J BUSN RES

1992 2.5 21-42

27

Competitive Advantages and Multinational

Enterprises in Latin America

Robert Grosse
Unrversrtyof Mlamr

TIus article exammes the competltlve strengths of large, U S -based multmatlonal

firms m Latin Amencan business The literatures m busmess strategy and mter-
national busmess have conceptualized a number of competltlve advantages that
enable firms to outcompete their rivals This paper draws on the theoretical ht-
erature for suggestions of specific areas of competltlve advantage and then tests to
see if these advantages apply m the Latin American context

Introduction
The literature on busmess strategy has identified a number of conceptually well-
founded sources of competltlve advantage that may enable firms to achieve positions
of above-average performance relative to rival firms These range from proprietary
technology (Porter, 1980, Vernon, 1966) to successful product dlfferentlatlon
(Comanor and Wdson, 1974, YIP, 1982) and many others Most of the advantages
can be seen as barriers to entry, as exammed by Bam (1956) Looking speafical-
ly at multmatlonal enterprises (MNEs), additional literature has discussed the
slgmficance of these and other advantages such as multmatlonal sourcing and
marketing opportunities (Vernon, 1977, Caves, 1982), flexlblhty to respond to
government pohcles and competitor strategies (Kogut, 1985), and learning and
mnovatlon opportunities (Ghoshal, 1987)
Most analyses of busmess strategy focus on competltlon m domestlc markets,
prmclpally the United States Some of the research has sought to test the rela-
tlonshlps between competltlve advantages and company performance, but most of
It IS conceptual m nature The work m international business suggests competltlve
advantages that may apply to mdlvldual firms, but emplncal tests of some of these
advantages m determmmg performance are mostly done at the industrial level
The purpose of this paper 1s to present the mam competltlve advantages that
have been ldentlfied m the literature and then to test their importance m deter-
mining the performance of multmatlonal firms m Latin America Thus region
differs slgmficantly m Its level of economic development and m industry struc-
ture relative to the mdustnal countries, where most previous analyses have con-

Address correspondence to Robert Grosse, Umverslty of Mlaml, Intematmnal Busmess and Bankmg Institute.
P 0 Box 248123, Coral Gables, FL 33124

Journal of Busmess Research 25,27-42 (1992) 014%2963/92/$5 00

0 1992 Elsev~er hence Pubhshmg Co , lnc
655 Avenue of the Americas,, New York, NY 10010
 J BUSN RES
28 1992 25 2742
R Grosse

centrated The average per capita income m Latin Amencan countries m 1987
was $US 2223, as compared with an average m the mdustnal (OECD) countries
of $US 14,670 Latin Amencan GDP 1s from Interamencan Development Bank,
Economrc and Socral Progress m Latin America, 1988 OECD average GDP is
from World Bank, World Development Report, 1989 The Latin American econ-
omies are highly concentrated, with major state-owned corporations controlling
the 011, mmmg, electnaty, telecommumcatlons, airline, and other key mdus-
tnes Most of these countries also sustam huge underground (parallel) econo-
mies, accounting for an estimated 50% or more of GNP m some cases See, for
example, De Soto (1989) and Grosse (1989, Ch 12, 13) For each of these rea-
sons, the results of this mvestlgatlon may well differ from those that arise from
studies m the mdustnal countries
Some of the differences may be seen readily m a few simple examples related
to multmatlonal firms None of the firms m the Fortune 500, which form the
emplncal base for this study and the bulk of U S direct investment m Latin
America, does any basic research m Latin America (as opposed to product de-
velopment, 1 e , adaptation of products such as foods or clothes-or even fertilizers
or other chemical products-to local markets) (see Grosse, 1989, Ch 13 and United
Nations Center on Transnatlonal Corporations, 1986) Those that do such research
carry It out m the United States and sometimes m European affiliates Very little
transshlppmg of products takes place between affiliates of these foreign multma-
tlonal firms, due to both high transport costs (because of poor transportation and
major geographic barriers m the region) and government-imposed barriers, this
contrasts with the same firms’ use of single plants to serve multiple national markets
m Western Europe
Specific company strategies m Latin America are noteworthy for their differences
from strategies elsewhere IBM has developed a successful strategy for dealing
with the Mexican government This strategy has enabled the firm to produce its
computers locally with 100% IBM ownership (when Mexican law requires foreign
firms to take majority Mexican partners m their direct investment projects, unless
an exception 1s granted) m return for exporting over 90% of the output, much of
which goes to other Latin American countries that are anxious to avoid ralsmg
their imports from the United States This government/company relationship 1s
described m detail by Steven Weiss (1990) IBM may be viewed as possessmg a
competltlve advantage m government negotiations and a consequent protected
business position m several national markets
L M Encsson, the Swedish telecommumcatlons manufacturer, has developed
small electronic switching systems that suit many customers who need less-extensive
and less-costly telephone systems than those produced and sold by its major rivals
m international business-Ericsson has developed a market niche advantage Each
of these examples of competltlve advantages gives the company the ability to out-
compete its rivals m a particular Latin Amencan context While these examples
typify the differences encountered by the firms m Latin American countries, we
expect to find many slmllantles as well The emplncal analysis seeks to methodically
explore this question
The paper 1s organized as follows The second section reviews the literature on
competltlve advantages, developing a list of those commonly deemed to be im-
portant m international competltlon dunng the 1980s The next section describes
 J BUSN RES
Multmatlonal Enterpnses m Latin America 1992 25 21-42
29

