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  ICBTT2004 Technology & Society Division, JSME

Foreign direct investment and firms' strategies in Argentina in the 1920s

Maria Ines Barbero

At the end of WWI started an important flow of foreign direct investment in Argentina, headed by American multinationals, followed by European companies. This process of FDI took place in a local context of expansion and modernization of the industrial sector, to which foreign companies made a crucial contribution.
The aim of this paper is to analize the FDI with an approach focused on the strategies of the firms and their different forms of production in the local market, and to evaluate the impact of the FDI in the local industry. The question that underlines the research is in what extent the industrial boom of the 1920s in Argentina is due to the action of MNs and to the transfer of foreign technology in production and management.
Te paper will study, at first, the activities in which MNs operated, and the patterns assumed by their investments, from commercial branches to the complete production of goods, including different options as the assembly of imported parts or the contractual relationship with local firms to manufacture under the direction of foreign companies.
A second issue is the study of the transfer of technology - in a large sense of the term -, with the purpose of evaluating to what extent a diffusion of americanism took part and new forms of organizing production, work and management were extended.
A third subject are the commercial strategies of the firms and the creation of a market through advertising and the diffusion of new consumption patterns in the local population, as another form of cultural influence of FDI.

Key Words: Industrialization, technological transfer and foreign investment in Argentina in the 1920s

During the 1920s, the Argentine industry grew at a high rate, from 4,5% to 5,1% per annum according to the data consulted. (Cort's Conde, 1997; CEPAL, 1959) At the same time, a process of diversification and modernization took place, defining it as the adoption of new technologies in production, new forms of management and the use of new techniques in distribution and marketing. (Barbero-Rocchi, 2002). The aim of this paper is to analyze some of the qualitative changes that occurred during this decade, trying to understand to what extent these changes were related with the transfer of foreign technology and distinguishing the different ways in which this transfer took place. It is conceived as a contribution to the study of the innovation process in an early stage of Argentine industrialization.

In the case of developing countries technological innovation is correlated to importing and adapting new technological methods from abroad, diffusing and upgrading them over time (Guerrieri, 1993). Innovation from external or domestic origin usually are not alternatives but complementary, not only because of the development of incremental innovation from imported technology, but also because in parallel of the import of technology local autonomous process can take place. In some cases, however, the import of technology can limit the possibilities of developing local innovations, if the local entrepreneurs are in an early stage of their innovation process.

In Argentina in the 1920s the most part of innovation was derived from the adoption of foreign technology. It came through foreign direct investment (FDI), joint ventures, license agreements, import of capital goods and new management and marketing methods imported from abroad. OCDE's definition of technological transfer includes all the measures adopted by a firm or an organization to exploit the economic benefits of innovation. It doesn't limit it to the introduction of new machines in the shop or in the office, but includes organization of work and the adoption of improved managament practices. (OCDE,1996) The process of technological transfer in the Argentine industry started many decades before the 1920s. As in other countries of new settlement, in Argentina, from the end of the XIXth Century, the transfer of technology was closely associated with immigration from southern and eastern Europe (Rosenberg, 1982). A large part of industrial firms created from 1875 on were owned by foreign entrepreneurs who arrived to the country with some skills which allowed them to start their businesses. FDI was another way of technological transfer, through the action of free standing companies and the settlement of branches of multinational enterprises (MNE). What was new in the 1920s is that during these years FDI in the industrial sector increased, and that Argentina received the impact of the first wave of americanization. The expansion and modernization of industry in this period had been the base for the industrial development after 1930, during the so-called import substitution period.

Foreign direct investment after WWI
Between 1921 and 1930, at least 43 large foreign companies opened branches int the Argentine industrial sector, whereas from 1900 to 1920 only 13 had settled in the country. (Villanueva, 1972). In the 1920s branches of European an American MNEs, free standing companies and branches of European family firms operated in the Argentine market. While before WWI the European capital was predominant, in the after war period American firms were the most dynamic. FDI had different forms, and this implied the existence of different ways for technological transfer. The two basic ones were commercial and manufacturing branches, but many hybrid forms as well.

Commercial branches: innovation through suppliers
The information available doesn't discriminate about commercial and manufacturing branches. Although this point is a limitation for the study of the strategy of individual firms, it is important to remark to what extent a commercial branch can operate as a vector of technological transfer. It is also crucial not to underestimate the relevance of the opening of a commercial branch. It is usually the first step in the process of settlement of a MNE, but is part of an strategy of entering a market and implies a level of investment and risk very superior to the operation through commercial agents. As for the technological transfer, its forms differ according to the sector in which it takes place. The Keith Pavitt's taxonomy about the technological change in the manufacturing industry distinguishes four sectors: supplier-dominated, scale-intensive, specialized suppliers and science based. (K.Pavitt, 1984). In Argentina at the end of WWI the industries of the first group predominated, and the role of suppliers was decisive in the innovation process. The opening of commercial branches of producers of machinery for the traditional sectors was crucial in the modernization, especially when the MNE had strategies to enter the market that favoured the users' access to equipment. The action of the specialized suppliers was also important to the generation of knowlege and spillovers. A very noted case is the United Shoe Machinery Co, which opened a commercial branch in 1903. The firm offered the most modern machinery for the production of shoes, and through a leasing system reduced the barriers to entry the sector (Brock, 1919).

