From Agglomeration to Innovation

From Agglomeration to Innovation

Other titles from IDE-JETRO: MAKING HEALTH SERVICES MORE ACCESSIBLE IN DEVELOPING COUNTRIES Hiroko Uchimura (editor) GLOBALISATION, EMPLOYMENT AND MOBILITY The South Asian Experience Hiroshi Sato and Mayumi Murayama (editors) POVERTY, REDUCTION AND BEYOND Development Strategies for Low-Income Countries Takashi Shiraishi, Tatsufumi Yamagata and Shahid Yusuf (editors) RECOVERING FINANCIAL SYSTEMS China and Asian Transition Economies Mariko Watanabe (editor) EAST ASIA’S DE FACTO ECONOMIC INTEGRATION Daisuke Hiratsuka (editor) NEW DEVELOPMENTS OF THE EXCHANGE RATE REGIMES IN DEVELOPING COUNTRIES Hisayuki Mitsuo (editor) DEVELOPMENT OF ENVIRONMENTAL POLICY IN JAPAN AND ASIAN COUNTRIES Tadayoshi Terao and Kenji Otsuka (editors) ECONOMIC INTEGRATION IN ASIA AND INDIA Masahisa Fujita (editor) REGIONAL INTEGRATION IN EAST ASIA From the Viewpoint of Spatial Economics Masahisa Fujita (editor) INDUSTRIAL CLUSTERS IN ASIA Analyses of Their Competition and Cooperation Akifumi Kuchiki and Masatsugu Tsuji (editors) GENDER AND DEVELOPMENT The Japanese Experience in Comparative Perspective Mayumi Murayama (editor) SPATIAL STRUCTURE AND REGIONAL DEVELOPMENT IN CHINA An Interregional Input-Output Approach Nobuhiro Okamoto and Takeo Ihara (editors) THE FLOWCHART APPROACH TO INDUSTRIAL CLUSTER POLICY Akifumi Kuchiki and Masatsugu Tsuji (editors) FROM AGGLOMERATION TO INNOVATION Upgrading Industrial Clusters in Emerging Economies Akifumi Kuchiki and Masatsugu Tsuji (editors)

From Agglomeration to Innovation Upgrading Industrial Clusters in Emerging Economies

Edited by Akifumi Kuchiki and Masatsugu Tsuji

© Institute of Developing Economies (IDE), JETRO 2010 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2010 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978–0–230–23310–2 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 19 18 17 16 15 14 13 12 11 10 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

Contents List of Tables

vii

List of Figures

xi

Acknowledgements

xiii

Notes on the Contributors

xiv

1 Introduction Masatsugu Tsuji and Akifumi Kuchiki Part I

1

Learning Linkage as Drivers for Creating Cluster and Innovation

2 The Automobile Industry Cluster in Malaysia Akifumi Kuchiki

15

3 Industrial Cluster Development and Innovation in Singapore Poh-Kam Wong, Yuen-Ping Ho and Annette Singh

50

4 Empirical Analysis of the Relationship between Upgrading and Innovation of Japanese SMEs and Industrial Clustering Shoichi Miyahara and Masatsugu Tsuji 5 Collective Goods for Reformatting the Rio de Janeiro Software Cluster into a Local Innovation System Antonio José Junqueira Botelho, Alex da Silva Alves and Glaudson Mosqueira Bastos 6 Innovation through Long-distance Conversations? Experience from Offshoring-based Software Clusters in Bangalore, India Aya Okada Part II

117

166

204

Market Pooling and Organizational Change as Drivers for Creating Cluster and Innovation

7 A Comparative Analysis of Organizational Innovation in Japanese SMEs Generated by Information Communication Technology Masatsugu Tsuji and Shoichi Miyahara

v

231

vi

Contents

8 The Role of the Specialized Markets in Upgrading Industrial Clusters in China Ke Ding 9 Industrial Clusters and Workplace Training to Expand Innovation Capability: Evidence from Manufacturing in the Greater Bangkok, Thailand Tomohiro Machikita 10 Innovation as a Driver for Building an Oil & Gas Industrial Cluster in Rio de Janeiro, Brazil Antonio José Junqueira Botelho and Glaudson Mosqueira Bastos

270

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11 Conclusion Akifumi Kuchiki and Masatsugu Tsuji

357

Index

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Tables 2.1 Changes in countries and regions for promising businesses in the medium term 2.2 Suitable production sites in the medium and long term 2.3 Problems in localization of employees, products and technology 2.4 Reasons for promising countries and regions 2.5 Evaluation index of investment environment of ASEAN and India in comparison with China 2.6 Questionnaire survey on application of Flowchart Approach to industrial cluster policy 3.1a Profile of the Singapore pharmaceuticals sector, 1980–2006 3.1b Profile of the Singapore medical technology sector, 1980–2006 3.1c Profile of the Singapore biomedical sciences (BMS) sector, 1980–2006 3.2 Milestones in the Singapore biomedical sector 3.3 Pharmaceutical and medical technology share of Singapore biomedical sector, 1980–2006 3.4 R&D expenditure and manpower in the biomedical sector, 1993–2006 3.5 Biomedical Shares of Singapore R&D Expenditure and RSEs, 1993–2006 3.6 Share of life science patents in Singapore, 1977–2007 3.7 Breakdown of Singapore life science patents by assignee, 1977–2007 3.8 Top pharmaceutical companies in Singapore, 2005 3.9 Major foreign pharmaceutical companies operating in Singapore 3.10 Establishment of life science public research institutes under A*STAR 3.11 Dedicated biotechnology firms (DBFs) founded in Singapore 3.12 Profile of NUS biomedical-related spin-off companies 3.13 Key component industries within Singapore maritime cluster 3.14 Growth trends in Singapore maritime cluster 3.15 Maritime clusters value added, international benchmarks 2001 3.16 Linkages of maritime cluster to economy 3.17 Principal statistics of Singapore maritime sector, 2005 3.18 Sales revenue of marine and offshore engineering industry 3.19 Principal statistics of marine and offshore engineering industry vii

30 31 33 34 35 37 56 57 58 59 61 62 63 63 64 66 67 73 77 80 86 87 87 88 89 95 97

viii

Tables

3.20 Leading offshore engineering companies 3.21 Leading offshore support services companies 3.22 Key R&D indicators for the Singapore marine engineering sector 1993–2006 3.23 Offshore patents invented in Singapore or assigned to Singapore interests 3.24 Examples of private and public/IHE collaborations in offshore sector 3.25 Profile of Keppel FELS and Sembcorp Marine 3.26 Turnover and net profit for Keppel O&M Ltd and Sembcorp Marine Ltd, 1993–2005 4.1 Distance between SMEs and collaborating partners 4.2 Year of establishment 4.3 Amount of capital 4.4 Number of employment 4.5 Category of industry 4.6 Category of manufacturing 4.7 Subcontracting 4.8 Recent annual sales 4.9 Trend of sales amount within recent 3 years 4.10 Balance of revenues and costs in recent 3 years 4.11 Ratio of R&D expenditures to total sales 4.12 Year of authorization 4.13 Number of upgrading and innovation: Replies to question V 4.14 Number of patents applied for 4.15 Number of patents registered 4.16 Number of new products and services developed 4.17 Ratio of R&D and sales trend 4.18 Ratio of R&D and business performance 4.19 Summary of statistics 4.20 Summary of estimation results: Upgrading model 4.21 Summary of estimation results: Innovation model A1–1 Results of estimation: Upgrading model I A1–2 Results of estimation: Upgrading model II A1–3 Results of estimation: Upgrading model III A1–4 Results of estimation: Upgrading model IV A2–1 Results of estimation: Innovation model I A2–2 Results of estimation: Innovation model II A2–3 Results of estimation: Innovation model III 5.1 Characteristics of the Rio de Janeiro City IT local productive arrangement 5.2 Local collective goods for the City of Rio de Janeiro 6.1 Analytic and interpretive perspectives 6.2 Modes of delivery of software services exports from India (%)

98 100 102 103 104 106 108 120 120 121 121 122 122 123 123 123 124 124 125 126 129 129 129 131 131 134 140 144 149 151 154 156 158 160 162 181 196 209 214

Tables ix

6.3 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13 8.1 8.2 8.3 8.4 8.5 9.1

