 34.15 42.82 32.10 profit in L.Am. Number of employees in 34,178 44,064 80,913 91,689 89,235 108,082 98,588 93,093 86,197 L.Am. 6,630 16,902 39.399 51,353 49,432 72,314 64,835 59,293 53,100 Number of branches in 3,310 3,749 6,518 7,226 7,491 8,946 7,988 7,504 6,924 L.Am. 257 1,028 1,788 2,531 2,945 4,865 4,161 3,886 3,353

54.1

58.4

Efficiency ratio (cost/ income) in L.Am.*** in Mexico Default ratio (NPL/100) in L.Am.*** in Mexico Coverage ratio in L.Am.*** in Mexico

16.4

1996

13.8

1995

Efficiency Indicators

ROE** in L.Am.*** in Mexico

BBVA

Table 3.2

37.0 30.1 42.8 43.2 49.0 41.1 0.94 3.67 2.24 252.5 109.3 251.3 24.13 42.41

2005 37.6 34.8 45.1 41.8 46.8 34.7 0.83 2.67 2.21 273 132.8 288 23.95 45.06

2006 34.2 32.8 46.7 45.3 43.7 33.2 0.89 2.14 2.15 225 145.6 255 27.06 41.71

2007

44.6 41.2 31.8 2.12 2.12 3.21 92 148 161 18.88 53.09

21.5 36.9

2008

40.44 40.6 31.9 4.3 2.7 4.3 57 130 130 20.04 52.97

16 40.2

2009

(continued )

84,117 94,681 98,553 111,913 108,972 51,370 61,604 66,146 78,805 77,928 6,375 7,328 7,499 8,028 7,787 3,293 3,618 3,742 4,291 4,267

20 27.8 39.4 44.9 42.1 37.4 0.95 3.18 2.34 247.2 145.2 269.0 21.01 32.74

2004

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Continued

1995

1996

1997

1998

1999

2000 a

2001

2002

2003

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2005

2006

2007 17.07 26.07 44.6 40.3 2.04 2.95 90.64 108 18.10 33.18

2008

36.0

75.33

3.24

41.7

13.90

2009

9,973 10,201 10,852 11,178 13,390 13,660 4,010 4,100 4,368 4,498 6,089 5,745

126,488 120,047 123,731 131,819 170,961 169,460 60,503 55,889 60,871 65,628 96,405 85,974

19.74 19.86 18.54 19.61 24.05 22.62 26.57 29.10 52.00 52.94 48.56 45.5 49.73 52.82 46.99 41.8 1.0 0.89 0.78 0.95 2.94 1.82 1.38 1.87 165.59 182.02 187.23 150.55 155.00 186.50 167.29 134 17.07 17.37 15.55 40.97 28.60 30.11 29.43

2004

* Outside of Spain, not only in L.Am. ** Retail banking abroad. *** Commercial banking in Spain only. This percentage figure includes coverage for mortgages. Without mortgages, the coverage ratio would be 100%. a. 20.86 excluding anticipated voluntary reserves. Source: SCH, Informe anual, 2000, 47. b. Average for commercial banking abroad, which includes BS’s operations in Germany, Switzerland, United Kingdom, Portugal, United States, Bahamas, Puerto Rico, Chile, Peru, and Uruguay. c. Commercial banking abroad. In 1997, this included BS’s overseas subsidiaries in Germany, Switzerland, United Kingdom, Portugal, United States, Bahamas, Brazil, Puerto Rico, Mexico, Chile, Peru, Uruguay, Venezuela, Colombia and Argentina. Source: Grupo Santander, Informe anual, 1997, 77. d. Retail banking abroad. e. Retail banking abroad. Source: BBVA’s annual reports.

13.86 12.42 14.48 ROE 14.78 15.63 18.62 19.25 18.51 17.60 11.87b 10.69** 14.71c 15.59d 14.5* 20.0 27.02 27.66 29.03 in L.Am. Efficiency ratio 65.41 62.88 63.08 63.05 57.70 56.41 53.98 52.88 49.34 in L.Am. 64.52** 63.11** 67.95 62.93e 54.25* 53.1 51.1 52.25 54.86 Default ratio 4,28 3.12 2.17 2.04 1.97 2.26 1.86 1.89 1.55 in L.Am. 3.25** 3.64** 3.29 3.55 3.48* 4.14* 3.32 4.07 3.90 Coverage ratio 178.24*** 181.29*** 124.85 124. 04 120.13 123.04 128.6 139.94 165.19 in L.Am. 118.67 113.23 120.73 112.90 106.30* 109.86* 128.80 113.78 125.08 % Assets in L.Am. 23.73 29* 24 % of net profits in 19.6** 20.6** 38.3** 24.1 34.3 50.2 67.9 61.5 40.77 L.Am. Number of 42,023 45,874 73,271 73,964 95,442 126,827 115,706 104,178 103,038 employees 13,705* 17,551* 45,121* 42,973 48,900* 72,241 64,497 57,358 52,229 in L.Am. Number of branches 4,239 4,410 5,399 5,953 8,731 10,827 9,951 9,281 9,199 in L.Am. 528* 630* 1,557* 1,902 2,702* 4,638 4,482 4,183 3,878

SCH

Table 3.2

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Venezuela. In Bolivia, Paraguay, Peru, and Uruguay, “neither the size of the financial system, nor the share of the market of the Group are large enough to develop a universal banking model.” In these markets, SCH decided to provide only corporate and institutional banking, and private banking. After the merger between BBV and Argentaria, BBVA sold some of its operations in Argentina, Bolivia, Colombia, Mexico, and Venezuela. BBVA and SCH also tried to improve control measures, such as development of technology, adoption of best practices, restructuring of processes, and centralization of hiring. For example, when BS took over Banespa in Brazil, BS came up with a list of over 200 processes subject to improvement. One of them was the time taken for a new customer to open an account. Before the takeover, each new customer had to fill out several forms and needed eight signatures. After the takeover, only one form and two signatures were necessary. These efficiency-gaining measures yielded impressive results. The return on equity (ROE) measures the firm’s efficiency at generating profits from every unit of shareholder’s equity (it is calculated by dividing the net income after tax by the shareholder equity). BBVA’s ROE in Latin America grew from 14.2 in 1997 to 40.2 in 2009 (a higher number indicates more efficiency). In 1997 ROE in its Latin American subsidiaries was below that of the bank’s overall ROE (15.4 overall–14.2 in Latin America), but in 2009 it was much higher in Latin America (16–40.2), indicating greater efficiency gains in Latin America than elsewhere (see Table 3.2). SCH’s ROE in Latin America grew from 11.87 in 1995 to 26.07 in 2008. In 1995 it was lower in Latin America than its overall rate (14.78 overall–11.87 in Latin America), but in 2008 it was considerably higher in Latin America (17.07–26.07). In 2008, BBVA had better rates than SCH in terms of ROE (see Table 3.2). Another measure of efficiency is the efficiency ratio, which measures expenses as a percentage of revenue (expenses over revenue). In this case, a lower number indicates more efficiency. BBVA’s efficiency ratio in Latin America fell from 55.5 in 1998 to 40.6 in 2009. The efficiency gains in Mexico were impressive, reaching 31.9 in 2009. SCH’s efficiency ratio in Latin America improved from 64.52 in 1995 to 40.3 in 2008. For both banks, the improvements in the efficiency ratio in Latin America were similar to the banks’ overall gains.115 In general, BBVA and SCH were similar in terms of efficiency ratio, but SCH made the most gains since the mid-1990s (see Table 3.2). Implement a Prudent Risk Management Strategy As exposure to Latin America grew, the Spanish banks feared to be “punished” by investors in the stock exchange, who at the time perceived Latin

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American markets to be riskier than North America and Western Europe. To address this, BBVA and SCH emphasized risk control by adopting several policies. 1. Risk assessment: When granting loans, both applied the risk criteria of the Bank of Spain in every market, unless the local regulations were more strict. They segmented the process of admission of credit by customer type, and the monitoring process assessed the potential deterioration of the borrower’s repayment capacity. Clients were rated to keep a history of their performance on the basis of a series of qualitative and quantitative criteria that indicated the likelihood of default. These were the basis for loans and payments and helped the banks determine the amount to set aside as provisions to cover defaults. Both banks utilized the “value-at-risk indicator” (VaR) to measure the maximum potential loss of market value that could be generated under historic conditions by a certain position or portfolio. SCH created “special recovery centers” in every subsidiary to try to recover the most loans before they were registered as non-performing, 90 days after the due payment date. Both banks conducted stress tests. For example, BBVA estimated that Latin America concentrated 42.5 percent of its risk exposure in 2000 and SCH’s maximum volatility stress test determined that losses could amount to $90.7 million, or $190 million in a crisis scenario conducted in 2000.116 One of the most important variants of credit was “country risk.” This term encompassed three different types of risk: transfer risk (the capacity of a debtor to meet its foreign currency payment obligations to an external creditor), sovereignty risk (ineffectiveness of legal actions against the resident borrower in another country because of its nationality), and macroeconomic risk (devaluation, rise in interest rates, or a crisis in the domestic capital markets). A global ceiling and a rating were assigned to each country.117 2. Focus on growth potential: Focus was on countries with most growth potential, mainly Brazil and Mexico. Mexico was BBVA’s main market in Latin America, with 15.8 million customers in 2008, out of BBVA’s 25 million customers in Latin America. Mexico was a large market with huge growth potential. In order to focus on Mexico, BBVA decided to reorient its strategy in Brazil in 2002, by integrating its subsidiary in Bradesco in exchange for a 4.5 percent share in this bank. Later in 2008 BBVA sold this stake: “The lack of a critical mass made it impossible to attain the profitability standards required by the BBVA group, so the strategic dilemma was whether to invest strongly to achieve an ideal competitive position or partially or totally divest.”118

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Since BBVA purchased a 30 percent stake in Bancomer in 2000, it focused on buying additional shares until owning 99.7 percent in 2004.119 BBVA’s investments in Bancomer also helped BBVA managers design their entry strategy into the United States. BBVA’s Chairman, Francisco González, explained that “in the United States, we are formulating a comprehensive value arrangement, exploiting the competitive advantages of the BBVA Bancomer brand amongst the population of Mexican origin, with the aim then being to extend it to the entire Hispanic community and, finally, to the whole of the US market.”120 BBVA managers decided to focus on the regions of the Southwest with a large Mexican population to become a major player in the transfer of funds from the US to Mexico, channeled through Bancomer Wire Services. BBVA took over Valley Bank in California and Laredo National Bank in Texas in 2004, Texas State Bank, State National Bank, and Texas Regional Bancshares in Texas in 2006, and Guarantee Bank in Texas/California in 2009.121 SCH focused on Brazil, where it had 24 percent of its customers in 2008 (9.5 percent of its customers were in Mexico). SCH expanded gradually since the late 1990s by taking over small banks such as Banco Geral do Comércio in 1997, Banco Noroeste in 1998, and Grupo Meridional in 2000. Its biggest acquisition came in 2007, when it took over the Brazilian subsidiary of ABN-AMRO. SCH invested over a10 billion in this acquisition, becoming one of the main banks in the industrial south of Brazil. As SCH invested in Brazil, it sold its pension management business across Latin America in 2007 and pulled out of Venezuela in 2009, selling its subsidiary Banco de Venezuela to the state for $1.050 billion.122 In the late 2000s SCH also began to expand in the United States, but its expansion strategy was different from BBVA’s. It did not build on its Mexican business and focused on the Northeast, where it took over Drive Financial in 2006 and one of the banks affected by the subprime mortgage crisis, Sovereign Bancorp, in 2008.123 1. Emphasis on deposits over credit to gain liquidity: Both banks promoted cheap products such as deposits in current accounts and savings accounts as well as off-balance sheet fund growth in mutual funds, insurance, and brokerage services.124 2. Concentration of new credit: The banks decided to concentrate new credit on businesses and upper income individuals when the economies slowed down and tighten the criteria for granting new credit.125 3. Reduction of default rates (non-performing loans—NPLs): When the economy contracted, default rates were reduced by lowering credit in the markets with low or negative growth rates. Both BBVA and SCH

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managed to reduce default rates considerably since the mid-1990s. BBVA’s default rates in Latin America fell from 12.56 in 1995 to 2.7 in 2009 (the economic slowdown cuased a small increase from 2.12 in 2008 to 2.7 in 2009) and SCH’s fell from 3.25 in 1995 to 1.38 in 2006 and grew to 2.95 in 2008. SCH managed to keep lower default rates consistently. Although in general the trend for both banks was toward lower default rates, rates fluctuated for both banks as a result of their takeovers in Latin America. The new subsidiaries tended to have higher default rates. After they adopted BBVA’s and SCH’s management rules, their rates began to fall (see Table 3.2). 4. Growth in provisions: When economic growth slowed down, both banks increased provisions to cover potential defaults. As an example, in 1997 BS used $2,456.8 million to amortize all of the goodwill in consolidation of its international acquisitions, as well as for provisions, including the full $1.535 billion generated by the sale of its stock in First Union of the United States. The lack of liquidity in Argentina in 2001 led SCH to put aside $6.228 billion in provisions and goodwill amortization ($3.303 billion came from the total or partial sale of SCH’s stock in other firms).126 The crisis of 2001 in Argentina led BBVA’s subsidiary BF to suspend credit and undertake a strict selection of debtors. BBVA put together a fund of $1.512 billion as collateral to cover the book value of BBVA Banco Francés, its goodwill amortization fund, and its subordinated debt, for the goodwill amortization fund of Administradora de Fondos de Pensiones (AFP) Consolidar, and to face the impact of the crisis on the Group’s participated industrial companies.127 The financial crisis that affected the United States and other developed countries between 2007 and 2010 was not as serious in Latin America and, with the exception of Mexico (due to its close ties to the US economy), most countries only experienced mild slowdowns in 2009. The coverage ratio for BBVA in Latin America only fell a bit in 2009, but remained strong. For SCH, it fell by 35 percent between 2006 and 2008, but remained over 100 (see Table 3.2). SCH’s profits in Latin America continued to grow in spite of the crisis from $3.655 billion in 2007, to $4.337 billion in 2008, and to $5.341 billion in 2009 (see Table 3.2). BBVA’s profits in Latin America also grew from $3.503 billion in 2007, to $3.924 billion in 2008, but fell to $3.108 billion in 2009 (see Table 3.2). This fall in 2009 was due to the reduction of profits in Mexico, because profits in Latin America outside of Mexico continued to grow steadily from $854 million in 2007 to $1.070 billion in 2008, and to $1.214 billion in

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2009.128 More than half of BBVA’s profits in 2008 and 2009 and a third of SCH’s came from Latin America (see Table 3.2). Default ratios in Latin America remained fairly low. For BBVA’s subsidiaries in Latin America default ratios grew from 2.14 in 2007 to 2.7 in 2009 (2.15 to 4.3 in Mexico), but remained lower than in the 1990s, when they were consistently above 5.0 (see Table 3.2). Default rates for SCH in Latin America grew from 1.87 in 2007 to 2.95 in 2008. This was also low, considering that until 2004 they were above 3 (see Table 3.2). However, both banks reduced lending to individuals in 2008 and 2009, focusing instead on firms and residential mortgages. They also promoted mutual funds and growth in deposits. Neither bank feared a spillover of the crisis to Latin America and both reaffirmed their willingness to continue in the region. SCH even raised a1.5 billion for its Brazilian subsidiary through one of the largest public stock offerings of the year in Latin America.129 Conclusions This chapter has argued that the two large Spanish banks included in this study, BBVA and SCH, made investments in Latin America since the 1990s because their managers believed they had an advantage that would allow them to develop strong ventures there. This advantage was the know-how embodied in their products and services. The managers believed that in the 1990s banking and financial markets in Latin America were going through a process similar to what Spain experienced since the 1970s: liberalization of banking and financial services, growing competition, low rates of bankarization, growing demand for new banking and financial products, a crisis of confidence in the banking sector as a result of previous banking crises, and weak domestic banking and financial firms. BBVA and SCH grew in this context in Spain between the 1970s and 1990s by taking over other banks, thanks to their ability to adjust to these conditions. Each bank developed sets of rules that regulated the behavior of their employees within the banks, as well as their relations with other actors in the markets where they operated. These sets of rules constituted the banks’ corporate organizational culture and embodied their know-how. In the 1990s, restrictions in other countries in the EU made expansion in Europe difficult. However, Latin America was opening up to foreign firms and the managers of BBVA and SCH believed their products, services, and know-how, as embodied by their corporate organizational culture, would allow them to become prominent players there. Their expansion in Latin America was also facilitated by the lack of competition from other large international banks. No Latin American bank developed large ventures

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outside their home market and North American and European banks (especially those that had previous experience in the region in the 1980s) did not trust the commitment of Latin American governments to sound macroeconomic policies, thereby causing new economic crises with potentially devastating consequences for their investments (as in the past). With a few exceptions, these fears were not realized. As a result, the two Spanish banks enjoyed two decades of stable political and economic conditions across Latin America, with little competition from other large international banks. In this context, they transferred their corporate organizational culture (sets of rules) to reorganize their new subsidiaries and their investments proved highly successful. When evaluating the investments of BBVA and SCH in Latin America, a few aspects stand out: both banks developed a network of banking and financial activities, especially in the larger countries, adopted a universal banking model, made important improvements in efficiency, became leaders across Latin America in banking and financial services, and made significant profits. Investors believed the strategies of both banks were sound and as a result the value of their shares increased significantly in the stock exchange from the mid 1990s, when they began their expansion in Latin America in earnest. 1. Georgraphic expansion. Both banks expanded across Latin America since the mid-1990s. They opened operations in nearly every Spanishspeaking country and Brazil. However, in the 2000s they focused on the larger markets where they generated more profits, especially Brazil and Mexico and, to a lesser extent, Chile, Colombia, Peru, and Venezuela. Mexico became Latin America’s main market for BBVA. Of its assets, 11.75 percent were in Mexico in 2009 (that is 59 percent of its Latin American assets) and so were 32.28 percent of its profits (61 percent of its Latin American profits). Out of SCH’s profits, 24 percent came from Brazil (that is 56 percent of its Latin American profits) and 10.74 percent of its assets were there (Brazil accounted for 56 percent of its assets in Latin America) (see Table 3.2).130 2. Universal banking. Both banks operated as universal banks in Spain and brought this same banking model to Latin America. The core of their business operations was retail. In other words, they made most of their profits from selling banking and financial products to the average person. They tried to attract new customers to banking services through aggressive educational and advertising campaigns. They courted invididuals by offering high remuneration accounts and prices to attract payslips deposits. They cross-sold other products to their customers to instill in them a banking

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culture. They offered bank deposits and loans, mortgage services, insurance, brokerage, pension fund management, and mutual fund management services, among others. The two banks played an important role in the development of Latin American stock exchanges in the 1990s, because the privatization of pension funds and the development of mutual funds across Latin America transferred huge amounts of money from the government to the stock exchanges, via the institutions that operated pension funds and mutual funds. Since both Spanish banks were top players in pension fund management and mutual fund management, their role was critical. Both banks also provided loans to small and medium enterprises, operated a wholesale division for large businesses and a wealth management section for wealthier customers, as well as an “institutions” division that provided banking services to governments. 3. Improvements in efficiency. Both BBVA and SCH made a very important effort to improve the performance of the Latin American banks they took over and made significant improvements in efficiency rates. While in the mid-1990s the ROE (net profits/shareholder equity) in their Latin American subsidiaries was lower than that of their banks in Spain, in 2009 it was greater in Latin America. BBVA’s was 19 in Spain and 40.2 in Latin America and SCH’s was 17 in Spain and 26 in Latin America in 2008 (see Table 3.2). The efficiency ratio (cost/income ratio) of both banks in Latin America improved over the years from 55.5 in 1998 to 40.6 in 2009 for BBVA and from 64.52 in 1995 to 40.3 in 2008 for SCH. This efficiency ratio became similar to that of their operations in Spain (40 in Spain and Latin America for BBVA in 2009 and 44 in Spain and 40 in Latin America in 2008 for SCH) (see Table 3.2). The early period of entry into every market finished in 2000, with the exception of SCH’s acquisition of ABN-AMRO’s subsidiary in Brazil in 2007. Since then, both banks focused on increasing revenue and improving efficiency ratios. The reforms adopted to achieve these efficiency gains, as well as the sale of some of the worst performing subsidiaries, continued through the 2000s (for instance, SCH sold its Venezuelan subsidiary to the state of Venezuela due to political risk as well as its pension fund management operations). The Latin American ventures of both banks became cornerstones of their business and both banks will remain in Latin America in the future. Chairmen of BBVA Francisco González and Emilio Ybarra in 1999, and SCH’s Chairman in 2002, Francisco Luzón, explained that the investments of their banks in Latin America were a “long-term strategic bet.”131 4. Leaders. The large assets that both BBVA and SCH managed to control in a short period of time indicates the important role that both played in financial markets. Their combined market share for loans and

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deposits in 2008 was 47 percent in Mexico; over 25 percent in Chile, Uruguay, and Venezuela; over 20 percent in Argentina; and over 10 percent in Brazil and Colombia.132 Moreover, both banks were involved in a large array of activities, including leading positions in pension fund management and mutual fund management. The role of both banks as mediators thus has important implications for the development of robust capital and securities markets in the region. They will remain prime players in Latin American financial markets in the near future. The advent of the Argentinean crisis in December 2001 served as an important test of their long-term commitment to Latin America. While Scotiabank of Canada and Crédit Agricole of France pulled out of Argentina in mid-2002, SCH increased its share in pension fund management firm Orígenes to 59 percent in 2003, with an investment of $150 million, and set aside another $161.3 million for its subsidiary Banco Río. BBVA increased its stake in Banco Francés, its Argentinean subsidiary, from 68.25 percent to 79.61 percent in December 2002. Moreover, they set aside provisions to cover the potential losses generated by the crisis.133 Their focus on universal banking across Latin America and their ability to create a banking culture among citizens has helped build faith in the banking and financial markets and diversify and strengthen the financial markets. However, their prominent role has created new worries. The high degree of concentration of loans and deposits, mutual funds, and pension funds in their hands should raise concerns about how their financial health can impact individual markets if they were to fail. 5. Profits. Improvements in efficiency, coupled with the completion of their expansion into the main markets, especially Brazil and Mexico, made their share of profits in Latin America grow, especially in the case of SCH. With only 18 percent of its assets in Latin America in 2008, SCH’s share of profits generated in Latin America was 33 percent of the total. BBVA had 20 percent of its assets in Latin America in 2009, but generated 53 percent of its net attributable profits there (see Table 3.2). These figures were especially important, considering that in the late 1990s and early 2000s growth indicators in Latin America fell, mainly in Argentina, due to the crisis of 2001–2002, and in Venezuela, due to the political and social unrest since 2000 and due to the close-down of the oil industry in 2002. Moreover, the depreciation of the Latin American currencies vis-à-vis the Euro, 19 percent on average, had an impact on these figures, partly concealing the important gains in efficiency and revenue.134 6. Stock value. Stock markets rewarded BBVA and SCH since they began expanding in Latin America. Between December 1991 and December 2005, BBVA’s market cap grew by a47.39 billion and shareholder value

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creation was a15.62 billion. BBVA’s average shareholder return was 19.8 percent (annual return for the firms included in Spain’s IBEX-35 indicator, excluding BBVA was 13.5 percent). Return was 1,151.1 percent for the whole period (526.3 percent for IBEX-35). BBVA’s share of IBEX-35 stayed between 5.6 percent and 16.5 percent in this period. By market value, BBVA grew from seventh-largest firm in IBEX-35 in 1993 to third in 2005.135 Fernández and Carabias also estimate that SCH’s market cap grew by a67.06 billion over the same period and shareholder value creation was a4.16 billion. SCH’s average annual return was 17.9 percent (the IBEX-35’s average excluding SCH was 13.6 percent). Each euro invested in SCH in 1991 was worth a10.06 in December 2005 (the ratio for IBEX-35 was between a1 and a6.26). SCH’s share of the IBEX-35 stayed between 5.2 percent and 17.4 percent in this period. By market value, SCH grew from seventh firm in 1991 to first. It also grew from thirty-fifth firm in EuroStoxx50 in 1996 by market value to fourth in 2005.136 Between 1995 (when they began the most aggressive phase of their expansion strategy in Latin America) and 2009, the value of their shares increased by more than 300 percent. This gain is not solely the response to their exposure to Latin America. It also reflects the health of their operations in Spain and the rest of Europe and the fact that they left the crisis that affected the financial markets in Europe and North America between 2007 and 2009 practically unscathed. However, since the share of profits generated by their Latin American subsidiaries increased and since the financial crisis only had a mild impact on Latin America (with the exception of Mexico and Central America), their stock performed better than that of other European and North American banks. The following table compares the appreciation in the value of BBVA’s and SCH’s stocks since 1995 to a selected group of leading international retail banks from the United States and from Western Europe. The value of BBVA’s and SCH’s stocks increased by more than 300 percent between 1995 and 2009. Barclays and Deutsche Bank grew by over 50 percent, but ING and Citigroup fell by 44 percent and 66 percent, respectively. Compared to other blue chips across industries, both BBVA and SCH did better. Nasdaq and Dow Jones grew over 100 percent over that period of time and S&P 500 by 81 percent. These numbers indicate that the Latin American investments of BBVA and SCH were regarded by investors as a good move. Given their rise since 1995, it could be argued that these investments added value to the banks’ stock. The economic slowdown of 2001 and 2002 caused a fall in the value of stock of banks across the board, which was a bit deeper for BBVA and

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Multinational Enterprises in Latin America Table 3.3 Appreciation of stock for a selected group of banks, Dec. 31, 1995–Dec. 31, 2009 Firm BBVA SCH Barclays Deutsche Bank ING Citigroup Nasdaq Dow Jones S&P 500

Percent gain 347.61 316.17 55.61 53.26 −44.54 −66.83 115.67 103.79 81.04

Source: NYSE.

SCH between mid-2001 and early 2002. This additional erosion of stock value could be attributed to their Latin American exposure, in the wake of the Argentinean crisis of 2001. However, the strong and steady growth of the Latin American economies since 2003 also helped BBVA and SCH outpace other international banks in the stock exchange through the second half of the decade. Interestingly, their high exposure to Latin America helped them keep the value of their shares higher since 2007, because Latin American economies fared the crisis better than the United States and Europe.

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CHAPTER 4

Telecommunications (Telefónica) is making “efforts to translate the know-how and products, whose efficacy has been proven in Spain, to the Latin American operators, to strengthen customer service, improve quality, and reduce response time and investment needs.”1 Telefónica, Annual Report, 1999 The attractiveness of these countries (Latin America) was greater due to the opportunity to develop in them Telefónica’s technical and managerial capabilities in the expansion of telecommunications networks, as applied in Spain, which consisted in the mobilization in short periods of time of the human, technological, and financial resources needed to undertake such enterprises successfully.2 Juan Perea, Telefónica’s CEO, 1999 The internationalization of Telefónica was established on the basis of the competitive advantages that Telefónica had vis-à-vis the American and European operators. It was based on the ability to undertake important investment programs in short periods of time. In the 1980s, Telefónica faced a crisis of demand for telephones and telephone services in Spain. In this period, Telefónica had close to one million demands to install a telephone. This crisis forced Telefónica to develop large investment programs quickly and efficiently. This know-how, which some characterized as “trench technology,” was very useful and extraordinarily attractive to satisfy the demands of the countries that needed an urgent expansion of their telephone systems, given the high demand for telephones waiting to be installed. There was good timing as well, because the countries with these problems were involved in a process of privatization of the state-owned firms that provided the telecommunication services under condition of monopoly.3 Ignacio Santillana, CEO of Telefónica Internacional, S.A., 1990–1996

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Introduction This chapter analyzes the investments of Spanish multinational Telefónica in Latin America. It argues that Telefónica’s managers began making investments outside of Spain in the early 1990s (mainly in Latin America) because they believed Telefónica had an advantage in markets in which telecommunications services were underdeveloped. The managers believed Telefónica developed its advantage in Spain between the 1970s and 1980s, operating under circumstances that were similar to those of Latin America in the 1990s. This chapter compares the conditions in Spain between the 1960s and 1980s with those of the Latin American countries where Telefónica made direct investments in the 1990s and argues that Telefónica’s main asset was its ability to modernize and expand its network very quickly. This advantage allowed Telefónica’s subsidiaries to meet the performance requirements set by the governments in Latin America. This chapter also discusses the regulatory frameworks within which Telefónica had to operate in Spain and in Latin America and provides an analysis of Telefónica’s lobbying strategy to influence the decisions of regulators and international telecommunications agencies. Telefónica was the single telephone operator in Spain until 1999 and received a concession to operate fixed-telephone services as a monopoly in Argentina, Chile, and Peru. An analysis of the strategy of internationalization devised by the firm’s managers comes next. In the early stages, Telefónica sought agreements with foreign telephone operators to share telecommunications infrastructure so that it could extend the reach of its services overseas, mainly for its corporate customers. As the company grew in international expertise, it became the leading technological partner in the consortia that participated in the privatization of telephone operators. A crucial aspect of this chapter is an analysis of the reforms introduced by Telefónica in its subsidiaries. Telefónica extended its telephone network to increase its customer base, improved the productivity of its subsidiaries, modernized infrastructure, introduced new products and services, and, since the late 1990s, began to diversify into media and entertainment. Before Telefónica began its international expansion in 1989, it was only a domestic telephone operator in Spain, with 11.797 million telephone lines and 75,350 employees. In 2009, it had more than 167 million customers in Latin America (264 million around the world) and a44.7 billion worth assets. By 2006, it was the second-largest-telephone multinational in the world according to UNCTAD’s transnationality index (behind Vodafone). In 2008, it was the world’s fourth-largest-telecommunications firm by market capitalization [behind China Mobile, American Telephone

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and Telegraph (AT&T), and Vodafone]. In 2009, 39 percent of its income came from Latin America, where it employed 173,014 people in 2008 (257,035 around the world).4 The development of the telephone industry in Spain dates back to 1877 and was undertaken primarily by private firms or by the municipalities, which received the concession from the state. This resulted in serious problems of interconnection and poor service, leading the national government to grant a monopoly to Compañía Telefónica Nacional de España (CTNE), a subsidiary of International Telephone and Telegraph Corp. (ITT), in 1924.5 In the second half of the 1920s, CTNE undertook a process of investments in technology to improve the quality of service. The Spanish Civil War (1936–1939) caused major destruction of infrastructure and in 1941 ITT tried to sell CTNE to German buyers, but was not allowed by the US State Department.6 The government of Francisco Franco nationalized CTNE in 1945 through the purchase of 42 percent of ITT’s stocks and in 1946 renewed CTNE’s monopoly over all civil domestic telephone services in Spain. ITT’s subsidiary Standard Eléctrica remained the sole supplier of telephone infrastructure to CTNE.7 The slow recovery of the Spanish economy in the 1950s did not require CTNE to make large investments to expand service. As economic growth picked up in the early 1960s, CTNE began to modernize its infrastructure. In 1966, CTNE and the Spanish government signed a contract establishing the conditions of operation. This contract was in place until 1991. Unable to keep up with demand for new lines, CTNE initiated a development plan in 1982 that relied on acquisition of new technology from some leading international firms to modernize and expand its network. To raise funds for these investments, CTNE became the first Spanish firm to be listed in the London Stock Exchange in 1985. At that point, CTNE had the world’s ninth-largest network, with 13 million telephones and 8 million lines. In 1988, CTNE changed its name to Telefónica de España, S.A.8 In 1990 Telefónica de España acquired its first subsidiary abroad in Chile.9 In 1998 its name changed to Telefónica.10 This chapter continues with an analysis of how Telefónica developed the ability to undertake the process of modernization that the Spanish telecommunications industry went through between the 1960s and the early 1990s. Then it explains how telecommunications industries in Latin America in the 1990s resembled those of Spain in the previous decades. It argues that while in Spain the modernization of telecommunications was undertaken by Spain’s state-run monopoly, governments across Latin America decided to privatize their telephone operators because they lacked the technology,

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the know-how, and the ability to raise funds for these upgrades in service and technology. The privatization of telephone operators in Latin America in the 1990s opened the door for Telefónica. The chapter then goes on to explain how Telefónica applied its advantage in the host Latin American markets. After reviewing how Telefónica transferred its know-how to the enterprises it took over, the chapter concludes with an evaluation of Telefónica’s investments in Latin America’s telecommunications industries.11 Development of the Advantage in Spain Between the early 1960s and the early 1990s, CTNE was under permanent pressure to keep up with the growing demands of the Spanish market. The need to open new lines and upgrade technology for new products and services pushed the firm’s resources to the limit and forced its managers to come up with the financial, technological, and human resources to meet these needs. Its success resulted in know-how that was embodied in a series of rules (the firm’s normative framework or corporate organizational culture) that told employees what to do and guided the firm’s relations with other actors in the market, including customers, suppliers, and regulators. In general, CTNE developed an advantage in Spain based on several areas: the ability to undertake massive programs to expand and upgrade the network and improve quality of service over a short period of time, access to appropriate technology, international funding, and ability to keep its market protected from competitors until it can compete successfully. Expansion Programs The acceleration of economic growth in Spain since the 1960s boosted demand for telephone services, especially from 1960–1976 and 1982–1993, separated by a slowdown caused by the economic crisis in the late 1970s and early 1980s. Between 1960 and 1976, demand for individual telephone lines grew from 1.22 million to 5.12 million and use per line increased by 6.6 percent (9.4 percent in the second half of this period). At the same time, CTNE went through the process of automation of its network, rising from 76.5 percent to 93.2 percent. Although CTNE increased the number of lines by 9.8 percent annually, in 1976 there were still 641,908 applications to install a telephone pending. To meet this challenge, the number of employees grew by 6.5 percent annually on average, but productivity also grew from 62.5 lines per employee in 1960 to 95.8 in 1976. Between 1977 and 1982 demand for new lines fell (by 50 percent in 1981) and made

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15.8 percent of the lines underutilized in 1982, the highest percentage since 1944. In 1982, CTNE had 21 lines in service per 100 inhabitants.12 As economic growth resumed in the mid-1980s, demand for new telephone lines as well as use per line reached record numbers (with growth rates of 27.9 percent in 1986 and 17.9 percent in 1987). As a result, in the mid-1980s there was another dramatic increase in wait time for the installation of new lines (from 346,000 demands for new lines in 1985 to 539,000 in 1988), coupled with a considerable deterioration in the quality of service, which forced CTNE to increase its investments to expand the network.13 The number of lines grew from 11 million in 1988 (28.1 per 100 inhabitants) to 14.3 million in 1993 (36.6), and to 20.8 million in 2002 (45.9). The number of lines waiting for installation fell gradually to 25,000 in 1993. Worker productivity did not stop growing through this period, from 149.30 lines per employee in 1982, to 181.36 in 1988, and to 213.61 in 1993.14 Telefónica de España also continued to make technological improvements such as the introduction of cellular telephones, new satellite telecommunications, Internet, and fiber optics.15 Access to Technology To have access to the latest technology, CTNE ended the monopoly that the state had granted to ITT’s Spanish manufacturing subsidiary Standard Eléctrica and created joint ventures with leading international telecommunications firms, such as Ericsson, Telettra, and General Cable in the 1970s and AT&T, Alcatel, Telcel, and Amper in the 1980s and early 1990s.16 Financial Resources The expansion of service between the 1960s and 1980s required important investments equivalent to 20 percent of the firm’s assets annually. CTNE raised money through bonds, loans, and capital increases at the Madrid stock exchange (in 1981, 1983, 1984, 1985, and 1986). Between 80 percent and 90 percent of the additional funding was external. CTNE’s debt over assets grew to 49.5 percent in 1982 as the price of CTNE’s stocks in the stock exchange fell by 68.5 percent between 1960 and 1980. In 1986, as the European Union (EU) instructed member countries to liberalize their telephone industries, the Spanish government began to prepare CTNE for full privatization, launching another phase of massive investments that lasted until 1993.17 This campaign sought to keep up with existing demands, replace obsolete technologies, implement digitization, and develop new services. Telefónica de España’s investments alone were equivalent to

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4.5 percent of gross capital formation in Spain for the period 1988–1993. Moreover, the improvement of the quality of service was made a centerpiece of the firm’s strategy, along with growing efficiency in the use of resources. In this period of time, Telefónica de España installed 4.8 million new lines and digitized 41.4 percent of its urban network by 1993 (10.8 percent in 1988). The adoption of cellular access technology since 1992 allowed Telefónica de España to extend basic telephone services to every corner of Spain (including rural areas), and to even out costs, for both rural and urban areas by 1996.18 In 1985 CTNE began a process of financial internationalization, raising funds worth 6.6 percent of its social capital in the stock exchanges of London, Paris, Frankfurt, and Tokyo, 5.6 percent in New York, and an additional 1.2 percent in Tokyo in 1987. As a result, 24 percent of its stocks were held by non-Spaniards in 1993.19 Since 1987, however, its emphasis was on bonds, rather than capital increases.20 The self-financing ratio rose from 42 percent in 1989 and 1990 to 116.8 percent in 1993. Net attributable profits also grew at a rate of 8.7 percent annually between 1988 and 1993. Telefónica de España’s managers took this as a sign of approval by the international financial community, and decided they were ready to apply the same model in new markets. To fund Telefónica de España’s expansion abroad, TISA received a boost of $1 billion ($238 million from the Spanish government and the rest from its parent company). Later in the 1990s, as Telefónica expanded in Latin America, more funds came from further periodic capital increases in the stock exchange. The firm’s own stockholders agreed to give up their annual dividends between 1998 and 2001 and have all earnings reinvested to finance expansion in Brazil. Telefónica rewarded them only with free stocks during that period.21 Courting the Government for Protection from Competition Spanish legislation granted CTNE a monopoly over telephone services between 1945 and 1999. With Spain’s entry into the EU in 1986, Spain was subject to pressures by the EU Commission to liberalize its telephone services but the Spanish government wanted to protect Telefónica from a takeover and managed to postpone liberalization until 1999, when the firm had developed a sizeable network of subsidiaries abroad. A reform of Spain’s telecommunications law in 1992 only gave the new entrants permission to operate in data, transactions, electronic mail, and private networks (i.e., outsourcing), but ordered operators in Spain to harmonize technical infrastructure so that when the monopoly over voice services was lifted, new entrants could use Telefónica’s infrastructure (“open network provision”).22

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The EU approved the liberalization of voice services after 1998. The Spanish government received an extension of five years, arguing that Telefónica was not ready for competition, but decided to open up in 1999 after negotiations with Telefónica.23 Telecommunications Markets in Latin America From the 1940s to the late 1980s, telephone services across Latin America were provided by state-owned telephone firms that failed to build widely accessible and reliable public networks. Waiting lists for a new line were long and infrastructure was poor, causing service to fail often. Governments used telecommunications profits to subsidize other activities.24 When Telefónica began making its investments in Latin America in 1989, the density of telephones per 100 inhabitants was 28.1 in Spain, but all countries in Latin America were below ten, except Uruguay (11.3).25 The reform of the Latin American telecommunication systems that began in the late 1980s was part of the process of structural reforms that swept this region since the mid-1980s.26 The telecommunications sector was a prime candidate for reform because it showed the commitment of the governments with the reforms and served as a tool to begin capitalizing domestic stock markets by attracting foreign capital. It also helped reduce public debts and attracted foreign telecommunications expertise.27 The reforms intended to make the state merely a regulator of network operations and services, increase competition, develop private networks, and modernize infrastructure.28 However, in the short term, most governments gave the new entrants long periods of monopoly on all basic voice services and preferences in the provision of other services to promote high rates of investment. They believed that a monopoly would encourage firms to make large investments to modernize and expand coverage because the lack of competition would allow them to generate profits to pay for these investments. In short, private monopolies replaced the old state monopolies in the short run.29 In most countries, governments postponed regulatory reform until after privatization and the agencies created to implement the regulations that determined rights and obligations of telephone operators were not totally independent.30 The conditions under which Telefónica had to operate in the countries where it took over a fixed-line phone operator were similar to those in Spain: Telefónica received a temporary monopoly concession. The government of Argentina included a series of regulatory guidelines in the bidding documents for the privatization of Empresa Nacional de Telecomunicaciones (Entel). The two entrants, Telecom Argentina and Telefónica Argentina,

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were granted monopoly for basic telephone services for seven years (until November 1997), which could be extended for a further three years if the companies met a series of operating targets for investment and service quality based on the operating levels existing at the time of privatization (Telefónica’s concession in the southern half of Argentina was extended until November 2000). Each firm operated in a different part of the country and did not compete. Service rates were set on the basis of the consumer price index, and the price was to be based on average rate values. In 1991, however, both companies agreed to maintain their average price level in exchange for a partial tax exemption on their value added tax. Both entrants were also authorized to provide other services (telex, data transmission, mobile telephony, et cetera) under a regime of competition with other providers.31 In Brazil, the government eliminated the monopoly status of Telebrás in 1995 and a new telecommunications law was approved in 1997, which established the framework for privatization, set up rules for the privatization of cellular and fixed telephone service, and defined the new norms for private operators. The 27 telecommunication companies that made up Telebrás were reorganized into 12 “Baby Brás,” which were in turn divided into three groups: three regional fixed-line companies, eight A-band cellular operators, and one long-distance company. No entrant was allowed to take over more than one company in each group. The law contemplated at least two companies in each category until 2005 and open competition thereafter. The bidding rules did not contemplate the inclusion of an experienced operator in the winning consortium (this raised some suspicions that the government was trying to help domestic groups), but the 49 percent restriction imposed on foreign ownership was removed. A new regulatory agency, Agência Nacional de Telecomunicações, was created to oversee the Brazilian telecommunications sector. This agency required operators to pay a 2 percent fee on net revenues for a 20-year period after their concession expired in 2005, important reductions in the price of local, domestic long-distance, and international calls by 2005, and a substantial expansion of fixed-line phones (9 million by 2001), particularly in the countryside.32 Telefónica gained several concessions in Brazil. The government of the state of Río Grande do Sul gave Telefónica’s Companhía Riograndense de Telecomunicações (CRT) a telephone monopoly in 1997, except in mobile telephony, and in 1998 the federal government granted Telefónica’s Telesp Participações a monopoly concession in fixed-line telephony from 1998 to July 1999. The Brazilian antimonopoly authorities forced Telefónica to sell CRT in 2000 because legislation restricted operators to one single telephone region only.33 When the market opened up to new entrants in 2002, the incumbents were allowed to expand outside of their region if they met

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the targets set by the government for 2003. Telefónica met its 2003 targets in 2001, gaining permission to expand outside of São Paulo.34 In wireless, Telefónica’s subsidiaries had to compete with another operator until 2001 in the state of the concession, and with several new entrants thereafter.35 In Chile, telecommunication law was reformed in 1982 and amended several times afterwards. The law set the requirements for licenses and technical standards and required interconnection between systems. Firms were free to set rates, except in cases where competition did not exist (in those cases, the government would set rates). An amendment introduced in 1987 to eliminate cross-subsidies specified that the rates would be based on a formula that indexed them to variations in costs, as reported by the carriers. These rates would be set for five-year terms for each service, each operator, and each geographic zone, until they were fully liberalized after 1994. The law also established minimum quality requirements. Incumbents were able to slow down introduction of competition because they could not agree on interconnection fees with new entrants and usually went to court, where the judges were unable to determine the appropriate fees. TISA operated ENTEL, domestic long-distance and international carrier, between 1989 and 1994 and CTC since 1990 (local calls). Antimonopoly courts ruled in 1994 that since Telefónica had over 40 percent control in both, it needed to sell its stakes in the latter. The government also opened up the market to new entrants in 1995 and allowed all operators to provide local, long-distance, and international calls.36 Telefónica’s first venture in Colombia was short-lived. Its subsidiary Cocelco resulted from a concession granted by the government in 1994 to provide cellular services for ten years, which could be extended for ten more years. Telefónica sold this venture in 1997 to focus on Brazil, but entered Colombia again in 2004 through the acquisition of Bell South’s wireless subsidiaries in Latin America.37 In El Salvador and Guatemala, Telefónica became the second operator when the governments eliminated the monopolistic concession granted to the incumbents.38 In Mexico, the government set quantitative and qualitative improvement obligations for Telmex, such as extension of fiber optic networks, installation of satellite communications stations, average 12 percent annual growth in new lines between 1991 and 1995, with a minimum of 2.7 million lines to be added, reduction of ordering time from 1.5 years to 6 months by 1994 and to 1 month by 2000, installation of at least a telephone booth in the smallest towns, and modernization of exchange facilities in large towns.39 Telefónica began providing wireless service in four regions of the North of Mexico in competition with regional providers in 2001, after the acquisition of Pegaso, and gained a concession to operate nationally in 2002.40

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The government of Peru granted Telefónica del Perú a concession for the provision of local service, national and international long-distance for 20 years since 1994 (with no competition until liberalization in 1999), in a contract that could be extended to 20 more years, renewable every 5 years if Telefónica met some quality requirements.41 Telefónica acquired Telefónica Larga Distancia (TLD) from the Puerto Rican government, the longdistance and international services of Puerto Rico Telephone Company in 1992 (the government of Puerto Rico kept a stake of 20 percent). In 1993, the US Federal Communications Commission (FCC) authorized TLD to extend these services to the US Virgin Islands and, in 1995, to originate domestic long-distance calls from anywhere in the United States, as well as international calls to nonaffiliated routes (that is, to international destinations, except Argentina, Chile, Peru, and Spain).42 Telefónica had a minority stake in Compañía Anónima de Teléfonos de Venezuela (CANTV), which had a concession for basic telephony and national and international long-distance under conditions of monopoly until 2000.43 In the 2000s, Telefónica also entered Ecuador, Nicaragua, Panama, and Uruguay to provide wireless service. Mark S. Fowler and Aileen Amarandos Pisciotta argue that these reforms failed to produce real “universal service,” efficiency, innovation, and domestic and international interconnectivity because governments did not distinguish privatization and competition: “the goals associated with achieving a short-term maximization of value in the sale of assets were not the same as achieving maximization of the value of infrastructure over the long term.” Fowler and Amarandos conclude that it would have been preferable to have regulatory reform started before the privatization process, because this would have allowed societies to identify the goals first (promotion of capital investments and expansion of network), and then adopt an industry structure that reflected the long-term objectives in each sector. Governments would have achieved these goals if they had promoted competition through a regulatory framework that provided for reorganization and rationalization of subsidy systems, balanced rate structures that reflect cost characteristics and technical standards, a network architecture that permitted fair interconnection, and provided a strong and independent regulatory body to set the goals and rules and to monitor competition.44 Expansion Strategy Telefónica’s strategy of expansion was based on the belief by its executives that, with the liberalization of telecommunications markets around the world, only a small group of firms would become leading players on a world

