Economic Liberalization and Corporate Governance: The Resilience of Business Groups in Latin

America
Author(s): Ben Ross Schneider
Source: Comparative Politics, Vol. 40, No. 4 (Jul., 2008), pp. 379-397
Published by: Ph.D. Program in Political Science of the City University of New York
Stable URL: http://www.jstor.org/stable/20434092
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 Economic LiberalizationandCorporateGovernance
The Resilience ofBusiness Groups inLatinAmerica
Ben Ross Schneider

In 1980 the largestprivate, domestic firm inMexico, Banamex, was a sprawling, highly
diversified, businessgroup,alsoknownas a grupo
closelyowned,andfamily-controlled
economico or just grupo. Twenty-five years later,theBanamex group was long gone, and
manyobservers
expectedthatdecadesofprofound
economicandpoliticalliberalization
would have transformed the rest of the corporate landscape as well. Yet by themiddle
of the firstdecade of the 2000s the largestprivate firm inMexico, and for thatmatter in
all of Latin America, the grupo Carso, was a similarly sprawling, widely diversified,
family-controlledgrupo. The names may change, but the corporate form lives on. Similar
comparisons could be made for the other large countries of the region. In fact, for the
past fiftyyears, scholarship on large domestic firmshas consistently documented the
dominance of family-owned, diversified business groups.I Why do these traditional
patterns of corporate governance inLatin America have such staying power?
Beyond empirical questions, thereare threebroader reasons forexamining corporate
governance in Latin America, two theoretical and one practical. A first theoretical
motivation is to stretch the geographical scope of recent theorizing on corporate
governance in developed countries. In particular, one set of arguments finds the roots
of differences in corporate governance in political factors like relative labor power
and distinct electoral systems.Were these arguments to hold forLatin America, then
democratization theregionshouldhavegenerated
throughout strong forreform
pressures
incorporate governance. A second theoreticalmotivation is to assess institutionalstability
and change in the face of globalization. This debate iswell-worn, though as yet unsettled,
and corporate governance in Latin America is an apt focus for furtherassessment both
because business organization should be more responsive than other sorts of institutions
to changing economic pressures and because Latin America has been at the vanguard of
global economic integration.On the practical side, implicit in the program of market
oriented reforms that swept Latin America in the 1990s was the expectation thatprivate
business would take over from the state the responsibility for leading development.
Despite this implicit expectation, there is little systematic research on how business

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Comparative Politics July2008

protagonists responded to new market opportunities and only fragmentarydata on their

strategies and practices.
On some dimensions, especially ownership, change in corporate governance was
rapid and profound. Starting in the 1980s and accelerating in the 1990s, governments
privatized state-owned enterprises and removed restrictionson foreigndirect investment,
prompting huge shifts in assets from state to private ownership and from national to
foreign ownership. But despite the massive reallocation of corporate assets, many
traditional practices persisted. As the dust settled on thebuying spree of the 1990s, four
core featuresemerged among remaining large domestic firms.One featurewas partial and
new: international expansion by some large private firms,now also known as emerging
multinational corporations or Translatins. The three other features-concentrated
ownership (blockholding), diversification, and family ownership-resembled long
standing practices in corporate governance.
The controversial features of institutional continuity in these business groups is
theoretically contested in part because so much recent scholarship suggests there should
be greater change and convergence toward U.S. standards of dispersed ownership,
professional management, and specialized operations.2 For example, about corporate
governance, many arguments indeveloped countries privilege causal factors likepolitical
coalitions and integrationof capital markets thathave changed dramatically enough in
Latin America to raise expectations of sharper discontinuities. An alternative, composite
interpretationhighlights ongoing incentives, resulting largely fromvolatility and market
imperfections, to maintain grupo governance as well as persistent advantages that
business groups have over other domestic and foreign competitors, primarily in termsof
preferential access to capital, information,and policymaking. For themost part, the three
components of grupo governance-blockholding, family control, and diversification
will be treatedas a composite whole, but the analysis will also address complementarities
among the three.3

Globalization, Democratization, and Convergence

Two broad categories of arguments would expect economic and political liberalization
in Latin America to produce significant changes in corporate governance: those that
emphasize the transformativeeconomic forces of globalization, especially productmarket
competition and the integrationof capital markets, and those thatprivilege political factors
like labor power, coalitions, and electoral systems. The first,globalization approach
focuses largely on diversification; the second, more on ownership concentration.
In theeconomic and globalization perspective, some argued thatcompetition inproduct
markets would force firms to specialize in a process one author called "globalfocusing."4
Moreover, as equitymarkets become more global, and asmore Latin American firmsraise
capital onWall Street, theybecome more subject to the homogenizing pressures of U.S.

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 BenRoss Schneider

analystsand institutional
securities investors
who pusheddediversification
and favored
refocused attention on core competence among U.S. firms in the 1990s.5 In addition,
the transnational spread of U.S.-style management training, as well as the increasing
flow of managers across borders, would also contribute to expectations of change and
convergence.
Politics were also transformed in Latin America after the 1980s in ways that
would, according to a number of theories, generate expectations of change in corporate
governance.In recentyears scholarsdeveloped severalpoliticalexplanationsfor
patterns
ofdispersed
ownership intheUnitedStatesandBritainversustheblockholding
predominantincontinental
Europe.Althoughthecausal arguments vary,allwould, if
extendedtoLatinAmerica,predictgreater
movementtowards dispersedownership.For
example, Mark Roe argues thatgreater labor power, both in national politics and within
promoted
firms, ownershipinsocialdemocratic
more concentrated countries
ofEurope,
while theweakness of labor in theUnited States favored dispersed ownership.6 In Latin
Americainrecent declinedbothinunionsandelections,
decadeslaborstrength certainly
by European standards, and might thereforebe expected to facilitatemovement toward
Focusingonmacro institutional
U.S.-styledispersedownership. differences
between
majoritarian and consensual political systems, several authors argue that the greater
policyvolatility withmajoritarian
associated systems moredispersedownership,
favors
as in theUnited States and Britain, while consensual systems provide greater stability
that encourages the sorts of long-term investments and patient capital associated with
blockholding in continental Europe.7 Extended toLatin America, most new democracies
would tend toward themajoritarian and volatile end of the spectrum and hence strengthen
for
incentives moredispersed
ownership.
Although blockholding persisted, and the overall empirical record does not bear
out most of these expectations of change, it is important to note significant shifts on
some dimensions of corporate governance. For example, the 1990s were a remarkable
period of asset churning due to a coincidence of large privatization programs, new
inflowsof foreign capital, and effortsby domestic firms to increase economies of scale
and scope. Foreign investorswere major protagonists in both privatization and mergers
and acquisitions generally. Inflows of foreign direct investment inLatin America more
thanquadrupled from the late 1980s to the turnof the century, though the composition of
that investment shifteddramatically fromgreenfield investment to acquisitions and from
toservices.8
manufacturing
Flows of foreign direct investment out of Latin America also increased, though
at only a fractionof the inward flow, as large domestic firms acquired subsidiaries in
other countries.9 In this article's sample, over three quarters of large domestic grupos
had subsidiaries in other countries of Latin America, and around half had subsidiaries
outside Latin America (mostly in theUnited States and Europe), though only about
a thirdof them received more than 25 percent of their revenue from abroad. Most of

