Did Entrepreneur Ernesto Tornquist Help or Hurt Argentina?

Professor Geoffrey Jones examines the career of Ernesto Tornquist, a cosmopolitan financier considered to be the most significant entrepreneur in Argentina at the end of the 19th century. He created a diversified business group, linked to the political elite, integrating Argentina into the trading and financial networks of the first global economy. The case, Ernesto Tornquist: Making a Fortune on the Pampas, provides an opportunity to understand why Argentina was such a successful economy at this time, and to debate whether its very success laid the basis for the country's subsequent poor economic performance.

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Brian Kenny: In April of 1495, the Crown of Castile broke their monopoly deal with Christopher Columbus, and began issuing licenses to other navigators for the West Indies. One of the first to benefit from the new arrangement was Amerigo Vespucci, an Italian merchant, explorer and cartographer. Vespucci is said to have led four expeditions in service to both Spain and Portugal, in which he explored uncharted waters around South America, discovering new land masses that he dubbed the New World in letters home, much to the dismay of Columbus's supporters.

One of those land masses was Argentina. The name Argentina has Italian origins, loosely translating to "made of silver," and for much of its history the country lived up to its name, yielding fortunes from its abundant natural resources for the ruling class, and offering the prospect of prosperity for immigrants around the world.

Today we're going to be speaking to Professor Geoffrey Jones about his case, co-written with Andrea Lluch, entitled, Ernesto Tornquist, Making a Fortune on the Pampas. I'm your host, Brian Kenny, and you're listening to Cold Call.

Geoff Jones researches the history and impact of globalization. His focus is on the role of entrepreneurs and business enterprises, and boy, all those things are appropriate for the case we're going to talk about today. Geoff, thanks for joining me.

Geoff Jones: My pleasure.

Kenny: I have had the great fortune to have been to Argentina a few times. It's a beautiful place, and it was really interesting to hear about this period in its history, which obviously was so crucial to what we know of Argentina today. Who's the protagonist in this case, and what's the setting?

Jones: Ernesto Tornquist is really one of the leading entrepreneurs in late 19th century Argentina. He becomes, by the 1900s, one of the richest men in Latin America. He was compared to the Rothschilds, all the rich people. His name now is largely forgotten.

Kenny: You're a business historian—I think it's a distinctive mark of Harvard Business School that we have such a focus on business history—but what caught your attention about this case?

Jones: Well, this case occupies an important place in my MBA course called “Entrepreneurship and Global Capitalism.” That deals with the role of entrepreneurs in globalization from the 19th century to the present day. Now, an important takeaway from that course is that globalization has absolutely not been a linear process. There's been shocks, waves, all sorts of things have gone on. And Argentina is a prime example of that.

As I say in the case, by the beginning of the 20th century, the country is one of the richest countries in the world. Far richer than most European countries. And that's the era of Ernesto Tornquist. But in the following hundred years, the country progressively loses its position, and in the last three or four decades, it's been a prime example of political and economic turbulence. So the case is very important in reminding students that things don't just go on in a smooth, linear pattern. Argentina, now, is one of the great mystery cases for economic and business historians. What on earth happened to this country? How did it go wrong? What was the cause of that?

Kenny: The case does a great job of citing some ... turning points, and decisions that have taken the country in the wrong direction. So we'll get more into that later. What was Argentina like before the Europeans arrived?

Jones: Well, as you said, the Spaniards described it as a new world, but it was only new to them. We know now that the whole of the Americas were the home of technologically advanced and sophisticated cultures. The Incas in Peru, the Aztecs in Central America. Now, Argentina doesn't have Incas or Aztecs, but it was by no means empty. There were settled, agricultural-based civilizations. The most interesting one was called by the Spanish the Diaguita. There near the Bolivian border, they have advanced agricultural systems with irrigation systems. They have amazing pottery, amazing skills in textiles, and they were very good soldiers as well. They stopped the Incas advancing into Argentina, and they're the reason why the Spaniards were so slow to get their hold on Argentina. They fought them off for decades and in fact their resistance to the Spanish lasted until the middle of the 17th century.