9.2

9.3

9.4 9.5 9.6 9.7

9.8

TCS’s partnerships with universities worldwide Question on software use Question on Internet use Index of organizational innovation of two groups Result of component analysis Summary statistics Result of OLS estimation Factors affecting organizational innovation (1) Factors affecting organizational innovation (2) Probit/logit estimation Problems of organizational innovation by SMEs (1) Problems of organizational innovation by SMEs (2) Policy desired for organizational innovation (1) Policy desired for organizational innovation (2) Number of booths in specialized markets in Zhejiang’s major industrial clusters (1998) Scope of specialized markets in Zhejiang’s major industrial clusters (1998, multiple) Profile of the Yuyao Moulds cluster Raw material businesses in the Yuyao Market Division of labour in the Yuyao Market Summary statistics of training incidence by outside labour market experience and tenure for production and non-production workers: On-the-job training incidence in 2001 Summary statistics of training incidence by outside labour market experience and tenure for production and non-production workers: Off-the-job training incidence in 2001 Summary statistics of log of wage in July 2001 by outside labour market experience and tenure for production and non-production workers: Log of monthly wage Job tenure and previous experience by industry and occupation Industry effects on training incidence, dependent variable: Binomial OJT incidence in 2001 Industry effects on training incidence for production workers, dependent variable: Binomial OJT incidence in 2001 Industry effects on training incidence for non-production workers, dependent variable: Binomial OJT incidence in 2001 Industry effects on training incidence, dependent variable: Binomial OFFJT incidence in 2001

221 240 240 242 244 245 247 249 250 251 253 254 255 256 271 272 280 281 281

299

300

302 303 306 308

309 310

x Tables

9.9

9.10

9.11

9.12

9.13

9.14

9.15

9.16

10.1 10.2 10.3 10.4 10.5 10.6

Industry effects on training incidence for production workers, dependent variable: Binomial OFFJT incidence in 2001 Industry effects on training incidence for non-production workers, dependent variable: Binomial OFFJT incidence in 2001 Effects of interactions between OJT length and industry on log of wage, dependent variable: Log of wage in July 2001 Effects of interactions between OJT length and industry on log of wage for production workers, dependent variable: Log of wage in July 2001 Effects of interactions between OJT length and industry on log of wage for non-production workers, dependent variable: Log of wage in July 2001 Effects of interactions between OFFJT length and industry on log of wage, dependent variable: Log of wage in July 2001 Effects of interactions between OFFJT length and industry on log of wage for production workers, dependent variable: Log of wage in July 2001 Effects of interactions between OFFJT length and industry on log of wage for non-Production workers, dependent variable: Log of wage in July 2001 Evolution of O&G industry suppliers South-east region O&G industry suppliers O&G industry suppliers by service groups Oil proven reserves at end of 2006 Oil proven reserves at end of 2006 in South and Central America Sectoral funds: Regulatory frame and resources

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313

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320 327 327 328 329 329 338

Figures 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 3.1 3.2 3.3 3.4 4.1 5.1 6.1 6.2 7.1 7.2 7.3 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11

Flowchart Approach to industrial cluster policy Factors Cluster policy Actors Flowchart Approach: Step 1: Agglomeration Flowchart Approach: Step 2: Infrastructure Priorities of each player Number of firms to strengthen and enlarge their branches Prescriptions for the automobile industry cluster Prescriptions for automobile industry clustering in Malaysia Flowchart of innovation by university, industry and cluster The Biology industry cluster in Singapore Singapore’s BMS cluster development strategy Overall institutional framework in Singapore for IMC development Singapore’s IMC development strategy Shipbuilding and Repair Revenues, 1972–2006 Trend of Upgrading and Innovation A flowchart of IT cluster in the City of Rio de Janeiro Software development services life cycle by location of activities Pattern of intra-firm international division of labour: The case of TI’s semiconductor production Layer of questions in AHP Weight obtained by AHP Distributions of indices Brazil oil production and consumption Brazil proven reserves of oil and NGL at end of 2006 PETROBRAS evolution investments, 1991–2001 PETROBRAS technological cooperation programmes Regional distribution of PETROBRAS cooperation PETROBRAS deep sea drilling technology evolution PETROBRAS technological system PETROBRAS R&D expenditures PETROBRAS production targets Projected special participation expenditures on R&D Management structure of the programme (PROMINP) xi

18 19 19 19 20 21 23 30 39 41 44 46 65 91 92 96 128 170 215 219 241 241 243 330 330 332 340 341 343 344 345 346 347 348

xii Figures

10.12 10.13

Organizational structure of REDE PETRO BC A flowchart of the exploration and production (E&P) Segment of the O&G sector in the state of Rio de Janeiro

349 353

Acknowledgements First of all, the editors would like to express sincere gratitude to Dr Tomohiro Machikita, Dr Yasushi Ueki and Mr Kentaro Yoshida for their research input and comments during the whole process of this project; their encouragement and support have been invaluable. We are also grateful for lively discussions with Dr Keshab Das, Dr Toshitaka Gokan, Prof. Yoshiaki Hisamatsu, Mr Ikumo Isono, Dr Jobaid Kabir, Dr Hisaki Kono, Mr Kazuki Minato and Prof. Yumiko Okamoto. Special thanks are due to anonymous referees, who kindly provided valuable comments and suggestions for revising the draft. Finally, the editors are indebted to Ms Mariko Hashimoto, Ms Junko Yaegashi and Ms Mayumi Hasegawa for their generous secretarial works.

xiii

Contributors Akifumi Kuchiki Professor, Department of International Development Studies, College of Bioresource Sciences, Nihon University Masatsugu Tsuji Professor, Graduate School of Applied Informatics, University of Hyogo Alex da Silva Alves Research Fellow, Pontifícia Universidade Católica do Rio de Janeiro (PUC – Rio University), Brazil Glaudson Mosqueira Bastos Research Fellow, Pontifícia Universidade Católica do Rio de Janeiro (PUC – Rio University), Brazil Antonio José Junqueira Botelho Professor, Pontifícia Universidade Católica do Rio de Janeiro (PUC – Rio University), Brazil Ke Ding Research Fellow, Area Studies Center, IDE-JETRO Yuen-Ping Ho Research Manager, NUS Entrepreneurship Centre, National University of Singapore Tomohiro Machikita Research Fellow, Inter-disciplinary Studies Center, IDE-JETRO Shoichi Miyahara Professor, Faculty of Economics, Aoyama Gakuin University Aya Okada Professor, Graduate School of International Development, Nagoya University Annette Singh Research Officer, NUS Entrepreneurship Centre, National University of Singapore Poh-Kam Wong Professor, Business School and Lee Kuan Yew School of Public Policy, National University of Singapore

xiv

5 Collective Goods for Reformatting the Rio de Janeiro Software Cluster into a Local Innovation System Antonio José Junqueira Botelho, Alex da Silva Alves and Glaudson Mosqueira Bastos

5.1

Introduction

The flowchart model has significantly contributed to the policy knowledge about the development of manufacturing industrial agglomerations in emerging economies in Asia into high-productivity, efficient clusters (Kuchiki 2004; Kuchiki and Tsuji 2005b). The flowchart model recent research efforts have been targeted at firm geographical agglomerations in other regions such as North and Latin America, particularly Brazil and the United States, and other types of industries such as renewable – sugar-alcohol production chain (Ueki 2007) – and non-renewable energy – oil and gas exploration and production (Botelho and Bastos, this volume) and software in India (Okada 2005; Okada, this volume); as well as exploring new topics such as innovation clusters in the United States and China (Kabir et al. 2007; Kuchiki 2007). This chapter represents yet another unique addition to this second phase of the flowchart research programme, as it studies the conditions for the redevelopment of a non-hierarchical cluster in the IT sector centred on innovation, with a particular focus on software and services industry (SSI), in the metropolitan region of Rio de Janeiro, Brazil. Estimates of the size of the Rio de Janeiro IT cluster vary widely from 500 to 1,250 to 5,000. The number of non-micro one- to two-person firms in the more circumscribed software and services industry (SSI) sector amounts to 1,250, of which about 500 software houses, which together represent 16 per cent of the state’s IT market. Most firms are small (fewer than ten employees), constituting a decentralized, non-hierarchical cluster, although in a few segments there is a significant number of firms of more than 30 employees. The state SSI industry association ASSESPRO RJ estimates that the top 20 firms have on average over 500 employees, and account for 15,000 to 18,000 employees of the total employment of 50,000. The balance of about 166

