Business Groups and Transnational Capitalism in Central America

Economic and Political Strategies

Benedicte Bull, F. Castellacci, Yuri Kasahara

• Publisher: Palgrave Macmillan
• Year: 2015
• ISBN:
  9781137359407
• Topic: Politics & International Relations
• Subtopic: Trade & Tariffs
• Index: Politics & International Relations

This book investigates Central America's political economy seen through the lens of its powerful business groups. It provides unique insight into their strategies when confronted with a globalized economy, their impact on development of the isthmus, and how they shape the political and economic institutions governing local varieties of capitalism.

1

Introduction: The Emergence and Evolution of Business Groups in Central America

1.1 Introduction

Central America as a region has made world headlines mainly due to civil wars, insurgencies, and, more recently, drug-trafficking and youth gang violence. Central American enterprises are only rarely studied; even less so are the Central American conglomerates and business groups that, albeit small by Latin American and global standards, play a significant role in the region’s economies. If they are studied at all, it is mainly as supporters of repressive dictatorships or corrupt regimes, or as the incarnation of colonizers and landholders, dominating the system that is considered to be the root cause of most of Central America’s problems.

In the absence of concrete information, Central American business leaders have acquired almost mythological dimensions in the local public debate. Figures such as Dionisio Gutierrez in Guatemala, Stanley Motta in Panama, Ricardo Poma in El Salvador, Carlos Pellas in Nicaragua, and Miguel Facussé in Honduras are treated with a mix of admiration, contempt, and fear. They are admired for being successful businessmen and purveying a sense of modern management in the midst of economies dominated by informal relations; they are despised as they have amassed immense fortunes in countries with high levels of poverty; and they are feared as they are assumed to have the power to dominate politics and the state. Yet, as few of the companies they own and manage are public, the information available about them is scarce.

As a result, the significant differences between the various business groups are often overlooked. And more importantly, so are the changes that the business groups are going through as they adapt to the recent opening of their countries’ economies. The purpose of this book is to contribute to filling this information gap and provide insight into the transformations that these business groups are undergoing. The principal questions that we pose are: What strategies do these groups apply to confront the changes in the international political-economic context? What can explain the differences in choice of strategy? And what is the impact of those strategies for the development of the six Central American countries?¹

Through answering these questions our aim is to contribute to the debate about the drivers behind growth and development in Central America. This debate has long been polarized regarding the role of the state and businesses. In the process of economic reforms that began in the late 1980s, some saw the state as the main cause of stagnation and low productivity. With its allegedly bloated state apparatuses, regulation, red tape, and inefficient bureaucracies, it was viewed as stifling business initiatives, crowding out private investment, and contributing to business-hostile macroeconomic volatility. As elsewhere, the solution was argued to be found in unleashing business initiatives by reducing and reforming state presence. However, while surveys conducted by private sector think tanks or associations that attempted to unveil the views of business about the main obstacles to growth flourished, very little research was done on the ownership structure of the companies or their main strategies and investments. The focus was rather on the state and how it should be reformed.

Against this, it was argued that the problem was not the magnitude of the state nor its presence in the economy, but rather the fact that it had always favored a small elite of capitalists who were preoccupied with their own interest, not that of the countries as a whole. However, the main concern of these critics was often to reveal the concentration of capital in the hands of a ruling class and how it influenced state policies, and not on how the elites organized and reorganized their enterprises or the implications that had for the economy.

This book is an attempt to carve out a different position by focusing on the business groups, their internal organization, and how they try to both influence and adapt to a volatile economic environment and a rapidly changing economic and political context.

In so doing, we attempt to contribute not only to the Central American development debate, but also to two bodies of scholarly literature. The first is the international literature on why diversified business groups (DBGs) emerge and thrive, and whether they represent important determinants of productivity and growth in developing countries. This literature has also addressed the questions of how DBGs respond to the process of institutional transition and market development that characterizes many developing economies worldwide. Are they progressively shrinking and weakening their dominant market position and political influence – or, by contrast, are they adapting to the new market-based competition and finding new strategies and market niches to maintain their market dominance?

The book also builds on, and intends to contribute to, the institutional literature on the Varieties of Capitalism tradition. A main inspiration is the work of Ben Ross Schneider (2008; 2010; 2013) on the Latin American form of hierarchical capitalism, which considers DBGs as an integrated element in a form of capitalism that is characterized by negative complementarities between the organization of business into sprawling, diversified groups, strong presence by multinational companies (MNCs), atomistic labor relations and low investment in skills and technology. The result is continued low productivity growth and, thus, sustained structural inequality and low long-term growth. While we take issue with parts of this argument, due to particular characteristics of Central America, we argue that the links and complementarities between groups’ resources, capabilities, and strategies, on the one hand, and the institutional characteristics of the environment in which they operate, on the other, go a long way to explaining the resilience and continued superiority that DBGs are proving to have in developing economies worldwide. We will explore this research avenue in the chapters that follow. In the rest of this introduction, we will briefly outline our theoretical approach, give a historical introduction to the emergence of DBGs in Central America, introduce our methodology, and outline the rest of this book.