Kenny: What led to the bid for independence?

Jones: As elsewhere in Latin America, it all started because of the Napoleonic wars in Europe. The French overran Spain, and when it was occupied by the French, the local white Spanish elite decided to assert their independence. And that happens throughout the sub-continent, and it happens in Argentina, too. So it's a transfer of power among the elites from the local-born white elite, from the Spanish to the local-born white elite.

Kenny: And this was happening sort of across the continent, in other places at the same time?

Jones: Yes. It's a very messy process, which explains why Latin America fell behind from the levels of income and wealth that it had in the 18th century. Coherent countries like Argentina or Chile don't emerge spontaneously. There's a lot of disagreement about boundaries, borders, and decades of lost income.

Kenny: How important was the conquest in the desert? It sounded [in the case] like that was one of those turning points.

Jones: Absolutely. This starts in the 1870s. So the southern parts of Argentina, the Pampas, were still occupied by the indigenous. By the 1870s, the Argentina army, armed with the latest military weapons, decides to expropriate all the indigenous. They attack, they kill people, they expropriate land, and they basically give it very cheaply to members of the elite. This is a huge area. It's an area bigger than the current state of California. It's immensely fertile, and this is the land where the Argentinians then build giant cattle farms, wheat farms, and it's really the basis of their vibrant agricultural economy.

Kenny: That sets the stage for them to move into this era of prosperity that the case gets into. One of the things that's called out in the case is the role of foreign investment. And I think more broadly, this was the first push into globalization, and investment was a big part of it. How did that work in Argentina?

Jones: Argentina had all this land but it didn't have infrastructure. So, foreign investment plays a key role in building the infrastructure, which enables agricultural exports to take place. There's massive British investment in railroads—the British build the whole railroad system of Argentina. Other foreign capital goes into ports, into processing facilities. So there's a huge amount of capital available in Europe, which is a capital-exporting region, and there's a huge demand for it in Argentina, and so the two come together.

Kenny: And you talk about the growth of the manufacturing sector, the growth of the agricultural sector. These things didn't come without their own set of challenges. What are some of the things that they encountered that could have stymied some of that growth along the way?

Jones: Growing and exporting commodities was quite a straightforward process because they’re bulk commodities. As long as you build the infrastructure, there {are} markets; people are anxious for food in Europe and the United States. The more tricky area was trying to develop any kind of manufacturing sector. And that's tricky for reasons that continue to be a problem for Argentina. First of all, the market is rather small. It's like eight million, I think, in 1914, so it's a small market. Then there's geography. Argentina was a very long way away from any other market, and it's surrounded by countries like Brazil and Chile, which are far poorer, so they're not a good market.

Then, it has no energy. It has no coal deposits. So in the 19th century, Europe and the US grew their industries on the basis of steam power generated by coal, and a bit later on, oil. Argentina doesn't have it.

Finally, there's the problem of human capital. So by the 1900s, Argentina was by far the most educated part of Latin America, but its literacy rate is 50 percent. By then, the literacy rate in the United States is 92 percent.

"What he did was build up a core set of skills, core set of political contacts, and he used those to leverage across sectors"

So, that's not a great basis to build any kind of sophisticated industry. It's fine for commodities, it's progressively less fine for anything involving any kind of technological sophistication.

Kenny: How did they address a problem like that?

Jones: They address it the way that Tornquist addresses it. And that is, he and other people like him diversified across sectors rather than investing in depth. So, like in the United States, you get the emergence of steel companies, or consumer goods companies, and they focus on one industry, and they build a lot of technological expertise about that one industry. Tornquist doesn't really go there. He has scarce managerial capabilities, scarce human capital, so he diversifies across a very wide range of industries, without going into depth in any of them. So there's no brand building, for example, like we see in the United States. He's handling scarce resources like that. Breadth rather than depth.