Rio de Janeiro Software Cluster 167

30,000 employees is accounted for by 17,000 one- to two-employee micro enterprises. Although there are no hard numbers available there is a firm consensus among local software industrial associations and development agencies that Rio de Janeiro software and services industry (SSI) has been in a relative decline since its heyday in the 1980s. ASSESPRO RJ estimates that the state’s share of the national industry was halved in a decade, going from 36 per cent in 1997 to 18 per cent in 2006, but it remains the country’s second largest. The share of the total number of IT firms which represented 18 per cent (5,022) in 1991 remains stagnated by 2001, although in absolute numbers it follows the total growth rate of 280 per cent over the period (ASSESPRO RJ 2005). Diverse empirical elements appear to sustain this uneasy feeling. One such indication is that Rio de Janeiro state software registry in the National Intellectual Property Institute (INPI) relative ranking has been declining over the past two decades. Furthermore, whereas São Paulo registries almost doubled between 1988–1999 and 2000–2006 and those of the third ranked state in the latter period (Minas Gerais) tripled, Rio de Janeiro registry ranking has fallen to number two after dividing the leadership with São Paulo and the absolute number of registrations has grown less than 30 per cent between the periods. Next, in the past couple of years a dozen SSI firms have made IPOs to finance their expansion to acquire a scale to compete become internationally, none founded or headquartered in Rio de Janeiro. Finally, as subsidiaries of large SSI firms in Brazil have stepped up their offshore outsourcing activities, most of this expansion has taken place in São Paulo – One of IBM’s and Brazil’s largest software development centre with 4,000 employees has been located in Hortolandia (in IBM’s old manufacturing facilities), nearby São Paulo capital,1 and EDS opened in late 2007 its largest single US$20 million software development services centre with 5,000 of its 10,000 employees in the country2 in the city of São Bernardo do Campo, in the greater São Paulo metropolitan region. The promotion of the territorial agglomeration of high-tech firms in local production systems of SMEs can be sustained by external economies and the collective goods that induce them. In particular, external economies that favour the generation of new products instead of their reproduction (in scale) to the marketplace. In high-tech sectors, the production process – once an output is finished – is relatively simple and much less costly in terms of time, work employed and space required than it tends to be in the case of industrial districts. Once produced something that ‘works’, meaning there is demand for it in the marketplace, its production can be started in an industrial scale at relatively lower costs. The major problem then lies in the inputs structure, that is to say, in the generation capacity of new products in sectors where this process tends to be strongly influenced by scientific advances. That argument is the main motivation behind the explanation of the importance of external economies linked to formal and

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informal relationships with scientific institutions as well as with the ‘production’ of specialized services that favour the connection between, on one side, education and scientific structures and, on the other, entrepreneurs and other stakeholders. Paraphrasing Bagnasco’s argument on the socioeconomic success of north and north-east Italian industrial districts in the 1970s, it could now be said that there is also a process of social construction of innovation, given the growing importance of the local sphere for innovation activities. In sum, external economies favouring the link between the generation process of new knowledge and the launching of new products seem to be much more important for small and medium-sized firms in high-tech sectors. In the generation of collective goods necessary for the evolution of this one particular form of production organization, the intentional processes that give birth to the promotion of cooperation among collective public and private agents are more important than those collective goods rooted in the original endowments of a territory. More importantly, it is the nature of social capital that differs among industrial and technological districts. Social capital is in the root of the generation process of collective goods. Collective goods produce the external economies that enhance the conditions for the agglomeration of firms in a territory. What thus explains the difference between those external economies arising out as the result of intentional processes (e.g., geared at the solution of a given problem) to those built through a process of long-standing trust founded on local identities is social capital. In technological districts, social capital tends to be formed by experimentation rather than by the construction of a local identity – or embeddedness. The evidence on the long-standing success behind the Silicon Valley seems to be oriented towards a cyclical dynamics of start-up creation and spin-offs from universities, public and private research labs and other firms that – even though most of them do not last too long – promote a sort of sane contagion of the local innovation culture. Behind this phenomenon there is a professional community – without walls or physical borders – working overnight towards the solution of business and research problems arising out by high-tech entrepreneurs’ decisions to risk in new ventures (Saxenian 1994). Additionally, even before the establishment of such communities, as Porter (2001) and Picchieri (2002) suggest, a group of intermediate organizations formed by the interaction of public agents in the local, regional and national spheres needs to be strengthened. The intermediate organizations constitute an important collective good needed to favour the link between research and the business environment (Antonelli 2001; Cooke 2001; Crouch et al. 2004; Granovetter et al. 2000; Kenney 2000; Saxenian 1994 and Storper 1997). They collectively suggest that the origins of technological districts seem to be given, on the one hand, by incremental and


spontaneous processes developed in terms of previous local competencies and resources (collective goods); on the other, and parallel to the prior aspect, there are also strong evidences indicating that without a qualifying public support – local and national – the development of technological districts would have become almost impossible. Innovation clusters tend to be more dependent on conscious political choices geared at establishing support organizations which stimulate cooperation between, on one side, educational and research institutions and, on the other side, firms and society at large. The production of these collective goods induces important external economies. These external economies, conversely, favour the localization of new small and medium enterprises and promote new positive externalities linked to the agglomeration effects that take place in both traditional and technological districts. Thus, public policy does represent an important role in the evolution of technological districts, not by securing a more efficient resource allocation in the local economy by means of subsided loans, tax exemptions, fiscal incentives, etc. such as public policies designed for traditional industrial districts development. The role of public support in technological districts tends to be much more promotional for the dynamics of such environments, being targeted to promoting the building up of intermediate organizations, such as science parks, business incubators, technology transfer offices as well as the (indirect) support to the formation of services organizations and associations as diverse as clubs of angel investors. This chapter focuses on a particular type of local production system, characterized by a complex set of SMEs operating in high-technology sectors such as, to name a few, software, biotechnology and media. Among the many classifications and names given to this phenomenon, these systems tend to be termed, particularly in Europe, as technological districts or innovation clusters. The chapter is divided as follows: The next section discusses the analytic imbrications of topics of local development, innovation and clusters. The following section briefly presents the Brazilian SSI industry and characterizes in greater detail Rio de Janeiro SSI evolution, discussing the basis of its strengths and weaknesses and identifying barriers and opportunities for future growth. The next section discusses the role of innovation in developing high-tech clusters, suggesting that critical modifications are needed in the flowchart model to apply it to the SSI in the case of Brazil, which are to substitute the anchor firm for local governance in the cluster phase and the lead scientist for collective learning culture in the innovation phase of the model (see Figure 5.1). The fourth section presents the results of an empirical survey with a small sample of SSI firms aimed at testing the proposition of the importance of collective learning and other conditions convergent with the flowchart model for reformatting the SSI cluster in Rio de Janeiro into an innovation framework capable of putting it into a new sustainable growth path.

170 Antonio José Junqueira Botelho et al.

Step 1 Agglomeration

Industrial zone (software market segments: finance, telecom, retail and oil & gas) Capacity-building Local governance (Rio Software Network, SEPRORJ and ASSESPRO)

Decentralized, non-hierarchical agglomeration (proto)cluster

Related firms

Step 2 Innovation

Universities and research institutes

Capacity-building

Lead scientist for collective learning culture Innovation-based cluster Figure 5.1

A flowchart of IT cluster in the City of Rio de Janeiro

Source: Authors’ own development based on Kuchiki and Tsuji (2005a).

The concluding remarks raise some policy considerations and further details the suggested modifications in the flowchart model to account for SSI in emerging economies.

