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18 Outward Foreign Direct Investment by Enterprises from Argentina Box 3. SME international investment in the agricultural machinery industry Agricultural machinery is another area in which Argentinean SMEs have stood out, investing in productive operations in neighbouring Brazil. Two cases are reviewed below: Plá. Plá produces several types of agricultural machinery in Argentina. It established a plant in Porto Alegre, Brazil, to produce self-propelled pulverizers. With an initial investment of $1.5 million, the plant currently employs 30 people. What attracted Plá to Brazil was the potential of the host country’s market. An additional reason for establishing a plant in the host country, versus exporting from Argentina, is that the company’s products qualify for subsidized credit offered to local buyers through the finance programme provided by the Brazilian development bank (La Capital 2004, 2005). Metalfor. Metalfor, based in Marco Juaréz, Córdoba, established a subsidiary in Brazil to produce agricultural pulverizers. The plant, situated in the southern state of Paraná, employs 100 people. Investments have been made to relocate and expand the plant in a nearby site. Metalfor also has facilities in the State of Mato Grosso, from where machinery is sold and spare parts are stocked for distribution. There are plans for the construction of an assembly plant and a plastic compounds operation in Mato Grosso (Metalfor do Brasil 2005). Source: Author, based on company information and La Capital (2004, 2005). and long steel. The company’s acquisitions and investments abroad have supported its exports through distribution networks (Catalano 2004). The company’s OFDI is increasingly complementing domestic production with sites situated close to consumer markets. Other Argentinean companies entered new markets through FDI. For example, Impsa has used its bases in Malaysia and the Philippines as export platforms for the rest of Asia in the provision of engineering services in infrastructure projects – especially electricity – and related capital goods. Impsa’s experience in Argentina gave it an advantage in operating in similar market environment in other developing countries. The company’s international operations has enabled it to maintain sufficient scale to survive in an industry that has been increasingly restricted at home. Impsa also explored the market for new services – such as GPS monitoring and environmental services – in Latin American markets, where it took advantage of language and other similarities. D. OFDI and implications for enterprise competitiveness The effects of OFDI – particularly in the 1990s – on competitiveness can be grouped into four broad categories. • Expand markets. OFDI has been a means to expand sales, both by allowing companies better distribution channels for their exports and/or by placing productive operations closer to consumer markets. As an example, and as far as exports go, from 1990 to 1999, before crisis hit, the world market share of the Argentine sugar confectionery industry (excluding chocolates), rose from 1.09 per cent to 2.16 per cent. Argentina’s share in the world market for chocolates went from 0.05 per cent in 1990 to 1.43 per cent in 1999 (TradeCAN 2004). Arcor’s large contribution to the increased presence in the international markets is undisputed. The company’s exports rose by a multiple of almost seven during this period. • Improve efficiency. Companies have been able to defend their positions on the domestic market: enhanced capacity and larger scale. In Arcor’s case, internationalization upgraded the quality of the company’s products. Striving towards approximation to international standards was in fact one of the main reasons for the company’s internationalization strategy. OFDI also allowed for the expansion of the scope and scale of operations. Both these factors helped strengthen the company’s presence in Argentina at a time of intense competition with foreign players. For Techint, scale acquired through internationalization generated greater efficiency in obtaining supplies, machines and other
inputs through greater bargaining power. The nature of Impsa’s core business, which involves high-tech services and capital goods for large-scale projects, required a larger minimum efficient scale than was compatible with the Argentine market, and its international operations thus became essential for the continuity of the development of high-tech solutions and productive operations. • Improve risk management. Arcor’s international presence shielded the company, to a certain extent, from the impact of the 2001 crisis. Although other companies reached out to the international market in response to the crisis, Arcor had an invaluable advantage in that it had pursued a long-term and systematic strategy to develop clients and markets abroad. By 2002, it exported to over 100 countries and enjoyed the confidence of retail channels in Europe (Kosacoff et al. 2002). International operations were a solution for other companies that saw their markets in Argentina contract severely, especially from the second half of the 1990s onwards. • Improve management skills. Technology, knowledge and skills transfer between companies’ international units, the application of best practices developed in other units, the results of human resource mobility within groups, and the capacity to manage larger and more sophisticated projects are among the benefits identified in this respect by a survey conducted by ECLAC in 2005 (ECLAC 2006). Companies interviewed for this survey perceived a positive externality of OFDI, which is the enhancement of the country’s managerial pool, with national executives having been exposed to the international business environment. SMEs that have internationalized have benefited from similar factors, at a smaller scale. In addition, SMEs from Argentina stand to benefit from the internationalization of larger companies, which provides opportunities to expand as suppliers. E. OFDI policies Current legislation on capital outflows allows residents (both companies and natural persons) outside the financial sector to have access to the Mercado Único y Libre de Cambios (official foreign exchange market) to acquire foreign currency for the purpose of undertaking direct investment abroad, subject to a monthly limit (Banco Central 2005). The current CHAPTER II 19 limit is $2 million, but can be increased according to export duties paid by the company and taxes paid on movements in the company’s current account. The Government has recently instituted a system whereby OFDI must be declared to the Central Bank annually. Declaration is mandatory for values of over $1 million. Government-subsidized financing programmes such as those executed by the Banco de Inversión y Comercio Exterior (BICE) seem to focus on investment made domestically and on support to SMEs. The latter may have a positive effect, in the long run, on OFDI by these companies to the extent that the programme supports the development of exporting SMEs, and, more generally, the growth and competitiveness of local companies. F. Conclusion One of the main obstacles to OFDI from Argentina has been the limited availability of funding at internationally competitive rates (Kosacoff 1999), aggravated in some cases by higher debt-equity ratios than foreign competitors (ECLAC 2002). In the past few years, economic crisis significantly weakened Argentine firms, causing a number of them to be bought by foreign firms. For companies that remained under Argentine ownership, the crisis had led to restricted investment capacity and often a need to divest. Other obstacles to outward investment include access to personnel qualified in international business operations or in management of overseas investment activities. The current legislation on capital outflows limits the amount of foreign exchange that residents (both companies and natural persons) can acquire. This issue is not, however, in itself generally considered a major obstacle to OFDI. The prospect for OFDI flows from Argentina is caught between the positive trend of companies, such as Techint, Arcor and a selected group of SMEs that have pursued aggressive internationalization strategies in the post-crisis environment, and a process of denationalization where important Argentine firms that could lead a trend towards OFDI are being acquired by foreign firms. A number of upcoming smaller firms in software and agriculture machinery industries may be an important factor in the growth of OFDI from Argentina in the next few years. Support policies for OFDI from Argentina could be thought out in terms of weighing, on the one hand, the potential of this kind of investment for generating social benefits in the form of development of local industrial production, productivity, employment, innovation capacity and other potential benefits and,
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