UNIVERSITY OF MICHIGAN BUSINESS SCHOOL

Professor Katherine Terrell Class Hours: Thurs. 7-10 pm Office: 7205 Davidson Hall Classroom: W2760 Tel.: 615-4558 Office Hours: W 2:00-4:00 Email: terrell@umich.edu Fall B 2005

CSIB-BE567

Business Strategies in Latin America

In today’s global economy, all managers need to understand the political, economic and cultural forces that shape the market environment in which their businesses operate. Latin American economies are characterized by volatility of many indicators in both the political and economic environment. Astute managers who are able to anticipate these changes and foresee how they affect their own competitive positions will be able to formulate successful strategic responses. This course provides an understanding of the globalization process in Latin America and examines the particular challenges and opportunities faced by MNCs and domestic businesses in the region. Examples will be drawn from the entire region with emphasis given to Argentina, Brazil, Costa Rica, Mexico and Venezuela. Among the many applications, the course provides a framework for making decisions about where to invest in Latin America. Opportunities to work through some of the problems confronting managers are provided in case analyses, class discussion, and interaction with guest speakers who have worked in or are from the region.

Prerequisites: IB Core, or permission of the instructor.

Reading Requirement: The required readings are available from the course materials office. Students are expected to have read the assignments before each class.

Format: The course will combine various learning devices: case analyses, lectures and discussion of articles, class presentations, and a guest speaker. Discussion (class participation) represents a principal learning and evaluation mode and will receive corresponding weight in the final grade, as indicated below.

Assignments: The class will form into teams of approximately three to four members in the second class (November 8). These teams are expected to meet regularly to prepare written

case analyses and a final project. Each team should write up the following four cases and e-mail them to me directly by the following due dates:

1) “Brazil: Embracing Globalization?” due by 5:00 on Nov. 10; 2) “American Outsourcing” due midnight Nov. 14; 3) “Palliser Furniture” due midnight Nov. 21; 4) “Mavesa” due midnight Nov. 30.

Teams may volunteer to present a case to the rest of the class for extra credit. The following cases are to be prepared individually for class discussion (not to be written up and turned in): 1) “Mexico in Debt” 2) “Intel”.

A) Written Case Analyses: may take the form of a memorandum to your supervisor, but the exact format of the analysis is up to the team. The analyses must be two pages long at amaximum, not including the cover page, with one inch margins at top, bottom, and at the sides, 12-point type of Times New Roman or equivalent font and double spaced. The Cover page should contain the name of the case, the number of your team and the names of the team members. You may include up to three exhibits as additional pages. Shortersubmissions are welcome. Longer submissions will be returned unread for revision.1 Thecase analyses are due at midnight before the corresponding class (with the exception of the first case). They should be sent to me at terrell@umich.edu; the subject box should contain your team number and brief name of the case. Unless otherwise indicated, the case should contain the following elements:

1) Identification of the problem/question - Identify a particular challenge presentedin the case and address your comments to a particular problem.

2) Develop criteria for solving the problem/answering the question - State yourapproach to solving the problem. What are the relevant considerations? How doyou choose among the alternative solutions? This step allows you to demonstrate your ability to critically analyze the situation.

3) Apply the criteria to the potential solutions and make your recommendation. Orjustify your answer to the question with the relevant criteria.

In most of the cases there is not “one correct” answer. Hence, I place emphasis in myjudgment of your case on how well you justify/argue your position base on your criteria (e.g.,economic principals, or objectives of business strategy, or SWOT analysis, etc.)

B) Final Project: You are asked by the CEO of your company to select a country in Latin America to invest in (either alone or with a strategic partner). Your team will write a 15-20page report (double spaced, 12 point Times Roman font, one inch margins) which includesall charts and tables (no appendices are allowed) and is prefaced with a one-page executivesummary (single spaced). Each team should begin by defining the company (fictitious or real) they are working for and assume that the company has only general knowledge about Latin America and the country the team has selected. The report should justify the selection by informing the CEO about recent developments and future prospects in the followingareas: a) political situation (stability, openness to foreign investment and foreign trade, degree of market-friendliness in its policies); b) economic environment (interpretation of its macroeconomic indicators, official investment rating); c) important legal, institutional, and regulatory features relevant to YOUR firm (ex., tax laws with respect to profits and theirremittance, tariffs and any other import-export barriers, exchange rate regime, and lawsrelated to corporate governance and other aspects of creating a joint venture); d) market size(actual and potential domestic market, and potential access to neighboring markets); e) degree of competitiveness in the market the company is planning to invest in (who are majorcompetitors in terms of size, ownership, etc.); f) risks and potential bottlenecks (ex., infrastructure, labor unions, etc.); and g) justification of why this country and not another(can be woven into sections a-f.).

