State, firms and technology. The rise of multinational telecommunications companies: ITT and the Compañía Telefónica Nacional de España, 1924–1945

Abstract

This article addresses a major topic in business history: the strategies used by multinational telecommunications companies to establish themselves on the world stage. It seeks to explore two interconnected issues: how a new entrant–ITT–used the immature market of Spain in its strategy for expansion, and how Spanish national institutions and government regulation influenced this process. With the backing of the US banks and government, ITT created a Spanish firm–the Compañía Telefónica Nacional de España–in 1924 to keep European competitors at bay and to win a licence to modernise and operate the telephone system in a backward country. The Spanish government granted ITT a monopoly concession, which remained unaltered for 20 years in spite of political changes. This was the first step in ITT's conquest of the world market and in its conversion into a multinational. Company strategy, government institutions and technological innovation played a crucial role in ITT's implantation on a worldwide scale.

Keywords:

• ITT
• Compañía Telefónica Nacional de España
• Spanish telephone
• multinationals
• telephone firms
• technological transfer

Acknowledgements

This study has been financed by projects SEJ 2005-02788 ECON and SGR2000-00009. Some parts of it were presented at the 33rd and 34th ICOHTEC Symposia, as well as IX Trobada SCHCT, 2006. I am deeply indebted to Narcis Serra, ex-vice president of the Spanish government, and to Antonio Alonso and Ramiro Sánchez de Lerín, secretaries of the Telefónica Board, for providing me with access to the firm archives. Consuelo Barbé and María Victoria Cerezo with their team, and Begoña Giménez have contributed a great deal to my research. I am also grateful to Antoni Roca, who drew my attention to the Terradas archive. I should also like to thank the editors of this journal, the anonymous referees and all those who, with their comments and suggestions, have helped to improve this text or earlier versions of it. It goes without saying that any errors or inconsistencies are wholly attributable to myself.

Notes

1. As indicated in Harvey and Wilson (2007). In addition to the works of Rosenberg, evolutionary economists are interested in technological innovations as a factor that might explain the levels and rates of growth (David, 1992; Dosi, Freeman, & Fabiani, 1994; Magnusson & Ottoson, 1997, 155 ff.; Nelson, 2005; Nelson & Winter, 1982). For a socio-technical and economic history approach: Estabrooks (1995); and for an approach from the financial history: Stehman (1967). A significant line of research focuses nowadays on economic infrastructure and its impact (Friedlander, 1995; Herranz, 2004; Röller & Waverman, 2001). Among the studies on the impact of telecommunications as a service on businesses: Lew & Cater (2006); Hermans et al. (2000). Other different approaches in Kelly (1991); Martin (1991).

2. The deregulations and the fall of the Bell system–AT&T had risen from the ashes by purchasing Bell South to create a new telecommunications giant–encouraged scholars to focus on the telephone (Caulie, 2005; Evans, 1983; Gabel, 1994; Galambos, 1992; Garnet, 1985; Hochfelder, 2002; Lipartito, 1989; Miranti, 2002; Mueller, 1997; Smith, 1985; Temin, 1987; Temin & Peters, 1985; Thierer, 1994). For studies on AT&T: Danielian (1939); MacDougall (2006). Recently, Wallsten (2005) has focused on the impact of institutional framework on the development of the telephone in Europe, and Milne (2007) on the users of the first period in the British case.

3. The references have been kept to a minimum. The bulk of the information is from CTNE Board Minute Books; Management Committee Books and Annual Reports.

4. Much has been written about the ways in which technology spreads, with scholars falling roughly into two camps: the followers of Schumpeterian, epidemic S-shaped diffusion patterns, and supporters of the fundamental diffusion models (Freeman, 1988). These models constitute a major topic in the literature on multinational companies. Without entering into a detailed discussion of their role here, we examine their importance in the transfer of technology within the telecommunications industry.