5.2 Local economic development, clusters and innovation3 New technologies following an uncertain and not yet consolidated trajectory are paving the way for the formation of high-tech systems fundamentally constituted by small and medium-sized enterprises (SMEs) (Keeble and Wilkinson 1999; Storper 1997; Swann et al. 1998). Research efforts have been directed towards identifying the variables explaining the motivations behind the agglomeration of firms in a territory, where scientific knowledge constitutes an important input in its production organization and, given that innovation is acknowledged as the most desired output of such territorial systems, local economic development strategies have been deemed as important to contribute to spur innovation among SMEs in a local production system (OECD 1996). It is assumed that an SME-based dynamism is more secure for local communities exploring certain production specializations because, as the literature suggests, it tends to be embedded in the ability of


territorial actors to sustain and to reproduce specialized knowledge in the production of certain products and services. Local production systems and, in particular, SMEs within these systems are the ones to benefit the most in a territorial context when competitiveness, quality job creation and social cohesion are ensured by the presence of solid collective goods. 5.2.1 Policy-relevant characteristics of local economic development Local economic development regards the capacity of local institutional agents to cooperate in order to start and to conduct a regional development agenda capable of mobilizing local and external resources and competences. The protagonists of local economic development efforts are usually those agents who can coordinate a set of vertical and horizontal initiatives capable of attracting external resources of political (qualified public investments or resources for bringing the private sector into the territory), as well as of cultural and economic nature (bound to investment decisions or to the localization of private agents). It is important to distinguish local economic development from local dynamism. The latter is measured merely in terms of income and employment generated in a territory as the consequence of a given policy (or political actions). Local economic development efforts, on the other hand, are about using external resources to bring value to the local assets of a territory in order to attract investments, external firms, cultural and scientific structures not only as a means to promote increases in production, income and employment, but fundamentally to enrich local competences and specializations (Antonelli 2001; Becattini 2000; Sapir et al. 2003). Thus, local economic development policies aim at qualifying a given social and economic environment with targeted interventions so that to increase the availability of infrastructure and services, as well as to foster cooperation of firms within their production processes (Trigilia 2005). There is an extraordinary variety of production systems’ linkages (Storper 1997). Local production systems can be very different from one another, not only concerning their productive apparatus, but also with reference to the social structures of which they are constituted. The events by which each community has built its own set of values are very diverse and dynamic so that there are countless axes around which communities, even of recent formation, find cohesion and solidarity.4 As a main building block of regional policies, local production systems permeate the whole socioeconomic fabric of a community, thus putting together governments, firms, local (and national) institutions and individuals in a coordinated effort aiming at the promotion of quality of life, infrastructure building, job creation and the competitiveness of firms operating in a territory. 5.2.2 External economies The external economies approach stresses the role of increasing returns within circumscribed regional spaces to which firms have access because

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of the important role of proximity. Consequently, externalities stem from imperfect divisibilities among production factors so that proximity provides enhanced opportunities for agents to internalize their benefits (Antonelli 1986; Brusco 1992; Camagni 1999; Piore and Sabel 1984). External economies can be the result of material (cooperation) and even of non-material collective goods, as can be the case of external economies made possible by the implementation of Information and Communication Technologies. External economies can be considered as the fruit of local collective goods which contribute to increasing the competitiveness of firms operating in a given territory. They can reduce costs and improve technological innovation in firms, particularly SMEs. The reason is that firms cannot produce on their own – or are not even interested in doing so given potential free riding effects – in a significant amount the quantity and quality of such goods that might be needed for improving their competitiveness conditions (Crouch et al. 2004). In certain cases such goods can be of a fully public nature, such as the availability of qualified workforce, good communications and logistics infrastructure; and, in other cases, they can be of exclusive access to certain groups as it can be the case of recycling infrastructures available to certain non-environmentally friendly production sectors. Nevertheless, external economies cannot take place without the production (and reproduction) of solid collective goods. In the case of technological districts, collective goods have a different and complementary nature in respect to industrial districts, in part explained by the type of external economies that need to be induced for the socioeconomic take-up of such environments and in part by the dynamics of technological development and innovation. The understanding of such differences require a broad analysis of the local character of innovation and the role played by the territory for the development of small and medium firms operating in high-technology segments. 5.2.3 Making innovation local A local innovation system (LIS) is built upon local social structures and institutions, thereby more carefully reflecting the development of knowledge and competencies within a regional or local community. For Bagnasco and Sabel (1995, p. 55), in local production systems: ‘1. the relationship among businesses are characterized by a close interweaving of competition and cooperation; 2. the relationships between entrepreneurs and their employees – both at micro-level within the business and at the macro-level within industrial relations – present at any one time elements of conflict and elements of participation; 3. the productive and, more generally, the social structure are rich in knowledge closely connected with production, technology, marketing and often financial administration and management.’ Along these lines, an innovation cluster thus refers to the specific


geographical localization and the cultural fabric of the innovation system in which it is embedded. An LIS focuses on the interests of a community or region, thus exploring local interests and competencies (Antonelli 2001), being more in line with local demands of the territory. All such localized environments, thence, are bound to specific aspects of the communities to which they belong, of which the most resilient one is social capital. A version of technological districts regards university-based local innovation systems. Here, the university is attributed a leading role, meaning that its R&D efforts and its technological partnerships with companies act as structuring and guiding elements in the innovative activity and, therefore, in opportunities to generate new enterprises. The new organizational arrangement, formed by new and emerging businesses, companies engaged in joint R&D with universities and research universities, constitutes the basis of a university-based LIS, together with market organizations (with their specialized equipment suppliers, services and customers) and non-market organizations (universities, research institutes, local trade associations, regulatory agencies, technology-transfer offices, business associations, relevant government agencies, etc.). So far, the results of public-led interventions for the development of LIS, though, tend to be in many accounts disappointing both in developed and in developing countries, although innovation (or the need to innovate) is today very present in the policy agenda of many nations. Most such policy to promote the technological capacity-building of firms and to build up solid national innovation systems, have been so far very much influenced by institutional and deterministic views of technological development (Leyten 2004; May 2002; Navarro 2003), neglecting other factors with a more ‘localized’ nature, such as the levels of quality of life, security and urban infrastructure of a territory which strongly influence the attractiveness of qualified human capital (Amendola et al. 2005). 5.2.4 External economies and collective goods The mobility, openness and flexibility of markets brought about by globalization also introduces new opportunities so that effective local economic development strategies that incorporate such opportunities to increasing the economic value of local resources need to be strongly emphasized. The acquisition of technological capabilities by SMEs tends to be strictly related to the quality of the provision of collective goods to SMEs. It is usually assumed that high-tech is whatever incorporates new technologies strictly connected to scientific advances, which is measured in terms of high rates of R&D expenditures – including scientific personnel employed in these activities. Among the sectors more frequently included in this category, there can be mentioned the pharmaceutical and chemical industries, aerospace and related industries, the biotechnology sector and the IT industry. Furthermore, most high-tech industry is not organized in local

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production systems of small and medium-sized enterprises, being each of them followed by differing dynamics, history and evolution processes. The high-tech sectors more commonly associated with local production systems of SMEs – as evidenced by empirical comparative research works – tend to be the ones in the biotechnologies, media production and information and communications technologies (in particular software development). The question that intrigues researchers the most, everywhere, lies on understanding the determinants of the decisions of firms in these industries to organize their production around decentralized systems (mainly) characterized by small and medium-sized enterprises. It seems though that the literature on industrial districts provides a good indication in this regard. As the Becattinian tradition suggests, a necessary prerequisite for the development of local production systems of SMEs lies in the divisibility of the production process. Another two aspects can be added here: (1) the uncertainty underlying technological paths, in this sense making more convenient a business approach founded on the experimentation among different players (external to the firm), as the experience with biotechnology suggests (DeVol and Bedroussian 2006; Powell 1996); (2) the constant market variations (in demand structure, in regulation, etc.) that requires a continuous flexible recombination of production factors, as experiences in the media business (movies, TV, etc.) and software development are putting in evidence (Bresnahan et al. 2001; Castells 2000). However, given that not all high-tech sectors give life to local production systems of SMEs, a further qualification seems necessary. In high-tech systems of SMEs there are also significant variations. As an example, not all software-houses (developers) and Internet companies can be seen as high-tech firms, given the low resilience of some of these companies on scientific knowledge and advances. The utilization of widespread methods, such as the number of employees engaged in R&D activities, tend to have reduced significance for supporting the classification of SMEs operating in these sectors. In addition to this difficulty, there are also high levels of innovations not captured by traditional indicators. This differentiation is important because it may directly affect the success of public policy and the types of collective goods available to firms in a technological district. The main explanation for the decisions of firms in high-tech sectors to organize in a territory rather than make use of the advantages brought about by globalization to reduce costs by recurring to outsourcing (as many firms in traditional industrial districts do), is in Becattini’s (1979) interpretation that takes into account the tangible and intangible external economies of which local firms take advantage in their utilization, together with the types of collective goods produced (intentionally or not). This approach, however, provides just part of the answer as it was originally developed to explain why firms in traditional districts do agglomerate. Thus, we hypothesize that the


