Latin America's Global Players

Alvaro Vargas Llosa

WASHINGTON—A recent survey of the top 500 companies in Latin America offers an interesting perspective on where the region is headed—or not. The rest of the world tends to hear about the region mostly in connection to its political fireworks, its literature and its soap operas, and, in more specialized circles, its role as a provider of raw materials. But it is time to add new ingredients to that cocktail.

A number of Latin American businesses are no longer just aiming at domestic markets or investing in neighboring countries: They are becoming true global players. According to the Chile-based America Economia magazine, direct foreign investment originating in a Latin American country increased by a factor of six over the last three years. This includes acquisitions such as Cemex, the Mexican cement producer, purchasing Australia’s Rinker Group for more than $14 billion—a move that will probably make Cemex the world’s top cement company—and Brazil’s mining mammoth Companhia Vale do Rio Doce (CVRD) taking over Inco, a nickel-mining concern in Canada, for more than $17 billion.

This does not mean that Latin America will overtake Asia as a source of foreign direct investment any time soon—60 percent of the foreign capital originating in a developing country is still Asian. But it does mean that there is an increasingly competitive group of Latin American businesses with the right kind of vision and skills to be successful in today’s world. This probably explains the steady increase in the proportion of large companies active in the region that are owned by Latin Americans. Of the top 500 companies, only one-quarter are “foreign.” Seven years ago the proportion was close to 40 percent.

Paradoxically, the failure of Latin America’s economy to keep pace with the other “emerging” regions of the world due to its messy politics has helped these enterprises become global. The reasons they are aggressively pursuing international sources of capital and markets have to do with the fact that, in the absence of major free-market reform since the end of the 1990s, domestic capital is too costly and domestic markets are too small for them. The excess of regulations and barriers to entrepreneurial activity means that companies usually have a hard time fighting back foreign competitors in their country. Gabriel Stoliar, a top executive at CVRD, is quoted by America Economia as saying that the mining company pursued international options because “our competitors were able to raise capital at a cost of 2 to 4 percent a year, and we had to pay between 10 and 12 percent.”

Few people anticipated that underdevelopment could be a stimulus for the globalization of Latin American businesses. We tend to think that a country needs to save a lot of capital before its entrepreneurs can become international players. Investment amounted to between 30 percent and 40 percent of the gross domestic product of Asia’s developing countries before their businesses took the world by storm. By contrast, Latin America’s comparatively backward investment levels are nowhere near 30 percent of GDP, and yet many local companies are expanding beyond the national borders. Of course, there is a limit to how many businesses will be able to follow suit in the absence of a major economic takeoff of the region, but the “premature” globalization of many businesses is an interesting indication that the potential is there.

The stimulating news, however, points to how much better Latin America could be doing if it cleaned its shady politics and continued with the reforms that came to a halt at the end of the 1990s because corruption and cronyism had turned millions of people against free markets. Many of these companies are successful despite their governments. In areas such as telecommunications, electricity and even mining, private businesses are struggling to meet an increasing demand. The reason is simple: Bureaucratic meddling has generated a torpid business environment in which the investments that should have been made were never undertaken.

Perhaps that is why we see the disquieting re-emergence of government-owned companies in the region. The failure of private companies to meet demand has also made it easier for governments to become economic players again. Forty-five percent of the total sales of the top 500 Latin American companies were generated by government-owned enterprises tied to raw materials. Not surprisingly, Venezuela’s oil giant, PDVSA, has the largest sales in the region—equivalent to the combined sales of the 36 mining concerns that made the top 500 group.

Latin America’s global players are sending a powerful signal back home, showing that the potential for a spectacular leap forward is there if politicians can get their act together.