Economic liberalization and corporate governance: The resilience of business groups in Latin America

Comparative Politics

Volumn 40, Issue 4, 2008, Pages

  Schneider, Ben Ross ^a  

^a NORTHWESTERN UNIVERSITY   (United States)

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[No Author keywords available]

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EID: 51149085845     PISSN: 00104159     EISSN: None     Source Type: Journal    
DOI: 10.5129/001041508x12911362383237     Document Type: Review

References (83)

1. See Ben Ross Schneider, Business Politics and the State in 20th Century Latin America (New York: Cambridge University Press, 2004), pp. 43-50,
2. 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;
3. Francisco Durand, Incertidumbre y soledad: Reflexiones sobre los grandes empresarios de América Latina (Lima: Friedrich Ebert Stiftung, 1996);
4. Wilson Peres, ed., Grandes empresas y grupos industriales latinoamericanos (Mexico City: Siglo Ventiuno, 1998);
5. Mauro Guillén, The Limits of Convergence: Globalization and Organizational Change in Argentina, South Korea, and Spain (Princeton: Princeton University Press, 2001).
6. 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, "Business Groups and Social Organization," in Neil Smelser and Richard Swedberg, eds., Handbook of Economic Sociology, 2nd ed. (Princeton: Princeton University Press, 2005);
7. Tarun Khanna and Jan Rivkin, "Interorganizational Ties and Business Group Boundaries: Evidence from an Emerging Economy," Organizational Science, 17 (May-June 2006), 333-52;
8. Ben Ross Schneider, "How States Organize Capitalism: Cross National Variations in Business Groups" (unpublished ms., 2007).
9. The empirical material draws on an original data set on the governance structures of nearly three dozen of the largest domestic, nonfinancial firms in five major countries of Latin America (see the Appendix 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.
10. Klaus Meyer, "Globalfocusing: From Domestic Conglomerates to Global Specialists," Journal of Management Studies, 43 (July 2006), 1109-44.
11. A related group of arguments locate the origins of 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 for more specialized growth into international markets. Guillén; 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;
12. Andrea Goldstein and Ben Ross Schneider, "Big Business in Brazil: States and Markets in the Corporate Reorganization of the 1990s," in Edmund Amannand and Ha Joon Chang, eds., Brazil and Korea (London: ILAS, 2004), pp. 48-74.
13. See Frank Dobbin and Dirk Zorn, "Corporate Malfeasance and the Myth of Shareholder Value," Political Power and Social Theory, 17 (2005), 179-98;
14. John Coffee, "The Future as History: The Prospects for Global Convergence in Corporate Governance and Its Implications," Northwestern University Law Review, 93 (1999), 641-707;
15. Rafael La Porta, Florencio López-de-Silanes, Andrei Shleifer, and Robert Vishny, "Investor Protection and Corporate Governance," Journal of Financial Economics, 58 (2000), 3-27.
16. Mark Roe, Political Determinants of Corporate Governance (Oxford: Oxford University Press, 2003).
17. Peter Gourevitch and James Shinn, Political Power and Corporate Control: The New Global Politics of Corporate Governance (Princeton: Princeton University Press, 2005), p. 10.
18. 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.
19. César Calderón, Norman Loayza, and Luis Servén, 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;
20. Koji Miyamoto, Human Capital Formation and Foreign Direct Investment in Developing Countries, Working Paper 211 (OECD Development Centre, 2003).
21. For a full review, see ECLAC, Foreign Investment in Latin America and the Caribbean 2005 (Santiago: United Nations, Economic Commission for Latin America and the Caribbean, 2006).
22. 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 in Chile and India," Journal of Economics & Management Strategy, 8 (Summer 1999), 274. In one of the most dramatic restructurings, Bunge y Born, one of Argentina's best known grupos, was extremely diversified coming into the 1980s, when it hired 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 to New York, left only a small subsidiary in Argentina, and thus ceased to be a leading Argentine firm.
23. Interview with José Luis Osorio, Dec. 5, 2005.
24. 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.
25. David Knoke, Changing Organizations: Business Networks in the New Political Economy (Boulder: Westview, 2001), pp. 117-19.
26. Celso Garrido and Wilson Peres, "Las grandes empresas y grupos industriales latinoamericanos en los años noventa," in Wilson Peres, ed., Grandes empresas y grupos industriales latinoamericanos (Mexico City: Siglo XXI, 1998), p. 13.
27. In Colombia, the four largest grupos (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)" (Ph.D. diss., Boston University, 2000), ch. 3, p. 16.
28. 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 in Chile" (Business School, PUC, Chile, 2004), p. 4.
29. Fernando Lefort, "Ownership Structure and Market Valuation of Family Groups in Chile," Corporate Governance, 5 (2005), 8.
30. Durand, p. 93.
31. 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.
32. See Eduardo Silva, The State and Capital in Chile: Business Elites, Technocrats, and Market Economics (Boulder: Westview, 1996); Lefort, "Ownership Structure."
33. Ben Ross Schneider, "The New Corporate Governance in Latin America and the Implications for Business-Led Development," paper presented at the annual meetings of the American Political Science Association, Washington, D.C., 2005.
34. See IDE, Family Business in Developing Countries (Institute of Developing Economies, JETRO, 2004).
35. Garrido and Peres, p. 32.
36. Andrea Colli and Mary Rose, "Family Firms in Comparative Perspective," in Franco Amatori and Geoffrey Jones, eds., Business History around the World (Cambridge: Cambridge University Press, 2003), p. 339.
37. Youssef Cassis, Big Business: The European Experience in the Twentieth Century (Oxford: Oxford University Press, 1997), p. 126.
38. Goldstein and Schneider, p. 61.
39. 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 in Mexico for three days to talk about family firms. See Schneider, Business Politics, p. xxii. Wealthy group-owning families have since made this meeting an annual retreat in different countries each year.
