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Electric Power Industry: Experiments in International Business

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ELECTRIC POWER INDUSTRY:
EXPERIMENTS IN INTERNATIONAL BUSINESS

Álvaro Ferreira da Silva

Nova School of Business and Economics

Isabel Bartolomé
University of Seville

Abstract

The electric industry became an international business since the first commercial ventures
started to use it for lighting and power. Back then, the industry resorted to any business
model available to investing abroad: free-standing companies, multinational investment by
manufacturing firms of electricity equipment, investment trusts, or consortia of investors.
The managerial economics of the industry justified this array of experiments. The utility
holding culminated this process of experimentation, representing the face of the
multinational firm in the electric power industry in the early twentieth century. It addressed
the intrinsic stand-alone characteristic of electric utilities and, simultaneously, devised a
business form to blend financing with engineering knowledge and hands-on management
capabilities. From the 1930s foreign capital and multinationals ceased to define the industry.
The preponderance of utility holdings decreased, victims of the Great Depression and the
role of the state as the main protagonist in the integration of national networks.

Introduction

This chapter focuses on the role of foreign investment and multinationals in the electric
power industry. The industry went global from the first commercial ventures in electric
lighting and power for industry and transport. Inventors and entrepreneurs – among them
some larger-than-life characters like Edison and Tesla – aimed at a global public audience.
International exhibitions provided stages to display spectacular commercial uses of the new
technology (Schivelbusch 1995 and Nye 2018).

The period from 1880 to 1930 was critical for developing the electric utility industry
(Hughes 1983: 1). By 1900, the technological bases had emerged: the invention and
commercial use of the dynamo, the central power station, the alternator, the use of long-
 2

distance transmission, and the polyphase system. This “dominant design” (Utterback and
Abernathy 1975) created a de facto technological standard. In the 1920s the industry attained
its maturity and was well-established in developed countries and the urban centers of the
peripheries (Hausman et al. 2008: 27). It settled the technological, managerial, and
institutional components, which combined are the definition of any “large technological
system” (Hughes 1983: 5-17 and 1993): a standardized technology, electrical engineering
experts and consultants, sources of venture capital, financiers and managers, government
agencies and educational institutions.

We argue that the electric power industry was global between 1880 to 1930. The electric
utility holding integrated in a business form the technological, managerial, and financial
components of the system. It represented the culmination of decades of experimentation in
international business forms. As we show, the electricity industry tried almost every business
model available to internationalizing firms during the first global economy: free-standing
companies, multinational investment by manufacturing firms of electricity equipment,
investment trusts or consortia of investors, joining together manufacturing firms, financial
and engineering interests (see sections 2 to 4). The chapter studies the evolution of the
organizational conduits for doing business abroad to understand why the electric holding
company epitomized the multinational firm in the industry. This study builds upon the
synthesis provided by Hausman and his coauthors (2008) and the insights from research on
free-standing companies and other unconventional organizational forms in multinational
activity, which “pushed forward thinking about different forms of multinational enterprise
behavior over time” (Wilkins 2009: 18; see also Lopes et al. 2018).

The evolution of the electric utilities’ foreign ownership (Hausman et al. 2008, table 1.4)
outlines the dominance of global firms in the early 1930s. After that, foreign capital and
multinationals ceased to define the industry. The Great Depression and to a lesser extent
World War I (section 5), triggered changes in the industry extrinsic to its economic and
technological dynamics. The electric power industry deglobalized after the 1930s because of
a combination of factors: the economic and political impact of the Great Depression;
decreasing returns on investment; the financial excesses of the electric holding firms in the
1920s; the belief that the state should foster national integration of electricity networks.
Nationalization policies were instrumental in ending the global electric holding.
 3

1. Technological and economic issues in the development of the electric utility

The electric power industry had a similar network design to other infrastructures and
utilities (see Tworek and John’s chapter on communications in this volume), which
influenced the industry’s entrepreneurial form. The industry’s commercial development
crucially relied upon the early adoption of the central power station and networked
transmission and distribution of energy, although the earlier innovations in electro-
processing -– Aluminium (Hall, 1888, Kensington, Pittsburgh, Pennsylvania); Calcium
Cyanamid (Frank-Caro 1898, Germany) –- seemed to lead to a scattered geography. The
dynamo created by the Belgian Zénobe Gramme in Paris around 1873 rapidly spread the
networked design and was further reinforced by Edison's incandescent light bulb of 1878,
the Pearl Street electrical station in 1882 in the U.S., and the electric tram created in
Germany in 1883 by Werner von Siemens. The first long-distance transmission of electricity
in the Electro-Technical Exhibition of Frankfurt in 1891, but its three-phase power was
only recognized as a better method than Edison's DC and Tesla's biphasic system twenty
years later (Dunsheat 1962; Devine 1990; Rosenberg 1994). Around 1900, the more
effective generation and distribution design was based on powerful and efficient generators
and the use of long-distance transmission grids, which permitted the access to sources of
hydroelectricity. (Hirsh 2003: 36; Neufeld 2016: 33).

Larger electric utility networks shared with other networked industries the advantages of
economies of scale but had one unique characteristic. The combination of different timing
and sort of demands, and the total capacity of the larger electric network will always be
lower than the summation of many smaller grids used for lighting, transport, and industrial
power in a particular city or region. This is important to solving the “peak-load problem” in
the efficient design of an electric network. Therefore, the peak of a larger network is always
well below the sum of the peaks of smaller ones (Hausman et al 2008: 13).