the sample of firms that was used to explore the importance of competltlve ad-
vantages and the methodology of analysis Section four lays out the basic research
hypotheses of the study The W+h section presents and analyzes the empmcal results
of hypothesis testing The final section suggests some avenues for further empmcal
mvestlgatlon and draws some conclusions

The Literature on Competttlve Advantages

I do not intend to review comprehensively the wide literature on competltlve
advantages Rather, I seek to ldentlfy those advantages that authors have suggested
and to refer to some of the mam studies available Since the focus 1s mternatlonal,
special attention is paid to competltlve advantages that apply at that level The
bodies of literature that could be reviewed for this purpose include business strategy,
orgamzatlonal development, theory of the firm, international business, mterna-
tlonal economics, and several others Most of the references will be made to
literature m business strategy and international business
The fundamental point of reference for this study 1s Barn’‘’ (1956) classic study
of barners to entry He identified many of the key features of competltlon that
create ohgopohstlc markets and enable firms to gam competltlve advantages Bam
classified the entry barriers as those due to absolute cost advantages, product
differentiation, and economies of scale The 12 headings presented below discuss
major competltlve advantages that have been identified followmg m Barn’s tra-
dition
The issue of proprietary technology has been the primary focus of subsequent
study since Barn’s mltlal work, competltlve advantage based on a technological
lead over rival firms appears repeatedly and consistently m the busmess strategy
(Porter, 1980, Ch 5) and international business (Vernon, 1966, 1977, Caves,
1971, Guile and Brooks, 1987) literatures This advantage generally can be ap-
plied across the firm’s actlvltles around the world (Ronstadt and Krammer,
1982), and so it should be evident m the Latin American context of the present
paper
A second category of competltlve advantage that 1s discussed widely m the
literature 1s the ability to realize economzes of scale, prmclpally m production Firms
that can operate larger-scale faclhtles may be able to reduce unit production costs
and thus achieve greater profits, assuming that the higher level of output can be
sold This advantage has been studied m relation to competltlon m genera1 (Porter,
1980) and m the context of multinational firms m particular (Buckley and Casson
1976, Dunning, 1980) Multmatlonal firms have the additional ability to spread
sales over more than one national market, increasing the likelihood of realizing
the production scale economies
Slmdar scale economres may be achieved In dzstrlbutlon (as noted above) and m
purchasmg, as well as m productlon Most commonly the literature has considered
scale economies together (or has looked only at basic production) rather than
separating them into economies at each stage of the production process Additional
cost economies may be recognized by applying skills or other company capablhtles
across businesses m which the firm participates These economies of scope have
been recogmzed m the literature as well
Preferential access to scarce production factors such as natural resources gives
30 J BUSN RES R Grosse
1992 25 27-42