Kenny: And he was like into everything. In the case, it describes that he was in agriculture, into manufacturing, into sugar refineries and into whaling. Was there anything that he wasn't involved in?

Jones: Actually, I don't think there was anything he was involved in. What he did was build up a core set of skills, core set of political contacts, and he used those to leverage across sectors. And he had core business in finance and another core business in real estate. So that's giving him the kind of financial resources to diversify and buy. He bought a lot of companies, too. He diversifies across sectors.

Kenny: How was he perceived in the community? Obviously, he had strong political connections ... but was he liked by people in the community?

Jones: He deliberately keeps, and chooses to keep, a very low profile, probably because he has so much power. He is, however, influential in various decisions which raise controversy.

In particular, he's very important in influencing government to set exchange rates in such a way that they favor commodity exports, of which he's one of the biggest. He's kind of portrayed by critics as carrying bags of money [and people are] kind of suspicious that he's in it for the money.

Kenny: He was sort of a robber baron type of guy.

Jones: Absolutely. A robber baron and a kind of foreign robber baron. Although, that made little sense, because Argentina was a country of immigrants anyway, so most of them were from somewhere else.

"You had a hugely successful country, which is incredibly cosmopolitan, and you could say it was a prime example of the benefits of an open immigration system to a country's development"

Kenny: It's led to a populist uprising in many places. This was a country that was largely built, like the US you could say, on the backs of immigrants. Can you talk a little bit about the role that that played for the rise of the Tornquist empire?

Jones: His father is born in Baltimore, of Scandinavian and German ethnicity. So he was a prime immigrant. And I think there were six or seven giant business groups which have developed by the early 20th century. They are all founded by first- or second- generation immigrants.

The key entrepreneurs are all immigrants, all the sons of immigrants. That's very, very important. They had higher skill levels, they had the right kind of connections to build successful businesses. And then, many of the blue collar workers, too, are immigrants. And that reflects the fact that the education system in Argentina was not good, so these people brought the kind of essential skills that were needed. It's the same story in the United States.

These people, unlike in the United States, rarely even took Argentinian nationality. They kept their own passport, it didn't seem very important to them. So you had a hugely successful country, which is incredibly cosmopolitan, and you could say it was a prime example of the benefits of an open immigration system to a country's development.

Kenny: It's interesting they didn't assume the nationality. Do you think that may have had something to do with the fact that [economic success] wasn't able to be sustained over time? Were they just not committed in the way that they needed to be?

Jones: And also, Argentina developed in a very odd way. If you ask other Latin Americans now about Argentina, the common joke they'll make is Argentinians imagine they're Europeans. They're just geographically situated in a different place. They kept that kind of European identity.

Kenny: Let's talk a little bit about the way the Tornquist’s managed this growing empire of businesses that they had. What was their management structure like?

Jones: It wasn't a very sophisticated one, and that reflects the fact they're mostly not doing very sophisticated things. Finance, real estate, simple processing, commodities. It clearly worked, because they performed very well, and the group absolutely survives after Tornquist dies, but it's not a sophisticated one.

It's very much a family business. He grooms his son to take over. There appears to be very little investment in developing professional managers of any kind, and there's a high reliance on recruiting managerial talent from Europe to man things, rather than to give up their own talent.

Kenny: You see that in a lot of Latin American countries. You see a lot of family-owned enterprise. Is this the kind of business that can sustain over time if you don't start to bring in some real talent within the organization and nurture that?

Jones: I think it's sustainable. The greater problem is that you can't develop highly sophisticated businesses. As I said earlier, there's no Tornquist brand that develops, for example. There's no R&D facility that's created, which we've already got in US businesses by the late 19th century. So, that kind of business is not going to become a hub of innovation. It can survive, it can make a great deal of money, but what it does is not sophisticated. There are no Fords or Carnegies being built in this period.

Kenny: Which leads to the vulnerability that we've seen since the time that the case was written.