5. The impact of the uncertainty of the political system on the behaviour of railway firms’ foreign investments has been emphasised (Gourvish, 2003; Keefer, 1996; Kobrak & Hansen, 2004; Wilkins, 2005); and see Millward's (2005) comparative study on regulations in Europe with specific attention to infrastructures. For the role of technology in the rise of big enterprises see Porter (2006). Although the elegant sociological constructivism has centred on the telephone as a large technological system (Davies, 1996; Hughes, 1987; Summerton, 1994), this approach is not followed here according to Galambos (1991) and Southard (1931).

6. The share will be almost 50% by 1940.

7. As early as 1912, US industry was already coveting the European market; in that year, AT&T entered Spain. Toward the end of World War 1, S. Behn probably knew of the contacts between North American bankers, US government observers and European telephone companies with a view to organising the reconstruction of the networks (Sobel, 1982).

8. Nevertheless, the practices of the network industries and their predatory attitude towards small companies led to a process of concentration spearheaded by Compañía Peninsular de Teléfonos (CPT) (Calvo, 1998, 2002). The diagnosis of Wallsten (2005) for the period ending in 1914 is mainly a view of the situation in 1895, limited by the sources he uses; it overlooks the high performance of the non-state public networks, a fact which challenges his final conclusions.

9. At the beginning of the twentieth century, 1.2% of the country's telephones belonged to the state, while 86.5% were owned by private firms and the remaining 12.3% by private individuals.

10. There was a slight upturn in support for municipalisation. Previous studies of mine provide a more detailed explanation of facts.

11. On behalf of the US administration the intervention of the ambassador and his trade attaché are worth mentioning. National City Bank took the lead of the US expansion abroad (Wilkins, 2005). National City Bank took the lead of the US expansion abroad (Wilkins, 2005). Behn brothers, who had shifted from the sugar business in the Caribbean to telephones, turned the ITT of 1920 into a constellation of firms (ITT, 1969).

12. The banks of Urquijo and Hispano Americano undertook to endorse ordinary shares but participation was open to a further five banks. Surprisingly, advisers of Cambó, one of the most influential financiers in Spain, received the new enterprise with mistrust: Cambó Institute Archives.

13. Attempts at penetration were made in networks which were strongly controlled by non-state public entities.

14. The board of directors initially comprised the key figure at ITT, Sosthenes Behn, and two Spanish representatives. With the expansion, Hernand, Sosthenes’ brother, and L. Proctor were added, together with the Marques of Urquijo (president), and three additional Spanish representatives; a government delegation was appointed, as required by state regulation.

15. For the whole of the North American industry in Europe, see Southard (1931).

16. The European firms New Antwerp Telephone and Electrical Works (Belgium), Siemens (Germany) and Ericsson (Sweden) were rejected. Western Electric's Bell technology was already present in Spain through the Spanish subsidiary Teléfonos Bell, the future industrial base of Standard Eléctrica. Antwerp Telephone and Electrical Works Co. had supplied equipment to some of the Spanish firms, as had Ericsson, which had intensified its international activity from the end of the nineteenth century onwards, as a manufacturing company (Russia, 1897; Great Britain, 1903; France, 1908; and later in Austria) and as an operator through arrangements with SAT (concessions in Moscow, Warsaw and Mexico in the early twentieth century) (Lundström, 1987). In spite of the fact that the loss of Russian subsidiaries after the 1917 revolution had weakened Ericsson's relative position, it decided to invest in several European countries, in fierce competition with ITT (Olsson, 1993). The difficulties found by German direct investment in the high voltage business contrasts with the comparatively good performance of the low voltage exports, i.e. telephone and Siemens (Hertner, 1987). According to Wilkins (2005), Siemens was unable to resume important international business after World War I. This article tends to support Hertner's position.

17. International Banking Co., International Telephone Securities Co., Morgan Harjes & Co. (Paris), Morgan Grenfell & Co. (London) acted as trustees of the company funds, together with Urquijo and Hispano Americano Banks, the Spanish financial base of CTNE (600,000 pesetas in ordinary shares were reserved by them).