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scale, operating individually or through alliances. Therefore, they concluded that by expanding in new markets, Telefónica would increase its bargaining power vis-à-vis other telephone operators, so that it could become one of the world’s leading telecommunications firms.45 Telefónica’s CEO in 1993, Cándido Velázquez, explained that “Telefónica’s strategy of international investments is not guided by speculative criteria nor oriented to the short term. Our participation in other operators intends to consolidate our competitive position in the long run and to obtain profitability for the investors backing us up.”46 To invest abroad in the mid-1980s, they considered three strategies. The first one was to become a global operator (anywhere, anytime, all services) such as the big telephone operators that followed the largest multinational enterprises, namely, British Telecom, Deutsche Telecom, France Télécom, Koninklijke Posterij Nederland (KPN), AT&T, MCI, and Sprint. The second option was to try to appeal to the residential segment, thus developing cellular telephony and multimedia services such as television, cable television, information systems, et cetera. This was the option followed by GTE, Nynex, SBC, Bell Atlantic, Stet, and France Télécom. The third and last option was to develop wireless service only, such as Bell South, SBC, and Air Touch. Telefónica’s executives chose the second alternative, in part because they did not have contracts with large multinational enterprises at that time, but intended to build up a list of large clients, including local firms and multinational enterprises with large operations in Latin America.47 Telefónica created a subsidiary called Telefónica Internacional S.A. (TISA) in the late 1980s that made Telefónica’s direct investments outside of Spain and operated the resulting subsidiaries.48 Where to invest came next. Telefónica’s executives considered the privatizations taking place in Eastern Europe, as well as in the Asia-Pacific region, but decided to invest in Latin America for a number of reasons. The first one was cultural and linguistic similarities. They also believed that Latin American telephone operators needed to make significant investments to upgrade basic infrastructure and improve productivity ratios, and Telefónica had just faced similar demands in Spain. Moreover, they expected stable growth in the long run thanks to quick demographic growth and increases in disposable income. Finally, they believed these conditions would also attract large multinational enterprises that would need a reliable telecommunications network of global reach.49 Telefónica’s executives believed that one of the company’s main assets was its ability to tackle such challenges, because they had just faced them in Spain: they made adjustments to transition from a monopolistic concession to a competitive market, and from a mere provider of telephone services to a diversified

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communications company. Its name embodied this know-how and was one of its main assets.50 Before making investment decisions, Telefónica’s executives contracted external consultants, investment banks, and international lawyers. TISA’s CEO also surrounded himself with a managing team that had a lot of experience in the following areas: project development, investments and follow-up, financial and human resources, legal and fiscal aspects, and firm relations. As Telefónica took over firms abroad, its CEO added two new areas: synergies and integration of operations, and development of new businesses.51 Given Telefónica’s lack of experience outside of Spain and the amount of money required for expansion abroad, alliances played an important role in its expansion strategy. Its main partners were other telephone operators, technological suppliers, and financial firms.52 In the 1980s and first half of the 1990s, telephone operators created alliances to design and implement services targeted at large enterprises or specific collectives (i.e., the financial sector) that needed international services. Telefónica joined Unisource in 1993 with Post, Telephone & Telegraph (PTT) Telecom (The Netherlands), Swiss PTT, and Telia (Sweden)53 and left in 1997 to form two new joint ventures called Telefónica Panamericana and Concert with MCI and British Telecom for distribution of multichannel services, as well as international traffic. Telefónica also agreed with Portugal Telecom (PT) to pursue joint ventures in Spain, Brazil, and North Africa. Telefónica’s managers hoped that these telephone operators would give Telefónica access to their infrastructure and technology and would also help build new infrastructure and enter new markets.54 One of Telefónica’s main engineering ventures was the creation of a wide network of submarine fiber optic cables. Telefónica partnered with Telmex to install a cable between Mexico and Spain in 199055 and with TYCO and IDT Corporation of the United States to build a network of cables linking Italy and the Iberian Peninsula with South America, Central America, and the United States.56 An example of an alliance for procurement of technology was Telefónica’s agreement with Akamai Technologies in 2001 to strengthen the capacity of its “T Data Internet Centers.”57 Financial partners were to share the costs of new acquisitions. Telefónica allied with Spanish bank BS to purchase Entel in Chile in 1989. Each of them acquired 10 percent, and Telefónica bought BS’s share one year later.58 Citicorp Equity Investment (CEI) was Telefónica’s financial ally in Argentina since the acquisition of Telefónica de Argentina (TASA) in 1990, and helped acquire three cable companies in 1997, Cablevisión, VCC, and Mandeville, as well as a minority stake in Torneos y Competencias, the company that

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had the rights over Argentinean soccer.59 Bain Capital of the United States and a group of local business people were the financial partners in El Salvador when Telefónica received a license to operate the second telephone network in the country.60 The privatization of state-owned phone companies in Brazil required great financial resources, so Telefónica sought a group of allies that included other telephone operators, financial firms, and public utilities. Telefónica was the leading technological partner of the consortium that submitted the winning bid for CRT in 1996. The consortium was also integrated by TASA, CTC, and a local firm called Participaçoes Rede Brasil Sul (RBS).61 In 1998, Telefónica joined the consortia that won four of the twelve telephone operators resulting from the breakup of Telebrás prior to privatization. Telefónica was the leading technological partner in Telesp Participações in São Paulo (other partners included Portugal Telecom, BBV, and Iberdrola) and Telesudeste Celular Participações in Rio de Janeiro and Espírito Santo (other partners were NTT and Itochu). Telefónica’s ally Iberdrola was part of the consortium that submitted the winning bid for Tele Leste Celular Participações in Bahía and Sergipe.62 Telefónica’s expansion in Latin America went through four different phases. In 1989 and 1990, Telefónica made its first acquisitions in two countries with stable economies and growth potential, Chile and Argentina. Chile’s favorable economic conditions (the economy grew by 5 percent annually between 1985 and 1993), economic policy, and its favorable social climate favored the growth of its telecommunications industry by 8 percent between 1984 and 1991.63 Argentina’s macroeconomic indicators, its success in the fight against hyperinflation, tax reforms, IMF credits, economic growth, and stable sociopolitical conditions persuaded Telefónica’s managers to invest there.64 During the second stage, between 1991 and 1996, Telefónica took over firms in new markets (Colombia, Peru, Puerto Rico, and Venezuela) and began to find synergies among its subsidiaries to reduce costs.65 The third stage, 1996–2001, focused on access to the largest markets, Brazil and Mexico.66 Telefónica took over Companhía Riograndense de Telecomunicações in 1996 and Telecomunicações de São Paulo S.A. (Telesp) in 1998. In 2001, the acquisition of Motorola’s cellular telephone subsidiaries in the North of Mexico, Pegaso, opened the door to the Mexican market and complemented the acquisition of CTI in the United States in 2000 to carry Telefónica’s calls between the United States and Latin America.67 As governments in Latin America ended the monopoly concessions granted in the early 1990s to new entrants, Telefónica also found opportunities in new Latin American markets as a second operator, such as El Salvador in 1998, Guatemala in 1999,68the northern half of Argentina in 2000 (Telefónica had been the exclusive operator in fixed

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telephony in the southern part of the country), and outside of the São Paulo region in Brazil in 2001 (Telefónica had been the sole operator of fixed-line telephone services there since 1998).69 During the fourth stage, 2002–2009, Telefónica’s attention shifted away from fixed telephone services to wireless telephony and asymmetric digital subscriber line (ADSL) broadband Internet service. The acquisition of Bell South’s Latin American cellular phone subsidiaries in 2004–2005 for a7.370 billion (a4.331 billion plus debt) was at the core of this strategy. Telefónica also diversified into Internet and media content (television programs and films)70 because its managers believed that the distinction between voice and data services was being blurred by the new technological developments, and important synergies could result from bringing together these services. To focus on these areas, Telefónica sold nonstrategic assets such as its telephone directory subsidiary Telefónica Publicidad e Información (TPI) in 2006 and Endemol (television content) in 2007. Telefónica also began a process of geographic diversification outside of Latin America. In 2005, Telefónica acquired 69.4 percent of Cesky Telecom, 100 percent of O2 in Britain, and 5 percent of China Netcom, and in 2007 began to increase its stock in Telecom Italia, reaching 24.5 percent in 2009.71 Firms Taken Over Phone services were introduced in most countries in Latin America in the 1870s and 1880s by US firms or by local entrepreneurs that contracted US technology and know-how. Telephone operators were nationalized in the 1950s and 1960s across the region, and privatized again in the late 1980s and early 1990s. All of the firms providing landline service that were taken over by Telefónica in Latin America were formerly state-owned enterprises operating under conditions of monopoly (see Tables 4.1 and 4.2 for Telefónica’s main subsidiaries in Latin America). Many of them, such as CTNE itself, had been owned by ITT prior to their nationalization. In Argentina, telephone service was first developed by a local entrepreneur with a license from Alexander Graham Bell in 1878. The telephone market was open to new entrants and domestic firms coexisted with the subsidiaries of foreign multinational enterprises. ITT entered Argentina in the mid1920s and after several takeovers became the main operator in the urban areas, keeping the name of one of the local firms called Unión Telefónica (UT). Since the 1930s, the cost of the telephone services became a politically sensitive issue and in 1945 the government nationalized the telephone industry, arguing that telephones were an essential public service that the private sector failed to provide for the whole country. The state controlled

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Atento Brasil, S.A. Cobros Serviços de Gestao, Ltda. Telefónica Engenharia de Segurança Telefónica Factoring Do Brasil, Ltd. Telefónica Gestao de Serviços Compartilhados do BRASIL, Ltda. Telefónica International Wholesale Services Brasil Participaçoes Telefônica Pesquisa e Desenvolvimento do Brasil, Ltda. Telemig Celular, S.A. Telesp Terra Networks Brasil, S.A. Vivo, S.A.

Atento Chile, S.A. Telefónica Chile, S.A. Telefónica Gestión de Servicios Compartidos, S.A. Telefónica Móviles Chile

Brazil

Chile

Colombia Telecomunicaciones, S.A. ESP Telefónica Móviles Colombia, S.A.

Atento Argentina, S.A. Atlántida Comunicaciones, S.A. Telefónica de Argentina Telefónica International Wholesale Services Argentina, S.A. Telefónica Gestión de Servicios Compartidos, S.A.C. Telefónica Móviles Televisión Federal S.A.- TELEFE Terra Networks Argentina, S.A.

Argentina

Colombia

Name

Telefónica’s main subsidiaries in Latin America in 2009

Country

Table 4.1

Communications services Cellular

Telecommunications services Fixed Management and administration Cellular

Telecommunications service Management and administration Security services and systems Factoring services provider Management and administration High bandwith R&D Cellular Fixed ISP and portal Cellular

Telecommunications services Media Fixed telephony High Bandwith communications Management and administration Cellular TV and radio broadcasting ISP and portal

Type of business

(continued)

53.03 100.00

99.06 97.89 97.89 100.00

100.00 99.33 99.99 50.00 99.99 100.00 100.00 33.31 87.95 100.00 33.31

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Share

79

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Telefónica Móviles El Salvador, S.A. de C. V.

Atento Centroamérica, S.A. Telefónica Móviles Guatemala, S.A. Terra Networks Guatemala, S.A.

Telefónica Factoring Mexico, S.A. de C.V. SOFOM ENR Telefónica Investigación y Desarrollo de Mexico, S.A. de C.V. Telefónica Gestión de Servicios Compartidos Mexico, S.A. de C.V. Terra Networks Mexico, S.A. de C.V. Pegaso Comunicaciones y Sistemas, S.A. de C.V.

Telefonía Celular de Nicaragua, S.A.

Telefónica Móviles Panamá, S.A.

Teleatento del Perú, S.A.C. Telefónica del Perú, S.A.A. Telefónica Gestión de Servicios Compartidos, S.A. Telefónica International Wholesale Services Perú, S.A.C. Telefónica Móviles Perú, SAC Terra Networks Perú, S.A.

Telefónica International Wholesale Services Puerto Rico, Inc. Telefónica Larga Distancia de Puerto Rico, Inc.

Telefónica Móviles del Uruguay, S.A. Telefónica International Wholesale Services America, S.A. Telcel, S.A.

El Salvador

Guatemala

Mexico

Nicaragua

Panama

Peru

Puerto Rico

Uruguay

Source: Telefónica, Audit Report 2009, pp. 119–123.

Venezuela

Telefónica International Wholesale Services Ecuador, S.A Otecel, S.A.

Continued

Ecuador

Table 4.1

Cellular High bandwith Cellular

High bandwith Communications

Telecommunications services Fixed Management and administration High bandwith Cellular ISP and portal

Cellular

Cellular

Factoring services provider R&D Management and administration ISP, portal and financial information services Cellular

Provision of call-center services Cellular ISP and portal

Cellular

High bandwith Cellular

100.00 100.00 100.00

100.00 98.00

100.00 98.34 100.00 100.00 100.00 99.99

100.00

100.00

50.00 100.00 100.00 99.99 100.00

100.00 99.98 99.99

99.08

100.00 100.00

80

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* Pegaso PCS: Bajacel, Movitel, Norcel, Cedetel. ** GTE is the technological leader and controls management decisions. Source: Telefónica’s annual reports.

18.66 – – – – 43.62 – – 22.39 – – – – – – – – – 35.00 – 79.00 – 4.88 –

12.89 – 7.85 – – 43.62 – – 14.51 – – – – – – – – – 35.00 – 79.00 – 4.88 –

27.75 – 35.00 – – 43.62 – – 16.32 – – – – – – – – – 35.00 – 79.00 – 6.40 –

29.02 – 16.70 8.22 – 43.64 – – – – – – 51.00 – – – – – 35.00 – 79.00 – 6.40 –

27.21 – 15.36 19.28 – 43.64 – – – – – – 44.22 26.01 – – – – 40.04 – 98.00 – 6.40 –

92.87 – 16.70 86.61 – 43.64 – – – – – – 40.75 47.00 – – – – 93.22 – 98.00 – 6.91 –

98.04 90.78 – 86.72 – 43.64 – – – – – – 42.69 47.28 45.92 – – – 97.07 90.82 98.00 – 6.91 –

98.04 90.52 – 87.42 30.10 43.64 – – – – – – 83.46 92.43 85.04 85.04 – – 97.15 90.55 98.00 92.43 6.91 –

98.03 90.53 – 87.49 30.10 43.64 – – – – – – 92.44 92.44 85.04 85.04 – – 97.21 90.56 98.00 92.44 6.92 –

98.03 90.55 – 87.49 46.23 44.89 92.46 – – – 92.46 92.46 84.83 92.46 – 85.06 92.46 92.06 98.19 90.58 98.00 92.46 6.92 92.46

98.03 92.91 – 87.49 46.46 44.89 92.90 – – – 92.91 92.91 92.01 92.91 – 92.91 92.91 92.91 98.19 91.08 98.00 92.91 6.92 92.91

98.03 100.00 – 87.95 50.00 44.89 100.00 – – 52.03 100.00 100.00 99.08 99.98 – 100.00 100.00 100.00 98.18 98.53 98.00 100.00 6.92 100.00

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Telefónica’s ownership in a group of selected Latin American firms

Argentina TASA – 6.10 8.07 8.07 19.40 20.81 Telef. Móv. – – – – – – Brazil CRT – – – – – – Telesp – – – – – – Brasilcel (cel.) – – – – – – Chile CTC – 44.49 43.63 43.63 43.63 43.62 Tel. Móv. – – – – – – Entel 10.00 20.00 20.00 20.00 20.00 – Colombia (Cocelco) – – – – – 36.00 Tel. Telecom – – – – – – Tel. Móv. – – – – – – Ecuador (Otecel) – – – – – – Tel. Móv. El Salvador – – – – – – Tel. Móv. Guatemala – – – – – – Mexico (Pegaso PCS)* – – – – – – Tel. Móv. – – – – – – Nicaragua (Tel. Cel.) – – – – – – Panama (TEM) – – – – – – Peru Telef. del Perú – – – – – 35.00 Telef. Móviles – – – – – – Puerto Rico (TLD) – – – 79.00 79.00 79.00 Uruguay (Telef. Móviles) – – – – – – Venezuela (CANTV)** – – 4.88 4.88 4.88 4.88 Telcel – – – – – –

Table 4.2

98.04 100.00 – 87.95 50.00 44.89 100.00 – – 52.03 100.00 100.00 99.08 99.98 – 100.00 100.00 100.00 98.18 98.53 98.00 100.00 – 100.00

2007

98.20 100.00 – 87.95 50.00 96.75 100.00 – – 52.03 100.00 100.00 99.08 99.98 – 100.00 100.00 100.00 98.18 98.63 98.00 100.00 – 100.00

2008

100.00 100.00 – 87.95 50.00 97.89 100.00 – – 52.03 100.00 100.00 99.08 99.98 100.00 100.00 100.00 100.00 98.34 100.00 98.00 100.00 – 100.00

2009

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management of the new telephone firm that operated as a monopoly, but welcomed a few small private stockholders as partners to raise funds. This firm became Empresa Nacional de Telecomunicaciones (Entel) in 1956 and, although privatization became a political issue in the 1970s, it did not happen until 1990.72 In Brazil, the introduction, expansion, and provision of telephone service was also undertaken by local entrepreneurs who licensed foreign technology and equipment, as well as by foreign firms. The network expanded tremendously in the 1910s and 1920s and again in the 1950s and 1960s. In 1960 there were more than 800 concessionaires (almost two-thirds of them in the states of São Paulo and Rio de Janeiro), but Canada’s Companhía Telefônica Brasileira provided service to 70 percent of the consumers by 1968. The government created Empresa Brasileira de Telecomunicações (Embratel) in 1965 to regulate the telecommunications industry, to facilitate the interconnection among regions (mainly to bring the Amazon region into the network), and to operate domestic and international trunk operations. Telebrás (80 percent owned by the federal government) took over Embratel’s responsibilities in 1972 and began to take over independent private providers (the number of phone operators fell from 1,000 in 1972 to 150 in 1992). Telebrás also promoted the growth of a domestic telephone equipment industry. Embratel’s new role was construction and operation of the telephone network, and provision of basic domestic long-distance and international telephone service. In the mid-1990s, the states were allowed to open up their markets. Embratel and Telebrás were privatized in 1998.73 The telephone industry in Chile began in 1880, with the concession of a license by Thomas Edison to a Chilean entrepreneur in Santiago. For the next 30 years, small private telephone companies mushroomed in the mining and agricultural areas. Most of them were taken over by Compañía de Teléfonos de Chile (CTC). In 1927, ITT acquired CTC and in 1930 the government granted ITT a concession for 50 years, renewable every 30 years, although other small firms remained in the market. In 1964, the government created Empresa Nacional de Telecomunicaciones (Entel) to compete with ITT in long-distance services. Calls for nationalization of large foreign enterprises grew in the 1960s. The government of Salvador Allende began to take over the smaller telephone firms and in 1973 revoked the statute that granted CTC’s concession. Nationalization occurred in 1974, under the regime of Augusto Pinochet. Entel and CTC continued to operate under state management until their privatization in 1989 and 1990.74 In Peru, telephone service was introduced by the Peruvian Telephone Company (PTC) in 1888, with financial and technical support from US investors. ITT created a subsidiary called Compañía Peruana de Teléfonos

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(CPT) in 1920 that took over PTC. ITT held 60 percent of the capital and Peruvian investors held the rest. In the 1930s, new telephone firms (most of them foreign) received concessions from the government to operate in the interior. Cries for nationalization of telephone companies began to rise in the 1960s. In 1967, the government stopped renewing expiring licenses and in 1970, began to nationalize the remaining operators, including CPT. The new state-owned monopoly was called Empresa Nacional de Telecomunicaciones del Perú (Entel-Perú), which operated telephone, telex, and telegraph services. In 1994, CPT and Entel were sold to Telefónica.75 The first telephone venture in Venezuela was developed by US-based Intercontinental Telephone Company in Caracas in 1883. Several more firms emerged thereafter, including CANTV in 1930, which became the single provider of all telecommunications services in Venezuela after it was nationalized in 1953. It was privatized again in 1991 and Telefónica became a minority stockholder.76 Reorganization of Subsidiaries Telefónica’s managers introduced reforms in their Latin American subsidiaries that were based on the know-how they had developed in previous decades in Spain. This know-how was embedded in a series of rules (normative framework) that constituted the firm’s organizational culture. Appointment of New Managers For each new subsidiary, Telefónica’s managers set up a working group for reorganization that established the plan, objectives, follow-up, and control systems, and communication with the old executive team and the personnel of the firm, with the media, and with the investment community. Telefónica incorporated local managers from the domestic political, economic, and financial world. All of the local partners were given room in the new board.77 Expansion of Service and Improvement of Infrastructure Development of infrastructure was critical to expand the network and generate more revenue. Between 1988 and 2004, Telefónica invested around a64 billion in Latin America, a34 billion in acquisitions, and a30 billion in infrastructure, becoming the main private investor in the region. Its investments constituted between 1 percent and 2.3 percent of GDP in Argentina, Brazil, Chile, and Peru. Telefónica provided landline access

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through GPON technology (Gigabit Passive Optical Network) and wireless service through 3G and 4G technology (in 2008 Telefónica had 2,767 base stations and nodes in 3G in Latin America and 18,481 in 4G).78 The number of landlines per 100 inhabitants, the indicator used by the International Telecommunications Union to measure the development of the telephone network in each country, increased substantially in the countries where Telefónica provided this service.79 While the number of fixed lines per 100 people was below 10 in 1989 in the Latin American countries where Telefónica took over a fixed-line operator, it was over 20 in Argentina, Brazil, and Chile in 2008, and over 10 in Peru.80 Digitization of the network helped Telefónica achieve synergies while diversifying into media and Internet, because all of these services could be provided through the same infrastructure. CTC’s network was fully digitized by 1993, TASA’s by 1998 and Telesp’s in 2003. In Peru, digitization reached 97 percent in 2003 but could not be completed by 2009.81 The number of Telefónica’s customers in Latin America rose from zero in 1988 to over 167 million in 2009. The rapid rise in demand was met by the expansion of the landline network in the 1990s and by wireless in the 2000s. The growth of wireless was spectacular. In 2008, Argentina, Panama, Guatemala, Uruguay, and El Salvador had more subscribers per capita than the United States. The expansion of the Internet network was also very important. The countries where Telefónica provided fixed-line broadband Internet access were among the highest in Latin America in number of users per 100 inhabitants. In the 2000s, Telefónica was the leading telephone company in Latin America, with a market share of 23 percent in fixed-line telephony. It was also a leader by number of wireless subscribers and by market share in 2003 in Argentina, Brazil, Chile, Nicaragua, Panama, and Venezuela, second in Colombia, Ecuador, El Salvador, Mexico, and Uruguay, and third in Guatemala.82 Focus on Brazil and Mexico Brazil and Mexico were Telefónica’s main targets in Latin America due to the growth potential of their telecommunications services. While Mexico was not one of Telefónica’s top markets by revenue in 2009, entry into Mexico (and Puerto Rico) was important due to its strong ties with the United States. Telefónica’s managers saw the possibility of becoming one of the carriers of telephone calls between the United States and Mexico (and between the United States and Puerto Rico), especially among the Spanish-speaking community in the United States. In the years to come, Telefónica will continue to look for opportunities to increase its ventures in the United States.83

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Increase in Efficiency To lower operating costs, Telefónica’s managers raised labor productivity and sought synergies. The increase in labor productivity (telephone lines per employee) was astounding, especially in CTC in Chile and Telesp in Brazil. Telesp had one of the highest rates of labor productivity in the world in 2002, 1,314 lines per employee.84 In 1995 Telefónica began to implement projects across its Latin American subsidiaries to find synergies in the following areas: ●

●

●

● ●

●

●

●

Software: Adoption of common information and management systems in Argentina, Chile, and Peru called “Estructura de Operación y Conservación de Planta”; Phone infrastructure: Between 1996 and 2000, Telefónica adopted automatic roaming for all of its Latin American cellular phone subsidiaries;85 Procurement: “Sistemas avanzados de compra” (SAD, advanced systems of acquisitions) was adopted in 1998 to centralize and coordinate the acquisitions policies and to speed up acquisition of products and inputs in Spain and Latin America initially. In 1998 alone, this project led to a 15 percent fall in acquisition expenditures. In 2002, Telefónica began to coordinate certain acquisitions with some of its partners, including BBVA, Repsol-YPF, and Iberia;86 Advertising: The advertising departments centralized acquisition of space in the media, in Spain, Argentina, Chile, and Peru;87 Customer relations: Centralization of customer relations began in 1999 with the creation of a subsidiary called Atento to provide comprehensive telephone services, telephone sales facilities and personnel, rental of call centers, billing et cetera to all of its subsidiaries. Savings totaled over $110 million per year;88 Human resources: Adoption of common human resource operations began in 2001.89 The human resource strategy focused on linking remuneration to employee performance and to the firm’s stock performance in the market. “Programa Corporativo de Jóvenes de Alto Potencial (JAP) identified young employees to cultivate their talent;90 Networking: In 2001, Telefónica embraced an institutional relations policy that tried to cultivate strong ties with the administrative, regulatory, sectoral, and cultural institutions;91 Nonstrategic activities: In 2001 and 2002, Telefónica opened centers in Argentina, Brazil, Chile, and Mexico, as well as in Portugal and Spain, that managed nonstrategic value-added activities (Telefónica

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Gestión de Servicios Compartidos—TGSC or “t-gestiona”) to identify scale economies, promote best practices across subsidiaries and eliminate duplicity of processes;92 and Real estate: A subsidiary created in 2001 sought to maximize the use of the firm’s buildings, selling unused ones.93

Diversification Until 1997, Telefónica’s strategy focused on fixed telephony. However, by the mid-1990s its managers were convinced that technological developments would make possible the provision of television, Internet, and audiovisual services through telephones and decided that Telefónica could achieve great synergies by diversifying upstream into media and Internet content production, and downstream into media distribution. The success of this strategy is questionable, in part because Telefónica did not have advantages in these areas and failed to develop them.94 ●

●

Internet content: Terra Networks, created in 1998, provided Internet content in Portuguese and Spanish. Terra signed agreements with media firms such as Disney, MTV Latino, Reuters, EFE, Bertelsmann, Uproar, Reforma, and Grupo Estado de São Paulo for content.95 One of Telefónica’s biggest investments in this area was the acquisition of Lycos in the United States in 2000. Telefónica’s managers presented this acquisition as a move to court the Latino market of the United States. However, it was mainly intended as a way to “acquire knowledge” in a field where Telefónica’s managers did not have an advantage. This acquisition would bring under Telefónica’s umbrella a group of managers with great expertise in the Internet industry that would guide Telefónica’s expansion in the future. However, this operation was a fiasco, because Lycos’ managers left, and Terra remained Telefónica’s sole site for Internet content.96 Media content: Telefónica’s media subsidiary was called Admira (Telefónica Media before 2002). It was organized in three areas: open television and radio, content (production of programs), and pay television. Since this was also a new area of business for Telefónica, its managers decided to take over some leading firms in 1999 to acquire know-how, including two leading television stations in Argentina, Telefé and Canal Azul (first and third by market share at the time. Canal Azul was sold in 2002), and one radio station, Continental (third by number of listeners). In 2000, Telefónica took over Endemol in The Netherlands, producer of international television hits such as

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●

●

●

●

●

87

“Big Brother” (sold in 2007) and Rodven Records in Venezuela in 2002 (sold in 2003). Telefónica also signed cooperation agreements for audiovisual materials with leading firms.97 Audiovisual systems and services: This area provided telecommunications infrastructure for television channels, including digital television.98 Fiber optics: Telefónica’s subsidiary Emergia commercialized access to Telefónica’s 25,000-km fiber optics network to business clients and wholesalers.99 Services to businesses: Telefónica DataCorp was the subsidiary that provided telecommunications services to large firms.100 Telefónica Data used technology from leading firms such as Cisco, HewlettPackard, IBM, Lucent Technologies, Microsoft, Nortell, SAP, or VeriSign.101 Advertising: Telefónica Publicidad e Información—TPI—produced telephone directories in Latin America since 1999, until Telefónica decided to sell in 2006.102 Customer relationship management: Telefónica’s own customer relations subsidiary, Atento, was also open to firms seeking to outsource their customer relations departments. Some of its customers included BBVA, SCH, Banco Popular, Citibank, Unibanco, Iberia, Varig, Globo, Unilever, Procter & Gamble, Losango, TACA, and AT&T.103 B2B: Katalyx and Adquira, created in 2000, sought to facilitate wholesale electronic commerce among firms and procurement, especially in the fields of transportation, food, supermarkets, construction, hotels, and office supplies. Some of its main customers were Ariba, Descartes Systems Group, IBM, Arthur Andersen, Hewlett Packard, Origin, Grupo Assa, GoCoop, Sol Meliá, Barceló Hoteles, Iberostar, Shell, Exell Logistic, and Quaker.104

Research and Innovation Wireless telephony and broadband technology were Telefónica’s main research areas because its managers believed demand for television, video, music, and multimedia services in general through wireless and Internet (interactive TV) would spike in the future and leading providers would gain huge profits. For wireless service, Telefónica focused on general packet radio service (GPRS), Groupe Spéciale Mobile (GSM), EDGE, MMS, and universal mobile telecommunication system (UMTS) technology and ADSL for broadband. Telefónica opened R&D centers in Brazil and Mexico. Its investments in R&D in 2005 amounted to a222 million in Latin America

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(a533 around the world). Investments in employee training were a70 million (more than 9 million hours).105 Image Promotion Thanks to its rapid expansion in Latin America in the 1990s, the name “Telefónica” became well-known across the region. Telefónica’s managers started a campaign in 1999 to solidify the firm’s reputation through advertising campaigns and sponsorship of cultural and sporting events that promoted a corporate image of an “innovative, technologically advanced, customer friendly and leading” firm.106 Transparency To rid itself of the poor reputation of the formerly state-owned firms it was taking over, Telefónica adopted a disclosure policy and reached out to the press, experts, and opinion leaders to communicate relevant information. Telefónica also publicized the transparency awards received from leading international firms such as Institutional Investor, Reuters, and Thomson Extel Survey and its corporate social responsibility programs, which provided funding and technological support for schools, people with disabilities, nongovernmental organizations, and cultural institutions and events.107 Risk Management To try to overcome country risk, Telefónica adopted two strategies. The first one, active lobbying, sought to ameliorate political risk, such as expropriation or a negative change of the regulatory framework. Telefónica participated actively in discussions on regulation and telecommunications standards with international organizations and state representatives such as the European Commission and the European Parliament of the EU (Telefónica opened a bureau in Brussels for lobbying purposes), as well as international telecommunications organizations such as CEPT, ETSI, EURESCOM, ETNO, EIP, and ITU.108 The second approach focused on how to minimize the impact of economic downturns. In periods of economic uncertainty such as the Argentinean crisis in 2001–2002 and the election of Lula da Silva in Brazil in 2002, Telefónica slowed down its investments and increased liquidity. To reduce the impact of currency devaluations, Telefónica’s subsidiaries raised funds in local currency when possible or borrowed from the parent in euro. To reduce delinquent accounts, Telefónica

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introduced prepaid lines for low-income customers. These accounted for 25 percent of total lines (59 percent in Peru, 29 percent in Argentina, 22 percent in Chile, and 19 percent in Brazil).109 Conclusions This chapter argued that Telefónica made large investments in Latin America since the early 1990s because its managers believed Telefónica had an advantage vis-à-vis other telephone operators, namely, their ability to undertake large projects to upgrade infrastructure, expand the network, and bring service to growing numbers of customers over a short period of time. Beginning in the late 1980s, governments across Latin America began to privatize state-owned telephone firms. In the short run, they were hoping to raise funds for the state’s cash-starved coffers. In the medium run, they were hoping to attract foreign telecommunications firms with the technological and financial resources to overhaul telecommunications services. Telefónica’s managers believed their firm had developed the know-how to undertake these reforms between the 1970s and the 1980s in Spain. The rapid growth of the Spanish economy since the 1980s fueled demand for telecommunications services from businesses, administration, and individuals. The Spanish government mandated Telefónica to raise funds in international financial markets, acquire technology, and train their employees to modernize and expand Spain’s telecommunications services. Telefónica’s managers developed the skills and know-how, embodied in a set of rules that constitute the firms’ corporate organizational culture. These rules helped employees undertake such projects successfully. The EU put pressure on member countries to liberalize telecommunications services in the 1990s (Spain opened up in 1999). The fear of growing competition at home led the Spanish government and Telefónica’s managers to believe that the best defense against a potential loss of market share at home would be expansion abroad. Since European governments were not willing to welcome new telephone operators, Telefónica’s managers turned their eyes to Latin America, where governments across the region were putting their state-owned firms out to tender. Telefónica’s managers believed that Latin American telephone firms were in dire need of a modernization plan like the one they had just implemented in Spain. They also believed that the know-how they developed over the previous decades could be easily applied in Latin America. As a result, they decided to make acquisitions across the region. Their first acquisitions in Chile, Argentina, Peru, and Brazil focused on the improvement of the network for fixed telephony, where they applied Telefónica’s corporate organizational culture. As Internet

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and cellular technology improved, their focus turned to wireless telephony and ADSL broadband Internet access. A close analysis of Telefónica’s ventures in Latin America shows that in 2009 Telefónica was present in almost every country in continental Latin America, diversified its products and services beyond basic telephony, made huge investments in acquisitions and infrastructure upgrades (thus becoming a major economic player in most of the countries where it is present), and was the leading telecommunications firm in Latin America. Its successful expansion strategy generated handsome profits and as a result, the value of Telefónica’s stock increased considerably. 1. Geographic expansion. By 2009, Telefónica was present in every Spanish- and Portuguese-speaking country of Latin America with the exception of Bolivia, Costa Rica, Cuba, Dominican Republic, Honduras, and Paraguay. Brazil was by far its largest market, accounting for 36 percent of Latin American revenue, followed by Venezuela (16 percent), Argentina (11 percent), Chile (8 percent), Peru (7 percent), and Mexico (7 percent). Since Brazil was the fastest growing market in Latin America by number of new lines in the 2000s, Telefónica had ambitious plans for further growth there. In 2009, Telefónica tried unsuccessfully to take over a wireless operator called GVT, but in 2010 purchased Portugal Telecom’s share in Vivo for $7.6 billion (PT was Telefónica’s partner in wireless in Brazil since 2001 with a 10 percent share). The move will give Telefónica 60 percent of Brasilcel (Vivo’s parent) and would allow Telefónica to merge Vivo with Telesp, its fixed-line operator. Telefónica expected to generate a4.3 billion in savings from this merger.110 Telefónica’s managers also had great ambitions to grow in Mexico, where it was the second operator in 2009. However, Mexico was the home market of its main competitor across Latin America, Telmex-América Móvil, which had a strong grip over the market and made Telefónica’s expansion difficult and slow. 2. Focus on individuals over big business. Just as BBVA and SCH emphasized retail banking in Latin America, Telefónica’s emphasis was on individual consumers. Some telephone operators began their expansion abroad by following their large domestic clients, normally large multinational enterprises. Telefónica’s large business clients from Spain did not have operations in Latin America, so when Telefónica devised a strategy for expansion there, the core of its strategy was provision of telecommunications services to individuals, although it also provided telecommunications services to the business sector and other telecommunications wholesalers. 3. Diversification. When Telefónica first invested in Latin America by the turn of the 1990s, its priority was landline telephony. Telfónica digitized

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the network where it had a fixed-line subsidiary (Argentina, Brazil, Chile, and Peru) to improve the quality of voice service and to provide other services such as Internet and television. Its customer base in fixed telephony grew through the 1990s to reach 24 million in 2001, where it remained through the 2000s. Stagnation was partly compensated by the promotion of broadband Internet access, which grew from less than 1 million in 2003 to over 6 million in 2009, but mainly by wireless. The number of cellular clients grew from 11 million in 2001 to 134 million in 2009. Telefónica also diversified into new activities, such as media and provision of customer relations through its call centers. Its managers believed that consumers would like to receive television, video, radio, newspapers, and Internet services through cellular phones and wireless devices in the future, so they decided to invest upstream into media and Internet content. Telefónica operated television and radio stations, as well as firms that produce content for television (such as soap operas and television programs) and Internet. 4. Economic impact in host economies. By 2004, Telefónica had become the main private investor in Latin America, with investments over a64 billion.111 Its economic impact in the region was momentous, accounting for more than 1 percent of GDP in Argentina, Chile, and Peru.112 Telefónica made considerable investments in the modernization of the telecommunications infrastructure. Its network was fully digitized in Chile in 1993, in Argentina in 1998, and in Brazil in 2003. In Peru, 97 percent of the network was digitized. The introduction of fiber optics improved the quality of service, as well as the possibilities for combining telephone, Internet, and audiovisual services.113 Modernization of infrastructure allowed Telefónica to boost productivity. In 2002, CTC in Chile, TASA in Argentina, and Telesp in Brazil had higher productivity (number of lines per employee) than Telefónica’s firm in Spain. While the rate was 457 in Spain, it was 1,315 in Telesp, one of the highest in the world, 1,058 in Chile, and 713 in Argentina.114 5. Leader. In the 2000s, Telefónica had more than 167 million customers in Latin America and was competing with Telmex-América Móvil for leadership. As a result of Telefónica’s investments, the number of fixed lines per 100 inhabitants and the number of cellular phones in the countries where it was present increased significantly since the mid-1990s. Growth was particularly significant in wireless. By the late 2000s some countries in Latin America had more cellular phones per capita than the United States. Part of this growth is explained by the low number of homes with access to a landline in the early 1990s. The great expansion of cellular telephony is also partly explained by the lower cost of taking cellular telephony to

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remote areas, vis-à-vis landlines. Catching-up was Telefónica’s advantage. However, the annual growth in new customers began to slow down by 2007 (from an increase in new lines of 83 percent in 2006 to 22 percent in 2007, 23 percent in 2008, and 18 percent in 2009). As the share of people with a phone reaches or exceeds one hundred in each country, Telefónica will need to find new sources of growth.115 6. Profits. Expansion of the network, increases in the number of customers and efficiency gains due to reduction of the workforce and technological improvements contributed to increase the efficiency of Telefónica’s subsidiaries in Latin America, as measured by number of customers per employee. As a result, Latin America came to generate 30–40 percent of Telefónica’s revenue between 2003 and 2009. Telefónica can still make significant productivity gains because Latin America accounts for over 60 percent of its labor force. Even so, its share of revenue coming from Latin America is likely to fall in the years to come as the Latin American markets become more mature and Telefónica continues to expand into new markets in Europe and Asia. 7. Stock value. Telefónica’s market cap increased by a55.695 billion between December 1991 and December 2005. The shareholder value creation during this period was a12.442 billion. The average shareholder annual return was 16.8 percent, higher than that of IBEX-35 (13.7 percent). Telefónica grew from twelfth firm in IBEX-35 by market value in 1998, to seventh in 2005. Each euro invested in Telefónica’s stock in 1991 was worth a8.84 in 2005 (a 783.9 percent increase. The increase for IBEX-35 was 526.3 percent.) Telefónica’s share of the IBEX-35 varied between 11.2 percent and 27.6 percent for this 14-year period.116 Telefónica’s Latin American expansion gained the approval of the investor community. Table 4.3 shows how it outperformed a selected group of US and Western European telephone operators. The table reveals that firms focused on wireless and those with the greatest exposure in emerging markets (China Mobile and Telefónica) did better, reflecting the greater growth of the telephone industry in those markets. Telefónica also outperformed indicators such as Nasdaq, Dow Jones Industrial Average (DJIA), and S&P 500. Its stock grew especially since 1998, when Telefónica took over Telesp and other wireless firms in Brazil. Telefónica will continue to focus on Brazil and Mexico in the near future. Its managers were more concerned about market access in Latin America in the late 1980s and early 1990s, but since the late 1990s they have been more selective and privileged markets where growth potential was greatest, thus Telefónica’s acquisitions in Brazil in 1998 and Mexico in 2001.

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Table 4.3 Appreciation of stock for a selected group of telephone operators, Dec. 31, 1997–Dec. 31, 2009 Firm China Mobile Telefónica Vodafone Deutsche Telekom AT&T France Télécom Verizon NTT BT Nasdaq Dow Jones S&P 500

Percent gain 453.40 384.17 61.69 −17.79 −23.46 −24.47 −27.19 −54.42 −72.93 44.50 31.85 14.91

Source: NYSE.

Telefónica’s growth in Brazil has been spectacular, but by 2010 Mexico was not even one of its top three markets in Latin America by revenue. Telefónica is likely to follow a strategy that combines organic growth with new acquisitions in both countries. However, Telefónica is also likely to continue its expansion into new markets in Europe and Asia, especially in countries with great growth potential. As a result, the weight of Latin America on revenue and profits is likely to fall moderately.

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CHAPTER 5

Public Utilities The geographical diversification undertaken by the ENDESA group focuses on applying to other markets the experience acquired in Spain in the management of the complete electricity cycle, from production to marketing, including high-voltage distribution and transmission. ENDESA’s experience in transmission networks is being successfully applied to electricity interconnections between different countries. Endesa, Annual Report, 1996, 26 Our experience abroad is based on the know-how and experience gained in the electricity business in Spain and on the moderate assignment of financial resources. This enables us to acquire international experience, and build up a balanced business portfolio, with a minimal increase in IBERDROLA’s financial debt.1 Iberdrola, Annual Report, 1995, 48 One of the factors that fueled the growth and expansion of UNIÓN FENOSA has been the capacity to translate to value the experience and knowledge acquired by its people and teams. This process generated a series of intangible assets, not reflected in the traditional financial statements, which constitute the Intellectual Capital of the Group, on which growth and the creation of value are based. The commitment to knowledge that the firm applies in all of its activities shapes the various horizontal policies of the Group.2 Unión Fenosa, Annual Report, 2000, 34

Introduction Three Spanish utilities, Empresa Nacional de Electricidad, S.A. (Endesa), Iberdrola, and Unión Fenosa (UF), became major players in Latin American electricity markets since the 1990s. The managers of these firms believed

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their knowledge of how to improve infrastructure to generate, transmit, and distribute electricity efficiently gave them an advantage over potential competitors in rapidly growing markets, particularly in Latin America. The process of privatization of public utilities in Spain and gradual liberalization of the electricity markets served as learning ground for their expansion in Latin America. This transition to privatization and competition took place in Spain in a context of sustained economic expansion, which fueled an increase in demand for electricity. This chapter starts with an analysis of how the three firms developed their advantage in Spain since the late 1970s. It pays special attention to the role of the Spanish government, which followed a carrot-and-stick policy to make the three firms competitive. On the one hand, the government pushed the firms to become more efficient by setting production targets and quality standards and by favoring competition within Spain, which resulted in mergers and takeovers and only four utilities left by the 1990s. However, the government set generous electricity rates and provided substantial subsidies to make sure these firms raised enough funds to pay for modernization of infrastructure and expansion. The chapter then goes on to explain how the conditions in the public utility sectors in Latin America in the 1990s were similar to Spain’s; state-owned public utilities were privatized and the state became a mere regulator.3 The analysis of the expansion of the three Spanish utilities in Latin America focuses on several steps: learning about Latin America (before investing in Latin America, the Spanish firms were hired as consultants by Latin American public utilities, thus learning about the markets and the state-owned firms), organization for expansion abroad (including entry strategy), funding (syndicated loans, bonds, capital increases, and government subsidies), post-entry strategy (focus on generation and distribution), and role of alliances (involving financial firms and natural gas producers). This analysis will show how the expansion strategies relied on the firms’ perceived advantage. In 2008, Endesa and Iberdrola had assets worth a20.807 billion in Latin America and the three firms combined had 27,838,000 million customers in distribution.4 Their installed capacity in generation in Latin America in 2009 was 23,974 MW and Endesa was the largest private public utility in Latin America by generation capacity and by number of customers. Between 1996 and 2009, the subsidiaries of the three Spanish firms built new power plants and increased installed capacity by 11,897 MW in Latin America and their power plants under construction in 2010 will expand capacity by an additional 5,288 MW (for a total increase in capacity of 17,185 MW). This expansion of generation capacity was particularly important for Latin America, where demand for electricity was expected to

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grow by 10,000 MW in the second half of the 1990s (expected growth was 7,500 MW in Canada and 15,000 MW in the United States).5 Endesa was created by the Spanish government in 1944 (it was 98 percent state-owned) to help rebuild energy infrastructure, damaged after the Spanish Civil War. Management was subordinated to the Instituto Nacional de Industria (INI), where real power rested. Endesa was the main public utility, but not the only one, because the government granted concessions to smaller regional firms (mainly private firms). A major reform of Spain’s electricity sector began in 1983 to meet criteria for EU membership. This reform affected Endesa in four different ways. First, the government brought together all of the state-owned public utilities under Endesa. Second, Endesa took over the nuclear power programs of the other utilities, which were struggling financially after complying with a government mandate enacted in the late 1960s that required them to build onerous nuclear power plants to reduce Spain’s dependence on crude oil. As a result of these reforms, Endesa grew from a mere electricity wholesaler to a more diversified and integrated energy production company, with interests in coal, oil, and nuclear- and hydro-electric generation. This reorganization did not create a monopoly because at least seven major companies remained in private hands, but Endesa was larger than all of the rest combined. Third, the government wanted to reduce the number of utilities in the market through a process of mergers and acquisition and Endesa began to take over small public utilities. Finally, Endesa also became the main stockholder of Red Eléctrica de España (REE), the regulatory body for the electricity industry in Spain. Endesa’s privatization began in 1988, when the government decided to issue 20 percent of its shares in the Madrid and New York stock exchanges. Full privatization culminated in the late 1990s. In 2008, Endesa was taken over by Italian utility ENEL, which bought 92.06 percent of Endesa’s shares.6 Iberdrola was founded in 1992 as a result of the merger of Hidroeléctrica Ibérica Iberduero and Hidroeléctrica Española (Hidrola). The history of these two companies, themselves the result of several mergers, goes back to the early twentieth century. Hidroeléctrica Ibérica was created in 1901 and Saltos del Duero in 1918 to build and operate hydroelectric power plants. They merged in 1944 to become Iberduero. Hidrola was established in 1907 to provide electricity to Madrid and Valencia. Both remained fairly small until 1957, when they began to build large power plants, including nuclear power plants in the 1970s to comply with a government mandate. Overcapacity and the high costs of the nuclear power plants caused serious economic problems. The government rescue plan allowed Iberduero and Hidrola to transfer some of their less productive assets to Endesa in the late

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1980s. As Endesa began taking over smaller utilities, Hidrola and Iberduero decided to merge, creating Iberdrola, at the time Spain’s largest private utility and Endesa’s main competitor. Iberdrola began diversifying into new activities (engineering, telecommunications, and data management) and new markets (Latin America, Eastern Europe, and Africa) in the early 1990s.7 Unión Eléctrica Fenosa emerged in 1982 from the merger of Unión Eléctrica Madrileña and Fuerzas Eléctricas del Noroeste (Fenosa). Unión Eléctrica Madrileña was itself the result of a merger that involved three small utilities in 1912. After Unión Eléctrica Madrileña opened its first nuclear power plant in 1968 to comply with the government’s nuclear mandate, its debts began to pile up and decided to merge with Fenosa in 1982. In the ten-year period after the merger, Unión Eléctrica Fenosa doubled its revenues and halved its 8,000-member workforce and nearly $6 billion debt. As a result, many firms hired Unión Eléctrica Fenosa for its slim-down know-how, giving UF a new thriving consulting business. Unión Eléctrica Fenosa also began an aggressive process of diversification in the late 1990s into telecommunications. Its consulting business abroad led to the decision to take over public utilities in Latin America and Europe. In 2008, UF was taken over by Gas Natural, which acquired 95.2 percent of its shares. Repsol and La Caixa are the main stockholders in the new Gas Natural Fenosa.8 Development of the Advantage in Spain The three Spanish utilities developed their advantage between the 1970s and the 1990s in Spain in a highly volatile context characterized by economic ups and downs and heavy government involvement in the industry. As economic growth accelerated in the 1960s, they invested heavily to increase production capacity, adopted a strategy of adjusting production to expected demand, and focused more on productivity. The Spanish electricity sector has been primarily in the hands of private firms from its origins, but the government has played an important role, setting production targets since the 1940s, choosing the sources of energy and promoting competition and competitiveness since the 1980s. As a result, the Spanish firms felt comfortable operating in a heavily regulated environment and learned to lobby and negotiate with the government and regulatory agencies. The ability to undertake such processes of modernization and expansion of generation capacity and distribution network, as well as good negotiating skills with regulators, constituted valuable know-how that the managers of Spanish firms regarded as a potential advantage in Latin America. The first electricity ventures in Spain were established in 1873. Most of them were local small private enterprises that operated hydroelectric power

