Guest editorial

Citation

Robles, F. (2017), "Guest editorial", Management Research, Vol. 15 No. 3, pp. 246-250. https://doi.org/10.1108/MRJIAM-06-2017-0759

Introduction to the special issue on location and dispersion of multinationals in Iberoamerica

The expansion of multinationals in Latin America has followed fundamental economic and market factors. Multinationals tend to concentrate in large metropolitan areas where they can benefit from proximity to markets, supply chains, infrastructure and economies of scale. Once they are established in key markets, market-driven multinationals will continue their country penetration through expansion to second- and third-tier markets, developing country networks that share economies of scale and supply networks. The patterns of expansion and size of these networks cannot be explained by fundamental economic and market factors only. In this special issue, we explore the impact of the variation in the quality of institutions as one possible explanation for the location and presence (or lack of) of these multinationals across and within countries in the region.

Quality of institutions is particularly important in studying this issue in Latin America. The region suffers from weak institutional quality, with high levels of corruption and weak enforcement of regulations and laws. We argue that multinationals may consider this factor in determining the location and scope of their activities. Given that institutional quality varies greatly across countries, we would argue that the concentration of multinational activity is positively related to the level of institutional quality in a country. Furthermore, the level of institutional quality varies within a country. Cities and states within a country are implementers of national regulations and, in many cases, develop their own regulations and business standards. Faced with different local economic and political conditions, local actors may create better or worse institutional conditions than the country as a whole; higher institutional quality would be more attractive to multinationals in addition to their fundamental economic and market factors. Thus, we also argue that variations of institutional quality within a country may explain the dispersion of multinationals within a country.

In this special issue, we explore whether differences in institutional quality impact the location and agglomeration of multinationals at the region, sub-region and within a country. Using the case of fast-food multinationals, we empirically test this general proposition. The five articles in this special issue take unique approaches to formulate empirical models at the regional (Latin America), sub-regional (Central America) and within country (Brazil, Mexico and Peru) environment. Another contribution is the unit of analysis: the city. Past studies of agglomeration and/or institutional quality have been at the country level. The city after all is the primary unit of analysis for location decisions of multinationals. The effort to operationalize city institutional quality is yet another contribution of the special issue as we recognize and acknowledge the increasing importance of cities in the global economy.

The first paper by Robles focuses on the agglomeration of multinationals at the regional level. Using agglomeration economics and institutional theories, the author advances the proposition that institutional quality moderates the relationship between overall agglomeration of multinationals of all industries and agglomeration of fast-food multinationals. He argues that the institutional quality of a city strengthens the direct relationship between the agglomeration of all multinationals and that of fast-food multinationals. The author measures institutional quality by the quality of city governance, personal security and judicial fairness of Latin American cities. Using the geographic dispersion of three global fast-food franchise networks in 45 large Latin American cities, the author tests this proposition using a negative binomial regression with controls for city population and economic power [gross domestic product (GDP)]. These results suggest the strong impact of the combined effects of market size (population) and buying power (city GDP per capita) on the agglomeration of fast-food networks. The moderating effect of institutional quality was tested through the introduction of an interactive term of industry aggregation and the index of institutional quality. The results show that the impact of horizontal agglomeration strengthens as noted by the increase in its regression coefficient and a significant direct impact of the city institutional quality index. The positive reinforcements of agglomeration and strong institutional environment are important for the investment location decision of fast-food multinationals. The positive reinforcement of institutional quality of the city should be an important consideration in the location decision of a multinational as it expands regionally and within a country. Smaller cities may not offer the agglomeration advantages of large metropolitan areas, but their good institutional quality may reduce the business costs for multinationals. The key implication is that small cities can achieve greater relevance and, in many cases, create islands of institutional transparency and good governance within countries with national institutions.