the possessor firm an ability to avoid supply bottlenecks and thus avoid being held
‘hostage’ by suppliers The oil-producing firms that held reserves of petroleum
unquestionably gamed a huge competitive advantage over rivals without such access
durmg the 1973-1980 penod of global 011 crisis This advantage has been examined
for petroleum firms (Odell, 1986) and tm firms (Hennart, 1986), among others
A lower cosc of cuplful obviously would provide the possessor firm with a greater
range of feasible investment projects when compared to similar rivals without such
funding opportumtles This advantage holds between smaller and larger firms if
hot!, 5.~ are m equal financial health, then the larger one will command access
to more funding and/or funding at a lower cost due to the precelved lower risk
involved The advantage has been discussed by many writers on competltlve strategy
(Porter, 1980, Yip, 1982) At the international level, Ahber (1970) reasoned that
firms from countries with overvalued currencies would have access to lower-cost
funding than their foreign nvals, though this proposltlon has not been demonstrated
empincally
Another barrier can be created by firms that establish over time a buyer pref-
erence for a reputable brand or trade name Firms that gain reputations for making
high-quality products are able to command higher prices than then less-respected
nvals To compete m the markets for bath soap, toothpaste, soft drinks, and many
other consumer nondurable goods, firms must mount costly advertising campaigns,
such a cost precludes entry by smaller firms or those that face difficulty m raising
financing This competltlve advantage has been explored by Comanor and Wilson
(1974) and others At the international level, firms can benefit from a reputation
advantage by selling to multmatlonal customers and by achieving scale economies
m advertising by transferring promotional campaigns across the various markets
m which they compete (Caves, 1971, Levitt, 1983)
Another marketing-related competitive advantage arises from supenor
product design Firms that can truly differentiate their products to offer greater
quality or different characterlstlcs may be able to charge higher prices and/or
sell more units than their undifferentiated rivals This advantage has been
shown clearly m worldwide automobile competltlon during the past two
decades, with the generally higher-quality Japanese cars taking sales away from
their Amencan and European rivals (Altshuler et al , 1984) Superior product
design has been dlscussed widely m the literature as a competitive advantage
(Kogut, 1985, Vernon, 1977)
Firms may achieve advantages from preferential access to channels of dlstrzbutton,
stemming from both cost-reducing and market-access factors If the firm can gain
access to and even monopolize the most efficient dlstnbutlon channel(s), a cost
advantage will be derived At the same time, the firm that is able to utilize the
most effective dlstrlbutlon channels may be able to achieve higher sales than rivals,
other things being equal These ideas are discussed by Bam (1956), Hamel and
Prahalad (1988), and others
Possession of an international marketing network may be viewed as a vanatlon
on Barn’s idea of preferential access to dlstrlbutlon channels In this case the
multmatlonal firm can expand the market for its product(s) and thus use overseas
markets to absorb excess capacity m any given market Also, the ability to spread
sales over several national markets reduces the risk of being dependent only on
one nation’s economy, whose varlablhty IS greater than that of a portfolio of nations
 J BUSN RES
Multmatlonal Enterpnses m Latm America 1992 25 27-42
31

(Grosse and Kulawa, 1988) To this point, all of the competltlve advantages m the
hstmg were discussed by Bam The remammg five advantages have been identified
m more recent studies
Managerzal experzence m different countnes has been viewed as a competltlve
advantage (Grosse, 1981) for multmatlonal firms relative to local nvals, since
the MNEs gam expenence with competltlve practices, government pohcles, and
other busmess condltlons m each country-some of which may be applied to sit-
uations m other countnes The multmatlonal firm’s managers learn from foreign
expenences and may have a better ability to deal with circumstances than their
local, umnatlonal nvals m a given country (Bartlett and Ghoshal, 1987)
Managerial expenence actually may be a burden or an advantage As Bartlett
and Ghoshal (1987) pomt out, the international firm must be able to redefine its
competltlve strategy as technology changes and rival firms shift their strategies
Expenence can make the firm more flexible m adjusting to new environments, or
It can lead to ossdicatlon of structures and strategies that impede the firm’s ablhty
to compete
Expenence has also been recognized widely as a competltlve advantage because
it enables the firm to lower costs more rapidly than rivals The “experience curve”
concept identified by the Boston Consultmg Group (Henderson, 1984) does not
rely on managerial experience alone, but on the firm’s orgamzatlonal experience
which enables costs to be cut m production, dlstnbutlon, purchasing, and the other
stages of the value chain
Knowledge of local condztzons IS a variant of managerial experience, focusing
m this case on understandmg busmess condltlons m particular countries, which
gives an advantage to the possessor over new entrants-rather than business ex-
penence m one country that may be transferrable to another country This
factor 1s one reason often cited for formation of Joint ventures and other stra-
tegic alliances (Kogut, 1985, Ohmae, 1989) between firms m mdustnal coun-
tries, where knowledge of the local market can be “purchased” from the local
partner m this manner
Superzor human resource management 1s generally noted to be a factor m the
success of Japanese multmatlonal firms m the automotive and steel industries
relative to their U S and European rivals (Ouchl, 1979, Hatvany and Puclk,
1981) While dlstmctly more difficult to measure than most of the other compet-
ltlve advantages, human resource management undoubtedly plays an important
role m carving out successful positions for firms m dechmng mdustnes, such as
automobdes and steel, and those with fairly standardized products m general
Supenor human resource management does not only result m greater productlv-
lty m the work force, but it also may lead to higher-quality outputs, more m-
novatlons, lower turnover, and other mamfestatlons of employee satisfaction
with the workplace
The multmatlonal firm may achieve lower costs and/or lower risk than its umna-
tlonal nvals by taking advantage of a worldwzde sourczng capabzlzty This ability
allows the firm to scan suppliers m different countries to try to obtain Inputs at
low cost and to avoid the hostage problem of buying from only one supplier or m
one country This competltlve advantage has been discussed widely m the mter-
national business literature (Vernon, 1977, Grosse, 1981), but httle empmcal evl-
dence exists on its importance
32 J BUSN FE%
R Grosse
1992 25 2-l-42