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Comparative Politics July2008

these Translatins produced bulk commodities (with relatively stable technologies) like
steel, cement, cellulose, and food products, and a fewwere also active in services like
electricity, telecommunications, and retail commerce. Some of the leading Translatins
were also among themost specialized firms,which would seem to lend support to
the global focusing hypothesis that globalization forces greater concentration on core
competence. However, among the smallminority of large specialized firms,
most of them
were specialized beforemarket reform,often for idiosyncratic reasons. For example, the
Brazilian mining giant CVRD and aircraftmanufacturer Embraer were state enterprises
thatwere firstcreated, and later privatized, as specialized operations. Moreover, it is
hard to find cases of diversified grupos that successfully adopted strategies of narrow
specialization in response to economic integration.Many grupos readjusted their
portfolios and sold off some marginal or uncompetitive firmsbut often at the same time
expanded into new sectors or consolidated a strategy of channeling investment into
three or fourmain sectors.10 In sum, aside from increases in foreign direct investment
and cross-border acquisitions, few other trends confirmed theories of globalization and
expectations of change.

Continuities inGrupo Governance inLatin America

In terms of ownership concentration, virtually all listed firms in Latin America have a
controlling shareholder,usually owning well above thecommon thresholdforblockholding
of 20 percent. Sometimes the ultimate ownership is obscured by pyramid schemes and
nonvoting shares, but studies that unravel these complex structures invariably find in
the end a single controlling shareholder, family, or controlling bloc. In addition, many
large firmsare privately held and not listed on the stock exchange. In Brazil therewas a
single, famous exception of a retail firm,Lojas Renner, with dispersed ownership, that
was ironically difficult to run because the shareholders were so unaccustomed to the
absence of a controlling blockholder.1' The fact thatas of 2006 all of the largest firms in
Latin America had a controlling blockholder disconfirms expectations from the political
theories discussed earlier thatmajoritarian politics (as well as other sources of political
volatility) and weak labor politics would favor dispersed ownership. In fact, volatility
seems to encourage grupo governance, in that concentrated ownership and centralized
control can facilitate rapid adjustment,without raisingmanagement worries about adverse
reactions fromminority shareholders, analysts, or "themarket."
Multisectoral diversification and conglomeration among large domestic corporations
are long-standing traditions inLatinAmerica. While many conglomerates inLatinAmerica
rationalized theirdiverse holdings, theydid not get swept up in thedeconglomeration fad
that took hold in theUnited States in the 1980s. In theUnited States conglomeration was
popular in the 1960s and 1970s but by the 1980s was vilified as "the biggest collective

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 Ben Ross Schneider

evermade byAmericanbusiness."12
error The subsequent shiftintheUnited
specializing
States to "core competencies," "refocusing," and "back-to-basics" did not catch on in
Latin America (ormost of the restof thedeveloping world).13
One of themost comprehensive studies of big industrial firms in Latin America
begins by noting that the universe of big stand-alone firms"is very small in the region.
Big firmsare, by a largemajority, part of formal or informal groups."14A more recent
survey of Latin America found that, "on average, almost 80% of large listed firms are
affiliated to an economic group."15Moreover, formost grupos the scope of diversification
covers not just one or two sectors but most of themain sectors of the economy, and
conglomerate subsidiaries regularly have no market or technological relation to one
another.A comparative studyof the five largestgrupos ineight countries inLatin America
found that thirty-four of fortygrupos had diversified into four or five differentsectors,
out of a totalof five.16On average, the large firmsexamined here had subsidiaries inover
threeof seven different sectors, and only about a quarter specialized more narrowly in
one or two sectors.17
Were deconglomeration a natural response to market reform, itwould be well
advanced inChile, the countrywith the longest neoliberal orientation. In fact,diversified
conglomeration in Chile was the predominant form of corporate organization under a
succession
ofverydifferent
development
strategies:
import industrialization
substituting
(1950s and 1960s), radical neoliberal reform (late 1970s), and pragmatic neoliberalism
(1980s on).'8Each periodofferedsomepeculiarincentives
todiversify,
and different
business groups dominated in successive periods, yet what stands out is the enduring
popularity of the group form. The history of the Luksic group illustrateswell this
progression.'9 Founded in the 1950s in copper mining, the group expanded broadly into
metalprocessing,
electricity,
manufacturing,
shipping,
fishing, andagriculture.
forestry,
During the socialist government of the early 1970s, theLuksic group expanded abroad
intoArgentina, Brazil, and Colombia. After themilitary coup in 1973, thegroup resumed
investment
inChile anddiversified
intotelecommunications,
hotels,banking,
beer,and
railways.Much of the recent diversification inLuksic and other grupos had a defensive
quality, as grupos moved intonaturally protected, nontradable, and service sectors.By the
late 1990s, about three-quartersof thegrupos in this sample had subsidiaries in sectors
not subject to competition from imports,perhaps a more predictable, risk-averse response
to trade opening.
Family capitalism is endemic in Latin America.20 In the 2000s over 90 percent of
the largestprivate firms inLatin America (n=32) were controlled by families, and most
had several familymembers in topmanagement positions. Moreover, thousands of large
nonlisted firms inLatin America are presumably family-owned.2' In theUnited States,
in contrast, only a thirdof the largest, Fortune 500 firmswere family-controlled.22By
another calculation, thepercentage of inheritors in command of big businesses inGreat
Britain, France, and Germany ranged from 15 to 35 percent in the early decades of the

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Comparative Politics July2008

twentieth century but dropped below 10 percent by the end of the century.23For the
present sample of groups in Latin America, the proportion of controlling heirs is over
three-quarters.
Family capitalism has evolved, albeit slowly and incrementally, since the 1990s.
Among all types of large firms, family enterprises lost some ground in the 1990s to
multinational corporations and scattered institutionally owned firms (especially ex
state enterprises).24 However,the great majority of large, private, domestic firms
remained family-controlled, and even new grupos adopted traditional styles of family
management.25 In terms of direct family control,many firms shifted gradually tomore
professional management by hiring more outside managers, shifting familymembers
out of formalmanagement positions on to company boards, and sending heirs to get
MBAs abroad.26The process of moving families to the board was pronounced inBrazil
and Chile, where general programs in improving corporate governance were also quite
visible. However, it is still an open empirical question as to just how much control families
really relinquished. For example, some family "board members" continued towork daily
alongside professional managers, and in other cases the board met very frequently,even
weekly, to keep management on a short tether.In sum, despite piecemeal moves toward
professionalization and separation of ownership and management, families maintained
firmcontrol over thegreatmajority of the largestbusiness groups.
The growing integration of capital markets gave foreign firms opportunities to
sell shares on Wall Street, and by 2006 over 200 firms in Latin America had issued
shares in the formofAmerican Depository Receipts (ADRs). Many of these firmswere
subsidiaries of multinational corporations or state-owned enterprises, but among them
were also many business groups or theirmember firms, including nearly half thegrupos
in this article's sample. As noted earlier, several scholars expect this integration through
capital markets to pressure firms to converge along U.S. lines of corporate governance.
While the dozens of grupos that issued ADRs did have to comply with stricterreporting
requirements, theydid not change fundamental patterns of diversification, blockholding,
and family control.27All the family firms in this sample that issued ADRs remained
family-controlled. In fact,ADRs initially reinforced concentrated control, since shares
held asADRs did not have votes orwere automatically voted with management.28 Grupos
issuingADRs were slightly less diversified (3.3 sectors per group) than those not (3.7
sectors per group). However, themore specialized firmswere already less diversified
before issuingADRs.
In sum, aside frommajor increases in flows of foreign direct investment, inward
and outward, therewere few other dramatic changes in corporate governance among the
largestgrupos. These continuities suggest that themotor of change lies not in factors like
globalization, capital markets, political systems, labor power, or trade liberalization.At a
minimum, theories thatprivilege these explanatory variables need to be modest about the
geographic and historical scope of theirarguments.

