Latin America (LA) is increasingly acting like the headquarter of internationally orientated firms (Goldstein, 2010). The favorable evolution and economic growth of Latin American countries have largely contributed to the development of firms and the emergence of multinationals, referred to as Multilatinas. Riviera & Soto (2010) define them as “those MNEs originated in Latin America that own and control access abroad through FDI and develop adding value activities”.
However, Cuervo-Cazurra (2007) further describes them as smaller size firms, with less technology and less sophisticated resources in relation to MNEs. Nevertheless, Multilatinas have been growing internationally demonstrating to be emerging challengers and survivors among volatile institutional environments due to their home country experience. Therefore, despite Latin American countries not being the most steady economically and politically, they have been the most stable in times of crisis. In order to appreciate how Multilatinas were born, we have to understand the economic changes Latin America went through. The region has been the main exporter for years, yet it has only recently (past 20-30 years) been opened to international operations. Hence, we must highlight the political and economic context that influenced the belated internationalization process of Multilatinas. From the 1940s until the 1980s Latin American companies relied on import substitution models, high levels of regulations and high government intervention, which protected firms from all types of competitors (Bruton, 1998). Consequently, companies were more likely to procure national consumption and exporting methods to exploit their competitive advantage of abundant natural resources and low labor costs at home (Vernon-Wortzel & Wortzel, 1988).
For this reason, LA companies had no pressure and poor initiative to improve their competitiveness (Bruton, 1998). Nevertheless, during the 1980s-1990s a process of pro-market reform (also known as the Washington Consensus) took place serving as a macroeconomic stabilizer (Bullmer-Thomas, 2001). This brought significant competition into LA, forcing companies to consider expansion methods in order to find stability for business operations elsewhere. Due to limiting domestic markets, barriers to imports, opportunism and increasing competition, LA firms started establishing assets abroad for survival. Hence we see a significant increase during the 1990s of FDI as a result of the economic openness and trade liberalization policies, which gave birth to Multilatinas (Cuervo-Cazurra, 2010) (Figure X). When identifying the most recognized Multilatinas worldwide among the Top 100 Companies of Latin America, we can observe most of them derive from the larger economies in the region; Brazil, Mexico, Argentina, Chile, and even Colombia (Cuervo-Cazurra, 2010) (Figure X).
Moreover, the “New Latin America” is also encouraging the emergence of more global multilatinas, incentive by political and social entrepreneurial and environmental innovations, which motivates them to move directly into developed markets (Casanova, 2010). Therefore, it is mistaken to assume that the internationalization process is the same for all firms. Despite being influenced by common characteristics such as the local market demands, economic fluctuations, and political instability, it is difficult to identify a unique road towards internationalization (Riviera & Soto, 2010). The sequence and speed of action are not the same, thus experiencing a mismatch with internationalization theories. Casanova and Fraser (2009) explain the internationalization of Multilatinas with 3 stages. First, the period between from the 1970s-1990s in which Multilatinas engaged in emerging FDI. Then, between the 1990s and 2002, their FDI expansion and the stage in which they experienced an organizational restructuring to compete in the new environment, learn and survive.
Finally, 2002 and after in which Multilatinas made larger transactions of FDI, accessing international capital markets through the acquisition of firms and strategic alliances. Internationalization Theories The phenomenon of internationalization has been broadly discussed among literature; however, it can be difficult to define due to its varying terminology. Therefore, for the purpose of this research, internationalization and multinationality will be used interchangeably.
Nonetheless, we will define the concept as “the successive development in a firm’s international engagement in terms of the geographical spreading in markets, products and operations forms” (Albaum et al, 1994). Internationalization Theory further explains the drives and patterns for firms to go abroad are based on the ideas of transactional costs and firm growth potential for further benefits (Rugman, 1981). These benefits include volume economies, intelligence gathering, product improvement, operational flexibility and stability, tax arbitrage and organizational advantage (Mitchell et al., 1993). Nevertheless, becoming an MNE requires solving further difficulties as the internationalization process extends and their knowledge of the foreign market becomes limited. Consequently, firms have to balance out benefits and costs related to global market participation (Hsu et al., 2003). As much as businesses could profit from higher returns, they could also suffer risks such as physical restrains, institutional voids, or poor transferability of resources as consequence of liability of foreignness (Cuervo-Cazurra et al., 2007).
For this matter, Ramamurti and Singh (2010) question and examine the strategies for competitive advantage that enabled emerging firms like Multilatinas to internationalize aggressively into the market, which develops international business (IB) literature by suggesting the path of mutinationalzation into emerging economies. Researchers recommend companies to acknowledge the process of internationalization when assuming global expansion in order to analyze the influences that could impact the pace and strategies for worldwide success.
Literature highly suggests incremental internationalization for this purpose as a method to evaluate benefits and costs throughout each stage, in order to assess the firm ’s potential survival. Johanson & Vahle (1977), founders of the theoretical model of gradual mutinationalzation known as Uppsala Model, stress the advantages of expanding into countries with cultural and distance proximity for quicker adaptation, lower risks, and less uncertainty.
Therefore, enabling firms to cultivate experiential learning, increasing their confidence for global growth and resource commitment for secure higher returns (Jian et al., 2014). Studies have shown that a firm’s internationalization is highly motivated by profit maximization (McDougall & Oviatt, 1996). Contractor et al. (2003) and Dunning (1981) agree and hypothesize that foreign expansion does improve business performance by spreading costs on a greater scale and scope. Since increasing performance is a priority for businesses, we need to address how significant multinational is on their efficiency and how it is affected by their speed and approach towards worldwide presence.