The advent of the American shoe machinery changed the aspect of the shoe-manufacturing industry in Argentina, and the old system (nailed boots and shoes) was replaced by new forms of production. The Argentine industry was greatly influenced by American ideas and many characteristic American methods and short cuts were adopted. In 1925, of the total of 450 shoe factories in the Republic, 416 were using U.S.M.Co machinery. The company had brought and installed 150 different kinds of shoemaking machines (Phoebus, 1926). Subsidiaries primarily devoted to merchandising operations also made minor assembly and service operations. United Shoe Machinery Co. maintained a shop for the service and rebuilding of its machines, in which it employed 30 to 40 men at the beginning of the 1930s. Singer Sewing Machine Company performed some assembly operations and serviced it products, as did International Harvester Company. (Phelps, 1936) The firms which imported machinery could have a direct influence in the construction of new plants for local companies and in the adoption of innovations not only in the equipment but also in the design of the shops. The producers of electric engines offered to the users advisory services for the installation of plants as a strategy to enter and control the market. European manufacturing concerns had their own engineers, who were always at the disposal of prospective customers. They charged nothing for the advice of the engineers or even for laying out entire plants. It was not an uncommon practice to furnish foremen for the erection of new plants or machinery, and operators were frequently engaged from among their own staff (Smith, 1919).

Manufacturing companies
Foreign companies which opened manufacturing branches operated in different forms, from the complete production to the packaging of commodities imported in bulk. The firms which assumed the total manufacturing before 1930 were very few, and generally they did it when they had local supply sources for raw materials, when the goods were perishable, when tariffs for imported goods were high or when there was a hard competition from other companies. The American meat-packing plants started local production in the first decade of the XXth Century, being the first companies which used the taylorist system. Besides using the same production methods of the American plants, they generated innovation. In the technical and industrial offices research and development activities were carried out with the aim of adapting and improving machines and tools, and of elaborating incresingly complex work programs. These offices were made up of engineers, technicians, industrial designers and draftsmen.(Lobato, 2001)

Due to the reduced dimensions of the Argentine market mass production was the exception, not the rule, and was used in sectors which destined their prodution to external markets. However, even in those cases in which the production was oriented to the domestic market and was made in a lower scale, the FDI encouraged the innovation in product and process technologies and generated learning processes. At the same time, some characteristics of the local market induced product innovations in the head offices. Algodonera Flandria, a branch of a Belgian textile family firm, sent fabric designs to Flemish producers to allow them to compete with French and Italian goods. (Barbero & Ceva, 1998)

In some sectors foreign firms took the control of local companies. In 1992 the steel producer Arbed from Luxembourg became a partner of with Tamet, a metallurgical company which was part of Grupo Tornquist, a large local group. Metal-working industry had high demand of capital and technical knowledge, favoring the entry of foreign firms when the production had reached some scale.(Gilbert, 2001)Companies producing pharmaceutical goods used to package commodities imported in bulk. But some mixing operations were often needed to prepare the product for the retail trade, and some products were completely manufactured in the local plants. (Phelps, 1936)

Assembly of parts imported from abroad: technological transfer and linages
In other cases, as the automobile companies, foreign firms assembled parts imported from abroad. Argentina was a very important market: in 1924 the country held seventh place among the nations of the world as automobile users (Phoebus, 1926), and during the 1920s Ford and General Motors built assembly plants. In a first stage the country didn't have local suppliers for parts, but at the end of the decade the settlement of branches of foreign companies which imported or assembled had contributed to some development of the local production of automobile accesories and replacement parts. At the same time, production of car bodies for trucks and buses had developed. The body builders usually didn't work on standard designs, but several used designs supplied by the importers. (Tewksbury, 1929)

Another form in which foreign firms operated was the production of some assembly units, the import of others, and the assembly in the branch plant. In the case of the Otis Elevator Company, the lifting apparatus was mostly imported, but the cabins, doors, shafts and even signal system were produced in Buenos Aires. Minor units were also purchased, and finally the various parts, some foreign, some domestic in origin, were assembled into the finished product. In this instance probably half of the entire production process was performed in the branch plant (Phelps, 1936)

