The yankee dollar; Capital investment, part two

Radio television at the University of Texas presents the Yankee dollar. The Yankee dollar. What is it Bob. Well it is by. Radio television the University of Texas in cooperation with the National Association of educational broadcasters invites you to tour Mexico with Richard Ariano as he talks to political leaders and to voters to management and to labor to rich to poor to the people of Mexico. One thing will guide these conversations. What is the American dollar brought south of our border. What can it buy. And above all what image of us is our money creating.

American money finds its way into Latin American countries in different ways. Cheap of these are through foreign aid. The federal dollars through monies spent by vacationers the tourist dollar and through money invested by businessmen. The company dollars through the channels through which our money flows or fails to flow affect the image it creates. The company dollar is money invested by American businessmen into the economic channel of Mexican life. To understand this flow of the Yankee dollar Mr. Ariano interviewed Mr. Edward Drees president of the American hospital supply company International in Mexico City. Here is a recording of that interview. I'm speaking with Mr. Ed Wood who is president of the American hospital supply Corporation International. Mr. Druce company has been in Mexico for a number of years now. And we were interested in finding out what some of the possible reasons

for this large American corporation having moved to Mexico has been. We're glad to have you with us. Thank you very much. A few of my ideas and officially my company's ideas come down to Mexico. We're quite interested in finding out what some of the possible reasons that your company considered this move to Mexico because as I understand you have projected a rather large scale manufacturing operation here in Mexico City is this correct. We have two operations in Mexico now. One is primarily a service organization. The other is a small manufacturing operation laboratory glassware and so forth. Our plans for the future we're considering very seriously the possibilities of setting up manufacturing operations here along the line of some of the items we manufacture in the states such as rubber goods some surgical furniture. We want to come to

Mexico because we feel that the countries in Latin America Mexico has the greatest potential has the greatest potential for our eyes. It has a political stability that I think is more prevalent here than other countries in Latin America. We're looking perhaps. Too much in the future but we really don't think so. We go in the Common Market. It's working actively in Central America. We feel that sooner or later Mexico will become an integral part of this group. This is the Latin American common market that you speak of Thrace. That's right exactly. Probably the Common Market will not come about for another five to 10 years. It is growing it is working right now.

With five other countries in Central America it is our feeling that eventually this will become a common market for all of Central and South America. Now is the time this year or next year to start investing in manufacturing operations on an extensive scale in Mexico. Mexico has the labor pool. Mexico has a close proximity to United States for technical knowledge. We also feel that the communications transportation from Mexico. Makes Mexico the. Center of operations as far as our company is concerned for Latin America. This indicates that you or your brother said that your company and yourself have planned into the future for a period of at least five years. Imagine that it is a longer range plan and that it is not working.

I said before actually we are thinking ahead 20 years. We are an operation here we are not only good for Latin America but because of the class that labor here will be able to ship back to United States. Thats over the next 10 to 20 years. Dr. Jack Berman who was an assistant secretary in an under secretary of the Commerce Department in charge of the foreign trade Division recently had a visit to the University of Texas announced a new plan that the Commerce Department is urging on American business men and something to the effect of patriotism for us profit in the sense that the North American firms. If that's the word being patriotic by helping the American government especially the State Department the Agency for International Development in developing these Latin American countries and yet at the same time it is not a canary type of an institution in other words there is a definite profit motive

attached to it. And I assume that American hospital supply corporation has feelings along this line ourselves. Well that's where it is not a sin to make money. We have an obligation to our own Thrones an obligation to wrest back all this to show a path that wrap a fair profit. We thought our particular aspect of the industry the health we can do to raise their standards in Latin America and across we're businessmen. We will make a profit doing a fair profit. Everyone will benefit. We people now understand the people. Would you care to describe for us in a very brief manner that you feel that the introduction of these new groups and possibly the manufacturing operations of your company in Mexico is bringing in the Yankee dollar will help the development of Mexico and possibly the rest of Latin America. Putting on new factories here we will have new tactic techniques