1.2 Understanding business group strategies in open and changing institutional contexts

In a global context, business groups – and particularly, DBG, which sprawl across multiple apparently unrelated sectors – are a well known and widely studied phenomenon. A large body of literature aims to answer the questions of why they predominate in certain contexts, how they fare in increasingly transnational economies, and what impact they have on development. However, this literature has largely focused on Asian and European economies; to the extent that they have included Latin American groups, they have focused on those in the large economies of the region: Brazil, Mexico, and Argentina, and to some extent Colombia, Chile, and Peru (Peres and Garrido, 1998; Schneider, 2013). Only Alexander Segovia’s (2005) study provides a systematic analysis of Central American groups, but it focuses exclusively on the groups that have successfully internationalized their activities. Also, the increasing literature on the Latin American multinational companies, the so-called multilatinas, has generally overlooked Central America (Cuervo-Cazurra, 2010; Casanova, 2009; 2011).

The reasons why Central American companies and groups have been overlooked are many: They are small and globally insignificant and they are often assumed to be highly dependent on MNCs and in the process of becoming absorbed by them (Robinson, 2003). After an initial review of the situation, we found that by no means all the Central American DBGs were in the process of being subsumed by MNCs, but neither were the majority of them thriving in the global economy. Rather, some groups were struggling hard to compete with MNCs and diversify as a means of defending themselves against MNC competition. Many groups were focusing their activity to sectors wherein there were still possibilities to create de-facto monopolies or oligopolies or they had particular competitive advantages as local groups, and many had established links with MNCs in order to access technology, new products to distribute or brands to produce. Many had cross-border investments, but only a few were moving towards being successful MNCs themselves.

Another preliminary finding was that the strategies of the business groups differed greatly across the six tiny countries of the isthmus: Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, and Panama. As a result of this, we have been concerned to include a focus not only on international economic drivers, but on formal and informal domestic institutions and how these condition, but are also conditioned by, the actions and strategies of the main business groups.

In order to understand the impact of domestic institutions on DBG strategies, we found two concepts from the Varieties of Capitalism literature particularly useful: hierarchies and networks. The concept ‘hierarchical capitalism’ was coined by Schneider to depict a form of capitalism typical of Latin America, where hierarchical relations govern the internal structure of the two dominant economic organizational forms – the diversified business group and the MNC. However, importantly, it also governs relations among firms both within sectors where large firms dominate economically (oligopoly) and in associations, as well as across sectors and borders as business groups and MNCs buy and control firms that would be independent in other varieties. As such, ‘hierarchies replace relations that in other varieties would be mediated by markets, networks, or coordination’ (Schneider, 2013, p. 40). In Central America, hierarchical relations are evident in the daily operation of the groups, and the command that the group leaders have over an array of companies in different sectors is a crucial resource in their survival and growth. Hierarchies also characterize the MNC structure, and the MNC’s arrival to Central America has shifted the kind of hierarchies that the business groups related to. This is evident in the access to technology, but also in some countries access to finance. Moreover, in the current process of regionalization, new hierarchies are formed when groups from one country buy a number of independent companies in neighboring countries.²

However, although hierarchies are important, it is impossible to understand the DBGs without also taking into account how they function as networks and within networks.³ We will argue that while hierarchies characterize the relationship between DBGs and MNCs, as well as between the large DBGs and smaller groups and independent companies, networks characterize the relations between several of the large DBGs and important political institutions. These networks are based on a set of informal institutions that are stable and long- term and not up for negotiation, and they are often what allows the companies to compete even with companies with superior technology or access to finance. With the transnationalization of the economy, due to the sale of a number of companies in which the DBGs controlled, the group owners acquired minority mutual shareholderships in a number of companies and thus network coordination became even more dominant. The long-term nature of hierarchies and networks of companies stands in contrast to the atomistic relationship companies in general have with labor and their relative isolation from local communities.