40. Alexandre di Miceli, Governança corporativa em empresas de controle familiar: Casos de destaque no Brasil (São Paulo: Institute Brasileiro de Governança Corporativa, 2006).
41. 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 in Corporate Governance," in Victor Nee and Richard Swedberg, eds., The Economic Sociology of Capitalism (Princeton: Princeton University Press, 2005), pp. 352-91;
42. Jordan Siegel, "Is There a Better Commitment Mechanism Than Cross-Listing for Emerging Economy Firms? Evidence from Mexico" (unpublished paper, 2006).
43. Garrido and Peres, p. 32.
44. Schneider, "How States Organize."
45. 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).
46. 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 in Corporate Ownership and Governance," Stanford Law Review, 52 (November 1999), 127-70. Although less direct, the weak 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.
47. 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.
48. Ibid., p. 116.
49. Barbara Stallings and Wilson Peres, Growth, Employment, and Equity: The Impact of the Economic Reforms in Latin America and the Caribbean (Washington, D.C.: Brookings Institution Press, 2000), 12.
50. La Reforma online, Aug. 23, 2005: interview at Camargo Correa, Aug. 2, 2006. See Granovetter, "Business Groups," p. 430;
51. John Ward, Perpetuating the Family Business: 50 Lessons Learned from Long-Lasting, Successful Families in Business (New York: Palgrave, 2004).
52. Schneider, "How States Organize."
53. 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.
54. Barbara Stallings, Finance for Development: Latin America in Comparative Perspective (Washington, D.C.: Brookings Institution Press, 2006), p. 124.
55. Ibid., pp. 158-59.
56. 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.
57. Credit markets in Latin America were also "very small...On average the ratio of credit to the private sector to GDP 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 in Latin America) (Washington, D.C.: Inter-American Development Bank, 2001), p. 57.
58. Manuel Agosin and Ernesto Pastén, "Chile: Enter the Pension Funds," in Charles Oman, ed., Corporate Governance in Development (Paris: OECD and CIPE, 2003), p. 85.
59. 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," in Oman, ed., p. 50.
60. 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.
61. Akira Goto, "Business Groups in a Market Economy," European Economic Review, 19 (1982), 61-63.
62. Andrés Ibáñez Tardel, "Retail Internationalization in Latin America," Powerpoint presentation (Santiago: Pontificia Universidad Católica de Chile, 2006).
63. See, also, Álvaro Calderón, "El modelo de expansión de las grandes cadenas minoristas chilenas," Revista de la CEPAL, 90 (December 2006), 151-70.
64. Guillen; Luigi Manzetti, Privatization South American Style (New York: Oxford University Press, 1999), pp. 83-84.
65. 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 the firm that can consequently put the sale price out of reach, unless the firm is under severe competitive pressure or facing a succession crisis. From the perspective of the multinational 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).
66. Schneider, Business Politics.
67. 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.
68. 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.
69. 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 that many grupos benefited handsomely from market reforms and infer backwards prior influence. However, evidence of direct influence is 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, the Brazilian congress voted down a major reform in corporate law in 2001. The motives for this legislative rejection are opaque, but it may be one good illustration of interest groups sustaining path dependence. Coutinho and Rabelo, p. 49.
70. Over a longer period in Brazil, less than one quarter of the 500 largest firms in 1973 were still among the top 500 by 2006. Valor Online, Sept. 25, 2006.
71. Interview with José Ermírio 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.
72. Interviews with top managers of Camargo Correa and Itaú, August 2-3, 2006; Khanna and Palepu, p. 280.
73. See Mark Granovetter, "Coase Revisited: Business Groups in the Modern Economy," Industrial and Corporate Change, 4 (1995), 108-9.
74. Moreover, if imperfections (like the oligopolies common in many 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.
75. Interview with José 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.
76. Wolfgang Streeck and Kathleen Thelen, "Introduction: Institutional Change in Advanced Political Economies," in Wolfgang Streeck and Kathleen Thelen, eds., Beyond Continuity (New York: Oxford University Press, 2005), pp. 1-39.
77. Collin even asked if group survival in Sweden might be the result of deep cultural propensities for solidarity and equality, an argument that would not get far in Latin America. Sven-Olof Collin, "Why Are These Islands of Conscious Power Found in the Ocean of Ownership? Institutional and Governance Hypotheses Explaining the Existence of Business Groups in Sweden," Journal of Management Studies, 35 (November 1998), 719-16.
78. Dirk Zorn, Frank Dobbin, Julian Dierkes, and Man-Shan Kwok, "Managing Investors: How Financial Markets Reshaped the American Firm," in Karin Cetina and Alex Preda, eds., The Sociology of Financial Markets (New York: Oxford University Press, 2006), pp. 269-89.
79. Schneider, "How States Organize."
80. For a skeptical review, see Randall Morck, Daniel Wolfenzon, and Bernard Yeung, "Corporate Governance, Economic Entrenchment, and Growth," Journal of Economic Literature, 43 (September 2005), 655-720.
81. Ward, p. 6.
82. 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.
83. Two other storied grupos of the late twentieth century, Bunge y Born and Perez Companc, were not included. In 1999 Bunge y Born was absorbed by Bunge Argentina, a subsidiary of Bunge, now headquartered in New York. Perez Companc was acquired by Petrobras in 2001. Before these acquisitions both firms were typical grupos with third generation managers and broad diversification into four or more sectors.