Government profecfzon may enable the firm to escape competltlon with rival
firms This protection may anse from the government’s lmposltlon of legal barriers
such as tanffs, quotas against imports, or other restrlctlons on domestlc competl-
tlon It also may arise from the government’s direct partlclpatlon m ownership of
the firm, 1 e , via a state-owned enterprise In either case, preferential government
pohcy can create a sustainable competltlve advantage for the firm that receives
such treatment (Poynter, 1985, Boddewyn, 1988, Behrman and Grosse, 1990)
The full range of competltlve advantages identified by Bam and subsequent
analysts thus include

A Technology protected by patents and other legal restrictions

B Preferential access to scarce factors of production
C Different cost of capital for new entrants
D Buyer preference for established brand or trade names
E Supenor product design
F Preferential access to dlstrlbutlon channels
G Economies of scale m production, purchasmg, or dlstnbutlon*
H Transferrable international managerial experience
I Knowledge of local condltlons
J Superior human resource management
K Worldwide sourcing capability
L Government protection

Obviously, these characterlstlcs do not constitute an exhaustive hstmg of possible

sources of competltlve advantage, since ldlosyncracles of busmess m any particular
market or segment are likely to make additional elements important m that context
The hstmg 1s reasonably complete m terms of reflecting those advantages that are
recognized m the literature until the time of the empirical study, since then even
more advantages have been suggested, such as Ghoshal’s (1987) “learnmg and
innovation opportunities ”

Research Hypotheses
Based on the literature review, it 1s possible to construct hypotheses about the
kinds of competitive advantages that are likely to be present m particular sltuatlons
and also about possible links between those advantages and company performance
More precisely, the basic task of empirical analysis here 1s to establish the lmpor-
tance of competltlve advantages to multmatlonal firms operating m Latin Amencan
countnes m the mid-1980s, and to explore the relationship between competitive
advantages and company performance m this context
The first hypothesis focuses on the ldentlficatlon of those competltwe advantages
from the range found m the literature that may apply m Latin American countnes
m recent years These markets are characterized generally by smaller size than
those of the major mdustnal countnes and a much greater degree of government

‘See Ban (1956, pp 15-16) m which the first seven competltwe advantages m the current hst were presented
Multmatlonal Enterpnses m Latm Amenca J BUSN RES
1992 25 21-42
33

intervention than m the mdustnal countnes Also, they are not nearly as Integrated
through trade and investment as the countnes of Western Europe and North Amer-
ica The first hypothesis, therefore, 1s
Hl The key competctrve advantages m the Latm Amencan context ~111 be slmdar to
those found m mdustnal countries, altered by the smaller, more insulated markets
there

A second hypothesis focuses on the relationship between competltlve advantages

and company performance m the Latin American context In this case the expec-
tation 1s that some of the advantages identified m mdustnal countnes will not serve
m these different markets Hence, those advantages that are not transferrable to
the Latin Amencan markets are not likely to be important determinants of success
there The hypothesis IS
H2 Company performance will be based pnmanly on those competltlve advantages
that are most transferrable from mdustnal countnes to Latin America, VIZ ,
proprietary technology and possession of a known and respected brand or trade
name

Although neither hypothesis can be fully validated, both are tested through an
emplncal sampling of firms as described below

Sample and Methodology

The Sample
Data collection was carned out during summer of 1986 The sample was drawn
from the 1986 hstmg of the Fortune 500 U S -based mdustnal corporations First,
an effort was made to include firms that truly have a Latin American strategy, as
opposed to serving countnes m the region on an occasional or simply reactive basis
Only those firms with affiliates m at least two of the largest four Latin Amencan
countnes (Argentma, Brazil, Mexico, and Venezuela) were considered While
possession of affiliates m at least two major Latin American markets does not
guarantee a specific Latin American strategy (as opposed to the firm’s broader
global strategy), this classlficatlon attempted to ensure that the firms included m
the sample had enough assets and sales m the region to Justify a mmlmum level
of attention by senior management The remammg 335 members of the Fortune
500 were found to have one or fewer affiliates m the region, one of the sampled
firms had apparently closed one of its Latin Amencan affiliates by the time the
survey was carned out, since it reported only one affiliate on the questlonnalre
response Th1.s resulted m an mltial universe of 165 firms The firms’ broad char-
actenstlcs are sketched m Table 1
This sampling procedure obviously limits the number of possible responses,
but more Importantly It attempts to ensure that the firms responding really do
have a significant commitment to Latin Amencan markets, rather than vlewmg
the repon as simply an (unimportant) outlet for excess capacity elsewhere The
markets of the four largest Latin Amencan countnes are among the 30 largest
m the world, and so presumably require that firms follow a carefully planned
strategy m order to survive Thus, m seeking an explanation of competltlve
34 J BUSN RES
1992 25 27-42 R Grosse