The next article takes the reader to a sub-regional examination of the central topic of this special issue. The article by Wiese explores the location and geographic dispersion of international fast-food franchises in 41 cities in seven Central American countries. Given the region’s poorly developed institutions and crime-plagued profile, there is a significant presence of international fast-food franchises. Such presence lends itself to explore the significant trade-offs of potential business risks. Would international franchises avoid investments in higher risk locations and favor those that offer safer environments? This is the central question that the author addresses. Wiese analyzes the agglomeration of eight international fast-food franchises and one native one (Pollo Campero – a Guatemalan-owned chain). Based on agglomeration economics and international business theory, the author finds that the location of these franchises is mostly determined by market potential indicators. At the city level, Wiese uses city population and city income per capita and urbanization at the country level. In the most intriguing part of the paper, the author analyzes whether institutional quality adds to the obvious economic factors and whether the presence of stronger institutions strengthens the agglomeration of fast-food franchisers. Wiese uses several indicators of institutional quality at the country and city level. At the country level, the author uses the good governance index from World Governance Index Report. At the city level, an index of overall social and political risk and three indicators from the World Bank Ease of Doing Business study (starting a business, obtaining contracts and registering property) to create a proxy of efficiency of the regulatory system. Wiese also includes the competitiveness of a city on infrastructure and human capital as an indicator of institutional quality.

Wiese finds that it is the efficiency of the regulatory system that has the most significant direct effect on the agglomeration of fast-food franchises. She also finds that when both market size and institutional quality are taken together, investors seem to be cautious to locate in moderately attractive locations where institutional quality is weak. Such a conclusion is supported by a more detailed analysis of the geographic concentration of fast-food franchises within a city. The clustering of these franchises in highly dense and affluent areas of cities in Central America supports the conclusion that safety is an important factor and that one of the agglomeration benefits is to fill the institutional void of lack of protection from crime and violence through a coordinated effort among franchises to collectively safeguard an area. In conclusion, the paper contributes to the special issue by its sub-regional focus. Central America offers the unique opportunity to analyze a group of countries with weak institutions and high levels of violence. The paper offers insights on how international franchisors deal with adverse conditions by distinguishing safer locations for their investments.

The rest of the papers provide a country study perspective. Two of the studies feature the largest economies in Latin America: Brazil and Mexico. The last study focuses on the medium-size economy of Peru.

The study of Brazil by Madeira and Giampaoli offers a good assessment of a large country situation. The authors analyze the location of 9 international and 261 Brazilian fast-food chains in 542 cities in Brazil. This effort produced a large database of 7, 643 fast-food restaurant units. The study collected city-level economic and market factors, such as population and income per capita. Institutional quality of the city was measured by a number of indicators: human development index, education, homicide rates and longevity. There were two indicators for education: per cent of people with complete primary education and rate of enrollment in vocational education and participation in the government food subsidy program (PAT). As expected, fast-food stores are highly concentrated in large Brazilian cities with Sao Paulo alone accounting for 35 per cent of the 7,643 total stores followed by Rio de Janeiro with 14 per cent of the total. Thus, the paper focuses on the rest of Brazil. In this respect, the authors found that income per capita and enrollment in technical vocation were the best predictors of agglomeration in the fast-food industry, whereas population was not as significant as one would have predicted. In contrasting international against Brazilian fast-food chains, the paper reveals that participation in the food voucher program (PAT) was a significant factor of agglomeration of Brazilian chains, whereas a larger concentration of international chains was found in areas of higher homicide rates. As for the latter, the authors advance the interesting argument that Brazilian franchisors may better discriminate levels of violence in cities and, therefore, avoid larger presence in them. In sum, the Brazil study is a pioneering effort to explore the expansion of multinationals in secondary and tertiary cities in a large country.

The second country paper by Merino and Fakos provides another opportunity to explore the impact of institutional quality on multinational location decision in the large economy of Mexico. As the authors argue, there is large heterogeneity of institutional quality within a large country. An additional benefit of focusing at the country level is to explore unique country factors. The Brazilian paper illustrates how subsidized food programs have an impact on the location of local franchising networks. In the case of Mexico, the unique land ownership system of “ejidos” – where the community owns the land – may limit the expansion of fast-food franchisors. An additional unique factor in Mexico is that a significant percentage of economic activity is informal, operating outside of tax and regulatory frameworks. Thus, fast-food franchisors face a large challenge in competing with informal food restaurants. Finally, violence in some areas of Mexico is notorious and certain parts of the country are controlled by organized crime. All of these factors make Mexico an interesting study of the spread of multinational presence.

