All in the Family: Trading Legal Security for Trust, and Export Growth, in Latin America

In terms of export growth, the world has been focused on Asia, and specifically southeast Asia, as the dominant regional economic bloc with the most profit potential in the still-developing world. Coming in second, however, is Latin America, and it's in this region that lawmakers and regulators on both sides of a US-Latin American transaction have worked for years to tear down barriers to make sales less of a hassle and to reduce administrative overhead.

Average tariffs on sales to the region fell from 48.8% in 1990 to 10.7% in 1999, mostly due to the enactment of the North American Free Trade Agreement (NAFTA), according to Ernesto Poza, a clinical professor of global entrepreneurship and family enterprise at the Thunderbird School of Global Management. "Likewise, nontariff restrictions went from affecting 37.6% of imports to affecting only 6.3% by the mid-1990s," he added. Poza was one of several speakers that discussed export opportunities at a recent Trade Connect event hosted by FCIB, the International Trade Administration and other export-oriented agencies and organizations in Arizona.

He noted that economic opportunity is widely available due in part to the efforts by Latin American economies to open up to sales from their northern neighbors and also in part to key characteristics of the region with great growth potential, but that these shifts toward greater opportunity have not necessarily resulted in a reduction of risk for sellers.

Less of a Bloc. More of a Family

Poza observed that many US exporters decrease their potential for success in the region by considering the entirety of Latin America as one big bloc. Thinking of Latin America and the cultures contained therein as though they were interchangeable is an easy way to cool off what could eventually grow into a hugely profitable business relationship. Treating each company from each country as its own entity and spending the time to acknowledge the differences in tastes, culture, history and everything in between can be vital to a new export ventures success.

Unifying characteristics in the Latin American economy do exist, however, and can further confuse attempts by American companies to increase their exports to the region. First, history has proven Latin America to be a region accustomed to fast economic starts and equally fast economic slowdowns. "One of the reasons were reluctant to do business over there is volatility. We go from fast starts to fast stops overnight," Poza said, noting that his own home country is a perfect example. "I was born in Cuba," he said. "I know about fast starts and fast stops. I know about currency fluctuation. I know about appropriation. All of those are risks when you take on partners in those countries."

A second characteristic of the Latin American economy that makes some exporters uneasy is the fact that more than any other region of the world, with the possible exception of Italy, Latin Americas is a business economy comprised almost entirely of family-owned and family-operated enterprises. "Anywhere from 80-98% of businesses on a worldwide basis are family-owned or family-controlled," Poza said. "In Latin America, it gets closer to 98%."

This fact can make a lot of American companies wary, simply due in some cases to the presence of stereotypes around family-owned enterprises, and also because "while being businesses, they do reflect the reality of other influences, some very powerful, that affects the basic strategy of a firm," Poza observed. The connotation of the term "family-owned business" too, at least in the US, conjures up the image of a simple storefront on Main Street, or a small contractor, or some other entity that might lack the buying and borrowing power of a larger corporate concern. Still, Poza notes that family companies operating in Latin American can be enormous, and that these entities have thrived through volatility and through other exporters' expansion into the market, even working without the legal protections that companies in the US take for granted.

Trust and Sacrifice

Another mostly-unifying theme that fits Latin American economies is that while growth there has been speedy, and efforts to increase American imports have been steady, the legal systems in these nations have not kept pace with exporter interest. This complicates the nature of risk management when it comes to conducting transactions with these companies because the same protections that apply to sales between American companies don't necessarily apply in Latin America. In some cases, similar notions apply to the security instruments and contract stipulations that define these transactions, but the cost of actually availing one's self of a Latin American court system could end up being prohibitively high, or amount to throwing good money after bad. For this reason, when it comes to risk management "in these markets, you don't have sufficient legal infrastructure or legal precedent to really do that job for you," Poza said. "The one that has the most development and whose business culture is more familiar to us is Chile, but everywhere else it's about trust and relationships."

In other words, in Latin America, the legal bond of payment is replaced largely with a bond of trust, built on a great deal of time spent building a relationship in a way that goes beyond signing a contract, and often results in payables turnarounds that are much quicker than exporters are used to in other markets and with other ownership structures, Poza noted.

Companies hoping to do business in a region where more than nine times out of ten the customer will be a family enterprise should first take a look at the realities of how these entities function, and what differentiates them from their non-familyowned counterparts. Additionally, they should also find out what separates them from every other enterprise and get to know the business as though it were an individual. "Familyowned, family-controlled companies are the bulk of businesses in Latin America</location> and if you want to do business there, you really ought to find out more about what makes them different and what makes them tick so that you can develop the trust in relationships and invest in long-term relationships with the bulk of firms in that part of the world," Poza said.

By long-term, Poza doesn't mean a few visits, but a lengthy period of enterprises getting to know one another, almost as though it were a courtship. As a clinical professor, Poza practices as much as teaches, and shared a story from years ago when he was involved with a firm that built "a multi-million dollar pulp mill to export pulp to Asia that came as a result of two families beginning to trust each other." One of the familyowned businesses in the US found out that a particular type of pine tree that would be used to make the pulp grew three times as fast in Chile as it did in the US state of Georgia. This, obviously, made it attractive to do business in Chile, so the company "established a small tree nursery farm" and operated it for about 10 years as they worked to build up their relationship with a Chilean counterpart, at which point they then decided to invest in another joint project.

"That was collaboration between two families that learned to trust each other, and not by legal means," Poza said, noting that the family structure can often present risk management benefits to the US seller if they're willing to put in the time to build the relationship. "Grupos [a Spanish term for groups of companies] are extremely adept at dealing with the volatile environment that Latin America represents because they diversify risks. They're like mini-conglomerates," Poza said. "And the structure of the Grupo provides you with significant risk attenuation because they know how to deal with corruption, they know how to deal with political changes, they know how to deal with labor issues and so partnerships with them are an important way to address that part of the world." 1

Unifying characteristics in the Latin American economy do exist, however, and can further confuse attempts by American companies to increase their exports to the region.

In Latin America, the legal bond of payment is replaced largely with a bond of trust, built on a great deal of time spent building a relationship in a way that goes beyond signing a contract...

...and often results in payables turnarounds that are much quicker than exporters are used to in other markets and with other ownership structures.

GLOBAL CONNECT SEMINAR COMING TO NORTHERN VIRGINIA

FCIB, in its partnership with the US Department of Commerces International Trade Administration, will cohost a Global Connect half-day seminar in Northern Virginia in June. Look for more details on this event from FCIB and NACM. as they become available. If you are not on FCIB's mailing list, request to be added by emailing info_global®fcibglobal.com.

JACOB BARRON, CICP

Jacob Barron, CICP, NACM staff writer, can be reached at jakeb@nacm.org.