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 BenRoss Schneider

ExplainingContinuities:IncentivesandAdvantages

The benefitof considering incentives and advantages together is that the combination can
account both forwhy business groups manage tooutcompete more specialized firms,both
domestic and foreign,and why, when theywin, theychoose to remain tightlyheld family
conglomerates.
Therearesomeinteresting variationsingrupogovernance
cross-national
but the focus here is on the strikingsimilarities across the large countries of the region.29
Firstare thetwomain sourcesof incentives
to formdiversified
businessgroups:
volatility and small stock markets.30Macroeconomic and political volatility is high
and enduring. Latin America "suffers from an extremely volatile macroeconomic
environment."3" For the period 1970-2000, volatility for output, terms of trade, and
capital flows in Latin America was higher than inAsia and almost twice as high as in
developed countries.32Market reforms initially added to volatility and "were slow to
produce an impact at themicroeconomic level because of the great uncertainty they
Over the1990sgreater
generated."33 macroeconomic becamethenorm,butnew
stability
democraciesintroduced sources
additional of instability At thesametime,
anduncertainty.
manybusinessgroups movedmoreof theirinvestments intocommodity sectorswhere
pricesanddemandhavehistorically
international beensubjecttogreatervolatility.
Thisvolatility
encouraged continued Forexample,inannouncing
diversification. in
2005 theestablishment
of a construction Juan
subsidiary, Rebelledo,thevice president
of the huge mining firm,Grupo Mexico, explained that "the construction firmhas the
advantage, the same as with the railroad firm[another subsidiary], of being countercycical
to copper, so thatwhen the prices of thatmetal go down a lot, these firmscan provide
liquidity, and that is the advantage of having a relatively diversified and controlled
portfolio." Or, as a manager at theBrazilian conglomerate Camargo Correa put itmore
starkly:"ifwe had stayed only in construction,we'd be dead by now." Moreover, outside
Latin America, diversification tomanage risk is a ubiquitous corporate strategy in both
developed and developing countries, and even in theUnited States among privately held,
family-controlled groups like Pritzer and Cargill that are not subject to the specializing
pressures of the stockmarket.34A broader comparative hypothesis would be thatgreater
volatilitywould encourage diversification across a wider range of sectors,which at first
glance seems tobe the case in comparing groups inAsia and Latin America.35 In addition,
against the political theories considered earlier, volatility also encourages blockholding
as owners seek tomaintain tightcontrol in order to be able to adjust rapidly to changing
circumstances.36
Due inpart tovolatility and weak property rights,stockmarkets are small. By some
measures stockmarkets inLatin America grew a lot after 1990, especially measured by
totalmarket capitalization, which more thanquadrupled from 8 percent of GDP in 1990
(an average for the seven largest economies) to 34 percent in 2003. However, over the
same period turnover fell from 30 to 20 percent, and the number of firms listed actually

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Comparative Politics July2008

dropped from 1,624 to 1,238. In contrast, over the same period in seven developing
countries of East and Southeast Asia, market capitalization almost doubled to 80 percent
of GDP, turnover increased slightly to 152 percent, and the number of listed firmsmore
thandoubled.37 Even where stockmarkets had grown substantially, as inBrazil and Chile,
the largestmarkets (proportionally) in the region, theywere in fact smaller than traditional
measures would indicate. For example, in Chile stock market capitalization surged in
2003 to 119 percent of GDP. However, many listed firms traded only a small portion of
their total value, liquiditywas low, and the turnover ratiowas only eight percent,which
is "very low by internationalstandards," and well below even regional averages.38While
initial public offerings and secondary issues increased in some years in the 2000s, the
overall underdevelopment of stock markets provided incentives for business groups to
maintain concentrated ownership. Moreover, by limiting opportunities to sell equity in
theirgroups, familyblockholders had fewer possibilities fordiversifying theirportfolios
by investing in shares of other firmsand hence stronger incentives to diversifywithin the
grupo in order to protect theirwealth and manage risk.39
Beyond continuing incentives for business groups to maintain their diversified,
blockholding structure,thequestion remainswhy, inmore open and competitivemarkets,
did specialized firmsand multinational corporations not outcompete them.This process
was certainly evident in sectorswhere multinational corporations dominated andmanaged
tobuy out local competitors.However, compared topotential rivals, business groups still
had a number of competitive advantages that can be summarized as preferential access
to capital, to information,and to policymaking. All threevary with size and hence gave
business groups an edge in competition with smaller, specialized, domestic firms,while
the informationand policy access favored grupos over multinational corporations.
Although reformsof recent decades diminished this constraint, the relative scarcity
and high cost of capital still gave business groups an edge over specialized firms (and
multinational corporations over domestic firms).40 Most firms in the region relied on
retained earnings for investment resources, and business groups had the advantage
of being able to draw on multiple firms for earnings. Moreover, some grupos relied
heavily on intragroup debt (lending from one subsidiary to another). In Chile "such
debt represents on average over 20 percent of the liabilities of the Chilean corporate
sector."41The cost of credit is partly a functionof size, which gives business groups a first
advantage, and larger firmshave better access to international sources.42Diversification
and internationalization also reduce the cost of borrowing, as creditors favor firmswith
multiple sources of income inmultiple currencies. After 1990 fewer business groups
were organized around major banks, as many had been before 1980, yet about half the
grupos in this article's sample had subsidiaries in finance,which suggests a continuing
advantage to internalizing some banking functions.
While overall multinational corporations still have the lowest cost of capital,
preferential access to information,especially informationacross thewhole local economy,

