PROSPECTS FOR MULTI-NATIONAL ENTERPRISE IN LATIN AMERICA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700070011-1
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 12
• Document Creation Date: November 16, 2016
• Document Release Date: January 7, 2000
• Sequence Number: 11
• Publication Date: August 1, 1974
• Content Type: IM

CI-AOER
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Prospects far Multir~atiQ'nal Enterprise in Latin., America .Aug 7~-;
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Intelligence Memorandum
Prospects for Mrilt',latlonal Enterprise in Latin A merica
ER IM 7411
August 1974
Copy No.70
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Prospects for Multinational
Enterprise in Latin America
Difficult years lie ahead for multinational enterprises in Latin America and
the Caribbean because of conflicting national and corporate goals. Many
governments now are actively involved in planning for economic development. They
want to expand local employment, increase exports, and gain access to modern
technology. Investment by multinational enterprises can play an important role
in achieving these aims, but governments want it on their own terms. Many of
them feel that local control over the actions of multinational enterprises 1?~as been
reduced by the size, power, and geographic dispersion of their operations.
In order to reassert local authority, many governments have been defining
areas for participation by foreign business, limiting foreign equity shares, and
restricting what are usually considered to be management prerogatives. Formal and
informal restrictions are most widespread in extractive industries, where
governments are concerned that nonrenewable resources be exploited to the best
advantage of the local economy. In the next few years, the most successful firms
will include:
? existing firms, particularly these in manufacturing, that
accommodate the desires of the local governments, and
s new entrants willing to adopt flexible arrangements such as joint
ventures or to provide consulting and technical services.
Even adjusting to government desires will not guarantee protection from
nationalization, especially if the firms' operations are in key economic sectors. The
potential for conflict between multinationals and governments is the greatest in
natural resource exploitation. It is here that national sensitivities are greatest because
of the key position of the mineral industry in many countries.
The ability of Latin American governments to create and sustain rapid rates
of economic growth and a reasonable degree of political responsibility will do much
to determine the future natuic and extent of the multinational presence. Stability
and prosperity better enable local governments to d;' al confidently and responsibly
Note: Comments and queries regarding this memorandum are welcomed. They
ma be directed to of the Office of Economic Research, Code 143,
25X1A
25X1A
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with the multinationals and to blunt the sharp edges of local nationalism;
conversely, multinational corporations are then more able and willing to contribute
to economic growth and to benefit from it. Mexico and more recently Brazil have;
created these conditions, and the results in the growth of US investment are quite
apparent.
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1. The rapid expansion of multinational corporations (MNCs) in the last
dhree decades has produced a new and powerful phenomenon on the world
economic scene. Traditional foreign direct investment typically had involved the
establishment of subsidiaries to produce products for sale in local markets or to
exploit local resources for their own use. The unique characteristic of MNCs is
their global outlook, with firms in one country supporting company activities in
another. They are large, with annual sales of hundreds of millions - sometimes
billions - of dollars. They often conduct business in numerous countries, control
vast. resources, operate in markets with few buyers or sellers, and maintain their
positions by developing new technology or special skills or by using product
differentiation or advertising. They often exert a significant influence on the rates
and patterns of capital formation in host countries. Their economic (and political)
impact has been especially profound in less developed countries.
2. Latin American governments have become increasingly concerned about
the role of powerful MNCs in their economics. They see MNC operations in their
countries as only part of a global corporate picture and as frequently unresponsive
to national goals. Many governments are now consciously attempting to direct
economic development through planning. Although the extent of planning varies
from country to country, most governments want foreign investment for what it
can contribute to the desired pattern of economic development. Foreign
participation is often acceptable only on these pounds.
3. The difficulty of reconciling corporate and host country goals increases
the potential for conflict between governments and MNCs. Governments are
adopting increasingly restrictive regulations covering these firms. National
sensitivities are rising, especially in regard to the exploitation of natural resources,
and companies operating in key sectors are being forced out. Thus the prospects
for MNCs will depend on their willingness and ability to adjust to the new business
climate.
4. The Latin American political and economic environment is only part -
albeit an important one - of the considerations for US firms. Investments elsewhere
to gain access to important markets, to provide new sources of raw materials, or
to secure Idgher profits are often more attractive and less risky. During the 1960s,
for example, US business invested heavily in manufacturing in EC countries in
order to maintain continued access to EC markets. Funds also flowed into mining
in Australia and Canada to feed US industries' growing need for raw materials.