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stations. Some consolidation occurred in the 1920s and early 1930s, along with expansion of the network. Following a major drought in 1944–45 that caused an energy crisis, a group of firms created a joint venture called Unidad Eléctrica S.A. (Unesa) to improve interconnections among the network of each regional operator. The government decided to get involved in generation and transportation of electricity through the creation of a stateowned firm, Endesa, in 1944 and also began to promote the interconnection of the grid of the different private firms through legislation and created the Repartidor Central de Cargas RECA (Central Switch Station) in 1953, which coordinated the process of unification of the electricity grid.9 Annual growth of demand for electricity was 2.6 percent between 1945 and 1955, but grew more than 7.3 percent annually between 1955 and 1975 (as much as 14.2 percent some years). To match demand, Spanish utilities built coal-based, petroleum-based, and nuclear power stations.10 The first “National Energy Plan,” launched in 1969, required utilities to use coal and petroleum, in addition to hydroelectric power, and commissioned them to build nuclear power plants (the first one had already opened in 1968). Utilities had to borrow in international markets to build nuclear power plants when interest rates were rising. The govenrment did not allow them to increase electricity rates. As a result, the Spanish nuclear program was ruinous for Spanish utilities. In 1984, the government and the utilities signed a protocol that allowed them to raise electricity rates. Firms also exchanged facilities to boost each other’s generation capacity. The government nationalized the distribution network and turned management to REE, a joint venture involving Endesa, which held 50 percent of the stock, the utilities, which held 49 percent, and the Spanish state, which held 1 percent.11 A new law in 1987 regulated generation and billing and finally brought financial stability to the electricity system. This law followed a carrot-andstick approach. It set the electricity bill based on the lowest estimated average production cost, in order to stimulate firms to increase productivity, but guaranteed enough revenue to cover, at a minimum, their costs of generation, by creating a pool or fictitious market in which the good performers in a given year sold their excess production and the bad performers bought the additional energy they needed. This law excluded Endesa.12 With their financial situation out of trouble, the electricity firms began to expand outside of their original regional market in Spain (Endesa led the way with several takeovers since 1989). The result was a rapid process of concentration that left only four firms in the Spanish market. Iberdrola emerged in 1991 as a result of a merger prompted by these reforms. In the second half

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of the 1990s, Endesa and Iberdrola alone had a market share of 81 percent in generation and 78 percent in distribution.13 New reforms in 1993 allowed the utilities to exchange facilities and tackled the outstanding debt from the nuclear program. The government and the utilities agreed to a plan that securitized part of their debt ($1.69 billion) and opened two lines of credit, worth $2.54 billion and $1.40 billion. This process helped the Spanish utilities reduce their debt by $5.75 billion. Iberdrola had built the largest number of nuclear power plants and received $4.27 billion, UF received $52 million, and Endesa $34 million.14 To comply with EU regulations, a new reform in 1997 put an end to the electricity pool and reduced the role of the state to that of a mere regulator. The market was now integrated only by two types of firms, producers (electricity generation) and distributors (firms that sell electricity to customers).15 Governments in Latin America and the Caribbean also adopted this legal distinction between generation and distribution. The firm in charge of the grid, REE, was split into two new institutions, the Market Operator (in charge of REE’s finances), and the Systems Operator (in charge of infrastructure). No stockholder could own more than 10 percent of REE’s stock to guarantee independence and openness to new entrants.16 The new law also allowed the government to compensate utilities for the so-called stranded costs, also called “costs of transition to competition” and, maliciously, “inefficiency costs” (the EU allowed member states to negotiate stranded costs with their utilities prior to liberalization). The stranded costs included “sunk costs” and “regulatory expenses.” “Sunk costs” were the costs of infrastructure that becomes underutilized as a result of lower demand for a firm’s electricity due to the entry of new utilities offering electricity at a lower price. “Regulatory expenses” are deferred costs, the costs of the nuclear program, and the costs of using more expensive domestic sources, such as coal and gas, as required by law.17 The Spanish government and the firms settled for $13.567 billion, which gave them fresh funds to invest in new ventures, including some in Latin America.18 In the 1990s, the Spanish utilities found themselves in a rather positive situation. First, they had a very diversified base of energy sources. While 81 percent of electricity was generated by hydroelectric power plants in 1929, in 1996 only 36 percent came from hydroelectric plants, 47 percent from coal, and 16 percent from nuclear power stations. The promotion of natural gas for combined cycle power plants and reweable sources, mainly wind and solar, contributed to further diversification in the 2000s.19 Second, the policies adopted by the Spanish government to stimulate efficiency, coupled with the prospects of the unification of the European energy markets, forced firms to upgrade infrastructure in order to increase production and

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lower costs. Finally, the firms managed to add capacity to match growing demand. The experience resulting from the implementation of programs to achieve modernization, diversification, and efficiency in the heavily regulated public utility industry (thus involving close contact with regulatory agencies and governments for lobbying and negotiation) resulted in valueable know-how (their main advantage), which guided these firms’ expansion outside of Spain.20 Electricity Systems in Latin America Governments across Latin America and the Caribbean implemented important reforms in their public utility sectors in the 1990s (although Chile began as early as the 1970s) that were similar to those implemented in Spain. The reforms comprised privatization of state-owned enterprises and liberalization of generation, transmission, and distribution of electricity. The main goals of the reforms were to attract private investment, improve energy efficiency and lower costs and prices, generate government revenues, improve quality of service, achieve universal service, reduce environmental impacts, and improve the public goods in general. Regulatory reform preceded privatization.21 Ronald Fischer and Pablo Serra identified three waves of reforms, 1970s, early 1990s, and late 1990s.22 The first wave took place only in Chile and the main goal was to introduce competition. The market for large customers was completely liberalized, requiring power generation companies, on the one hand, and large consumers (firms) and distribution companies, on the other, to negotiate long-term supply contracts. In retail (individuals and small businesses), distributors had to buy energy from the producers at a regulated price, but the final price they charged to their customers was open to competition (Spain also adopted this model in the 1980s). The Chilean government established clear guidelines for access to the system, generators and transmission companies were free to negotiate transmission fees and the government did not set production targets, leaving production output to the market. Generation more than doubled between 1990 and 1998, energy losses fell by more than half, to 8.3 percent in 1997, and labor productivity grew. The price of electricity for residential customers fell by 17 percent between 1987 and 1998 and by 37.4 percent for industrial and large-use consumers. The rates of return for the firms grew from 10.4 percent to 35 percent.23 With the exception of Brazil, Colombia, and Costa Rica, in the 1980s the state-owned power companies were inefficient, overstaffed, and unreliable, electricity losses were high, collections were poor, and returns on assets

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were low. A serious financial crisis that affected public utilities in the 1980s triggered the wave of reforms of the 1990s.24 Based on the Chilean model, the second wave of reforms comprised Argentina, which implemented new legislation in 1992, Peru in 1993, and Bolivia and Colombia in 1994. Their main goal was to attract private investment and improve the technical and financial performance of the utilities. Regulators introduced competition in generation, and established fixed transmission fees. Public utilities were unbundled, that is they were not allowed to operate in generation, transmission, and distribution at the same time. Some countries created a system by which the distribution companies put their energy requirements out to tender among producers. Regulations also addressed performance, setting fines for poor service.25 The third wave involved Central America (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama), Brazil, and Venezuela in 1997. The government introduced retail competition, including creation of a new player, the energy broker. The broker purchased electricity from the generator and sold it to its customers, paying a fee to the transmission and distribution companies for use of infrastructure. Liberalization of the spot market allowed the generators to make price and quantity bids to the pool operators. A very important initiative launched at the time sought to integrate the Central American electricity markets by developing a regional electricity grid called “Sistema de Interconexión Eléctrica para los Países de América Central” (SIEPAC), whose construction began in 2007.26 In general, the three waves of reforms unbundled vertically integrated energy firms (they used to provide full service from generation to distribution) and created a competitive market on both ends. Governments confined themselves to the role of regulators and created agencies to monitor compliance with the rules. Ahmad Ghamarian believes the reforms reduced losses, improved efficiency, increased private investment and generation capacity, and expanded service to new customers. However, Ronald Fischer and Pablo Serra claim the reforms only resulted in lower electricity prices in countries that introduced competition, but not where monopolies persisted, because efficiency gains accrued to the utilities in the form of “monopoly rents.” They also questioned the independence of regulators in some countries.27 Learning in Latin America The three Spanish utilities began their Latin American expansion very cautiously. Iberdrola and UF operated as consultants, providing management know-how before they made large investments. Iberdrola and Endesa took

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over small firms at first and as these ventures proved successful, they made larger investments. The consulting experience in Latin America allowed firms to learn about the state of Latin American utilities and test the applicability of their know-how. UF was a pioneer. The success of the merger between Unión Eléctrica and Fenosa in 1982 sparked the interest of international utilities. Its first consulting project outside of Spain came from Usinas y Transmisiones Eléctricas (UTE) in Uruguay in 1988, and many more followed, including Electricidade de Portugal (EDP), Edesa, Edeersa and Edelar in Argentina, Luz y Fuerza del Centro in Mexico, ENEL in Nicaragua, Coelce in Brazil, Edesal in Peru, ANDE in Paraguay, Agua y Alcantarillado de Bogotá in Colombia, Instituto Costarricense de Acueductos y Alcantarillados in Costa Rica, and Unión Eléctrica de Cuba. UF’s consulting business emphasized information systems, processes, telecommunications, organization, human resources, business redesign, engineering, and global services to electric enterprises.28 Iberdrola began to work as a consultant in Latin America in 1995, thanks to a contract awarded by the Inter-American Development Bank to study the regionalization of electricity distribution in Honduras. Several more contracts from public utilities followed, including reports on how to reform distribution firms in Ecuador, optimization of the distribution network of a power company in Medellín (Colombia), improvement of the electricity grid in Chile and Argentina, decentralization of the Brazilian electricity industry, reduction of energy losses for Emelec in Ecuador, and elaboration of a complete energy management program for the government of Costa Rica. Iberdrola was also hired to provide engineering work for an electric facility on the Duqueco River in Chile, the Angra nuclear power plant in Brazil, ELENIC in Nicaragua, and modernization of Nuevitas thermal power station in Cuba.29 The success of these consulting experiences in Latin America led Iberdrola’s and UF’s managers to conclude that the know-how they accrued in Spain could be translated successfully to Latin America to modernize the public utilities and meet growing demand for electricity. Therefore, they decided to take over some of the state-owned firms being privatized, so that they could have control over management. Iberdrola made its first Latin American acquisition in Argentina in 1992, but in the long run, its expansion focused on generation in northeast Brazil since 1997 and Mexico since 1999 (see Table 5.1).30 When Iberdrola’s Chairman, Íñigo de Oriol, discussed this aggressive expansion program in 1997, he argued: “the expansion in new markets, in other business areas, and in other countries is vital if Iberdrola is to grow profitably in the future. This is a strategy designed to take the maximum advantage of our competitive advantages and to transfer

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the experience, management, and technological capacity of our Group to markets that have great growth potential, with the goal of getting the return that we are looking for”.31 The bulk of Iberdrola’s acquisitions in Latin America took place between 1995 and 2002, focusing on organic growth after that. However, outside of Latin America, Iberdrola continued to expand into new markets through major takeovers such as Scottish Power in the United Kingdom in 2006 and Energy East in the United States in 2007.32 UF made its first acquisitions in Argentina in 1995, but since 1998 decided to focus on Central America and the Caribbean, mainly in generation and distribution (see Table 5.1), to facilitate coordination and synergies. Most of its acquisitions took place between 1995 and 2000. UF’s Vice Chairman, Victoriano Reinoso, explained that UF’s strategy in Latin America relied on the export of know-how from Spain: “to improve management it is

Table 5.1

Main acquisitions of Spanish utilities in Latin America

Iberdrola Year

Country

Firm

Colombia 1992 Argentina

Aguas Santa Marta Gas Litoral G.T. Güemes 1995 Bolivia Electropaz Elfeo 1996 Bolivia Cadeb Edeser Chile Inversora Tocopilla Ltda. Inversora Eléctrica Andina 1997 Brazil CEG Coelba Cosern Ementhal Guaraniana Inversora Brasileira Borgogna Chile EE Colbún-Machicura Electropacífico Colombia Gas Natural ESP 1998 Brazil Telesp CRT Tele Leste Celular Colombia Gasoriente Transcogas, S.A. Guatemala EEGSA 1999 Mexico Iberdrola Energía de Monterrey Uruguay Aguas de Maldonado

Activity Water Natural Gas distribution Generation Distribution Distribution Distribution Distribution Generation Investment company Gas distribution Distribution Distribution Investment company Investment company Investment company Generation Investment company Gas distribution Fixed-line telephony Fixed-line telephones Cellular telephony Gas distribution Gas distribution Distribution Generation Water distribution

percent Stake

100.00 100.00 12.75 25.00 9.87 24.39 21.44 49.00 39.00 3.50 19.12 51.00 1.34 2.25 62.00

39.20 49.00 (continued)

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105 Table 5.1 Continued 2000 Brazil Chile Mexico 2001 Mexico Peru 2002 Mexico 2007 Guatemala

Celpe ESSAL Altamira power station Enertek Talara Gas Natural Mexico Río Bobos power plant

Distribution Water distribution Generation Generation Water distribution Gas distribution Generation, Hydraulic

51.00 100.00 13.25

Source: Iberdrola’s annual reports.

Unión Fenosa Year

Country

Firm

1995 Argentina 1996 Argentina 1997 Argentina Bolivia 1998 Panama

EDELAR* EDESA* Emdersa* Transportadora de Energía** EDECHI EDEMET 1999 Dominican EDENORTE*** Republic EDESUR*** Guatemala DEOCSA DEORSA Mexico G.A.P.**** Hermosillo Uruguay Conecta 2000 Colombia ELECTROCARIBE ELECTROCOSTA EPSA Costa Rica Dominican Republic Mexico Nicaragua Uruguay 2007 Colombia

La Joya Palamara La Vega Naco-Nogales Tuxpan DISNORTE DISSUR Conecta***** Central Hidráulica de Hidroprado

Activity Distribution Distribution Distribution Transmission Distribution Distribution Distribution Distribution Distribution Distribution Airport management Generation Distribution of gas Distribution and commercialization Distribution and commercialization Generation, distribution, and commercialization Generation Generation Generation Generation Generation Distribution Distribution Transportation of natural gas and liquified gas Hydroelectric power plant

percent Stake 10.00 25.00 25.00 37.72 51.00 51.00 49.95 49.95 79.99 79.99 30.25 39.70 69.20 70.30 64.20 100.00 100.00 100.00 100.00 100.00 95.00 95.00 39.70 100.00

* Sold in 1999. ** Sold in 2002. *** Sold in 2003. **** Sold in 2006. ***** Sold in 2004. Source: Unión Fenosa’s annual reports.

(continued)

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Table 5.1 Continued Endesa Year

Country

1992 Argentina Argentina 1993 Venezuela

Firm

Activity

Share

EDENOR Yacilec Elecar

Distribution 9.70 Transmission 22.20 Generation, transmission and 7.86 distribution 1994 Peru Cía. Peruana de Distribution Electricidad Distrilima Distribution 1995 Dominican Republic CEPM Generation, transmission and 40.00 distribution 1996 Argentina Dock Sud Generation 57.10 Brazil Cerj Generation, transmission and 22.48 distribution Peru ETEVENSA Generation EEP Generation 1997 Chile Enersis Generation and distribution 29.20 Colombia Codensa Generation 22.40 Emgesa Distribution 22.40 1998 Brazil Coelce Distribution 41.00 Brazil-Argentina CIEN Transmission (interconnection line) 55.00 2000 Chile Chispas Holding 99.80 Smartcom Cellular telephony 100.00 2001 Panama EPR Transmission 14.29 2006 Colombia Termocartagena Generation Source: Endesa’s annual reports.

essential to undertake a transfer of knowledge and experiences. It is necessary to enrich the capacity of the people and, with the experience accumulated in other projects, to take them to the belief that they have to break routines and that they have to be open to change. ( . . . ) This is the orientation that Unión Fenosa wanted to give initially to its international activity: a consulting job to modernize management and to share knowledge with professionals from other countries. The solutions that we proposed were the same that already existed in our own firm, and they could be appropriately tested and experimented by the professionals of the firms for which we worked.”33 Endesa’s Latin American takeovers took place between 1992 and 2001, focusing on organic growth since then. The acquisition of Enersis in Chile in 1997 was particularly important, because Enersis already had an important number of subsidiaries across Latin America (see Table 5.1).34Endesa’s managers knew Enersis well before this acquisition because Enersis had been Endesa’s partner in some consortia that took over several Latin American utilities, including Cerj and Coelce in Brazil, Edelnor in Peru, and Codensa

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and Emgesa in Colombia. Endesa’s takeover of Enersis generated serious debates in the Chilean congress, but after it was completed, Endesa brought all of its Latin American subsidiaries under Enersis and organized further expansion in Latin America from Chile.35 Endesa’s CEO, Rafael Miranda, stated that the presence of Endesa abroad is “a purely entrepreneurial decision to search for new business opportunities, in which Endesa and its group of firms could capture the benefits of all of the knowledge that we had accumulated since our creation in 1944, the availability of experienced human resources that could apply adequately and efficiently their skills, as well as financial resources that could be invested profitably in countries that were going through deep processes of opening and sociopolitical change.”36 The resources for these takeovers came largely from the firms’ own resources, sometimes raised in the stock exchange through capital increases and conversion of debt to stocks, from syndicated banking loans, involving BBVA and SCH as well as large international banks, and from the sale of nonstrategic assets. For example, in 2002, Iberdrola received a syndicated loan of $1.8 billion from a group of 27 financial institutions to finance payment of its debt that was due in 2002. An additional $2.1 billion came from the sale of nonstrategic assets in Latin America alone, such as real estate, water, and natural gas in Brazil and Colombia (sold to Repsol-YPF’s Gas Natural).37 In 2002, 62 percent of Endesa’s debt was financed with funds raised from the capital markets and 38 percent from syndicated bank loans.38 Another important source of financial support came from multilateral banks. The Inter-American Development Bank, the United Nations (UN), and the European Bank for Reconstruction and Development were willing to finance improvements of the electricity grid, expansion of the network, and construction of new power plants.39 Alliances played a very important role in the expansion of the three utilities in Latin America. BBVA and SCH normally provided financial support, as well as Repsol-YPF, which allowed Iberdrola to offer bonds redeemable for Repsol-YPF’s stocks in 2001. In 2002, Repsol-YPF acquired some of Iberdrola’s natural gas assets in Latin America when Iberdrola was raising funds to pay off some of its debt.40 In 1998, Iberdrola created an alliance with EDP to coordinate their ventures in Portugal, Spain, and Latin America and submitted a joint bid for the privatization of EEGSA in Guatemala. Iberdrola partnered with Telefónica to get into the telcommunications industry in Brazil when Telebrás was privatized.41 Reorganization of Subsidiaries As the Spanish public utilities took over Latin American firms, they translated their organizational framework from Spain to their new subsidiaries.

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A set of rules constituted this corporate culture and embodied the knowhow developed in Spain. Productivity Gains The three firms increased productivity by adopting a series of measures that comprised expansion of the customer base, increases in electricity output and distribution, adoption of best practices such as human resource management and customer relations models and information systems and synergies in procurement, financial resources, and technology by coordinating the activities of their Latin American subsidiaries.42 After Endesa’s takeover of Enersis, labor productivity in generation, measured as giga watt hour (GWh) per employee, rose by 22 percent from 21.7 in 1998 to 26.4 in 2001, and measured as MW per employee, rose by 57 percent from 6.9 to 10.8. In distribution, the number of customers per employee rose 73 percent from 798 to 1,379. Operating costs in generation fell by 75 percent from $13.4 in 1998 to $3.4 in 2002 and by 7 percent in distribution, from $16.2/MWh to $15.0.43 UF increased its productivity as measured by GWh/employee by 72 percent between 2004 and 2008 in Colombia, from 4.80 to 8.28, and by 51 percent in Central America, from 1.62 to 2.44.44 Iberdrola increased labor productivity in generation as measured by GWh per employee by 731 percent from 1.86 in 2002 to 13.6 in 2009, and by 27 percent in distribution, from 8.9 to 11.3.45 Reduction of Network Electricity Losses The three firms reduced network losses in distribution by installing meters that prevent electricity theft and by improving the grid. After the acquisition of Enersis, Endesa reduced power losses by 13.3 percent between 1998 and 1999.46 Distribution losses across Latin America fell by 5.9 percent between 2002 and 2007, from 11.9 percent to 11.2 percent. Iberdrola’s network losses fell between 2005 and 2008 by 11 percent in Brazil from 14.85 to 13.24; by 17.5 percent in Guatemala, from 9.42 to 7.77; and by 17.36 percent in Bolivia, from 9.68 to 8.0.47 UF’s losses fell by 43 percent between 2000 and 2008 in Colombia, from 26.6 percent to 15.1 percent; and by 30 percent in Central America, from 22.8 percent to 16 percent.48 Increase in Generation of Electricity Generation and distribution of electricity were the core activities of Spanish utilities in Latin America. One of the reasons why governments in Latin

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America privatized the state-owned public utilities was their inability to raise the funds to undertake the expansion of the network that was necessary to meet the expected growth in demand in the second half of the 1990s, which was estimated at 10,000 MW for that period. New entrants were expected to add considerably to the existing installed capacity, in order to raise electricity supply, and prevent power outages and shortages.49 Spanish firms increased generation capacity mainly by building combined cycle gas-based power plants (CCGT) and hydroelectric power plants. Of the total new capacity they built in Latin America, 63 percent was in Mexico, followed by Chile, 13 percent, and Brazil, 9 percent (see Table 5.2). Chile and Argentina were Endesa’s main markets in generation, partly due to the acquisition of Enersis in Chile, but Endesa was also an important player in Colombia and Peru. However, after the initial investments to gain entry into each market, the main focus of Endesa’s investments to add new generation capacity was Chile (see Table 5.2). Mexico was the main market for Iberdrola and UF. Both were attracted in 1999 by the decision of the government to grant concessions for public utilities to build and operate new power plants so as to keep up with growing demand for electricity. The government provided security by having the Mexican Federal Commission for Electricity sign 25-year agreements with utilities to buy the electricity generated by these new plants. Iberdrola was the largest private producer of electricity in Mexico through the 2000s. Iberdrola and UF also signed agreements with large industrial groups and UF even reached a cross-border agreement with El Paso Energy Marketing Company by which the Texan company provided natural gas for UF’s combined cycle power plants in Naco-Nogales and Hermosillo through the Wilcox pipeline across the Mexico-Arizona border and bought back part of the electricity produced by UF for sale in the United States.50 Distribution of Electricity Distribution was the other core business area of Spanish public utilities in Latin America, along with generation of electricity. Distribution involves getting the electricity generated by the power plants to the customers. In 2009, the three utilities had 27,838,000 million customers in Latin America (Endesa had 12.4 million, Iberdrola had 9.3 million, and UF 5 million).51 The strategy of the Spanish utilities was to reach a growing number of customers (businesses, public administration, and residential); increase productivity, defined as the amount of money billed per customer; focus on areas with the greatest growth potential; and reduce losses (from theft of electricity and due to the poor infrastructure of the transport network).52

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110 Table 5.2 Generation capacity added by Spanish utilities in Latin America until 2009, in MWa Country

Endesa

Argentina

CCGT (775) H (8) CCGT (349)

Brazil

Chile

Colombia

Iberdrola

Unión Fenosa

C (93) CCGT (203) H (456) H (710)* H (120)

CCGT (362) H (731) OCG (248) W (78) C(370)* H (2,355)* OCG (66) H (50)

Costa Rica Dominican Rep Guatemala Mexico

Panama Peru Total Capacity including new projects

CCGT (5,292) CG (37) W (160) W (228)* CCGT (361) OCG (200) 3,228 5,953

Total

Share

783

6.5

1,101

9.2

H (60)* W (500)*

1,539

13.4

H (165)*

116

1

H (100) H (50)* F (198) (120)* CCGT (2,000) W (730)*

100

0.8

198 0 7,489

1.7 0 62.6

H (10)

10 561

0.1 4.7

2,308 3,933

11,897 17,185

100.0

6,361 7,299

Abbreviations: C, coal; CCGT, combined cycle gas turbine; CG, cogeneration; F, fuel oil; H, hydroelectric; OCG, open cycle gas; W, wind *Power plants projected in 2010. Capacity not included in totals. a This table only includes the generation capacity of the new plants built by Spanish utilities. It excludes plants built before they took over.

Type CCGT H OCG W F C CG Total

MW

Share

9,342 1,475 514 238 198 93 37 11,897

78.52 12.40 4.32 2.00 1.66 0.78 0.31 100.00

Source: annual reports.

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Electricity theft was one of the most serious challenges the three firms faced in Latin America, due in part to the inability to fight this problem in the court systems, where it was seldom regarded as a crime. UF launched an education campaign in the Dominican Republic in 2002 to teach people that stealing electricity is illegal but gave up its distribution business in 2003, handing it over to the state. Since then UF only operates in generation in the Dominican Republic. Endesa began to install new meters in Rio de Janeiro in 2005 that made electricity theft more difficult, reducing losses by more than 50 percent.53 Transmission of Electricity The Spanish utilities hardly involved themselves in transmission of electricity. Transmission involves transporting electricity from the power plants to customers and concerns mainly building and operating the electricity grid. Endesa was the firm that developed the largest ventures. Proyecto Cien (Companhía de Interconexão Energética) was a high-voltage network to transport energy between Brazil and Argentina, with a capacity of 2,000 MW. Endesa won the public tender for the construction of this project in 1998 and built two 500 KV high-voltage lines with a power of 1,000 MW that stretched for over 500 km each, between 1998 and 2002.54 Endesa was also one of the utilities that participated in the construction of the SIEPAC network, 1,802 km of electric lines linking up Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama to create a Central American wholesale electricity market. This single project, launched in 2007, involved investments worth $370 million. Endesa received a loan from the InterAmerican Development Bank (IDB) worth $240 million.55 UF only had a venture in transmission between 1997 and 2002 in Bolivia called Empresa Transportadora de Electricidad (TDE), where UF was the leading technological partner, but decided to sell to concentrate in generation and distribution only in the Caribbean region.56 Role of Alliances Allies played a critical role in the expansion of the three Spanish utilities in Latin America. They had four types of partners. In most of the operations involving core activites, there was a financial partner (often BBVA or SCH), a local firm, and a producer of natural gas. When diversifying into noncore activities, such as telecommunications, they also sought another partner from that industry. The financial partner provided funds for acquisitions and for development of new infrastructure, such as building new power plants. The local partner contributed local know-how and access to the local

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business and political communities. The producer of natural gas guaranteed a steady supply of natural gas to power the CCGTs and in turn benefitted from securing a market for gas. And in noncore activities, the partner from the new industry provided managerial know-how. Iberdrola had three important allies in its Latin American expansion, Electricidade de Portugal (EDP), Gas Natural (Repsol-YPF’s natural gas subsidiary), and Telefónica. Iberdrola signed an important alliance with EDP in 1998 to coordinate their expansion in Portugal and Spain, as well as Latin America. This agreement involved acquisition of stock (Iberdrola acquired 4 percent of EDP’s stock in 1999 and 4 percent of EDP’s natural gas subsidiary, Galp, in 2000, becoming the leading private stockholder).57 Gas Natural was Iberdrola’s main supplier of natural gas. Iberdrola and Gas Natural took over Gas Natural ESP of Bogotá (Colombia), and Companhía Estadual de Gas (CEG) of Río de Janeiro in 1997, and Gasoriente, also in Colombia, in 1998. They also received a monopoly concession to distribute gas in Cundiboyacá, Colombia. In 2002, Iberdrola sold its share in the Colombian and Brazilian ventures to Gas Natural who, in turn, sold Gas Natural Mexico to Iberdrola.58 When Iberdrola’s managers decided to diversify into telecommunications, Telefónica was its partner. Telefónica brought Iberdrola into the management of its subsidiary CRT in Brazil in 1998 and both participated in the privatization process of Telesp and Tele Leste Celular, also in Brazil.59 In 1999, Iberdrola also signed an alliance with Proxicom of the United States to cooperate in the development of Internet services in Latin America.60 UF’s managers decided in 1998 to strengthen the firm’s internationalization strategy by signing alliances with important international firms. National Power of the United Kingdom took over 25 percent of Unión Fenosa Generación and provided technological support and know-how in generation. UF became the leading partner in the joint ventures that both firms undertook in Latin America, while National Power was the leader in other regions of the world, with UF as its partner.61 UF also sought alliances to sell its management systems for public utitlities. CSC would market them in the US market and IBM in the rest of the world.62 UF was also part of a consortium of firms that took over management of 12 airports in Mexico in 1999. Its partners included two Spanish firms, Aena (an airport management firm), and Dragados y Construcciones (construction), and Grupo Empresarial Los Ángeles from Mexico.63 Diversification into Noncore Activities The three Spanish utilities diversified into noncore areas, mainly natural gas distribution, water management, telecommunications, and waste

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management. Endesa expanded into waste management and water management. In the water business, its main subsidiaries were Aguas Provinciales de Santa Fe (Argentina), Aguas de la Costa (Uruguay), Campo Grande (Brazil), and Empresa Mixta de Aguas de La Habana (Cuba), serving a total of 3.400 million inhabitants. Its subsidiary Desalant, which specialized in the desalinization of sea water, won the concession to build a desalinization plant in Antofagasta (Chile), for urban water supply. Endesa also operated a cellular telephony business in Chile called Smartcom betwen 2000 and 2005 (Telefónica was not involved in this venture). Smartcom had 947,542 customers in 2002 (a market share of 15.4 percent). Endesa also developed its own business-to-business venture in e-commerce in 2000 called Endesa Marketplace for transactions among suppliers, focused mainly on Argentina, Brazil, Chile, Colombia, Peru, and Spain. Finally, Endesa created a subsidiary called Endesa Servicios in Argentina in 2000 to sell its management know-how, systems, and solutions in Latin America, especially in electricity, gas, and water. Some of its customers included the Comisión Federal de Electricidad (CFE) of Mexico to develop a communication system through electric cable and Paraguay’s state-owned Administración Nacional de Electricidad (ANDE).64 Iberdrola began diversifying into new activities in Latin America in 1998 thanks to three joint ventures intended to help Telefónica expand in Brazil, Companhía Riograndense de Telecomunicações (CRT), Tele Leste Celular, and Telesp. In 2001, Telefónica bought Iberdrola’s stakes in the three firms, paying with Telefónica’s stock.65 Iberdrola also made investments in water treatment and distribution, e-commerce, and in natural gas, in partnernship with Repsol-YPF’s Gas Natural, as discussed above.66 UF began diversifying away from electricity in Latin America in 1996, by making investments in telecommunications, technology, environmental protection, airport management (as discussed above), and natural gas distribution.67 Between 1999 and 2004 UF operated a subsidiary in Uruguay involved in gas distribution and between 1999 and 2006 it was part of a consortium that operated 12 airports in Mexico.68 However, noncore activities remained marginal in general and were sold when the utilities needed to raise funds to grow in their core businesses of generation or distribution of electricity. Risk Management The three Spanish utilities followed a series of steps to reduce risk. They made their largest investments in the fastest-growing economies, mainly Mexico, Chile, and Brazil, indexed their flows to foreign currencies to protect themselves from currency devaluation, reacted to periodic economic

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crises by increasing solvency, incorporated local partners in each country to smooth relations with the government and the business community (see section on the role of alliances), and sought credit from multilateral financial institutions, mainly the Inter-American Development Bank, the European Bank of Reconstruction and Development, and the UN’s International Financial Corporation. The three firms focused mainly on the countries with the greatest growth potential and stable political systems. Of the new generation capacity, 85 percent was added in Brazil, Chile, and Mexico (see Table 5.2). Iberdrola focused on Brazil and mainly Mexico, especially the industrialized regions of the north, becoming the largest private utility in generation in the country. The government of Mexico offered 25-year contracts to buy the electricity produced by new power plants. To secure natural gas for these plants, Iberdrola signed long-term agreements with Pemex in Mexico and Petrobras in Brazil. UF concentrated its investments in Central America and the Caribbean region where there was less competition from other utilities. Its managers also wanted to keep their subsidiaries within a small geographic area to develop synergies among them. Mexico concentrated almost two-thirds of its increases in generation capacity in Latin America. Endesa concentrated almost half of its investments in new generation capacity in Chile, where its main Latin American market was since taking over Enersis.69 Currency devaluations could have serious consequences. Endesa’s operating income in Latin America increased by 25 percent in local currency in 2002, but fell by 10.9 percent when translated to euro due to currency fluctuations. This translated into a loss of $580.70 Endesa’s foreign currency hedging policy was also based on cash flows and was intended to maitain a balance between flows indexed to foreign currencies and asset and liability levels (measured in the same currency). Each subsidiary balanced the currency of its cash flow with its debts. In general, in periods of economic crisis, Endesa’s managers increased the amount of debt denominated in euros and dollars. Endesa maitained dollar-denominated liabilities at consolidated level, adjusted for expected cash flows in dollars. For example, in 1999, 50 percent of Endesa’s Latin American debts were denominated in euro, 33 percent in dollars, 13 percent in Chilean pesos, and 4 percent in other currencies. Following the 2001–2002 slowdown in Latin America, the amount of debt denominated in euro grew to 59 percent in 2002, 33 percent was denominated in dollars, 3 percent in Chilean pesos, and 5 percent in other currencies. However, after the international economic crisis in 2007–2008, when the terms of maturity allowed in Argentina, financing in dollars was replaced with local currency debt.71

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Spanish utilities reacted to economic crises by increasing liquidity in Latin America. As a response to the Argentinean crisis of 2001, Endesa launched a plan in 2002 that comprised a capital increase of $2 billion, a syndicated loan of $2.3 billion to refinance its debt, a plan of selective disinvestments from nonstrategic ventures that generated $1 billion, a reduction of $3.490 billion in the amount earmarked for new investments, and a plan to increase efficiency. In addition, Endesa set aside $1.236 billion in 2002 to improve the finances of its Argentinean subsidiary and adjusted the book value of its Latin American subsidiaries to their market value. This plan reduced Endesa’s profits in 2002 by 14 percent over the previous year.72 In 2008, Endesa Chile prepaid $200 million on a revolving credit line, leaving these funds available for future use, issued bonds worth $450 million (but did not have to draw on them), contracted a $400million bank loan over six years (drawing $200 million and leaving the rest as a revolving loan), and an additional $234 million in bank loans to cover its financing needs for the year, and issued a 21-year bond in the local market that raised $360 million. Its subsidiaries in other countries carried out similar operations to gain solvency, including refinancing, new issues, and hedging worth $2.209 billion ($125 million in Argentina, $594 million in Brazil, $793 million in Colombia, and $697 million in Peru).73 The managers of the Spanish firms believed that the incorporation of multilateral funding agencies into their projects provided important political and financial backing, and guaranteed a high degree of transparency. The IDB granted loans for projects conducted by the three utilities. Endesa received $250 million for the SIEPAC project. Iberdrola received a loan of $200 million for construction of a combined-cycle power station in Pernambuco (Brazil) and also received funds to assess the regionalization of electricity distribution in Honduras. UF received a loan of $188 million in 2002 to improve its distribution networks in Central America and the Caribbean. In 1997, Iberdrola participated in a project sponsored by the EU to provide technical support for the electricity industry of Nicaragua and another one with Empresas Públicas de Medellín (Colombia) to develop an electricity management optimization program.74 Environmental Protection and Corporate Social Responsibility The three utilities developed strategies to reduce the environmental impact of their activities. The new generation facilities they built used mainly CCGTs. They also built hydroelectric plants and wind farms. All of these facilities generated fewer CO2 emissions than existing plants. In addition, the three firms launched programs (called “programas de gestión

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medioambiental”) to reduce consumption of energy, water, and other inputs and reduce waste and emissions. They also sought environmental ISO certification for their Latin American subsidiaries. In 2009, Iberdrola claimed to be the leading wind power utility in the world and the only utility to be included in the Dow Jones Sustainability Index for ten consecutive years. The three utilities also subscribed the United Nations Global Compact on corporate social responsibility, committing themselves to respect human rights, international labor standards, and protection of the environment. They funded cultural, educational, and social programs led by civil society groups in their Latin American markets.75 Conclusions The expansion in Latin America of the three Spanish public utilities analyzed in this chapter, Endesa, Iberdrola, and UF, was led by the belief of their managers that they had an advantage over their competitors, their know-how. This know-how was developed in Spain primarily between the late 1970s and mid-1990s, when the Spanish market experienced dramatic changes led by economic growth and growing demand for electricity, and a process of liberalization and growing competition among existing utilities that resulted in a series of mergers and takeovers among public utilities. The utilities had to invest heavily in new generation facilities to increase electricity production and had to improve the transmission network to deliver electricity to a growing number of customers. Most governments across Latin America introduced reforms in their energy sectors (including privatization of the state-owned utilities) in the 1990s to attract firms with the know-how and the financial and technological capacity to make heavy investments in generation, keep up with growing demand, and prevent power shortages. The managers of the Spanish utilities justified their investments in Latin America in the 1990s and 2000s on the belief that these conditions in Latin America were optimal for their firms to thrive. The remainder of this chapter will discuss a few highlights of the investments made by Endesa, Iberdrola, and UF in Latin America: their largest investments took place in the markets with the greatest growth potential, especially Brazil, Chile, and Mexico; they focused on generation and distribution; their generation facilities used cleaner sources of electricity, mainly natural gas, water and wind; although electricity generation and distribution was the core of their strategy, they also diversified into other activities, such as gas and water distribution; and their strategy was well received by investors in the stock exchange, resulting in significant gains in the value of their stock.

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1. Geographic expansion. As shown in Table 5.2, the three utilities built 85 percent of their new generation facilities in only three countries, 63 percent in Mexico, 13 percent in Brazil, and 9 percent in Chile, where their managers saw the greatest growth potential in demand for electricity as well as political and social stability. Their investments in distribution and transmission, as well as nontraditional activities, were more diversified. Brazil was one of the main markets for Endesa and Iberdrola, Mexico for Iberdrola and UF, and Chile for Endesa. Endesa concentrated 46 percent of its assets in Chile, 20 percent in Colombia, 16 percent in Brazil, 11 percent in Peru, and 7 percent in Argentina. Iberdrola invested mainly in northeast Mexico and northeast Brazil and, to a lesser extent, in Chile. UF focused on Mexico, and to a lesser extent on Colombia. In 2009, Latin America generated 16.83 percent of Iberdrola’s operating profit, 36.51 percent of Endesa’s, and 27.25 percent of Gas Natural Fenosa’s sales.76 2. Focus on generation and distribution of electricity. Generation and distribution, rather than transmission, were the main activities of the three utilities in Latin America (only Endesa developed important projects in transmission). In some countries, such as Mexico and the Dominican Republic, they focused on generation exclusively due to regulatory constraints. Private firms were only allowed in generation by Mexican law and were required to sell most of their electricity to the federal government for distribution. In the Dominican Republic, UF developed a venture in distribution but sold it to the government because of its inability to reduce electricity losses caused mainly by theft. In the other Latin American markets, the Spanish utilities operated in generation and distribution. 3. Reliance on natural gas and renewable sources in generation. Until the mid-1990s, most of the power plants in Latin America were hydroelectric and thermal, but most of the new generation facilities built in Latin America by the Spanish utilities used CCGTs, accounting for 79 percent of their added installed capacity by 2009, 12 percent was hydroelectric, and only 2 percent wind (see Table 5.2). The emphasis on natural gas as a source of energy by the Spanish firms became the core of their strategy in Spain in the 1990s, to take advantage of the gas deposits in North Africa. A pipeline through the Straits of Gibraltar opened in 1996 gave them access to a steady supply of North African natural gas. The discovery of important deposits of natural gas in Latin America allowed the Spanish utilities to replicate the same model in Latin America since the 1990s. As a result, the source of electricity in Latin America changed considerably. Renewable sources will become more important for the Latin American subsidiaries of Spanish utilities in the coming years, mainly hydroelectricity and wind. Although hydroelectricity’s share of added capacity in generation

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was only 12 percent in 2009 (see Table 5.2), it will increase to 28 percent by 2012 as new hydroelectric power plants under construction come into operation. In 2009, hydroelectricity was already the main source of added capacity by Spanish subsidiaries in Chile (55 percent) and Brazil (41 percent) and will increase to 68 percent in Chile and 64 percent in Brazil when projects under construction are finished. Wind accounted only for 2 percent of added capacity in 2009, but will increase to 10 percent of new added capacity in 2012 with the completion of wind farms under construction. By 2012, 38 percent of added capacity will come from renewable sources, and the share generated by CCGT will fall to 54 percent, as no new CCGT power plants were under construction in 2010. 4. Diversification into noncore activities. Electricity generation and distribution (and to a lesser extent transmission) were the core activities of the three Spanish utilities in Latin America. However, they also diversified into new activities, such as transportation and distribution of natural gas, water management, environmental protection and pollution alleviation, telecommunications (including telephone and Internet services), and airport management, among others. However, these were marginal and normally undertaken to support a partner or to strengthen their core business. Iberdrola’s ventures in telecommunications in Brazil are an example of the former. Iberdrola helped Telefónica gain control over some of the telephone operators privatized in Brazil in the late 1990s by submitting a bid where Telefónica was not allowed to participate (the Brazilian government limited the number of bids by each firm). Iberdrola’s investments in gas distribution in Argentina, Brazil, Colombia, and Mexico, and UF’s investments in gas distribution in Uruguay were examples of the latter. One of the goals of this strategy was to benefit from and strengthen relations with gas suppliers. As Spanish utilities relied more on natural gas as a source for their CCGTs, they needed to secure access to natural gas. Gas producers also needed to secure a market for their gas, thus the important role of public utilities. The following chapter will explore this relationship in more detail, including UF’s takeover by Repsol-YPF’s Gas Natural. 5. Stock value. The three Spanish utilities did fairly well in stock markets. Between 1991 and 2006, Endesa’s market cap increased in a33.4 billion. The shareholder value creation during this period was a29.892 billion. The average shareholder return in these 15 years was 18.5 percent, higher than that of the IBEX-35 (15.4 percent). Its share of IBEX-35 ranged between 5.3 percent and 13.5 percent. Endesa fell from second in 1991 to fourth in 2006 by market capitalization in the Spanish stock exchange.77 Iberdrola’s market cap increased between 1991 and 2005 by a17.3 billion. Shareholder value creation during this period was a14.4 billion. The average

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Table 5.3 Average annual shareholder return, 1998–2006 Public utility Fortum Korea Electric Power Corp Unión Fenosa Electrabel Iberdrola National Grid Plc TXU Energy Endesa Southern Company Suez E On RWE CLP Holdings Tokyo Electric Power EDP

Percent 31 23 23 18 18 18 16 16 15 14 12 11 11 9 6

Source: Pablo Fernández and José María Carabias, “Creación de valor para los accionistas de Endesa1991–2006,” 11–12.

shareholder return in these 14 years was 17.3 percent, higher than that of the IBEX-35 (14.0 percent). Its market capitalization varied between 3.9 percent and 8.5 percent of IBEX-35, falling from fifth in 1991 to sixth in 2005.78 UF’s market cap grew between 1991 and 2005 by a8.6 billion. Shareholder value creation was a7.7 billion. The average shareholder return in these 14 years was 21.6 percent, higher than that of the IBEX-35 (14.0 percent). Its market capitalization oscillated between 1.3 percent and 2.4 percent of IBEX-35. UF jumped from fourteenth firm by market capitalization to twelfth.79 Between 1998 and 2006, the average annual shareholder return for the three Spanish utilities compared favorably to that of some of the leading utilities in the world (see Table 5.3). UF was among the highest, with an annual average return of 23 percent, and Iberdrola was close behind, with an average annual return of 18 percent. Endesa’s 16 percent was a bit lower. The three performed better than some prominent international utilities such as Southern Company and TXU of the United States, E.On and RWE of Germany, Suez of France, Tokyo Electric Power of Japan, CLP of Hong Kong, and EDP of Portugal. These results indicate that international investors supported their overall strategy, including their investments in Latin America.