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 BenRoss Schneider

gives grupos an advantage over both foreign and specialized firms.43The extent and
quality of informationprocessing is partly a functionof size but also of scope, especially
ifbusiness groups have part of theiroperations in finance.The informationadvantage may
also be greater forgrupos in smaller economies where multinational corporations are less
likely to invest in informationand to tailor theiroperations to local tastes and customs.
of theChileanretailsectoris revealing.
The evolution Someheavyweight
multinational
retailers (including Home Depot, Sears, and JC Penney) entered theChilean market in the
1990s only towithdraw in frustrationsome years later.At the same time some Chilean
retailers Partof theirsuccessderivedinfactfromtheir
expandedrapidly. diversification.
So Falabella, for example, offered customers both retail stores and personal financial
services and managed to dominate lower income segments of the credit card market, a
market themultinational companies neglected. The larger lessonwas thatChilean grupos
knew the peculiarities of the customers and markets better thanmultinational entrants.44
Inmany instances the informationadvantage is largely intangible; inothers ithas a more
visible and deliberate manifestation in large research and planning departments. The
Brazilian conglomerate Camargo Correa, for example, had a department of twenty-five
professionals,
independent fromtheoperationalsubsidiaries, with identifying
charged
newopportunities
foracquisitions,
recommending divestment
ofunderperforming
assets,
andplanning fordiversification.
overallstrategies
Of the three kinds of advantages, it is in politics that grupos most outdistance
theirrivals. For example,gruposbenefit
disproportionately
frommeasuresdesigned
to favor "national capital" or the "national bourgeoisie," as with restrictionson foreign
ownership, discrimination inpubliccontracts,
sympathetic or subsidized
regulations,
credit.Preferential a of
policieshave continuedthroughvariety changing development
So, forexample,gruposbenefited
strategies. underimport industrialization
substituting
fromprotection, licensing,and subsidizedcredit,thenlaterduringprivatization
from
favorable regulation.45 In this sample, over 80 percent of the business groups (n=23)
participated in theprivatization process, and over two-thirds leveraged privatization into
greater diversification. Privatization did create a handful of new specialized, nonfamily
firms like CVRD and Embraer in Brazil and LAN and Enersa in Chile. However,
these firms stand out more as exceptions that prove the rule.Moreover, in Brazil the
government retained a "golden share" (veto power) inpart to fendoffmultinational suitors
in privatized firms.Without such protections, Enersa in Chile was bought by Spanish
multinational corporations.46Overall, though, theorigins of grupos can not be tied to any
singledevelopment Government
strategy. toa "national
commitment bourgeoisie,"
using
thepolicies of the day, gives business groups a leg up.
Moreover, grupos simplifycoordination and communication forgovernments.When
policymakers needed informationor cooperation, theyregularly called together,formally
or informally,theheads of the largestbusiness groups.47 InMexico, forexample, allmajor
grupo owners belonged to the Consejo Mexicano de Hombres de Negocios (Mexican

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Comparative Politics July2008

Council of Businessmen). The CMHN had fortyor so members, by invitation only, and
CMHN explicitly excluded multinational corporations and smaller firms.The CMHN met
everymonth for lunchwith a governmentminister and usually annually with thepresident
ofMexico. This sort of access was repeated throughoutLatin America, though usually
more informally,and ifanythingwith smaller numbers of thevery largestbusiness groups.
This privileged access gave grupo owners ample opportunity to present theirviews, as
well as gain importantadvantages in informationon policymaking. This access was part of
broader informationaladvantages thatbusiness groups had based also on formal research
departments and formal access to informationon policymaking. According to thehead of
the formerBanamex group inMexico, business groups sometimes paid employees to be
presidents and directors of business associations which provided another potential source
of advantage in informationon policymaking. All formsof access increased thepotential
returns frompolitically sensitive assets (for example, subject to government promotion,
regulation, or intervention,as in public utilities and media) for groups relative to other
foreign or national investors.48
This view of political advantages is less restrictive and empirically sounder than
several path dependence formulations based on arguments that interest groups wield
their power in politics tomaintain privileges and the rules that favor them.49 In most
periods most business groups seem to have enormous power. However, much of the
empirical evidence on policymaking undermines basic interestgroup approaches to path
dependence. Major policies affectingbusiness groups, especially market reforms,changed
dramatically inways that hurtmany preexisting grupos, sometimes mortally, without
much evidence that business groups had a direct hand in designing these reforms. In
most countries, governments implementedmany policies ofmarket reformwithout much
prior input fromgrupos.50Moreover, while some policy changes helped some groups,
especially privatization programs, they drove others under. It is remarkable that some
family firmshave survived for generations, but more striking is thatmany seemingly
powerful economic empires have collapsed, and similar looking new ones have emerged
to replace them. Theoretically, a high level of turnover among business groups is not
consistentwith interestgroup formulations of path dependence.5"
For themost part, the three featuresof grupo structure-concentrated blockholding,
family control, and multisectoral diversification-are treatedhere as a composite whole
because theyoccur so regularly together.However, it is also worth considering themicro
complementarities among them,where thepresence of one increases the returns from,or
incentives for, the other two (see Figure 1). Thus, as noted earlier, because the business
group provides income and wealth over the long run to familymembers, the incentives
to diversify are greater than if the owners were dispersed investors or large institutional
blockholders thathave diversified portfolios outside any one firm(arrow 1).Moreover, if
families are owners, then diversification can ease succession crises and family relations
generally by offering opportunities formultiple heirs tomanage separate pieces of the

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 Ben Ross Schneider

grupo.i2
On a slightly
different
dimension(ofpositiveemotionalbutnegativeeconomic
returns),
familyowners may holdon longertosubsidiaries
forsentimental
reasonswhere
managersmightbemore inclinedto sell.At thesametime,diversification
professional
can increase the returns to family over professional management. Diversification raises
informationcostsandasymmetriesand therebyexacerbates
principal/agent
problemsfor
which familymanagementis one solution(arrow2).5 Furthermore,ifdiversification
does not requirecutting ormanagerialexpertise,
edge technological thenprofessional
talent is potentially less valuable than strong principal control over agents of the sort
provided
bykinshipties.54
Both family
control inturn,
anddiversification, increasethereturns
toblockholding
by increasing the discount that potential minority investorswould demand (arrows 3
and 4). Diversification raises information costs to outside investors, and the resulting
organizational
complexity
increases for
opportunities toexpropriate
majorityshareholders
them.Similarly, outside investors arewary of family firms, inpart because families have
tax and other incentives to extractmaximum salaries, benefits, and consumption from

Figure1 Complementarities
amongBlockholding,
Family andDiversification
Control,

j amily control andL

management 10t
5. Lack of capital / \
markets .A c ofo

AeBo
acenfathtepr e ofwealthsestherensB
/ / management \ 3
/ s ~~~~and\\
/ sneso
/3 & 4. Risk

/
concentratdierses
/ ofminority\
thrug
\
stockem
marketm
/ expro-\ \

Blockholding (and pria_on

underdeveloped Multisectoral
stock markets) stockmarkets) p d~~~~~~~~~iversification
~ 6. Absence of opportunity to
diversify through stock market

A - P*B means that the presence of A increases the returns to B.