In the early twentieth century, engineers and entrepreneurs acknowledged the advantages
of larger, integrated networks in electric utilities. Private initiative dominated, and local or
regional monopolies would turn out to be the most efficient solution to provide power for
lighting, industrial uses, and transportation. Yet, the combination of private undertakings
and monopolist operation raised important regulatory issues (Millward 2005: 76-87).

When commercial use of electricity began, invention and innovation were international,
 4

spanning across Germany, US, England, France, Austro-Hungary, Belgium, or Italy

(Dunsheat 1962 and Hughes 1983, chs. 4 and 5). In the early twentieth century, the industry
concentrated in a few countries: Germany, the U.S., and Switzerland. Electricity became a
relatively complex technology, as the power and efficiency of generators, power stations,
and transmission technology rapidly evolved.

The diffusion turned out to be increasingly complex. Extending networks, integrating

different sources of energy (thermal and hydraulic), and designing the optimal power to for
efficiently overcoming the peak-load problem demanded specialized knowledge. The site-
specificity of the network, power generation and transmission, and peak-load forecasts
limited the degree of standardization. The design of the particular solution for a specific
place demanded highly skilled engineering services. When hydroelectricity was an option,
the engineering design was even more site-specific (Armstrong and Nelles: 1988).

The development of electric utility demanded, thus, a much more site-specific technology
transfer than in manufacturing (Rosenberg: 1972; 1976). Water or sewerage networks
raised similar challenges, as did the earlier installation of railways. The creation of free-
standing companies provided the solution for spreading these new technologies to locations
far from centers of technological knowledge. Free-standing companies synthesized the
necessary capital, the engineering, and the management.

The electric utility industry shared another characteristic with networked utilities and
infrastructures: these technological innovations demanded costly and highly transaction-
specific capital investments in generation equipment, transmission and distribution lines,
dams, and reservoirs. What was peculiar to the electric power industry was the much higher
intensity of these initial capital costs. This prevented the use of retained earnings for
financing a gradual investment or even for paying back the capital interest during the first
years of operation. Hausman and his co-authors (2008: 19-23, particularly figure 1.4)
emphasize the extraordinary capital intensity of the electric power industry during the late
nineteenth and early twentieth centuries. Until World War I, the industry invested more in
capital equipment than its total revenue, which was an abnormal situation, accumulating a
high volume of capital without a remuneration out of the operational revenue (Neufeld 2016:
5). Moreover, capital costs did not end after the system launched. The electrical firms had
to continually absorb not only intensive consumers – like chemical industries—but also
competitors, namely urban gas and electricity distributors, in order to build a regional
 5

monopoly.

Managers perfectly understood the economics of the electric utility firm by the 1920s.
Management practices accounted for the utility cost structure, its unusual balance between
fixed and operating costs, the need to deal in the most efficient way with the peak-load
factor, and the importance of price discrimination to entice customers to spread use evenly
and thus decrease the maximum amount of energy generators should produce (Giannetti
1988; Hirsh 2003: 26; Neufeld 2016: 22.).

These economic characteristics and the technological breakthroughs that favored larger
electrical networks affected how the industry internationalized. The development of
international business in electricity utilities became, thus, a rapid succession of experiments
with several business models to find the most efficient solution for different issues:
exceptional and transaction-specific capital costs; rapidly rising costs of the initial
investment due to technological innovation and increasing scale; operating revenues hardly
matching operating costs; much less remuneration of capital. This created a tension in the
industry around the two poles of the Modigliani-Miller theorem (equity vs corporate debt).
On the one hand, debt was advisable for reducing financial risk in such a capital-intensive
industry. On the other hand, long-term, foreign direct investment was appealing to enforce
control over the electric utilities management, securing serial equipment orders, engineering
services, and efficient management for protecting the capital tied up to the investment.
Equity or debt, direct or portfolio investment remained thus a difficult choice for the firms
driving early foreign investment in the industry.

The next section explains how manufacturers of electrical equipment had a strong interest
in rapidly enlarging the market for the new technology both to sell capital equipment and
appliances as well as to enforce their proprietary standards in the generation and
transmission of technology. Investing in electric utilities at home or abroad was a way to
attain these twinned objectives.

2. International business at the dawn of the first electricity ventures

Electricity became an international business at the same time as the industry became a
commercial venture and the investment requirements were relatively modest (Segreto 1994:
162). In the late 1870s and 1880s, there was intense competition between different solutions
 6

for electric lighting and power. In France the Société Générale d’Électricité aimed to
introduce electric lighting in the French main cities, but also in London and New York. At
the beginning of the 1880s, Siemens created a subsidiary in London to promote the
illumination of the British Museum (Hausman et al. 2008: 75). The American Edison
Company expanded abroad, even before installing the Pearl Street electrical station in 1882,
which created a new model for power management and distribution in the industry. A rush
to secure the diffusion and the ownership rights of Edison’s inventions abroad drove its
international expansion: in Britain, an agreement with the banking house Drexel and
Morgan to license Edison’s inventions (1878); in Continental Europe, the creation of Edison
Electric Light Company of Europe Ltd. (1880). The success of the New York power station
launched many other initiatives across Europe and the Americas (Hughes 1983 ch. 3; List
of Edison’s companies in http://edison.rutgers.edu/list.htm#Lightfor).

This first phase of international expansion in the electricity industry depended upon
inventors and manufacturers of electrical equipment. The Edison Company epitomizes this
trend. Edison and his partners intended to diffuse abroad the new model of centralized
power stations. The surge in Edison- affiliated companies around the world - from UK to
Germany, France to Italy, Argentina to Cuba – was meant to secure concessions for urban
lighting and enlarge the market. Contracts between the Edison Company in the USA and
affiliates supported licensing agreements, striving to push a de facto standard for electricity
production and transmission, at a time when a dominant design was still absent. These
initiatives were short-lived as affiliates of the USA company. Some of the firms were
liquidated shortly after. Many others severed the initial ties with Edison and transformed
into independent firms, as Società Edison in Italy, Deutsche Edison Gesellschaft (DEG) in
Germany, or the Compagnie Continental Edison in France.