Table 1. Charactensttcs of the Sample Ftrms tn 1986

Averge worldwIde sales $US 8 728 bdhon

Range of worldwlde sales %US 471 mdhon-$US 96 372 bdhon

Average sales per country m Latm Amenca $US 96 872 mdhon

Range of annual sales m Latm Amencan %US 40 thousand-$US 800 mdhon

countnes

Number of Latm Amencan countnes with Mean 5 06 countnes

subsldlanes Fewest 1 country
Greatest 14 countnes

Technology mtenslty (R&D cost/sales Mean 3 71% of sales

worldwide) (US industry average 3 1%)

Year of estabhshment of first affihate m Latm Average 1955

Amenca Oldest 1912
Newest 1981

strategy by multmatlonal firms m Latin America, the sampling process limited

responses to those firms that were most likely to have developed a specific strat-
egy for operating there

Methodology
A questionnaire was developed to request mformatlon from company executives
with responslblhty for Latin American operations m each of the sample firms
Responses were obtained from executives m each firm who had Latin American
responslblhty, rather than responslblhty for one country This was done to en-
sure that the manager knew enough about the whole firm to evaluate its com-
petitive advantages, even though that person may not have been as
knowledgable about a given country as, say, the country manager there In
some cases, the regional office manager discussed the questlons with country
managers to corroborate his pomt of view The degree of commumcatlon be-
tween the respondent and mdlvldual Latm American affihates was quite fre-
quent and extensive m those cases that were checked on this issue This
questionnaire was pretested m interviews with MNE managers working m South
Flonda at the Latin American headquarters or marketing offices of five U S -
based firms The finahzed questionnaire was composed of 13 closed-ended ques-
tions covermg company characterlstlcs such as size, structure, age, and perfor-
mance measures, as well as one question covermg a hst of the 12 competltlve
advantages The competltlve advantages were adlusted from the original hst
presented earlier economies of scale m production and m drstrlbutlon were pre-
sented separately and product quality and recognized brand name were
combined mto one variable The questlon concerning competltlve advantages
asked only for managers’ opmlons, rather than for detailed, recorded data
An mltlal mailing of the questlonnalre was made m July of 1986 The survey
instrument was sent to the Latin Amencan dlvlslon manager at each firm, or to
the head of the mtematlonal dlvlslon d no Latin American manager could be
identified About 20 of these executives were located at offices m South Florida,
and the rest at the home office or m Latm America About 40 responses were
Multmatlonal Enterpnses m Latin America J BUSN RES 35
1992 25 21-42

Table 2. Competltlve Advantages of U S MNEs m Latm Amenca (n = 56)

Advantage“ Mean scoreb SD

1 Goodwdl based on brand name or firm name 1 24 0 69

2 Propnetary technology 1 13 0 65
3 Managenal expenence m Latin Amenca 0 71 0 87
4 Intematlonal dlstnbutlon network 0 69 0 74
5 Supenor financial capablhty 0 63 0 85
6 Knowledge of local condltlons 0 55 0 67
I Worldwide sourcmg capability 0 53 0 68
8 Productlon economtes of scale 0 52 0 81
9 Human resource management 0 51 0 67
10 Dtstnbutton economies of scale 0 46 0 94
11 Government protection 0 06 100
12 Access to scarce raw material 004 0 39

‘Note These are the advantages as they were hsted on the questmnnalre
&ores range from 2 = ma,or competltlve advantage to 0 = neutral to -2 = mayor competnwe disadvantage

received, including several that simply replied that the firm would not partlcl-
pate m the study A second mailing to nonrespondents was carried out m
August 1986 In all, 71 responses were received, yleldmg 56 usable questl-
onnalres The 56 firms were compared to the remaining 109 firms m the total
population and no response bias was found The t test on company size (annual
sales) was mslgmficant at the 05 level Interestmgly, the mean size of the 56 re-
sponding firms was larger than the mean size of the nonrespondents, though the
difference was mslgmficant
Responses to the survey were tabulated to obtain frequency dlstnbutlons on
each question AddItional mformatlon about some competltlve advantages was
available from other published sources Multiple regression analysis was used to
explain performance results based on competltlve advantages