external economies in innovation clusters tend to differ from those originated in traditional industrial districts. Understanding these differences is important due to the policy design mistakes and implementation error, as well as the consequent utilization by territorial actors (mainly firms) of the collective goods generated as the result of innovation and regional policies. Three main aspects need to be considered. First, it is important to consider the territorial actors’ conditions of access to the knowledge generated by research enterprise as well as the availability of communication (and interaction) channels with scientific and university facilities. This is actually a fundamental collective good that guarantees a continuum of technological upgrading and capacity-building or upgrading of firms as well as the availability of an evergreen flow of qualified personnel. The presence of each of these institutions may vary from case to case, although they are strictly interdependent and represent, together, a fundamental role in the development of high-tech local production systems. Regarding the first external economy (technological upgrading) made available by this collective good, the possibility of formal relationships (contracts, joint ventures) among companies (or groups of firms) and the research institutions must be ensured by the rule of law so to guarantee that contracts (mainly in terms of confidentiality agreements) will be met and the intellectual property will be secured. Here, scientific and educational institutions also influence the territory’s production system by means of more informal relations through personal networks that put firms together with the research centres’ environments. This type of external economy is more important than the first given the influence exerted by innovation activities on the competitiveness of firms. In this sense is usually formed a group of ‘professional communities’ that are particularly relevant for the exchange of information, for the development of modes of tacit knowledge and local trust, as well as for head-hunting of qualified professionals. The sort of social capital generated is established in terms of ‘experimentation’ and weak ties, rather than on a social construction process of trust and the collective sense of embeddedness, as it does in traditional industrial districts. Secondly, the availability of qualified suppliers of goods and services for firms constitutes another relevant collective good in these clusters. This refers to external economies formed as the result of emergent effects of (mostly) non-intentional processes. Such processes tend to be bound to the original localization of some firms as well as educational and research structures that successively induce the evolution of entrepreneurial and quality workforce resources. This element is of significant importance to the modes of production presupposing a specialized division of labour and a horizontal integration of small and medium-sized enterprises. It is not, of course, an established rule to all firms in the high-tech sector. In the software sector this high division of labour and flexible organization of production tends

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to be very much pronounced (Botelho et al. 2005; Biagiotti and Burroni, in Crouch et al. 2004; Ramella and Trigilia 2006). In general, though, one cannot imagine such networks as autarchic closed systems which do not interact with the external environment. Networks not only interact but can be also largely be influenced by the external setting. Demand for high-tech products and services usually comes from the markets outside their territorial boundaries (Bresnahan et al. 2001). Brazilian software clusters, for example, tend to explore its domestic market, with very low penetration rates in international segments, mostly due to losing industrial policies in the past decades and macroeconomic uncertainties throughout the 1980s and 1990s, thereby affecting long-term market expansion strategies of firms (Botelho 2005; De Negri and Salerno 2005). Markets for most of the firms operating in an industrial district tend to be the firms operating in the final edge of the same district’s specialization value-chain. Finally, in LIS, there are usually significant cooperation ties with large firms, most of them external to the district. Nevertheless, as the empirical evidence suggests, the availability of local partners bound to formal and informal cooperation ties is presented as an important condition for the operation of firms, thus influencing (and qualifying) the overall system dynamics. Beyond services associated with the valorizations of research and education, a very important role is played by financial, marketing and entrepreneurs’ support services (coaching to start-ups). The technological path leading to the launching of innovative products and services takes time to mature and is uncertain and risky, so that the presence of these intermediary service providers is growing in importance, particularly regarding specialized financial services such as business angels and venture capitalists. The territorial embeddedness of such financial institutions, frequently taking place by means of transfers of experienced and qualified individuals from the research to the business environment, and from industry to the finance environment is also very important, because it paves the way for more coherent (and less risky) evaluations on the feasibility of technological projects (Kenney 2000; Powell et al. 2002). Without quality financial services that very strongly contribute to bridging the knowledge-to-business process, even good ideas founded on prospective market opportunities cannot transform into the assets that so importantly contribute to local economic development. Therefore, it can be assumed that proximity is important for the development of high-tech activities, because it favours the formation of tacit knowledge and its utilization through direct, face-to-face interactions among local agents in the process of generating innovations. In sectors where a technological path has not yet been consolidated, firms tend to agglomerate in a territory in order to exploit their synergies: the growth of tacit knowledge and the enhanced chances of participating in innovative networks are


important externalities that may help explain the territorial concentration of small and medium-sized high-tech firms. However, externalities related to the generation of new technical knowledge seem more important for high-tech local systems. In this respect, it can be hypothesized that the influence of such externalities – or untraded interdependencies in the words of Storper (1997) – is increased in those activities more strongly based on the continuous generation of new knowledge and on scientific advances. In addition, changes in the market and in consumers’ preferences brought about a need for greater flexibility in production processes. In so far as production is customized, such as in the media industry, and even customized over a broad scope of functions and continuously over time, as in certain software developments, the need for flexibility is higher, and this can explain the presence of many small firms that collaborate at a local level, taking advantage of external economies. Trust and social networks play an important role in reducing transaction costs for sharing valuable information in productive interactions exposed to opportunistic behaviour such as moral hazard and free riding. However, in LIS, it is then hypothesized that trust is less embedded in local identities historically built in a territory and more rooted within communities formed around the high-calibre competencies of individuals. They are developed by local agents in their careers through different firms and research and university institutions. Given the stronger role of a highly educated labour force that is usually much more volatile and less loyal to a firm or to a territorial identity, the capacity of the territory to attract – and to maintain – qualified individuals by providing high salaries, quality of life and very good infrastructure counts for much more than local history and other social and political features of a territory. On the cognitive side, a key role is played by research and university structures, in that they can provide the territory with a myriad of collective goods capable of enriching it with positive externalities. For in high-tech systems, universities and research institutions, together with the R&D facilities of large firms, provide qualified labour and chances of formal collaborations and informal exchange between specialized actors. The same applies to the role of financial institutions (like Venture Capitalists and business angels) and other specialized business services (like management consulting, business and technological coaching). In this regard, local and regional governments can influence the formation of high-tech systems with appropriate policies that enhance the chances of developing a localized base for technical knowledge production (and reproduction) so that the fine-tuning of an adequate channel (or infrastructure) to promote communication with research institutions and industry becomes fundamental. LIS constitute a different type of local production system, being fundamentally structured towards understanding the governance dynamics of these systems, given the confusion developed by policy-making wings in

178 Antonio José Junqueira Botelho et al.

terms of effective policy design and implementation to favour technological systems of SMEs, particularly in middle-income developing countries whose policy recipes follow those designed in industrialized countries. These clusters are sustained by specific collective goods which, in turn, are produced through the interplay with complementary governance institutions at local, regional and national levels. References made to the governance dimension can thus help analyse the relationship between national conditions and local factors, thus allowing the combination of useful insights coming from the national innovation systems approach with those offered by the studies of industrial districts and of localized technical knowledge. It is widely accepted that these collective goods are determinants for the success of LIS. Nonetheless, there seems to be some sort of disregard to a third type of collective good that produces significant (positive) external economies: the quality of the environment. The quality of the environment surrounding and within a local production system reflects the capacity of institutional stakeholders to (intentionally) produce collective goods by means of quality cooperation. Naturally, the availability of an adequate infrastructure at affordable costs is fundamental for SMEs, particularly those in their early stages and start-up growth phases. In this regard, there are varying types of technological and business incubators and science parks in such high-tech local production systems. Not of lesser importance is the availability of good communications infrastructure supporting easy links to national and international centres. The importance of these nodes, mainly founded on a quality infrastructure provision, induces the territory to value its internal resources thus attracting qualifying investments and other external stakeholders. Although these resources tend to be a prerequisite to successful industrial districts and other local production systems, it seems that there is an additional peculiarity to consider regarding technological districts. In the latter, it seems that socio-cultural and environmental quality also plays an important role, of lesser relevance in other local production systems. This particular factor influences the capacity of a territory to attract (and to maintain and to subsequently renew) qualified and specialized workers who come to a territory together with their families. This sole fact conditions the chances for the establishment of relatively stable ‘professional communities’ that are in the roots of the experimentation processes leading to LIS.