Thomson-Houston Electric Company, the rival of Edison in the USA (apart from
Westinghouse with no experiences abroad) before both firms merged into International
General Electric in 1892, moved into Europe differently during this first phase. Instead of
creating affiliates and subsidiaries, it recycled Thomson-Houston’s investments into
marketable securities in operating utilities stock or bonds. The new securities were then sold
to Thomson-Houston stockholders or on the market (Hausman et al. 2008: 81). Thomson-
Houston International Electric Company (1885) was the vehicle used to export the firm’s
proprietary technology without a network of subsidiaries (Carlson 1991: 212-8). The
 7

American company also engaged in foreign direct investment through British and French
Thomson-Houston, founded respectively in 1886 and 1893, but this was minimal compared
to Edison.

At this time, different European manufacturing firms created competing solutions for
lighting and power. The competition was technological and commercial, domestic and
international. Germany witnessed a period of cooperation with the agreement between
Siemens and Edison (1883). The German Edison subsidiary agreed to purchase generators
and other equipment from Siemens, which would not litigate Edison incandescent lamps
and would produce them for the German domestic market. Besides Siemens & Halske, this
agreement also included Thomas Edison, the Edison Electric Light Company of Europe
Ltd., the DEG, the Continental Edison (which commercialized Edison patents in Europe),
and three German banking houses, which supported the creation of Deutsche Edison
(Hughes 1983: 68). Around 1900, when Allgemeine Elektricitäts-Gesellschaft (AEG)
replaced DEG, the competition with Siemens became more intense. In 1903, AEG signed
an agreement with the American General Electric splitting up the world into two main areas
of influence. Europe was left to AEG, which had taken over UEG (founded in 1892), with
close links with International General Electric.

Electrical manufacturers had strong incentives to establish electric utilities abroad through
foreign direct investment, as the Spanish case exemplifies. AEG invested in electric utilities
in Madrid (1889), Seville (1894), and Bilbao (1895) and acquired the British tram
companies to create the Compañía General de Tranvías de Barcelona a Sans. In 1896,
Schuckert started operating in Bilbao with Ahlemeyer Cía Anónima, and Siemens
purchased a plant in Malaga (Lanciotti and Bartolomé, 2014). They were crucial to expand
the market for the new technological ensemble, selling generators, transmission equipment,
or lamps, and channeling royalties from licensing the use of technological solutions. This
occurred, while there was still no set electro-technical solution for generating and
transmitting electricity. The initial utility design could create path-dependency constraints
preventing the use of other kind of machinery. Thus, manufacturers established
technological reliance on their own equipment in the initial phase by controlling the design
of the electricity systems. This was essential to support a permanent flow of sales in electrical
equipment and appliances. Manufacturers acted either as initiators, providing not only
equipment but also engineering solutions, or in association with a foreign electrical
 8

manufacturer as an affiliate. However, downward vertical integration of light and power

operating companies by manufacturers of electricity equipment was full of hazards and tied
up capital for a long time. Manufacturing firms wanted to enlarge the market and sell their
products but disregarded the direct involvement in running electrical utilities. In several
instances and once the plant/system was running, manufacturers frequently sold to other
investors (Hertner 1986 and Segreto 1992a and 1992b).

Launching downward vertical integration of foreign electric utilities via electrical equipment
manufacturers was the closest the electricity business came to the classic model of
multinational firm, in which investment abroad starts after developing a consistent presence
in the home country (Nelles 2003: 4). The German companies, AEG, Siemens-Halske,
UEG, Schuckert, and the Swiss Brown-Bovery (specialized in hydro power) had their
enormous technological potential stuck in limited domestic markets, in contrast with their
American counterparts. This explains why they rapidly started to develop other options for
enlarging the market for equipment and services abroad. In the very late nineteenth century
they became the main experimenters in alternative business solutions to foreign direct
investment in electric utilities.

3. Emulating railways and public works: the rise of consortia and holdings

A new business model for investments took shape in the late nineteenth century, as the
industry’s technology converged to more centralized solutions, exemplified by the central
power station and the outcome of the “battle of currents” (David 1992). The demonstration
of long-distance transmission at the Frankfurt exhibition (1891) showed the commercial
viability of hydroelectricity, capable of supplying distant urban or industrial consumers and
the use of polyphase systems (Hughes 1983: 127-139; Segreto 1994: 163). Investing in larger
power stations and transmission infrastructure increased capital requirements.

The business model of international expansion during the 1880s owes much to American or
German firms’ experiences of internationalization in manufacturing. After 1890, the
industry used previous practices for financing and constructing railways, ports, channels,
water, and gas utilities, and trams (Schisani and Caiazzo 2016). The common characteristics
of these industries and electricity explain the expansion of the new business model. The
operating companies in railways, ports, water, and gas utilities were also highly capital-
intensive and did not expand over borders. Business solutions for expanding abroad had
 9

relied on free-standing companies and consortia of investors for mobilizing capital and
technology for investments in foreign locations.