Hypothesis Tests and Dlscusslon

Managers’ Views of Key Competmve Advantages
Hl The key cotnpetrtwe advantages tn the Latm Amencan context ~111be similar to
those found m mdustnal countries, altered by the smaller, more insulated markets
there
The survey demonstrated a broad agreement by MNE managers across the 56
firms concerning the Importance of the various competltlve advantages They um-
formly pomted to competltlve strengths based on proprietary technology and on
company/product reputation (based on brand names or company name) Table 2
presents the mean scores for each of the 12 competltlve advantages and their
standard devlatlons
Note that clearly the most important strengths as viewed by these managers
were propnetary technology and goodwdl based on brand name or company name
Also rated highly were the possession of an international dlstnbutlon network and
managenal expenence m Latin Amenca The mean scores of the top two com-
petitive advantages (goodwdl and propnetary technology) were slgmficantly higher
than any of the others, accordmg to simple t tests on their mean values This finding
36 J BUSN RES
1992 25 27-42 R Grosse

1s broadly m agreement with the mternatlonal busmess literature (e g , Caves,

1982, Vernon, 1966)
Interestingly, economies of scale m production and m dlstnbutlon ranked very
low m the managers’ responses This phenomenon may be explained by the fact
that most of the firms do not operate large-scale faclhtles m Latin America Also,
since their competltlon 1s prtmanly with other large, multmatlonal firms, these firms
do not view economies of scale as a relevant advantage m comparison with those
nvals The production process often IS divided mto various locations to take ad-
vantage of scale economies and to avoid risks For example, It 1s quite clear that
the chemicals firms centralize their R&D m mdustnal countnes and their production
of basic chemicals mostly m mdustrlal countries (with several exceptions m Brazil
and Mexico) On the other hand, they have wldespread sales offices m Latin
America and also fairly numerous final processmg faclhtles These firms are usually
considered technology intensive, though their major products m Latin Amenca
sometimes are commodity chemicals Very few of the firms export significant
amounts of their products within Latin America, while most of them do import
into the region from their North American and European plants In this hlgh-
technology industry, production 1s generally centrahzed outside of the region, with
local processmg plants, sales offices, and dlstnbutors as the most common forms
of market servicing (Grosse, 1989, Ch 11)
Even less local production takes place m high-technology mdustnes such as
computers, aircraft and avlomc equipment, electronic instruments, and
telecommumcatlons equipment IBM and other firms have been mduced to set
up major manufacturing faclhtles m Mexico, but generally they supply Latin
American markets from U S and European factones Brazil, m fact, currently
prohibits foreign personal computer producers from servmg that market These
mdustnes are characterized by even more centrahzatlon of production m the
mdustnal countnes and only limited local assembly m Latm American markets
Since they produce very little m Latin America, scale economies are decidedly
unimportant m this context
Industnes that are not dominated so importantly by production economies of
scale and by advanced technology show much greater amounts of direct investment
m local production within Latin America Food processmg firms often have many
manufacturing subsldlarles spread throughout the region, as do producers of elec-
tncal appliances, tires, and other relatively low-technology products Hlgh-
technology and low-technology firms are dlstmgulshed m this dlscusslon simply by
their industry rankings on the annual BuwzessWeek survey of R&D intensity of
American mdustnal companies Industries scoring above the national average are
discussed as “high-tech” and firms scormg below the average as “low-tech” The
hypothesis tests rated firms according to the managers’ responses about proprietary
technology as a competltlve advantage The two measures are very highly posltlvely
correlated RJR-Nabisco has production faclhtles m almost every Latin American
country, as does Kraft Goodyear and Flrestone tire plants operate in many coun-
tnes from Mexico to Argentina The other relatively low-tech firms m the sample
tend to follow these production strategies quite regularly Although these firms
have many more production faclhtles m Latin Amenca than the previous group,
they tend to be smaller-scale operations m which scale economies likewise are not
significant
Multmatlonal Enterprises m Latm America J BUSN RES
37
1992 25 27-42