1These longer submissions must be resubmitted, with the original, by the next class session in order

to obtain credit. Such revisions do not incur a grade penalty. Any submission after the next class session will not be accepted.

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The team should divide up the different sections of the report among the membersand the table of contents should indicate which section each person wrote up. The project isdue by 12:00 midnight on Thursday, December 15 sent to me by e-mail.

Some recommended sources include: publications of The World Bank (IBRD), International Monetary Fund (IMF) and the I.M.D. World Competitiveness Report; theEconomics Intelligence Unit (EIU) country reports (quarterly) and country profiles (annual) as well as numerous data sources on the web; Business Latin America, International

Executive, http://www.latin-focus.com, reports by McKinsey, by the industry, etc.

Grading: The final grade will be based on the following elements:Individual class participation 35%Three Written case analyses 30%

Final project* 35% (*includes paper & 15-min.class presentation)

Extra Credit of 10 points will be given to each team that provides a 15-minute ppt presentation of one of the four cases to be discussed class on Nov. 10, Nov. 15, Nov. 22 orDec. 1. Selection of team presentation is on a first-come first-served basis.

Topics and Reading Assignments:

Nov. 1: Introduction and Overview: From Crisis to Reform

In this class I will go over what you can expect to learn in these seven weeks and

what I expect of you. We then begin getting into the material of the course with an

overview of Latin America, stressing its diversity, patterns of economic growth in recent years and opportunities for business.

The readings below will be the basis for a discussion, in the second half of the class,

of the reform policies of the Washington Consensus – why they were undertaken,

what they set out to achieve, and what has been the experience with these policies one

decade later. The case on Mexico will give you an understanding of what kicked off

the “Lost Decade” and the policies of the Washington Consensus. I would like you to

be able to answer the following questions from material in the case:

1) What were the causes of the 1982 Debt Crisis?

Domestic Factors

International (External) Factors

2) What steps did Pres. de la Madrid take between 1982 and 1988 to restore

confidence and restructure the debt and turn Mexico's economy around?

We will address the “Peso Crisis” in the following class.

Readings:

Argawal, Vivek, Diana Farrell and Jaana Remes, “Offshoring and Beyond: Cheap labor is the beginning, not the end,” McKinsey Quarterly 2003 Special Edition:Global Directions (11 pages)

World Report: Latin American Finance 2003, Financial Times March 21, 2003.

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IADB. Latin American Economic Policies, 1st Quarter, 2002. (The entire issue is on “reforms” in Latin America.)

ECLAC, United Nations, “Latin America and the Caribbean in the WorldEconomy: 2005 Trends,” summary pp. 7-12. (5 pages)

*Case: Mexico in Debt (answer above questions on your own for class discussion.)

Nov. 8: Financial Crises

In this class we will review the Mexican Peso Crisis (1994) and Argentina Financial Crisis

(2001) to try to understand what the root causes of financial crises are and what policies

may help avoid them in the future. This will help you, as a manager of a business, know what to look for in making or guarding an investment in the region. (Reading: 55 pages)

Readings On Argentina:

“Special Report: A decline without parallel - Argentina's collapse; Argentina'scollapse” The Economist, March 2, 2002.

“Finance and Economics: Argentina's bottomless pit; Economics Focus,” The Economist, Aug 10, 2002.

IMF. “Executive Summary,” Report on the Evaluation of the Role of the IMF in the Argentina (1991-2001). June 30, 2004.http://www.imf.org/External/NP/ieo/2004/arg/eng/index.htm

Lessons from Financial Crises

Garten, Jeffrey. "Lessons for the next Financial Crisis” Foreign Affairs, Vol. 78, No. 2, Mar/April 1999, pp. 76-92.

IADB. “Capital Flows Before and After Russia,” Latin American Economic Policies,4th Quarter 2002.

“A cruel sea of capital”; Economist Survey, May 1, 2003

“Sudden storms”; Economist Survey, May 1, 2003

“A slightly circuitous route,” Economist, May 1, 2003

“How the bug can spread,” The Economist, July 19, 2001

Hanke, Steve H. “Reflections on exchange rate regimes,” Cato Journal Winter, 1999.