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CHAPTER 6

Oil and Natural Gas South America is an emerging area on the world economic scenario, with a rapidly expanding energy market, where we believe we have clear competitive advantages. ( . . . ) The idea behind this strategic expansion is to place Repsol as an integrated energy company in Latin America.1 Alfonso Cortina de Alcocer, Chairman and C.E.O. of Repsol in 1996

Introduction The last case study in this book analyzes the direct investments made by the largest Spanish multinational in the oil and natural gas industry, RepsolYPF (Repsol before its takeover of YPF in Argentina),2 in Latin America. Repsol-YPF’s managers intended to transfer the firm’s advantages, developed mainly in Spain, to the new Latin American subsidiaries. These advantages were embodied in the know-how derived from operating all of Spain’s stateowned hydrocarbon enterprises, from upstream operations in exploration and production (E&P) to refining and distribution and marketing. When governments in Latin America began to open up their hydrocarbon industries in the 1990s, Repsol gained access to markets where it could internalize every activity of the oil cycle, from exploration to marketing, thus capitalizing on this know-how. One significant difference exists between Repsol and the Spanish multinationals discussed in previous chapters. Repsol was weak on E&P, because there were no major oil or gas deposits in Spain. As a result, Repsol had to buy most of the raw material for its downstream operations in the market from other firms. One of the main reasons behind Repsol’s expansion strategy in Latin America was development of its upstream operations by gaining concessions for E&P of oil and natural gas. Access to oil and gas deposits in Latin America gave Repsol raw materials needed for its main market, Spain. At the same time, growth in downstream operations in Latin

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America added new markets for its finished products such as oil derivatives, including gasoline and gas (with an emphasis on natural gas). Repsol was created by the Spanish government in 1987 to bring together all of the state-owned firms in the hydrocarbon industry for privatization. Its privatization in the 1990s marked the end of a long period of government control over production and marketing of oil derivatives in Spain, through which the private sector played only a very marginal role. The Spanish government nationalized the oil industry in 1927, as a strategy to guarantee a steady flow of oil, needed for its industrialization plans, and placed all foreign and domestic oil ventures under the control of a state agency, the Compañía Arrendataria del Monopolio de Petróleo S.A. (CAMPSA), which was granted the monopoly over the exploration; production; import; transport; and sale of oil, oil-based products, and natural gas. Until then, oil was supplied by major multinationals and distributed through a fragmented domestic network. The only concession to the private sector was Compañía Española de Petróleos S.A. (CEPSA), in the Canary Islands.3 As CAMPSA failed to find oil in Spain, in 1944 the government allowed foreign private and state-owned firms to operate in upstream and refining operations, but CAMPSA kept control over marketing and distribution.4 After 169 failures, CAMPSA’s first successful exploration took place in 1964 off the Mediterranean coast. Although small, this was a timely discovery, as economic growth in Spain caused demand for oil to grow by 15 percent annually. The government founded Hispánica de Petróleos (Hispanoil) in 1965 to promote new exploration plans in Spain, encouraged multinationals to build refineries and responded to the oil crisis by lowering taxes on oil imports in 1974.5 In 1981, the government brought together several stateowned firms in the oil industry under a single umbrella, Instituto Nacional de Hidrocarburos (INH), which became Repsol in 1987. CAMPSA remained mainly involved in distribution.6 The Spanish government proceeded to privatize Repsol by first floating one-third of its shares in the Madrid and New York stock exchanges in 1989 (the largest share offer worldwide that year, raising more than $1 billion). New share issues followed between 1993 and 1997, when the government sold its remaining shares. In 1990, Repsol was still by far the main firm in the Spanish oil and gas industries. Repsol had 5,000 service stations; other Spanish competitors had 180 and foreign firms only 7. Repsol also controlled 100 percent of Spain’s market for butane. In 1991, Repsol refined more than 60 percent of all crude processed in Spain, distributed all liquefied petroleum gas (LPG), and produced half the petrochemicals. Under EU pressure, the Spanish government began to liberalize the oil industry, and in 1995 there were already 40 foreign oil companies in the country. As competition grew in Spain, Repsol

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began to expand abroad in search for crude and new markets, gaining concessions to explore and produce oil in Algeria, Angola, Argentina, Colombia, Dubai, Egypt, the North Sea, Turkmenistan, and Vietnam. Repsol’s managers decided to invest heavily in development of a strong natural gas venture and created a new subsidiary called Gas Natural for their growth in gas. In 1995, Repsol almost had a monopoly in the Spanish natural gas industry and its gas businesses generated 25 percent of its earnings.7 Repsol-YPF was the eighth-largest oil multinational enterprise in the world in 2006 (Table 1.2). In 2009, it was the world’s third-largest producer of natural gas and the third-largest firm in transportation of LNG by volume. It was also the largest producer of oil and natural gas in Argentina, and the second largest in Brazil, Mexico, and Venezuela. Repsol-YPF had the largest market share in refining in Argentina and Peru; was market leader in LPG in Argentina, Chile, Ecuador, and Peru; had 5.42 million supply points for gas across Latin America; and operated the largest network of service stations in Argentina and Peru. Latin America and the Caribbean was Repsol-YPF’s main market outside Spain, generating 33 percent of its operating income and holding 89.5 percent of its oil and gas reserves.8 This chapter will first explain how Repsol developed its know-how in Spain in the oil and natural gas business, focusing on geographic and business diversification into activities such as electricity generation through CCGT power plants fueled by Repsol’s natural gas. Then comes a review of the reforms implemented by Latin American governments that prompted Repsol’s investments, followed by an analysis of Repsol’s strategy of investments in the full oil cycle, from upstream operations to downstream, paying special attention to Repsol’s alliances with public utilities to promote the use of natural gas to power CCGT power plants for electricity generation.9 Development of the Advantage in Spain Thanks to a state monopoly, Repsol profited from the long experience of its managers and employees in all of the stages of the oil and gas cycles, from E&P to distribution and marketing. Operating under the protective umbrella of the Spanish state, which did not allow foreign or domestic competition (with a few exceptions), Spain’s state-owned oil firms developed wide infrastructure, business network, and know-how, gaining a huge advantage over new entrants once liberalization ensued between 1998 and 2005. Repsol’s decision to become a market leader in every stage of the oil and gas industries in Latin America came from their experience as a monopolistic firm in Spain.

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The history of Spain’s oil industry in the twentieth century is characterized by heavy government intervention that allowed for large state-owned enterprises to thrive. In its early stages, Spain’s oil industry was developed by small domestic firms that bought oil from foreign producers for distribution in Spain until the nationalization of the industry in 1927. The government embarked on ambitious industrialization programs and believed that the steady flow of necessary oil could only be guaranteed by a large state monopoly, placing all existing oil firms under a single state agency called Compañía Arrendataria del Monopolio de Petróleo S.A. (CAMPSA). Only one private firm was allowed to operate in the Canary Islands, Compañía Española de Petróleo S.A. (CEPSA), which built Spain’s first refinery. CAMPSA began to explore for oil in 1941 but its failure to find deposits led the government to allow foreign firms in exploration through joint ventures in 1944, with CAMPSA retaining control over management. Legal reforms in 1952 and 1958 introduced technical and financial criteria to qualify for these joint ventures and set royalty payments. As demand for oil began to grow (15 percent annually), the government introduced a “state quota” in 1963, by which refineries had to buy a share of their oil inputs from the state and sell their finished products to CAMPSA, which retained its monopoly over distribution. CAMPSA finally discovered oil in Spain in 1964, after 169 failed attempts, and the government created Hispánica de Petróleos (Hispanoil) in 1965 to promote new exploration ventures. When the oil crisis hit, the government created Enagás in 1972 to diversify energy sources. Enagás was in charge of the production of gas in Spain, imports of gas from abroad, and the building of the gas network for transportation. The government tried to increase the oil supply by introducing a legal reform in 1974 that eliminated royalty payments, reduced the tax on profits from 50 percent to 40 percent, eliminated the limits on the number of exploration concessions, set a high price of oil and natural gas to subsidize production, and created Empresa Nacional del Petróleo (ENPETROL) to secure oil supply through direct bargaining with producing states (ENPETROL resulted from the merger of three refineries in which the state had controlling stakes).10 These measures failed to stimulate oil E&P in Spain and the government took the second oil crisis as an opportunity to introduce new reforms that would lead to privatization of all hydrocarbon state-owned firms. In 1981, the government brought together all of the state-owned firms under a single umbrella, the INH, and devised a plan to make them more competitive in order to facilitate their privatization. INH was reorganized in 1986, creating different firms along areas of activity: exploration (Hispanoil), refining (ENPETROL), petrochemicals (Alcudia), LPG (Butano), and natural gas

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distribution (Enagás). In 1987, all of them, with the exception of Enagás, merged to create Repsol S.A.11 As the EU pressured Spain to liberalize its oil industry, Repsol sold 1,200 of its CAMPSA stations to CEPSA (21 percent) and British Petroleum (9 percent). CAMPSA became Compañía Logística de Hidrocarburos in 1993, in charge of transportation, storage, and distribution of hydrocarbons, and the Spanish government welcomed CEPSA, BP, and Shell, in addition to Repsol, as stockholders. The opening of the Spanish market allowed British Petroleum to take over a small Spanish oil firm called Petromed, and Elf bought a stake in CEPSA. By 1995, 40 foreign oil firms operated in Spain.12 In 1998, new reforms brought Spanish legislation in line with the EU’s, eliminating the state quota, entrusting the oil business to the private sector, establishing the rights and duties of those receiving state concessions for E&P, including environmental requirements, and restricting the state to the role of regulator, although the state retained the right to introduce production incentives and regulated the storage of underground oil security reserves. After almost 70 years of heavy state involvement in Spain’s oil industry to stimulate E&P and an investment of $6.1 billion between 1960 and 1997, oil production in Spain between 1964 and 1997 was 31,526 Nm3 (a little more than the oil processed by refineries in Spain in a given year) and natural gas production was 8,776 Nm3 (less than the amount of gas processed in Spain in 1997), leading Spanish oil firms to conclude that there were no significant oil deposits under Spanish soil and waters.13 Expansion abroad became the only option for Repsol to grow in E&P, but the outlook in the 1990s looked grim for a firm that lacked success in this area, especially given the experience of the leading international oil firms: finding costs (on-shore and off-shore), defined as the relationship between the investments made by firms in exploration and the barrels found, fell from $6 per barrel to $2, thanks in part to better drilling technologies that reduced the time needed to reach the oil and increased the usable share of oil in each deposit from 25 percent to 50 percent, and to the discovery of fields in new regions and the discovery of additional deposits in old regions, mainly in Mexico, the Middle East, Nigeria, and Venezuela. Activities other than E&P (those that Repsol had mastered) became less profitable due to growing competition and the large international oil firms decided to focus primarily on E&P. Refining became less profitable due to cheaper refined oil from the Persian Gulf and from the former Soviet Union. The spread of fleets with flags of convenience dropped transportation prices tremendously. Storage became less interesting because the drop in consumption of fuel oil led firms to use idle fuel oil storage facilities. Finally, as refineries began to sell oil to nontraditional oil firms, such as retailers, gasoline prices fell.14

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This weakness led Repsol’s managers to base their expansion in E&P on gas. At the time of Repsol’s early investments abroad, the number of known natural gas deposits was growing very rapidly, from 108 billion cubic meters (bcm) in 1987 to 145 million cubic meters in 1997 (enough to guarantee production for 65 years). Technological improvements opened the possibility to use gas as a source of energy for factories, as fuel for automobiles, and in the petrochemical industry. Demand was expected to grow by 3 percent annually from 1997 to 2015.15 Electricity generation had relied heavily on coal and nuclear energy in the 1960s and 1970s, and, to a lesser extent, on fuel oil, requiring large power stations with an installed generation capacity of more than 500–600 MW for coal and over 1,000 MW for nuclear. The huge financial costs of building these plants made the calculation of returns on investment very difficult and governments provided subsidies. The development of new gas turbines and combined cycle technology in the 1980s and 1990s allowed utilities to build smaller power stations (300–350 MW in the case of combined cycle power stations, smaller yet in the case of gas turbines) and to reduce construction time and investment requirements. As natural gas became easier to transport and its environmental impact was lower, plants could be built almost anywhere. Liberalization of the electricity industry around the world since the 1970s ended the monopoly of public utilities over generation by allowing new entrants that could negotiate contracts directly with distributors and large consumers through purchase power agreements. Gas-powered power plants mushroomed.16 Consumption of gas in Spain grew from 5 million therms in the 1960s to 7.5 million in 1970, 13 million in 1980, and 24 million in 1993. The Spanish government only began to promote natural gas in 1985 as an alternative source. By declaring natural gas a “public service,” the government kept control over entry into the market through concessions and billing (setting the price distributors had to pay Enagás for buying gas and the maximum price distributors were allowed to charge consumers). Access to the transportation and distribution network was another important entry barrier. The government’s intentions to keep the industry in the hands of Spanish firms became clear in the late 1980s, when British Gas became the leading stockholder of Catalana de Gas (the company that distributed gas in the industrialized region of Catalonia) between 1988 and 1989, until Repsol bought British Gas’ stock in Catalana de Gas. This acquisition marked the beginning of a process of takeovers by Repsol that included Enagás, through which Repsol gained a quasi-monopolistic position in the Spanish gas market, controlling most of the national production, imports, distribution, and primary transport, and leaving only three other

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small regional firms. Repsol merged its gas subsidiaries to create Gas Natural in 1991.17 The Spanish government began to liberalize the gas industry timidly in 1996 with reforms that established new criteria for third parties to access the network and gas plants and allowed large consumers to bypass their local distributor to negotiate the acquisition of gas directly with any provider.18 In 1998, the government embraced an EU gas directive that sought to open up markets across the EU. The new reforms created competition in transportation, distribution, network operators, storage, and commercialization of gas and allowed new entrants, as long as they complied with clear technical requirements. Spain liberalized the natural gas market for commercialization in 2003 and distribution in 2005, ahead of the EU deadline. By then Repsol was by far the largest operator in the country, through its gas subsidiary Gas Natural.19 Oil and Natural Gas Markets in Latin America In its origins, the oil industry was developed by entrepreneurs across Latin America. There was little government participation except for the concession of exploration rights. As oil grew in importance, governments became heavily interventionist, claiming that state control of the oil industry was necessary to push industrialization and keep foreign oil firms from seizing most of the profits generated by the countries’ natural resources. The countries with the largest deposits, Argentina, Bolivia, Brazil, Mexico, and Venezuela, saw their oil industry nationalized at different points in the twentieth century, but the economic crises of the 1980s led to reforms that in some cases went as far as privatization of the state-owned oil firms while in some other cases the governments opened up only some sectors of the industry to foreign investment. The Argentinean oil industry was born in 1907, when a team of prospectors found oil on public soil in Comodoro Rivadavia. As a growing number of European and North American oil companies flocked to Argentina, President Hipólito Yrigoyen decided to create a state-owned firm called Yacimientos Petrolíferos Fiscales (YPF) in 1922 to keep them from taking over too large a share of the Argentinean oil industry. The long concessions granted to foreign firms led to cries for nationalization as early as the 1920s. In 1932, General Agustín Justo established a state oil monopoly on all federal land (oil companies could still receive concessions from the provinces) and in 1934 he limited all private concessions to their existing boundaries. Juan Perón and Arturo Frondizi invited foreign oil back, but as pressure from the “petroleum nationalists” grew, mainly the military, the bureaucracy,

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the middle classes, and the intellectuals, Isabel de Perón decided to nationalize petroleum-product marketing in 1974.20 YPF now controlled all of the oil produced in Argentina, although the government allowed some firms in E&P and refining. The government set the price of oil for every transaction below international prices, thus subsidizing consumption and monopolized transportation and distribution of gas. Oil production fell by 9.5 percent between 1981 and 1988, while gas production grew by 47.2 percent.21 Reforms in Argentina began in the mid-1980s, when YPF was unable to maintain Argentina’s self-sufficiency. Raúl Alfonsín allowed foreign firms in upstream operations between 1985 and 1990. YPF had become a drain for the state coffers, so privatization soon became a goal. Between 1989 and 1992, Carlos Ménem drafted new legislation that provided freedom of trade and financial flows, liberalized the prices of hydrocarbons, terminated the production contracts with private firms (some dating back to the 1950s), returned jurisdiction over subsoil hydrocarbons to the provinces, auctioned fields where production was low and welcomed foreign firms to create joint ventures with YPF in fields where production was highest (these sales raised $2.1 billion). YPF and Gas del Estado were streamlined and privatized in 1992 and 1993, respectively.22 Following Argentina’s experience, the government of Bolivia nationalized Standard Oil of Bolivia to create Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) in the 1930s. Bolivia also introduced important legal reforms in 1991 and 1996. Foreign firms were allowed to take over YPFB fields and operations, including refining and transportation, when they were auctioned. The concession of investment guarantees and important discoveries of natural gas attracted large amounts of investment. The laws sought to create a favorable investment climate to guarantee the export of Bolivian natural gas, making this country a center of a regional network of gas pipelines. The government of Colombia welcomed foreign firms into joint ventures with state-owned Ecopetrol during the 1980s and 1990s. The state always retained 60 percent of the stocks. As a result of these ventures, major discoveries took place since the 1980s. This policy remained in place into the 2000s.23 Brazilian law gave local landlords and states the rights over underground resources but the constitution of 1934 transferred those rights to the federal government. President Getúlio Vargas created the National Petroleum Council in 1938 to develop a Brazilian oil industry, but little changed until the 1950s, when the Brazilian congress granted a monopoly over the oil industry to the state, claiming that state control would increase energy resources needed for development. Between 1954 and 1990, Brazil’s recoverable reserves of crude oil and gas equivalent of crude grew from 27 million to 555 million barrels, domestic production increased from 1 million barrels

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to 230 million barrels, dependence on imports of foreign oil fell from 65.8 percent to 45.3 percent of crude oil, and refining capacity grew from 42,330 to 1,516,140 barrels per day. Petrobras’ share of the economy increased from 0.14 percent to 2.44 percent of gross domestic product and in 1990, Petrobras was the largest firm in Brazil.24 The reform of the Brazilian hydrocarbon sector proceeded more slowly than Argentina’s. The federal government privatized some petrochemical firms between 1993 and 1996 and some of the natural gas firms in 1997. In 1999, the states also privatized some of their gas firms. The federal government introduced two important legal reforms, elimination of price controls and free trade within Brazil. The government also decided to sell 31.7 percent of Petrobras’ stocks gradually and allowed foreign firms to bid for new exploration rights. In 2000, Petrobras swapped assets with foreign firms to attract new investment into Brazil and to expand in new markets. The first of the swaps involved Repsol-YPF, which took 30 percent of Petrobras’ Refinería Alberto Pasqualini (REFAP) and its network of gas stations, in exchange for EG3 in Argentina.25 The Mexican oil industry was first developed by firms from the United States seeking oil for their home market. The first successful explorations took place in 1901, but production remained low until 1910. The success of the Mexican revolution led to important changes. The Constitution of 1917 sanctioned the state’s ownership over subsoil deposits of hydrocarbons and rescinded the rights acquired by the oil firms, but foreign firms were still allowed in E&P under new terms. Production peaked in 1921 and declined rapidly in the 1930s. As more oil was used to meet national demands, tensions between the government and foreign firms began to grow, leading President Lázaro Cárdenas to nationalize the oil industry in 1938. Between the 1940s and the 1960s, Petróleos Mexicanos (Pemex) supplied cheap oil to Mexico’s growing industries, fueling the country’s economic expansion, but was unable to undertake large capital investments to meet growing demand and Mexico became a net oil importer in 1969. The oil crisis led the government to give Pemex the financial and technological resources to develop new fields, and since the late 1970s Mexico experienced a second oil boom, becoming a net exporter again.26 The fall in oil prices in 1982 and 1986 reduced Mexico’s export revenue, leading President Carlos Salinas to introduce policies to diversify Mexico’s exports. However, reforms in the hydrocarbon sector were mild and the government maintained legal and institutional barriers to the entry of private capital, especially foreign multinationals, keeping state control over most of the industry. Pemex began a process of internationalization that comprised several steps: creation of a subsidiary called Mexpetrol to export

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its services and products, acquisition of production facilities outside of Mexico, creation of strategic alliances with foreign firms, and acquisition of stock in foreign firms. Pemex’s acquisition of 3.5 percent of Repsol led to an alliance, by which Repsol would sell Pemex’s products in the EU. Pemex also created alliances with firms in the United States market, such as Shell and Clark, to sell its products there. The opening of the natural gas sector began in 1999 and went a bit further, because the government wanted to increase electricity production by stimulating construction of CCGT power plants. The government eliminated tariffs on gas imports to lower generation costs and allowed firms to bid for concessions to distribute natural gas in some of the larger cities to attract financial resources and know-how. Repsol-YPF’s Gas Natural received some of these concessions.27 The takeoff of the Venezuelan oil industry was a consequence of the advent of the Mexican Revolution. Oil companies fearing the growth of nationalism in Mexico flocked to Venezuela after the discovery of the Mene Grande field in 1914, east of Lake Maracaibo. In 1929, Venezuela was already the world’s second oil producer after the United States. Production continued to grow until 1970, but two decisions by the Venezuelan government scared investors who began to look for countries with a more favorable investment climate. The first measure was a new profit-sharing law introduced in 1958 that gave the government the highest take per barrel in any large oil-producing country in the world, a maximum rate of 45 percent. The second was Venezuela’s activism in Organization of Petroleum Exporting Countries (OPEC) since its creation in 1959. In the 1960s, the government increased its share of the oil profits and introduced measures to gain more control over pricing of crude oil for export. Nationalization of the industry took place between 1971 and 1975.28 Oil production was falling steadily since 1970 (except for a small increase during the Gulf War in the early 1990s) and President Hugo Chávez decided to introduce mild reforms to increase production. PDVSA continued to operate under conditions of monopoly in refining and distribution, but in 1998 the government ended its monopoly in distribution of gasoline and natural gas, allowing foreign firms to operate under their own name (they still had to buy gasoline from PDVSA). In 1998, the government also authorized joint ventures involving foreign firms in exploration and generation. Repsol-YPF and its Argentinean subsidiaries Astra and Maxus (YPF signed the first agreement in 1998, before Repsol’s takeover) were involved in several of these joint ventures, becoming one of PDVSA’s main partners. The government also began to auction concessions for fields where production was low in 1999. All of these reforms sought to attract foreign technology and know-how.29

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Natural gas became an important source of energy in Latin America in the 1990s. Between 1971 and 1991, demand for natural gas grew by 3.3 percent per year, vis-à-vis a growth of 2.1 percent for coal and 1.4 percent for oil.30 The discovery of significant reserves in the 1990s raised the potential for additional growth and governments decided to tap into natural gas to meet the growing demand for electricity generated by economic growth. Argentina, Mexico, and Venezuela produced 75 percent of the region’s total, and Bolivia and Colombia generated a sizable portion of the remaining 25 percent.31 The natural gas industry was heavily controlled by the state in every country. The monopoly over transportation was justified on economies of scale and heavy sunk costs. A transportation monopoly gave the government a lot of power, because it created a demand monopoly for firms in E&P and a supply monopoly for firms in distribution, thus justifying price controls. Distribution monopolies were also justified on economies of scale and sunk costs. As a result, the natural gas industries were inefficient and governments lacked the resources to increase production. In 1993, Kim Fuad estimated that the Latin American oil and natural gas industries needed $30 billion in investments to expand energy production (including oil, natural gas, and electricity).32 The need to attract capital, technology, and know-how prompted the reforms implemented in the 1990s, namely, elimination of monopolies in production and distribution, unbundling of transportation and supply, privatization of state-owned firms, adoption of realistic technical requirements, price liberalization, reallocation of gas to private operators, freedom of trade, reduction of taxes on remittances and income, greater legal and political guarantees and development of an international pipeline network to increase competition and create a regional market. As a result of these reforms, by 2002, Latin America was self-sufficient.33 Expansion Strategy Between 1995 and 1996, Repsol’s managers developed a strategic plan that tried to overcome the firm’s main weaknesses, upstream operations and a vision to grow in business areas with growth potential. In 1995, refining and marketing, gas, and chemicals each generated about 30 percent of Repsol’s operating income, but E&P generated less than 10 percent. Second, natural gas, logistics, LPG, and chemicals had lower volatility due to the lack of sharp variation in demand, and higher growth potential in the long run. With these considerations in mind, they adopted a new strategy, based on four guiding principles: strengthening its position at the head of the home market (Spain); growth in E&P by developing new

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discoveries and acquisitions, giving priority to natural gas reserves for the Spanish market; international expansion (centering on Latin America); and promotion of natural gas for electricity generation.34 Repsol’s managers wanted “to be leaders in those areas or businesses in which [they] concentrate. This way, the creation of value for [their] stockholders will have more solid ground and Repsol-YPF will set itself apart from other firms.”35 Latin America appeared as the right region to further Repsol’s strategy because of its proven reserves of natural gas and the opening of oil and gas markets across the region, as well as language and cultural similarities. Repsol’s acquisitions focused on firms with exploration rights, known deposits and know-how in E&P, as well as a wide network of service stations, such as Astra, Pluspetrol, and YPF in Argentina and some of YPF’s and Petrobras’s assets in Brazil. These acquisitions would allow Repsol to become an “integrated energy group” in Latin America (the same approach they took in Spain) in oil, gas, and electricity, in wholesale and retail markets (see Table 6.1).36 Reorganization of Subsidiaries Repsol’s managers had to integrate their new subsidiaries into the whole of the firm so as to facilitate the transfer of know-how in downstream operations from Spain, and in upstream from its new subsidiaries, mainly in Argentina. The firm’s organization followed business areas, with each subsidiary reporting to the parent along these areas: E&P, refining and marketing, chemicals, and natural gas and electricity. The top managerial positions were occupied by a combination of executives from Repsol and the firms taken over.37 Exploration and Production Repsol’s efforts to gain concessions of E&P rights in Latin America and the Caribbean sought to overcome a major disadvantage, its dependence on third parties for oil and gas. Repsol’s takeover of YPF became a major operation in this regard. YPF had technology, exploration rights, qualified labor, and managerial know-how (its ability to lobby the main actors in the industry across Latin America, including other firms, regulators, and governments) developed since its creation in 1922. Repsol lacked these assets and saw in YPF’s takeover an opportunity to acquire them.38 Repsol tried to gain concessions in low- and medium-risk countries where large oil firms did not dominate oil E&P, and where the costs of exploration, development, and extraction were low. Natural gas was a critical part of Repsol-YPF’s exploration strategy. Demand for natural gas grew

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133 Table 6.1 Repsol’s main acquisitions in Latin America Year

Country

Firm

1992 1995 1996

Argentina Trinidad & T. Argentina

Gas Natural BAN Atlantic LNG Astra (CAPSA)

Ecuador Peru

Repsol Ecuador, Lubrienergy, Ltda. Refipesa Relapasa Corpetrol Planta Envasadora Rimac, S. A. Solgás Limagás, S.A. Energás, S.A. Algás Astra CAPSA EG3 Electricidad Argentina, S.A. Gas Argentino, S.A. Inversora Dock Sud, S.A. Inversora en Distribución de Entre Ríos, S.A. Mexpetrol Argentina, S.A. Refinerías del Norte, S.A. Pluspetrol Energy Refisán, S.A. CEG Riogás Astra Chile, S.A. Pluspetrol Chile, S.A. Gas Natural ESP, S.A. Astra Central Térmica San Miguel de Tucumán, S.A. Gas Argentino, S.A. Gasoriente Duragas Alvisa, S.A. Astra CAPSA La Pampa, S.A. YPF Astra CAPSA Gas Natural de São Paulo, S.A. Lipigás SEMSA Refinadores del Perú, S.A.

1997

Argentina

Brazil Chile

1998

Colombia Argentina

1999

Colombia Ecuador Argentina

2000

Argentina Brazil Chile Mexico Peru

percent 10.00 37.70 6.00 99.99 42.80 60.00 80.00 99.99 60.00 60.00 60.00 99.30 13.02 60.41

33.50 45.00 42.50 9.13 12.14

39.23 9.28 15.00 11.33 54.50 75.00 100.00 1.86 99.99 97.81 31.48 100.00 45.00 100.00 6.77 (continued)

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Table 6.1 Continued 2001

Bolivia Brazil

2003 2007

Trinidad & T. Mexico

Andina, S.A. Albacora Leste REFAP Atlantic LNG Anahuac power plant Lomas del Rey power plant Valle Hermoso power plant Saltillo power plant Águila Altamira power plant

29.75 10.00 30.00 20.00

Source: Repsol’s annual reports.

by 8.1 percent in the Spanish domestic household and small business sectors, and 50.8 percent in the Spanish industrial sector, in 1995 alone.39 Repsol’s managers expected demand to treble between 1996 and 201040 and decided that Repsol had to be a prominent player: “Natural gas is becoming in the medium- and long-run the hydrocarbon on which the incremental generation of energy will be based for world development. Its environmental characteristics, energy efficiency, availability and economic competitiveness make it stand out over any other technically viable alternative.”41 Repsol conducted E&P activities for oil and natural gas and created a subsidiary called Gas Natural for its downstream operations in gas and electricity generation. Repsol held 45.3 percent of the stock in Gas Natural and42 its main partner was La Caixa, a savings and loans institution from Barcelona that was also Repsol’s main stockholder.43 Repsol’s strategy comprised three clearly defined markets, each one of them fed with natural gas from three different source regions. “Repsol-YPF is aware of this strategic opportunity and has been acquiring and creating consciously several integrated chains of natural gas in several geographic contexts: Argentina and Bolivia-Peru-Southern Cone, Trinidad and Tobago-Spain and the United States, and North Africa-Spain and the rest of Europe.”44 Repsol’s goal in Bolivia, Peru, and the Southern Cone was to become a global energy firm, by operating in production, transportation, distribution, and marketing of natural gas, as well as electricity generation through CCGT power plants.45 In 1996, Repsol and Gas Natural created a 50-50 joint venture called Gas Natural Latinoamericana, to carry out this project. Gas Natural Latinoamericana sought concessions for E&P of natural gas in Argentina, Bolivia, Peru, Trinidad and Tobago, and Venezuela, and for distribution in Argentina, Brazil, Colombia, Mexico, Puerto Rico, and Uruguay.46 Argentina was Repsol-YPF’s main source of natural gas thanks to the concessions granted to Astra, Pluspetrol Energy, Mexpetrol, and YPF. Its

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fields were mainly in Neuquén, Cuyana (north of Neuquén), Patagonia (Gulf of San Jorge), and the Straits of Magellan. Repsol-YPF expanded two pipelines in Neuquén province to transport its additional production of gas. The Transneuquino gas pipeline came into operation in 2004 and Gaseoducto del Norte gas pipeline in 2005, adding 1.8 million cubic meters of additional capacity per day.47 Repsol-YPF wanted to become a major player in the expansion of Brazil’s oil and gas industry and reached four agreements with Brazil’s National Oil Agency in 1999 to explore for and produce oil and gas off the Brazilian coast in three basins, Campos, Espírito Santo, and Santos. These fields were estimated to have the largest reserves among those offered by the Brazilian government, but were technologically challenging, because they were under very deep waters.48 In August 2000, the first findings took place and in 2001, explorations began in Santos basin, resulting in discoveries of significant deposits (among the largest in the world) in 2007 and 2009.49 Repsol-YPF’s operations in Bolivia focused on production of natural gas for export to Argentina. Exports began in 2004. Following the nationalization of the energy industry decreed by the government of Evo Morales in 2006, Repsol-YPF renegotiated its contract with the Bolivian government, creating a new joint venture in which BYPF held 51 percent of the shares and Repsol-YPF the remaining 49 percent. In Peru, Repsol-YPF was one of the firms operating in the Camisea field. Repsol-YPF was also part of the consortium that built a liquefaction plant called Pampa Melchorita. This plant had the capacity to process 4.5 million tonnes per year to ship gas to the west coast of the United States and Mexico. In 2009, Repsol signed an agreement to supply 67 bcm of natural gas to Mexico’s Comisión Federal de Electricidad annually to feed its CCGT power plants in the central and western regions of Mexico. Shipments from Pampa Melchorita to Mexico began in 2010 when the liquefaction plant opened.50 Repsol-YPF received several concessions in Venezuela since 1997, when the government opened up its fields to foreign firms, and by 2002 became the largest private producer of natural gas, with a daily production of 8.2 million of cubic meters. In 2009, Repsol discovered the largest field of its history, holding enough reserves to produce 580,000 cubic meters of gas and 620 barrels of oil per day. Since 2005, the government of Venezuela required Repsol-YPF to invite PDVSA into joint ventures, as part of its plan to gain more control over the country’s hydrocarbons.51 Repsol-YPF also received concessions for E&P in Colombia, Cuba, and Ecuador (including a concession to build a pipeline that would allow Ecuador to double its exports), but these were smaller operations. Although small, its ventures in Mexico are important, because Repsol-YPF became the first international

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company to gain a concession in E&P in Mexico in the Reynosa-Monterrey block in 2003.52 Trinidad and Tobago became the site of one of Repsol-YPF’s most strategic projects in E&P, called Atlantic LNG (liquefied natural gas). Repsol decided to participate in a project for exploration in 1995, in conjunction with Amoco (later BP), with a 10 percent stake (Repsol-YPF acquired an additional 20 percent in 2003). The concession included the rights to explore for natural gas and build a liquefaction plant with a capacity of 15 million tonnes per year (after its four trains became fully operational in 2008), 40 percent of which was exported to Spain. Repsol-YPF also used a regasification plant called Cove Point in Maryland that received 2.7 bcm per year since 2003 for sales in the northeast of the United States. To increase its sales in the United States and Canada, Repsol-YPF gained a concession to build a regasification plant called Canaport on the east coast of Canada to process 10 bcm of LNG per year. This project was a joint venture involving Irving Oil, which held 25 percent of the capital, with Repsol-YPF holding 75 percent. Construction of the plant was completed in 2009. Irving Oil began to market the gas processed at the plant in the east of Canada, and Repsol-YPF in the rest of Canada and the United States.53 The third geographic context, Europe (mainly Spain, France, and Portugal), was a major market in distribution but not a source of oil or natural gas. The natural gas came mainly from North Africa, through the Maghreb pipeline, and from Trinidad and Tobago, transported in tankers. The construction of the Maghreb-Europe pipeline between North Africa and Spain was crucial to guarantee the stability of supply. This pipeline transported Algerian gas to Spain and, from there Repsol delivered it throughout Spain, Portugal, and other European countries, through its French subsidiary. The pipeline was built by a consortium integrated by one of Repsol’s subsidiaries, Enagás, and came into operation in 1996. The other major partner, Sagane of Morocco, was taken over by Repsol in 1997, to gain control over this “strategic asset.”54 In conclusion, Repsol’s takeover of YPF allowed its managers to acquire know-how, deposits, and concessions for exploration. Production of oil and gas grew steadily since the mid-1990s (see Table 6.2). Argentina was the main market for E&P until the mid-2000s. Trinidad and Tobago was the major source of natural gas since the Atlantic LNG project began to increase production in the early 2000s. As Repsol-YPF acquired knowledge and technology for E&P, its managers began a more aggressive strategy to develop new E&P ventures in Bolivia, Ecuador, Colombia, and Venezuela in the late 1990s and early 2000s, and since 2006 in OECD countries, mainly in the Gulf of Mexico, Brazil, Canada, and Norway. In 2007, Repsol-YPF sold

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Table 6.2 Repsol-YPF net production of oil and gas by region (thousands of barrels of oil equivalent—BOEs) Oil Region

1995

2000

2005

2009*

1,825 5,722 34,894 8,900 51,341

811 19,730 35,554 18,776 74,871

880 145,535 – 47,453 193,868

1 25 15 8 49

Region

1995

2000

2005

2009

Spain Latin America and the Caribbean Middle East and North Africa Rest of the World Total

2,781 0 35.8 2,041 4,858

2,936 8,138 9,028 4,866 135,102

2,125 889,139 – 355,368 1,246,632

11,230 2,133,700 134,760 16,845 2,296,535

Spain Latin America and the Caribbean Middle East and North Africa Rest of the World Total *Million barrels Source: Repsol-YPF’s annual reports.

Gas

Source: Repsol-YPF’s annual reports.

14.9 percent of its stakes in YPF, reducing its exposure to Argentina, and contemplated the possibility of selling additional shares in the future as it expanded in new areas. Repsol-YPF’s E&P ventures were still heavily concentrated in Latin America and the Caribbean by 2009: 41 percent of its reserves were in Trinidad and Tobago, 20 percent in Argentina, 18 percent in the rest of South America, 14 percent in North Africa, 6 percent in the Gulf of Mexico (mainly in US waters), and 1 percent in Spain. However, the learning and growth experienced in E&P allowed Repsol-YPF to be involved in the discovery of three of the largest five new fields in the world in 2008 and three of the largest fifteen in 2009, and its managers felt more confident about expanding outside of Latin America and the Caribbean.55 Refining and Distribution and Marketing Downstream diversification in these business areas comprised production of oil derivatives, distribution, and wholesale and retail marketing. To grow in Latin America, Repsol-YPF acquired and improved refining units, adapted its products to the legal requirements in each country, built polyducts (plastic pipes used for civil and electrical engineering, telecommunications,

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gas and water services, street lighting, motorway communications, and other applications) and storage facilities, and developed a network of gasoline stations.56 Although refining had become one of the least profitable aspects of the oil industry in the 1990s due to competition from refineries from the Middle East and former Soviet Union, Repsol’s managers decided to build a network of refineries in Latin America in order not to depend on third parties to process its oil. In 1996, Repsol bought a 60 percent stake in a refinery called La Pampilla in Peru (45 percent share of the Peruvian market)57 and three in Argentina, EG3, Refisán, and Refinor (56 percent market share).58 After the acquisition of YPF in 1999, Argentinean antitrust authorities instructed Repsol to sell some of its assets. Repsol-YPF and Petrobras agreed to an exchange, by which Petrobras transferred a refinery called REFAP and a network of 240 service stations to Repsol-YPF, and Petrobras received 63 service stations in Argentina from EG3. This exchange made Repsol-YPF the second largest integrated oil company in Brazil, with a refining capacity of almost 60,000 barrels per day.59 Repsol-YPF developed a network of gasoline stations to market its own oil derivatives in Argentina, Ecuador, and Peru in the 1990s and in Brazil and Chile since 2000. At its peak in 2005, Repsol had 2,732 service stations in South America. The acquisition of YPF gave Repsol a network of 89 service stations in Brazil, mostly concentrated in the industrial regions of São Paulo and Minas Gerais and the swap with Petrobras in 2001 added 240. After the initial acquisitions in each country, Repsol’s managers began to adopt measures that transferred the know-how developed in Spain, namely, expansion of the network, adoption of a single brand name, improvement of quality of service, adoption of measures to gain efficiency, and addition of new products. However, as Repsol-YPF’s E&P ventures became more successful in the mid-2000s, its strategy began to focus more on E&P and sold its network of service stations in Chile in 2007 and Brazil and Ecuador in 2008, keeping those in Argentina (1,639) and Peru (242) only.60 “Repsol” became the brand name for all of the firm’s service stations and products in Latin America, except Argentina, where “YPF” remained. Repsol’s managers believed the name embodied the firm’s prestige in marketing and was one of its main assets. Since 1998, all of Repsol-YPF’s service stations adopted a single design created by British architect Norman Foster, which would set the firm’s stations apart from others.61 To improve quality of service, Repsol transferred some measures that had been applied in Spain successfully. To promote loyalty, YPF launched the “YPF en ruta” card in 2000 in Argentina. This card was based on the experience of “Solred,” introduced in Spain in 1990. “YPF en ruta” offered customers

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discounts and gifts throughout the firm’s network. To cut down operating costs, Repsol applied a single commercial management model across Latin America, called “Red XXI,” which simplified administrative and accounting processes, and optimized distribution logistics. Since only 25.5 percent of its service stations were under Repsol-YPF management in 2001 (the rest were franchises), it was difficult to transfer these measures across service stations. Therefore, in 2001 Repsol-YPF’s managers decided to increase the number of stations under its own management by reducing the number of service stations operated as franchises (this strategy was introduced successfully in Spain in 1995).62 Chemicals Until the late 1990s, Repsol-YPF’s production of chemicals came from three plants, two in Spain and one in La Plata (Argentina), which Repsol inherited through one of its acquisitions. In 1999, Repsol-YPF decided to increase production of natural gas–based products in Latin America, and launched three projects, two in Argentina and one in Mexico. Repsol-YPF built a plant in Plaza Huincul that produced 411,000 tonnes of methanol per year, and a second plant in Bahía Blanca to produce a fertilizer called Profertil. Repsol-YPF owned 50 percent of Profertil. Agrium of Canada contributed the other half. The Mexican project, called “DYNA-SOL Elastómeros,” was also a 50-50 joint venture involving a local firm called Dirsa. DYNA-SOL produced 200,000 tonnes of rubber per year. RepsolYPF supplied 90 percent of the natural gas needed for these projects annually.63 In 2002, ExxonMobil began to distribute some of RepsolYPF’s alcohol products in the province of Buenos Aires, thanks to an agreement.64 Gas and Electricity Promotion of gas for household and industrial consumption and for electricity generation was one of the main pillars of Repsol-YPF’s strategy in Latin America. The gas division comprised three main activities, distribution of LPG or bottled gas, distribution of natural gas, and generation of electricity. LPG had been one of Repsol’s main business divisions in Spain for decades. In 2000, Repsol-YPF distributed 3.230 million tons of LPG in the world (900,000 tons in Latin America), and was the third-largest distributor in the world. Sales began to fall in the second half of the 1990s as natural gas began to grow. In 2001, sales fell by 3 percent in Europe and by 4 percent in Spain, but grew by 6.3 percent in Latin America, mainly

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in Bolivia and Peru. Repsol-YPF hoped that growing sales of LPG in Latin America would compensate for declining sales in Europe.65 As an example, in 2002, this division had an operating income of $269 million of which $55 million came from Latin America.66 Repsol had many decades of experience in Spain and its managers believed this know-how would help develop a strong LPG venture in Latin America. Since 1997, Repsol made important investments in the acquisition of LPG distribution companies in Argentina, Bolivia, Brazil, Chile, Ecuador, and Peru.67 The shrinking of the LPG market in Europe was partly caused by the growth in distribution and commercialization of natural gas for industrial and household use, thanks to the improvement of the network of pipelines. In Latin America, Repsol focused on some of the largest cities of Argentina, Brazil, Colombia, and Mexico. The acquisitions were followed by investments to expand the network, production plants, storage facilities, and home infrastructure. In 1999, Repsol-YPF became the second-largest firm in the world in production and sales of bottled gas and natural gas.68 Electricity generation was Repsol-YPF’s third business area in the gas industry. Its managers believed Repsol-YPF could achieve important synergies from combining the natural gas business with electricity generation and took over CCGT power plants in Argentina in the 1990s and Mexico in 2007. Gas Natural was in charge of distribution and marketing of RepsolYPF’s natural gas operations. Its combined cycle power plants in Argentina came through the acquisition of YPF, Pluspetrol Energy, and Astra. The Dock Sud CCGT power plant in Buenos Aires had a generation capacity of 800 MW, Astra operated another CCGT power plant with a capacity of 63 MW, and Pluspetrol Energy owned 100 percent of two combined cycle power stations in El Bracho (Tucumán), Central Térmica Tucumán with a capacity of 440 MW, and Central Térmica San Miguel de Tucumán with a capacity of 330 MW. In 2007, Repsol-YPF acquired five CCGT power plants in Mexico, Anahuac, Lomas del Rey, and Valle Hermoso in the northern state of Tamaulipas, Saltillo in Coahuila, and Águila Altamira in the state of Altamira. Their installed capacity was 3,803 MW.69 Repsol-YPF also relied on alliances with other oil firms and with public utilities to promote the use of natural gas for electricity generation. In upstream operations, the huge costs of developing new fields required partnerships with other large oil and gas firms. As an example, Repsol and Amoco (BP Amoco after 1998) established a strategic partnership in 1995 to develop natural gas fields in Trinidad and Tobago.70 Amoco also agreed to cooperate with Repsol to promote and develop electricity generation projects in Spain and Latin America. As a result of this agreement, RepsolYPF and BP Amoco received a concession to build a CCGT power station

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in Brazil in 1999.71 Repsol also developed alliances with public utilities to promote the use of natural gas in downstream operations and secure longterm contracts for its natural gas. Repsol and Iberdrola reached an agreement in 1996 to cooperate on new projects to generate electricity at cogeneration plants, to build new generation units powered by gas (especially CCGT power plants), and to convert existing power stations so that they can operate on gas. This agreement also contemplated joint shareholdings in fields and energy projects outside of Spain, especially in South America, exchange of assets (Repsol-YPF took over some Iberdrola’s natural gas assets in Brazil and Colombia in exchange for 13 percent of Gas Natural de México in 2001) and both firms committed $2 billion to build CCGT power plants with capacity to generate 3,000 MW.72 Repsol-YPF also worked on several projects with Endesa but they did not develop a global alliance. Repsol-YPF’s Astra and Endesa built a CCGT power plant called Dock Sud in Buenos Aires and a pipeline called Gaseoducto Atacama between northern Argentina and northern Chile to feed future CCGT power plants in Chile. Repsol-YPF and Endesa also signed a contract by which Repsol-YPF would supply the natural gas that Endesa needed for its combined cycle power plants in Spain.73 Repsol-YPF’s managers decided to take control over a utility in 2005. Controlling a public utility would allow Repsol-YPF to achieve two goals. First, it would secure demand for its natural gas and, second, it would allow Repsol-YPF to expand into electricity generation. Gas Natural made a takeover bid for Endesa in 2005, triggering new bids from E.On and Enel (which eventually took over Endesa in 2009). This competition increased Endesa’s price, leading Gas Natural to focus instead on Unión Fenosa (UF). Between 2008 and 2009, Gas Natural gained control over 95.2 percent of UF, at a cost of a16.757 billion. To pay for this acquisition and to cover UF’s and Gas Natural’s debt, Repsol had to raise a32.31 billion. a18.26 billion came from a syndicated loan, a3.502 billion from a rights issue, a6.95 billion through bond issues in the Euromarket, and a3.6 billion from the sale of assets (service stations and combined cycle plants in Spain—as requested by Spanish antitrust authorities—and EPSA in Colombia).74 Innovation Repsol-YPF conducted most of its R&D projects in Spain. Its R&D facilities were scattered around the country until they were brought together at a new Technological Center in Madrid in 2002. Its R&D efforts in “E&P” tried to increase the amount of oil extracted from the fields, reduce production costs, and minimize environmental impact. In 2003, Repsol-YPF

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was commissioned by the government of Spain the task of recovering 12,000 tonnes of oil from the Prestige, an oil tanker sunk at a depth of 4,000 meters off the coast of Spain. Repsol-YPF built robots to operate underwater to inspect, clean and seal the leaks, and extract the oil. In “refining and marketing,” the focus was on developing oil derivatives that complied with the environmental regulations set by the EU and the Latin American countries where they were sold. A project to develop biodiesel was launched in 2005, resulting in Argentina’s first biofuel, Gasolbio, in 2007. In “chemicals,” the focus was on developing new oil and gas derivatives for agriculture and industrial use, new asphalts, and plastics. RepsolYPF also tried to improve productivity through automation of bottling and storage facilities and simulation of distribution networks. In the “gas” division, Repsol-YPF worked on safety mechanisms and improvement of infrastructure (such as construction of new cryogenic storages plants) and tried to find new applications for LPG and natural gas, such as new gas-powered heaters and cogeneration prototypes. Repsol-YPF also promoted electronic business and joined other Spanish firms such as BBVA, Telefónica, and Iberia to create an e-market for supplies, called Adquira, which reduced costs.75 Adequate Risk Management Model Repsol-YPF found more bumps on the road than the other Spanish multinationals included in this book and had to work really hard to “keep risk within reasonable limits,” as stated repeatedly in the firms’ annual reports. The Argentinean crisis of 2001 required Repsol-YPF to adopt a strong and quick response to adjust and in the long run decided to reduce its exposure in Argentina. The Argentinean government broke the convertibility of the Argentinean peso vis-à-vis the US dollar on a 1-1 rate, modified the price regime by translating to pesos the rates that were until then calculated in US dollars, barred firms from adjusting their rates on the basis of the US price index, and set a 20 percent tax on oil exports and a 5 percent tax on exports of refined products.76 The prices of gas for exports remained in US dollars. Repsol-YPF reached agreements with some large Argentinean firms from the export sector to translate the devaluation of the Argentinean peso into the price they paid for gas in 2002 and continued to negotiate with the Argentinean government a gradual increase of prices for the domestic market.77 To guarantee YPF’s financial soundness, Repsol-YPF’s managers put together provisions worth $1.438 billion, drawn from the firm’s 2001 profits: $280 million were provisions against defaults, $211 million to pay part