Note finally that government protectlon rated as an extremely weak source of

competltlve advantage to the sample firms This outcome IS most likely because
government protection 1s more often provided to locally owned firms, and thus IS
frequently a dtsadvantage to the foreign multmatlonals (Moran, 1985, Nalm, 1985)
Still, the foreign firms with local production often do receive protection against
imports, so the balance of these two influences leaves government protection as
approximately neutral m the survey
Thus, the first hypothesis was broadly confirmed, with the most frequently
cited competltlve advantages m industrial countries also appearmg at the top of
the list m these less developed countries Some of the key mdustrlal country
advantages were not found to be similarly important m the smaller, less mte-
grated Latin American markets-particularly notable IS the low importance of
productton economies of scale m local operations of the multmatlonal firms in
the sample

The Relation Between Performance and Competltwe Advantages

H2 Company performance will be based pnmanly on those competltlve advantages

that are most transferrable from mdustnal countnes to Latm America, VIZ ,
propnetary technology and possesslon of a known and respected brand or trade
name

The basic measure of performance used m this analysis was market share of the
firm’s greatest income-generating product While far from a perfect measure of
earnings performance, this indicator has the desirable characteristic that it 1s not
SubJect to bias due to the firm’s internal transfer pricing strategy (that may bias
profits toward or away from the Latin American affiliates) or due to other factors
such as shifting exchange rates or remittance pohcles Market share was averaged
on an unwelghted basis for all of the countries m which the firm operates m Latin
America, yielding one aggregate measure Another variant on this measure that
was used was the market share of the firm’s two greatest income-generating
products, calculated slmllarly as above
A second measure of performance, the company manager’s opmlon on how his
firm was performing relative to its mam rivals m the two mam products, was
collected as well The manager’s opmlon on this performance m each of the four
countnes was requested, and then the unwetghted responses for that company were
pooled Regressions on this dependent variable also are presented below These
two measures of performance both have useful aspects, though of course neither
1s wholly satisfactory The correlation between them IS r = -0 12, demonstrating
that they are very weakly correlated, yet the independent vanables showed similar
correlation to each one separately This result IS useful, since it demonstrates that
the two performance measures are not simply (collinear) variants on the same
factor
The market share measures for the entire sample were regressed against the
full set of competltlve advantages and then only the slgruficant ones (at the p
< 0 05 level) Slmllarly, the relative performance measures were regressed
against the competltlve advantages Table 3 shows results of both sets of
regressions
38 J BUSN RES
1992 25 27-42
R Grosse

Table 3. Performance RelatIonshIps with Competltlve Advantages

Explanatory Proprietary Goodwdl due ProductIon F value
vanable technology to brand name scale economies of regresslon
Performance Measure
Average market share I” 14 06b 12 85” 14 64b 62 68b
(+3 56) (+3 57) (+3 86)
Average market share II 15 62’ 10 538“ 11 50 55 29h
(+401) (+2 97) (+3 07)
Relative performance 0 494 0 628’ 0 344d 48 27b
(+2 90) (+4 21) (+2 07)

Nore The numbers m the table are coefficients of the Independent vdrmble named as a column headmg. wth each coefticlent s
I value m parentheses below It
‘Average market share I Includes only the firm s smgle most Important product m each country Average market share II
mcludes shares of the firm’s two most Important products m each country Number of usable observatmns = 49
b = Coefficient was slgmficant at the 001 level
’ = Coefficient was slgndicant at the 01 level
d = Coefficient was slgmficant at the 05 level

Using all 12 competltlve advantages m an attempt to explain market share for

the firm’s two most Important products m each market, stepwlse multlple regression
produced three advantages that contributed to the equation and had significant
coefficients at the 05 level The results of regressing this dependent variable on
only those three independent variables are shown m Table 3 These regressons are
presented with 110 intercept value This IS because the intercept term was not
slgmficantly different from zero m any of the speclficatlons Placing it m the equation
slightly reduced the slgmficance of the other coefficients The correlation matrix
for the competltlve advantages IS presented m the Appendix
Three competltlve advantages turned out to be significant m the equation, com-
parable to studies of multmatlonal firms’ successes m industrial countries All three
of them show the expected posttlve sign, demonstratmg that market share IS cor-
related with the firm’s proprietary technology, Its goodwill based on brand or trade
name, and its production economies of scale
Followmg the same procedure for the dependent variable that measured the
managers’ opmlons of performance relative to rival firms, the stepwlse regression
resulted again m three slgmficant independent variables Results of the regressions
on only these three variables are presented m Table 3 Analogous to the first
measure of performance, the perceived performance measure was positively cor-
related with the firm’s technology intensity, Its goodwill based on brand or trade
name, and its production economies of scales
These results are generally consistent with the rankmgs of the competltlve
advantages, with the exception of production economies of scale This factor
apparently does make a difference m company performance, despite the man-
agers’ views that scale economies m Latin America were not generally a hlgh-
ranking competltlve advantage This IS probably due to the fact that production
scale economies are reahzed m plants outside of Latin America, but they stdl
play an important role m determmlng the competltlveness of subsldlarles m the
region (which are often importing products made m large-scale facilities
elsewhere)
Multmatlonal Enterpnses m Latm America .IBUSN RES 39
1992 25 27-42