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Comparative Politics July2008

the business group.55From the familyperspective, ifoutsiders are unwilling to pay what
grupo owners think their shares are worth, thenwhy sell them? Furthermore, as noted
earlier, the dominance of blockholding, of which the underdevelopment of the stock
market is both cause and consequence, favors familycontrol and diversification (arrow 5).
The absence of opportunities fordiversifying through stockmarkets increases the returns
to internal conglomerate diversification (arrow 6). Lastly, the lack of well developed
financial intermediation throughbanks, bonds, stocks, and othermeans does not somuch
increase the returns to family control as make it the default.
In sum, the approach thatbest illuminates the resilience of business groups inLatin
America focuses primarily on incentives, advantages, and micro complementarities
among family capitalism, concentrated ownership, and multisectoral diversification.
Put counterfactually, in the absence of complementarities and incentives like volatility
and shallow capital markets, large groups might trend toward greater specialization
and dispersed ownership. And, without their continuing advantages in capital markets,
informationprocessing, and political access, business groups would have greater difficulty
competing with specialized firmsand multinational corporations.

Conclusions and Implications

What are thepractical and theoretical implications of the resilience of diversified, family
controlled grupos in Latin America? Among the theoretical implications, the resilience
of business groups challenges much theorizing on corporate governance in developed
countries and belies expectations of rapid institutionalchange in response toglobalization.
Itmight be tempting to conclude that these theories will be more illuminating once
developing countries have consolidated effective legal systems and working financial
markets. However, this hope neglects the extent towhich legal and financial systems
in Latin America have modernized in recent years. Chile is instructive in this regard.
Many of its legal and financial indicators are close to standards fordeveloped countries,
yet business groups still predominate. Overall, theorizing on developed countries could
benefit from extending its geographic scope and incorporatingmore of the kinds of
factors analyzed here.
Given the so farmuted response of business groups to globalization, broader
institutionalchange in corporate governance, if and when ithappens, seems more likely
to come gradually and incrementally-through processes like institutionaldisplacement
and layering-rather than as an abrupt transformation.56For example, if new firms
created in the 1990s and 2000s are adopting differentownership structuresand corporate
practices, theymay, if they grow and multiply, start to edge aside or displace grupos as
the dominant domestic firms.Other incremental changes within grupos, or institutional
layering, such as moving familymembers frommanagement to theboard and increasing

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 BenRoss Schneider

outside investment in the firm,may ultimately lead to greater separation of ownership

and management. However, it is still too early to tell how far and fast displacement and
layering
mightgo.
Years from now major firms in Latin America may be mostly specialized,
professionally
managed corporations,
withoutcontrolling
shareholders.
Alternatively,
decades hence, scholarsmay again be marveling thatbusiness groups managed to survive
decades more ofmodernization, liberalization, and economic integration,as theyhave of
business groups in Sweden, Japan, Belgium, Italy, and other developed countries. This
scenario would justify recasting the standard empirical puzzle; instead of asking why
corporate governance in countryX differs so much from theUnited States, the question
should be why are practices in theUnited States so differentfrom the rest of theworld.
To date most theorizing on business groups startswith the presumption that corporate
governance in theUnited States and Britain is at the vanguard and other countries are
arrayed somewhere behind them inamarch towardU.S.-style, widely held, professionally
managed firms specialized in core competences. This teleological view pushed past
theorizing on business groups to seek out the imperfectionsand peculiarities of non-U.S.
contexts to explain "deviant" group behavior.57However, as research accumulates on
business groups, it finds them thriving in an everwider variety of contexts,which should
encourage researchers to turn the question around. If groups are a pervasive feature of
modern capitalism, then they should be looking forubiquitous causes, as are many of
the factors identifiedhere, and asking insteadwhat are the peculiar factors thatgive rise
to such anomalous formsof corporate governance in theUnited States.58 Sidelining the
United States and Britain as major points of reference could also help shift theorizing
to focusmore on variations among economic groups and the possibility thatdistinctive
political, social, and economic contexts give rise to differenttypes of grupos.59
On thepractical side, how well-suited are grupos to forgebusiness-led development
in the twenty-firstcentury?Research on this question is scant, especially in lightof the
importance of the answer to the futurewelfare of the region. In fact, the behavior of
business groups raises serious reservations, in principle, thatmerit deeper empirical
investigation.60First, some of themost spectacular growth among grupos has come
through foreign acquisitions by Translatins. Over themedium run, thismay be the best
way for large firms inLatin America to survive and thrive in a buy-or-be-boughtworld.
Nonetheless, the strategy has short-termopportunity costs if the alternative to buying
firmsabroad were tobuild new plants at home. Moreover, Translatins are unlikely to reap
many of the benefits othermultinational corporations get, especially inmanufacturing,
because most are in lower technology sectors with lower requirements for research and
development and fewer global economies of scale.
Second, while familymanagement can bring benefits such as loyalty, long-term
commitment, and often generations of experience, genetics are hardly the best basis for
recruiting rawmanagerial talent, especially for firms that can afford to pay the highest

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Comparative Politics July2008

salaries. Moreover, family firms are subject to damaging, sometimes fatal, succession
crises. One major study found that only 20 percent of family firms lasted more than
sixty years, and of the surviving firms two-thirds had stopped growing.61 Lastly, and
more speculatively, business group strategies in Latin America often seem defensive
and cautious, especially in the case of business groups that expanded into regulated
and nontradable sectors. To the extent thatdevelopment depends on private investment,
societies are likely to prefer that the animal spirits of theircapitalists tendmore toward
the competitive, risk taking, and innovative end of the spectrum.None of these concerns
should gainsay the remarkable entrepreneurial successes of some grupos. However, it is
still an open empirical question as towhat sorts of contributions business groups are best
suited tomake to development and what sorts of policies might push them to contribute
more.

Appendix on Data Collection

Reliable, comparable data on economic groups are scarce, so a variety of sources (listed
below) was used to piece togethercomposite portraits as of 2006 of the sample of thirty
three of the largest private domestic, nonfinancial firms in Brazil, Mexico, Argentina,
Chile, and Colombia.62 The sample is unlikely to have omitted any of the largestgrupos
in each country,but it is impossible to fix a clear lower threshold. Therefore, some of
thegrupos included heremay not be larger than some other grupos not included, ormay
subsequently have been eclipsed by rising grupos, but such selection problems on the
margins seem random and should not introduce any significantbias.

Cases

Argentina: Arcor, Macri, SCP/Soldati, Techint.63

Brazil: Camargo Correa, CVRD, Embraer, Gerdau, Ipiranga, Odebrecht, Telemar,
Vicunha/CSN,
Votorantim.
Chile: Angelini, Briones, Falabella, Luksic, Matte/CMPC.
Colombia: Ardilla Luille, Carvajal, Santo Domingo, Sarmiento Angulo, Sindicato
Antioquefno.
Mexico: Alfa, Bimbo, Carso, Cemex, Desc, Femsa, Grupo Mexico, Imsa, Modelo,
Vitro.