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of the debt contracted by YPF in US dollars and $30 million for the debt of YPF’s subsidiaries, $729 million to cover the value of YPF’s Argentinean upstream operations, and $187 million for potential contingencies. YPF also froze some investments, especially in E&P, wages, and compensation and adopted new cost-reducing measures, including the sale of some assets. As a result, YPF’s oil reserves in Argentina fell by 58 percent between 2003 and 2009, from 1,269 million barrels to 538, and gas reserves fell by 67 percent, from 7,980 billion cubic feet to 2,672. Its oil production fell by 29 percent, from 157 million barrels to 111 million, and gas production by 21 percent, from 644 billion cubic feet to 533. YPF’s share of Argentina’s oil production fell from 40 percent in 2003 to 35 percent in 2009, and its share of natural gas production fell from 32 percent in 2003 to 26 percent in 2009.78 These figures suggest that Repsol reduced investments in exploration and development of new fields and used YPF’s profits to reduce debt and reward stockholders through dividends to prevent a slide in the value of its stock. The sale of nonstrategic assets (including E&P operations in Egypt, exploration rights in Indonesia, the Transandino pipeline, Edenor, 23 percent of Gas Natural and Enagás, among others) raised over $3 billion, an additional $2.4 billion came through bonds and $3.1 billion worth of debt was converted into stock. As a result, debt/capitalization fell from 73 percent in 1999 to 51 percent in 2000, 40 percent in 2001, and 29 percent in 2002. The only positive unintended consequence of the crisis was that since Repsol-YPF calculated operating costs in domestic currency, the crisis caused improvements in finding costs, development costs, and lifting costs, improving the overall efficiency of the firm’s operations in exploration and generation. In spite of the impact of the Argentinean crisis on Repsol-YPF, the firm’s Chairman, Alfonso Cortina, affirmed in the 2001 annual report: “[O]ur presence in this country (Argentina) has an unquestionable strategic value and we have the will to stay there, in spite of the adverse temporary circumstances.”79 Since the Argentinean crisis, Repsol-YPF’s managers made a huge effort to keep the firm’s debt under control. Debt fell to a3.334 billion in 2008 and debt/capitalization stood at 7.7 percent, but the takeover of UF in 2009 increased debt to a10.928 and raised debt/capitalization to 16.7 percent. To reduce the effect of currency devaluations, debt was denominated mostly in dollars or was dollar-indexed. The 2008–2009 crisis reduced RepsolYPF’s profits by 39 percent in 2009. Repsol-YPF decided to commit undrawn credit facilities amounting to a4.680 billion.80 The financial resources for Repsol-YPF’s acquisitions and investments came mainly through capital increases and bonds. In 1997, Repsol International Capital Ltd. issued “guaranteed preference shares” in the New York

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Stock Exchange for $725 million. The resources for the acquisition of YPF in 1999 came through Eurobonds worth $7.650 billion and a capital increase of $5.665 billion. The final price tag for YPF was $14.909 billion, the largest amount ever paid for a Latin American firm at that time. RepsolYPF also stretched out the payments for the amortization of the goodwill in consolidation generated by these acquisitions from ten to twenty years. To reduce the impact of currency fluctuation, most of its revenue and debt are denominated in US dollars or dollar-indexed.81 Transparency and Corporate Social Responsibility Repsol-YPF’s managers were aware that oil firms were often targeted for their environmental record but its lack of international exposure was an advantage. Repsol had not become the target of international campaigns and its managers wanted to keep this type of low profile. Repsol endorsed the UN’s Global Compact and adopted a code of good government in 1995, which was subsequently amended to comply with newer regulations and recommendations. A Disclosure Committee was created to facilitate communication with political and economic actors and regulatory agencies.82 Repsol-YPF’s corporate social responsibility program supported projects in education (mainly for research, scholarships, acquisition of computers and technology, and support for development of energy-related programs at engineering schools, but also sustainable development and environmental protection programs), cultural projects (sponsorship of concerts, festivals, and cultural publications, and renovation of old buildings), protection of children, and sponsorship of sporting events. Repsol-YPF invested every year between a24 and a30 million in social responsibility projects.83 To reduce the environmental impact of its operations, Repsol-YPF developed a “System of Environmental Administration,” based on existing environmental legislation and ISO 14001 rules, which resulted in ten principles: minimization of impact, continuous adaptation to legal requirements, prevention of pollution and evaluation of potential risks, application of efficiency criteria in the solution of environmental problems, environmental cooperation, incorporation of environmental assessment into management decisions, use of environmental criteria when dealing with outside contractors, use of environmental information and communication, environmental education, and continuous improvement. Repsol put together its first environmental report in 1996, reviewing implementation of environmental criteria, and began conducting environmental audits in 1997, some by independent auditors (over two hundred were conducted annually on

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average). Some of the more common measures adopted to apply these criteria included energy efficiency, reduction of emissions, water treatment, reduction of waste, and reduction of the visual impact of its projects. To give its sustainability efforts international visibility, Repsol-YPF joined the World Business Council for Sustainable Development and the Climate Leadership Index.84 Repsol-YPF also organized meetings with the indigenous communities living in the regions where they explored for oil in Argentina, Bolivia, Colombia, and Ecuador and conducted public awareness campaigns to try to reduce opposition to its projects. The Dow Jones Sustainability Index considered Repsol-YPF the world’s most transparent oil company for four consecutive years between 2006 and 2009.85 Conclusions Repsol began its internationalization strategy through foreign direct investments in Latin America in 1992. Its managers decided that the firm had strong advantages in downstream operations, mainly its know-how in refining and marketing, which could help Repsol market its products successfully in new markets. However, Repsol also faced important disadvantages in upstream operations. It did not have many concessions to explore in oil-rich areas and as a result it was highly dependent on other firms for their oil and natural gas. Its managers saw expansion abroad as a way to overcome these disadvantages and develop new advantages. Participation in the Atlantic LNG project in Trinidad and Tobago in 1995 and takeover of Astra in Argentina in 1996 were the beginning of a process of acquisitions of firms with a long history in E&P, in order to gain exploration rights, access to fields, know-how, and technology. The reforms implemented by the government of Argentina in the 1990s opened the door for Repsol. The government liberalized the hydrocarbon industries, allowing free entry into the market and free export of oil and gas. The government also welcomed all firms (Argentinean and foreign) to submit bids for new E&P rights and privatized YPF, Argentina’s largest firm in the oil and gas industry. Repsol took over three important firms in Argentina in the second half of the 1990s, Astra, Pluspetrol Energy, and YPF, gaining E&P operations in several countries of South America, mainly in Argentina. After these important acquisitions, Repsol-YPF also began to bid for new concessions across Latin America in the late 1990s, especially in Brazil, Mexico, and Venezuela, where the oil and gas industries had been in the hands of state-owned monopolies for decades. Repsol’s managers believed investments in these countries were safe because these countries

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had significant proven deposits. The governments wanted to stimulate production by inviting foreign firms into E&P ventures, some in old fields where production was falling, but in new ones as well. Repsol-YPF also bid successfully for E&P rights in Bolivia, Colombia, Ecuador, and Peru. By the mid-2000s, Repsol-YPF had developed solid know-how in E&P (including offshore operations) and began to seek concessions in new markets, such as the US area of the Gulf of Mexico and Norway. The success of these investments in E&P also resulted in important advantages in the gas and electricity-generation industries. Repsol-YPF became a leading producer of gas and invested heavily in marketing, mainly LPG and LNG. Public utilities around the world began to invest heavily in construction of CCGT power plants in the 1990s as cheaper and cleaner alternatives to older power plants. This proliferation of CCGT power plants fueled demand for natural gas. Repsol-YPF developed alliances with public utilities to secure long-term contracts for its natural gas and encouraged construction of additional CCGT power plants to stimulate additional demand. In 2008, Repsol-YPF’s subsidiary Gas Natural made a bold move and took over UF, which also had significant operations in Latin America and the Caribbean. In addition, in the second half of the 2000s, Repsol-YPF began shipping its natural gas from Trinidad and Tobago to Canada and the United States, and from Peru to the west coast of Mexico (and planned to start shipments from Peru to the west coast of the United States as well). Repsol is likely to focus on developing its midstream and downstream operations in North America in the 2010s, integrating them into its pan-American project that encompasses the whole oil and gas cycle. The highlights of Repsol’s strategy of expansion in Latin America and the Caribbean are the prominent role played by the Spanish government, full integration of operations from upstream to downstream, development of strong operations in E&P, its leading role in several areas (especially in E&P, and gas production and marketing), pan-American business strategy, promotion of natural gas for the retail and industrial sectors (with emphasis on electricity generation), high profitability, and the significant growth of its stock value. 1. Role of the Spanish government. The Spanish government played a prominent role to help Repsol become the leading player in the oil and gas industries in Spain and encouraged its investments in Latin America. Repsol was the result of the reorganization of the state-owned hydrocarbon industry in Spain, when the government decided to bring together all of the operations under a single firm, Repsol, which was then privatized. The

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government also wanted Repsol to champion the development of the natural gas industry in Spain and developed an aggressive strategy to keep foreign competitors out. First, the government stopped the expansion of British Gas in Spain, got Repsol to take over BG’s subsidiaries, and went on to hand Enagás, which operated the network for transportation of natural gas in Spain, over to Repsol. Second, the managers appointed by the government developed Repsol’s expansion strategy in Latin America and the Caribbean, and smoothed relations with the governments of Latin America that granted Repsol-YPF concessions in E&P or in distribution of natural gas. 2. From upstream to downstream. Repsol’s strategy in Latin America rested on applying in the new markets the same strategy that had allowed Repsol to be the major player in Spain: operating in all of the activities of the oil industry, from E&P to marketing, to capture all of the returns of these operations, control management throughout, and reduce transactions involving third parties. In the late 1990s and the 2000s, Repsol operated in the full cycle from upstream to downstream operations in Argentina, Bolivia, Brazil, Colombia, Ecuador, and Peru. In Chile, Repsol had important downstream operations, but not upstream ventures due to the lack of deposits. Mexican and Venezuelan law constrained the role of foreign firms so Repsol could not achieve full integration there either. Since the late 1990s, Repsol-YPF was the largest private producer and distributor of gas in Mexico and became one of the main private producers of electricity thanks to the acquisition of UF and the purchase of five CCGT plants in 2007. Since the 1990s, Repsol also became the leading private producer of oil and gas in Venezuela. Trinidad and Tobago was the single most important source of natural gas for Repsol but did not develop downstream operations there. 3. Development of strong operations in E&P. When Repsol’s managers decided to make investments outside of Spain, one of the main driving forces was Repsol’s weakness in E&P. The state-owned firms that preceded Repsol in Spain’s oil industry, as well as Repsol itself after its creation, had invested in E&P in Spain since 1941, with little success, but not outside of Spain. As a result, Repsol had to buy most of its oil and gas from other firms. In 1995, refining and marketing, gas, and chemicals generated about 30 percent of Repsol’s operating income each, but E&P generated less than 10 percent. By 2009, E&P and gas accounted for almost a quarter each and downstream operations accounted for a third (down from 60 percent). In terms of operating profits, E&P accounted for over half in 2007, refining and marketing 40 percent, and chemicals only 4 percent. Gas had already grown to 9 percent and it will probably grow larger as Gas Natural UF

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builds more CCGT power plants and Gas Natural seeks contracts with other utilities.86 4. Leadership. Repsol’s managers tried to become leaders in downstream operations and, when possible, in E&P. Entry into every new market took place through acquisition of a large domestic firm when possible. This was the case in Argentina, Chile, Bolivia, Ecuador, and Peru. In the case of Brazil, entry took place through a swap of assets with Petrobras, followed by new concessions from the government in E&P. Entry into Trinidad and Tobago and Venezuela took place through government concessions for E&P. In 2009, Repsol-YPF was the market leader in distribution and marketing of oil derivatives in Argentina, Bolivia, Chile, Ecuador, and Peru. It was also the leading distributor of LPG in Argentina, Chile, Ecuador, and Peru, the largest distributor of natural gas in Argentina and Mexico, and the largest private producer of oil and gas in Argentina, and the second largest in Brazil, Mexico, and Venezuela (only behind the state-owned firms Petrobras, Pemex, and PDVSA). 5. Pan-American strategy. The backbone of Repsol-YPF’s strategy in the Americas was based on a simple concept: Repsol’s managers divided the Americas up into two main industrial regions where demand for oil and gas was high. The first region was the industrialized southern cone, comprising Argentina, Chile, and southern Brazil, and the second region was North America, comprising mainly Mexico and the United States, as well as Canada. Repsol sought deposits of oil and gas to supply these markets. The resources for the Southern Cone came mainly from fields in Argentina and Bolivia. To get them to the markets, Repsol acquired or built pipelines for transport. The gas that Repsol produced for North America came from Trinidad and Tobago and Peru. Repsol also produced gas in Mexico for the domestic market and hoped to build a pipeline from Bolivia to a port in Chile or Peru so that it could also export Bolivian gas to North America. 6. Focus on natural gas. In the 1990s, Repsol’s managers saw great potential in the use of gas for electricity generation and decided to invest heavily in E&P as well as marketing. In the 2000s, Repsol was already the third-largest producer of natural gas in the world and a leader in marketing of LPG and natural gas in several countries (as seen above). However, Repsol’s managers saw the greatest potential for natural gas in electricity generation. Gas-powered CCGT plants were smaller, cheaper, and quicker to build than coal-based thermal plants and nuclear plants, and they were becoming the favorite plants among the public utilities. In addition, CCGTs generated lower emissions of greenhouse gases, so governments also favored them. Since the late 1990s, Repsol-YPF developed alliances with other oil firms and with public utilities to promote CCGT plants and

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secured long-term agreements to supply gas for CCGT plants across the Americas. In 2008, Repsol-YPF took over UF. By controlling a utility, Repsol-YPF secured a strong client for its gas and acquired the know-how to build additional CCGT plants. 7. Alliances. Although it is normal for oil and gas companies to build partnerships with other firms for E&P and to develop fields (to share cost and reduce risk), it is important to highlight that Repsol-YPF sought strong alliances with public utilities over the years to secure clients for its natural gas. As seen above, the ultimate alliance came through UF’s takeover. A strong alliance with a public utility does not preclude alliances with other utilities, so Repsol-YPF worked closely with Endesa and UF in Latin America over the years and especially with Iberdrola. 8. Stock value. In the 2000s, Latin America contributed significantly to Repsol-YPF’s operating income, generating around 30 percent annually.87 By 1991, Repsol-YPF had few assets in Latin America, so its performance in the stock exchange since then in part reflects the impact of its investments in Latin America. Between 1991 and 2005, Repsol’s market cap increased by a27.5 billion. Shareholder value creation during this period was a7.4 billion and the average shareholder return was 14.1 percent annually, lower than that of the IBEX-35 (15.4 percent).88 This indicates that the other Spanish firms in this book did better than Repsol-YPF on average. Table 6.3 compares Repsol-YPF to a group of leading international firms in the oil and gas industries. Between 1991 and 2009, Repsol-YPF’s stock value grew by 302 percent. This was well above indicators such as the Dow Jones, Nasdaq, and S&P 500, but below some of the leading international oil firms. Occidental and Total grew significantly more, ExxonMobil, Chevron, and ConocoPhillips grew slightly more, and Royal Dutch Shell, BP, and Marathon grew slightly less. Considering that all of these multinationals had much more expertise in the oil industry when Repsol began making investments abroad in 1992, the fact that Repsol-YPF ranks somewhere in the middle supports several conclusions. First, it speaks favorably of Repsol-YPF’s strategy and ability to develop advantages in E&P. Second, this is also an endorsement of its ambitious plans in the natural gas industry, including its ventures in electricity generation via the UF takeover. Third, it indicates that the transfer of know-how from YPF after its acquisition was successful, because Repsol-YPF was capable of seeking new E&P ventures in new countries in Latin America and outside. Finally, this success also indicates that Repsol-YPF was able to translate to its new Latin American ventures some of the advantages it had developed in downstream operations in Spain prior to its international investments.

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Multinational Enterprises in Latin America Table 6.3 Appreciation of stock, Dec. 31, 1991–Dec. 31, 2009 Firm Occidental Petroleum Total Exxon Mobil Chevron Conoco Phillips Repsol Nasdaq Royal Dutch Shell BP Marathon Dow Jones S&P 500 Sinopec

Percent gain 810.46 442.25 348.02 346.32 325.58 302.15 287.00 270.37 252.83 242.17 229.08 167.35 148.051

1 Since July 1993. Source: NYSE.

However, the other Spanish multinational enterprises included in this study did better than Repsol-YPF when compared to some of the leading international firms in their industries. BBVA, SCH, and Telefónica did significantly better than their competitors and the public utilities were among the top in their industry. Repsol-YPF “only” ranks in the middle by growth of stock value among the largest oil firms. This relative “poor” performance indicates that Repsol-YPF had fewer advantages than the other Spanish multinationals when they began investing abroad. As a result, Repsol-YPF had to develop them through acquisitions and learning.

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CHAPTER 7

Conclusions

T

he model developed in this book for the study of Spanish multinational enterprises (MNEs) builds on the concepts of “advantage,” “knowledge,” and “internalization.” Stephen Hymer used the idea of “advantage” to support his argument that, in order to be successful in foreign markets, firms have to have an advantage that allows them to compensate for the additional costs of starting and doing business in new markets. Many students of MNEs borrowed the concept, but took the advantage as a given, and failed to develop a model to show how a firm develops its advantages.1 The general equilibrium theory of international trade and the new international trade school took foreign direct investments (FDIs) to be the result of the endowments of countries. Some countries have some factor endowments that give them a “comparative” advantage over others. International trade results from these comparative advantages and FDIs emerge eventually when the managers of the firms in that country see the opportunity to start production abroad.2 Several scholars have theorized the role of “knowledge” as a determinant of FDI. In his “product cycle theory,” Raymond Vernon argued that knowledge of the market was important in the early stages of development of a product, forcing managers to keep the research and development (R&D) facilities close to the market. However, knowledge itself was not a determinant of FDI. The driving force was the search for efficiency advantages (mainly cheaper labor), once the production process became standardized.3 Alfred D. Chandler and Takashi Hikino emphasized the importance of knowledge when studying the organizational structures of firms. They explained that the most successful firms are those whose internal organization facilitates learning about markets and products, resulting in knowledge that fosters innovation.4 John Cantwell argued that the firm had supplanted the state and other actors as the main agent of innovation and R&D. Technological development was a function of the firm’s learning experience

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and had two components, scientific and technological knowledge on the one hand and organizational routines and collective expertise and skills of specific production teams on the other. This second type of knowledge resulted from the collective learning experiences of the firm and was not transferable.5 The Scandinavian School also regarded FDIs as part of the learning experience of firms and argued that FDIs were more likely as managers learned more about new markets.6 Theorists of the firm introduced the concept of “internalization.” They argued that markets are imperfect and firms prefer to make FDIs to bypass the imperfections of contracting with local firms. Alternatives to FDI such as franchising or consulting would not give the managers of the firms “selling” their knowledge full “control” over the operations of the firms that “buy” their knowledge, and as a result fear that part of the knowledge might get lost in the process. To overcome this “market imperfection,” they make FDIs, bring their own managers to the host countries, and try to replicate the organizational arrangements of the parent in the subsidiary.7 To operationalize these three concepts (advantage, knowledge, and internalization) and explain how the managers of an MNE adopt different institutional frameworks so as to facilitate collective learning and knowledge transfers, this book proposed a model informed by rule-oriented social theory as developed by Nicholas Onuf. In rule-oriented constructivism, agents and institutions co-constitute each other. Firms are institutions organized around sets of rules created by the managers to tell all employees what role they play in the firm. These rules emanate from the managers’ knowledge of the firm, the firm’s employees, products and services, and the market. The rules result from a process of collective learning and constitute the firm’s “normative framework” or “corporate culture,” which is always interpreted, applied, and modified as employees and managers continue to learn. Outside of the firm, the market is a broader institution, in which the firm becomes an agent. The rules of the market are determined by the regulating agents (governments and regulatory agencies) and by the firms that operate in them.8 The approach to the study of MNEs presented in this book departs from previous analyses of MNEs developed in the fields of political science and international relations, where most scholars regard firm-government relations as a struggle over resources resulting in a zero-sum game. Scholars who study MNEs in developing countries in particular focus on capital inflows, impact on a country’s trade account, domestic firms, effect on democracy and political institutions, loss of national autonomy, corruption, and erosion of state power, among other topics. These scholars, however, normally treat MNEs as a black box and fail to understand the fluid relationship that exists between firms and societies (home and host) and the

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processes by which they co-constitute one another. The framework provided in this book allows the researcher to study the process of development of the advantage in the home country, its application in the host countries, and the process of learning that takes place in host markets, which results in new knowledge, transformation, or elimination of old advantages and development of new ones. This framework also sheds new light on the study of the contribution of MNEs to development and the evolution of the sectors in which they operate. Students of MNEs take the concept of “advantage” as a given, as an asset that a firm has, but fail to show how it develops, how a firm’s managers perceive it as an asset to be taken to a new market, and how they apply it in their subsidiaries. The goal of this book was to focus precisely on those areas that past students of MNEs neglected: the development of the advantages that lead to FDIs and the application of the advantage in the host markets. Seven firms from Spain that until the late 1980s or early 1990s had no or few operations outside of their home market served as case studies. The book is organized along the four industries in which these multinationals operate: banking and finance (BBVA and SCH), telecommunications (Telefónica), public utilities (Endesa, Iberdrola, and UF), and oil and gas (Repsol). In the 1990s, these Spanish multinationals made very large direct investments outside of Spain, mainly in Latin America and the Caribbean, because their managers believed that their firms produced products and services that fit the needs of the Latin American countries. These products and services embodied the knowledge developed within the firms. This knowledge was sector-specific and firm-specific and evolved as a result of the interaction of the firms’ managers, the government and regulatory agencies and the consumers, in a very specific context. The institutional setting (rule-oriented social theory regards institutions as sets of rules) in which these firms operated was very important. Although some conditions were different in each industry, commonalities existed. The four industries involved the provision of basic infrastructure and had been heavily regulated by the Spanish government until the 1970s, 1980s, or 1990s. Therefore, in all industries the government played a very prominent role, sometimes as a mere regulator (banking), and sometimes as a regulator and a producer (all other cases). The telecommunications and oil industries were dominated by state monopolies (Telefónica and Repsol), public utilities (even if they were not necessarily state-owned) operated under conditions of monopoly in a specific region (Endesa, Iberdrola, and UF), and the banks (BBVA and SCH) were large firms operating in a sector shielded from foreign competition by law. Governments, firms, and consumers interacted in this context.

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The government wanted to make the firms competitive by international standards and devised a carrot-and-stick approach to encourage them to become more efficient. Consumers demanded more modern, reliable, and cheaper products and services. And the firms embraced modernization to meet the demands of the government and the consumers, while at the same time lobbying the administration for friendly laws. In this institutional setting, the experience of each firm resulted in learning, which led to the institutionalization of successful practices, both internally and externally. The firms devised the internal organizational structures to deliver the goods and services that government and society expected. Externally, they also devised patterns of interaction with outside agents and institutions (consumers, government, and regulatory agencies) to influence the rules of the game and shape the conditions of operation. This patterned behavior was the “organizational culture” of each firm that embodied its “knowledge of the market.” Development of the Advantages Spain achieved high rates of economic growth since the 1960s that fueled demand in the four industries included in this book. Spanish consumers demanded better services and the government pushed firms to become more modern and efficient in order to improve the quality of service and make firms competitive by European standards. Spanish banks had to increase the array of banking and financial services they offered, in order to be able to survive the process of financial diversification and disintermediation that began in the 1980s. The public utilities had to invest in new power plants to generate more electricity. Telefónica had to expand the telephone network, install a great number of new landlines, and introduce a greater number of new services, such as the Internet and mobile telephony. Repsol had to find new sources of oil to reduce dependence on foreign suppliers, and adjusted to growing environmental demands by developing new oils that generated fewer emissions and by building a new division for natural gas that met the growing demand of CCGT power plants. In the 1990s, the European Union (EU) decided to push the creation of a single European market by focusing on some sectors in which protectionism was still high and forced member states to eliminate restrictions to foreign firms in the four industries included in this book. To comply with EU law, the Spanish government began to change Spanish legislation. The Spanish government began to privatize its state-owned firms gradually, Telefónica and Repsol among them, culminating in 1997 with the sale of the last stocks, and then proceeded to open up each industry to new

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entrants. The Spanish government had been a pioneer in liberalization of banking and financial markets since 1978, but liberalization of the telecommunications, public utilities, and oil and gas markets did not take place until the second half of the 1990s. Since it was already clear in the 1980s that liberalization would take place, the firms in these sectors began to get ready, especially after the timeline was made clear in the 1990s. They became more modern and efficient and devised a long-term strategy to survive in a single EU market. Application of the Advantages A wave of liberalization swept through the world in the 1990s. The managers of these seven Spanish firms thought that this process would not be reversed and concluded that only early movers would grow to become global players, and only global players would survive in a global market. Until the 1990s, telecommunications and public utilities were regarded by governments in Latin America as “universal service,” thus justifying the need to hold these firms under state control as the best option to guarantee access. The oil and gas industries were also heavily controlled by the states under cries of “oil nationalism” to prevent the exploitation of national resources by foreign multinational firms. The banking and financial industries were more open to foreign players, but states also played a very active role through restrictive legislation and sometimes ownership of several banks. All this changed in the 1990s, when governments called for “efficient service.” Governments lacked the resources required to make these industries more modern and efficient and decided to invite the private sector to take over by privatizing the state-owned firms. They set regulations to encourage expansion and quality of service, but had to conduct periodic adjustments over price, taxation, technical requirements, et cetera. As a result, the incumbent firms and the new entrants had to interact with the regulators on a regular basis, gaining some power over legislation. These conditions were very similar to the corporate experiences that the Spanish firms faced in Spain in the 1980s and 1990s. The similarity of conditions led the managers of Spanish firms to consider the possibility of entering those markets. In addition to similarities in the legal and political frameworks, the managers believed that in many of the countries where governments were privatizing firms and liberalizing these industries, they would find the same development needs that Spain faced between the late 1970s and early 1990s, and they could replicate the same corporate experience they had in Spain. Moreover, they were familiar with the institutional framework in

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which they would have to operate. This would give them advantages over some competitors. In Central and Eastern Europe, Africa, Asia, and Latin America, governments were privatizing state-owned firms in these sectors and/or opening up the doors to new entrants. The institutional frameworks in these markets were similar to those described above for Spain. The governments of Latin America began to open up their markets in the late 1980s. Chile began in the mid-1970s, Mexico in the mid-1980s, and most of the other governments began theirs in the late 1980s and early 1990s. These reforms included privatization of state-owned firms in all of the sectors included in this study, with the main exception of the oil industry in Mexico, Brazil, and Venezuela, where reforms were milder and slower. All of the Spanish firms in this study acquired formerly state-owned firms in public tender. BBVA and SCH purchased some banks that had been taken over by some of the Latin American governments as a result of the last banking crisis of the mid-1990s. The public utilities acquired electricity firms, Telefónica took over telephone operators and Repsol acquired formerly state-owned oil firms, among them Argentina’s YPF in 1999, the largest takeover in Latin American history at the time. With the exception of the oil industry in Brazil, Mexico, and Venezuela, the governments of Latin America and the Caribbean adopted measures to introduce competition. In some cases they offered a period of temporary monopoly to the new entrants (this was very common in the telephone industry), but in the long run all of the sectors opened up to new entrants, and the governments introduced new legislation and independent regulatory agencies to make sure that free competition occurred. The need to attract new technology was one of the main reasons behind privatization and liberalization in these sectors. The productivity of the telephone, public utility, and oil firms had declined drastically since the 1970s across Latin America, and in the 1990s the governments found themselves short of money to undertake the large investment projects needed to upgrade infrastructure, especially in light of the expected growth of demand caused by rising rates of economic growth. The need to adopt some of the new technological developments and services of the previous years increased the costs of upgrading the telecommunications infrastructure. As a result, state-owned firms could not make the investments required and decided to invite private firms, many of them foreign. The seven Spanish firms included in this study brought with them new technologies and financial services. BBVA and SCH played a leading role in the development of capital markets in general, especially by developing pension and mutual fund management programs, capitalization of the stock exchange,

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and extension of banking services to lower-income strata. For policymakers, foreign banks with sound finances and lending policies were necessary to prevent defaults, and their ability to introduce new financial services was critical to help capitalize domestic firms. The reforms introduced in the telephone industry intended to attract leading international firms. Governments hoped these firms would expand the network of landlines and bring the latest technologies to improve the quality of service and boost efficiency. Telephone operators were also expected to introduce new services, such as Internet and mobile telephony. In the public utility industry, Latin American governments expected the new entrants to build new power plants to boost electricity generation. The high rates of economic growth in the early 1990s increased demand for electricity and governments feared state-owned public utilities lacked the financial resources to increase generation capacity to keep up with rising demand, resulting in power shortages. Governments had an ambitious agenda that went beyond increases in generation capacity. They also expected the public utilities to improve the efficiency of the grid to reduce energy losses, expand service to new areas, and adopt cleaner sources to minimize environmental impact. Declining production of mature fields was the main driving force behind reforms in the oil industry. State-owned firms in Mexico and Venezuela boosted production in the 1970s, but in the 1990s they found themselves short of cash and technology to keep up with growing demand, not only abroad, but even at home in the case of Mexico. The spikes in demand for oil in the early 1990s led governments to adopt measures to increase production in mature fields and stimulate exploration in new areas, mainly concession of exploration rights, but even outright privatization of stateowned oil firms in some countries. Even the governments of countries that had not had a strong oil industry before, such as Brazil, invested heavily in oil exploration to support their national industrialization plans and invited international firms to help. The growth of the natural gas industry since the 1980s also led governments in Latin America and the Caribbean to grant exploration concessions to international firms. As public utilities began to build CCGT power plants, development of the natural gas industry became necessary, and governments welcomed firms into production and distribution of natural gas. Repsol-YPF and its subsidiary Gas Natural became prominent players. Attracting new managerial know-how was not one of the main reasons used by Latin American governments to justify a new investment legal regime that welcomed FDI, including privatization of state-owned firms. However, with market liberalization came more competition and new

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models of management brought in by foreign firms. Domestic firms had to become more competitive and also adopted new styles of management that put the consumer first and tried to develop their own advantages to survive in a more competitive environment. The ability of domestic firms to become more competitive was one of the most beneficial results of the reforms, because it helped increase living standards. The success of the East Asian countries in the age of globalization, as well as Chile, Latin America’s earliest reformer, served as models that stimulated most Latin American governments to embrace liberalization as the best alternative to catch the train of globalization. Insertion in the international flows of capital, trade, and investment, rather than isolation, was the way to go, and attracting large international firms not only brought in capital inflows, technology, and managerial knowhow, it also developed new links with the core economies of the world. The fact that Spanish multinationals came to play such an important role in these reforms also helped diversify Latin America’s economic relations with the rest of the world, by reducing the weight of the United States as a source of FDI, and by increasing that of the EU in general, and Spain in particular. In spite of the reforms, the sectors analyzed in this book remained heavily regulated. In the short run, markets were still relatively closed or totally closed to competition because in some industries, governments granted a period of monopoly to new entrants as a way to make privatization more appealing. Monopolies, however, forced governments to enact legislation to force firms to improve quality of service and efficiency and to lower costs in the long run. As a result, the new entrants had to interact with the governments and regulatory agencies very frequently and had some say over regulation. However, in the long run regulation was not intended to reduce market access, and new entrants knew that the governments would introduce competition. In short, the legal and political institutional framework in Latin America at the time of the reforms was very similar to Spain’s in the 1980s and early 1990s. The expectations by the Latin American governments were similar to those in Spain when the Spanish government began introducing reforms. These conditions applied also in other regions where governments were implementing similar reforms, such as Central and Eastern Europe and Africa. However, the markets in Latin America offered an additional advantage that African and European markets did not. Their culture was similar to Spain’s. The managers of the Spanish firms that made the decisions to make direct investments in Latin America believed that the mindset of the people, the religion, the language, the model of education, and history made Latin America more culturally alike than any of the other regions.

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They concluded that in Latin America it would be easier to replicate their firms’ corporate cultures and transfer their advantages. The managers of the seven Spanish multinationals believed the organizational culture their firms developed in Spain proved adequate in Latin America. The managers of BBVA and SCH believed their banks had an advantage in retail banking because the characteristics of the Spanish banking market since the late 1970s were very similar to those in Latin America since the 1980s. Spain went through a process of financial development in the 1970s and 1980s. This process of disintermediation (emergence of new financial services and firms other than banks) threatened to erode the banks’ hegemony in financial markets. To compete, BBVA and SCH developed new financial services such as those provided by the new independent pension and mutual fund management firms, insurance companies, institutional investors, et cetera. Diversification was consistent with their philosophy of operating in universal banking. Latin American governments implemented banking reforms in the 1980s and 1990s that led to a similar process of disintermediation, creating analogous conditions to those in which BBVA and SCH thrived in Spain. The new legal regime also encouraged FDI, providing the legal guarantees that the managers of the Spanish banks felt they needed to invest in Latin America. To gain entry, BBVA and SCH took over leading banks in each of their target markets and embarked on a very ambitious strategy of expansion. They believed Latin American markets offered great growth potential because the share of the population that used banking services in the early 1990s was very low and efficiency rates in the banking industry were low as well. Their strategy (the same they had applied in Spain in previous years) rested on attracting new customers, providing more and more services to them over time, and increasing efficiency. Both banks exercised some more caution than in Spain because default ratios in their Latin American subsidiaries were higher, but rates in Spain and Latin America converged in the long run. Telefónica’s managers believed their firm’s advantage over competitors in Latin America was the ability to modernize and expand telephone infrastructure over a short period of time. Telefónica developed this advantage in the 1970s and 1980s in Spain, when the high growth rates of the Spanish economy generated a quick increase in demand for new landlines and Telefónica made large investments to upgrade and expand infrastructure over a short period of time. Until the 1990s, Telefónica was the sole telephone operator in the country, so it was fully responsible for this expansion. When governments across Latin America began to privatize their telephone operators, they required the new entrants to expand and upgrade service over a short time. By acquiring incumbent state-owned telephone firms in

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Latin America, Telefónica received monopoly concessions and a mandate to upgrade and expand service in a short time. These conditions were very similar to those in Spain, and Telefónica’s managers saw an opportunity to apply in Latin America the expertise developed in Spain. After the acquisitions, they implemented a strategy in every country that rested on a few pillars, expansion and modernization of the telephone network, introduction of new products and services, such as Internet and mobile telephony, to increase the number of customers and revenue, productivity gains to lower costs, and diversification into nontraditional activities, such as media and entertainment. The advantage of the three public utilities also rested on their ability to undertake large investments to add generation capacity (mainly through construction of natural gas-powered CCGT plants) and improve the distribution network to reach a growing number of customers in a short period of time. Their managers believed they developed this advantage in Spain since the mid-1980s when rapid rates of economic growth increased demand for electricity. The electricity sector was heavily regulated until the 1990s. The government gave each utility a concession to distribute electricity in a given region and set production targets, price ceilings, and minimum quality standards. The reforms introduced by Latin American and Caribbean governments in the 1990s created conditions of operation that were very similar to those in Spain. The governments privatized state-owned public utility firms and remained involved in the industry as mere regulators, setting minimum quality standards, overseeing prices, and preventing the development of monopolies. The managers of Endesa, Iberdrola, and UF felt the context was similar to Spain’s and decided to take over utilities in Latin America and the Caribbean to apply the same strategy they had applied earlier in Spain. Repsol-YPF’s advantage rested on full integration of the oil and natural gas industries, from E&P of hydrocarbons to refining, production of petrochemicals, distribution and marketing, as well as generation of natural gas-based electricity in CCGT power plants. Repsol-YPF’s managers developed this advantage by operating in Spain as a quasi-monopoly, when Repsol was still owned by the state. Since the Spanish government nationalized the oil industry in the late 1920s, all of the oil-related activities undertaken in Spain were entrusted to the state-owned oil companies, which merged in the 1980s to become Repsol, inheriting their know-how. In the 1990s, Repsol’s managers decided to make direct investments outside of Spain. Given the small size of Repsol’s E&P operations, they saw FDIs as the only option to gain access to E&P concessions. Repsol’s managers also decided to invest heavily in production of natural gas. They believed

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demand would grow at the retail level. As public utilities were investing heavily in CCGT power plants (because they were cheaper to build and generated lower emissions), demand for gas would grow faster than demand for oil. Governments in Latin America and the Caribbean were opening up their oil and gas sectors in the 1990s, either by privatizing state-owned oil firms or by inviting international firms to submit bids for joint ventures with state-owned firms or for new concessions for E&P and natural gas marketing. Their goal was to increase production. Repsol decided to invest in Latin America in all of the activities of the oil and gas cycles. Its managers hoped to benefit from Repsol’s advantages in midstream and downstream operations. Very importantly, they were also expecting to overcome Repsol’s disadvantage in E&P (Repsol had to acquire most of its oil and gas from other firms) by taking over Latin American firms with a long experience in E&P, to gain access not only to active fields, but to technology and knowhow as well. The acquisition of several firms in Argentina, mainly YPF, served this purpose. Repsol-YPF internalized YPF’s E&P know-how, and went on to submit bids for new E&P concessions across Latin America first, and in OECD countries since the late 2000s. When the seven Spanish firms began to operate in Latin America, their managers found that their expectation of finding a very similar institutional framework was partly correct. They found significant differences and had to modify the organizational framework they brought from the parent. The most critical difference they found between Spain and Latin America was risk. The likelihood of an economic crisis in some countries of Latin America in the 1990s and early 2000s was higher, so they devised new policies to protect their subsidiaries against the adverse consequences of a potential crisis, such as the crisis that hit Argentina in 2001. They increased reserves to cover potential defaults and implemented policies to adjust to higher inflation rates and currency fluctuation. Ironically, one the most serious crises Spanish firms experienced since the early 1990s happened in their home market of Spain in the late 2000s. The crisis manifested itself in Latin America as a mild recession (the only large host market that experienced a serious crisis was Mexico) and the good results of their Latin American subsidiaries helped overcome the poor results of operations in Europe. Impact of Spanish Multinationals in Latin America With assets worth $517 billion and 267 million customers in Latin America in 2009, the Spanish firms included in this book had become important economic players.9 The countries that received the largest amounts of

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investment from the Spanish firms were those in the southern cone, mainly Argentina, Brazil, Chile, and Peru, as well as Mexico. However, even if other countries received less investment in general, some Spanish firms played really important roles due to their dominant position in specific industries. This was the case of Spanish banks in the pension fund industry of Bolivia, Colombia, and Ecuador and Repsol-YPF in natural gas E&P in Trinidad and Tobago. Argentina was one of the first countries to receive large investments by Spanish firms since the early 1990s. BBVA and SCH controlled two of the country’s largest banks, Banco Francés and Banco Río de la Plata, respectively. The two banks were involved in universal banking, providing a wide array of services from traditional loans and deposits to pension and mutual fund management, insurance, mortgages, et cetera. Between both banks, they controlled 14.5 percent of loans, 16.4 percent of deposits, and 43.8 percent of the assets in pension funds. Telefónica had a vast presence in several areas, including fixed-line telephony, mobile telephony, Internet, broadband, e-commerce, media, and call centers, among others. Since the early 1990s, Telefónica operated one of the two fixed-line telephone companies in the country. This placed the Spanish firm far ahead of its competitors when the market opened up to new entrants. Endesa operated in all areas of the electricity business, in generation, transmission, and distribution and marketing of electricity, including construction of CCGT power plants. For Repsol-YPF, Argentina was by far its most important market, operating in every stage of the oil and natural gas cycles, even construction of CCGT power plants through joint ventures with public utilities. Bolivia was particularly important for Repsol-YPF’s Latin American strategy, holding a quarter of its reserves of natural gas in the 1990s and early 2000s. Repsol-YPF commercialized part of this gas in the domestic market, but supplied most of it to public utilities in Argentina, Brazil, and Chile, where demand was greater, and expected to build a pipeline to the Pacific Ocean to ship some of the gas to Mexico and the United States. BBVA also played a very important role in Bolivia, especially in the 1990s, because it was the sole firm in charge of the country’s pension funds system thanks to a monopoly concession granted by the government. In 1999, antitrust authorities forced BBVA to sell 50 percent to new entrants. SCH owned Banco de Santa Cruz for a few years in the 1990s and early 2000s, but pulled out of Bolivia when its managers decided to focus on larger markets only. Spanish utilities also played an important role. Iberdrola controlled 40 percent of the market in electricity distribution thanks to its subsidiaries in La Paz and Oruro, and UF operated a firm in charge of electricity transportation between the mid-1990s and 2002, but sold when its managers decided to concentrate their investments in the Caribbean basin.

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Brazil was also a major host to the seven firms included in this study since the late 1990s. SCH took over one of the largest banks, Banespa, in the state of São Paulo, and became one of the five largest banks in Brazil by share of deposits and loans. Its main focus was the industrial region of São Paulo. On the contrary, BBVA failed to build a subsidiary and pulled out of the country. Its acquisition of a regional bank from Bahía, Banco Excel Econômico, was expected to be the beginning of a process of growth through more acquisitions, but BBVA could not find suitable banks to take over and BBVA’s managers decided to sell Excel to Bradesco in 2003 in exchange for a share of 4.44 percent in this bank. BBVA sold this stake in 2008, pulling out of Brazil altogether.10 Telefónica was also a major player in Brazil, especially in provision of fixed-line telephone services and cellular telephony. Its operations were concentrated mainly in the industrial south, including the São Paulo region, where Telefónica had a monopoly between 1998 and 1999. Telefónica championed a great expansion of the number of landlines in the late 1990s and early 2000s and cellular lines in the 2000s, reaching 70 million customers in 2010. Iberdrola was a major player in electricity generation and distribution in the Brazilian Northeast, in the states of Bahía and Pernambuco. Endesa operated in generation, transmission, and distribution, and commercialization of electricity as well. Its investments were concentrated in Rio de Janeiro and the northeastern state of Ceará. Both firms built CCGT power plants and Iberdrola built hydroelectric power plants as well. RepsolYPF entered the Brazilian market in 1999, through the acquisition of YPF’s Brazilian subsidiaries and gained new assets from Petrobras in 2000 in exchange for some of YPF´s assets in Argentina. Repsol-YPF’s activities included offshore E&P of oil and gas, refining, marketing of natural gas, and distribution and marketing of gasoline and oil derivatives through a network of service stations, mainly in the regions of São Paulo and Rio de Janeiro. In the late 2000s, Repsol-YPF sold its service stations to focus on E&P. Some of the discoveries that Repsol-YPF was involved in between 2007 and 2009 were among the largest in the world. Chile was also one of the most important hosts to Spanish multinationals due to its early reforms. The managers of the Spanish firms believed it was one of the safest markets in Latin America due to its openness to FDI, legal guarantees on investment, political and economic stability, and growth potential. BBVA and SCH were major players in Chile’s banking industry, controlling over a quarter of deposits and loans and over 40 percent of assets in the pension fund market. Chile was the first country where Telefónica took over a telephone operator in 1989. Telefónica was the largest telephone company in the country in the 1990s and 2000s, providing

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landline telephone service, mobile telephony, Internet, broadband, call centers, and telephone directories, among other services. Chile was Endesa’s main market outside of Spain. Its subsidiary Enersis centralized management of Endesa’s Latin American operations and organized Endesa’s expansion in Latin America. In Chile alone, Endesa had operations in many business areas, including the electricity cycle (from generation to distribution and marketing), distribution of natural gas, and construction of a pipeline for transportation of natural gas from Argentina. Iberdrola was a smaller player in Chile and its investments focused mainly in electricity generation through hydroelectric power plants and a smaller water treatment venture. Repsol-YPF operated a network of service stations between the late 1990s and late 2000s, but its main plans in Chile focused almost exclusively on natural gas marketing since the early 2000s, when a gas pipeline between Chile and Northern Argentina was built to bring gas from Bolivia. In Ecuador, BBVA and Repsol-YPF played leading roles in their industries. BBVA was the leader in the pension fund management segment, with a market share of over 70 percent in the late 1990s and early 2000s. RepsolYPF was also the market leader in distribution of LPG, and a major player in distribution and marketing of oil derivatives through its network of service stations between the late 1990s and 2008. Repsol-YPF was also involved in E&P of oil and natural gas and integrated the consortium that built a pipeline between the oil fields of the Amazon and the Pacific coast in the early 2000s. This pipeline doubled the amount of oil that could be transported to the coast for export. BBVA and SCH were also the leaders in pension fund management in Colombia, holding almost 60 percent of assets in the 2000s. Telefónica was a minority stockholder in a firm that provided wireless service between 1994 and 1997, but developed a stronger wireless venture after acquiring Bell South’s wireless subsidiaries in Latin America in 2004, including a subsidiary in Colombia. Endesa and UF developed fully integrated utilities in Colombia, from generation to marketing. UF focused on the Caribbean and North Pacific coast, while Endesa operated in the central Andean region, around Bogotá. Repsol-YPF had several subsidiaries to commercialize natural gas and also developed small E&P ventures. Spanish firms invested in Mexico really late because the government only opened up to FDIs selectively in the sectors included in this book. The government allowed FDI in the telecommunications industry when domestic firms had secured a strong position in the market and invited international firms into the energy industries only to complement domestic firms in electricity generation, oil and gas production, and gas marketing where

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domestic firms could not keep up with growing demand. However, Mexico was very important to six of the Spanish firms, not only due to the size and growth potential of its market, but also to its ties to the United States, which made Mexico a gateway to the United States. BBVA and SCH became major players in Mexico thanks to their takeover of some of the main Mexican banking institutions. The Mexican government tried to prevent recurring financial and banking crises by inviting solid international banks. This made the banking and financial industries the only sectors in this study where the Mexican government welcomed foreign investors without restrictions. BBVA took over Probursa in the early 1990s and Bancomer in 2000. SCH acquired Banco Bital in the early 1990s and Banco Serfin in 2000. Both Spanish banks developed a universal banking model and by 2009 they controlled close to half of bank loans and deposits and a third of the pension fund management business in Mexico. Telefónica entered the Mexican market very late, in 2001. The Mexican government sheltered Telmex until it had secured a strong position in Mexico as well as in other Latin American countries. At first Telefónica provided mobile telephony in the wealthier northern regions and only began to expand to other large cities in the late 2000s. Iberdrola and UF were heavily involved in electricity generation in Mexico’s industrial regions, mainly in the north. Iberdrola built several CCGT power plants in the Northeast, adding over 5,000 MW of generation capacity, the most by any private utility. UF built several power plants with over 2,000 MW of generation capacity in the northwestern region of Hermosillo. UF exported some of the electricity generated at these plants to the United States through Texas. UF also ventured into noncore activities such as telecommunications and joined a consortium that operated a dozen airports on the Western coast of Mexico. Repsol-YPF’s managers had ambitious plans to expand in Mexico, but the slow pace of reforms in the Mexican oil and gas constrained growth. Repsol’s main business operations in Mexico focused on natural gas distribution and electricity generation, with small E&P and chemicals operations. Repsol was involved in natural gas marketing since 1995, when the government granted concessions to operate in several cities, including El Saltillo, Nuevo Laredo, Toluca, and Monterrey. In 2003, Repsol-YPF became the first international firm to receive an E&P concession in Mexico. When Repsol-YPF’s managers decided in the late 2000s to focus on electricity generation, one of their boldest moves was the acquisition of five CCGT power plants in Mexico in 2007, followed by the takeover of UF a year later. Repsol-YPF’s chemicals division also built a factory to produce rubber for industrial use. Small as these ventures are by Mexican standards, in 2010

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Repsol-YPF was one of the main international players in the country in these sectors. Its managers saw these investments as a strategic move to be ready for further expansion if liberalization continues. Peru was, along with Argentina and Chile, a major market for the expansion of Spanish multinationals in Latin America in the early 1990s due to the speed and depth of the reforms implemented by the administration of Alberto Fujimori. BBVA and SCH took over leading Peruvian banks and controlled one quarter of banking loans and deposits and over half of pension fund assets in 2002. SCH sold its Peruvian subsidiaries that year, with the exception of its pension fund management firm. BBVA alone still controlled a quarter of the country’s deposits in 2009. Few Spanish multinationals generated as much attention in Latin America as Telefónica did in Peru in the 1990s. Telefónica received a concession to operate the Peruvian telecommunications sector as a monopoly since its privatization in 1993 until 1999. Critics of the reforms made Telefónica a target of their attacks and held this firm as a symbol of Spanish neocolonialism. Telefónica remained the main telecommunications firm in the country by 2009. Its activities also comprised the provision of cellular telephony, call centers, broadband, Internet, and telephone directories. Endesa was the only Spanish utility in Peru but played an important role in Peru’s electricity industry because it was involved in the full electricity cycle. Endesa added new generation capacity and operated in transmission and marketing, mainly around Lima and in the northern region of Piura. Repsol-YPF was also an important player in Peru. It was the largest supplier of LPG in the country, and operated a refining plant and a network of service stations. One of its main ventures in Peru was developed as part of the consortia to produce natural gas from the Camisea field, construction of a pipeline from the field to the coast, and construction of a liquefaction plant to export gas to Mexico and the United States. Venezuela was an important market for BBVA, SCH, and Repsol-YPF. BBVA and SCH began operating there in the mid-1990s. They developed ventures in universal banking and managed to hold one-third of the market share for loans and deposits. Venezuela was one of the Latin American markets where they generated more profits, but SCH decided to pull out in 2009. The government wanted to gain control over Banco de Venezuela and after a few years of tense negotiations, SCH sold it back to the state in 2009. Telefónica’s operations in Venezuela were fairly modest. In the 1990s, Telefónica held a minority stake (below 7 percent) in the country’s main telephone company, which operated under a monopoly concession since its privatization in 1991 until 2000, but never controlled management. Telefónica sold its stake in 2000 but came back in 2004 through the

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acquisition of Bell South’s Latin American wireless operators, which included a Venezuelan subsidiary. Repsol-YPF was one of the first international firms to gain concessions in E&P when the government decided to invite international firms to mature fields where production was declining. Repsol-YPF received its first E&P concessions in 1997 and since 2002 it has been the largest private firm in E&P in Venezuela. In 2009, Venezuela became the site of Repsol’s largest discovery ever. The role of the Spanish firms in Paraguay was very modest. Only BBVA had operations in 2009. SCH had a subsidiary in the 1990s but left Paraguay because of its poor performance. In Uruguay, BBVA and SCH held around a fifth of deposits and loans, Telefónica provided wireless service since 2002, Repsol-YPF had a small venture in E&P, and UF operated natural gas marketing firms. Guatemala and Panama were the main Central American host markets for Spanish firms and UF was the multinational with the largest exposure. Guatemala was Central America’s main market for Telefónica, which received the second concession to provide fixed telephony. Telefónica also provided wireless and broadband service and call centers. Guatemala also had strategic importance for Telefónica, because it was the meeting point for some of its network of submarine cables uniting North and South America. Iberdrola and UF were the main utilities in Guatemala. Iberdrola commercialized electricity in the main urban areas, operated the main national grid, and run a water treatment plant. UF provided electricity service in some rural areas and implemented a program devised by the Guatemalan government, supported by the Inter-American Development Bank, to extend electricity service to rural areas. UF also provided telecommunications and consulting services. In Panama, UF was a fully integrated firm, from electricity generation (operating a hydroelectric power plant) to marketing (operating two distribution firms). BBVA was a universal bank in Panama and played a major role in the pension fund system, controlling 50 percent of deposits in the 2000s. In El Salvador, BBVA also held half of the country’s assets in the pension fund system. Telefónica provided landline and wireless service. UF was the main Spanish multinational in Nicaragua, where it was a major distributor of electricity, and Costa Rica, where UF built a hydroelectric power plant. Endesa was a member of the consortium that built the Central American grid in the late 2000s. The main Caribbean hosts for the Spanish firms were Trinidad and Tobago and the Dominican Republic. Repsol-YPF was by far the largest investor through its role in the consortium to develop a natural gas field and a liquefaction plant in Trinidad and Tobago. In the Dominican Republic, Endesa and UF operated ventures in electricity generation and

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BBVA provided pension fund management services. BBVA, SCH, and Telefónica included Puerto Rico in their Latin American report (after BBVA and SCH acquired subsidiaries in the United States, they included Puerto Rico in their North American operations). BBVA and SCH held a quarter of banking loans and deposits and Telefónica provided domestic, long distance, and international service. Most of the Spanish firms also used fiscal havens in the Caribbean to channel some of their investments in Latin America, mainly the Cayman Islands. Areas for Future Research The approach developed in this book to study the investments of Spanish multinationals in Latin America could be applied to study the FDIs by multinationals from other countries. Portuguese firms would be a great choice, because there exist many similarities between Portugal and Spain. They have similar economic histories, institutions, and both joined the EU at the same time. Moreover, Brazil had similar pull factors for the Portuguese firms, including linguistic, cultural, and institutional similarities. This comparative study would provide new insights to understand the investments of Spanish firms in Brazil. Another research project could be an analysis of the FDIs by firms from another country outside the EU, for instance, the United States, the main home for FDIs going to Latin America in the second half of the twentieth century. Why did US multinationals not invest in Latin America as much as Spanish firms did in the sectors analyzed in this book? Another case study could be multinationals from Chile. Some Chilean multinationals made important FDIs in the 1990s, and some of them even participated in the privatization of state-owned enterprises in other Latin American countries. Lastly, it would also be interesting to include the case of China, whose outward FDI grew substantially since the 1990s. China, with its different political and economic framework, would be a very useful case to test the limitations of this model.