Merino and Fakos studied the spread of three well-known international franchisors in 78 Mexican cities. The authors were interested in factors that explain the presence and the absence of these franchisors and used a two-stage model. The first-step model accounts for factors that explain the likelihood of presence of franchising networks in a city. In this stage, cities with no-presence of a multinational fast-food networks are included. In the second stage, the authors explore the factors that explain the size of the networks once presence is included. The factors considered in the models were of two types: fundamental (market and economic) and institutional factors. Market size is defined as the product of population times the average salary in a city. Institutional quality is measured using different indicators:

• the formal rate of employment;

• the proportion of land under ejido rule; and

• the homicide rate.

In their analysis, the authors found differential impacts of crime among the three international fast-food franchisors. For instance, Subway avoids high crime cities. The two-step probit model results found that a high homicide rate is the key reason for a lack of fast-food networks in a city. In the second step, the size of the fast-food network is explained by market size and the rate of formal employment. As expected, large city markets attract a large agglomeration of fast-food network. The authors explain the importance of formal employment in a city as a factor supporting the decision to scale up fast-food networks as a risk reduction strategy. Informality creates a challenge to franchisors in that it is difficult to observe real output indicators on which royalties are based as is the case in agency theory. As a result, franchisors would expand in cities where formality is higher. In sum, the paper shed lights on the impact of crime and violence in location decisions as well as how institutional factors such as formality add to the fundamental market factors to determine fast-food network size and scale. They conclude by recommending that local governments to regulate informal enterprises as a way to attract greater investment in their localities – a challenging task in the case of Mexico.

The last article by Navarro and Colla explores the impact of institutional quality on the spread of international franchising operations in a medium-size economy. Peru has experienced sustained economic growth in recent years and that is reflected in the expansion of international and domestic fast-food chains throughout the country. Similar to the paper on Mexico, Navarro and Colla aim to research the presence or lack of presence of fast-food restaurants. The authors gathered data on the spread of three master franchisors in Peru [Two franchisors represent international fast-food chains and one national one or a total of four fast-food chains]. For this purpose, the authors assembled a large database of 1,854 districts (municipalities) or 57 perc ent of all districts in Peru. The presence and number of fast-food establishments was collected for the period of 2009-2014 allowing the researchers to account for closures and additions over time and only include data if establishments were operating a minimum of three years. The important contribution of this paper is the development of a city institutional quality index. Using a large database for districts (the equivalent of a municipality surrounding a city), they focus their effort on developing an index that captures the operational efficiency and ability to attract investment in infrastructure. Using dimension reduction analytical tools (principal components), they elaborated a three-component index that captures the competence of the district in urban development management, result-based systems and information systems. In addition to this index, the authors compiled a demand indicator based on population, income, food expenditures and other variables associated with consumption in the district. Finally, the authors compiled data on infrastructure quality and transportation factors that relate to the operational costs of fast-food franchisors.

As expected, an increase in demand had a significant impact on the number of fast-food units in a district. The indicators of competence on urban development and information systems also positively impact the agglomeration of fast-food franchisor, whereas the outcome-based systems, contrary to expectations, negatively impact agglomeration. The infrastructure and transportation index is not significant. The contribution of the Peruvian paper is the methodology of building an institutional quality index at the city level.

The papers in this special issue explore the importance of institutional quality on the location decision and spread of multinational companies in Latin America. Using the fast-food franchising case, the papers explore this topic from regional, sub-regional, country and city perspectives. The multiple levels of research provide a comprehensive view of the topic to better understand the geographic spread of these multinational networks in the region. As multinationals spread, they create an agglomeration of fast-food networks clustered in given locations. Such approach reveals that there are both common factors throughout the region as well as unique country factors. Furthermore, the research effort in this special issue shows evidence of variance of market and institutional factors within a region that not only explains the spread but also the lack of presence in particular geographic locations.

All together, the collection of papers provides a comprehensive view of the importance of institutional quality in Latin America. All papers showed evidence that the main determinants of location and fast-food network size are market and economic fundamentals. Given market size, the institutional quality of the location (the city in this case) is either a filter (presence/no-presence) or a moderator. Fast-food network agglomeration is stronger when the quality of institutions is strong.

The particular components of institutional quality vary with the country situation. Each one of the papers use a different operationalization of institutional quality based on their region and country and availability of data. These differences in operationalization reveal the challenge and difficulty to find common indicators of institutional quality across countries.

In sum, this special issue contributes in several ways to our understanding of multinational agglomeration, location and the important role of institutional environments at the regional, sub-regional, country and city level.