if we can follow the same techniques that we have been following this state will be able to manufacture many birds here in Mexico at a much much lower cost than is presently being paid by the Mexicans presently working extensively and offering our help and assistance. To various governmental departments apartments in United States as well as various government agencies in Latin America. Since we're speaking of Mexico we feel that by setting up new manufacturing operations here and as a businessman not only benefiting ourselves we will be able to make a bearable. Our technical knowledge that will raise the health standards here in Mexico to such an extent that we're really creating a market for ourselves as well as helping the people of Mexico for

better health better health means. Business. As far as our company is concerned. Part of the implication in verse has been that you will help the Mexicans technologically for its better health. Does this mean that in some mix to some extent that technology is catching In other words due and to suppose that there are imitators. If that's not a correct word if there were that there would be need of entrepreneurs that will follow in an American hospital supplies for a step so to speak in this country and throughout the rest of Latin America. That's a very interesting comment. We will encourage as we always have encouraged people who want to put this well to grow in competition with us. We believe that competition just gives us the impetus to go ahead and do better things in the health field. Without competition we would go on for years and years. So

we say a stagnant state. Yes we definitely expect competition here and we welcome competition. From what I understand Mexico has probably is one of the more developed health programs. They have a large number of hospitals per capita. They have a larger number of doctors per capita and in general their health services are quite well developed. Has this been one of the major reasons that you chose Mexico as a place of residence for your manufacturing operations. Yes again with many interesting comments. We have found here. Aspects of hospital construction systems of hospital circulation within hospitals that we feel are advantage to anything we have seen in Latin America or in United States or Europe. We feel that the progressive prayer that the Mexican government has in their East Larry. These are good us as you said that with their programs they are bearing in Birbhum hospitals they are getting ready to have

to set an extent that it is. In ratio it surpasses any other program in Latin America. This is very stimulating too as well in the health field and it will be very beneficial to the Mexican people. Now if we can transfer slightly the experience that American hospital supply has had in their investment in Mexico that will do. Qualifier of what would you name as being strict prerequisites for any American corporation desiring to establish a business or manufacturing operations in Latin America. And. Frankly that is a very difficult question to answer. Every company must consider its objectives are. In many years of service it will be to the advantage of the American company to have the majority. STARCK all those.

Are of Mexican origin. Something else such as Robin Barnaby or something and sell for that. It has been found and advantageous to have a global depression if not a majority of the stock that was of Mexican nationality. This can I live with the chairman. A group from a company that has an interest in investing investing in Mexico coming here meeting with Mexican speaking to people at the American embassy during a general market survey speaking to the people and then bam back in deciding how they should best proceed. There is no run answer for any company. And I wrote it might be possible that these corporations would be better off to hire the services of these consulting groups that specialize in analyzing these very problems stronger than before they come down. I think that is a very good approach. If a company wishes to come to

Mexico with the idea of investing having no previous experience here I think the best procedure would be to contact. Their concern to a global management consulting firm Mexican compellingly Mexican management there or give them the true answer is they will tell them what can be done what can't be done the advantages and disadvantages they will save the company a lot of time and expense. You are developing the Mexican nationals within the company. Would you go around telling us how that this is being done. Trying to do this for every American we have working here we are training a Mexican national to take his place in the future. We would like to have a completely Mexican operated. That has black men having come there that is of Mexican origin. Slowly but surely this is coming about in some cases it is taking us to the back and that's again in our technical

technological techniques and so to refer us to either America we have down here in that particular position you find a Mexican employee used to be slow or fast learners. I think I'd take Mexico City here for example. The climate is conducive to wreck the Mexican is a very good worker. He's a very fair school isn't best to his person. He wants to and he was learning were very very pleased with the results we have found down here with our Mexican friends. Mr. please as a final question I'd like to ask if you wouldn't mind giving us an overall impression of your move into Mexico why it was made and especially what you consider to be the future of this role. I can sort of the future here are brighter and then the future. I personally could have been there in the States. As I've said previously that Mexico is the country of the future. I feel that Latin America is the