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Notes

Chapter 1 1. Camino Álvarez, Corporate Development Manager (gerente de desarrollo corporativo), Telefónica. Interview, Madrid, 31 July 2001. 2. The difference between direct investment (foreign or not) and portfolio investment (foreign or not) depends on whether the party making the investment gains “control” over the management of the firm. The investor who gains control intends to remain involved in the firm in the long run. For statistical purposes, the International Monetary Fund assumes that when a party owns 10 percent or more of a firm, there is direct investment. Since it became possible to make investments through the Internet, the capacity of governments to track down every investment has disappeared. According to Elena Martín Tubía, Technical Advisor to the Dirección General de Comercio e Inversiones of the Spanish Ministry of the Economy, official statistics might not reflect as much as 10 percent of all of the transactions taking place. Source: Interview with Elena Martín Tubía, Madrid, Dirección General de Comercio e Inversiones, 24 June 2001. For more information on the difference between direct investment and portfolio investment, see Stephen Hymer, The International Operations of National Firms: A Study of Direct Foreign Investment, Cambridge, MA: MIT Press, 1976; Richard E. Caves, Multinational Enterprise and Economic Analysis, New York: Cambridge University Press, 1996; Fernando Merino de Lucas and Marta Muñoz Guarasa, “Fuentes estadísticas para el estudio de la inversión directa española en el exterior,” BICE 2751, 9–15 December 2002, 5–15. 3. Source: ICE 1661, 1 Februrary 1979, 349–350; ICE 1765, 29 January 1981, 382–383; ICE 2415, 6–12 June 1994, 1403; and Merino de Lucas y Muñoz Guarasa, 6–7. 4. Investment flows measure the amount of money that the parent company invests in the acquisition of a subsidiary in a different country. For statistical purposes, it is calculated annually. The position or “stock” measures the flows, plus the earnings reinvested by the subsidiaries in activities related to their business or in the development of new ventures in the host country. Position figures are a better measurement of the amount of FDI, because flows vary a lot from year to year. 5. Asset value of the Latin American subsidiaries of the seven Spanish firms as provided in their 2009 annual reports.

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6. Figures for Repsol-YPF and Telefónica refer to foreign assets in 1999, not only Latin America. However, most of their assets outside of Spain were concentrated in this region. Source: UNCTAD, World Investment Report 2001, 90. Figures for BBVA are for 2001, and the rest, for 2002. Source: BBVA, Informe anual, 1999, 22; BBVA, Informe anual, 2001, 120; BBVA, Annual Report, 2002, 17; SCH, Informe anual, 2002, 5, 22; Endesa, Informe anual, 2002, 9, 110; Iberdrola, Informe anual, 2002, 101–104; and Unión Fenosa, Informe anual, 2002, 63–64. 7. Two good examples of this are Maura de Val’s essay, La privatización en América Latina. ¿Reconquista financiera y económica de España? Madrid: Editorial Popular, 2001, and the journalistic work of Horacio Verbitsky, Robo para la corona: Los frutos prohibidos del árbol de la corrupción, Buenos Aires: Planeta, 1991. De Val denounces the alienation of the national productive, financial, and economic systems of each Latin American country through processes that were not transparent and probably corrupt. Verbitsky denounces a plan between the administrations of Carlos Ménem in Argentina and Felipe González in Spain, along with the executives of the Spanish firms, to facilitate these takeovers. It is important to keep in mind that none of these pieces is academic, because the authors did not support their claims with references. 8. John Williamson coined the term “Washington consensus” to refer to a set of ten policies, on which the Latin American reforms were based: fiscal discipline; different use of public funds, by reducing subsidies and increasing investments in health, education, and infrastructure; fiscal reform to increase state revenue; free allocation of interest rates in the market; free allocation of exchange rate by the market; trade liberalization; liberalization of investment flows; privatization of state-owned enterprises; deregulation of economic activities to foster competition; and strengthening of property rights. See John Williamson, Latin American Adjustment. How Much Has Happened? Washington, D.C.: Institute for International Economics, 1990. 9. Some journalistic works in Spain also denounced the lack of transparency in the privatization of several Spanish state-owned enterprises, including some of the firms that made the largest investments in Latin America. The journalists also emphasized the political connections between the Spanish Government and those in the countries where the investments took place. See José Díaz Herrera and Isabel Durán, El saqueo de España, Madrid: Ediciones Temas de Hoy, 1996; Jesús Mota, La gran expropiación. Las privatizaciones y el nacimiento de una clase empresarial al servicio del PP, Madrid: Ediciones Temas de Hoy, 1998; Jesús Mota, Aves de rappiña. Cómo se han apoderado los populares de empresas, medios de comunicación y organismos independientes, Madrid: Ediciones Temas de Hoy, 2001. 10. Banco de España, Balanza de pagos de España, www.bde.es (accessed 5 May 2003); Banco de España, Boletín estadístico, www.bde.es (accessed 5 May 2003); and Dirección General de Comercio e Inversiones, Secretaría de Estado de Comercio y Turismo, Ministerio de Economía español, www.mcx.es/polco/ InversionesExteriores/estadisticas (accessed 5 May 2003); Miguel Ángel Cortés,

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12. 13.

14.

15.

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opening speech at “Seminario Iberoamérica y las empresas españolas,” Universidad Internacional Menéndez Pelayo, Santander, Spain, 19 August 2002. Gabriel Tortella, The Development of Modern Spain. An Economic History of the Nineteenth and Twentieth Centuries, Cambridge, MA: Harvard University Press, 2000, 352. UNCTAD, World Investment Report 2008, 220–221, 226. Sebastian Edwards, Crisis and Reform in Latin America. From Despair to Hope. Oxford: Oxford University Press, 1995; Mosiés Naím, “Does Latin America Need Competition Policy to Compete?” In Competition Policy, Deregulation, and Modernization in Latin America, ed. Moisés Naím and Joseph S. Tulchin, Boulder, CO: Lynne Rienner, 1999, 22–23. See Michael W. Doyle, Empires, New York: Cornell University Press, 1986; Paul Kennedy, The Rise and Fall of the Great Powers. Economic Change and Military Conflict from 1500 to 2000, New York: Random House, 1987; and Giovanni Arrighi, The Long Twentieth Century, London: Verso, 104. The analysis of democratization waves by some scholars, including Juan Linz and Alfred Stepan, was very influential. See The Breakdown of Democratic Regimes, ed. Juan Linz and Alfred Stepan, Baltimore: Johns Hopkins University Press, 1978. These categories derive from the ones used in Spanish official statistics. Until 1993, there was a category for “energy and water,” another one for “transport and communications,” and another for “financial institutions, insurance, services provided for enterprises and rents.” Since 1993, “energy and water” was divided into two, “production/distribution of electric energy, gas and water,” and “extractive industries, oil refining, and processing of hydrocarbons”; and “transport and communications” was broken up, so after 1993 there was a separate category for “telecommunications.” I added the data for “production/ distribution of electric energy, gas and water” to the data from “extractive industries, oil refining and processing of hydrocarbons” because this study comprises firms from both categories, and this allows me to make comparisons among different years. However, I did not add the data for “telecommunications” and “transport” since 1993 because the transport sector firms are not included in this research. Because of the ambiguity of the definitions, it is possible that all of the money included in each category may not correspond to the firms analyzed in this study. However, the firms included in it generate the largest amount of FDI in their sectors, and therefore the figures included are indicative of their investment trends. Since 1993, a new category appeared in the Spanish official statistics, “management of societies and holding societies.” Until then, the data for these firms were included in “financial institutions, insurance, and services provided to enterprises and rents.” I included them here because some, if not all of the firms in this study, channel part of their FDI to Latin America through these societies. For this reason, it is possible that a large part of the amounts included in

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this category end up in one of the sectors of this study. However, it is impossible to determine to what extent, due to the policy of protection of privacy of the investments of the Dirección General de Comercio e Inversiones. Another important aspect to keep in mind when reading these statistics is that the Spanish Government passed a law in the mid-1990s to eliminate the payment of taxes on dividends and capital gains generated abroad for firms based in Spain. The firms that could benefit from this policy were those based in Spain whose social goal was to manage firms outside of Spain. These firms could not be speculative and their capital gains or dividends should have paid taxes before. The Spanish Government passed this law to facilitate the internationalization of the large Spanish enterprises through societies based in Spain, thus preventing them from channeling their investments through third countries (mainly fiscal havens). In fact, it is impossible that the percentage included in “communication” dropped in the second half of the 1990s because Telefónica made important investments in Latin America in that period of time. This means that Telefónica channeled many of its Latin American investments through holding societies. In 2000, this law was extended to non-Spanish holding societies. For this reason, the Spanish FDI figures since then include the FDIs channeled through Spain by non-Spanish firms. The amounts included in the statistics are revised periodically and retroactively, when the Spanish authorities have new data. That is to say, that if the Spanish Ministry of the Economy were to find out in 2005 new investment data, for say 1997, the figures for that year would be revised to incorporate the new information. For all of these reasons, these statistics must be taken as indicators of trends, rather than as final figures. Source: Inés Abril and Miguel Jiménez, “España se convierte en un “paraíso fiscal” para atraer a las grandes multinacionales,” 5 días.com (accessed 8 May 2003); Dirección General de Comercio e Inversiones.

Chapter 2 1. Stephen Hymer, The International Operations of National Firms: A Study of Direct Foreign Investment, Cambridge, MA: MIT Press, 1976. 2. Richard E. Caves, Multinational Enterprise and Economic Analysis, New York: Cambridge University Press, 1996, 24. 3. Hymer, International Operations, 23. 4. Raymond Vernon, “International Investment and International Trade in the Product Cycle,”, in The Theory of Transnational Corporations, ed. John H. Dunning, Vol. 1, 49; Raymond Vernon, “The Location of Economic Activity,” in Economic Analysis and the Multinational Enterprise, ed. John H. Dunning, New York: Praeger Publishers, 1974, 93. 5. John H. Dunning, “The Key Literature on IB Activities: 1960–2000,” in Oxford Handbook, ed. Alan M. Rugman and Thomas L. Brewer, 40–44. 6. Ibid.

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7. Peter J. Buckley, “A Critical View of Theories of the Multinational Enterprise,” in Economic Theory of Multinational Enterprise, ed. Peter J. Buckley and Mark Casson, New York: St. Martin’s Press, 1985, 1–2. 8. Mark Casson, “Internationalization Theory and Beyond,” in Theory of Transnational Corporations, ed. John H. Dunning, 361. 9. Buckley, A Critical View, 11. 10. Mira Wilkins, “The Evolution of Manufacturing Multinational Enterprise,” in História de Empresas e Desenvolvimento Econômico, ed. Tamás Szmrecsányi and Ricardo Maranhão, São Paulo: Editora Hucitec, 1996, 98. 11. John Dunning, “Trade, Location of Economic Activity and the Multinational Enterprise: A Search for an Eclectic Approach,” in Theory of Transnational Corporations, ed. John H. Dunning, 191. 12. Michael Porter, The Competitive Advantage of Nations, New York: Free Press, 1990. 13. John H. Dunning, “The Key Literature on IB Activities,” 44–47; John H. Dunning, “The Eclectic Paradigm as an Envelope for Economic and Business Theories of MNE Activity,” International Business Review, 9 (2000), 163–190. 14. Elhanan, Helpman, “A Simple Theory of Trade with Multinational Corporations,” Journal of Political Economy, 92 (June 1984), 451–471. 15. James R. Markusen, and Anthony J. Venables, “Multinational Firms and the New Trade Theory,” Journal of International Economics, Vol. 46, No. 2 (December 1998), 184; James R. Markusen, “The Boundaries of Multinational Enterprises and the Theory of International Trade,” Journal of Economic Perspectives, Vol. 9, No. 2 (Spring 1995), 175–176. 16. Oliver Williamson, “Introduction,” in The Nature of the Firm. Origins, Evolution, and Development, ed. Oliver Williamson and Sidney G. Winter, New York: Oxford University Press, 1991, 3–7; Oliver Williamson, “The Logic of Economic Organization,” in Nature of the Firm, ed. Oliver Williamson, 90–116. 17. Harold Demsetz, “The Theory of the Firm Revisited,” in Nature of the Firm, ed. Oliver Williamson, 173. 18. David J. Teece, Managing Intellectual Capital. Organizational, Strategic, and Policy Dimensions, Oxford: Oxford University Press, 2000, 3–30. 19. Alfred D. Chandler and Takashi Hikino, “The Large Industrial Enterprise and the Dynamics of Modern Economic Growth,” in Big Business and the Wealth of Nations, ed. Alfred D. Chandler, Jr., Franco Amatori, and Takashi Hikino, Cambridge: Cambridge University Press, 1997, 34–35. 20. D. Eleanor Westney and Srilata Zaheer, “The Multinational Enterprise as an Organization,” in Oxford Handbook, ed. Alan M. Rugman and Thomas L. Brewer, 351–355. 21. Ibid., 355–367. 22. John Cantwell, “Innovation and Information Technology in MNE,” in Oxford Handbook, ed. Alan M. Rugman and Thomas L. Brewer, 434–437, 442–446. 23. John H. Dunning, “The Strategy of Japanese and U.S. Manufacturing Investment in Europe,” in Does Ownership Matter? Japanese Multinationals in

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24.

25.

26. 27.

28. 29.

30.

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Europe, ed. Mark Mason and Dennis Encarnation, Oxford: Claredon Press, 1994, 70. Michelle Gittelman and Edward Graham, “The Performance and Structure of Japanese Affiliates in the European Community,” in Does Ownership Matter? Ed. Mark Mason and Dennis Encarnation, 137–145. D. Eleanor Westney, “Japan,” in Oxford Handbook, ed. Alan M. Rugman and Thomas L. Brewer, 624–641. John Child, “China and International Business,” in Oxford Handbook, 681–686; Gordon Redding, “The Smaller Economies of Pacific Asia and their Business Systems,” in Oxford Handbook, ed. Alan M. Rugman and Thomas L. Brewer, 760–781. Klaus E. Meyer, “International Business Research on Transition Economies,” in Oxford Handbook, ed. Alan M. Rugman and Thomas L. Brewer, 725–729. Alan M. Rugman and Alain Verbeke, “Multinational Enterprises and Public Policy,” in Oxford Handbook, ed. Alan M. Rugman and Thomas L. Brewer, 819–821. Ibid., 822–827. Stephen J. Kobrin, “Sovereignty @Bay: Globalization, Multinational Enterprise, and the International Political System,” in Oxford Handbook, ed. Alan M. Rugman and Thomas L. Brewer, 186, 199; Robert O. Keohane and Joseph S. Nye, Power and Interdependence. World Politics in Transition, Boston: Little, Brown, 1977; Immanuel Wallerstein, The Capitalist World-Economy, Cambridge: Cambridge University Press, 1979; Andre Gunder Frank, El Desarrollo del Subdesarrollo, Bilbao: Zero, 1974; Robert O’Brien, Anne Marie Goetz, Jan Aart Scholte, and Marc Williams, Contesting Global Governance. Multilateral Economic Institutions and Global Social Movements, Cambridge: Cambridge University Press, 2000. Dietrich Rueschemeyer, Evelyne Huber Stephens, and John D. Stephens, Capitalist Development and Democracy, Chicago: University of Chicago Press, 1992, 7; Jeffrey Stark, “Globalization and Democracy in Latin America,” in Fault Lines of Democracy in Post-Transition Latin America, ed. Felipe Agüero and Jeffrey Stark, Miami: North-South Center Press, 1998, 76. For a detailed analysis of the structural reforms implemented in Latin America after the Debt Crisis of the 1980s and the Washington Consensus literature, see Sebastian Edwards, Crisis and Reform in Latin America. From Despair to Hope, Oxford: Oxford University Press for the World Bank, 1995; Guillermo O’Donnell, “On the State, Democratization and Some Conceptual Problems,” Working Paper #192, April 1993, The Helen Kellogg Institute for International Studies, University of Notre Dame, 16–22; Pamela K. Starr and Philip Oxhorn, “Introduction: The Ambiguous Link Between Economic and Political Reform,” in Markets and Democracy in Latin America. Conflict or Convergence? Ed. Philip Oxhorn and Pamela K. Starr, Boulder, CO: Lynne Rienner Publishers, 1999, 3–4, 247; Luiz Carlos Bresser Pereira, José María Maravall, and Adam Przeworski, Economic Reforms in New Democracies, Cambridge; Cambridge University Press, 1993, 215–216; Adam Przeworski, Sustainable Democracy, Cambridge: Cambridge University Press, 1995, 70; Adam Przeworski, Democracy

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32.

33.

34. 35.

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and the Market. Political and Economic Reforms in Eastern Europe and Latin America, Cambridge: Cambridge University Press, 1991; Carlos H. Acuña and William G. Smith, “The Political Economy of Structural Adjustment: The Logic of Support and Opposition to Neoliberal Reform,” in Latin American Political Economy in the Age of Neoliberal Reform. Theoretical and Comparative Perspectives for the 1990s, ed. William Smith, Carlos Acuña, and Eduardo Gamarra, Coral Gables: North-South Center, University of Miami, 1994, 17–66; Alfred Stepan, “Introduction,” in Americas. New Interpretative Essays, ed. Alfred Stepan, New York: Oxford University Press, 1992; Eduardo Gamarra, “Market-Oriented Reforms and Democratization in Latin America: Challenges of the 1990s,” in Latin American Political Economy in the Age of Neoliberal Reform, ed. William Smith, Carlos Acuña, and Eduardo Gamarra, 6–8; Peter Evans, Dependent Development. The Alliance of Multinational, State, and Local Capital in Brazil, Princeton, NJ: Princeton University Press, 1979, 11–12; Peter Evans, Embedded Autonomy. States and Industrial Transformation, Princeton, NJ: Princeton University Press, 1995, 11–12; Ronald W. Cox, ed. Business and the State in International Relations, Boulder, CO: Westview Press, 1996. John H. Dunning, Economic Analysis and the Multinational Enterprise, New York: Praeger Publishers, 1974; John H. Dunning, “Trade, Location of Economic Activity and the Multinational Enterprise: A Search for an Eclectic Approach,” in The Theory of Transnational Corporations, ed. John H. Dunning, 191; and John H. Dunning, “The eclectic paradigm as an envelope for economic and business theories of MNE activity” International Business Review 9 (2000) 163–190. Juan José Durán Herrera, ed. Multinacionales españolas I. Algunos casos relevantes, Madrid: Pirámide, 1996; Multinacionales españolas II. Nuevas experiencias de internacionalización, ed. Juan José Durán Herrera, Madrid: Pirámide, 1997; and Juan José Durán Herrera, Multinacionales españolas en Iberoamérica. Valor estratégico, Madrid: Pirámide, 1999. William Chislett, Spanish Direct Investment in Latin America: Challenges and Opportunities, Madrid: Real Instituto Elcano de Estudios Internacionales y Estratégicos, 2003. José Antonio Alonso, “La inversión española en América Latina: ¿tiempos de crisis?” Economistas 80 extraordinario, 1999, 163–171. José Manuel Campa and Mauro F. Guillén, “A Boom from Economic Integration,” in Foreign Direct Investment and Governments: Catalysts for Economic Restructuring, ed. John H. Dunning and Rajneesh Narula, London: Routledge, 1996a, 207–239; José Manuel Campa and Mauro F. Guillén, “Evolución y determinantes de la inversión directa en el extranjero por empresas españolas,” Papeles de Economía Española 66, 1996b, 235–247; Cristina López-Duarte and Esteban García Canal, “La inversión directa realizada por empresas españolas: análisis a la luz de la teoría del ciclo de desarrollo de la inversión directa en el exterior,” papeles de trabajo de la Universidad de Oviedo, Doc. 146/97. For the IDP approach developed by Dunning-Narula,

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36.

37. 38.

39.

40.

41.

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see John H. Dunning and Rajneesh Narula, Transpacific FDI and the Investment Development Path: The Record Assessed, University of South Carolina, Essays in International Business, No. 10, May 1994. José Molero and Mikel Buesa, “La expansión internacional de la empresa española: posibilidades y limitaciones hacia Iberoamérica,” Economía Industrial 283, January-February 1992, 25–41; Mikel Buesa and José Molero, Economía industrial de España. Organización, tecnología e internacionalización, Madrid: Civitas, 1998. Yolanda Fernández, “España como inversor en América Latina,” Análisis Financiero Internacional 98, February-March 2000, 41–50. Adolfo Gutiérrez de Gandarilla Saldaña and Luis Javier Heras López, “La proyección exterior de las empresas españolas: de la teoría gradualista de la internacionalización,” ICE 788, November 2000, 7–17. For an analysis of the model of the Uppsala School, see Jan Johanson and Jan-Erik Vahlne, “The Internationalization Process of the Firm—A Model of Knowledge Development and Increasing Foreign Market Commitments,” Journal of International Business Studies, Vol. 8, 1977. Eduardo Cuenca García, “Comercio e inversión de España en Iberoamérica,” ICE 790, February-March 2001, 141—162; Carlos Rodríguez González, “Un estudio preliminar de la relación por países entre las inversiones directas españolas en el exterior y las exportaciones,” ICE, 2683, 26 February–4 March 2001, 7–14; María Teresa Alguacil Mari, Óscar Bajo Rubio, María Montero Muñoz and Vicente Orts Ríos, “¿Existe causalidad entre exportaciones e inversión directa en el exterior? Algunos resultados para el caso español,” ICE 782, November-December 1999, 29–34; María Teresa Alguacil Mari and Vicente Orts Ríos, “Relación dinámica entre inversiones directas en el extranjero y exportaciones: una aproximación VAR al caso español, 1970–1992,” ICE 773, September and October, 1998, 51–63. For more information on the international trade theory, see James R. Markusen, “The Boundaries of Multinational Enterprises and the Theory of International Trade,” Journal of Economic Perspectives, Vol. 9, No. 2, Spring 1995, 169–189; and James R. Markusen and Anthony J. Venables, “Multinational Firms and the New Trade Theory,” Journal of International Economics, Vol. 46, No. 2, Diciembre 1998, 183–203. Cristina López Duarte, “Internacionalización de la empresa española mediante inversión directa en el exterior. 1988–1994,” Economía Industrial 318, 1997, 141–150. For a more detailed study of industrial organization theory, as developed by Stephen Hymer, see Stephen H. Hymer, The International Operations of National Firms; for internalization theory, see Oliver E. Willliamson, Markets and Hierarchies, New York; Free Press, 1975; and Oliver E. Williamson, “Transaction Cost Economics: The Governance of Contractual Relations,” Journal of Law and Economics, Vol. 22, 1979, 233–261. Francisco Mochón and Alfredo Rambla, La creación de valor y las grandes empresas españolas. Los casos de BBV, Banco de Santander, Endesa, Iberdrola, Repsol y Telefónica, Madrid: Ariel Sociedad Económica, 1999; Miguel Ángel Gallo and José Antonio Segarra, “La tendencia en la internacionalización de la empresa,” ICE 643, March 1987, 87–90.

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42. Ramón Casilda Béjar, La década dorada. Economía e inversiones españolas en América Latina, 1990–2000, Alcalá, Universidad de Alcalá, 2002. 43. Santos M. Ruesga and Julimar S. Bichara, “Las empresas españolas en Iberoamérica,” Economía Exterior 7, 1998–1999, 187–196; Rafael Pampillón and Ana Raquel Fernández, “Comportamiento reciente y perspectivas de la inversión española en América Latina,” Economía Exterior 9, verano, 1999, 58–70; Guillermo de la Dehesa, “La inversión directa española en Latinoamérica,” Boletín del Círculo de Empresarios, Iberoamérica y España en el umbral de un nuevo siglo 65, 2000, 201–241. 44. José Antonio Alonso and J. Manuel Cadarso, “La inversión directa española en Iberoamérica,” ICE, October-November 1982, 116. 45. María Teresa Fernández, “Presencia y efectos de arrastre de las filiales extranjeras de servicios a empresas en España,” Universidad de Alcalá, Documento de trabajo No. 1/2000. 46. Álvaro Calderón Hoffmann, “El boom de la inversión extranjera directa en América Latina y el Caribe: el papel de las empresas españolas,” Economistas 81, September 1999a, 24–35; and Álvaro Calderón Hoffmann, “Inversiones españolas en América Latina: ¿una estrategia agresiva o defensiva?” Economía Exterior 9, verano 1999b, 97–106; Juan Velarde, José Luis García Delgado and A. Pedreño, eds., Apertura e internacionalización de la economía española. España en una Europa sin fronteras, Madrid: Colegio de Economistas de Madrid, 1991. 47. Mauro Guillén, The Limits of Convergence. Globalization and Organizational Change in Argentina, South Korea, and Spain, Princeton, NJ: Princeton University Press, 2001, 3, 214. 48. Nicholas Greenwood Onuf, World of Our Making. Rules and Rule in Social Theory and International Relations, Columbia: University of South Carolina Press, 1989. 49. Masaaki Kotabe, “Contemporary Research Trends in International Marketing: the 1990s,” in Oxford Handbook, ed. Alan M. Rugman and Thomas L. Brewer, 458. 50. Ibid., 460–486. 51. John L. Graham, “Culture and Human Resource Management,” in Oxford Handbook, ed. Alan M. Rugman and Thomas L. Brewer, 504–505. 52. Ibid., 506–532. 53. See El Exportador, “El español como recurso económico,” 61, February 2003, www.el-exportador.com (accessed 14 May 2003). 54. The impact of cultural differences in business has generated a great number of studies from an anthropological perspective. Two of the main scholars in this field are Edward Hall, a pioneer in the study of the influence of culture in business, and Geert Hofstede. See Edward Hall, The Silent Language, New York: Anchor Books, 1960; Geert Hofstede, Culture’s Consequences, Beverly Hills: Sage, 1980. For a compilation of the main studies of the importance of culture in business, see John L. Graham, “Culture and Human Resources Management,” in Oxford Handbook of International Business, ed. Alan M. Rugman and Thomas L. Brewer, 503–536. 55. Ibid., 740. 56. Ibid., 741–744.

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57. For an analysis of the processes of privatization in Spain, see Álvaro Cuervo García, “La privatización de las empresas públicas, cambio de propiedad, libertad de entrada y eficiencia,” ICE 772, July-August 1998, 45–57; Luis Mañas Antón, “La experiencia de una década de privatizaciones,” ICE 772, July-August 1998, 145–175; Enric Rivas Mirangels, “Valor de la empresa y privatizaciones,” ICE 772, July-August 1998, 99–108; Luis Gámir Casares, Las privatizaciones en España, Madrid: Pirámide, 1999. For privatizations in Latin America, see José Antonio Ocampo and Roberto Steiner (1994), Manuel R. Agosin (1995), William Glade and Rossana Corona (1996), Ravi Ramamurti (1996), Melissa H. Birch and Jerry Haar (2000), and Gregorio Vidal (2001). 58. For Latin America, see Sebastian Edwards (1995). For Spain, Instituto de Estudios Económicos, La necesaria liberalización de los servicios en España, Madrid, 1994; Gaspar Ariño Ortiz, ed., Privatización y liberalización de servicios, Madrid: Universidad Autónoma de Madrid and Boletín Oficial del Estado, 1999; Gaspar Ariño Ortiz, Liberalizaciones, Granada: Comares S. L., 2000; Pablo Arocena Garro and Fidel Castro Rodríguez, “La liberalización de sectores regulados,” BICE 2640, 10–23 January 2000, 27–36. 59. See Buesa and Molero (1998); Molero and Buesa (1992); and Juan José Durán (1996, 1997). 60. Camilo José Vázquez Ordás, “Estrategias de internacionalización de un negocio,” Economía Industrial, No. 304, 1995, 101–117; Juan José Durán Herrera, “Estrategia de localización de la empresa multinacional española,” Economía Industrial, No. 306, 1995, 15–26. 61. For a Spanish analysis of globalization, including the impact of globalization on the economy and the Spanish firms, see Guillermo de la Dehesa, Comprender la globalización, Madrid: Alianza, 2000. 62. Gaspar Ariño Ortiz (1999, 2000). 63. Ibid. 64. For an analysis of the activities of the governments of the host countries to attract inward FDI, see José Antonio Ocampo and Roberto Steiner (1994), Manuel R. Agosin (1995), William Glade and Rossana Corona (1996), Ravi Ramamurti (1996), Melissa H. Birch and Jerry Haar (2000), and Gregorio Vidal (2001). There are no detailed studies about the contribution of Spanish firms to economic development in Latin America.

Chapter 3 1. Matías Rodríguez Inciarte, “La expansión de las empresas españolas en Iberoamérica. El caso de la banca,” Economía Exterior 7 (1998/1999), 34. 2. Emilio de Ybarra y Churruca, “20 años de cambio trascendental en la empresa y la banca española,” in 1979–1999: 20 años de cambios trascendentales en la sociedad española, ed. Andrés Ollero Tassara, Juan Velarde Fuertes, and Emilio de Ybarra y Churruca, Madrid: Instituto de Estudios Económicos, 1999, 26. Emilio de Ybarra y Churruca resigned in December 2001. 3. BBVA, Informe annual, 1999, Madrid, 5–6.

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4. Francisco Luzón, CEO of SCH. “La experiencia de Santander Central Hispano.” Speech at “Seminario Iberoamérica y las empresas españolas,” Universidad Internacional Menéndez Pelayo, Santander, Spain, 20 August 2002. 5. BBVA, Annual Report, 2007, 128; Annual Report, 2008, 22, 48; SCH, Annual Report, 2008, 2, 35, 99; GDP figures by IMF. The conversion rates were those provided by the Federal Reserve for each year. 6. Juan José Durán Herrera, “BBV. Una empresa financiera multinacional con diversificación industrial,” in Multinacionales Españolas II. Nuevas Experiencias de Internacionalización, ed. Juan José Durán, Madrid: Ediciones Pirámide, 1997, 24. 7. Jaime Bonache and Julio Cerviño, “Banco Santander: el valor de los directivos internacionales,” in Multinacionales Españolas I. Algunos Casos Relevantes, ed. Juan José Durán, Madrid: Pirámide, 1996, 171. 8. Business & Company Resource Center, Banco Bilbao Vizcaya Argentaria SA – Chronology (accessed 6 September 2002). 9. Juan José Durán, “BBVA,” in Multinacionales Españolas II, ed. Juan José Durán, 24–25; and Business & Company Resource Center, Banco Bilbao Vizcaya Argentaria SA. 10. Gabriel Tortella, The Development of Modern Spain. An Economic History of the Nineteenth and Twentieth Centuries,Cambridge, MA: Harvard University Press, 2000, 395; Juan José Durán Herrera, “BBV,” in Multinacionales Españolas II., ed. Juan José Durán, Madrid: Ediciones Pirámide, 1997, 23–27; and Business & Company Resource Center, Banco Bilbao Vizcaya Argentaria SA—Chronology. 11. Juan José Durán Herrera, “BBV,” in Multinacionales Españolas II, ed. Juan José Durán, 23–27. 12. Juan José Durán Herrera, “BBV,” in Multinacionales Españolas II, ed. Juan José Durán, Madrid, Ediciones Pirámide, 1997, 23–27. 13. Business & Company Resource Center, Banco Bilbao Vizcaya Argentaria SA – Chronology. 14. Jaime Bonache and Julio Cerviño, “Banco Santander”, Multinacionales Españolas I, ed. Juan José Durán, Madrid, Pirámide, 1996, 169–173. 15. Jaime Bonache and Julio Cerviño, “Banco Santander,” Multinacionales Españolas I, ed. Juan José Durán, Madrid: Pirámide, 1996, 169–173. 16. Business & Company Resource Center, Banco Santander Central Hispano S.A. History (accessed 6 September 2002). 17. Business & Company Resource Center, Banco Santander Central Hispano S.A. History. 18. Jaime Bonache and Julio Cerviño, “Banco Santander,” Multinacionales Españolas I, ed. Juan José Durán, Madrid: Pirámide, 1996, 174–175. 19. Business & Company Resource Center, Banco Santander Central Hispano S.A. History. 20. The existing literature on the international expansion of Spanish banks abroad can be divided into two main groups. One group emphasizes the higher

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21.

22.

23. 24.

25. 26.

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productivity rates, high solvency, capitalization, and efficiency of Spanish banks. See Ramón Casilda Béjar, La banca española. Análisis y evolución, Madrid: Ediciones Pirámide, 1997, 134–135; Altina Sebastián González, Nuevas estrategias del sistema bancario en la Unión Económica y Monetaria, Madrid: Instituto de Estudios Económicos, 1999; Joaquín Maudos and José M. Pastor, “La eficiencia del sistema bancario español en el contexto de la Unión Europea,” Papeles de economía española, 84–85 (2000), 155–168; Ignacio Lagartos, “El papel de la banca española,” Perspectivas del sistema financiero, 66 (1999), 85–88; Juan José Durán Herrera and Sofía de la Maza, “Internacionalización de la banca. Especial referencia al caso español,” Revista asturiana de economía, 4 (1995), 105–145; Clara Cardone Riportella and Leonardo Cazorla Papis, “Estrategias de entrada de la banca española en América Latina: análisis teórico y empírico,” Documento de Trabajo 99-18, Serie de Economía de la Empresa 07, November 1999, Departamento de Economía de la Empresa, Universidad Carlos III de Madrid. The second group looks mainly at how changes in the environment impacted the banking sector and banking firms. See Francisco J. Valero, “La internacionalización de la empresa bancaria española,” Economistas, 62 (1994), 38–46; Ángel Berges, Emilio Ontiveros, and Francisco J. Valero, “La internacionalización de las cajas de ahorros españolas,” Papeles de economía española, 74–75 (1998), 55–81. For a thorough history of the Spanish banking and financial sectors, see El sistema financiero en España. Una síntesis histórica, ed. Pablo Martín Aceña and Manuel Titos Martínez, Granada: Universidad de Granada, 1999; Gabriel Tortella, The Development of Modern Spain. An Economic History of the Nineteenth and Twentieth Centuries, Cambridge, MA: Harvard University Press, 2000. For an analysis of the 1980s and 1990s, see Jordi Canals, Bancos universales y diversificación emprearial, Madrid: Alianza Editorial, 1996; Ramón Casilda Béjar, La banca española. Análisis y evolución, Madrid: Ediciones Pirámide, 1997; Altina Sebastián González, Nuevas estrategias del sistema bancario en la Unión Económica y Monetaria, Madrid: Instituto de Estudios Económicos, 1999. Gabriel Tortella, The Development of Modern Spain, 397–398; Ramón Casilda Béjar, La banca española, 58. There is a slight divergence between the two authors. Ramón Casilda estimates that the crisis affected 28 percent of the workers, and the assets of the institutions in crisis amounted to 27 percent. Gabriel Tortella, Development of Modern Spain, 397–398. In 2002 banks were barred from taking over the cajas, but cajas could take over banks. The result of this policy was a rapid spread of cajas outside of their original region of operation since the elimination of this restriction in 1988, through the takeover of small regional banks. Jordi Canals, Bancos universales y diversificación empresarial, 291. Ramón Casilda Béjar, La banca española. Análisis y evolución, 45–47; Altina Sebastián González, Nuevas estrategias del sistema bancario en la Unión Económica y Monetaria, 44–45. Ramón Casilda provides a list of the banking laws passed by the Spanish government between 1915 and 1995 on pages 54–55.

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27. Ramón Casilda Béjar, La banca española, 50–51. 28. Ibid., 50–55. 29. In Bancos universales y diversificación empresarial, Jordi Canals concluded that there is no direct correlation between the size of a bank and its efficiency. The government used mergers to try to increase Spain’s profile in the EU. 30. Banco Santander, 22.48 percent; BBV, 19.47 percent; Argentaria, 15.89 percent; BCH, 15.56 percent; and Banco Popular, 4.72 percent. Source: Ramón Casilda Béjar, La banca española, 56–57; Ignacio Lagartos, “El papel de la banca española,” 87. 31. Jordi Canals, Bancos universales y diversificación empresarial, 295–296; Business & Company Resource Center, Banco Bilbao Vizcaya Argentaria SA—Chronology; and Business & Company Resource Center, Banco Santander Central Hispano S.A. History. 32. BBVA, Annual Report, 2001, 56–57. 33. Emilio Ybarra y Churruca, “Preveo una nueva ola de fusiones y adquisiciones en nuestro país,” in Perspectivas del sistema financiero 60 (October–December 1997), 147. 34. Francisco Javier Sáez Fernández and Manuel Martín Rodríguez, “Las participaciones empresariales de la banca y las cajas de ahorros españolas, 1992–1998,” Papeles de economía española, 84–85 (2000), 222–236. 35. Jordi Canals, Bancos universales y diversificación empresarial, 297–304, 317. 36. Juan José Durán Herrera, “BBV,” 48–51. 37. Jesús Mota, La gran expropiación. Las privatizaciones y el nacimiento de una clase empresarial al servicio del PP, Madrid: Temas de hoy, 1998, 57–67. 38. Sebastian Edwards, Crisis and Reform in Latin America. From Despair to Hope, Oxford: Oxford University Press, 1995, 200–205. 39. Ibid., 206–207. 40. Barbara Stallings and Rogerio Studart, Financial Regulation and Supervision in Emerging Markets: The Experience of Latin America since the Tequila Crisis, Santiago de Chile, ECLAC, Economic Development Division, 2001, 19–21; Sebastian Edwards, Crisis and Reform in Latin America, 208; Gunther Held and Luis Felipe Jiménez, “Liberalización financiera, crisis y reforma del sistema bancario chileno: 1974–1999,” in Reformas, crecimiento y políticas sociales en Chile desde 1973, ed. Ricardo French-Davis and Barbara Stallings, Santiago de Chile: CEPAL/LOM Ediciones, 2001; Francisco Gallego and Norman Loayza, Financial Structure in Chile: Macroeconomic Developments and Microeconomic Effects, Washington, D.C., World Bank, 2001; Luiz Fernando de Paula, Banking Internasionalization and the Expansion Strategies of European Banks to Brazil during the 1990s, Vienna, Société Universitaire Européenne de Recherches Financières, 2002, 21–25. 41. Sebastian Edwards, Crisis and Reform in Latin America, 212–213. 42. Barbara Stallings and Rogerio Studart, Financial Regulation and Supervision in Emerging Markets, 28. 43. Ibid., 23–24.

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44. Ibid., 23–24; Luiz Fernando de Paula, Banking Internasionalization and the Expansion Strategies of European Banks to Brazil during the 1990s, 24; Rogerio Studart and Jennifer Hermann, “Sistemas financeiros no Mercosul: Perspectivas a partir das Reformas dos anos 1990,” Texto para discução 799, Instituto de Pesquisa Econômica Aplicada (IPEA), Brasilia, 2001. For Brazil only, see also Luiz Fernando de Paula, The Recent Wave of European Banks in Brazil: Determinants and Impacts, Oxford: Centre for Brazilian Studies, University of Oxford. 45. Barbara Stallings and Rogerio Studart, Financial Regulation and Supervision in Emerging Markets, 24. 46. Ibid., 24. For more information on the Mexican financial system, see Elizabeth McQuerry, “The Banking Sector Rescue in Mexico.” Economic Review, 3rd quarter, Federal Reserve Bank of Atlanta, 1999. 47. Barbara Stallings and Rogerio Studart, Financial Regulation and Supervision in Emerging Markets, 10–11. 48. Source: IMF. In Matías Rodríguez Inciarte, “La expansión de las empresas españolas en Iberoamérica. El caso de la banca,” Economía Exterior 7, 1998/99, 30. For a comparison of the conditions in Latin America, Central and Eastern Europe, and East Asia, see Matías Rodríguez Inciarte, “La expansión de las empresas españolas en Iberoamérica.” 49. Matías Rodríguez Inciarte, “La expansión de las empresas españolas en Iberoamérica,” 31. 50. Ibid., 31–32. 51. Ibid., 32–33. 52. Ibid., 29. 53. Grupo Santander, Annual Report, 1998, 14. 54. BBV, Annual Report, 1996, 68, 104. 55. Grupo Santander, Annual Report, 1998, 17. 56. Grupo Santander, Annual Report, 1994, 35–37. 57. BBV, Annual Report, 1996, 8–9; BBV, Annual Report, 1997, 12; BBV, Annual Report, 1998, 18; BBVA, Annual Report, 1999, 11; BBVA, Annual Report, 2000, 3, 114–115; BBVA, Annual Report, 2001, 5; BBVA, Annual Report, 2002, 5. 58. Grupo Santander, Annual Report, 1997, 12. 59. Grupo Santander, Annual Report, 1999, 29–30. 60. Grupo Santander, Annual Report, 1996, 6. 61. Grupo Santander, Annual Report, 1999, 34–35. 62. BCH, Annual Report, 1995, 29–30. 63. BCH, Annual Report, 1996, 76; BCH, Annual Report, 1996. Informe de auditoría. Cuentas anuales. Informe de gestión, 15; BCH, Annual Report, 1998, 33, 85, 175; Grupo Santander, Annual Report, 1999, 33; Grupo Santander, Annual Report, 2000, 109. 64. SCH, Annual Report, 1999, 33; SCH, Annual Report, 2002, 23, 117. 65. Banespa. www.banespa.com.br (accessed 17 March 2003). 66. Banco de Venezuela. www.bancodevenezuela.com (accessed 17 March 2003).