Lapper, Richard. “Crisis starts debate on dollarisation,” Financial Times, March 12, 2000.

Nov. 10: Trade Liberalization and Regional Trade Blocs

Latin American countries have made great strides in opening their economies to trade. We

will examine how this was done and what are the current challenges in the area of trade

agreements today. (Reading: 45 pages)

Inter-American Development Bank (IADB). Latin American Economic Policies,Third Quarter 2002.

“The New Regionalism”“The Spaghetti Bowl of Trade Liberalization” “RIAs and FDI: What’s the Link?” “Regional Integration and Productivity: A Tale of Two Countries” “An Agenda for the Future”

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“Nothing’s Free in this World: What to Expect from Central American Free Trade Agreement,” The Economist, August 4, 2005.

“Central America is Holding its Breath,” Business Week, June 20, 2005.

“Looking South, North or Both?” The Economist, Feb. 5, 2004

Stiglitz, Joseph “The Broken Promise of NAFTA,” New York Times, op-ed contribution, January 6, 2004. http://www.citizenstrade.org/pdf/nytimes_stiglitz.pdf

ECLAC, United Nations, “Latin America and the Caribbean in the WorldEconomy: 2005 Trends,” summary pp. 12-22. (11 pages)

“Selling Brazil: the eternal country of the future comes of age on the global stage,” Financial Times, Sept. 14, 2004.

*Case: Brazil: Embracing Globalization (Case Analysis #1 to be written up as aTeam project; it should be e-mailed to me by 5:00 pm Nov. 10.)

Nov. 15: The Emerging Global Labor Market – Offshoring

The integration of global labor markets is tending to produce what amounts to a single

market for jobs that can be performed remotely. What do Latin America’s labor markets

look like? How can Latin American businesses and governments compete with India and

China’s cheap labor? (60 pages)

World Bank. “Trade Liberalization and Labor Reform in Latin America in 1990s: A brief Note” (5 pages)

Bailey, Martin and Diana Farrell, “Exploding the Myths of Offshoring,” McKinsey on Economics, June 2004 (6 pages)

Farrell, Diana, Antonio Puron and Jaana Remes. “Beyond Cheap Labor: Lessonsfor Developing Economies,” The McKinsey Quarterly, 2005, No. 1. (11 pages)

Farrell, Diana, Martha Laboissiere and Jason Rosenfeld. “Sizing the EmergingGlobal Labor Market,” The McKinsey Quarterly, 2005, No. 3. (11 pages)

Ritter, Ronald and Robert Sternfels. “When Offshore Manufacturing Doesn’t Make Sense,” The McKinsey Quarterly, 2002, No. 4 (3 pages)

*Case: American Outsourcing (Case Analysis #2 to be written up as a team project and e-mailed to me by midnight Nov. 14.)

Nov. 22: Foreign Direct Investment: Country Risk Assessment and Corporate

Governance

In the first half of this class we discuss which factors influence the location of foreign direct

investment. You will find that the managers in the Palliser case have to make a decision that

is similar to the one you will be making for your final project. You will find the information

in these readings important in helping you structure your final project. (Reading: 50 pages)

HBS. “Note on Foreign Direct Investment,” October 28, 2002.

IADB. “FDI: The only Game in Town” and “Corporate Governance, the Forgotten Factor,” Latin American Economic Policies, 4th Quarter 2002.

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The Economist Survey, May 1, 2003:“Catching the tide. Why does so little capital flow from rich countries to poor?”“Shipbuilding: Developing country governments still have a lot of work to do if they want to attract foreign capital?”

Farrell, Diana, Jaana Remes, and Heiner Schulz, “The Truth about Foreign Direct Investment in Emerging Markets,” The McKinsey Quarterly, 2004 No. 1.

*Case: Palliser Furniture, LTD. (Case Analysis # 3 to be written up as a team; due Nov 21, by midnight.)