Jones: Well, it does, because this business is built on the global economy. And it's built on the hunger of growingly urban populations in Europe and the United States for food. And it seems to them at the time it's always going to happen. It doesn't happen. After Tornquist dies, you get World War I, you get the Great Depression, then you get tariffs, and suddenly your commodity export business is in a huge amount of trouble, and you have nothing to replace it. You don't have the kind of business that can really supply the domestic market, or supply more different types of markets. So a commodities-based export economy is highly vulnerable to global shocks, and we've had that in more recent periods, too.

Kenny: We see a parallel to what's happening today with the Trump administration and the trade wars that are looming. The tariffs that Argentina was imposing were something along the lines of 30 percent, I think the case cites. Can you talk a little bit about the strategy there? What were they trying to achieve?

Jones: The government was trying to get industries, manufacturing industries, to develop and that's because, as I said, they had a real problem. Their market was very small. So that kind of made some sort of sense. But the tariffs were very high, and imposed very high costs.

In a less, more cynical way, people such as Tornquist were an enormous beneficiary of these kind of tariffs, and he used them, for example, in the sugar industry to build up a very large business, larger than was needed by the domestic market, which is very inefficient, but very profitable for him.

Kenny: Do you think that the Tornquist phenomenon could happen today? Is the world just in a different place, where it wouldn't be possible for a family to create this kind of an enterprise?

Jones: Oh, absolutely not. What you've got is large, family-owned, diversified groups. The typical structure in India, the typical structure across Latin America. I mean, the more successful ones have introduced layers of professional management, but in almost every case, the family is still up there.

Kenny: Is that a problem? I mean, as we look at what happened in this case, does that sort of leave the same exposure there?

Jones: There were several problems. One is that families disagree. And so the next generation, the whole business, can fragment, with different parts going to different brothers, or occasionally sisters. So that is a huge issue. On the other hand, businesses like Tata in India show that you can go into fifth or sixth generations of families and have a business that can do quite sophisticated things, from autos to management consultancy.

So it is possible, if you can find the right mixture of professional management and family ownership. It always depends on the values of the family, if the family has a strong set of values. If it has mechanisms to enable the more competent members of the family to make decisions, and do something with the less competent members of the family, it can work quite well, and it can actually give rise to a more sustainable business than a business dependent on short-term capital markets. But it's a tricky one, and there are lots of tradeoffs.

Kenny: One of your colleagues, Ryan Raffaelli, wrote a case on Faber Castell, the pencil company, which I think is in their sixth generation of being family run. But they're in an isolated industry; it's a very niche thing, so I see this as quite different, where the diversification makes it more complicated in many ways.

Jones: Well, the US has big business, Cargill's, for example. It's a fifth or sixth generation [family business]. It's a giant and successful company, so even in the US, it's quite possible to run this kind of business. But there are many tradeoffs.

"Businesses like Tata in India show that you can go into fifth or sixth generations of families and have a business that can do quite sophisticated things"

Kenny: So you mentioned you wrote this case for your history class. Have you discussed it in class?

Jones: I must have taught it about 10 times now. It typically goes very well, and I think the reason for that is we have a lot of students from emerging markets, and the case totally resonates with them. They're like, "Oh, yeah. We've got all these business groups, and they're run by families." And they'll pretty much focus quite quickly on the trade-offs and the issues here. Some of these groups now, like in the past, are quite effective for driving economic growth, and Tornquist is pioneering new businesses and everything else.

On the other hand, these groups are like octopuses, which are into everything. It's really hard for a new generation of entrepreneurs to get going, because these groups fill the space. The second thing is they all ... focus on this close relationship with the political elite. That kind of crony capitalism is prevalent still in multiple countries, and is a huge problem.

So I think hopefully, like all my cases in this course, it has some deep historical learning but a lot of direct relevance to people now as they think about their own countries and how to move things forward.

Kenny: It certainly came across that way to me. Geoff, thanks so much for joining us today.

Jones: It's been great. Thank you very much.