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67. SCH Mexico. www.sch.com.mx (accessed 17 March 2003); SCH, Annual Report, 2000, 199. 68. BBV, Annual Report, 1997, 93. 69. SCH, Annual Report, 1999, 169; SCH, Annual Report, 2002, 166; www. santander.cl (accessed 17 March 2003). 70. Bancomer. www.bancomer.com.mx (accessed 18 March 2003); BBVA, Annual Report, 2002, 95. 71. www.santandernet.com (accessed 17 March 2003); BBVA Puerto Rico, www. bbvapr.com (accessed 18 March 2003). 72. BBVA, Annual Report, 1997, 14–15. 73. BBV, Annual Report, 1996, 9–13; BBV, Annual Report, 1997, 9, 14; BBV, Annual Report, 1998, 13; BBVA, Annual Report, 1999, 31; BBVA, Annual Report, 2002, 13, 75–76. 74. Grupo Santander, Annual Report, 1996, 24; Grupo Santander, Annual Report, 2002, 97–98. 75. BBV, Annual Report, 1997, 133–134. 76. BS acquired a share of First Fidelity in 1991. In 1995, First Fidelity merged with First Union. BS had a share of 29.9 percent in the former, 11.4 percent of First Union in January 1995, 9.3 percent in 1996, and 8.90 percent in 1997, when BS sold its final stake. Source: Grupo Santander, Annual Report, 1997, 118; and Grupo Santander, Annual Report, 1997, 4, 63, 131; Grupo Santander, Annual Report, 1998, 84. 77. BBV, Annual Report, 1997, 133–134; BBV, Annual Report, 1998, 18, 108; BBVA, Annual Report, 1999, 35–36; BBVA, Annual Report, 2000, 110–113, 161; BBVA, Annual Report, 2001, 129. 78. Grupo Santander, Annual Report, 1995, 178; Grupo Santander, Annual Report, 1998, 72; Grupo Santander, Annual Report, 1999, 20, 117–118; Grupo Santander, Annual Report, 2000, 102, 105; Grupo Santander, Annual Report, 2001, 23. 79. BBV, Annual Report, 1996, 9, 24. 80. BBV, Annual Report, 1996, 4. 81. BBVA, Annual Report, 1999, 5–6. 82. Francisco Luzón, CEO of SCH. “La experiencia de Santander Central Hispano.” Speech at “Seminario Iberoamérica y las empresas españolas,” Universidad Internacional Menéndez Pelayo, Santander, Spain, 20 August 2002. 83. Grupo Santander, Annual Report, 1997, 15. 84. Grupo Santander, Annual Report, 1995, 24. 85. BBV, Annual Report, 1996, 18–19. 86. BBVA, Annual Report, 1998, 166–167. 87. BBV, Annual Report, 1997, 137–138. 88. BBVA, Annual Report, 1998, 164. 89. Grupo Santander, Annual Report, 1997, 14. 90. Grupo Santander, Annual Report, 1998, 14.

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91. Grupo Santander, Annual Report, 1997, 14. 92. BBVA, Annual Report, 1999, 31–33. 93. Grupo Santander, Annual Report, 2000, 100; Grupo Santander, Annual Report, 2001, 20. 94. Grupo Santander, Annual Report, 2001, 24, 27. 95. Grupo Santander, Annual Report, 2000, 8. 96. BBV, Annual Report, 1998, 108. 97. BBV, Annual Report, 1998, 166–167; BBVA, Annual Report, 1999, 34, 36. 98. Grupo Santander, Annual Report, 1999, 121, 129; Grupo Santander, Annual Report, 2000, 115; Grupo Santander, Annual Report, 2001, 24–26. 99. BBV, Annual Report, 1996, 18-19; BBVA, Annual Report, 1997, 14–15; BBVA, Annual Report, 1998, 160–161; BBVA, Annual Report, 2002, 95. 100. Grupo Santander, Annual Report, 1999, 24–27.BBVA, Annual Report, 2002, 227–237. 101. Grupo Santander, Annual Report, 2002, 57–77; BBVA, Annual Report, 2002, 131–137. 102. BBVA did not publish data on market share after 2003. BBVA, Annual Report, 2003, 109. 103. BBVA, Annual Report, 2003, 109; SCH, Annual Report, 2008, 104–109. 104. BBVA, Annual Report, 1999, 32; BBVA, Annual Report, 2000, 107, 113; BBVA, Annual Report, 2001, 122, 125; Grupo Santander, Annual Report, 1996, 44–46, 51–52, 137; Grupo Santander, Annual Report, 1997, 41, 79, 80, 82; Grupo Santander, Annual Report, 1998, 27, 84; Grupo Santander, Annual Report, 1999, 113. 105. BBV, Annual Report, 1997, 135–136; BBVA, Annual Report, 1998, 168–169; BBVA, Annual Report, 2000, 120; BBVA, Annual Report, 2001, 130; Grupo Santander, Annual Report, 2000, 109. 106. BBV, Annual Report, 1998, 160–161, 171; BBVA, Annual Report, 1999, 34–35; BBVA, Annual Report, 2001, 100; Grupo Santander, Annual Report, 2000, 108. 107. BBVA, Annual Report, 2007, 116, 126. 108. BBV, Annual Report, 1997, 20–21, 137–138; BBV, Annual Report, 1998, 17–18, 164, 168–170; BBVA, Annual Report, 1999, 35; BBVA, Annual Report, 2001, 12, 122, 126–127, 129; BCH, Annual Report, 1997, 29; BCH, Annual Report, 1998, 33, 101, 104, 106; SCH, Annual Report, 1999, 23, 29; SCH, Annual Report, 2002, 116. 109. SCH, Annual Report, 2002, 113. 110. BBVA, Annual Report, 2001, 122, 135. 111. SCH, Annual Report, 2001, 23, 27. 112. BBVA, Annual Report, 2001, 13. 113. BBV, Annual Report, 1997, 20–21, 133–136; BBV, Annual Report, 1998, 160–164, 168–171; BBVA, Annual Report, 1999, 34–37; BBVA, Annual Report, 1999, 36–37; BBVA, Annual Report, 2000, 108–109, 111, 113; BBVA, Annual Report, 2002, “Highlights” section in the preliminary pages; Grupo

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114. 115.

116.

117. 118. 119. 120. 121. 122. 123. 124. 125.

126. 127.

128. 129. 130. 131.

132. 133.

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Santander, Annual Report, 1995, 178; BCH, Annual Report, 1996, 76–80; BCH, Annual Report, 1997, 28–30, 96; BCH, Annual Report, 1998, 33, 101, 104, 106; Grupo Santander, Annual Report, 1998, 29, 73–75; SCH, Annual Report, 1999, 20–21, 121; SCH, Annual Report, 2000, 8; SCH, Annual Report, 2001, 24, 27; SCH, Annual Report, 2002, 79. SCH, Annual Report, 2000, 104. BBV, Annual Report, 1998, 108; BBVA, Annual Report, 2000, 162; BBVA, Annual Report, 2001, 92, 94, 97, 133; BCH, Annual Report, 1996, 76–80; BCH, Annual Report, 1997, 19; BCH, Annual Report, 1998, 21; SCH, Annual Report, 1999, 114; SCH, Annual Report, 2000, 8; SCH, Annual Report, 2002, 108. BBVA, Annual Report, 2000, 65–72, 75–76, 79, 108; BBVA, Annual Report, 2001, 58, 62–63, 68–71, 76; BBVA, Annual Report, 2002, 59, 62; SCH, Annual Report, 2000, 72–73, 79–80, 140, 144–146, 150–151, 155–158. SCH, Annual Report, 2000, 86; SCH, Annual Report, 2000, 146, 160–161. BBVA, Annual Report, 2002, 111; Annual Report, 2008, 43. BBVA, Annual Report, 2002, 98; Annual Report, 2004, 108. BBVA, Annual Report, 2005, 3. BBVA, Annual Report, 2004, 4, 110; Annual Report, 2006, 4. SCH, Annual Report, 2007, 7, 98; Financial Report, First Half 2009, 5. SCH, Annual Report, 2006, 15; Annual Report, 2008, 8, 20. Grupo Santander, Annual Report, 1998, 30, 34, 67–69. BBV, Annual Report, 1997, 133–134; BBVA, Annual Report, 1998, 160–163, 168–169; BBVA, Annual Report, 1999, 34–35, 37; BBVA, Annual Report, 2000, 112–113. Grupo Santander, Annual Report, 1998, 22, 67; SCH, Annual Report, 2001, 7, 41–42; SCH, Annual Report, 2002, 158. BBV, Annual Report, 1998, 89; BBVA, Annual Report, 1999, 33–37; BBVA, Annual Report, 2000, 109, 113; BBVA, Annual Report, 2001, 97, 125–126, 134. BBVA, Annual Report, 2008, 124; Quarterly Report. 4th Quarter 2009, 40, 48; SCH, Annual Report, 2008, 85; Financial Report, January-December 09, 17. BBVA, Annual Report, 2008, 121; SCH, Annual Report, 2008, 93; Financial Report, January-December 09, 1–2. BBVA, Quarterly Report. 4th Quarter. 2009, 40, 48; SCH, Financial Report, January-December 09, 17. BBVA, Annual Report, 1999, 5–6; Francisco Luzón, CEO of SCH, “La experiencia de Santander Central Hispano.” Speech at “Seminario Iberoamérica y las empresas españolas,” Universidad Internacional Menéndez Pelayo, Santander, Spain, 20 August 2002. BBVA, Annual Report, 2003, 109; SCH, Annual Report, 2008, 104–109. BBVA, Annual Report, 2002, 161; Financial Times Information Limited, “SCH to Invest in Argentinean Subsidiary,” March 20, 2003; Latin American Newsletters, Ltd. “Argentina: Santander pays US$150m to boost pensions fund stake,” April 8, 2003.

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134. SCH, Annual Report, 2002, 10, 114; BBVA, Annual Report, 2002, 9, 203. 135. Pablo Fernández and José María Carabias, “Creación de valor para los accionistas del BBVA.” IESE Business School, Universidad de Navarra, Documento de investigación número 638, June 2006. 136. Pablo Fernández and José María Carabias, “Creación de valor para los accionistas del Banco Santander.” IESE Business School, Universidad de Navarra, Documento de Investigación número 637, June 2006.

Chapter 4 1. Telefónica, Annual Report, 1999, 65. 2. Juan Perea, “El desarrollo internacional del Grupo Telefónica,” Economía Exterior 7, 1998/99, 103. 3. Ignacio Santillana, “La creación de una multinacional española. El caso de Telefónica,” Economistas 73, 1997, 94. 4. UNCTAD, World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge, 228; UNCTAD, World Investment Report 2001. Promoting Linkages, New York, 90; Telefónica, Annual Report, 1990, 3; Telefónica, Annual Report, 2001, 8, 11, 13, 30–34; Telefónica, Annual Report, 2002, 12–14, 23; Telefónica, Annual Report, 2009, 33, 125. 5. Juan José Durán and Fernando Gallardo, “La internacionalización de Telefónica de España. Una estrategia multidoméstica con orientación global,” in Multinacionales Españolas I, ed. Juan José Durán, Madrid: Pirámide, 1996, 87–128. 6. Business & Company Resource Center. Telefonica S.A.—Chronology (accessed 6 September 2002). 7. Rafael Isidro Aparicio, La evolución de las telecomunicaciones españolas 1982–1983: el caso de Telefónica de España, S.A.. Documento de trabajo 9404, Programa de Historia Económica, Fundación Empresa Pública, Madrid, June 1994, 31–32. 8. Business & Company Resource Center. Telefonica S.A.—Chronology (accessed 6 September 2002). 9. Juan José Durán and Fernando Gallardo, “La internacionalización de Telefónica de España. Una estrategia multidoméstica con orientación global,” in Multinacionales Españolas I, ed. Juan José Durán, Madrid: Pirámide, 1996, 87–128. 10. Business & Company Resource Center. Telefonica S.A.—Chronology, http:// galenet.galegroup.com/ (accessed 6 September 2002); Juan José Durán and Fernando Gallardo, “La internacionalización de Telefónica de España. Una estrategia multidoméstica con orientación global,” in Multinacionales Españolas I, ed. Juan José Durán. 11. Scholars who study the expansion of Telefónica abroad emphasize the interplay of three main factors: technological developments in the field of telecommunications, deregulation, and globalization of telecommunications services. See Juan José Durán Herrera and Fernando Gallardo Olmedo, “La estrategia de

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internacionalización de las operadoras de telecomunicaciones,” ICE 735, 1994, 89–103; Juan José Durán Herrera and Fernando Gallardo Olmedo “La internacionalización de Telefónica de España. Una estrategia multidoméstica con orientación global,” in Multinacionales españolas I, 87–128; Francisco Mochón and Alfredo Rambla, La creación de valor y las grandes empresas españolas, Barcelona: Ariel, 1999, 275–282; Philip R. Wallace, “Integración de servicios y nuevas tecnologías,” ICE 740, April 1995, 94–100; Javier Monzón and Eugenio Vela, “La internacionalización de las empresas de tecnología avanzada,” Economistas 62, 1994, 48–54. Some former Telefónica managers wrote on Telefónica’s expansion, emphasizing similar factors: Ignacio Santillana del Barrio “La creación de una multinacional española. El caso de Telefónica,” Economistas 73, 1997, 90–99; Cándido Velázquez-Gaztelu Ruiz, “Internacionalización: la experiencia de Telefónica.” Papel de trabajo 12, March 1993, Centro Internacional Carlos V, Universidad Autónoma de Madrid, Facultad de Ciencias Económicas y Empresariales; Germán Ancochea Soto, “El operador principal. Las nuevas reglas de la competencia,” ICE 740, April 1995, 101–118; Juan Perea, “El desarrollo internacional del Grupo Telefónica,” Economía Exterior 7, 1998–99, 103–115. Some scholars chose the telecommunications industry as a case study to explain the application of European Union competition law at the national level: Teodosio Pérez Amaral, “Telecomunicaciones: ¿Llega la liberalización?” Economistas 74 extra, 1997, 88–94; Amadeo Petitbò and Antonio Maudes, “Interconexión y competencia en las telecomunicaciones,” Economistas 80 extraordinario, 1999, 80–88); Jacint Jordana and David Sancho, Políticas de telecomunicaciones en España, Madrid: Tecnos, 1999; Rafael Myro and Cirpriano Quirós, “El inicio de la competencia en el mercado telefónico,” Economistas 80 extraordinario, 72–79; Rodrigo Keller, “Las telecomunicaciones: del monopolio a la competencia,” ICE 740, April 1995, 31–45; Tomás de la Quadra-Salcedo, Liberalización de las telecomunicaciones, servicio público y constitución económica europea, Madrid: Centro de Estudios Constitucionales, 1995; Gonzalo Cedrún Rábago, “La regulación en las telecomunicaciones,” ICE 740, April 1995, 77–84; Rafael García-Palencia, “La política de telecomunicaciones de la Comisión de la Unión Europea,” 47–53; José J. López-Tafall Bascuñana, “Las telecomunicaciones: un sector clave en las economías modernas,” 13–29; Elena Salgado Méndez, “El papel de la administración,” 55–61; Pedro de Torres Simó, “Cambio en la política de telecomunicaciones. Aspectos jurídicos y económicos,” 63–76; Martin Taschdjian, “Efectos de la competencia sobre los resultados del sector estadounidense de las telecomunicaciones,” 85–93; Bernard Clements, “La liberalización de redes y servicios de telecomunicaciones: la política reguladora europea,” ICE 47, November 1995, 4–48; Francisco Caballero Sanz and Miguel Ángel Peña Castellot, “La política de competencia y el sector de las telecomunicaciones en la Unión Europea,” 87–110; and David Camino and Juan Ramón Trecu, “Cooperación y competencia en el sector de las telecomunicaciones: las alianzas estratégicas internacionales,” 105–119; Íñigo Herguera and César Martinelli, “Regulación de precios de interconnexión,” 73–85; Miguel Ángel Feito Hernández, “La competencia a través de segundos

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12. 13.

14.

15. 16. 17. 18. 19. 20. 21.

22.

23.

24.

25. 26. 27.

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operadores,” 49–59; Thomas Kiessling, “Regulación óptima de la estructura del mercado de redes de telecomunicaciones en la Unión Europea,” 61–72; Luis Rodríguez Romero and Íñigo Herguera, “Regulación de las telecomunicaciones en la Unión Europea: competencia en servicios y en redes,” 9–22; Oliver Stehmann, “Consecuencias de la globalización del sector de telecomunicaciones para la competencia en redes de la Unión Europea,” 23–39. Rafael Isidro Aparicio, La evolución de las telecomunicaciones españolas, 31–34. Rafael Isidro Aparicio. La evolución de las telecomunicaciones españolas 1982–1983: el caso de Telefónica de España, S.A. Documento de trabajo 9404, Programa de Historia Económica, Fundación Empresa Pública, Madrid, June 1994. Rafael Isidro Aparicio, La evolución de las telecomunicaciones españolas, 52–67; Germán Ancochea Soto, “El operador principal. Las nuevas reglas de la competencia,” 103; Telefónica, Annual Report, 2002, 7–8, 13–14. Rafael Isidro Aparicio, La evolución de las telecomunicaciones españolas, 52–67, 76. Ibid., 70. Ibid., 35–41. Ibid., 50–51. Ibid., 60–65. Ibid., 65–68, 76. Ignacio Santillana, “La creación de una multinacional española,” 94; Juan Perea, “El desarrollo internacional del Grupo Telefónica,” 104–105; Telefónica, Annual Report, 2002, 8. Gonzalo Cedrún Rábago, “La regulación en las telecomunicaciones,” 77–78; Bernard Clements, “La liberalización de redes y servicios de telecomunicaciones,” 41–42; Santi Macià, “El tímido proceso de definición del servicio universal de telecomunicaciones en España,” in Políticas de telecomunicaciones en España, ed. Jacint Jordana and David Sancho. Bernard Clements, “La liberalización de redes y servicios de telecomunicaciones,” 42–44; Teodosio Pérez Amaral, “Telecomunicaciones: ¿llega la liberalización?” Economistas 74 extra, 1997, 88–89. Eli M. Noam and Cynthia Baur, “Introduction,” xi–xii, xv, in Telecommunications in Latin America, ed. Eli M. Noam. For a study on the political reasons for nationalization and privatization of telecommunications in Latin America and the Caribbean, with an emphasis on Argentina, Jamaica, Mexico, and Venezuela, see Privatizing Monopolies. Lessons from the Telecommunications and Transport Sectors in Latin America, ed. Ravi Ramamurti, Baltimore: The Johns Hopkins University Press, 1996, 1–173. Manuel Sánchez et al., “The Privatization Process in Mexico: Five Case Studies” (1993), 156. See Chapters 1 and 2. Federico Basañes and Robert Willig, eds. Second Generation Reforms in Infrastructure Services, 1–145; Walter T. Molano, The Logic of Privatization. The Case of Telecommunications in the Southern Cone of Latin America, Westport,

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CT: Greenwood Press, 1997; Hector E. Schamis, Re-Forming the State. The Politics of Privatization in Latin America and Europe, Ann Arbor: University of Michigan Press, 2002; Privatizaciones y poder económico. La consolidación de una sociedad excluyente, ed. Daniel Azpiazu, Bernal: Universidad Nacional de Quilmes Ediciones, Flacso, and Instituto de Estudios sobre Estado y Participación, 2002. Eli M. Noam and Cynthia Baur, “Introduction,” in Telecommunications in Latin America, ed. Eli M. Noam, New York: Oxford University Press, 1998, xi; Second Generation Reforms in Infrastructure Services, ed. Federico Basañes and Robert Willig, Washington, D.C.: Inter-American Development Bank and The Johns Hopkins University Press, 2002, 147–262. Eli M. Noam and Cynthia Baur, “Introduction,” xvi, in Telecommunications in Latin America, ed. Eli M. Noam. Luis Gutiérrez, “Privatization and Regulatory Reform in Latin American Telecommunications,” in Privatization, Deregulation and Economic Efficiency. A Comparative Analysis of Asia, Europe and the Americas, Cheltenham: Edward Elgar, 2000, 217. Pablo Gerchunoff and Germán Coloma, “Privatization in Argentina,” in Privatization in Latin America, ed. Manuel Sánchez and Rossana Corona, Washington, D.C.: Inter-American Development Bank and The Johns Hopkins University Press, 265–266; Telefónica, Annual Report, 1997, www.telefonica. es/memoria/memoria1997/Dimens1.htm (accessed 15 February 2003); Telefónica, Annual Report, 1998, www.telefonica.es (accessed 13–14 February 2003). Luigi Mazetti, Privatization South American Style, Oxford: Oxford University Press, 1999, 215–216. Telefónica, Annual Report, 2000, 95. Telefónica, Annual Report, 1998, 46; Telefónica, Annual Report, 2000, 21; Telefónica, Annual Report, 2001, 9. Telefónica, Annual Report, 1998, 46. José Ricardo Melo, “Chile,” in Telecommunications in Latin America, ed. Eli M. Noam, 215–225; Telefónica, Memoria 1990, 26; Telefónica, Annual Report, 1994, 34. Telefónica, Annual Report, 1996, 111; Telefónica, Annual Report, 1997, www. telefonica.es/memoria/memoria1997/Dimens2.htm (accessed 15 February 2003). Telefónica, Annual Report, 1998, 46. Mark S. Fowler and Aileen Amarandos Pisciotta, “Privatization as an Objective,” 121–122, in Latin America’s Turnaround. Privatization, Foreign Investment, and Growth, ed. Paul H. Boeker. Kathleen A. Griffith, “Mexico,” in Telecommunications in Latin America, ed. Eli M. Noam, 185; Telefónica, Annual Report, 2001, 9; Telefónica, Annual Report, 2002, 48. Telefónica, Annual Report, 1996, 110; Telefónica, Annual Report, 1997, www. telefonica.es/memoria/memoria1997/Dimens1.htm (accessed 15 February

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43. 44.

45. 46. 47. 48. 49.

50. 51. 52. 53.

54.

55. 56. 57. 58. 59.

60.

61.

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2003); Telefónica, Annual Report, 1998, www.telefonica.es (accessed 13–14 February 2003); Telefónica, Annual Report, 2000, 21–22. Ramón Morales Cortés, “Puerto Rico,” in Telecommunications in Latin America, ed. Eli M. Noam, 200–201; Telefónica, Annual Report, 1993, 38; Telefónica, Annual Report, 1995, 36–37. Telefónica, Annual Report, 1997, www.telefonica.es/memoria/memoria1997/ Dimens1.htm (accessed 15 February 2003). Mark S. Fowler and Aileen Amarandos Pisciotta, “Privatization as an Objective,” 121–125, in Latin America’s Turnaround. Privatization, Foreign Investment, and Growth, ed. Paul H. Boeker. Ignacio Santillana, “La creación de una multinacional española,” 93; Telefónica, Annual Report, 1992, 15. Cándido Velázquez-Gaztelu, “Internacionalización: la experiencia de Telefónica,” 15. Ignacio Santillana, “La creación de una multinacional española,” 91, 94. Telefónica, Annual Report, 1996, 12–13; Telefónica, Annual Report, 1999, 12, 31; Telefónica, Annual Report, 2002, 24. Cándido Velázquez-Gaztelu, “Internacionalización: la experiencia de Telefónica,” 17–18; Ignacio Santillana, “La creación de una multinacional española,” 92, 95. Telefónica, Annual Report, 1998, www.telefonica.es (accessed 13–14 February 2003). Ignacio Santillana, “La creación de una multinacional española,” 95. Telefónica, Memoria 1990, 25. Fernando Gallardo Olmedo, “Internationalization of Telecommunication Operators. The Case of Telefónica and its FDI in Latin America,” Paper presented at the “Spanish Investment in Latin America: History and Prospects” conference, Miami, October 18–19, 2002, 5. Telefónica, Annual Report, 1997, www.telefonica.es (accessed 14 February 2003); Telefónica, Annual Report, 2000, 25; Telefónica, Annual Report, 2002, 270. Telefónica, Memoria 1990, 25–26. Telefónica, Annual Report, 1997, www.telefonica.es/memoria/memoria1997 (accessed 14 February 2003); Telefónica, Annual Report, 1999, 22–23. Telefónica, Annual Report, 2001, 44. José Ricardo Melo, “Chile,” ed. Eli M. Noam, 218-219; Telefónica, Memoria 2000, 26. Telefónica, Annual Report 1997, www.telefonica.es/memoria/memoria1997/ Dimens2.htm (accessed 15 February 2003); www.telefonica.es/memoria/ memoria1997/Dimens3.htm (accessed 15 February 2003). Telefónica, Annual Report, 1998, www.telefonica.es (accessed 14 February 2003); Juan José Durán Herrera and Fernando Olmedo Gallardo, “La estrategia de internacionalización de las operadoras de telecomunicaciones,” 97 Telefónica, Annual Report, 1996, 41.

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62. Telefónica, Annual Report, 1998. 63. Cándido Velázquez-Gaztelu, “Internacionalización: la experiencia de Telefónica,” 19. 64. Ibid., 23–24. 65. Ignacio Santillana, “La creación de una multinacional española,” 96, 98; Cándido Velázquez-Gaztelu, “Internacionalización: la experiencia de Telefónica,” 27. 66. Telefónica, Annual Report, 1996, 14–15. 67. Telefónica, Annual Report, 2000, 20. 68. Telefónica, Annual Report, 1998. 69. Telefónica, Annual Report, 2000, 21–29. 70. Telefónica, Annual Report, 2001, 55. 71. Ignacio Santillana, “La creación de una multinacional española,” 96, 98; Telefónica, Annual Report, 2004, 176; Telefónica, Annual Report, 2005, 8; Telefónica, Annual Report, 2009, 27, 107–108; Telefónica, Annual Report, 2007, 25. 72. Ben Petrazzini, “Telephone Privatization in a Hurry: Argentina,” in Privatizing Monopolies, ed. Ravi Ramamurti, Baltimore: The Johns Hopkins University Press, 1996, 109–111, 116–130. 73. Antonio José J. Botelho, José Roberto Ferro, Lee McKnight, and Antonio C. Manfredini Oliveira, “Brazil,” in Telecommunications in Latin America, ed. Eli M. Noam, 227–250. 74. José Ricardo Melo, “Chile,” in Telecommunications in Latin America, ed. Eli M. Noam, 202–226. 75. Percy Conejo and Juan Ernesto Barreda Delgado, “Peru,” in Telecommunications in Latin America, ed. Eli M. Noam, 60–71. 76. Natan Zaidman, “Venezuela,” in Telecommunications in Latin America, ed. Eli M. Noam, 115–130. 77. Ignacio Santillana, “La creación de una multinacional española,” 95. 78. Telefónica, Annual Report, 2003, 21; Telefónica, Annual Report, 2004, 8; Telefónica, Annual Report, 2008, 33. 79. Venezuela is excluded here because Telefónica is only a minority partner in CANTV, operated by GTE. 80. International Telecommunication Union. 81. Telefónica, Annual Report, 1996, 43; Telefónica, Annual Report, 1998, 35; Telefónica, Annual Report, 2003, 118. 82. International Telecommunication Union; Telefónica, Annual Report, 2003, 18; Annual Report, 2004, 16. 83. Telefónica, Annual Report, 2001, 9; Telefónica, Annual Report, 2003, 7. 84. Telefónica, Annual Report, 2001, 33–34; Telefónica, Annual Report, 2002, 44. 85. Telefónica, Annual Report, 1995, 39; Telefónica, Annual Report 1996, 46; Telefónica, Annual Report, 2000, 28. 86. Telefónica, Annual Report, 2001, 22; Telefónica, Annual Report, 2002, 40.

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87. Telefónica, Annual Report, 1998; Telefónica, Annual Report, 1999, 57; Telefónica, Annual Report, 2000, 14. 88. Telefónica, Annual Report, 1999, 23; Telefónica, Annual Report, 2001, 23–24. 89. Telefónica, Annual Report, 2000, 12–13. 90. Ibid., 12–13. 91. Ibid., 14. 92. Telefónica, Annual Report, 2001, 21, 30; Telefónica, Annual Report, 2002, 44. 93. Telefónica, Annual Report, 2001, 23. 94. Telefónica, Annual Report, 1997, www.telefonica.es/memoria/memoria1997/ Dimens.htm (accessed 15 February 2003). 95. Telefónica, Annual Report, 1999, 35, 38. 96. Telefónica, Annual Report, 2000, 41–42; and Terra-Lycos, Annual Report, 2000, 4. 97. Telefónica, Annual Report, 1994, 35; Telefónica, Annual Report, 1999, 51–55; Telefónica, Annual Report, 2000, 53; Telefónica, Annual Report, 2001, 55, 57; Telefónica, Annual Report, 2002, 28. 98. Telefónica, Annual Report, 1999, 55. 99. Telefónica, Annual Report, 2000, 66; Telefónica, Annual Report, 2001, 60–61, 64. 100. Telefónica, Annual Report, 1999, 47. 101. Ibid., 48. 102. Ibid., 39; Telefónica, Annual Report, 2000, 47–50. 103. Telefónica, Annual Report, 2000, 61–62; Telefónica, Annual Report, 2001, 59–60. 104. Ibid., 62–64; Telefónica, Annual Report, 2001, 61. 105. Ibid., 21, 28–29; Telefónica, Annual Report, 2002, 9–10, 27, 34, 49; Telefónica, Annual Report, 2005, 30, 50. 106. Telefónica, Annual Report, 1999. 107. Telefónica, Annual Report, 2000, 74–75; Telefónica, Annual Report, 2001, 26; Telefónica, Annual Report, 2002, 33. 108. Telefónica, Memoria 1990, 25–26; Annual Report, 1991, 37; Telefónica, Annual Report, 1992, 43; Telefónica, Annual Report, 1993, 36; Telefónica, Annual Report 1999, 59–60; Telefónica, Annual Report, 2002, 29; Cándido VelázquezGaztelu Ruiz, “Internacionalización: la experiencia de Telefónica,” 14. 109. Telefónica, Annual Report, 2001, 20; Telefónica, Annual Report, 2002, 39; Telefónica, Annual Report, 2005, 118. 110. Christopher Bjork and Santiago Pérez, “Telefónica Bids for Big Role in Brazil’s Wireless Market,” The Wall Street Journal, 12 May 2010, B5; M. Jiménez and R. Muñoz, “Telefónica firma el acuerdo con Portugal Telecom para comprar Vivo por 7.500 millones,” El País, www.elpais.com (observed August 24, 2010); Telefónica, Annual Report, 2009, 145–147; Telefónica, “Telefónica gains control of Vivo after agreeing the purchase of 50% of Brasilcel with Portugal Telecom,” 28 July 2010, press release. 111. Telefónica, Annual Report, 2003, 21.

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112. Telefónica, Annual Report, 2008, 41. 113. Telefónica, Annual Report, 2002, 9–10, 27, 34, 49; Telefónica, Annual Report, 2003, 118. 114. Telefónica, Annual Report, 2002, 44. 115. Telefónica, Annual Report, 2006, 132; Telefónica, Annual Report, 2007, 17; Telefónica, Annual Report, 2008, 5, 8; Telefónica, Annual Report, 2009, 134–135. 116. Pablo Fernández and José María Carabias, “Creación de valor para los accionistas de Telefónica.” IESE Business School, Universidad de Navarra, Documento de investigación 635, September 2006.

Chapter 5 1. Capitals in the annual report. 2. Capitals are original. 3. The role of foreign multinationals in Latin American public utilities has not received a lot of attention by academics. Juan José Durán Herrera applied John Dunning’s OLI paradigm to explain the expansión of Spanish utilities abroad: Juan José Durán Herrera, Multinacionales españolas en Iberoamérica. Valor estratégico, Madrid: Ediciones Pirámide, 1999, 151–207. Several scholars analyzed FDI as part of a broader management strategy: Ramón Casilda Béjar, La década dorada. Economía e inversiones españolas en América Latina, 1990–2000, Madrid: Universidad de Alcalá and Centro de Internacinonal de Formación Financiera de la Universidad de Alcalá, 2002, 360–374; Enrique Loredo Fernández and Eugenia Suárez Serrano, “La internacionalización de las empresas eléctricas españolas,” ICE 761, March-April, 1997, 100–108; Francisco Mochón and Alfredo Rambla, La creación de valor y las grandes empresas españolas. Los casos de BBV, Banco de Santander, Endesa, Iberdrola, Repsol y Telefónica, Barcelona: Ariel Sociedad Económica, 1999, 157–230. However, most of the literature (from academics and practicioners) focuses on how changes in the regulatory framework prompted FDI: Tomás Calleja, “Pasado y futuro en la internacionalización del sector eléctrico,” in El sector eléctrico del año 2000, ed. Luis Fernández de la Buelga, Emilio Ontiveros, and Arturo Rojas, 321–330; Círculo de Empresarios, “El sector de la energía (Una visión panorámica de su reforma regulatoria),” Documentos Círculo, No. D 055197, Madrid, March 1999; Rafael Miranda, “Estrategias para la empresa española ante el nuevo entorno competitivo,” Economistas 64 extraordinario, 151–154; Rafael Miranda, “La experiencia de Endesa en Mercosur,” Economía Exterior 7 (1998/1999), 117–122; Victoriano Reinoso, “Hacia la explotación de capacidades y recursos en nuevas actividades para el sector eléctrico,” in El sector eléctrico del año 2000, 49–59; Victoriano Reinoso, “Oportunidades del nuevo entorno energético internacional. La experiencia de Unión Fenosa en los mercados emergentes,” Economistas 76 (February 1998), 62–68; Manuel Rodríguez, “Internacionalización del sector eléctrico. La actuación internacional de Endesa,” in El sector eléctrico del año 2000, 331–339.

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4. Figures for Iberdrola are for 2009. 5. Source: Endesa, Annual Report, 2008, 70, 128, 130; Annual Report, 2009, 127; Ahmad Ghamarian, Best Practices Guide: Electricity Regulation in Latin America. The Energy Group. Institute of International Education, 2002, 10; Iberdrola, Annual Report, 2008, 101–104; Annual Report, 2009, 162–163; Unión Fenosa, Annual Report, 2008, 5, 94–101; H. Rudnick and J. Zolezzi, “Electric Utility Deregulation and Restructuring. Electric sector deregulation and restructuring in Latin America: lessons to be learnt and possible ways forward,” IEE Proceedings online no. 20010230, DOI: 10.1049/ip-gtd: 20010230, received 15 November 2000, 180; World Energy Council, Energy Markets in Transition: The Latin American and Caribbean Experience, London, 2001, 2, 70. 6. Business & Company Resource Center, Endesa Group History (accessed 6 September 2002); Endesa, Annual Report, 2008, 6; ENEL, Annual Report, 2009, 28–29. 7. Hoover’s Online, Iberdrola S.A., www.hoovers.com (accessed 10 September 2002). 8. Hoover’s Online, Unión Eléctrica Fenosa, S. A., www.hoovers.com (accessed 10 September 2002); Gas Natural, Annual Report, 2009, 54. 9. Juan de la Cruz Ferrer and Eva Pérez Fernández, La liberalización de los servicios públicos y el sector eléctrico, 284–285; Garry Vollans, “The Decline of Natural Monopolies in the Energy Sector,” Energy Studies Review, Vol. 7, No. 3, 1995, 247–261. 10. Juan de la Cruz Ferrer and Eva Pérez Fernández, La liberalización de los servicios públicos y el sector eléctrico, 285. 11. Juan de la Cruz Ferrer and Eva Pérez Fernández, La liberalización de los servicios públicos y el sector eléctrico, 287; Pilar Sánchez Núñez, “Los modelos de regulación de los sectores energéticos en España,” 78–79. 12. Juan de la Cruz Ferrer and Eva Pérez Fernández, La liberalización de los servicios públicos y el sector eléctrico, 287–289; Pilar Sánchez Núñez, “Los modelos de regulación de los sectores energéticos en España,” 78–79. 13. Juan de la Cruz Ferrer and Eva Pérez Fernández, La liberalización de los servicios públicos y el sector eléctrico, 296; and Pedro L. Marín, “Liberalización y competenecia en el sector eléctrico,” 65–66. 14. Other firms also received funding. Source: Juan de la Cruz Ferrer and Eva Pérez Fernández, La liberalización de los servicios públicos y el sector eléctrico, 287–289. 15. Pablo Benavides, “La política energética de la Unión Europea,” Economía Industrial 316, 1997, 17; Pilar Sánchez Núñez, “Los modelos de regulación de los sectores energéticos en España,” 79. 16. Pilar Sánchez Núñez, “Los modelos de regulación de los sectores energéticos en España,” 79. 17. Gaspar Ariño Ortiz, “El mercado eléctrico y los costes de transición a la competencia,” Economía Industrial 316, 1997, 93–94. For a more theoretical analysis of “stranded costs,” see W. J. Baumol and J. G. Sidal, “Recovering Stranded Costs Benefits Consumers,” Regulation 2, 1996; P. Joskow, “Does Stranded Cost Recovery Distort Competition?” Electricity Journal, April 1996.

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18. Gaspar Ariño Ortiz, “El mercado eléctrico y los costes de transición a la competencia,” 93–108; Miguel Cuerdo Mir, “La política energética española: de la planificación al mercado (con arreglo al Protocolo),” 79–86. 19. Juan de la Cruz Ferrer and Eva Pérez Fernández, La liberalización de los servicios públicos y el sector eléctrico: modelos y análisis de la Ley 54/1997, 289–293. 20. Juan de la Cruz Ferrer and Eva Pérez Fernández, La liberalización de los servicios públicos y el sector eléctrico, 299, 302–304. 21. H. Rudnick and J. Zolezzi, “Electric Utility Deregulation and Restructuring,” 180; Ronald Fischer and Pablo Serra, “Regulating the Electricity Sector in Latin America,” Economía, Fall 2000, 155; Ahmad Ghamarian, Best Practices Guide: Electricity Regulation in Latin America, 11–13. 22. H. Rudnick and J. Zolezzi, “Electric Utility Deregulation and Restructuring,” 180; Ronald Fischer and Pablo Serra, “Regulating the Electricity Sector in Latin America,” 155–156. 23. Ronald Fischer and Pablo Serra, “Regulating the Electricity Sector in Latin America,” 156–157; Ahmad Ghamarian, Best Practices Guide: Electricity Regulation in Latin America, 10. 24. Ahmad Ghamarian, Best Practices Guide: Electricity Regulation in Latin America, 10. 25. H. Rudnick and J. Zolezzi, “Electric Utility Deregulation and Restructuring,” 180; Ronald Fischer and Pablo Serra, “Regulating the Electricity Sector in Latin America,” 157–158. 26. Ahmad Ghamarian, Best Practices Guide: Electricity Regulation in Latin America, 11; Endesa, Annual Report, 1996, 27; Annual Report, 2007, 103. 27. Ahmad Ghamarian, Best Practices Guide: Electricity Regulation in Latin America, 10; Ronald Fischer and Pablo Serra, “Regulating the Electricity Sector in Latin America,” Economía, Fall 2000, 155–159; Ahmad Ghamarian, Best Practices Guide: Electricity Regulation in Latin America (The Energy Group), 11–13; H. Rudnick and J. Zolezzi, “Electric Utility Deregulation and Restructuring,” 180. 28. Victoriano Reinoso y Reino, “Oportunidades del Nuevo Entorno Energético Internacional,” 64–66; Unión Fenosa, Annual Report, 1996, 65; Unión Fenosa, Annual Report, 1997, 56–57; Annual Report, 1998, 52. 29. Iberdrola, Annual Report, 1995, 48–49; Annual Report, 1996, 10–11; Annual Report, 1997, 19, 56; Annual Report, 1998, 17; Annual Report, 1999, 42; Annual Report, 2000, 28. 30. Iberdrola, Annual Report, 1996, 68; Annual Report, 1999, 43; Annual Report, 2000, 66. 31. Íñigo de Oriol Ybarra, in Iberdrola, Annual Report, 1997, 4. 32. Iberdrola, Annual Report, 2006, 51; Annual Report, 2007, 16. 33. Victoriano Reinoso y Reino, “Oportunidades del nuevo entorno energético internacional. La experiencia de Unión Fenosa en los mercados emergentes,” Economistas 76, February 1998, 65. 34. Endesa, Annual Report, 1998, 51. 35. Source: Endesa, Annual Report, 1997, 47; Annual Report, 1999, 26, 47–48, 50; Annual Report, 1998, 50; Annual Report, 2000, 12, 82, 87–88; Annual report,

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36. 37. 38. 39. 40. 41. 42.

43. 44. 45. 46.

47. 48. 49. 50.

51. 52. 53. 54. 55.

56. 57. 58. 59. 60.

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2002, 74; Franco Parisi and Guillermo Yáñez, “The Deal of the Century in Chile. Endesa España’s Takeover of Enersis,” International Review of Financial Analysis, Vol. 9, No. 1 (2000), 103–116. Rafael Miranda, “La experiencia de Endesa en Mercosur,” Economía Exterior 7, 1998/99, 117. Iberdrola, Annual Report, 2002, 53, 58. Endesa, Annual Report, 2000, 37–38; Annual Report, 2002, 58, 74. Iberdrola, Annual Report, 2001, 7, 21, 24–25. Iberdrola, Annual Report, 1996, 68; Annual Report, 2001, 54. Iberdrola, Annual Report, 1998, 57. Iberdrola, Annual Report, 1998, 16; Annual Report, 2001, 24; Unión Fenosa, Annual Report, 1999, 92; Annual Report, 2000, 30–32, 110; Annual Report, 2001, 103–106. Endesa, Annual Report, 1999, 50; Annual Report, 2000, 12; Annual Report, 2000, 82; Annual Report, 2001, 92; Annual Report, 2002, 111. Unión Fenosa, Annual Report, 2008, 96–97. Iberdrola, Annual Report, 2003, 18. Endesa, Annual Report, 1999, 50; Endesa, Annual Report, 2000, 12; Endesa, Annual Report, 2000, 82; Endesa, Annual Report, 2001, 92; Endesa, Annual Report, 2002, 111; Annual Report, 2003, 117; Annual Report, 2007, 104. Iberdrola, Annual Report, 2005, 128; Annual Report, 2008, 54. Unión Fenosa, Annual Report, 2004, 118, 121; Annual Report, 2008, 96–97. H. Rudnick and J. Zolezzi, “Electric Utility Deregulation and Restructuring,” 180. Iberdrola, Annual Report, 2000, 7, 27, 30, 68; Annual Report, 2001, 23–27, 49–50; Annual Report, 2002, 51–52, 57, 101–103; Unión Fenosa, Annual Report, 1998, 54; Annual Report, 1999, 92; Annual Report, 2000, 110–111; Annual Report, 2001, 106; Annual Report, 2002, 71. Endesa, Annual Report, 2008, 73; Iberdrola, Annual Report, 2007, 93; Unión Fenosa, Annual Report, 2008, 93–101. Iberdrola, Annual Report, 2002, 101–103. Endesa, Annual Report, 2005, 90; Unión Fenosa, Annual Report, 2002, 66; Annual Report, 2004, 120. Endesa, Annual Report, 1998, 57; Annual Report, 1999, 49; Annual Report, 2000, 84; Annual Report, 2002, 113. Endesa, Annual Report, 1996, 27; Annual Report, 2002, 113; Ahmad Ghamarian, Best Practices Guide: Electricity Regulation in Latin America, 11; Annual Report, 2007, 103–104. Unión Fenosa, Annual Report, 1997, 56; Annual Report, 2002, 70. Iberdrola, Annual Report, 1999, 21. Iberdrola, Annual Report, 1997, 49; Iberdrola, Annual Report, 1998, 48; Iberdrola, Annual Report, 2002, 51. Iberdrola, Annual Report, 1998, 56–57. Iberdrola, Annual Report, 1999, 5.

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Notes 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74.

75.

76. 77.

78. 79.

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Unión Fenosa, Annual Report, 1998, 148–149. Ibid., 5, 50–51. Unión Fenosa, Annual Report, 1999, 11. Endesa, Annual Report, 2000, 92–93, 96, 99–100; Annual Report, 2001, 104; Annual Report, 2002, 126; Annual Report, 2005, 9. Iberdrola, Annual Report, 1998, 16–17. Iberdrola, Annual Report, 1999, 5; Annual Report, 2001, 2; Annual Report, 2002, 51. Unión Fenosa, Annual Report, 1996, 62. Unión Fenosa, Annual Report, 1999, 4; Annual Report, 2004, 113. Iberdrola, Annual Report, 2001, 26–27, 45. Endesa, Annual Report, 2002, 55–56. Endesa, Annual Report, 2000, 37–38; Endesa, Annual Report, 2002, 58, 74. Endesa, Annual Report, 2002, 24–28, 75, 110–111. Endesa, Annual Report, 2008, 68. Endesa, Annual Report, 1997, 23; Annual Report, 2007, 103–104; Iberdrola, Annual Report, 1996, 68; Annual Report, 1997, 19; Annual Report, 2001, 54; Unión Fenosa, Annual Report, 2001, 105; Annual Report, 2002, 66. Endesa, Annual Report, 2002, 140, 146–151; Iberdrola, Annual Report, 2002, 112–114; Unión Fenosa, Annual Report, 2002, 98–99; Consolidated Financial Statements, 2009, 168. Gas Natural Unión Fenosa, Annual Report, 2009, 125; Iberdrola, Consolidated Financial Statements, 2009, 68; Endesa, Annual Report, 2009, 96. Pablo Fernández and José María Carabias, “Creación de valor para los accionistas de Endesa, 1991–2006,” IESE Business School, Universidad de Navarra, January 2007, 1. Pablo Fernández and José María Carabias, “Creación de valor para los accionistas de Iberdrola,” IESE Business School, Universidad de Navarra, July 2006, 1. Pablo Fernández and José María Carabias, “Creación de valor para los accionistas de Unión Fenosa,” IESE Business School, Universidad de Navarra, July 2006, 1.

Chapter 6 1. Repsol, Annual Report, 1996, 3. 2. “Repsol” is used in this chapter for the Spanish firm before its takeover of YPF in 1999 and Repsol-YPF for the resulting firm after the takeover. Repsol’s annual reports were issued under “Repsol” again after 2009. 3. Juan José Durán and María José García, “Repsol: política pública y eficiencia empresarial,” in Multinacionales Españolas I, ed. Juan José Durán, Madrid, Pirámide, 1996, 243–244. 4. José Luis Díaz Fernández, “Tendencias en la investigación y explotación de hidrocarburos. Evolución de la legislación española,” Economía Industrial 321, 1998, III, 25–26; Business & Company Resource Center, Repsol-YPF S.A. History (accessed 6 September 2002); Carlos Pérez, “El refino y distribución de

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5. 6. 7.

8.

9.

10.

11. 12. 13. 14.