The rising capital-intensity in electricity after the early 1890s favored the creation of
consortia of investors in foreign ventures. The German, Swiss, and Belgium investment
trusts or holdings after 1894 presented the first formalization of this process (Segreto 1994).
One of the earliest was the Gesellschaft für Elektrische Unternehmungen (Gesfürel) created
in 1894 in Berlin and joining German banks (Darmstädter Bank für Handel und Industrie,
Dresden Bank, Disconto-Gesellschaft, Bankhaus S. Bleichröder, Privatbanken Born &
Busse) and electrical manufacturers (AEG and Isidor Loewe). It was followed by similar
initiatives centered on another manufacturer, Schuckert & Co.: Rheinische Schuckert-
Gesellschaft für elektrische Industrie AG (1894) and the Continentale Gesellschaft für
elektrische Unternehmungen (1895). Investment firms in Belgium and Switzerland made
foreign operations a priority. In Switzerland, Elektrobank was promoted by AEG in 1895,
Indelec by Siemens & Halske, and Motor established in 1895 by Brown-Boveri of Baden.
In Belgium, UEG created the Société Générale Belge d’Enterprises Eléctriques in 1895, in
partnership with Gesfürel, two Belgian railway holding companies (Société Générale des
Chemins de Fer Économiques and Compagnie Générale des Chemins de Fer Secondaires),
three Belgian banks (Cassel et Cie, la Banque de Bruxelles, Josse Allard) and the French
bank Comptoir National d’Escompte (Bitsch 1994). In 1898, the same partnership between
UEG and Gesfürel, Belgian banks (Cassel et Cie, Josse Allard, Mathieu et fils), German
banks (Disconto-Gesellschaft and Dresden Bank) and other minor participations created
the Société Financière de Transports et Enterprises Industrielles (Sofina).

The Belgian and Swiss initiatives had similar promoters to their German counterparts:
equipment manufacturers and banks, which created these firms as a financial basis for
channeling investments to operating companies in electrical power and urban transport.
Banks had helped to establish public utility systems from the 1880s, when the initiative was
led by equipment manufacturers. For instance, J. P. Morgan partnered with Edison in the
first steps of internationalizing the American company. The banking house also participated
in setting up the electricity project of Niagara Falls in the early 1890s. Banks provided access
to capital markets and supported the issuing of equity and corporate debt, underwriting the
securities. The association of manufacturers and financial firms in an investment trust or
consortium constituted in itself a means for organizing a constellation of other investors for
 10

specific projects.

The Consortium of the Barcelona Tramways (1905) represents a clear example of the pivotal
role played by these investment holdings in organizing a consortium of investors. Sofina led
the consortium with 23 other partners. The German firm Gesfürel singled out with 30% of
the capital, followed by the pivot firm (Sofina) with 23% and Belgian banking houses (Josse
Allard and Cassel with a total of 18%). Many other examples of similar consortia in
Constantinople or Lisbon could be added (Thobie 1991 on Constantinople). Sofina’s initial
function was to spot opportunities: a city that wanted to franchise the modernization of
lighting or transport using electrical power; a gas company or a tramway operator in
difficulties for moving on to the new technology; a set of existing power and transport
companies in a single city which could be combined in a more efficient one; an individual or
society who got the franchise for electric lighting or transportation, but did not have the
capital or the expertise to lead the process. If necessary, Sofina negotiated the franchise with
the municipal or state authorities, created the consortium (or syndicate, as it was mentioned
in contemporary documents), contracting the engineering solution, promoting the company,
ensuring the securities issuing and underwriting by financial partners in the consortium, and
finally launching the actual construction of electrical facilities. The members of these
business alliances were meant to support the initial funding of the project, retain their shares
for a period of time (usually one year), which might be extended through yearly agreements.
This would create a convergent block of shareholders during the project management and
construction phase, even if any single participation by an investor in the consortium was in
clear minority.

The economic and political context facilitated the transnational business alliances
underpinning these consortia. The international capital market and operators had extensive
experience of similar investments in the railway sector, major public works, or other utilities.
There was a perception of minimal political risks associated with these investments. Finally,
the electricity sector experienced a very rapid innovation rhythm, typical of technological
bubbles, and the rapid diffusion and adoption of innovations.

This model could be easily replicated in different geographies, in Lisbon or Constantinople,

in Barcelona or Buenos Aires, explaining the proliferation of initiatives with the same agents
in different countries and cities over the late nineteenth and early twentieth centuries. These
early holdings and consortia were a conduit for foreign investment, but they rarely created
 11

stable multinational enterprises running utilities in foreign countries. Their participants

were more interested in the engineering, manufacturing orders, financial revenues from the
project phase, coupled with revenues from a portfolio investment.

4. Electric holdings: the face of the multinational enterprise in electric utilities

These consortia and investment firms in electricity had evident fragilities. They seemed
much more devoted to serial projects, without entering into the actual process of
management. They shared the characteristics of similar ventures for railway construction,
mostly targeting the earnings obtained during the construction phase (Silva 2015: 727).
Investment firms and consortia were more interested in getting the concession and
constructing the power station, infrastructure of transmission, lighting, and traction, with
the inherent equipment orders and engineering fees, as well as the underwriting fees and
other earnings associated with the financial side of the business. The operation of the firm
was beyond their strategic aims. They remained inherently unstable as a management block
for long-term investments, as contemporaneous businessmen acknowledged (Heineman,
1931 and Horn 1936).