Kenny: If you enjoyed hearing about the Tornquists making a fortune in the Pampas, you may also enjoy some of our other Cold Call episodes. You can find them on Apple Podcasts, and while you're there, please leave a review. Thanks for listening. I'm Brian Kenny, your host, and you're listening to Cold Call, an official podcast of Harvard Business School.

This interview was recorded on June 7, 2018. The transcript has been edited for length and clarity.

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Brian Kenny: In April of 1495, the Crown of Castile broke their monopoly deal with Christopher Columbus, and began issuing licenses to other navigators for the West Indies. One of the first to benefit from the new arrangement was Amerigo Vespucci, an Italian merchant, explorer and cartographer. Vespucci is said to have led four expeditions in service to both Spain and Portugal, in which he explored uncharted waters around South America, discovering new land masses that he dubbed the New World in letters home, much to the dismay of Columbus's supporters.

One of those land masses was Argentina. The name Argentina has Italian origins, loosely translating to "made of silver," and for much of its history the country lived up to its name, yielding fortunes from its abundant natural resources for the ruling class, and offering the prospect of prosperity for immigrants around the world.

Today we're going to be speaking to Professor Geoffrey Jones about his case, co-written with Andrea Lluch, entitled, Ernesto Tornquist, Making a Fortune on the Pampas. I'm your host, Brian Kenny, and you're listening to Cold Call.

Geoff Jones researches the history and impact of globalization. His focus is on the role of entrepreneurs and business enterprises, and boy, all those things are appropriate for the case we're going to talk about today. Geoff, thanks for joining me.

Geoff Jones: My pleasure.

Kenny: I have had the great fortune to have been to Argentina a few times. It's a beautiful place, and it was really interesting to hear about this period in its history, which obviously was so crucial to what we know of Argentina today. Who's the protagonist in this case, and what's the setting?

Jones: Ernesto Tornquist is really one of the leading entrepreneurs in late 19th century Argentina. He becomes, by the 1900s, one of the richest men in Latin America. He was compared to the Rothschilds, all the rich people. His name now is largely forgotten.

Kenny: You're a business historian—I think it's a distinctive mark of Harvard Business School that we have such a focus on business history—but what caught your attention about this case?

Jones: Well, this case occupies an important place in my MBA course called “Entrepreneurship and Global Capitalism.” That deals with the role of entrepreneurs in globalization from the 19th century to the present day. Now, an important takeaway from that course is that globalization has absolutely not been a linear process. There's been shocks, waves, all sorts of things have gone on. And Argentina is a prime example of that.

As I say in the case, by the beginning of the 20th century, the country is one of the richest countries in the world. Far richer than most European countries. And that's the era of Ernesto Tornquist. But in the following hundred years, the country progressively loses its position, and in the last three or four decades, it's been a prime example of political and economic turbulence. So the case is very important in reminding students that things don't just go on in a smooth, linear pattern. Argentina, now, is one of the great mystery cases for economic and business historians. What on earth happened to this country? How did it go wrong? What was the cause of that?

Kenny: The case does a great job of citing some ... turning points, and decisions that have taken the country in the wrong direction. So we'll get more into that later. What was Argentina like before the Europeans arrived?

Jones: Well, as you said, the Spaniards described it as a new world, but it was only new to them. We know now that the whole of the Americas were the home of technologically advanced and sophisticated cultures. The Incas in Peru, the Aztecs in Central America. Now, Argentina doesn't have Incas or Aztecs, but it was by no means empty. There were settled, agricultural-based civilizations. The most interesting one was called by the Spanish the Diaguita. There near the Bolivian border, they have advanced agricultural systems with irrigation systems. They have amazing pottery, amazing skills in textiles, and they were very good soldiers as well. They stopped the Incas advancing into Argentina, and they're the reason why the Spaniards were so slow to get their hold on Argentina. They fought them off for decades and in fact their resistance to the Spanish lasted until the middle of the 17th century.

Kenny: What led to the bid for independence?