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Notes

hidrocarburos ante el nuevo marco de liberalización,” Economía Industrial 321, 1998, III, 33. Business & Company Resource Center, Repsol-YPF S.A. History (accessed 6 September 2002). Juan José Durán and María José García, “Repsol: política pública y eficiencia empresarial,” 243–244. Comisión Nacional de Energía, Cronología del sector petrolero español, Madrid, November 2003, www.cne.es/pdf/IAP_Crono_DP.PDF (accessed 17 November 2003); Business & Company Resource Center, Repsol-YPF S.A. History. UNCTAD, World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge, p. 228; Repsol, Annual Report, 2009, 44, 101, 104, 114, 119. The foreign direct investments of Spanish firms in the oil and natural gas industries received the least attention among the sectors included in this book. The main academic studies by Juan José Durán and María José García (1996), Ramón Casilda (1997), Juan José Durán (1999), and William Chislett (2003) applied John Dunning’s OLI model (see Chapter 2) and concluded that Repsol’s investments abroad sought location advantages. Francisco Mochón and Alfredo Rambla (1999) focused on management strategies to generate new business opportunities. Another group of academics wrote on EU and Spanish regulation in the oil and gas industries: Peter Pearson and David Hawdon (1993), Pilar Sánchez (1997), José Luis Díaz (1998), Javier de Quinto and Glira Sanz (1999), and José Luis Villar (1999). CEOs and managers of Spanish oil and gas firms also wrote on different aspects of the Spanish oil and gas industry but hardly discussed the international investments of Spanish firms. Most of them focused on EU and Spanish regulation: Óscar Fanjul, Repsol (1995), José Damián Bogas, Endesa (1998), Carlos Pérez, CEPSA (1998), and Círculo de Empresarios (1999). Jorge Basso, Cambridge Energy Research Associates (1995), reviewed the history of the gas industry in Spain since the 1960s, and António Mexía (Transgás) (1999) recommended the creation of a single gas market in the Iberian Peninsula. Juan José Durán and María José García, “Repsol: política pública y eficiencia empresarial,” in Multinacionales Españolas I, ed. Juan José Durán, 243–244; José Luis Díaz, “Tendencias en la investigación y explotación de hidrocarbonos,” 26; Business & Company Resource Center, Repsol-YPF S.A. History (accessed 6 September 2002). Juan José Durán and María José García, “Repsol: política pública y eficiencia empresarial,” 243–244. Business & Company Resource Center, Repsol-YPF S.A. History; Pilar Sánchez, “Los modelos de regulación de los sectores energéticos en España,” 78. José Luis Díaz, “Tendencias en la investigación y explotación de hidrocarburos,” 27–28. Ibid., 21–22; Óscar Fanjul, “La competencia en el negocio petrolero. El caso español,” 105–107.

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15. José Luis Díaz, “Tendencias en la investigación y explotación de hidrocarburos,” 111. 16. José Damián Bogas, “La convergencia de gas y electricidad en el mercado energético global,” 112–114. 17. Jorge Basso, “La industria española del gas,” 111–115. Círculo de Empresarios, El sector de la energía, 30–32; Pilar Sánchez, “Los modelos de regulación de los sectores energéticos en España,” 79–80. 18. Círculo de Empresarios, El sector de la energía, 33–37. 19. Círculo de Empresarios, El sector de la energía, 22–26, 33–37; Repsol-YPF, Annual Report, 2000, 24–25. 20. Carl E. Solberg, Oil and Nationalism in Argentina. A History, Stanford: Stanford University Press, 1979, 8–9, 51, 171–173. 21. Nicolás Gadano, “Determinantes de la inversión en el sector petróleo y gas de la Argentina,” Serie reformas económicas, 7, Santiago de Chile, CEPAL, 1998, 12–13. 22. Nicolás Gadano, “Determinantes de la inversión en el sector petróleo y gas de la Argentina”, 11–21, 25–27; Kim Fuad, “Oil and Natural Gas Privatization,” in Latin America’s Turnaround, 159–160. 23. M. A. Adelman, “Western Hemisphere Perspectives: Oil and Natural Gas,” Contemporary Policy Issues, Summer 1985, Vol. 3, No. 4, 3–12; Humberto Campodónico, “The natural gas industry and its regulation in Latin America,” Cepal Review 68, August 1999, 142–143; Kim Fuad, “Oil and Natural Gas Privatization,” in Latin America’s Turnaround, ed. Paul H. Boeker, 159–160; Stephen J. Randall, “Oil Industry Development and Trade Liberalization in the Western Hemisphere,” The Energy Journal, Vol. 14, No. 3, 1993, 108, 114; Thomas Sterner, “The Development of State Oil Companies in Latin America: From Conflict to Collaboration,” The Journal of Energy and Development, Vol. 15, No. 1, 1992, 111–123. 24. Laura Randall, The Political Economy of Brazilian Oil, Westport, CT: Praeger, 1993, 1–2, 9–12. 25. Patricio Rozas, “La inversión europea en la industria energética de América Latina,” serie 10, seminarios y conferencias, Santiago de Chile, CEPAL, 2001, 65–68. 26. Fabio Barbosa, “Technical and Economic Problems of the Newly Nationalized Industry,” in The Mexican Petroleum Industry in the Twentieth Century, ed. Jonathan C. Brown and Alan Knight, Austin: University of Texas Press, 1992, 189–207; Jonathan C. Brown, “The Structure of the Foreign-Owned Petroleum Industry in Mexico, 1880–1938,” in The Mexican Petroleum Industry in the Twentieth Century, 3–6, 15–22, 24–26; Esperanza Durán, “Pemex: The Trajectory of a National Oil Policy,” in The Oil Business in Latin America. The Early Years, ed. John D. Wirth, Washington, D.C.: Beard Books, 2001, 145–188; Alan Knight, “Introduction,” in The Mexican Petroleum Industry in the Twentieth Century, ix–xv; Isidro Morales, “Pemex during the 1960s and the Crisis in Self-Sufficiency,” in The Mexican Petroleum Industry in the Twentieth Century, 233–255; Isidro Morales, “The Consolidation and Expansion of

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27. 28. 29. 30.

31.

32. 33.

34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46.

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Notes

Pemex, 1947–1958,” in The Mexican Petroleum Industry in the Twentieth Century, 208–232. Patricio Rozas, “La inversión europea en la industria energética de América Latina,” 97–100. Juan Carlos Boué, Venezuela. The Political Economy of Oil, Oxford: Oxford University Press, 1993, 7–9, 13. Patricio Rozas Balbontín, “La inversión europea en la industria energética de América Latina,” 114–118. Paulina Beato and Carmen Fuente, “Liberalization of the Gas Sector in Argentina, Colombia, and Mexico,” in Second-Generation Reforms in Infrastructure Services, ed. Federico Basañes and Robert Willig, Washington, D.C.: Inter-American Development Bank and Johns Hopkins University Press, 2002, 323; Humberto Campodónico, “The Natural Gas Industry and Its Regulation in Latin America,” 138. Paulina Beato and Carmen Fuente, “Liberalization of the Gas Sector in Argentina, Colombia, and Mexico,” in Second-Generation Reforms in Infrastructure Services, ed. Federico Basañes and Robert Willig, Washington, D.C.: InterAmerican Development Bank and Johns Hopkins University Press, 2002, 323; Humberto Campodónico, “The Natural Gas Industry and Its Regulation in Latin America,” 138. Kim Fuad, “Oil and Natural Gas Privatization,” in Latin America’s Turnaround, ed. Paul H. Boeker 153, 155. Paulina Beato and Carmen Fuente, “Liberalization of the Gas Sector in Argentina, Colombia, and Mexico,” 324–332; Humberto Campodónico, “The Natural Gas Industry and Its Regulation in Latin America,” 137, 141; Rocky Mountain Mineral Law Foundation, ed. Mining and Oil & Gas Development in Latin America, Denver, 2001. Repsol, Annual Report, 1995, Sumario, 2; Annual Report, 1996, 2; Annual Report, 1998, 5. Repsol, Annual Report, 1999, 5; Repsol-YPF, Annual Report, 2001, 4. Repsol, Annual Report, 1996, 3. Repsol, Annual Report, 1998, 32, 37; Repsol-YPF, Annual Report, 1999, 8–9; Annual Report, 2001, 7. Interview with Enrique Waterhouse. Repsol, Annual Report, 1995, 23. Repsol, Annual Report, 1996, 2. Repsol-YPF, Annual Report, 2000, 26. Repsol, Annual Report, 1995, 23. Repsol-YPF, Annual Report, 1999, 33–34; Repsol-YPF, Annual Report, 2000, 24; Repsol-YPF, Annual Report, 2002, 27. Repsol-YPF, Annual Report, 2000, 26. Repsol, Annual Report, 1997, 33. Repsol, Annual Report, 1995, 3, 12–13; Annual Report, 1996, 3, 29; RepsolYPF, Annual Report, 1999, 18, 33–34; Annual Report, 2000, 26; Annual Report, 2002, 16.

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47. Repsol, Annual Report, 1996, 2, 10, 12, 50; Repsol, Annual Report, 1997, 13–14, 17; Repsol-YPF, Annual Report, 1999, 7; Repsol-YPF, Annual Report, 2000, 14; Repsol-YPF, Annual Report, 2001, 15–16; Repsol-YPF, Annual Report, 2002, 17; Annual Report, 2004, 25; Annual Report, 2005, 27. 48. Repsol-YPF, Annual Report, 1999, 16; Repsol-YPF, Annual Report, 2007, 9; Annual Report, 2009, 50. 49. Repsol-YPF. Annual Report, 1999, 7; Annual Report, 2000, 13–14; Repsol-YPF, Annual Report, 2001, 15–16. 50. Repsol-YPF, Annual Report, 2004, 26; Annual Report, 2006, 10; Annual Report, 2007, 31; Annual Report, 2008, 50; Repsol, Annual Report, 2009, 91. 51. Repsol, Annual Report, 1997, 7, 14, 17; Repsol, Annual Report, 1998, 18; Repsol-YPF, Annual Report, 1999, 7; Repsol-YPF, Annual Report, 2000, 14; Repsol-YPF, Annual Report, 2001, 16, 18; Repsol-YPF, Annual Report, 2002, 2; Annual Report, 2005, 26; Annual Report, 2008, 81; Repsol, Annual Report, 2009, 14. 52. Repsol, Annual Report, 1995, 3, 12–13; Annual Report, 1996, 2, 11; RepsolYPF, Annual Report, 1999, 7; Annual Report, 2001, 16; Repsol-YPF, Annual Report, 2003, 1. 53. Repsol, Annual Report, 1995, 4, 7, 14; Annual Report, 1996, 30; Annual Report, 1997, 30; Repsol-YPF, Annual Report, 1999, 7, 16–17, 33; Annual Report, 2003, 17; Annual Report, 2002, 2, 15, 27; Annual Report, 2005, 25; Annual Report, 2009, 90. 54. Repsol, Annual Report, 1995, 23–25; Annual Report, 1996, 29; Annual Report, 1997, 30; Annual Report, 1998, 55. 55. Repsol-YPF, Annual Report, 2006, 29; Annual Report, 2007, 3; Annual Report, 2008, 7; Annual Report, 2009, 8, 14. 56. Repsol-YPF, Annual Report, 1999, 22. 57. Repsol, Annual Report, 1996, 18; Annual Report, 1997, 20, 54; Repsol-YPF, Annual Report, 2000, 17. 58. Repsol, Annual Report, 1997, 6, 19–21, 54; Annual Report, 1998, 22–23; Repsol-YPF, Annual Report, 1999, 24; Annual Report, 2000, 17. 59. Repsol, Annual Report, 1997, 6, 19–21, 54; Annual Report, 1998, 22–23; Repsol-YPF, Annual Report, 1999, 24; Annual Report, 2000, 17; Annual Report, 2001, 20–22; Annual Report, 2009, 98. 60. Source: Repsol, Annual Report, 1995, 5; Repsol, Annual Report, 1996, 5, 16, 50; Annual Report, 1998, 6; Repsol-YPF, Annual Report, 2000, 18, 20; Annual Report, 2001, 20–21; Annual Report, 2007, 3, 39; Annual Report, 2008, 92–93. 61. Repsol-YPF, Annual Report, 1998, 6; Annual Report, 2002, 20. 62. Repsol, Annual Report, 1998, 6; Repsol-YPF, Annual Report, 2000, 18, 20. 63. Repsol-YPF, Annual Report, 1999, 7, 27–28; Annual Report, 2000, 23; 64. Repsol-YPF, Annual Report, 2002, 25–26. 65. Repsol-YPF, Annual Report, 2000, 19; Repsol-YPF, Annual Report, 2001, 22 66. Repsol-YPF, Annual Report, 2002, 21.

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67. Repsol, Annual Report, 1996, 28–29, 50; Repsol, Annual Report, 1997, 29; Repsol, Annual Report, 1998, 32; Repsol-YPF, Annual Report, 1999, 7, 30. 68. Repsol, Annual Report, 1995, 23, 25; Annual Report, 1996, 3, 29; Annual Report, 1997, 6, 31–32, 54; Annual Report, 1998, 33–34, 55; Repsol-YPF, Annual Report, 1999, 33–34; Annual Report, 2000, 26; Annual Report, 2002, 16. 69. Repsol, Annual Report, 1996, 5, 30, 33; Repsol-YPF, Annual Report, 1999, 34; Annual Report, 2007, 47; Repsol, Annual Report, 2009, 120–121. 70. See section of exploration and production for more details. 71. Repsol, Annual Report, 1998, 34; Repsol-YPF, Annual Report, 1999, 33. 72. Repsol, Annual Report, 1996, 3; Repsol, Annual Report, 1998, 34; Repsol-YPF, Annual Report, 2000, 5; Repsol-YPF, Annual Report, 2002, 28–30. 73. Repsol, Annual Report, 1996, 30, 33; Annual Report, 1998, 34; Repsol-YPF, Annual Report, 1999, 31–32. 74. Carcar, Santiago, “La italiana Enel toma control de Endesa,” www.elpais.com, 21 Feb. 2009 (observed 21 Feb. 2009); Repsol-YPF, Annual Report, 2008, 120–121; Repsol, Annual Report, 2009, 123–125. 75. Repsol, Annual Report, 1995, 17–18, 23, 25, 29; Annual Report, 1996, 19–20; Annual Report, 1997, 37; Repsol-YPF, Annual Report, 2000, 31; Annual Report, 2001, 33; Annual Report, 2002, 31; Annual Report, 2003, 37; Annual Report, 2004, 9; Annual Report, 2005, 45; Annual Report, 2007, 41. 76. Repsol-YPF, Annual Report, 2001, 11–12. 77. Repsol-YPF, Annual Report, 2002, 15. 78. Secretaría de Energía. Ministerio de Planificación Federal, Inversión Pública y Servicios. República Argentina; YPF, Form 20-F, 2009, 23; Memoria 2005, 4; Memoria 2009, 4–7, 17–18. 79. Repsol-YPF, Annual Report, 2001, 3, 11–13; Annual Report, 2002, 2, 4, 13, 15. 80. Repsol-YPF, Annual Report, 2008, 5; Repsol, Annual Report, 2009, 8, 36, 39. 81. Repsol, Annual Report, 1997, 5, 34; Annual Report, 1998, 13; Repsol-YPF, Annual Report, 1999, 2; Annual Report, 2005, 20. 82. For the composition of the Committee and its functions, as well as the firm’s internal rules regarding good governance, see Repsol-YPF, Annual Report, 2002, 38, 42–43; Annual Report, 2004, 45–47. 83. Repsol, Annual Report, 1995, 31–32; Annual Report, 1996, 34; Annual Report, 1998, 44; Repsol-YPF, Annual Report, 2000, 35–36; Annual Report, 2001, 37–38; Annual Report, 2008, 144–147. 84. Repsol, Annual Report, 1995, 29–30; Annual Report, 1996, 33–34; Annual Report, 1997, 38; Annual Report, 1998, 7, 37, 41–42; Repsol-YPF, Annual Report, 2000, 19, 32–34; Annual Report, 2001, 34–35; Annual Report, 2002, 32–33; Annual Report, 2006, 7, 9. 85. Repsol, Annual Report, 1995, 29–30; Repsol, Annual Report, 1996, 3–33; Repsol, Annual Report, 1997, 38; Repsol, Annual Report, 1998, 41–42; RepsolYPF, Annual Report, 2000, 34; Repsol-YPF, Annual Report, 2001, 36; Repsol, Annual Report, 2009, 19.

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86. Repsol, Annual Report, 1995, Sumario, 2. 87. Repsol-YPF, Annual Report, 2004, 7; Annual Report, 2005, 21; Annual Report, 2006, 23; Annual Report, 2007, 23. 88. Pablo Fernández and José María Carabias, “Creación de valor para los accionistas de Repsol, 1991–2006.” IESE Business School, Universidad de Navarra, Documento de investigación número 638, January 2007.

Chapter 7 1. Stephen H. Hymer, The International Operations of National Firms. A Study of Direct Foreign Investment, Cambridge, MA: MIT Press, 1976, 44–45. 2. James R. Markusen, “The Boundaries of Multinational Enterprises and the Theory of International Trade,” Journal of Economic Perspectives, Vol. 9, No. 2 (Spring 1995), 169–189; James R. Markusen and Anthony J. Venables, “Foreign Direct Investment as a Catalyst for Industrial Development,” Working Paper 6241. National Bureau of Economic Research, Cambridge, October 1997; James R. Markusen and Anthony J. Venables, “Multinational Firms and the New Trade Theory,” Journal of International Economics, Vol. 46, No. 2 (December 1998), 183–203; James R Markusen, Thomas F. Rutherford, and David Tarr, “Foreign Direct Investments in Services and the Domestic Market for Expertise,” Policy Research Working Paper 2413. Washington, D.C., World Bank, August 2000. 3. Raymond Vernon, “The Location of Economic Activity,” in Economic Analysis and the Multinational Enterprise, ed. Hohn H. Dunning, New York: Praeger Publishers, 1974, 89–114; Raymond Vernon, “International Investment and International Trade in the Product Cycle,” in The Theory of Transnational Corporations, Vol. 1, ed. John H. Dunning, New York: United Nations, 1993, 44–60. 4. Alfred D. Chandler, Jr. and Takashi Hikino, “The Large Industrial Enterprise and the Dynamics of Modern Economic Growth,” in Big Business and the Wealth of Nations, ed. Alfred D. Chandler, Jr., Franco Amatori and Takashi Hikino, Cambridge: Cambridge University Press, 1997, 24–57. 5. John Cantwell, “Innovation and Information Technology in MNE,” in The Oxford Handbook of International Business, ed. Alan M. Rugman and Thomas L. Brewer, Oxford: Oxford University Press, 2001, 431–456. 6. Jan Johanson and Jan-Erik Vahlne, “The Internationalization Process of the Firm—A Model of Knowledge Development and Increasing Foreign Market Commitments,” Journal of International Business Studies, Vol. 8, 1977. 7. Mark Casson, “Internationalization Theory and Beyond,” in The Theory of Transnational Corporations, Vol. 1, ed. John H. Dunning, New York: United Nations, 1993, 361–386; John H. Dunning, ed. Economic Analysis and the Multinational Enterprise, New York: Praeger Publishers, 1974; Mira Wilkins, The Maturing of Multinational Enterprise: American Business Abroad from

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1914 to 1970, Cambridge, MA: Harvard University Press, 1974; Oliver E. Willliamson, Markets and Hierarchies, New York: The Free Press, 1975. 8. Nicholas G. Onuf, World of Our Making. Rules and Rule in Social Theory and International Relations, Columbia: University of South Carolina Press, 1989. 9. Figures for Repsol-YPF and Telefónica refer to foreign assets in 1999, not only Latin America. However, most of their assets outside of Spain were concentrated in this region. Source: UNCTAD, World Investment Report 2001. Promoting Linkages, New York, 90. Figures for BBVA are for 2001, for the rest, 2002. Source: BBVA, Informe anual, 1999, 22; BBVA, Informe anual, 2001, 120; BBVA, Annual Report, 2002, 17; SCH, Informe anual, 2002, 5, 22; Endesa, Informe anual, 2002, 9, 110; Iberdrola, Informe anual, 2002, 101–104; Unión Fenosa, Informe anual, 2002, 63–64. 10. BBVA, “BBVA formaliza el acuerdo estratégico con Banco Bradesco S.A. (Hecho Relevante),” press release, www.bbva.es, 10 June 2003 (accessed 13 August 2003).

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españolas,” Universidad Internacional Menéndez Pelayo, Santander, Spain, 19–20 August 2002. Gomis Sáez, Antonio (External Relations, Repsol). “Iberoamérica y las empresas españolas. La experiencia de Repsol.” Speech at “Seminario Iberoamérica y las empresas españolas,” Universidad Internacional Menéndez Pelayo, Santander, Spain, 19–20 August 2002. Luzón, Francisco (CEO, SCH). “La experiencia de Santander Central Hispano.” Speech at “Seminario Iberoamérica y las empresas españolas,” Universidad Internacional Menéndez Pelayo, Santander, Spain, 19–20 August 2002. Montejo Velilla, Salvador (Secretary of the Board). “Iberoamérica y las empresas españolas. La experiencia de Endesa.” Speech at “Seminario Iberoamérica y las empresas españolas,” Universidad Internacional Menéndez Pelayo, Santander, Spain, 19–20 August 2002. Ontiveros, Emilio (Chairman, Analistas Financieros Internacionales). “Las empresas españolas en Iberoamérica.” Speech at “Seminario Iberoamérica y las empresas españolas,” Universidad Internacional Menéndez Pelayo, Santander, Spain, 19–20 August 2002.

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Index

ABN-AMRO, 57, 61 advantage, 8–9, 11, 13–15, 17, 19–24, 35–38, 47–48, 59, 65–66, 68–71, 74–76, 86, 89, 92, 95–96, 98–101, 103–104, 116, 121, 123–127, 132, 144–146, 149–161, 198 AEG, 3–4 Aena, 112 AFP Consolidar, 58 Agrium, 139 Agua y Alcantarillado de Bogotá, 103 Aguas de la Costa, 113 Aguas Provinciales de Santa Fe, 113 Air Touch, 75 Akamai Technologies, 76 Alcatel, 69 Alcudia, 124 Alfonsín, Raúl, 128 Algeria, 123 Alguacil, María Teresa, 22 Allende, Salvador, 82 alliances, 43, 66, 75, 96, 107, 111–112, 114, 130, 140–141, 146, 148–149 Alonso, José Antonio, 22–23 Amarandos, Aileen, 74 América Móvil (see Telmex) Amoco, 136, 140–141 Amper, 69 ANDE, 103, 113 Angola, 123 Argentaria, 32–33, 37–38 Argentina, 4, 13, 23, 39–40, 42–43, 46–49, 51–52, 55, 58, 62, 64, 66,

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71–72, 74, 76–78, 83–86, 88–91, 102–104, 109, 111, 113–115, 117–118, 121–123, 127–132, 134–145, 147–148, 156, 161 Astra, 130, 132, 134, 140–141, 145, 162–164, 170 Atlantic LNG, 136, 145 AT&T, 66–67, 69, 75, 87 Aznar, José María, 38 Bain Capital, 77 Bajo, Óscar, 22 Banca del Oriente, 45 Banca Serfín, 45, 47 Banco Bital, 165 Banco Continental, 51 Banco Cremi, 45 Banco de Asunción, 43 Banco del Libertador, 43 Banco del Sur, 43 Banco de Santa Cruz, 162 Banco de Santiago, 43, 45 Banco de Venezuela, 45, 57, 166 Banco Excel Econômico, 163 Banco Francés (see BF) Banco Ganadero, 46 Banco Geral do Comércio, 57 Banco Hipotecario, 33 Banco Noroeste, 57 Banco O’Higgins, 43, 45 Banco Popular, 87 Banco Provincial, 46 Banco Río de la Plata, 47, 62, 162

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Banco Serfín, 43, 45, 165 Banco Tornquist, 43 Bancomer, 45–46, 50, 57, 165 Bancosur, 43 Banespa, 43–44, 49, 52, 55, 163 Banesto, 37 Bank of Spain, 14, 32, 37, 56 banking, 1, 4, 11, 13, 15, 24, 31–64, 150, 153–157, 159, 162–168, 171, 179–180, 183 Bankinter, 34 Barclays, 63 Bartlett, Chris, 19 Basel Committee, 37 BB, 32–35, 37 BBV, 32–33, 37–38, 45–48, 50, 55, 77 BBVA, 1, 4, 13, 31–64, 37, 85, 87, 90, 107, 111, 142, 150, 153, 156, 159, 162–168 BC, 34, 37 BCH, 34, 37–38, 43 Bell Atlantic, 75 Bell South, 73, 75, 78, 164, 166–167 Bertelsmann, 86 BF (Banco Francés), 46–47, 49, 58, 62, 162 BHA, 34, 37 BHIF, 46 Bichara, Julimar S., 23 BofA, 34, 43 Bolivia, 55, 90, 102, 108, 111, 127–128, 131, 134–136, 140, 145–148, 162, 164 Botín, Emilio, 35, 42 Botín Ríos, Emilio, 34 Botín Sáenz, Emilio, 33 BP, 125, 140–141, 149 BP Amoco (see BP) Bradesco, 56, 163 Brasilcel (see Telefónica) Brazil, 12–13, 39–44, 49, 51–52, 55–57, 59–62, 70, 72–73, 76–78, 82–85, 87–93, 101–103, 106–109, 111–118, 123, 127–129, 132,

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134–136, 138, 140–141, 145–148, 156–157, 162–163, 168 National Oil Agency, 135 British Gas, 126, 147 British Telecom, 75 BS, 33–34, 37–38, 41–42, 46, 48, 50, 58, 76, 183 Buesa, Mikel, 22 butane, 122 Butano, 124 BV, 32–35, 37 Cablevisión, 76 Cadarso, J. Manuel, 23 Caixa, La, 38, 98, 134 cajas (savings and loans), 35–38, 180 Calderón, Álvaro, 23 Campa, José Manuel, 22 Campo Grande, 113 CAMPSA, 122, 124–125 Canada, 82, 97, 136, 139, 146, 148 Canal Azul, 86 Canaport, 136 CANTV, 83 Cantwell, John, 20, 151–152 Carabias, José María, 63 Cárdenas, Lázaro, 129 Caribbean, 11–12, 104, 111, 114–115, 123, 132, 162, 167–168 Casilda, Ramón, 23, 180, 198 Casson, Mark, 18 Catalana de Gas, 126 Cayman Islands, 168 CEG, 112 cellular telephony (see wireless telephony) Central America, 6, 63, 76, 102, 104, 108, 111, 114–115, 167 Central Hispano Banco S.A., 43 CEPSA, 38, 122, 124–125 Cerj, 106 Cesky Telecom, 78 CHADE, 3 Chandler, Alfred, 19, 151

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Index Chávez, Hugo, 130 Chevron, 149 Chile, 4, 7, 13, 39, 41, 43, 45–46, 51–52, 60, 62, 66–67, 73–74, 76–77, 82–85, 89–91, 101, 103, 106–109, 113–118, 123, 138, 140–141, 147–148, 156, 158, 162–164, 168 China, 20, 168 China Mobile, 66, 92 Chislett, William 22, 198 Cisco, 87 Citicorp (see Citigroup) Citigroup, 63, 76, 87 Clark, 130 CLP, 119 coal, 97, 99–100, 126, 131, 148 Coase, Ronald, 18–19 Cocelco, 73 Coelce, 103, 106 Codensa, 106 cogeneration, 100, 141–142 Colombia, 13, 32, 39, 46, 48, 52, 55, 60, 62, 73, 77, 84, 101–103, 106–109, 112–113, 115, 117–118, 123, 128, 131, 134–136, 140–141, 145–147, 162, 164 combined cycle power plant, 100, 109, 112, 115, 117–118, 123, 126, 130, 134–135, 140–141, 146–149, 154, 157, 160–163, 165 Companhía Telefônica Brasileira, 82 Compañía Logística de Hidrocarburos, 125 competitive advantage (see advantage) Concert, 76 Conoco Philips, 149 Continental, 86 Corporación Financiera O’Higgins Central Hispanoamericano S.A., 43 corporate social responsibility, 50, 88, 115–116, 144 Cortina, Alfonso, 121, 143 Costa Rica, 90, 101–103, 111, 167

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Crédit Agricole, 62 CRT, 72, 77, 113 CSC, 112 CTC, 73, 77, 82, 84–85, 91 CTI, 77 Cuba, 90, 103, 113, 135 Cuenca, Eduardo, 22 culture, 24–25, 29, 31 Dehesa, Guillermo de la, 23 Demsetz, Harold, 19 deregulation, 7, 22 Desalant, 113 Deutsche Bank, 63 Deutsche Telecom, 75 Dirsa, 139 Disney, 86 diversification, 38, 42–43, 51, 66, 75–76, 78, 84, 86–87, 90–91, 95, 97–98, 100–101, 111–113, 116, 118, 123–124, 129–130, 137–140, 154, 156–160 Dominican Republic, 111, 117, 167–168 Doz, Yves, 19 Dragados y Construcciones, 112 Drive Financial, 57 Dubai, 123 Dunning, John, 18, 20–22, 193, 198 Durán, Juan José, 21–22, 193, 198 E.On, 119, 141 Ecopetrol, 128 Ecuador, 74, 84, 103, 123, 135–136, 138, 140, 145–148, 162, 164 Edeersa, 103 Edelar, 103 Edelnor, 106 Edenor, 143 Edesa, 107 Edesal, 103 EDP, 103, 107, 112, 119 EEGSA, 107 EFE, 86

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efficiency, 50–52, 55, 60–62, 65–66, 68–70, 75, 85–86, 91–92, 96, 101–102, 107–108, 115, 138, 141–143, 145, 151, 154–155, 157, 159–160, 180–181 EG3, 129, 138 Egypt, 123, 143 El Paso Energy Marketing Company, 109 El Salvador, 73, 77, 84, 102, 111, 167 ELENIC, 103 Elf, 125 Embratel, 82 Emelec, 103 Emgesa, 107 Empresa Mixta de Aguas de La Habana, 113 Empresas Públicas de Medellín, 115 Enagás, 124–126, 136, 143, 147 Endemol, 78, 86–87 Endesa, 1, 4, 13, 38, 95–119, 141, 149, 153, 160, 162–164, 167, 193 Endesa Chile, 115 ENEL (Italy), 97, 141 ENEL (Nicaragua), 103 Energy East, 104 Enersis, 106–109, 164 ENPETROL, 124 ENTEL (Argentina), 71–72, 82 ENTEL (Chile), 73, 76 ENTEL (Peru), 82 environmental protection, 50, 113, 115–116, 118, 125–126, 143–144, 148, 154, 157, 160 EPSA, 141 Ericsson, 69 European Bank for Reconstruction and Development, 107, 114 European Union (EU), 1, 6, 23, 28, 41–42, 59, 69–71, 88–89, 97, 100, 115, 122–124, 127, 142, 154–155, 158, 168, 181, 187, 198 Exxon Mobil, 139, 149

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Fenosa, 98, 107 Fernández, Ana Raquel, 23 Fernández, María Teresa, 23 Fernández, Pablo, 63 Fernández, Yolanda, 22 First Fidelity, 183 First Union, 46, 183 Fischer, Ronald, 101–102 Foster, Norman, 138 Fowler, Mark S., 74 France, 1, 32, 37–38, 70, 75–76, 119, 136 France Télécom, 75 Franco, Francisco, 3, 67 Frondizi, Arturo, 127 Fuad, Kim, 131 Fujimori, Alberto, 166 Gallo, Miguel Ángel, 22 Galp, 112 García, María José, 198 García Canal, Esteban, 22 García Delgado, José Luis, 23 Gas del Estado, 128 Gas Natural, 38, 98, 107, 112–113, 118, 127, 130, 134, 140–141, 143, 146–148, 157 Gas Natural ESP, 112 Gas Natural Fenosa, 98, 117, 141, 147–148 Gas Natural Latinoamericana, 134 Gas Natural México, 112, 141 Gasoriente, 112 General Cable, 69 Germany, 1, 36, 38, 67, 70, 75–76, 119 Ghamarian, Ahmad, 102 globalization, 21, 23–24, 26, 28, 158, 186 Globo, 87 González, Felipe, 38, 170 González, Franciso, 57, 61 government (Spanish), 1, 4, 11–13, 27–28, 32–33, 35, 37–38, 67,

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Index 69–71, 89, 96–97, 100, 122, 125–127, 146, 153–155, 158, 160, 170, 172, 180 Graham, John L., 25 Grupo Empresarial Los Ángeles, 112 Grupo Estado de São Paulo, 86 Grupo Meridional, 57 GTE, 75 Guarantee Bank, 57 Guatemala, 73, 77, 84, 102, 107–108, 111, 167 Guillén, Mauro F., 22–23 Gulf of Mexico, 136–137, 146 Gutiérrez, Adolfo, 22 GVT, 90 Hall, Edward, 177 Helpman, Elhanan, 19 Heras, Luis Javier, 22 Hewlett-Packard, 87 Hidroeléctrica Española (Hidrola), 97–98 Hidroeléctrica Ibérica Iberduero, 97 Hikino, Takashi, 151 Hispanoil, 122, 124 Hofstede, Geert, 177 Honduras, 90, 102–103, 111, 115 Hong Kong, 1, 119 hydroelectric power (see renewable sources) Hymer, Stephen, 17, 22, 151 Iberdrola, 1, 13, 38, 77, 95–119, 141, 149, 153, 160, 162–165, 167 Iberduero, 97–98 Iberia, 85, 87, 142 IBM, 87, 112 IDB, 103, 107, 111, 114–115, 167 IDT Corporation, 76 image (corporate), 46–47, 88, 138–139 IMF, 169 Indonesia, 143 ING, 63 INH, 122, 124 INI, 97

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233

innovation, 20, 34, 49–50, 52, 87–88, 141–142, 144, 151–152 Instituto Costarricense de Acueductos y Alcantarillados, 103 Intercontinental Telephone Company, 83 Inversiones Aurum S.A., 43 Irving Oil, 136 ISI (import-substitution industrialization), 3, 6–7 Italy, 38, 76, 97 Itochu, 77 ITT, 67, 69, 78–79, 82 ITU, 84, 88 Japan, 7, 10, 20, 38, 70, 119 joint-ventures, 25, 34, 43, 69, 76, 90, 99, 112–113, 124, 128, 130, 134–136, 139–141, 161–162, 165, 167 Justo, Agustín, 127 Keohane, Robert, 21 know-how, 26–27, 35, 43, 45–49, 59, 65, 67–68, 75–76, 78, 83–89, 95–96, 98, 101–104, 106–108, 111–112, 116, 121, 123, 130–132, 136, 138, 140, 145–146, 149, 154, 157–158, 160 knowledge, 11, 17–20, 24, 26–27, 29, 151–153 KPN, 75 Laredo National Bank, 57 leader(ship), 42, 61–62, 91–92, 132, 146, 148, 162–167 learning, 18, 29, 31–32, 42–43, 45–46, 96, 102–104, 106–107, 124–126, 132–135, 137, 149–150, 152, 154 liberalization, 3, 7–13, 22–23, 25, 26–28, 32–33, 35–37, 39–41, 48, 69–74, 89, 96, 101–102, 116, 122–123, 125–131, 145, 154–155, 157–158, 166, 170, 186

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LNG, 123, 136, 146 López-Duarte, Cristina, 22 Losango, 87 LPG, 122–123, 131, 139–140, 142, 146, 148, 164, 167 Lucent Technologies, 87 Luksic, Grupo, 43, 45 Lula (see Silva) Luz y Fuerza del Centro, 103 Luzón, Francisco, 31, 48, 61 Lycos, 86 managers, 25–29, 46, 83, 159–161, 163, 166, 187, 198 managerial know-how, 19, 25–29, 47, 65, 157–158 Mandeville, 76 Marathon, 149 Markusen, James, 19, 24–25 Martín, Elena, 169 Mason, Mark, 20 Maxus, 130 MCI, 75–76 Ménem, Carlos, 128, 170 mergers, 33–35, 37, 45, 50–51, 96–98, 125, 154–156, 183 Mexico, 7, 13, 39–43, 45–48, 50–52, 55–60, 62–63, 73, 76–77, 84–85, 87–88, 90, 92–93, 103, 109, 112–114, 116–118, 123, 125, 127, 129–131, 134–136, 139–140, 145–148, 156–157, 161–162, 164–167 CFE, 109, 113, 135 Mexpetrol, 129–130, 134 Meyer, Klaus E., 25 Microsoft, 87 Middle East, 125, 138 Miranda, Rafael, 107 Mochón, Francisco, 22, 198 Molero, José, 22 monopoly, 10–12, 28, 65–67, 69–78, 82, 102, 123–124, 126–131,

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145–146, 153, 156, 158, 160, 162–163, 166–167 Montero, María, 22 Morales, Evo, 135 Morocco, 136 Motorola, 77 MTV Latino, 86 Narula, Rajneesh, 22 National Power, 112 natural gas, 11, 13, 15, 24, 96, 109, 111–114, 116–118, 121–150, 153–155, 157, 160–167, 171, 198 Netcom, 78 Netherlands, 1, 75–76, 86–87 Nicaragua, 74, 84, 102–103, 111, 115, 167 Nigeria, 125 Nortell, 87 North Africa, 117, 123, 134, 136–137 North Sea, 123 Norway, 136, 146 NTT, 77 nuclear power, 97–100, 126, 148 núcleo duro, 38 Nye, Joseph, 21 Nynex, 75 Occidental, 149 oil, 1, 4, 11, 13, 15, 24, 97, 99, 121–150, 153–157, 160–167, 171, 198 oil derivatives, 122, 131, 139, 142, 154, 160, 163–164 Onuf, Nicholas, 23–24, 152 OPEC, 130 Orígenes, 62 Oriol, Íñigo de, 103–104 Orts, Vicente, 22 O2, 78 Pampillón, Rafael, 23 Panama, 47, 74, 84, 102, 111, 167 Paraguay, 43, 55, 90, 103, 113, 167 Participaçoes Rede Brasil Sul, 77

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Index PDVSA, 130, 135, 148 Pedreño, A., 23 Pegaso, 73, 77 Pemex, 114, 129–130, 148 Perea, Juan, 65 Perón, Isabel de, 128 Perón, Juan, 127 Persian Gulf, 125 Peru, 13, 32, 43, 48–49, 51, 55, 60, 66, 74, 77, 82–85, 89–91, 102–103, 106, 109, 113, 115, 117, 123, 134–135, 138, 140, 146–148, 162, 166 Petrobras, 114, 129, 132, 138, 148, 163 Petromed, 125 Pinochet, Augusto, 82 Pluspetrol Energy, 132, 134, 140, 145 Porter, Michael, 18 Portugal, 42, 75–76, 85, 107, 112, 119, 136, 168 Portugal Telecom (PT), 76–77, 90 Prahalad, C. K., 19 privatization, 1, 7, 10–12, 20, 22, 25–29, 33, 38, 40, 41, 43–45, 48, 61, 65, 67–69, 71–74, 77–78, 82–83, 89, 96–97, 101–103, 107, 109, 112, 116, 122, 124, 127–131, 145–146, 154–158, 159–161, 166, 168, 170, 178 Probursa, 45, 165 Procter & Gamble, 87 Profertil, 139 Proxicom, 112 Proyecto Cien, 111 PTC, 82 PTT, 76 public utilities, 1, 4, 11–13, 15, 24, 95–119, 140–141, 146, 148–150, 153–157, 160, 162–167, 171, 193 Puerto Rico, 45, 52, 74, 77, 84, 134, 168 Puerto Rico Telephone Company, 74 Rambla, Alfredo, 22, 198 RBS, 77

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235

REE, 97, 99 REFAP, 129, 138 Reforma, 86 reforms, 6, 10–13, 35–39, 71–74, 101–102, 123, 127–131, 154–159, 163, 166, 193 regulation, 26–28, 66, 71–74, 88, 98–102, 117, 124–125, 137, 153–159, 163, 172, 180, 187, 193, 198 Reinoso, Victoriano, 104, 106 renewable sources, 117–118 hydroelectric, 96–100, 109, 115–118, 164, 167 solar (sun), 100 wind, 100, 115–118 Repsol-YPF, 1, 4, 13, 85, 107, 112–113, 118, 121–150, 157, 160, 162–168, 197, 204 Repsol, 38, 121–123, 125–127, 130–132, 134, 138, 140–141, 145–147, 153–154, 156, 160, 165, 197 research and development (R&D) (see innovation) Reuters, 86 Revell Report, 37 risk, 42–43, 48, 55–59, 88–89, 113–115, 142–144, 161 Rodríguez, Carlos, 22 Rodríguez, Matías, 41 Rodven, 87 Rojo, Luis Ángel, 3 Royal Dutch Shell (see Shell) Ruesga, Santos S., 23 RWE, 119 Sagane, 136 Salinas, Carlos, 129 Saltos del Duero, 97 Santillana, Ignacio, 65 SAP, 87 SBC, 75 SCH, 1, 4, 13, 31–64, 87, 90, 107, 111, 150, 153, 156, 159, 162–167

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236

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Scotiabank, 62 Scottish Power, 104 Segarra, José Antonio, 22 Serra, Pablo, 101–102 service stations, 123, 132, 138, 142, 164, 167 Shell, 125, 130, 149 SIEPAC, 102, 111, 115 Silva, Lula da, 88 Smartcom, 113 solar power (see renewable sources) South Korea, 20, 23 Southern Company, 119 Sovereign Bancorp, 57 Sprint, 75 Stallings, Barbara, 40–41 Standard Eléctrica, 67, 69 Standard Oil, 128 State National Bank, 57 state-owned enterprise, 7–8, 10–12, 20–22, 25, 27–28, 33, 37–38, 65, 67–68, 71–74, 77–78, 82–83, 89, 96–97, 101–103, 107, 109, 112, 116, 122–124, 127–131, 145–148, 153–157, 159–161, 168, 170 Stet, 75 stranded costs, 100 Studart, Rogerio, 40–41 Suez, 119 sun power (see renewable sources) Sweden, 75–76 Swiss PTT, 76 Switzerland, 75–76 TACA, 87 Taiwan, 20 takeover, 43–45, 74–83, 103–107, 116, 126, 131–132, 138, 140–141, 145, 148, 150, 159–160, 162–167, 169 TASA, 76–77, 84, 91 TDE, 111 technology, 11, 20, 22, 26–29, 33, 47–49, 52, 65, 67–70,

9780230100459_11_index.indd 236

76–78, 82, 84–85, 87–89, 92, 103–104, 108, 111–113, 116, 125–126, 129–131, 135–136, 141–142, 144–145, 151–152, 156–158, 186 Teece, David, 19 Telcel, 69 Tele Leste Celular, 77, 112–113 Telebrás, 72, 82, 107 Telecom Argentina, 71–72 Telecom Italia, 78 telecommunications, 1, 4, 11–13, 15, 24, 38, 66–93, 98, 103, 107, 111–113, 118, 150, 153, 155, 157, 159–160, 162–168, 171–172, 186–187 Telefé, 86 Telefónica, 1, 4, 13, 38, 66–93, 107, 112–113, 118, 142, 150, 153–154, 156, 159–160, 162–168, 172, 186–187, 204 Admira, 86–87 Adquira, 87, 142 Atento, 85, 87 Brasilcel, 90 Emergia, 87 Katalyx, 87 Telefónica DataCorp, 87 Telefónica Panamericana, 76 Terra, 86 TISA, 75–76 TPI, 78, 87 Vivo, 90 Telesp, 72–73, 77, 84–85, 90–92, 112–113 Telesudeste Celular Participações, 77 Telettra, 69 Telia, 76 Telmex, 73, 76, 90–91 Texas Regional Bancshares, 57 Texas State Bank, 57 theory, 9, 13–15 constructivist, 23–24, 152–154 of the firm, 18–20, 152

4/14/2011 5:18:12 PM

Index gradualist, 18–19, 22 industrial organization, 17, 22 institutionalist, 23 interdependence, 21 internalization, 17–18, 151–152 international economics, 17 international trade (general equilibrium theory of ), 17, 22, 24–25, 151 investment development path, 22 location, 17–18 new international trade school, 19, 151 OLI, 18, 22, 193, 198 product cycle, 17–18, 151 Scandinavian school, 18–19, 22, 152 strategic analysis, 21–22 transaction cost, 18–19 TLD, 74 Tokyo Electric Power, 119 Torneos y Competencias, 76–77 Total, 149 Transparency, 50, 88, 115, 144–145 Trinidad and Tobago, 134, 136–137, 140–141, 145–148, 162, 167 Turkmenistan, 123 TXU, 119 TYCO, 76 UF (see Unión Fenosa) UN, 50, 107, 114, 116, 144 IFC 114 unbundling, 102, 131 UNESA, 99 Unibanco, 87 Unidad Eléctrica S.A. (Unesa), 99, 107 Unilever, 87 Unión Eléctrica de Cuba, 103 Unión Eléctrica Madrileña, 98 Unión Fenosa (UF), 1, 13, 38, 95–119, 141, 143, 146–147, 149, 153, 160, 162–165, 167

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237

Unisource, 76 United Kingdom (UK), 1, 33, 36–37, 41, 67, 70, 75–76, 104, 112 United States (US), 1, 6–7, 9–10, 20, 38, 41, 43, 45–46, 57–58, 63–64, 67, 70, 74–78, 82–84, 86, 91–92, 97, 104, 109, 112, 119, 122, 128–130, 134–137, 142–144, 146, 148, 158, 162, 165, 167–168 Federal Communications Commission (FCC), 74 universal banking, 32–33, 49, 55, 60, 62, 159, 162, 165–167 Uproar, 86 Uruguay, 4, 39, 43, 47, 55, 62, 71, 74, 84, 103, 113, 118, 134, 167 UT, 78 UTE, 103 Val, Maura de, 170 Valley Bank, 57 Vargas, Getúlio, 128 Varig, 87 VCC, 76 Velarde, Juan, 23 Velázquez, Cándido, 75 Venezuela, 39, 45–46, 48, 51–52, 55, 57, 60–62, 74, 77, 83, 87, 90, 102, 123, 125, 127, 130–131, 134–136, 145–148, 156–157, 166–167 Verbitsky, Horacio, 170 VeriSign, 87 Vernon, Raymond, 17–18, 21, 151 Vietnam, 123 Vivo (see Telefónica) Vodafone, 67 Wallerstein, Immanuel, 21 water management, 112–113, 118, 164, 167, 171 waste management, 112–113 Westney, D. Eleanor, 20 Wilkins, Mira, 18

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238

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Williamson, John, 170 Williamson, Oliver, 18–19, 22 wind power (see renewable sources) wireless telephony, 73–75, 78, 84, 87, 90–92, 164, 167

9780230100459_11_index.indd 238

Ybarra, Emilio, 31, 38, 47–48, 61 YPF, 127–128, 130, 132, 134, 136–138, 140, 142–145, 149, 156, 161, 197 YPFB, 128, 135 Yrigoyen, Hipólito, 127

4/14/2011 5:18:12 PM

Multinational Enterprises in Latin America since the 1990s

Multinational Enterprises in Latin America since the 1990s

Multinational Enterprises in Asian Development

Latin America: Politics and Society since 1930

Latin America: Economy and Society since 1930

Multinational Enterprises and the Global Economy

Multinational Enterprises and the Global Economy

In the Hurricane's Eye: The Troubled Prospects of Multinational Enterprises

Archaeology in Latin America

Latin America In Crisis

Latin America in Crisis

AIDS in Latin America

Cyborgs in Latin America

The Economic History of Latin America since Independence

Religion in America Since 1945

1990s to 2010 (Hispanic America)

The Cambridge History of Latin America, Volume 7: Latin America since 1930: Mexico, Central America and the Caribbean

Multinational Enterprises in India: Industrial Distribution (International Business)

What's Left in Latin America?

Cultural Tourism in Latin America

Telling Ruins in Latin America

Sports Tourism in Latin America

The Cambridge History of Latin America: Colonial Latin America

Annual Report on the OECD Guidelines for Multinational Enterprises 2010

Multinational Enterprises and the Challenge of Sustainable Development

Chile since Independence (Cambridge History of Latin America)

Savings in Latin America after the Mid 1990s: Determinants, Constraints and Policies (Macroeconomia Del Desarrollo)

The Spanish Banks' Strategy in Latin America

Multinational Enterprises in Latin America since the 1990s