5.3

Rio de Janeiro IT cluster

The Brazilian SSI market has almost doubled in size between 2004 and 2007, growing 23 per cent in 2007. Services growth has been higher (24 per cent) than software (20 per cent). In 2006 the Brazilian SSI market reached US$9.1 billion (out of a total US$16 billion IT market, 1.3 per cent of the global market), of which US$5.8 billion in services and US$3.3 billion in software


(ABES 2007), the world’s thirteenth largest and representing almost 1 per cent of Brazil’s GDP. Domestic software production accounted for over US$1 billion (33 per cent of the market), of which 24 per cent was standard, 72 per cent was customized and less than 5 per cent was for export of licenses (US$52 million). Custom software exhibits the largest growth rate, 36 per cent, higher than the overall SSI (23 per cent) and services alone (24 per cent). Service exports were close to US$200 million. According to this source almost 8,000 firms (over two-thirds in software, 31 per cent in development and 69 per cent in distribution) were involved in the development, production and distribution of software and in service provision and of those in development and production, 94 per cent were micro and small.5 Overall, small firms are 57 per cent and micro 37 per cent of the total number of firms. The largest software market segments are industry (onequarter), finance (one-fifth) and services, including telecom and related activities (one-seventh) but the fastest-growing segments are agribusiness (95 per cent), retail (61 per cent) and oil and gas (55 per cent). Since 1995, according to the RJ software business association (SEPRORJ) the software market has been growing at an average annual rate of 11 per cent, three times larger than the hardware segment. This rate has been accelerating in recent years with the diffusion of IT and the shift in business models towards increased outsourcing. Thus the software and services market grew 15 per cent in 2005 and 15.4 per cent in 2006, and is expected to grow 14 per cent in 2007. The city of Rio de Janeiro has a population of 6 million people (2007) and the country’s second largest GDP of about US$66 billion (2005, 5.5 per cent of total and 3.3 per cent of population), less than half of that of São Paulo, the largest (12.3 per cent of total and 6 per cent of population), and 50 per cent larger than the third biggest, Brasilia, the country’s capital. The top five municipal (out of 5,564 municipalities) GDPs account for one-quarter of Brazil’s GDP (versus top ten in 1985). Services represent 66 per cent of Brazil’s GDP. Rio de Janeiro’s GDP fell to 5.5 per cent of Brazil’s; continuing evidence of the city’s historical economic decline started with the move of the nation’s capital to Brasília in 1960. Although Rio de Janeiro represents just 2.8 per cent of the industrial GDP versus almost 10 per cent for São Paulo, Rio de Janeiro and São Paulo together account for over 20 per cent of the country’s services GDP. Although all major capitals have experienced a decline in their share of the services GDP over the period 2002–2005, Rio de Janeiro’s decline at almost 1 per cent was the largest among them, reaching 6.5 per cent of this total in 2005 (7.3 per cent in 2002). The Rio de Janeiro metropolitan region (2007) has a population of 11 million and the state 15.4 million. 5.3.1 Historical evolution Rio de Janeiro was the birthplace of information technology in Brazil, as it had the first computer in the country to process census data back in 1960.

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Around this computer the first data processing centre was established (Rio Datacentro) at the Pontifical Catholic University of Rio de Janeiro (PUC Rio) and gave birth to the first Master’s programme in computer science as well as the first academic undergraduate course. This spurred the emergence of a software industry cluster which remained the country’s most advanced and largest until the early 1990s. However, three developments changed this picture over the next decade and half. First, the end of the failed nationalistic market reserve policy to develop an indigenous hardware industry in Brazil (Botelho and Tigre 2005), which had assisted the development of a few large associated software firms and public data processing and software development centres in Rio de Janeiro which then accounted for about 60 per cent of national production, eliminated a critical, albeit artificial, national government institutional support to the consolidating industry. Secondly, the consolidation of São Paulo as the country’s economic centre eventually led to the gradual departure of the banking and financial sectors from Rio de Janeiro to São Paulo, and depriving Rio de Janeiro of an ever-important demand source as the financial sector accounts for about one-third of the total domestic software demand (Botelho et al. 2005). Finally, the near completion of the transfer of government ministries and public agencies to the new capital of Brasilia inaugurated in 1960, including of large government data processing agencies and services, took away yet another significant market for software and related services, estimated at one-third of the total market (ibid.), at a time of government IT modernization and when it began to outsource.6 As a result of these, several of the largest software firms of the country based in Rio de Janeiro (although they were relatively small to middle-sized by international standards) drastically diminished in size or shut down and specialized software developers opened offices in São Paulo, eventually transferring their headquarters there. Yet, the large majority of experienced first-generation software developers who had worked for these companies set up one- to two-men firms to provide customized software development and related services (software maintenance, network management, web design, Internet provider, etc.). It is estimated that there are about 17,000 such software firms operating in Rio de Janeiro.7 A few large national capital firms that survived continued to expand, particularly in the training area, and large IT and software services foreign firms which originally had operations in the city (IBM, EDS, Unysis, Accenture, etc.) also continued to expand, although much of their growth took place in São Paulo.8 5.3.2

Industrial structure

A recent territorial-based study of the economic profile of the state of Rio de Janeiro commissioned by the Rio de Janeiro state , business federation (FIRJAN) and the state chapter of the government-regulated SMEs promotion agency (SEBRAE RJ) based on agglomeration economies, identified 15 such agglomerations including one out of three in IT, in the city of Rio de


Janeiro, by far the largest and the most significant one as the others are mainly satellite fiscal-based fictional clusters (Britto 2004; see also Constant 2007). Other significant SSI demand clusters in the metropolitan region are: telecommunications; petrochemicals, chemicals and plastic; and shipbuilding. Britto (2004), analysing social security data for the city of Rio de Janeiro (2001), identified 1,313 IT firms (all activities confounded) employing almost 20,000 people (see Table 5.1). The majority of the firms are micro and small with an average of 14.5 employees for the IT industry as a whole, with those with data processing activities exhibiting a larger number – 22.7 employees. The average wage per employee for the IT industry was R$1,970.00 in December 2001, rising for firms with IT systems consulting activities and other IT activities. In regard to employment distribution by firm size one finds the following features: a) employment concentration in smaller-sized firms with activities in IT systems consulting and equipment maintenance and repair; b) an even distribution across firm size in firms with activities in software development and other IT activities; c) concentration of employment in smaller-sized firms with activities in data processing. The study also identified 13 exporting IT firms, mainly first-time exporter micro-enterprises, which in 2002 grossed US$500,000 in hardware sales to the United States, Chile Colombia and Bolivia.

Table 5.1

Characteristics of the Rio de Janeiro City IT local productive arrangement

Statistical category (CNAE) – Integrated activities 72109 – IT systems consulting 72206 – Software development 72303 – Data processing 72508 – Maintenance and repair of office and IT equipment 72907 – Other IT activities, not previously specified Total

Wages Aver. size Employment # firms (12/2001 – R$) (employees)

Average wage (R$)

3,539

330

7,456,952.15

10.72

2,107.08

3,103

222

6,471,454.19

13.98

2,085.55

6,399

282

11,849,685.04

2.69

1,851.80

2,771

224

3,489,279.53

12.37

1,259.21

3,231

255

8,239,756.25

12.67

2,550.22

19,043

1313

37,507,127.16

14.50

1,969.60

Notes: CNAE means Classificação Nacional de Atividades Econômicas – it’s the name of the current national classification (Brazilian Activity Classifications) in accordance with the International Standard Industrial Classification. Source: Britto (2004).