The transformation of former electrical holdings into actual multinational firms addressed
the fragility and short-termism of the entrepreneurial initiatives based on investment trusts.
Holding is a catch-all term and with vague conceptual foundations, as economists like
Bonbright and Means (1932), and businessmen, like Heineman, head of Sofina recognized
at the time. It could mean an organizational form similar to an investment trust, mostly
dedicated to portfolio investments (Nelles 2003: 14). In other instances, the same
designation was typical of multinational enterprises, taking over and controlling direct
investments (Paquier 2001). Heinemann signals well this conceptual looseness (“a certain
investment trust is named holding, and a holding is called trust”, 1931: 9; also Hausman
2008: 55). For Heinemann, the distinctive element of the holding is the control over the
management of the firm, distinct from the portfolio investment typical of investment trusts
(“the holding’s purpose is to manage firms, not a portfolio”, 1931: 10). The leader of Sofina
emphasizes the role of the holding in managing the utility, keeping its autonomy but creating
a pool of engineering and consulting services provided by the holding and coordinating
different utilities. In some cases, the organizational form had a low, flatter, hierarchy. In
other cases, it created a pyramid structure to maximize control over the affiliates (Morck
 12

2005; Bonbright and Means 1932: 18-20 and 147-8).

Manufacturing and financial interests led the initial establishment of electric holdings in the
mid-1890s, but they acquired a life of their own. For instance, Sofina was a Belgian holding
created by an electric manufacturer, the German UEG. Spotting investment opportunities
continued to be the basis for its entrepreneurial activity. After signaling a favorable
opportunity, Sofina organized a block of external investors, including financial
intermediaries for the underwriting of securities in capital markets and the manufacturing
firm(s) for supplying the equipment. The engineering talent for project design and
management resources for supporting the operation were in-house capabilities.

These functions remained similar to consortia or investment firms. The novelty came from
the investment’s longer time horizon, as well as the internal capabilities in management and
engineering. These holding firms were interested in garnering the revenues from the project
management phase. But they also wanted to gain the profits from operations, as well as
secure long-term fees for providing technical and management services. Sometimes – as in
the case of Sofina – they started with a logic closer to a portfolio investment. Rapidly they
evolved to a stable multinational endeavor to launch and control the operation of electric
utilities.

The creation of electrical holdings provided a long-term orientation to foreign investments.

They protected the manufacturers from the hazards of operating the utilities abroad, without
renouncing the privileged access to foreign markets for supplying electrical equipment. They
merged the entrepreneurial and venture creation ability of the first investment trusts with
long-term multinational operation.

Countries like Belgium or Switzerland shared similar advantages for hosting firms with this
double entrepreneurial and multinational function: neutral, with advantageous fiscal and
company legislation as well as sophisticated financial institutions and integrated in the
multinational networks of finance (Segreto 1994: 163 and Hertner 1987: 343).

Besides Germany, the other major pole of technological innovation and entrepreneurial
activity was the United States, where electric holdings developed later (Bonbright and
Means 1932: 91)1. The creation of holdings in the USA followed a similar pattern but a

1
For a different perspective, emphasizing the pioneering role of Electric Bond & Share Co. and its manager,
S. Z. Mitchell, in the creation of the electric holding company, see Hirsh (2003: 23).
 13

different chronology than in continental Europe: they combined the interests of

manufacturing firms (General Electric or Westinghouse, for instance), banks (Morgan
House, Drexel, Bonbright), engineering firms and electric utilities into financial devices to
drive investment in utilities (Hausman and Neufeld 1990 and 2004). The holding structure
had showed its adaptive potential to the specificities of the electricity industry in the
American domestic market before expanding overseas. Electric Bond & Share Co. created
in 1905 by General Electric, is an earlier example of an electric holding. At the beginning it
was mostly a financial vehicle to transform GE’s portfolio of equity and bonds in different
utility companies into marketable securities, evolving firstly to create holdings in domestic
market and only expanding abroad later (Hughes 1983: 396; Hausman and Neufeld 1997;
Schröter 2006).

Electric utility holdings in the American energy domestic market developed rapidly during
the 1920s; by the early 1930s they controlled about 80% of total electric power generation
in the USA (Bonbright and Means 1932: 94-5; Neufeld 2016: 97). The American holdings
were less internationally oriented than their European counterparts, as American domestic
market was so large. The data collected by Bonbright and Means (1932: 103) indicate that
only American & Foreign Power Company (led by General Electric) was involved in major
international expansion into South America and Asia. Others had some investments across
the border with Canada. The other American holding encompassing major foreign
investment was Utilities Power and Light Corporation, a Chicago-based firm not even
mentioned by Bonbright and Means but with interests in Britain (Hausman et al 2008: 187.).

Canada was another major pole for the creation of multinational holdings, once again later
than in Continental Europe. The same fiscal and legal advantages enjoyed by Belgium and
Switzerland explain the role played by Canada in clustering multinational activity in the
electric industry, firstly through free standing companies in South America and later hosting
holding companies in the 1920s (Hausman et al 2008: 167-8). The Canadian holdings were
in fact conduits for European and American entrepreneurs’ multinational investment
(Nelles, 2003).

It is difficult to provide a quantitative and diachronic perspective on the role of these

holdings in the international electricity business. The situation prior to World War I might
be different from the late 1920s and 1930s, when one may rely on data collected by Schröter
(2006). Two holdings stand out in terms of assets (see table 1): Sofina and American &
 14

Foreign Power Company. The case of Sofina is the most impressive. It presided over several
other holdings on table 1, as Brazilian Traction, Light & Power Co, Chade, Barcelona
Traction, Light & Power Co., Mexican Light & Power Co, and Sidro, controlling almost
50% of total assets in the table. Moreover, those 22 holdings clustered in a bimodal
distribution, corroborating the different chronologies in the creation of international
holdings in the two sides of the Atlantic. The oldest were set up around 1900, representing
the forerunners of the electric holding in the first-moving European countries, as well as
some prior free-standing companies which later evolved into international holdings (the
Canadian firms created before World War I). The second peak is in the 1920s, when the
American holdings emerged.

