Restructuring in manufacturing: Case studies of Chile, Mexico and Venezuela

The economies of Latin America have undergone important transformations during the past years. Yet, while there have been many studies on the macroeconomic changes that have taken place in Latin America, studies on the microeconomic changes are relatively scarce. The purpose of this paper is to provide evidence that leads to a better understanding of how firms respond to new circumstances. The research on Latin American manufacturing firms presented here shows that the new state of the economic environment has led to a substantial change in firms’ behaviour. Innovative firms have adopted flexible forms of behaviour and are upgrading their production and marketing capabilities, and they have introduced significant changes in terms of vertical integration, input procurement, technological innovation, incentive pay systems and management techniques, training, subcontracting, distribution and retailing. At least for the most innovative consumer goods manufacturing firms, their core activities have shifted from being mainly concerned with production to combining the manufacture of goods with their distribution, and often also the distribution of other domestic and imported goods as well. This provides them with a better chance of simultaneously increasing their profits and defending their market share. Finally, the investigation also showed that uncertainty surrounding economic policy leads to a substantial decrease in investment by firms. Such uncertainty explains why more firms do not change, or why they do not change faster. It has a twofold negative effect on entrepreneurs’ decisions to modernize their firms: they are uncertain about what they should do, as well as about the sustainability of the economic policy. There is therefore an important role for policies that redound in programmes that seek to encourage firms to upgrade. At the same time, it must be stressed that the most important role for policy is that of creating a stable economic environment in which firms can plan long-term investment.