18. Appointing native citizens to the board was standard practice in the internationalisation of firms.

19. Mussolini fragmented the network in Italy, where in 1925 Ericsson began to operate and manufacture in the south through Societá Esercizi Telefonici and Fabbrica Apparechi Telefonici e Materiale Elettrico; on opposition to ITT's plans in Germany and attempts at introducing an autochthonous telephone industry in France (see ITT, 1925; Schröter, 1995; Thomas, 1988). Successive failures to establish itself as an operator saw ITT concentrate on taking up key positions in the European equipment market by means of associated companies. By 1930, ITT had 14 manufacturing plants in Europe (Sobel, 1982).

20. The government acted very differently in the other communication industries with the maintenance of the state monopoly on telegraphs, and in other strategic sectors such as oil. In fact, ITT transferred the principles of Bell system: interconnection, intercommunication and interdependence (ATT, Annual Report, 1908).

21. There were 78,124 telephones in Spain in August 1924. For an optimistic vision in CTNE, see Notes on progress made by CTNE in Spain during year ended December 31, 1929 (unpublished).

22. 2.5% of the gross income was assigned to this.

23. In fact, the tariffs proposed by CTNE had been accepted by the government. CPT related the prices to distance, while the state did so to the provincial limits.

24. The growing US investment in Spain in 1929–1936 contrasted with a general decline elsewhere in Europe (Puzzo, 1962). It was forecast that the restructuring would affect around a thousand people. In fact, the number of employees first grew until 1927 and then declined.

25. In 1945, 30 high frequency repeaters were in operation.

26. CTNE Constructions and Maintenance Department, 1930; ITT Engineering Department, November 1928. In 1929, there were 390 students at the company's schools. For the role of intangible goods in the multinational enterprises (see Wilkins, 2005).

27. Economies of density work when a fall of the average costs coincides with output growing over a network of fixed size (Madden, 2003). An ITT instruction contains a perfect explanation of the network externalities: ‘the fundamental sales activity should be the securing of new subscribers, since the addition of subscribers to the system increases the values of both the local and long distance services, as well as the revenues’.

28. The main Spanish cities were poorly connected to the European network. In the international institutions, the idea of linking up European countries accentuated in the 1920s (Chapuis, 1976).

29. The US government was determined to lodge a diplomatic complaint against Spain, which meant a demand for full compensation and the withdrawal of US investments in the country: MOFAA, Spain's attaché (Washington) to the Ministry of State, 14 and 22 December 1931. It is worth noting a lesser known fact, the pressure brought to bear by France: MOFAA, 1932. Behn strove to prevent the US embassy being transferred from Madrid to avoid the possible seizure of the company by the Republican government (Traina, 1968). The influential work of Little (1979) introduced a bias in the analysis of the institutional framework. In fact, the period of confrontation was short: during the Civil War, the Popular Front and the Republican government maintained the international commitment to ITT.

30. The anti-Republican rebels bombed ITT headquarters in Madrid.

31. Beaulac was advisor to the US embassy in Madrid (Sobel, 1982). In 1938, with the Montana project, the Nazis planned six mining companies in the Rebel zone and in the Spanish zone in Morocco (Leitz, 1996). Major economic concessions given by Franco to Germany were affected by the outbreak of the war (Harper, 1967; more on economic situation in Harrison, 1993).

32. Behn referred to ITT's outstanding account with CTNE, ‘ratifying his faith in the future of the company and in the continued growth of Spain’. It can be deduced that they intended to convert 280 million pesetas of debt payments into shares, to alleviate the compulsory charges in the balance sheet and to increase the payment to the state.

33. The radiotelegraphic concession required the continuous intervention of the US embassy. For the new period of US–Spanish relations, see Liedtke (1998).

34. Archives of the Presidency of the Government, La Moncloa, Madrid. Scholars have pointed out the different character of this nationalisation and that of Rio Tinto in 1954 (Gómez Mendoza, 1994, pp. 21–22). More on nationalisations in Gálvez and Comín (2005).

35. ITT received $ 46 million in bonds at 4% for the consolidated balance and $ 4.1 million in management and services for the declaration of investments and unconsolidated chargeable fees (ITT, 1946, pp. 38–45). Discrepancies exist in the evaluation of amount paid by the Spanish government.