Variables

Diversification: The number of differentsectors firmsubsidiaries are involved in out of a

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 Ben Ross Schneider

totalof seven:
manufacturing,
agriculture,
foodprocessing,
mining,finance,
construction,
andnonfinancialservices(including and transportation).
media, communications, The
average was 3.5 sectors per firm,and 52 percent had subsidiaries in finance (banking,
insurance, or stockbrokerage).In terms
pensionfunds, 73 percentof
of nontradables,
firmshad subsidiaries in sectors thatwere not subject to import competition, such as
perishable food products, media, or public utilities (energy, telecommunications, and
transportation).
Translatins(LatinAmericanMultinational The data set includesthree
Corporations):
separate measures: regional Translatins with subsidiaries in Latin America, 77 percent
(n=30); international with subsidiaries
Translatins outsideLatinAmerica,48 percent
(n=29); and consolidated Translatins that get more than 25 percent of revenues come
fromsubsidiaries
abroad,34 percent(n=32).
Family Control: 91 percent of the firms (n=32) were family-owned, usually with
multiple familymembers and generations represented in topmanagement positions. In
these family-controlled firms, themean number of generations thathad participated in
management was 2.7 (n= 28). In 80 percent of the firms,the topmanagers were heirs of
thefounding
owners(n=28).
Information for the data set was collected fromperiodical reports, especially
thespecializedbusinesspressineachcountry,
forexample,
AmericaEconomia(Chile),
Exame (Brazil) and Valor (Brazil)), annual reports, company and other websites, and
someacademicscholarship;
Durand;DanielChudnovsky,
Bernardo
Kosacoff,andAndres
Lopez, eds., Las Multinacionales Latinoamericanas: Sus Estrategias en un Mundo
Globalizado (Mexico City: Fondo de Cultura Economica, 1999); Diego Finchelstein,
"El Comportamiento Empresario Durante la Decada de losNoventa: El Grupo Macri,"
Realidad Economica,203 (April2004), 26-49; Peres; Schneider,"New Corporate
Governance."

NOTES
I am grateful to the Tinker Foundation for financial support and to Felipe Alonso, Richard Locke, Gerald
McDermott, Edward Gibson, JamesMahoney, Leonardo Martinez, Rory Miller, Jason Seawright, Ken Shadlen,
David Soskice, Kathleen Thelen, and seminar participants atNorthwestern University and theHarvard Business
School for comments on previous versions.
1. See Ben Ross Schneider, Business Politics and the State in 20th Century Latin America (New York:
Cambridge University Press, 2004), pp. 43-50, for a historical review and more bibliography; Nathaniel
Leff, "Industrial Organization and Entrepreneurship in the Developing Countries: The Economic Groups,"
Economic Development and Cultural Change, 26 (July 1978), 661-75; Francisco Durand, Incertidumbre y
soledad: Reflexiones sobre los grandes empresarios de Am?rica Latina (Lima: Friedrich Ebert Stiftung, 1996);
Wilson Peres, ed., Grandes empresas y grupos industriales latinoamericanos (Mexico City: Siglo Ventiuno,
1998); Mauro Guillen, The Limits of Convergence: Globalization and Organizational Change inArgentina,
South Korea, and Spain (Princeton: Princeton University Press, 2001).
2. I adopt a fairly restrictive definition of business groups as diversified collections of firms subject to
centralized ownership and financial coordination. For further conceptual discussion, see Mark Granovetter,

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Comparative Politics July2008

"Business Groups and Social Organization," in Neil Smelser and Richard Swedberg, eds., Handbook
of Economic Sociology, 2nd ed. (Princeton: Princeton University Press, 2005); Tarun Khanna and Jan
Rivkin, "Interorganizational Ties and Business Group Boundaries: Evidence from an Emerging Economy,"
Organizational Science, 17 (May-June 2006), 333-52; Ben Ross Schneider, "How States Organize Capitalism:
Cross National Variations inBusiness Groups" ( unpublished ms., 2007).
3. The empirical material draws on an original data set on the governance structures of nearly three dozen of
the largest domestic, nonfinancial firms infive major countries of Latin America (see theAppendix for details)
and field research in Chile, Mexico, and Brazil, including over twenty interviews with business executives,
members of group-owning families, and expert observers.
4. Klaus Meyer, "Globalfocusing: From Domestic Conglomerates to Global Specialists," Journal of
Management Studies, 43 (July 2006), 1109-44. A related group of arguments locate the origins o? grupos in
past policies associated with import substituting industrialization and state-led development. For example,
if domestic firms diversified in response to import substituting industrialization and other policy distortions
of state-led development, then the trade liberalization of the 1990s should have reduced incentives for
diversification and expanded opportunities formore specialized growth into international markets. Guillen;
Pankaj Ghemawat and Tarun Khanna, "The Nature of Diversified Business Groups: A Research Design and
Two Case Studies," Journal of Industrial Economics, 46 (March 1998), 35-61; Andrea Goldstein and Ben
Ross Schneider, "Big Business inBrazil: States and Markets in theCorporate Reorganization of the 1990s," in
Edmund Amannand and Ha Joon Chang, eds., Brazil and Korea (London: ILAS, 2004), pp. 48-74.
5. See Frank Dobbin and Dirk Zorn, "Corporate Malfeasance and theMyth of Shareholder Value," Political
Power and Social Theory, 17 (2005), 179-98; John Coffee, "The Future as History: The Prospects forGlobal
Convergence in Corporate Governance and Its Implications," Northwestern University Law Review, 93
(1999), 641-707; Rafael La Porta, Florencio L?pez-de-Silanes, Andrei Shleifer, and Robert Vishny, "Investor
Protection and Corporate Governance," Journal ofFinancial Economics, 58 (2000), 3-27.
6. Mark Roe, Political Determinants of Corporate Governance (Oxford: Oxford University Press, 2003).
7. Peter Gourevitch and James Shinn, Political Power and Corporate Control: The New Global Politics of
Corporate Governance (Princeton: Princeton University Press, 2005), p. 10. See, also, Peter Hall and David
Soskice, "An Introduction to Varieties of Capitalism," in Peter Hall and David Soskice, eds., Varieties of
Capitalism (New York: Oxford University Press, 2001), pp. 1-68.
8. C?sar Calder?n, Norman Loayza, and Luis Serven, Greenfield Foreign Direct Investment and Mergers
and Acquistions: Feedback and Macroeconomic Effects, World Bank Policy Research Working Paper 3192
(Washington, D.C.: World Bank, 2004), p. 22; Koji Miyamoto, Human Capital Formation and Foreign Direct
Investment inDeveloping Countries, Working Paper 211 (OECD Development Centre, 2003).
9. For a full review, see ECLAC, Foreign Investment inLatin America and theCaribbean 2005 (Santiago:
United Nations, Economic Commission for Latin America and theCaribbean, 2006).
10. For similar findings of continued diversification among business groups in Chile and India, see Tarun
Khanna and Krishna Palepu, "Policy Shocks, Market Intermediaries, and Corporate Strategy: The Evolution of
Business Groups inChile and India," Journal ofEconomics & Management Strategy, 8 (Summer 1999), 274.
In one of themost dramatic restructurings, Bunge y Born, one ofArgentina's best known grupos, was extremely
diversified coming into the 1980s, when ithired external consultants who devised a bold plan of specialization.
The sprawling grupo proceeded to sell off all subsidiaries not related to core lines in agribusiness. However,
the firm also moved its headquarters toNew York, left only a small subsidiary inArgentina, and thus ceased
to be a leading Argentine firm.
11. Interview with Jos? Luis Osorio, Dec. 5, 2005.
12. Gerald Davis, Kristina Diekman, and Catherine Tinsley, "The Decline and Fall of the Conglomerate
Firm in the 1980s: The Deinstitutionalization of an Organizational Form," American Sociological Review, 59
(1994), 563.
13. David Knoke, Changing Organizations: Business Networks in theNew Political Economy (Boulder:
Westview, 2001), pp. 117-19.
14. Celso Garrido and Wilson Peres, "Las grandes empresas y grupos industriales latinoamericanos en los
a?os noventa," inWilson Peres, ed., Grandes empresas y grupos industriales latinoamericanos (Mexico City:
Siglo XXI, 1998), p. 13. In Colombia, the four largestgrupos (accounting for 20 percent of GDP) controlled 278
firms in 1998 and had minority holdings in other firms. Beatriz Angelika Rettberg, "Corporate Organization and
the Failure of Collective Action: Colombian Business during the Presidency of Ernesto Samper (1994-1998)"

