Economic Backwardness and Firm Strategy: An American Railroad Corporation in Nineteenth-Century Mexico

During the second half of the nineteenth century Latin American countries were engaged in a railroad expansion program that drastically altered the role of the state, modified the organization of social and economic institutions, and required massive inflows of foreign investment. Although scholars have analyzed some of these issues, little attention has been paid to the difficulties involved in the adaptation of large modern railroad corporations to the conditions characteristic of less-developed countries. The purpose of this article is to portray the experience of the largest American enterprise that operated in Mexico during the nineteenth century. This experience will also allow us to illustrate some important peculiarities of railroad development in Mexico with respect to other Latin American countries.

The period from 1850 to 1880 is generally considered to be the first stage of railroad construction in Latin America ¹ ; however, Mexico lacked the material as well as the political conditions either to finance railroad expansion or to attract foreign investment during these years. As a result, the construction of railroads began relatively late in Mexico, and Mexican entrepreneurs did not play a leading role in this industry. ² Mexico also differed from other Latin American countries in other respects: repeated default on loan payments and the rupture of diplomatic relations with most European powers in 1867 kept Mexico isolated from the international financial community up until the 1880s; by the time Mexico created conditions for the foreign financing of railroads, the competition for resources in the international capital markets had tightened, forcing the Mexican state to grant monetary subsidies instead of profit guarantees; and Mexico enjoyed a unique geographic location, sharing a large border with the United States, the fastest growing economy of the world.

In short, timing, political issues, and geographic location determined the sources of capital available for railroad ventures in Mexico. Thus while most Latin American countries relied on British resources to build and finance their railroad networks, Mexico enjoyed access to two capital markets for railroad construction: Great Britain and the United States. British companies built the main railroad lines in central Mexico, while U.S. interests played a leading role in the expansion of railroads in northern Mexico, from the American border to Mexico City. On the other hand, the nature of British and U.S. enterprises also differed. Most British railroads in Mexico and other Latin American countries were built and managed by freestanding companies, that is, companies that "did not grow out of the domestic operations of existing enterprises that had headquarters in Britain." ³ As for American investment in Mexican railroads, timing and geographical proximity to the United States also influenced the type of organization that was created to support the construction of railroads. ⁴ The rail lines that connected Mexico with the United States were typically a spillover of lines built by American railroad corporations that sought an expansion beyond their national boundaries. ⁵ Although formally independent, these railroad companies were organized, owned, and initially managed (directly or through interlocking directorates) by U.S. railroad enterprises, and were often regarded as part of the latter's expansion schemes.

The existing literature on foreign railroads in Latin America addresses issues related to ownership, profitability, and state participation. Yet few studies have shown how economic and institutional constraints posed obstacles to the adaptation and efficient operation of large railroad enterprises in less-developed countries. By neglecting this issue, it has been implicitly assumed that the economic benefits of railroads depended on the quality of their construction, management, and tariff policy. Accordingly, all the possible flaws would originate within the firm, as if the economy in which the railroad operated was an absolutely responsive environment that did not offer the slightest resistance to the innovation. In contrast to this view, I argue that economic and institutional constraints had an adverse impact on the operation...