The multmatlonal firm may take advantage of Its competltlve strengths through
multiple vehicles m vanous markets--ownership of a factory or office m each
country 1s unnecessary EXXON, having been pushed out of several Latin Amer-
ican countnes by natlonahstlc legislation, earns significant income from licensing
and management contracts through which it sells expertise to local state-owned 011
companies The firm produces petrochemicals m Brazil and elsewhere as well,
again budding on its 01 base Pharmaceuticals manufacturers routinely contract
with other firms m the industry to produce their drugs under “tolling” agreements,
which are essentially licenses to manufacture ethical drugs using the proprietor
firm’s name The Dow Chemical pharmaceuticals plant m Argentina formulates
drugs for Merck, Eh Lilly, and other multmatlonal drug companies, m other coun-
tnes Dow contracts out to other firms to produce its products m the same manner
The correct strategy depends on the entire competltlve position of the company m
all of its markets
In sum, the second hypothesis was supported, with the additional finding that
production economies of scale were slgmficantly related to company performance
m the Latin American countries While the other competltlve advantages generally
had the expected sign m regression analysis, none of them were significant m any
of the three speclficatlons

Conclusions
Competltlve advantages can be seen to influence MNE performance m Latin Amer-
ica, and the only advantages that consistently seem to be significant are propnetary
technology, goodwill based on the firm’s brand name or company name, and econ-
omies of scale m production This result 1sbroadly consistent with findings of studies
done m mdustnal countries m recent years
Athough possession of an international dlstnbutlon network and “experience,”
defined as the length of time of operation m the given country, were rated as fairly
important advantages by the managers, neither they nor any of the other com-
petitive advantages showed consistent correlation with performance by the 56-firm
sample of large U S -based MNEs This may be surpnsmg, since often other ad-
vantages such as economies of multmatlonal sourcing and marketing capablhtles
are discussed as important competltlve strengths of MNEs Perhaps this outcome
IS due to the fact that the markets are relatively small and isolated, so that several
of the other advantages are not obtainable m this context For example, the Latin
Amencan countnes have severe geographical barriers between themselves, which
make mtercountry transportation of products relatively costly-not to mention
additional legal barners such as tariffs, import licensing requirements, and exchange
controls These barriers may largely preclude the use of multmatlonal sourcing and
marketing advantages by the firms that possess these capablhtles In any event, the
study found only three competltlve advantages to be regularly significant m the
vanous countries and groupings of firms
One may expect this environment to change m the years ahead, as transpor-
tation barners decline and as more European and Japanese MNEs enter Latin
America Also, as Latin American countries open up their regulatory envlron-
ments, this additional barrier will be lowered Just as competltlon m general
40 J BUSN RES
1992 2.5 27-42
R Grosse

has become more mternatlonal and more intense m the industrial countries m
the past two decades, so It probably will develop m Latm Amenca m the de-
cade ahead

Appendix Correlation Matrix Among the 12 Competltwe Advantages

CA1 CA2 CA3 CA4 CA5 CA6 CA7 CA8 CA9 CA10 CA11 CA12

100 004 -0 11 -008 -0 27 0 07 0 30 0 19 019 009 0 12 0 32

100 -0 15 0 07 0 20 -0 24 0 27 0 17 0 28 0 13 0 38 0 28
100 055 009 0 29 0 02 0 23 0 11 -004 0 15 -0 10
100 009 -006 -005 0 37 0 33 0 13 0 25 0 12
100 -001 -0 12 0 08 0 01 -0 03 -0 13 0 13
100 -006 -0 12 -0 02 -0 33 -0 21 -021
100 0 29 0 05 010 044 0 37
100 0 16 0 16 0 34 0 16
100 0 14 0 13 0 12
100 0 13 0 20
100 0 31
100

CA1 technology protected by patents and other legal restrlctmns CA2 preferentml access to scarce factors of productmn,
CA3 ddferent cost of caprtal for new entrants, CA4 buyer preference for estabhshed brand or trade names CA5 supenor
product desqn, CA6 preferential access to dlstnbutmn channels, CA7 econormes of scale m productmn purchasmg or dlstn-
butmn. CA8 transferrable mternatmnal managerial expenence, CAY knowledge of local condmons CA10 supenor human
resource management, CA11 worldwde sourcmg capabdlty, CA12 government protectmn

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