Multinationality-Performance Relationship The empirical literature has been flourishing throughout the last ten years attempting to find out whether the firm’s multinational (M) affects its performance (P). Various theoretical approaches have been proposed to predict and explain the relationship, however, findings have been increasingly contradictory. Hennart (2007) interprets the M-P relationship based on 2 predictions: 1. MNEs seek lower risks by internationalizing 2. MNEs internationalize for greater profits Markowitz (1959) suggests that firms experience lower risks at any given level of return if they have activities located in a portfolio of countries that are not economically integrated.
Portfolio Theory supports this by suggesting that firms with operations in a diversity of countries can enjoy lower risks compared to those that are less geographically diverse (Kim et al., 1993). On the other hand, Transaction cost/Internationalization Theory (TCI) supports Hennart’s (2007) second prediction suggesting that economies of scale, flexible access to resources, better technology, and universal exposure minimizes costs (Contractor et al., 2003).
However, TCI contradicts Portfolio Theory arguing that MNEs are unable to achieve risk reduction through their portfolio diversification because of its limited investment on countries with different business cycles, which defeats Hennart’s (2007) initial prediction. Moreover, researchers also criticize economies of scale leading to greater profits, since selling in many foreign countries does not necessarily provide advantages over selling in just one or even any (Hennart, 2006). George et al. (2005) warn businesses that multinationality not only provides benefits for firms but also increases costs that could potentially reduce their performance. Therefore, we propose and emphasize investing in knowledge acquisition to prevent internationalization failures and performance deterioration.
Linear relationship As previously mentioned, M-P literature suffers from conflicting schools of thoughts. Therefore, we consider empirical research to explain the correlation in measures rather than theories. Scholar’s initial findings developed a linear relationship in which internationalization increase is positively followed by performance, demonstrating that the benefits of multinationality are greater than the costs (Hajela and Akbar, 2013; Contractor et al., 2007; Nachum, 2004). Gomes & Ramaswamy (1999) further advise that despite increasing profitability from internationalizing, this will eventually have a diminishing rate. Other studies suggest a negative M-P relationship, which is similarly interpreted as the positive correlation (Singla & George, 2013; Collins, 1990).
Researchers also suggest that in M-P linear relationship firms that engage with FDI do better than those that do not during a financial crisis. This is criticized by Yang & Driffield (2010) who state that MNEs struggle to access resources for long-term investments during critical periods, thus showing no effect. Curvilinear Relationship Further studies suggest a curvilinear relationship depicted as a U-shape to explain how firms benefit from multinational once adjusted to foreign market conditions (Capar & Kotabe 2003; Ruigrok & Wagner, 2003; Contractor et al., 2003). Hence we see a decrease in firm performance that progressively turns positive.
On the contrary, the inverted U-shape relationship proposes that multinationals are associated with positive returns until a certain extent in which performance is negatively affected due to liabilities associated with overseas expansion and organizational coordination difficulties (Gomes & Ramaswamy, 1999; Ojan et al., 2008). S-shape The most recent and elaborated measure to explain the progress of the M-P relationship found by Lu & Beamish (2004) proposes three stages of an S-shape figure. Stage I (Early Expansion) – Shows a negative slope in which initial stages of internationalization will result in negative returns for the firm due to unfamiliarity with the foreign market and high level of uncertainty (Contractor et al., 2007). Stage II (Maturity) – The positive slope represents the period of internationalization in which the firm begins to benefit from global diversification.
However, this only happens after all costs are covered in the early stages and further expansion results in fewer costs, investment opportunities, and more knowledge. Stage III (Extensive Expansion) – A negative slope is expected at the final stage indicating the limit of multinationality and the deterioration of firm performance. Internationalization threshold occurs when costs start to outweigh benefits again, which could happen because poor managerial practices to cope with costs, such as information overload, information loss, distortion in governance, or increases in environmental and regulatory diversity (Contractor et al., 2003).
Although Lu & Beamish (2004) appear to have developed an appropriate model explaining M-P correlation, its implementation on emerging firms is often critiqued due to their smaller size, resource deficiency, and restraining capabilities (Contractor et al., 2007). Rugman (1979) however reasons that this serves as an incentive for firms to go abroad and minimize the impact of market failure and dependency on domestic markets.
Nevertheless, we are uncertain of how likely emerging firms are to go through all three stages of the model. M-P scholars still encounter inconsistent findings towards this research, yet they remain persistent on the positive relationship between internationalization and performance, due to the firm’s ability to learn. Hitt et al. (1997) propose that firms with a diverse portfolio of countries develop better learning abilities, leading to enhanced decision-making strategies for greater profits. Having operations in diverse environments helps multinationals learn how to increase their capabilities and exposes them to a networking platform that enables them to share knowledge (Hedlund, 1986). Nevertheless, these assumptions are unclear towards the correlation of how much firms are able to learn and how rewarding is this for them.
Internationalization Process-Performance Relationship IB literature concentrates too much on why, where and when can firms internationalize and how beneficial will this be; however, for the purpose of this study and the evaluation of the growth of Multilatinas, we will focus on the process and sequence of the multinationals. A few scholars have already investigated MNE’s foreign entries as a sequence (Casillas et al., 2009; Chang & Rosenzweig, 2001; Chang, 1995; Delios & Heinsz, 2003; Guillen, 2002), and as previously mentioned, the Uppsala Model has been proposed by Johanson & Vahle (1977) as a theoretical framework that embodies the concept.
The theory recalls on the implications of gaining knowledge and commitment on performance enhancement, denoting the importance of organizational learning through incremental expansion. Consequently, progressive multinationality has become increasingly important to understand the complexities of building MNEs, including their learning capacity and adaptation abilities (Hedlund, 1994). Despite the long literary recognition of organizational constraints regarding their growth and development; little research has directly examined how different rates and patterns of expansion have resulted in performance between firms