Jones: As elsewhere in Latin America, it all started because of the Napoleonic wars in Europe. The French overran Spain, and when it was occupied by the French, the local white Spanish elite decided to assert their independence. And that happens throughout the sub-continent, and it happens in Argentina, too. So it's a transfer of power among the elites from the local-born white elite, from the Spanish to the local-born white elite.

Kenny: And this was happening sort of across the continent, in other places at the same time?

Jones: Yes. It's a very messy process, which explains why Latin America fell behind from the levels of income and wealth that it had in the 18th century. Coherent countries like Argentina or Chile don't emerge spontaneously. There's a lot of disagreement about boundaries, borders, and decades of lost income.

Kenny: How important was the conquest in the desert? It sounded [in the case] like that was one of those turning points.

Jones: Absolutely. This starts in the 1870s. So the southern parts of Argentina, the Pampas, were still occupied by the indigenous. By the 1870s, the Argentina army, armed with the latest military weapons, decides to expropriate all the indigenous. They attack, they kill people, they expropriate land, and they basically give it very cheaply to members of the elite. This is a huge area. It's an area bigger than the current state of California. It's immensely fertile, and this is the land where the Argentinians then build giant cattle farms, wheat farms, and it's really the basis of their vibrant agricultural economy.

Kenny: That sets the stage for them to move into this era of prosperity that the case gets into. One of the things that's called out in the case is the role of foreign investment. And I think more broadly, this was the first push into globalization, and investment was a big part of it. How did that work in Argentina?

Jones: Argentina had all this land but it didn't have infrastructure. So, foreign investment plays a key role in building the infrastructure, which enables agricultural exports to take place. There's massive British investment in railroads—the British build the whole railroad system of Argentina. Other foreign capital goes into ports, into processing facilities. So there's a huge amount of capital available in Europe, which is a capital-exporting region, and there's a huge demand for it in Argentina, and so the two come together.

Kenny: And you talk about the growth of the manufacturing sector, the growth of the agricultural sector. These things didn't come without their own set of challenges. What are some of the things that they encountered that could have stymied some of that growth along the way?

Jones: Growing and exporting commodities was quite a straightforward process because they’re bulk commodities. As long as you build the infrastructure, there {are} markets; people are anxious for food in Europe and the United States. The more tricky area was trying to develop any kind of manufacturing sector. And that's tricky for reasons that continue to be a problem for Argentina. First of all, the market is rather small. It's like eight million, I think, in 1914, so it's a small market. Then there's geography. Argentina was a very long way away from any other market, and it's surrounded by countries like Brazil and Chile, which are far poorer, so they're not a good market.

Then, it has no energy. It has no coal deposits. So in the 19th century, Europe and the US grew their industries on the basis of steam power generated by coal, and a bit later on, oil. Argentina doesn't have it.

Finally, there's the problem of human capital. So by the 1900s, Argentina was by far the most educated part of Latin America, but its literacy rate is 50 percent. By then, the literacy rate in the United States is 92 percent.

"What he did was build up a core set of skills, core set of political contacts, and he used those to leverage across sectors"

So, that's not a great basis to build any kind of sophisticated industry. It's fine for commodities, it's progressively less fine for anything involving any kind of technological sophistication.

Kenny: How did they address a problem like that?

Jones: They address it the way that Tornquist addresses it. And that is, he and other people like him diversified across sectors rather than investing in depth. So, like in the United States, you get the emergence of steel companies, or consumer goods companies, and they focus on one industry, and they build a lot of technological expertise about that one industry. Tornquist doesn't really go there. He has scarce managerial capabilities, scarce human capital, so he diversifies across a very wide range of industries, without going into depth in any of them. So there's no brand building, for example, like we see in the United States. He's handling scarce resources like that. Breadth rather than depth.

Kenny: And he was like into everything. In the case, it describes that he was in agriculture, into manufacturing, into sugar refineries and into whaling. Was there anything that he wasn't involved in?

Jones: Actually, I don't think there was anything he was involved in. What he did was build up a core set of skills, core set of political contacts, and he used those to leverage across sectors. And he had core business in finance and another core business in real estate. So that's giving him the kind of financial resources to diversify and buy. He bought a lot of companies, too. He diversifies across sectors.