Higher investment flows to other regions reduced the Latin American share of
US direct foreign investment from 26`/o in 1960 to 17% in 1972.
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Business Climate for Multinational Enterprises
5. The business climate for MNC, in Latin America and the Caribbean has
been shaped by certain negative attitudes toward foreign business, which are
expressed more sharply in some countries than in others. Foreign investors have
often been accused of exploiting host countries to increase profits without
considering the countries' economic interests. They have been accused of removing
local resources for their own benefit, paying low taxes, investing in activities that
are largely capital intensive, bringing in their own managers but little technology,
and exerting undue influence over local governments.
6. On the other hand, many Latin governments and business leaders are
aware of the economic importance of MNCs in the area. They recognize that of'..,
the MNCs have brought in financing not available from domestic sources, have
expanded employment, have increased exports, and have introduced advanced
management and marketing techniques. Nations needing capital and advanced
technology continue to seek MNC participation often in contravention of their
own statutes, although non-US investors frequently are preferred to US corporations
because of a desire to reduce a predominant dependence on the United States.
Provisions for Local Control
7. Current foreign investment policies of most Latin American countries
aim at restricting foreign participation in basic industry and infrastructi''re and
guaranteeing favorable terms for themselves. Such policies are only the most recent
manifestation of Latin American government intervention. Some railroads and other
public utilities were nationalized earlier in this century. In more recent years, public
investment and creation of government enterprises in such key sectors as petroleum
and steel have been used to reduce foreign influence. Legislation also has been
passed regulating foreign ownership shares and profit remittances.
8. Basic industries, such as petroleum in Mexico and Brazil, often are
reserved for the state. In Peru, industries eventually to be in the hands of the
state include steel, nonferrous metallurgy, chemicals, and banking. In Mexico,
transportation, communications, and some mining and, in Brazil, airlines, shipping,
and mass media must be own-d by nationals. In Mexico, all firms not reserved
to the state or to Mexican ownership must have at least 51% local ownership after
periods negotiated with the companies. Meanwhile, a portion of the profits must
be distributed to the employees as shares in the company.
9. Some governments also regulate capital flows and the conditions of
transfers of technology. Peru limits profit remittances to 14% of invested capital;
Argentina, 12.5%. Rules governing transfers of technology are aimed at gaining
some local control over its use and the prices charged for importing it. In Mexico,
for example, all technology transfer contracts must be registered. Registration is
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denied if' the contract restricts export; of goods using the technology, limits local
research and development, or establishes excessively long periods of payment for
the use of a particular technology.
I%xihle Interpretations
10. In practice, each country interprets the laws to the benefit of its own
national interests. Generally, interpretations tend to be flexible and foreign investors
are often treated more favorably than the law allows, particularly when foreign
investment provides new technology, employment, and exports.
11. In Peru, mining companies that did not meet investment timetables lost
their concessions, but the laws are frequently loosely applied, especially for small
firms. Mexico tends to interpret loosely its requirements for 51% local participation.
It does enforce sections of the foreign investment law restricting particular industries
to the state or to national ownership. Venezuela appears to be strictly enforcing
the new President's executive decrees concerning the phasing out of most foreign
capital in marketing and services and is moving to nationalize iron mining. Although
Brazil has relatively few laws restricting foreign investment, the government has
usually required majority national ownership in mining and supports large
state-owned firms in such basic industries as steel. Brasilia, however, may be
reevaluating this position because of the world energy situation and is considering
allowing foreign participation in the domestic search for oil.
The Position of Multinational Corporations in Latin America
12. Multinational corporations usually prefer to have wholly owned
subsidiaries in foreign countries. Increasingly, they are being forced to accept
partners. In Brazil, for example, US Steel and Nippon Steel are minority owners
with the government mining ccri:oration, Cia. Vale do Rio Doce, of the Cerra dos
Carajas iron mining project. Many manufacturing firms also have taken local partners
but tend to retain control. Ford operations in Brazil fall into this category. Even
if majority ownership is in local hands, companies can be flexible, safeguarding
their interests by influencing management and using their voting power in
shareholder meetings.
Value of US Direct Private Investment
13. US direct private investment in Latin America and the Caribbean has
grown about 5.71% annually since 1960. In 1972, the book value of this investment
was US $16.1 billion (see the table); Venezuela, Brazil, Mexico, Panama,l and
Argentina accounted for about 60%.