Furthermore, we will argue that because of the structural and long-standing characteristics of the networks in which DBGs are embedded, groups are often better able than independent companies to get access to and coordinate tangible and intangible resources, exploit external economic and policy opportunities, upgrade their managerial and technological capabilities, and strengthen their market dominance even in the presence of a rapidly changing institutional context. However, as these networks are social and political as well as economic, one has simultaneously to analyze the implicit and explicit business and political strategies of the DBGs. These business and political strategies depend on the institutional context and market developments but will feed back and affect, in turn, the process of institutional change and market development. This two-way interaction process amounts to a dynamic co-evolution between group-level strategies, on the one hand, and country-specific institutional conditions, on the other. This co-evolutionary process may actually lead to distinct development trajectories, according to the specific combination of institutions and groups’ dynamics that characterizes each national economy. In the case of Central America, we identify two distinct trajectories: a network-based hierarchical capitalism and a state-regulated hierarchical capitalism. These models will be further discussed in the conclusion.

1.3 Defining characteristics and varieties of business group

There is little agreement in the literature about how to define the sprawling networks of companies, mutual shareholderships, families, and political parties dominating the political economy of several Central American countries. In most of the literature specific to the region these have been conceptualized through terms that somehow attempt to capture simultaneously their economic resources and their influence on political decisions. Some take an explicit or implicit structural or Marxist point of departure and talk about ruling classes (Stone, 1990), dominant classes (Mahoney, 2001) or elites, encompassing landholders as well as the industrial bourgeoisie (Rueschemeyer, Stephens, & Stephens, 1992; Flora & Torres-Rivas, 1989; Paige, 1997). The DBGs’ economic strength and political influence are viewed as derived from the ownership of assets (land, capital), and splits within the dominant classes are understood as resulting from differences in the interests derived from different forms of capitalist production: agriculture, industry, commerce, and finance.

More recent studies have used concepts such as ‘hegemonic bloc’ (Paniagua, 2002), power groups (Segovia, 2005; Meza et al., 2008), and elites (Dosal, 2005; Palencia Prado, 2002; Váldes, 2003) in order to capture the simultaneous economic and political clout of big business. We have taken a different approach: Our starting point is the more specific figure of the business group, typically defined as ‘legally independent firms, operating in multiple (often unrelated) industries, which are bound together by persistent formal (e.g. equity) and informal (e.g. family) ties’ (Khanna & Yafeh, 2007, p. 331). We have chosen this as our main focus as we have needed a more precise definition than the ones referred to above in order to make a multi-sectoral comparison across national contexts, as is intended here.

However, the concept of business group also encompasses a number of variations. Business groups differ regarding the kinds of tie that bind the enterprises within the group together, their internal ownership structure and their degree of diversification. The linkages that bind the business groups together may include mutual shareholdership, close market ties (such as inter-firm transactions), and/or the social relations (family, kinship, or friendship ties). Regarding ownership structure, some might be of the network type, defined as a constellation of legally independent companies that cooperate for common, long-term goals, whereas others are hierarchies in which a holding company owns and controls legally independent operating units, usually organized as subsidiaries and affiliates. Within the latter group one may further distinguish between multi-company firms, which transact in different markets under common entrepreneurial and financial control, and pyramidal business group, which allow owners to tunnel profits from second- and third-tier subsidiaries to owners (Colpan & Hikino, 2010).

Another difference is whether or not the group presents itself as a group. Rettberg, for example, argues that business groups are ‘networks of legally independent firms, affiliated with one another through mutual shareholding or by direct family ownership under a common group name’ (Rettberg, 2000). However, in Central America, we find a number of constellations of networks of companies with common shareholderships that do not appear under a common name but are nevertheless bound together by persistent relations. Moreover, we find many formal groups with owners who also own a number of companies that are not formally in the group but that are financially and administratively coordinated with the rest. This complicates significantly the identification of groups, since one needs a lot of knowledge about the relations between the different companies in order to conclude whether or not they belong to the same group.

Our strategy to diminish, if not overcome, this problem has been to focus on the family-owned groups. These are the overwhelmingly dominant ones in Central America, and starting with the family or family network has helped us to identify the business groups. Our definition of a diversified business group is thus: a set of legally independent firms, operating in multiple (often unrelated) industries, which are ...

Table of contents

• Cover
• Title
• 1 Introduction: The Emergence and Evolution of Business Groups in Central America1
• 2 Between Hierarchies and Networks: Understanding Business Group Strategies in a Global Capitalism
• 3 Regional Shifts and National Trajectories: Differences in the Context and Strategies of Business Groups
• 4 From Oligarchs to Transnational Business Group Leaders? The Shifting Strategies of Key Business Groups
• 5 Internationalization and the Export Performance of the Central American Business Groups
• 6 Central American Business Groups, Innovation, and Institutional Conditions
• 7 The Role of the State: Government Financial Policies and Business Group Strategies
• 8 Between the Back and the Front Stage: The Political Strategies of Central American Business Groups
• 9 Conclusion
• Notes
• References
• Index