future market. The United States. Is becoming so competitive today that the United States must have a market and the market should be right here next to our borders. This not only holds true for our industry but I feel for any industry that is interested in export it and I don't see an expert now that should become interested in export. The next 10 to 20 years. This is very concerning in international business. I would like to reiterate what I said at the beginning of this interview that I am speaking as a representative of my company. As far as our general ideas are concerned but I am speaking on officially that I have read forever today on my own personal note and not necessarily the views of my company which address me thank you very much.

This is radio television Texas Richard at you know in Mexico City for a further discussion of the company dollar radio television invited into its studios. Dr. Ernest W. Walker professor of finance chairman of the Department of Finance the University of Texas and a specialist in the field of corporate finance speaking with Dr. Walker is Mr. Richard Ariano. Dr. Walker we're glad to have you with us today. I'd like to take this opportunity to ask you to comment on one of the major themes which were developed by Mr. Drees in this program. That being that there exist cost differentials in Latin America which will result in a better profit margin for North American companies. What do you feel about this. Well one of the things I like to mention here is Mr. Drees pointed out demand is most important in Mexico but in less profit. It comes along with demand. And then of course we cannot expect to operate down there

now developing near the income stream that is derived by operations as affected by the cost of labor. The cost of management and the various wrong material costs. It's my understanding that if a company goes down to Mexico and uses only American labor as well as American management then obviously it's going to reduce its income stream. But having increased costs and good down there and through a process of training as Mr Drees pointed out that he was doing and training Mexican nationals to take over these jobs and obviously he's going to reduce his callers thus increasing his income stream thereby making available a Haar rate of return on investment because the rate of return is in direct proportion to the cost of doing business.

Now you speak of an effective demand being necessary in Mexico and the rest of Latin America and I think you're included. The United States is being a portion of this effective demand for goods produced in Mexico. Would you feel that the trade barriers which presently exist between the United States and the rest of the world will be sufficiently lowered or modified such that this type of a manufacturing operation will be permitted. Well I think if the European common market continues as it is and we're going may have to look to the Latin American Common Market which was mentioned in this conversation by you and Mr. Drees. And if we can join this common market that is the Latin American common market we may find. That they call create trade agreements can be brought about by companies to say companies in Mexico can sell to the United States because they can produce. And

then take just way in Mexico therefore bringing their products into the United States and in to a certain degree the people in you know that is companies in the United States can produce more effectively and take goods into Mexico as well as other Latin American countries and therefore increase demands for each other's products in this fashion and with our cost structure as it is in the United States. We are going to have to look for lower cost are as I stated before increased income streams in order to operate more effectively. One of the major determinants it seems of profitability or ensuring profitability for these firms that go into Latin America. Again hinges on this very important concept of an effective demand. Do

you imply in your of what you've just said possibly that there is some validity to ses law that is that supply will create its own demand. Well I love easily I believe in this. We've seen this to be true in the United States that is as we increase our productive capacity in this country obviously our supply our productive capacity and thus increase in supply our demand for products. Now there is a point where I think that that supply will not necessarily create its own demand but in the countries such as Mexico and other Latin American countries that porn is a way way down the road and any in any investment. Particularly in the thinks capital market area fixed capital markets down in Mexico would generate many dollars of income so let's go back to a concept

of the multiplier principle. For example any dollar spent on capital goods in Mexico would generate many more dollars than if it were spent on consumption goods and consequently with the increased demand for capital goods in that country and there we have a whole multiplications of dollars that is to say a dollar down their spend will generate many dollars of income and you can readily see the impact of a dollar invested in Mexico. What about the problems that are associated with such things as repatriation of capital or blockage of profits in this type of a thing that sometimes are applied in underdeveloped nations of the world and recently have been in some Latin American countries with this go far in in negating these advantages that we're talking about and blocking these advantages. Well obviously those things that you've mentioned tend to be deterrents to capital investments and until such time that we can improve that