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 BenRoss Schneider

(Ph.D. diss., Boston University, 2000), ch. 3, p. 16. In Chile, "groups are the predominant form of corporate
structure." Some fifty conglomerates control "91 percent of the assets of listed non-financial companies in
Chile. There is no clear decreasing trend in these figures." Fernando Lefort and Eduardo Walker, "The Effect of
Corporate Governance Practices on Company Market Valuation and Payout Policy inChile" (Business School,
PUC, Chile, 2004), p. 4.
15. Fernando Lefort, "Ownership Structure and Market Valuation of Family Groups in Chile," Corporate
Governance, 5 (2005), 8.
16. Durand, p. 93.
17.My sample and Durand's are not comparable and hence can not support the interpretation of decreasing
diversification. Even within sectors, firms in Latin America tended to diversify more than similar firms in
developed countries, largely in response to fluctuations in demand. For example, on the capital goods industry
in Brazil, see Edmund Amann, Economic Liberalization and Industrial Performance in Brazil (New York:
Oxford University Press, 2000), esp. pp. 233-48.
18. See Eduardo Silva, The State and Capital inChile: Business Elites, Technocrats, and Market Economics
(Boulder: Westview, 1996); Lefort, "Ownership Structure."
19. Ben Ross Schneider, "The New Corporate Governance inLatin America and the Implications forBusiness
Led Development," paper presented at the annual meetings of theAmerican Political Science Association,
Washington, D.C., 2005.
20. See IDE, Family Business inDeveloping Countries (Institute of Developing Economies, JETRO, 2004).
21. Garrido and Peres, p. 32.
22. Andrea Colli andMary Rose, "Family Firms inComparative Perspective," inFranco Amatori and Geoffrey
Jones, eds., Business History around theWorld (Cambridge: Cambridge University Press, 2003), p. 339.
23. Youssef Cassis, Big Business: The European Experience in the Twentieth Century (Oxford: Oxford
University Press, 1997), p. 126.
24. Goldstein and Schneider, p. 61.
25. The Grupo Carso, owned by Carlos Slim, the richest man in Latin America, emerged in the 1980s and
1990s as a new, aggressive, and innovative business group. However, Slim has carefully groomed his children
for top management positions. So committed was he to family capitalism that in 2003 Slim invited, at his
expense, the heads of several dozen of the largest firms throughout Latin America?and their children?to
meet inMexico for three days to talk about family firms. See Schneider, Business Politics, p. xxii. Wealthy
group-owning families have since made thismeeting an annual retreat in different countries each year.
26. Alexandre di Miceli, Governan?a corporativa em empresas de controle familiar: Casos de destaque no
Brasil (S?o Paulo: Instituto Brasileiro de Governan?a Corporativa, 2006).
27. Studies of European and Mexican firms that listed in the United States also found little change in
governance. Gerald Davis and Christopher Marquis, "The Globalization of Stock Markets and Convergence
inCorporate Governance," inVictor Nee and Richard Swedberg, eds., The Economic Sociology of Capitalism
(Princeton: Princeton University Press, 2005), pp. 352-91; Jordan Siegel, "Is There a Better Commitment
Mechanism Than Cross-Listing for Emerging Economy Firms? Evidence from Mexico" (unpublished paper,
2006).
28. Garrido and Peres, p. 32.
29. Schneider, "How States Organize."
30. These causes are constant and therefore do not fit some conceptions of path dependence in political
science. See James Mahoney, The Legacies of Liberalism: Path Dependence and Political Regimes in
Central America (Baltimore: The Johns Hopkins University Press, 2002). However, constant causes are
more common in discussions of path dependence in corporate governance, where they are also grouped with
efficiency, structural, functional, or transaction cost explanations. Lucian Bebchuk and Mark Roe, "A Theory
of Path Dependence inCorporate Ownership and Governance," Stanford Law Review, 52 (November 1999),
127-70. Although less direct, theweak legal system and consequently higher transaction costs also encourage
grupo governance, as well as limit the growth of the stock market, and raise the cost of capital to nongroup
borrowers.
31. IDB, Good Jobs Wanted: Labor Markets in Latin America (Economic and Social Progress in Latin
America: 2004 Report) (Washington, D.C.: Inter-American Development Bank and Johns Hopkins University
Press, 2003), p. 133.
32. Ibid., p. 116.

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Comparative Politics July 2008