1. Most of the investment in Panama represents bookkeeping operations of international trading companies.
These investments do not result in significant capital investments to that country.
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14. US investment in the Caribbean has grown rapidly in recent years. Since
1960 the US share of the area's investment has grown from 12% to 21%. La ge
amounts of funds going to the Caribbean have been channeled into mining and
smelting operations, particularly bauxite ventures in Jamaica.2 By 1972, one-half
of all investment in mining in the area was in the Caribbean. At the same time,
funds also flowed quickly into petroleum facilities in the Caribbean.
15. On a country basis, the largest flows since 1960 have been to Brazil;
in 1972, it was the largest recipient of US investment in the area. The largest
share of capital flows to Brazil since 1960 has entered manufacturing. Investment
in Venezuela grew slowly through 1972; in Chile it declined 85% as US copper
mines and other enterprises were nationalized. In 1973, US investment in Peru
also dropped with the nationalization of some US firms.
16. US firms are involved in many sectors of Latin economies. In 1960-72,
funds flowed into the manufacturing sector most rapidly, raising its share of total
US investment in the area from 18% to 34%. The share in extractive industries
fell from 50% to 34%.3
17. US investors are the largest single source of foreign capital in Latin
America and the Caribbean. US investment represents about two-thirds of tot-11
foreign investment in Mexico; in Argentina, nearly one-half. Although Brazil's
rapidly expanding economy has attracted sizable amounts of private capital from
Europe and Japan, the United States still accounts for more than one-third of
foreign investment.
18. In recent years, investors have adopted new organizational arrangements
and shifted to new sectors to ensure continuing participation in Latin American
markets. Joint ventures with private individuals in manufacturing and service
enterprises and with governments in w.tractive industries have become increasingly
important. Management and technical assistance contracts or consulting services
constitute even newer forms.
19. Investors also have had to accede to government demands to reduce the
number of foreign managers and train locals for managerial, supervisory, and
technical positions. Experience suggests, however, that such accommodations are
not sufficient to prevent long-established foreign companies from being nationalized.
Chile nationalized US copper mines, and Venezuela recently announced that the
1983 reversion date for the oil industry would be advanced. Caracas also indicated
that it will require firms engaged in internal commerce to place 80% of their shares
2. The share in the Caribbean will change sharply as a result of recent Jamaican actions against foreign
bauxite holdings.
3. The loss of copper investments in Chile also affected the relative shares.
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for sale on the local market. Among the firms affected by this action is a largely
locally managed Sears, Roebuck and Company subsidiary in which employees held
20% of the equity.
20. Firms operating in what are considered to be key economic sectors are
prime candidates for nationalization, even if new and progressive. For example,
the Peruvian government nationalized several fishing firms in 1973.
21. The terms of nationalization are seldom completely satisfactory to either
party. Governments often use book value as their guide to the value of assets;
companies push for current market value. Settlement As often reached when the
government wants to attract new foreign management or technical assistance. This
presumably was an important factor in Peru's compensation agreement wth the
United States for firms nationalized after 1968.
Prospects
Existing Firms
22. Although the situation will vary from country to country, it is all, but
certain that the Latin American environment will become increasingly
uncomfortable for existing MNCs. Much will depend on how new government
policies and controls are implemented in two key countries - Argentina and
Venezuela. Rapid and sweeping implementation could produce an absolute decline
in the book value of US investment in Latin America because of divestiti'.es and
the impact on reinvestment. A more measured pace, particularly if ac.ompanied
by rapid economic growth, could result in little change in the recent rate of growth
of new US investment in the area.
23. Where they are permitted to do so, existing MNCs will remain in operation
to salvage as much of their investment as possible. Many will be able to hang
on, and some to prosper. The most successful are likely to be those that contribute
directly to local economic development - e.g., by supplying advanced technology
and management skills and increasing employment.
24. On the wLole, manufacturing enterprises, particularly those producing
for export, will fare better than extractive enterprises because the nationalistic
pressures for local control over the latter are greater. Many companies will be forced
to reduce their share of ownership by divesting to the state or to local capital,
with compensation that will often be inadequate. On the positive side, as local
citizens acquire a larger stake, they will provide a local source of capital and a
growing political buffer between the company and the state.