Intel's Site Selection Decision in

Ted Telford, of Intel’s site selection team, had to make a decision as to which country

in Latin America he would recommend where Intel should locate. This is very similar

to the problem you must solve for your final project and although you know by now

that Costa Rica was the choice, the cross-country comparison should be useful to

help you think about how to do your project. In your case analysis discuss what

advantages and disadvantages Costa Rica had over other countries. What steps did

the Costa Rican Government and CINDE do to overcome its disadvantages? We will

also discuss the effect MNCs have on small developing countries. In your analysis,

show the impact that Intel had on the Costa Rican economy. (Reading: 20 pages)

Sam Quinones, "Central American Tiger," World Trade, March 1998

*Case: Roy Nelson, "Intel's site selection decision in Latin America Thunderbird

International Business Review, Mar/Apr 2000, Vol. 42, Issue 2, pg. 227-49 (This case will not be written up as a team. Prepare answers to questions in case for

class discussion.)

Nov. 24: No Class (Thanksgiving)

Nov. 29: EIU Models of Country Risk Assessment

Leila Butt, Senior Editor/Economist and Deputy Manager, Country Risk Services the Global

Intelligence Unit of the Economics Intelligence (EIU) Unit will show the class how to use two

EIU models of country risk assessment, which can be used in your final project. The two

models are briefly described below:

1) Business environment rankings model: The business rankings model measures the

quality or attractiveness of the business environment in the 60 countries using a standard

analytical framework. It is designed to reflect the main criteria used by companies to

formulate their global business strategies, and is based not only on historical conditions but

also on expectations about conditions prevailing over the next five years. The business

rankings model examines ten separate criteria or categories, covering the political

environment, the macroeconomic environment, market opportunities, policy towards free

enterprise and competition, policy towards foreign investment, foreign trade and exchange

controls, taxes, financing, the labor market and infrastructure. Each category contains a

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number of indicators which are assessed by the Economist Intelligence Unit for the last five

years and the next five years.

2) Riskwire Model: The Riskwire model evaluates the risks of investing and operating in

60 markets around the world using a standard analytical framework. It combines economic

and financial risk assessment with coverage of security, the regulatory and tax environments

and the impact of infrastructural inadequacies on investment and local operations. The

Riskwire model examines ten separate criteria, each of which contains a number of

indicators that are assessed by the EIU.

Kaufmann, Daniel, Aart Krayy, and Massimo Mastruzzi (2005) “Governance Matters IV: Governance Indicators for 1996-2004,” http://www.worldbank.org/wbi/governance/pubs/govmatters4.html

Dec. 1 (Thurs.): Survival Strategies in Emerging Markets: Case of Venezuela

This class focuses on the difficulties of strategic planning and doing business in an

unstable political and economic environment. In the first half of the class we will

have a speaker and in the second half we will discuss the Mavesa case, which takes

place in Venezuela. (Reading: 25 pages)

Richard Canny, currently 'Director, Business Development - Americas' at Ford,

formerly President, Ford South America will speak to the class about Ford’s Strategy

in Latin America.

“The Bolivarian revolution marches on,” Economist, Feb. 6, 2003.

“Venezuela: Gripped by unparalleled tragedy,” Financial Times, March 21, 2003

“What really happened in Venezuela,” Economist Sept. 4, 2004.

“Cowing the Private Sector,” Economist, Sept. 1, 2005

*Case: MAVESA: Business Strategy amid Economic and Political Turmoil (Case Analysis # 4; Due Nov. 30, by midnight.)

Dec. 6: Inequality, Informality and Business at the Bottom of the Pyramid

The first half of the class we will examine more closely an issue we have touched on in

earlier sessions of this class: inequality and informality in Latin America. We will look at

the causes and consequences of this phenomenon and discuss what role business can play in

reducing poverty and offering new opportunities to the poor in Latin America. (about 40

pages)

Second half of Class: Start Class Presentations of final reports

World Bank. Inequality in Latin America and the Caribbean: Breaking with History? Summary. http://wbln0018.worldbank.org/LAC/lacinfoclient.nsf/8d6661f6799ea8a48525673900537f95/b618e499adfb54b985256e2b007d1490/$FILE/Inequality_in_LAC

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World Bank. “Doing Business in 2005: Removing Obstacles to Growth,” Oxford Universty Press.

Capp, Joe, Heinz-Peter Esltrodt, and William Jones, Jr. “Reining in Brazil’s Informal Economy,” The McKinsey Quarterly,” January 2005.

C.K. Prahalad. The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, “CEMEX, Innovation in Housing for the Poor,” pp. 147-168

Dec. 13: Wrap-up Discussion and Class Presentations of final reports

We will spend part of the class summarizing the main themes of the course and then

proceed with presentations of the final projects.

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