Group Blog 2 - Week 4

John Ceisel, Eric Anderson, Gigi, & Ivan John

            The automobile industry undisputedly plays an integral part in both international and domestic economics.  Industrialized countries such as Japan, South Korea, and the U.S.A have developed national car firms that generate not only money, but also a label of each country’s identity.  In examining Argentina and Brazil, it’s noted that both countries chose, whether out of necessity or strategy, to utilize the investment of foreign companies rather than creating their own firms.  The inherent question created therein is simply, “Why?

Our first path of inquiry takes us to the ESRC´s [UK Economic and Social Research Council] explanation.  The common automobile policy in Mercosur countries like Brazil and Argentina was to “reconcile national industrial development goals and private investor demands.”   In allowing larger well-established firms to tackle car manufacturing, plants and more importantly jobs were created at a faster pace.  Additionally, there is less financial risk to both Argentina and Brazil by opting out of entrepreneurship in an already extremely competitive automotive market.

            There is another train of thought revolving around the notion that the car industry, cruising on the momentum of a booming past, is prompt to see a drop in automobile sales.  This possible justification of Brazil & Argentina´s strategy is only further supported by the current surge in oil prices.  Owning & maintaining a car today is as expensive as ever.  Add on to this the rising tension of petro-dollar controversy, and most economists are hard pressed to denounce a country´s past reluctance to create their own automotive firms.

            From the foreign firms´point of view a lucrative market existed in both Argentina and Brazil.  Since Mercosur countries wanted to trade with themselves, investing allowed foreign firms to enter a profitable trading ring.  The general view of Brazil and Argentina as an emerging market by both North America and Europe only added to foreign firm´s willingness to venture investment.  When Mercosur was initiated between Argentina, Brazil, Paraguay & Uruguay, firms thought that the development of regional intra-trade and opportunities to have economies of scale would be extremely beneficial for them financially.  “Mercosur became the new El Dorado for the automotive industry.”  This was due to the fact that further investment in industrialized countries by the big automotive firms would not yield a lot of profit because the market there was saturated.

            Asides from the inital theoritical explainations, these three tangible explanations stand out:  First, both Argentina and Brazil were viewed as emerging markets and firms were eager to invest.  Second, Mercosur wanted its members to trade amongst themselves.  If any participant country were to have their own automobile firm then only that country would benefit.  Lastly, both Argentina and Brazil wanted variety so that one type of car didn´t saturate their respective markets.  Foreign firms jumped on the opportunity to invest in both countries because their current markets had already been saturated.