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5.3.3 Institutional evolution In 1965, the country’s first computer users’ society was created in Rio de Janeiro (Sucesu) and throughout the 1970s the city hosted the main IT events, Sucesu’s trade fair and congress. In the 1980s a new trade fair organization, Fenasoft, was created in Rio de Janeiro, but soon thereafter it is transferred to São Paulo, and its last edition in the city took place in 1996. In the following years business associations, promotion agencies and other organizations and institutions failed to act in a coordinated fashion to launch significant trade events in the city and, more importantly, failed to work together on a common project for the local SSI. From being the country’s IT capital, Rio de Janeiro gradually lost its role of industrial and cultural reference, although it remains the second largest regional market and industry. However, a reversal in this policy governance decline began in 2002 with the creation of the Rio Software Network, Redesoft, with an executive committee composed of several local institutions: SEBRAE RJ, Riosoft (the local chapter of the government funded software industry promotion organization SOFTEX), ASSESPRO RJ (Association of Information Technology, Software and Internet Firms), SEPRORJ (Data Processing Firms Business Association of Rio de Janeiro), Firjan, ACRJ (Chamber of Commerce of Rio de Janeiro), Rio de Janeiro State Government (Secretariats of Economic Development and of Science and Technology – Sede/Secti), Municipality of Rio de Janeiro, Reinc (Rio de Janeiro State Network of Incubators and Technological Parks) and Funpat (representing several partners of the Petropolis Technological Park, a nearby mountain town). In 2004, SEBRAE RJ commissioned a diagnostic study of the IT sector in the state of Rio de Janeiro to assist in the design of policies and mechanisms for the local SSI (SEBRAE RJ 2005). This joint governance effort and network operation eventually produced a collective project for the development of the IT sector called City of Rio de Janeiro IT Project, coordinated by a council formed by some of the same institution in the network (City of Rio de Janeiro Technological Network – REDETEC, SEPRORJ, ASSESPRO RJ, SEBRAE RJ) and the support of the State Economic Development Secretariat. The pioneering project in terms of a formal governance structure came to light in March 2005 and was made up of 19 structuring activity programmes, ranging from software development certification (CMMI),9 establishment of a an office to assist local firms in procuring public funds for financing software innovation and development to capacity-building in software engineering. It also set the following targets: (1) increase the volume of sales of IT firms by 10 per cent until December 2005 and 15 per cent until December 2006; and (2) increase the number of employees by 5 per cent until December 2005 and 10 per cent by December 2006. In September 2005, a SEBRAE RJ entry review of the Project found that the majority of the firms (93 per cent) had knowledge of the actions and 64 per cent felt it


benefited from them. A majority of the interview sample (52 per cent) participated in the decision-making process leading to the Project. Results indicators were to be monitored by subsequent reviews. By the end of the first half of 2008, the Project’s governance will have completed the first review of results against the targets, focusing on increase in sales and number of employees. The entry review numbers for the related indicators average sale volume per firm in the cluster ranged from R$5.06 million to R$10.84 million; and the average number of employees from 68 to 211. The great majority of sampled firms are members of the business trade organization (SEPRORJ), 76 per cent, and of the sector association ASSESPRO, 67 per cent. In the meantime, in 2003 the State Government of Rio de Janeiro through its economic development and science and technology secretariats launched the Responsible for the Programme to Promote Technological Knowledge in Information Technology of Rio de Janeiro State – Rio Knowledge, which has among its objectives to promote the development and the consolidation of the IT sector in the state and in the capital city. Recently, Constant (2007), identified three sub-clusters in the city: (1) Downtown Pole; (2) Rio de Janeiro Technological Park, at the Federal University of Rio de Janeiro (UFRJ); and (3) South Rio Pole, distributed according to Figure 5.1 and with the following characteristics: ●

●

●

Downtown Pole: Within an urban perimeter established by the Municipality of Rio de Janeiro of 7 square kilometres are housed about 54 per cent of the firms of the cluster, totalling over 500 firms with a significant concentration of software developers. In the same area are located the main organizations and institutions – ASSESPRO, SEPRORJ and Riosoft/Softex. Rio de Janeiro Technological Park profits from its proximity to Brazil’s largest federal research university and its graduate programme laboratories (Coppe/UFRJ), with the national Electric Energy Research Center (Cepel) and the corporate research centre of the state oil and gas company Petrobras (Cenpes), as well as a business incubator in the park area. South Rio Pole: Composed of firms located in the Gávea neighbourhood, it is in fact an externalization of the business incubation activities of PUCRio, which has the country’s highest graded computer science graduate programme according to the Ministry of Education graduate education promotion agency (CAPES), with a focus on distance learning, media convergence and software for engineering research products and processes developed at PUC Rio’s labs; and in neighbouring Barra da Tijuca, where the city’s largest firm is located, the state Cobra Computadores, a survivor from the market reserve policy; a Cinema and Video Production Pole and the Globo television network (Brazil’s largest) Production Centre (Projac). Several IT firms have began to move to this emerging sub-cluster thanks

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to a state funded high-speed fibre optics network and it is estimated that about 18 per cent of the firms of Rio de Janeiro are located there.

5.3.4 Recent policy actions In light of the growth from 2006 of the number of public calls to support R&D and innovation in firms, particularly in software, one of the four industrial policy priorities (2004) and related areas such as digital TV through grants and low-interest loans, the Rio de Janeiro IT cluster institutional governance have launched efforts to diffuse these calls and to provide professional assistance in writing proposals. ASSESPRO RJ, a nonprofit professional business association representing a broadly defined local IT industry – IT, software and Internet – in September 2007 established a Project Management Office which assisted 40 interested associated local firms to prepare proposals to the second economic subsidy call of the Brazilian Innovation Agency FINEP. The call, with about US$260 million in resources, provided grants to corporate innovation projects in priority areas of the Industrial, Technological and Foreign Trade Policy (PITCE), including software and digital TV, areas which were allocated about US$60 million, a sharp increase from US$40 million in the previous 2006 call, when 114 projects in all areas received grants. The assistance package put together comprised a customized commentary on the call, a FAQ, hints for filling out forms and structuring projects and a set of recommendations. ASSESPRO RJ used the opportunity to generate a procedural discipline among its associated firms wishing to submit proposals in so far as it encouraged submission just from those willing to structure its proposal in a coherent and consistent way. It also learned lessons from previous calls and shared these with its associates. Some of the most common mistakes identified in project submission by associates in previous calls, mainly regarding project coherence that prevented them from getting to the merit analysis phase were: absence of technological innovation; lack of clarity in regard to objectives and methodology; ill-defined management coordination mechanisms; inadequate financial and project timetables; and lack of mention to call priority components (cooperation, sharing, result appropriation, etc.). In 2005, 23 firms from Rio de Janeiro received R$60.3 million (US$33.5 million) in government grants (FINEP, Faperj-State Foundation for Research Support and CNPq – National Research Council calls). In 2006, Rio de Janeiro IT firms had 16 projects approved in these public calls. ASSESPRO RJ PMO has also started to map associates’ demands in order to generate more focused assistance products. It has found that the five most sought-after types of resource are grants, venture capital, angel investment, counterpart grants and private equity, and that public resources are considered more attractive than private ones. Firms plan to use these


resources to fund business expansion, human resources, working capital, innovation and exports. In 2007, the state business federation FIRJAN published a short collection of position papers aimed at establishing a strategic framework for strengthening the software industry in the state (SISTEMA FIRJAN 2007). Though lacking in new data and analytical depth, the papers therein represents a small block in the ongoing construction of a renewed awareness of local industry, while also offering some policy recommendations. Finally, in July 2007, the Municipality of Rio de Janeiro submitted to the City Council a Programme of Incentives to Investments in the IT Sector in the City of Rio de Janeiro (Law Project 1250/2007). The programme’s main component is a proposal of reduction in the Service Tax (ISS) on SSI activities from 5 per cent to 2 per cent thus meeting a longstanding demand of the local SSI firms to bring the city service tax for SSI sales in line with that practiced by other major capitals (Porto Alegre) and towns in major metropolitan regions (Barueri and Hortolandia in the Greater São Paulo Metropolitan Region), what has been a major factor in the change of local firms’ headquarters to other cities, estimated at 50 per cent. Another is a series of fiscal incentives for SSI firm investing a minimum of R$50,000 (about US$30,000) comprising credits in the service tax (ISS) up to 80 per cent of investments, 50 per cent of real estate transfer tax (IBTI), and 50 per cent of property tax (IPTU).

