Spanish Foreign Direct Investments in Latin America: Internationalization Strategies and Financial Management Practices

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This study analyzes the internationalization strategies and the financial management practices of seven Spanish companies with the largest volume of investments in Latin America. The companies selected for an in-depth analysis represent approximately 80 percent of the total Spanish foreign investments during the period of analysis. Their investments have taken place mainly in service sectors such as banking, energy, and telecommunications. The study identifies the market conditions and the corporate strategies that have allowed these Spanish companies to successfully initiate and expand business activities into Latin America. The findings suggest Spanish investors have strengthened their global competitiveness and have accomplished greater financial results.

1. Introduction

This study presents a comprehensive analysis of the corporate internationalization strategies and financial management practices implemented by seven Spanish companies to initiate and expand operations into Latin America. Such practices include strategies for domestic or international financing, international capital budgeting and risk management for exposures such as foreign exchange risk, credit risk, institutional and country risks. All companies analyzed in this study had limited international experience before engaging in foreign direct investments (FDIs) in Latin America. Therefore, this study provides insights on the formation of Spanish multinational enterprises (MNEs).

Previous studies of corporate internationalization strategies suggest that the analysis of success factors should be centered on the capacity of companies to exploit their knowledge and capabilities in new markets more than on factors such as their operational cost and/or efficiency (Dunning, 1977; Johansson and Vahlme, 1977; Caves, 1982, 1985; and Madhock, 1998). In fact, when companies expand into international markets they strategically use their knowledge and capabilities in the development of those new markets. The understanding of successful internationalization strategies is of interest to researchers and corporate executives alike.

This study begins by analyzing the universe of Spanish foreign direct investments into Latin America. We utilize Spanish investors' records obtained from Standard & Poor's Research Insight. Subsequently, to analyze corporate internationalization strategies and financial management practices we collect primary data through personal interviews with financial executives of the Spanish companies with the largest volume of foreign direct investments in Latin America. In effect, seven Spanish companies were selected for an in-depth analysis. These companies represent approximately 80 percent of the total Spanish foreign investments during the period of analysis.

This study identifies the antecedents and factors that explain the internationalization of premier Spanish companies in Latin America. Evaluating the competitive advantages, risk factors, and management practices associated with such Spanish investments in Latin America, the study analyzes the seven Spanish companies' strategies associated with corporate decision-making in areas such as financing and investment.

The results suggest that the selected Spanish companies with foreign direct investments in Latin America have been successful. The survey respondents indicate that their investments have strengthened their global competitiveness and have generated the expected financial results. Nevertheless, as the 1999 crisis in Argentina occurred, it became evident that economic volatility, political instability, institutional fragility and consequently, a high level of uncertainty within these emerging economies, have conditioned the investment strategies forcing the Spanish companies under study to periodically adjust their financial practices (Cardoza et al., 2007; Fornes and Cardoza, 2008).

The following sections of this study present a theoretical background regarding the internationalization of corporations, a synthesis of economic development and foreign direct investment in Latin America, a description of the research methodology, a discussion of results and finally some concluding remarks.

2. Theoretical Framework for the Internationalization of Corporations

In his seminal work on internationalization, Hymer (1960) defines, for the first time, the term of Foreign Direct Investment (FDI) as the financial operation that does not entail the change of the proprietor of the transferred goods and that goes accompanied with technology flows and know-how. This author introduces in addition the concepts of ownership advantages and internalization that later are retaken in the internationalization theories (Dunning, 1992). Particularly, the theory of internalization proposes that companies internalize value-generating operations beyond their country borders based on the strategic advantages anticipated for their growth (Buckley and Casson, 1976; Helpman, 1984). These processes are materialized through the FDI and they contribute to the creation of value for the company if the benefits of using its intangible assets in a foreign market are greater than the costs of opening, coordinating and operating a branch (Mork and Yeung, 1992; Dunning, 1992).

Another theoretical framework used to explain internationalization processes, particularly in the selection of the entry mode to a new market, is the transaction cost1 theory (Coase, 1937; Williamson, 1985). According to this theory, the decision to enter into a foreign market entails acquisition costs, costs of the necessary information and resources as well as the costs of managing uncertainty and distrust. On the other hand, the resource-based view of the firm (Wernerfelt, 1984; Barney, 1991) approaches the relationship between the tangible and intangible2 resources, the strategy and the company results. This theory has been used in the internationalization studies (Buckley and Casson, 1976; Dunning, 1988, 1993) which suggests that building competitive advantages depends mainly on getting or developing high-value-added resources that are difficult to imitate. The acquisition of these resources can be achieved through international alliances, mergers and acquisitions, or by FDIs.

Nevertheless, agency theory suggests that the lack of trust between parties explains the determination of contracts in internationalization processes through strategies such as alliances, acquisitions, or mergers (Bergen, Dutta, and Walker, 1992). The lack of confidence and the uncertainty present in all internationalization processes are derived from the fact that the parties involved in an international transaction are primarily motivated by their own interests and are ready to assume different risks.

The eclectic theory provides another conceptual development for internationalization processes. In particular, this theory as proposed by Dunning (1988) focuses on the selection of mode of entry into a new market. This theory merges the approaches proposed in the theories of resources and capacities, internalization, and transaction costs and suggests that the success of internationalization depends on creating and taking advantage of ownership, location and internalization3.

Finally, the Uppsala model (Johanson and Vahlme, 1977, 1990) suggests that due to the risks associated with internationalization processes, corporate executives have the tendency to focus their internationalization efforts initially in "psychologically" closer markets. They may be more comfortable because they better understand the culture, or simply because they have greater knowledge and experience in these markets.

3. Economic Development and Foreign Direct Investments (FDIs) in Latin America

Latin American countries have sought external savings to finance their industrialization process, which allows them to obtain greater levels of economic development. In fact, the low level of local savings in Latin American countries represents one of the major obstacles for economic development in the region. The problem is circular: the savings …