Railways shops: from repair operations to production
Subsidiaries of public utility and transportation companies used to combine minor production, assembly and service operations. The railways companies in Argentina had from the beginning repair shops which assumed increasingly complex tasks. In part because of their own maturing process, in part because ofthe impact of the war, in the 1920s the railways shops had production plants able to manufacture all the rolling stock. The Gorton workshops of the Central Argentine Railroad, which had been built from 1912 to 1917, were considered in the 1920s the largest and best-equipped locomotive shops in South America. They handled the repairs of all the locomotives of the Central Argentine System, the erection of new locomotives and the repair and fabrication of steel freight cars. They were equipped with machinery capable of making any part of a locomotive. The organization was quite modern, including both an engineering and a planning department.(Brady, 1926) The shops of the Southern Railway were primarily for repair work, but they were mechanically equipped to make every part of a locomotive or car. In the 1920s all the passenger and baggage coaches were built in the shops, and all parts pertaining to locomotives were made, with the exception of the boiler shell and the cast steel parts. In the repair shops of the Western Railway the railroad's engineers had given much attention to the standardization of parts in order to simplify the manufacture and reduce the number of varieties of parts to be carried in stock (Brady, 1926).

Production through contractual relationships with local firms
Some MNE did not own or operate a branch plant but the had their products manufactured through contractual relationships with native concerns. In these cases local firms carried out production under the control of a foreign company. This procedure was used in the manufacture of radios and refrigerators, and of road building forms and castings. No one local firm was equipped to perform all the necessary operations, but a number of concerns were given contracts to produce specific parts and the product was later assembled. (Phelps, 1936) Pharmaceutical firms used this manufacturing procedure more often. Agreements sometimes involved only the privilege of manufacturing a product under the formula and name used in the country of origin of the foreign firm, paying a royalty. The opposite extreme was the production under the direct supervision of a representative of the home office, the foreign firm controlling raw materials, equipment, production process, formula and often the selling.of the finished product. Between these points, there were different options depending on the role of the foreign and local firms in production and distribution and on the control exercised by each one. (Phelps, 1936; Thomas, 1927)

Licensing agreements and foreign patents
From 1900 to 1929, 1243 foreign patents were radicated in Argentina, but in the 1920s the number grew to 8731 (Villanueva, 1972). At the same time, local companies increased the use of foreing licenses. An example is Siam Di Tella, a metal-working firm founded in 1910 by three Italian immigrants for the production of bakery equipment. In the 1920s it started the production of gasoline pumps though a licensing agreement with an American firm (Wayne Pump Company). In 1933 they made an agreement with Kelvinator for the production of refrigerators, importing parts and making others locally. In the next years the firm continued with the same strategy. (Cochran & Reina, 1962)

New distribution, marketing and advertising techniques
The 1920s were also important concerning the adoption of new techniques of marketing and advertising, with a large influence of the American methods, which had an increasing diffusion after WWI. At the beginning of the decade a report from the U.S. Department of Commerce described Buenos Aires as the only citiy in all of South America where modern advertising practices had developed to any great extent, but it emphasized that advertising practices were far behind from the American standards. (Sanger, 1920) At the end of the 1920s American advertising methods had increased their influence. Local advertising agencies had developed and American agencies as Walter Thompson had established local branches. (Rocchi, 2002) New sales methods were diffused through of foreign companies. The Ford branch created a network of dealers and taught them the American methods. (Wilkins & Hill, 1964). The leasing system used by the U.S. Shoe Machinery was the first used in the local market, and "had made lack of capital not an insurmontable obstacle in the establishment of new shoe factories in Argentina" (Brock, 1919)
Some local firms adopted the sales in monthly shares, following the American model. This was the case of Siam Di Tella, which sold bakery equipment under this system. In the 1920s the president of the firm, Torcuato Di Tella, studied methods of finance in his trips to the United States and he decided to expand sales on credit paid for in monthly installments (Cochran & Reina, 1962)

Concluding remarks
As a conclusion, I want to remark some issues that I think are relevant for the comprehension of the links between foreign investement, innovation and industrialization in Argentina in the 1920s. Firstly, foreign investement was crucial for the diffusion of new production, management and distribution methods. Not only the manufacturing plants but also the commercial branchs had an important role in the technological transfer. A very interesting point are the differents manners in which manufacturing plants produced, and the effect of the contractual relationships with local firms in the modernization of methods and plants. The demand from MNEs gave birth to local suppliers and encouraged the production of new goods and the use of new technicques. Manufacturing plants, in all their forms, played an important role in the training of technicians and workers. At the same time, foreign firms evolved through a maturing process, extending the areas and activities in which they operated. Sometimes, local branches improved products, techniques and methods carried from abroad. Local entrepreneurs adopted technology in different ways, from the licenses agreements to the association with foreign firms. The openess of the economy and the contact with Europe and specially with the United States -which had increased from WWI on, offered the possibility of using, knowing and copying new methods and new goods. The expansion and modernization of industry in the 1920 was crucial because it offered the basis for the industrial growth after 1930, when the market was much more closed and when local improvements had been made on the previous industrial structure.


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