Nationalization and Uncertainty

Spanish oil company Repsol recently accepted Argentina’s offer to negotiate a settlement over the nationalization of the Argentine oil company YPF. Repsol long held a controlling share of YPF, which produces approximately 1/3 and ¼ of Argentina’s oil and gas respectively.

The nationalization occurred last year, after Argentina accused Repsol of not investing enough to improve output, a charge which Repsol denied, claiming that it had invested $20 billion in Argentina. Further complicating the issue is the fact that Pemex, Mexico’s national oil company, also holds a share in Repsol, which contributes to geopolitical tension. In addition, a US firm ostensibly affected by the nationalization also participated in the suit against Argentina, while the EU is also engaged in a lawsuit against Argentina regarding import policy.

One of the greatest fears associated with international investment is nationalization. The willingness of Argentina to negotiate with Repsol seems in large part to be related to the tremendous international pressure placed on Argentina by Spain, Mexico, and the United States. Given that nationalizations are often performed by regimes hostile to capitalism, many times compensation is nonexistent. From an Industrial Organizations standpoint, the question is to what extent does uncertainty of the future hamper foreign investment? With the hypothetical life of a company as infinite, the future status of a company’s operations means that many players may be unwilling to invest in countries that seem political unstable or anti-Western in nature.

2 thoughts on “Nationalization and Uncertainty

  1. State-owned entities are often far less efficient than private counterparts. Managers usually benefit from high job security after politically-motivated promotions. High job security doesn’t encourage managers to maintain company well-being. Further, inefficient or bankrupt firms are not forced from the market — citizens and governments bear that burden. Reservations concerning investment in a state-owned enterprise are well-founded.

  2. Interestingly nationalization often leads to rapid deterioration of the nationalized companies. This then often leads to the subcontracting of crucial services, like technical maintenance, to e.g. competitors of the nationalized incumbent, adding insult to injury. However, with a globalized economy states like Argentina often have assets abroad that can be confiscated by court order in retaliatory action (as seems just beginning to happen in the above case) and therefore these measures are often only last-ditch attempts before the nationalizer is toppled. This move to me seems the Kirchners’ equivalent to the Junta’s Falkland/Malvinas crisis.

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