Kenny: How was he perceived in the community? Obviously, he had strong political connections ... but was he liked by people in the community?

Jones: He deliberately keeps, and chooses to keep, a very low profile, probably because he has so much power. He is, however, influential in various decisions which raise controversy.

In particular, he's very important in influencing government to set exchange rates in such a way that they favor commodity exports, of which he's one of the biggest. He's kind of portrayed by critics as carrying bags of money [and people are] kind of suspicious that he's in it for the money.

Kenny: He was sort of a robber baron type of guy.

Jones: Absolutely. A robber baron and a kind of foreign robber baron. Although, that made little sense, because Argentina was a country of immigrants anyway, so most of them were from somewhere else.

"You had a hugely successful country, which is incredibly cosmopolitan, and you could say it was a prime example of the benefits of an open immigration system to a country's development"

Kenny: It's led to a populist uprising in many places. This was a country that was largely built, like the US you could say, on the backs of immigrants. Can you talk a little bit about the role that that played for the rise of the Tornquist empire?

Jones: His father is born in Baltimore, of Scandinavian and German ethnicity. So he was a prime immigrant. And I think there were six or seven giant business groups which have developed by the early 20th century. They are all founded by first- or second- generation immigrants.

The key entrepreneurs are all immigrants, all the sons of immigrants. That's very, very important. They had higher skill levels, they had the right kind of connections to build successful businesses. And then, many of the blue collar workers, too, are immigrants. And that reflects the fact that the education system in Argentina was not good, so these people brought the kind of essential skills that were needed. It's the same story in the United States.

These people, unlike in the United States, rarely even took Argentinian nationality. They kept their own passport, it didn't seem very important to them. So you had a hugely successful country, which is incredibly cosmopolitan, and you could say it was a prime example of the benefits of an open immigration system to a country's development.

Kenny: It's interesting they didn't assume the nationality. Do you think that may have had something to do with the fact that [economic success] wasn't able to be sustained over time? Were they just not committed in the way that they needed to be?

Jones: And also, Argentina developed in a very odd way. If you ask other Latin Americans now about Argentina, the common joke they'll make is Argentinians imagine they're Europeans. They're just geographically situated in a different place. They kept that kind of European identity.

Kenny: Let's talk a little bit about the way the Tornquist’s managed this growing empire of businesses that they had. What was their management structure like?

Jones: It wasn't a very sophisticated one, and that reflects the fact they're mostly not doing very sophisticated things. Finance, real estate, simple processing, commodities. It clearly worked, because they performed very well, and the group absolutely survives after Tornquist dies, but it's not a sophisticated one.

It's very much a family business. He grooms his son to take over. There appears to be very little investment in developing professional managers of any kind, and there's a high reliance on recruiting managerial talent from Europe to man things, rather than to give up their own talent.

Kenny: You see that in a lot of Latin American countries. You see a lot of family-owned enterprise. Is this the kind of business that can sustain over time if you don't start to bring in some real talent within the organization and nurture that?

Jones: I think it's sustainable. The greater problem is that you can't develop highly sophisticated businesses. As I said earlier, there's no Tornquist brand that develops, for example. There's no R&D facility that's created, which we've already got in US businesses by the late 19th century. So, that kind of business is not going to become a hub of innovation. It can survive, it can make a great deal of money, but what it does is not sophisticated. There are no Fords or Carnegies being built in this period.

Kenny: Which leads to the vulnerability that we've seen since the time that the case was written.

Jones: Well, it does, because this business is built on the global economy. And it's built on the hunger of growingly urban populations in Europe and the United States for food. And it seems to them at the time it's always going to happen. It doesn't happen. After Tornquist dies, you get World War I, you get the Great Depression, then you get tariffs, and suddenly your commodity export business is in a huge amount of trouble, and you have nothing to replace it. You don't have the kind of business that can really supply the domestic market, or supply more different types of markets. So a commodities-based export economy is highly vulnerable to global shocks, and we've had that in more recent periods, too.