INSERT TABLE 1 HERE

The holding firm prevailed as the most important business model for multinational activity
in electric utilities until the mid-20th century, when the industry started to favor national
networks and public ownership (Hausman et al. 2008: ch. 6; Millward 2005). It adapted to
deal with two inherent characteristics of the electrical industry: the large sunk costs and the
intrinsically stand-alone operation of electrical utilities. The second characteristic is shared
by other activities (mining, public works, railways, and other utilities) where the attributes
of on-site operation do not lead to the emergence of multinationals out of operating
companies, as was the case of the classical multinationals in manufacturing activity (Casson
1998: 100).

The holding firms created across Europe and North America could maintain the inherent
domestic and stand-alone characteristics of the electric utilities and, simultaneously, devise
an adaptable business form to blend financing with engineering and management
knowledge. The previously cited text on holdings by the head of Sofina, D. Heineman (1931:
10-11), clearly identified two fundamental functions: the use of financial capabilities and
knowledge transfer (also Bonbright and Means 1932: 103 ff.). Other functions are also
mentioned, such as the procurement of equipment and raw materials over time, accounting,
financial and technical consulting, but the financial and knowledge transfers are
fundamental to understand the peculiar role assumed by these multinational firms. Kogut
and Zander (1993) discussed multinationals as firms specializing in difficult to codify
knowledge transfers. The emphasis on technical knowledge and site-specific engineering as
 15

major characteristics of electric holdings as multinationals goes well with this definition.

Investment trusts, consortia and early holdings shared with the clusters of promoters of free-
standing companies the same hands-off management perspective. In contrast, in the electric
holdings the fee-based engineering, financial, and procurement services provided to utilities
abroad coupled with hands-on management. This element of strategic and operational
control is, in fact, another characteristic defining a multinational besides knowledge and
capital transfers to foreign locations.

5. Turning Points and De-globalization: World War I and the Great Depression

Before the outbreak of World War I, foreign investment had electrification global through
multinational firms and international finance on a huge, but very uneven scale. During the
conflict, government intervention increased and ensured that energy supply became a
priority, accelerating the development of hydroelectricity in European peripheries, where
coal shortages had raised the energy prices (Hausman et al. 2008: ch. 4). In Britain, the
U.S., and Germany, governments also rationalized the production of electricity, expanding
power capacity and transmission lines at a regional level. Furthermore, government
involvement, stemming from growing nationalism, led to antiforeigner legislation. The
authorities of belligerent countries subjected to monitoring overseas companies and imposed
restrictions on capital exports. German authorities put under their control Belgian firms and
intended to confiscate the assets belonging to French and English corporations. In turn, the
U.K. and U.S. took over German investment in electric utilities, although it was small. In
the U.S., licenses, financial incentives, and support to build waterpower utilities were
restricted to its own citizens. The Russian revolutionary government became the first state
to nationalize all foreign properties, including electric utilities.

The war had deep consequences for global electrification. On the one hand, some of the key
actors of foreign electrification were replaced. Electricity businesses abroad had ceased to
be profitable during the war. In the European theatre of hostilities but also in neutral
countries, utility companies suffered from important imbalances between declining revenues
and increasing operating costs, aggravated by currency depreciations during the early post-
war. In the aftermath, getting supplies to the subsidiaries continued straggling the
businesses for some years. Moreover, the Treaty of Versailles ratified the takeovers of
German possessions abroad, as Keynes warned (1921: 37), using precisely the example of
 16

DUEG, the German electricity holding. Siemens and AEG lost a large part of their
investment in Europe, Latin America, and Africa. German interests in the Swiss
Electrobank and Indelec decreased and the former had to be redesigned while Motor coped
with financial difficulties and had to merge with Columbus in 1923. Thus, an opportunity of
entering sizable markets to other investors arose. U.S. holdings’ interests grew in Italy first
and Latin American in the late 1920s, through American & Foreign Power Co (Hausman et
al. 2008: 145).

On the other hand, there were continuities. As early as 1919, German manufacturers
decided to intensify their investments through Swiss or Belgian holding companies – e.g.
Elektrobank, Sofina – and registered new distribution companies abroad. As the examples
of the Iberian companies–Barcelona, Traction Light and Power and CRGE of Lisbon—
showed, German control was disguised by means of the openness to Iberian capital and the
leading role of third countries. Shortages of capital due to mark depreciation and the fear
that German equities were requested as reparations forced to sell DUEG-CATE, the
Argentinian electric company. A Spanish banking consortium purchased it and the CHADE
was registered as a Spanish company with interests in Argentina, Chile and Uruguay. It
soon became clear, however, that Sofina was backstage and German manufacturers were
still involved in all contracts for the company’s projects (Lanciotti and Bartolomé 2014).

After the war, governments were reluctant to abandon their commitment to rationalizing
energy markets in general and electricity networks in particular. The takeover of German
interests during the conflict enabled some governments to nationalize electric utilities and
grids after the war. Particularly in Eastern Europe, takeovers eliminated the German
presence, while in South America, Belgian, French and British investment substituted for
German interests. However, British had serious difficulties to restore its positions as the
world’s greatest electrical financial center and one of the most important registration places
of foreign utility companies. Even the former almighty Canadian group started to withdraw
from some markets while both U.S. foreign investments in electric utilities and the U.S.
finance acquired prominence along the twenties. Monetary risk summed up to political risk
after the World War I (Coppersmith 2008). As Nelles (2003) has pointed out, foreign
investment in electric companies was particularly hazardous in the aftermath of the war, due
to the currency exchange instability and the difficulty in restoring anything close to the fixed
exchange rates of the pre-war gold standard. The companies attempted to keep under
 17

control the rates of foreign exchange of capital flowing in both senses and private electric
holdings prevailed as the most suitable means to lead the process to rationalize electricity
business operations during the interwar period. Sofina, the British Whitehall and the
Canadian Securities (derived from the Toronto group), and Electric Bond and Share were
still on the spot, but at the end of the twenties new U.S. companies and capital went abroad
in a very tangled web of corporate structures, particularly through American & Foreign
Power Company. Nothing was ever the same again in the overseas electrification after the
war and U.S. holdings featured the formidable expansion of electricity during these years.

