Home Latin America II 2001 Hung Up? Telecommunications, Foreign Direct Investment and Development in Latin America

Hung Up? Telecommunications, Foreign Direct Investment and Development in Latin America

by david.nunes
Michael MortimoreIssue:Latin America II 2001
Article no.:4
Topic:Hung Up? Telecommunications, Foreign Direct Investment and Development in Latin America
Author:Michael Mortimore
Title:Chief of Investment and Corporate Strategies Unit Economic Affairs Officer
Organisation:Economic Commission for Latin America and the Caribbean (ECLAC)
PDF size:48KB

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Article abstract

The global telecommunications industry is a vibrant industry. It is opening up the dynamic digital world of broadband technology, including the new generation of mobile cellular telephony, the Internet and multimedia. Between 1990 and 2000 the number of telephone lines in the world increased from 520 to 920 million, international traffic grew from 22 to 110 billion minutes, subscriptions to cellular telephone services rose from 11 to 650 million, and the Internet grew from 2.6 to 285 million users.

Full Article

Growth in Latin America is seen in the rapid increase of cellular mobile subscribers in many countries (Table 1 ). Still, early experience in Latin America—based on the privatisation of State fixed line telephony providers—seems to show that the benefits produced by the accelerated growth of the telecommunications industry have been enjoyed disproportionately by the transnational corporations operating in the region rather than host countries. “…the technology race and increased competition have led to significantconsolidation of the players.” It has yet to be seen if in mobile telephony the Latin American countries can improve on their past performance, avoid the risks that arose in the European and US experiences with licence sales and spectrum allocation, and develop in a manner more in keeping with the real potential of the industry. To do so, requires a thorough understanding of the corporate strategies of the principal agents of change in this industry. [1] Foreign direct investment (FDI) has played a major role in the growth of this global industry. Globally, the transnationalisation and the international expansion of the principal economic agents has been particularly noteworthy. Moreover, a new class of transnational corporation has been created, i.e., that of partially privatised incumbents, such as Deutsche Telekom, France Telecom, Telefónica de España and, even, Telmex de México. These have begun to establish international networks of their own. In this industry, the technology race and increased competition have led to significant consolidation of the players. Between 1990 and 2000, 188 mergers and acquisitions took place in the sector. Individual price tags surpassed the US$1 billion mark. The total figure stands at US$1.282 trillion. In 2000, just one transaction—the purchase of the German firm Mannesmann by the British firm Vodafone AirTouch—involved more than US$200 billion. The large North American and European corporations have been the quickest to make use of the option of setting up international systems based on the acquisition of existing companies and the purchase of mobile licences. This way they can establish rapidly regional or global digital footprints. In Latin America countries such as Argentina, Mexico, Peru and Venezuela privatised their telephone systems in the early 1990s. More recently, however, the tendency has been to auction licences for mobile telephony in combination with the privatisation of fixed-line operators to create a more competitive and better regulated environment (Brazil). In the last few years, the FDI in the regions telecommunications has accounted for about 30 per cent of the total capital inflow. In the region, two waves of telecommunications industry FDI can be identified (Table 3). The first came with the privatisation of the dominant basic telephony operators in countries such as Argentina, Chile, Mexico, Peru and Venezuela. The few European companies that entered the region at this stage (Telefónica de España and Telecom Italia were particularly active) started out in fixed-line telephony. Later, they expanded their presence in three ways: – by entering other segments (mobile, Internet, data)—they are the principal operators of mobile in the region; – by expanding their ownership of local affiliates that they did not already control outright (such as the Veronica operation of Telefónica de España); and – by moving into other markets, particularly Brazil and Mexico. These firms, which are second-ranking by world standards, have a very substantial part of their international systems in Latin America. The second FDI wave may have begun by way of new decisions taken by globalising companies (Table 3). Vodafone has gone into the Verizon Wireless venture, together with the recently merged Bell Atlantic and GTE. This seems to give a certain logic to GTEs holdings in Latin America, which use CDMA technology, considering Vodafones involvement with Mexicos Lusacell, another mobile telephony company controlled by Verizon. One more globalising strategy in Latin America is being pursued by SBC Communications in partnership with Telmex (América Móvil) and Bell Canada International. These companies created Telecom Americas for the very purpose of integrating their Latin American platforms, especially in mobile telephony, on the basis of TDMA technology. Having already unified their cellular mobile communications assets in the United States, SBC and Bell South could then pool their networks throughout the region, where the latter has a large mobile telephony digital footprint. All this suggests that the Latin American countries may have another opportunity to channel telecommunications sector FDI towards objectives that square with their own national priorities and promote an improved developmental impact. Latin Americas experience with the first wave of telecommunications industry FDI was not wholly positive. The priorities of the time—to maximise the privatisation value of state assets or to support a national champion—were not calculated to unlock the full potential of the sector. In exchange for investing to expand national networks, buyers enjoyed long periods of exclusivity during which they had monopoly rights over basic telephony. In most countries, the national authorities were inexperienced and had no clear vision for the future of telecommunications. There were no modern telecommunications laws to provide a regulatory framework and independent regulatory institutions had yet to be created. As a result, the results fell short of the potential. A new wave of telecommunications FDI would give the regions countries a new opportunity to reconcile more effectively the objectives of global business strategies with their own mobile telephony policies. For these countries, such a new opportunity would create a regulatory challenge. Better regulations would be needed to promote a better reconciliation between corporate strategies and national policies than took place during the first wave of telecommunications FDI in Latin America. Conclusion A sound regulatory system will, of course, play a key role in ensuring satisfactory performance of the industry. Other countries would do well to learn, as Brazil seems to have done, from the previous Latin American experience. The Latin American authorities will need to take a modern approach and decide what goals they want to pursue in dealing with the telecommunications industries. National telecommunications programmes need to be developed and concrete priorities set. Attracting the highest possible level of FDI is not a telecommunications policy. Telecommunications legislation is needed in order to ensure that the regulatory system has a solid legal basis and that its institutions are granted the necessary independence to function properly. Along the same lines, regulatory bodies must be given sufficient budgetary resources to perform their duties and to hire qualified professional staff so as to guarantee the stability of the system. Contrary to the case with basic telephone services, new types of regulation will probably be needed for the mobile telephone, Internet and multimedia segments of the industry. It should then be possible to maximise the positive and minimise the negative effects of globalisation in the telecommunications industry and improve the harmony of interest between corporate strategies and national policies.

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