Kenny: We see a parallel to what's happening today with the Trump administration and the trade wars that are looming. The tariffs that Argentina was imposing were something along the lines of 30 percent, I think the case cites. Can you talk a little bit about the strategy there? What were they trying to achieve?

Jones: The government was trying to get industries, manufacturing industries, to develop and that's because, as I said, they had a real problem. Their market was very small. So that kind of made some sort of sense. But the tariffs were very high, and imposed very high costs.

In a less, more cynical way, people such as Tornquist were an enormous beneficiary of these kind of tariffs, and he used them, for example, in the sugar industry to build up a very large business, larger than was needed by the domestic market, which is very inefficient, but very profitable for him.

Kenny: Do you think that the Tornquist phenomenon could happen today? Is the world just in a different place, where it wouldn't be possible for a family to create this kind of an enterprise?

Jones: Oh, absolutely not. What you've got is large, family-owned, diversified groups. The typical structure in India, the typical structure across Latin America. I mean, the more successful ones have introduced layers of professional management, but in almost every case, the family is still up there.

Kenny: Is that a problem? I mean, as we look at what happened in this case, does that sort of leave the same exposure there?

Jones: There were several problems. One is that families disagree. And so the next generation, the whole business, can fragment, with different parts going to different brothers, or occasionally sisters. So that is a huge issue. On the other hand, businesses like Tata in India show that you can go into fifth or sixth generations of families and have a business that can do quite sophisticated things, from autos to management consultancy.

So it is possible, if you can find the right mixture of professional management and family ownership. It always depends on the values of the family, if the family has a strong set of values. If it has mechanisms to enable the more competent members of the family to make decisions, and do something with the less competent members of the family, it can work quite well, and it can actually give rise to a more sustainable business than a business dependent on short-term capital markets. But it's a tricky one, and there are lots of tradeoffs.

Kenny: One of your colleagues, Ryan Raffaelli, wrote a case on Faber Castell, the pencil company, which I think is in their sixth generation of being family run. But they're in an isolated industry; it's a very niche thing, so I see this as quite different, where the diversification makes it more complicated in many ways.

Jones: Well, the US has big business, Cargill's, for example. It's a fifth or sixth generation [family business]. It's a giant and successful company, so even in the US, it's quite possible to run this kind of business. But there are many tradeoffs.

"Businesses like Tata in India show that you can go into fifth or sixth generations of families and have a business that can do quite sophisticated things"

Kenny: So you mentioned you wrote this case for your history class. Have you discussed it in class?

Jones: I must have taught it about 10 times now. It typically goes very well, and I think the reason for that is we have a lot of students from emerging markets, and the case totally resonates with them. They're like, "Oh, yeah. We've got all these business groups, and they're run by families." And they'll pretty much focus quite quickly on the trade-offs and the issues here. Some of these groups now, like in the past, are quite effective for driving economic growth, and Tornquist is pioneering new businesses and everything else.

On the other hand, these groups are like octopuses, which are into everything. It's really hard for a new generation of entrepreneurs to get going, because these groups fill the space. The second thing is they all ... focus on this close relationship with the political elite. That kind of crony capitalism is prevalent still in multiple countries, and is a huge problem.

So I think hopefully, like all my cases in this course, it has some deep historical learning but a lot of direct relevance to people now as they think about their own countries and how to move things forward.

Kenny: It certainly came across that way to me. Geoff, thanks so much for joining us today.

Jones: It's been great. Thank you very much.

Kenny: If you enjoyed hearing about the Tornquists making a fortune in the Pampas, you may also enjoy some of our other Cold Call episodes. You can find them on Apple Podcasts, and while you're there, please leave a review. Thanks for listening. I'm Brian Kenny, your host, and you're listening to Cold Call, an official podcast of Harvard Business School.

This interview was recorded on June 7, 2018. The transcript has been edited for length and clarity.

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