Analysis of Latin America's Corporations as a Rational Response to the Economic Environment Present in the Region - Part I

This is the first of a series of working papers analyzing the basic characteristics of the economic environment in which Latin American Corporations live and the optimal design of incentive programs compatible with such environment. By economic environment we mean the technology that the organizations have access to, the legal framework present in these countries, the macro-economical characteristics, the markets in which they operate (competitors, monopolies, customers, reliability of suppliers, etc.), the nature of their capital markets and in general of the sources of financing for their companies, etc. We could broadly say that any key feature of the economy that has the potential to influence the way business is run in Latin America is part of its economic environment. The underlying unifying idea in this series is that, unless we have clear evidence to the contrary, corporate practices observed in Latin American firms are rational responses to the environment in which they operate. They are a sort of Darwinian adaptation to such environment. Therefore, much like in biological systems, these characteristics of corporations should be considered optimal in a relative sense. That is, in order to survive in the market, the observed corporate practices should be better that the ones from the competition for the given economic environment. This observation suggests that improvements to the observed practices are indeed possible. In fact, the present series of working papers is in part structured to explore possible improvements. These improvements, however, are not likely to be the simple copy of corporate practices that evolved as an optimal response to the environment of the developed world. In this first work we present some important empirical characteristics of the Latin American Corporations and the first key aspect of the economic environment prevailing in this region: the legal framework. We show how many of the empirical characteristics presented can be see as optimal responses to the legal framework.