The aftermath of the Great Depression revealed a divergence from other industries
(Schröter 2006). Compared to the rest of the economy, the demand for electricity decreased
very little in the United States and Europe while no significant effect is observed in most
parts of the world. During the late twenties, electricity had become a necessity for
manufacturing, public lighting, and households. In spite of the differences in consumption
per capita in 1932 and household electrification, the percentage of users of electricity in
industrialized countries was above 90 percent (Table 2). The electricity market was
broadened thanks to the increasing demand of the new home appliances, advertised by the
utility companies. Furthermore, the electricity industry had concentrated and rationalized,
whilst internationalization was pursued. Thus, after the stock market crash, the electricity
business was perceived as mature and the electricity companies as sound. Although the most
ambitious projects, as the Egyptian dam in Aswan, were promptly cancelled, the flow of
overseas investment continued, and new actors emerged.

INSERT TABLE 2 HERE

In 1930, foreign investments even intensified. As the prices of the electricity securities fell,
the American market opened to foreign investors on the cheap, while US holdings (Insull,
Electric Bond & Share and United Corporation), the British Whitehall and some banks
sought for business abroad, most of them through loans guaranteed by governments like
Italy and Spain. New actors also joined the venture, the Americans (American Foreign
Power Corp, Amforp, subsidiary of Bond & Share) and the European Electric Corp.
(EEIC), registered in Canada. Their funds were addressed to the peripheral countries, in
Latin America and the south of Europe, where they all made sizeable investments.

In the spring of 1931, the sector was perceived as vulnerable when US banks withdrew large
 18

amounts of money from Italian companies and the former Berlin City Elec. Co., which
heavily relied on American loans. Furthermore, the crisis attained Latin America where
sharp declines in exchange rates were experienced.

Political risks matched financial threat in 1932. Governments of FDI host countries
discouraged foreign investment primarily hampering the overseas transfer of dividends in a
new era of capital controls. After 1933, foreigners with holdings in German securities lost
not only their interest payments but also any chance of withdrawing their investments.
Secondly, the new political setting favored the regulation of electricity prices and new
taxations, like the Laval government in France. The diminishing profits perspective did not
suit with the new governmental requirements to electricity companies: huge amounts of
additional investments in the form of both enlargement and densification of networks to
cover rural areas and enhancing the security of supply of the whole electricity system.
Foreign companies were seen with mistrust and the peril of an expropriation against the will
of the owners was embodied in some legislations. Accordingly, Gesfürel transferred its
stake-holdings in CHADE to a Swiss subsidiary to avoid German nationalistic controls. At
the same time, Electrobank diminished its holdings in German electricity sector, whereas in
Italy foreign investment was mostly rescued by the IRI in 1933.

When the Insull empire collapsed in 1932 (Neufeld 2016: 105-8), it became clear how the
largely pyramid structures of holdings were at risk, exacerbated according to their degree
of international exposure. As Hausman et al. (2008) put, the electricity companies were
caught up in these problems. Both American and British financiers increased domestic
investments at the expense of overseas ones. However, as Schroter (2006) emphasized,
electrification continued being a basic demand and most international holding companies
were tied up by long-run investments. Thus, they adopted a new set of survival strategies.
Firstly, the investments were diversified and the utility companies favored the reinvesting
of profits; secondly, the concentration processes of large firms were reinforced; thirdly, the
collaboration with host country’s entrepreneurs became a usual practice in order to avoid
any kind of discrimination in concessions. Thus, Elektrobank diversified its portfolio of
holdings in Europe and in the U. S., where all the stakes were portfolio investments. Indelec
expanded in Eastern Europe as Siemens did, but some residual investments in France
remained in the thirties whereas Motor-Columbus concentrated its interests in Switzerland
and the Empain group in France. The difficulties of Sidro and Electrobel once the autarchic
 19

policies discouraged foreign investment in the South of Europe and the survivors focused
on peripheral markets, particularly those in Eastern Europe and South American cities, like
Motor-Columbus and particularly Sofina. This company remained a global business
notwithstanding the most difficult environment. It transferred CHADE to a new
Luxembourg company, SODEC, and reduced its holdings in both France and Turkey
whereas obtained sizable ones in the U.S.

The major change was the progressive trend to reverse the balance between foreign direct
and portfolio investment in multinational holdings. Although Heineman maintained the
hope of this crisis as transitory and opted for an increase of direct investments, most holding
companies followed the opposite path. They maintained sizable stakes as international
investors (Hausman et al. 2008: 219, Table 5.1) but more as portfolio investments rather
than direct investors. Investors reduced their foreign exposure focused on a bunch of
peripheral markets and reduced the number of their employees, in a clear sign that they
were singling portfolio investment out of the Modigliani-Miller two poles. At the end of the
thirties the ties within and outside the electric multinationals had loosen.