33. Barbara Stallings and Wilson Peres, Growth, Employment, and Equity: The Impact of the Economic
Reforms inLatin America and theCaribbean (Washington, D.C.: Brookings Institution Press, 2000), 12.
34. La Reforma online, Aug. 23, 2005: interview at Camargo Correa, Aug. 2, 2006. See Granovetter,
"Business Groups," p. 430; JohnWard, Perpetuating theFamily Business: 50 Lessons Learned from Long
Lasting, Successful Families inBusiness (New York: Palgrave, 2004).
35. Schneider, "How States Organize."
36. Garrido and Peres, p. 32; Eduardo Silva, "State-Business Relations in Latin America," in Laurence
Whitehead, ed., Emerging Market Democracies (Baltimore: The Johns Hopkins University Press, 2002), p.
66.
37. Barbara Stallings, Finance for Development: Latin America in Comparative Perspective (Washington,
D.C.:Brookings Institution Press, 2006), p. 124.
38. Ibid., pp. 158-59.
39. Volatility and undeveloped stock markets are major incentives for, or constant causes of, grupo
governance. While grupo governance can be viewed as a functional or efficient response to this set of market
or institutional imperfections, the response also has an indirect political feedback effect. That is, would-be
reformers who would like to strengthen the legal system or bolster the stock market are unlikely to find allies
among the grupos that have found individual solutions to these collective challenges. To the extent that they
weaken potential reform coalitions, grupos may thus help to perpetuate the constant causes, as well as their
advantages.
40. Credit markets in Latin America were also "very small...On average the ratio of credit to the private
sector toGDP in the 1990s was close to 35 percent, roughly a third of the size of the average credit markets in
East Asia and the developed countries." IDB, Competitiveness: The Business of Growth (Economic and Social
Progress inLatin America) (Washington, D.C.: Inter-American Development Bank, 2001), p. 57.
41. Manuel Agosin and Ernesto Pasten, "Chile: Enter the Pension Funds," inCharles Oman, ed., Corporate
Governance inDevelopment (Paris: OECD and CIPE, 2003), p. 85.
42. According to La Porta, Lopez-de-Silanes, Schleifer, and Vishny, p. 21, "the lion's share of credit in
countries with poor creditor protection goes to the few largest firms." See also Khanna and Palepu, p. 291 ; and
Luciano Coutinho and Flavio Marcilio Rabelo, "Brazil: Keeping It in the Family," inOman, ed., p. 50. Earlier
scholarship focused on scarcities in capital and management expertise in the 1950s and 1960s. See Leff. Both
these constraints were somewhat relaxed by the 1990s. However, other cross-national research finds little
evidence for the capital market function. Tarun Khanna, "Business Groups and Social Welfare in Emerging
Markets: Existing Evidence and Unanswered Questions," European Economic Review, 44 (May 2000), 753.
43. Akira Goto, "Business Groups in a Market Economy," European Economic Review, 19 (1982), 61-63.
44. Andr?s Ib??ez Tardel, "Retail Internationalization inLatin America," Powerpoint presentation (Santiago:
Pontificia Universidad Cat?lica de Chile, 2006). See, also, Alvaro Calder?n, "El modelo de expansi?n de las
grandes cadenas minoristas chilenas," Revista de la CEPAL, 90 (December 2006), 151-70.
45. Guillen; Luigi Manzetti, Privatization South American Style (New York: Oxford University Press, 1999),
pp. 83-84.
46. It also seems that diversified family grupos may be better able to fend off the onslaught of foreign
acquisitions than specialized or institutionally owned firms. Families, especially founders, attach emotional
value to thefirm that can consequently put the sale price out of reach, unless thefirm is under severe competitive
pressure or facing a succession crisis. From the perspective of themultinational corporations, most buyers are
looking to acquire a firm, and market share, in their core product line and have little interest in acquiring a
conglomerated holding that they have difficulty valuing (and running).
47. Schneider, Business Politics.
48. Interview with Augustin Legorreta, ex-president of Banamex, July 28, 1998. In an example outside
the region, the largest groups in Israel grew up precisely around politically sensitive sectors in defense
related industries. David Maman, "The Emergence of Business Groups: Israel and South Korea Compared,"
Organization Studies, 23 (2002), 737-58.
49. Douglass North, Institutions, Institutional Change and Economic Performance (New York: Cambridge
University Press, 1990); La Porta, Lopez-de-Silanes, Schleifer, and Vishn, p. 21; Bebchuk and Roe.
50. For a review, see Ben Ross Schneider, "Organizing Interests and Coalitions in the Politics of Market
Reform in Latin America," World Politics, 56 (April 2004). Other studies show thatmany grupos benefited
handsomely from market reforms and inferbackwards prior influence. However, evidence of direct influence is

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 BenRoss Schneider

scarce. In corporate law, the adoption of reforms in the 1990s and 2000s to enhance the protection of minority
shareholders and other measures that favor grupo competitors belie arguments that interest groups drive path
dependence through favorable laws and policies. In a possible exception, theBrazilian congress voted down a
major reform in corporate law in 2001. The motives for this legislative rejection are opaque, but itmay be one
good illustration of interest groups sustaining path dependence. Coutinho and Rabelo, p. 49.
51. Over a longer period inBrazil, less than one quarter of the 500 largest firms in 1973 were still among the
top 500 by 2006. Valor Online, Sept. 25, 2006.
52. Interview with Jos? Erm?rio de Moraes Neto, Votorantim, December 9, 2005; Ivan Lansberg and Edith
Perrow, "Understanding and Working with Leading Family Businesses in Latin America," Family Business
Review, 4 (Summer 1991), 130.
53. Interviews with top managers of Camargo Correa and Itau, August 2-3, 2006; Khanna and Palepu, p.
280.
54. See Mark Granovetter, "Coase Revisited: Business Groups in theModern Economy," Industrial and
Corporate Change, 4 (1995), 108-9. Moreover, if imperfections (like the oligopolies common inmany
countries) generate rents in particular markets, they create further incentives to diversify as well as additional
transparency and agency problems between owners and managers, making tight hierarchical and/or family
control again attractive options. Peter Gourevitch, "The Politics of Corporate Governance Regulation," Yale
Law Journal, 112 (May 2003), 1829-80.
55. Interview with Jos? Luis Osorio, December 5, 2005. See Institute of International Finance, Corporate
Governance in Brazil: An Investor Perspective (Washington, D.C.: Institute of International Finance, Inc.,
2004), p. 7.
56. Wolfgang Streeck and Kathleen Thelen, "Introduction: Institutional Change in Advanced Political
Economies," inWolfgang Streeck and Kathleen Thelen, eds., Beyond Continuity (New York: Oxford University
Press, 2005), pp. 1-39.
57. Collin even asked if group survival in Sweden might be the result of deep cultural propensities for
solidarity and equality, an argument thatwould not get far in Latin America. Sven-Olof Collin, "Why Are
These Islands of Conscious Power Found in theOcean of Ownership? Institutional and Governance Hypotheses
Explaining the Existence of Business Groups in Sweden," Journal ofManagement Studies, 35 (November
1998), 719-46.
58. Dirk Zorn, Frank Dobbin, Julian Dierkes, and Man-Shan Kwok, "Managing Investors: How Financial
Markets Reshaped theAmerican Firm," inKarin Cetina and Alex Preda, eds., The Sociology of Financial
Markets (New York: Oxford University Press, 2006), pp. 269-89.
59. Schneider, "How States Organize."
60. For a skeptical review, see Randall Morck, Daniel Wolfenzon, and Bernard Yeung, "Corporate Governance,
Economic Entrenchment, and Growth," Journal ofEconomic Literature, 43 (September 2005), 655-720.
61. Ward, p. 6.
62. The criterion of nonfinancial makes the sample more homogeneous and comparable cross-nationally and
excludes only the three large Brazilian banks, Bradesco, Itau, and Unibanco. These banks were somewhat less
diversified than the sample mean, though Bradesco only recently so, but they all had controlling owners, and
two of the three had family control and management.
63. Two other storied grupos of the late twentieth century, Bunge y Born and P?rez Companc, were not
included. In 1999 Bunge y Born was absorbed by Bunge Argentina, a subsidiary of Bunge, now headquartered
inNew York. P?rez Companc was acquired by Petrobr?s in 2001. Before these acquisitions both firms were
typical grupos with thirdgeneration managers and broad diversification into four or more sectors.

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