through understanding between our governments. Then we're going to find a deterrent to investment. Now my personal opinion is that through a process of education not necessarily education the Mexican people search but educating them in the process of income determination and investment criteria and so forth. I think ultimately they will overcome these deterrents and will have a real good market in this part of the country. Do you believe that education will eliminate the nationalistic prejudices which often are really the things that lead to these actions. Well if education won't do it nothing will in my opinion and personally I have to say yes because if we can point out

that through the educational process the function of investments the function of profits in the function of demands and so forth upon the investment the investment opportunities then obviously I think these people will enter into and make available an atmosphere which is conducive to the investment of American money in Mexico. And I would like to hasten to add that when I speak of money going into Mexico this doesn't necessarily mean that the goods will necessarily leave Mexico that is in any productive process is down there will go to benefit Mexico and the return will be said that American business man and enjoy better than a reasonable return on his investment. Mr. GRAEF spoke of the fact that he had considered this idea of patriotism plus profit. Is this really a

viable statement. Is there truth to this in your opinion or would you say that this was more of what we are accused of frequently by certain groups in Latin America that it is just more of economic imperialism. Well I don't know we can't read the minds of all businessmen but if you look up in the United States using that as an example there are not many dollars being invested a really respectable return in expected from this. Therefore I can't see any dollars being invested in Mexico a reasonable return can also be expected. However I think that American management can increase its return. As I mentioned before I think American management can increase its return by certain policies which it can it can and will probably will have to adopt. When you speak of a reasonable return is there some measure whereby you can

determine what a reasonable return is this is rather said. We think of for instance in the United States of reasonable public utility returns as being some magic figure of 6 percent or something in this area. Is there any yardstick whereby this reasonability can be measured for a foreign investment. Well Reason number has to be thought of in the term of risk. For example if a dollar has 100 as a 90 percent chance of disappearing because of some revolution or something like that obviously then a 6 percent return will not get that dollar down there however as its political stability is brought about in Mexico. Then risk losing this dollar will tend to diminish that is come nearer to zero and then they return obviously will have will decline by a corresponding amount.

But I wouldn't want to say to you that 20 percent 10 percent or 6 percent is a good return because it depends entirely on the conditions under which the dollars invested. One of the criticisms that are made in Latin America. Occasionally I heard this during my trip to Mexico was that debt capital from external sources flowing into these countries ultimately is more harmful to the nation because it be capitalized as in their words the nation. Is this so. Would you mind explaining what you mean by the way don't you think I think all I thinking is this that the service and the debt that the servicing of the debt payment of interest charges and so on in the long run actually takes away more from the economy than if they hadn't had this in the original if they hadn't originally had this influx. Well I think all of this has to go back to the concept of trading on the

equity that is to say if the cost of capital exceeds the return that can be expected on that capital. Obviously then it would as you use the term to d capitalize the country because in that instance they would be of greater flow out than the flow you know. However in this country we have been able to increase the rate of return on equity capital through the use of debt capital and that and obviously when the atmosphere becomes conducive that is to say the risk elements in Mexico tends to be reduced then more and more debt capital can be used more and more advantageously at that point. At this point in certain parts of the Latin American countries no one would risk that capital at this time. They would hire a risky equity cap. Dr. Walker We certainly thank you for being with us today. We've enjoyed it. It's been an interesting interview.

Thank you. This has been another in the series of interviews conducted by Richard Ariano in Mexico. Mr. Ariano has been talking with Mr. Edward Drees president of the American hospital supply company International in Mexico City. Our studio guest was Dr. Arness W. Walker chairman of the Department of Finance at the University of Texas. The Yankee dollar was produced by our scene our eyes and directed by BW Crocker at radio television the University of Texas under a grant in aid from the National Association of educational broadcasters. This is the end E.B. Radio Network.