Conclusion

This study on the Protean faces of international business in electric utilities privileged
substantive and nuanced approaches to the taxonomies of foreign investment in the industry
offered by Hausman et al. (2008: ch. 2) or Nelles (2003: 4). Behind many of the vehicles for
investing abroad were very often the same manufacturing firms and entrepreneurs, banking
houses and engineering firms, lawyers and politicians as brokers. The emphasis attributed
to clusters of entrepreneurs and investors in the literature is consistent with the porosity
revealed by the organizational forms and the human agency behind these investment
vehicles. Hausman and his co-authors argued forcefully for the similarity between holdings
and serial free-standing companies emerging frequently from the same clusters of investors
(2008: 63). In fact, investment trusts and the early holdings consolidated in the multinational
electric holding the informal alliances of manufacturers and banks formerly promoting
foreign stand-alone investments through free-standing companies. The informal alliances
did not disappear with the emergence of holdings and investment trusts in the mid-1890s.
The consortia created for stand-alone investments in electric utilities (see the
aforementioned examples of Barcelona or Constantinople) replicated those informal clusters
 20

of investors.

This chapter did not follow the presentation of divergent styles of foreign investment,
separating German from American, Canadian from Belgian initiatives (Hertner and Nelles
2007; Nelles 2003). Indeed, the Canadian financial syndicates, so active in Latin America or
in the second technological wave in electrifying Barcelona, replicated the consortia created
in Europe by Swiss or Belgian investment trusts, German or Swiss manufacturers and banks
from different nationalities since the 1890s. Once more: these large consortia of investors
were not a novelty. The electric industry followed similar solutions for investing abroad in
other capital-intensive and stand-alone foreign operations. Even the contractual agreement
among the members of the Canadian syndicates to pool the common stock in a syndicate
manager for a specified period of time appeared as a common solution in other national
contexts and industries. To sum up, the entire range of organizational solutions were used
irrespective of national affiliations or styles.

Jones and Khanna (2006: 459) warn against the fallacy of the new in international business
studies. The variety of institutional conduits for promoting business ventures abroad in the
electric industry belies the idea that late twentieth-century globalization created most of the
brand-new and variegated forms of international business. In the short period of time
covered by this chapter, different organizational models materialized, intertwined,
coalesced, and evolved to foster new forms, sometimes reminiscent of current born-global
firms or the flexible arrangements in joint ventures and business alliances.

The fallacy of the new should also not haunt the cross-industry comparison of institutional
models in international business. Firm structures often seen as innovations instead emerged
from adapting and invigorating business forms already tried in other industries (railways,
other utilities, or public works). The organizational solutions experimented in the electric
utilities addressed management tensions in the operation of the industry. These tensions
heighten when running electric utilities as a result of the peculiar economic and
technological conditions emphasized in section 1. However, other industries faced
comparable strains: stand-alone operations, site-specificity, capital intensive with high sunk
costs, or the need to experiment on pricing to enlarge the consumer basis. A portfolio of
organizational solutions to deal with these tensions was already available in the late
nineteenth-century global economy. Therefore, the institutional conduits for foreign
investment in electricity moved along an array of existing solutions: free-standing
 21

companies, formal and informal consortia of investors for capital intensive projects,
investment trusts formalizing these alliances, manufacturing firms conveying abroad the
goods or services provided in the home country.

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Table 1: Foreign assets of electric utilities holdings, 1929 and 1937, in current US dollars
(adapted from Schröter 2006, table 1)

Country of Assets Assets

Name Year
registration 1929 1937
American & Foreign Power Co USA 1924 756 535
Société Financière de Transports et des Belgium 1898 420 399
Entreprises Industrielles SA (Sofina)
Brazilian Traction, Light & Power Co Canada 1912 369 426
Comp. Générale d’Entreprises Electriques et Belgium 1929 194 218
Industrielles SA (Electrobel)
Compania Hispano-Americana de Electricidad Spain 1920 139 38
SA (CHADE)
Barcelona Traction, Light & Power Co Canada 1911 116 190
The Mexican Light & Power Co Canada 1902 101 110
 24

Electrotrust Belgium 1928 50 98

Motor Switzerland 1895 46 45
Soc. Internationale d’Energie Hydro- Belgium 1923 44 91
Electrique SA (Sidro)
Gesellschaft für Elektrische Unternehmungen Germany 1894 43 63
(Gesfürel)
Compagnie Financière d’Exploitations Hydro- Belgium 1928 - 53
Electriques SA (Hydrofina)
Italian Superpower Corp. USA 1928 39 32
European Electric Corp. Canada 1930 - 28
Schweizerisch-Amerikanische Elekrizitäts- Switzerland 1928 27 21
Gesellschaft AG
Bank für elektrische Unternehmungen AG Switzerland 1895 23 30
(Elektrobank)
International Power Co. Canada 1926 15 21
Schweizerische Gesellschaft für elektrische Switzerland 1896 11 11
Industrie AG (Indelec)
Elektrische Licht und Kraftanlagen AG Germany 1897 10 19
Société Financière Italo-Suisse Switzerland 1902 9 14
Société Générale pour l’Industrie Electrique Switzerland 1927 7 12
Société Centrale pour l’Industrie Electrique France 1909 4 5

Table 2 . Some Data on World Electrification in 1932

United
Canada U.S.A. Sweden Kingdom Germany France Italy Argentina Spain Portugal

Output per inhabitant 1516 919 792 369 365 325 245 142 136 41
Percentage of users of
electricity n.a. n.a. 91,7 97,4 87,7 97,6 93,4 n. a. 88 90
Percentage of electrification
of households n.a. n.a. 84,5 43,7 75,3 93,6 73,5 n.a. n.a. n.a.
Sources: Annuaire statistique de la Société des Nations 1932-1933, 1933, Geneva; Bruno Seeger. El Consumo
de Electricidad para alumbrado en Europa. 1933, Madrid: Gráfica Administrativa.

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