25. Former owners often are interested in continuing association with the
nationalized firms. If they can be assured of a continuing supply of raw materials,
some fi.cros in extractive industries may participate under management or technical
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assistance contracts. If part of the compensation is in bonds, such association is
important in guaranteeing future payment. Governments also frequently want
continuing association. Although managers and technicians can be hired, the former
owners' long experience with the company is advantageous in insuring smooth
operation. Participatio!,, by former owners may also case marketing problems.
26. The fate of existing companies will obviously have an impact on new
entrants. Event if the climate remains hospitable, new business entrants will be
undertaking activity in the area on new terms. National sensitivities will continue
to grow, and there will be continuing demands for greater local control and for
greater participation by local capital.
27. Successful foreign investors are likely to be those most flexible in
adopting new methods to participate in Latin American countries. Joint venture
arrangements for investment in manufacturing and some service operations are likely
to be important. Other significant methods will include consulting and technical
assistance companies that have little or no investment in facilities but which
contribute technology and skills. These investment forms would lead to an expanded
presence for many MNCs even if their share of equity declines.
28. Many foreign firms are willing to adopt new techniques in order to obtain
needed raw materials or to enter growing markets, if the profit arrangements are
satisfactory. They are also willing to participate in local companies with less than
full ownershi ;.
29. Conflicts may arise despite flexibility on the part of the MNCs. Because
the requirements of industrial nations for imported raw materials will contialue
to grow, foreign firms will push for participation in the extractive industries. But,
it is here that local sensitivities are the greatest, and where the greatest potential
for conflict between host countries and investors exists.
Effect on the Economies
30. A reduction in direct foreign investment need reduce neither the total
supply of foreign capital available to Latin American countries nor their rates of
growth. Only 20% of the total foreign capital flow to Latin America consists of
direct private investment; most of the rest is private credit. In Brazil, for example,
where direct foreign investment plays an unusually large role, direct investment
represents only about 25% of total capital inflow and less than 10% of domestic
investment. Long-term private credit is the most important foreign source of capital
in the region; it accounted for more than 50% of the total flow in 1972. Official
foreign aid accounted for about 30% of the total.
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31. Most private credit is attracted by sound indigenous economic policies
and by economic success. If these conditions are present, credit is likely to be
available even if direct nvestment is discouraged. If these conditions are absent,
all foreign capital inflows will be discouraged. In Argentina, political instability
has impeded growth more than fluctuations in the flow of direct foreign investment.
Brazil, by contrast, has attracted sizable amounts of foreign private capital because
of its rapid frowth, sizable market potential, and political stability.
32. Direct private investment remains important to economic growth in
certain situations. Where a business is a going concern that produces a fairly simple
product with a ready market, such as is the case with most raw materials, it is
possible to operate with credit and hired expertise. It is less feasible to do so
when a country wishes to estaldish new industries, particularly those requiring
sophisticated techniques of production and marketing. To interest foreign
companies in such new undertakings, governments will have to give them a
substantial financial'stake and considerable freedom of action. This is one important
reason why joint ventures are likely to become increasingly important in the area.
Efforts Toward Collective Guidelines
33. Prospects for a regional or worldwide policy toward MNCs in the next
few years are dim. The report of the United Nations' Group of Eminent Persons
on MNCs suggested developing a code of conduct but did not suggest such a code
for raw materials cartels. At the recent meeting of Latin American foreign ministers
in Washington, a Group on Transnational Enterprise was established to prepare
a report on principles applicable to MNCs for the next ministerial meeting in March
1975. The first Group meeting is scheduled for August.
34. Deep divisions between the United States and the Latin American nations
and among the Latins themselves make determining even the scope of the problem
and the procedures for tackling it difficult. The United States wants the Group
to consider the conduct of both the gove-nments and the MNCs. Additionally,
the United States wants to apply international law as a guide to company and
country action. The Latins tend to view the problem in a narrower national context,
wanting only to control the actions of multinational firms and to apply national
rather than international law.
35. Subregional groups have also failed in attempts to regulate the activities
of foreign investors. Although the original five Andean Pact members formulated
a policy covering foreign companies wishing to participate in intra-Pact trade behind
a common external tariff wall, the members cannot agree on uniform application
of the ;rules. Bolivia, Chile, and Colombia believe the code is slowing foreign
investment. Each member is now applying only those portions of f `re code with
which it agrees, and discussions aimed at modifying the code are being held.
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