5.4 Local development, innovation and the Rio de Janeiro software cluster This section aims at launching the basis for the discussion on the reformatting of local innovation clusters in developing countries. It presents a case study and an analysis of the current policy efforts to establish an innovation cluster in software in the metropolitan area of Rio de Janeiro. The motivations, mistakes and policy traps involved in this attempt for promoting local economic development and high-tech SMEs in Rio are put into relief. It argues that the lack of inclusion of local economic development in the policy recipes of the State of Rio de Janeiro, as well as a scant and weak local governance, favouring a purpose-driven institutional support are main factors. A coherent local governance capable of setting up a local economic development agenda designed to promote innovation in high-tech SMEs, thus capable of attracting the external resources required to add value to existing territorial assets as well as to developing new ones is missing. Without it, the high-calibre individual actors who do play a role in innovation will not be capable of agglomeration into a professional community to determine the pace of technological communication in local production systems of SMEs.

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5.4.1 Rio de Janeiro local innovation system 5.4.1.1 Human resources According to the Brazilian Ministry for Education, there were less than 600 PhD titles granted from Brazilian universities in 1980. From 1996 to 2000, there were about 20,900 PhD titles awarded in the country. In 2004, this figure has reached almost 48,000 PhDs in diverse areas of scientific knowledge all over the country, although a significant amount of these titles have been granted from public universities in the richer south and south-eastern states. The majority of Master’s and Doctoral title holders work (2000) in the south-eastern states of São Paulo (22,354) and Rio de Janeiro (16,763). However, on a per capita basis we see that major cities like São Paulo and Rio de Janeiro, having together more than 23 million inhabitants, are being replaced in the top of the list by other municipalities, most of them with less than 1 million inhabitants, quality research universities with backgrounds in specific areas of knowledge, and a significant presence of qualified individuals holding Master’s and Doctoral degrees. Even though having dozens of universities with internationally celebrated academic and scientific achievements, both São Paulo and Rio de Janeiro suffer from chronic social disorders and growing urban violence that is causing a sort of brain drain to other cities offering more quality of life conditions, located nearby or even away from these urban centres. Yet, the cities of Rio de Janeiro and São Paulo are still the most important for the country’s GDP, and still account for the highest number of business incubators, science parks and start-ups based on potentially prospective new technologies. Education is another very important concern. The technical schools in the state of Rio de Janeiro, who prepare technicians with a relatively good quality for attending industry needs, received in 2005 only 11.5 per cent of the total enrolments in the state’s high-school system. The statistics for higher education – at university level – are even more skewed for both Rio de Janeiro and other Brazilian states. According to the Brazilian Ministry for Education, only 9 per cent of people from 18 to 24 years of age are enrolled in an undergraduate degree course. The State of Rio de Janeiro encompasses 13 per cent of the total enrolments in universities at undergraduate level, while São Paulo detains 26 per cent. That is to say, two out of 26 Brazilian states roughly encompass 40 per cent of all enrolments in undergraduate courses in Brazil. In Rio de Janeiro, in 2004, only 15.8 per cent of total enrolments corresponded to students in science and technological disciplines, against 19.1 per cent in the State of Santa Catarina and 44 per cent in South Korea. 5.4.1.2 Innovation infrastructure The city of Rio de Janeiro, although presenting a world-class R&D infrastructure, does not have a sufficient innovation infrastructure. Bridging the gap between a R&D and an innovation-oriented infrastructure will


fundamentally depend on coherent local governance capable of setting up a local economic development agenda designed to promoting innovation in the territory, thus capable of attracting the external resources required to add value to existing territorial assets as well as developing new ones. Without this, which is built by cognitive and normative collective goods, the highcalibre individual actors who do play a role for innovation to take place will not be capable of agglomeration around the professional communities that determine the pace of technological communication in local production systems of SMEs. The most salient aspect of the IT industry of Rio is the presence of top-level educational institutions in the state, plus a myriad of mature support organizations that are acquainted on the capital importance of the IT industry for the promotion of a sustainable development of the territory. The city of Rio de Janeiro is well positioned in terms of the capacity for knowledge production, in respect to other major Brazilian cities. It hosts a high number of holders of Master’s and PhD titles, and is well positioned in terms of research centres and research universities in diverse areas of knowledge. In areas of scientific knowledge directly or indirectly related to support institutions and universities, only to mention those in the metropolitan area of Rio de Janeiro, there are seven main celebrated research universities: the Federal University of Rio de Janeiro (UFRJ); the Federal Centre for Technological Education (CEFET); the Catholic University of Rio de Janeiro (PUC-Rio); the State University of Rio de Janeiro (UERJ); the Institute for Applied and Pure Mathematics (IMPA); the Federal Fluminense University (UFF); and the Military Institute of Engineering (IME). Apart from IMPA and IME, all of these universities have business incubators hosting firms operating in the IT sectors. All of them offer Master’s and PhD courses on areas pertaining to IT, and the average distance from one university to another is usually less than 20 kilometres. In addition, there are also another public university in humanities (UniRio) and more than 40 private universities offering undergraduate courses and vocational training in IT areas, as well as hundreds of technical schools offering vocational courses for the qualification of computer programmers, electronic and telecommunications technicians and so forth. There are also business incubators not related to universities, as the ones hosted by Instituto Nacional de Tecnologia (INT) and Serviço Nacional de Aprendizagem Comercial (SENAC-RJ). The city of Rio de Janeiro counts with several support institutions. The most important of them is SEBRAE-RJ. SEBRAE-RJ designs and operates entrepreneurship development programmes in many commercial, services and industrial areas, and is structuring new lines of action for more effectively stimulating the formation of local production systems of SMEs in technological fields. The recognition on the part of SEBRAE of the importance of clusters of firms for local economic development, with the translation of support measures for those firms, started in the beginning of 2000 and has been strengthened after the joint project carried out with Promos (see note 94). In addition

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there are, located in the same building in downtown Rio de Janeiro: the export promotion agency for IT firms, RioSoft; the Association of IT firms, ASSESPRO; and the Union of Workers of IT firms of the State of Rio de Janeiro, Sindpro. In addition to these capillary support institutions, given that most of them have existed since the late 1970s, the city of Rio hosts the headquarters of the most important science and technology and industrial development federal institutions, namely the Brazilian Innovation Agency (FINEP) and the Brazilian Development Bank (BNDES). These institutions, spread in the city of Rio de Janeiro, are located an average of 10 kilometres away from one another. Even hosting so many institutions, the level of utilization of centres of excellence from small and medium-sized enterprises is very poor. The penetration of development support organizations is also considered by firms and policymakers alike as embryonic, given that the critical mass formed around the importance of systemic institutional support for high-tech SMEs take-up has started to be included in the policy arena a little more than five years ago, with very few substantial practical results. In some cases, research centres and firms compete for the scant public funds in calls and tenders for the financing of technological projects on the part of FINEP. According to Rede de Tecnologia do Rio de Janeiro (hereafter Redetec), the Rio de Janeiro network of innovation support institutions to start-ups, there are 19 business incubators in the State of Rio, with 80 per cent of them concentrated in the city of Rio and the metropolitan area (the city’s surrounding municipalities). These business incubators, 90 per cent of them formed within or nearby important universities, support high-tech start-ups on the most critical phase of their growth stages, that is the pre-incubation (business planning support, in most cases) and incubation processes (physical and telecom infrastructure provision, managerial and technological coaching). The sectors covered are so vast, in many cases exploring the core research competences of local universities, ranging from biotechnologies, IT, agro-industry and so forth. In 2006 there were, according to Redetec, 107 firms being ‘incubated’ in the state of Rio, as well as some more 103 firms that managed to survive to the incubation process – which takes two to three years – thence established in the marketplace. 5.4.1.3

IT industry structure and markets

A sustained exodus of firms is being verified in the city of Rio de Janeiro, fundamentally motivated by the problems related to public security. A survey carried out by the Federation of Industries of the State of Rio de Janeiro (hereafter FIRJAN) in 2003 with 2,665 workers in the city of Rio, concluded that 44 per cent of those people declared to have been victims of any type of violence caused by third parties. Moreover, in another poll carried out by FIRJAN in 2005 with 1,157 workers, 70 per cent of these interviewees named public security as a priority problem to be sorted out in the city of Rio. SMEs


are an important engine of the Brazilian economy, representing, according to SEBRAE (2004), more than 99 per cent of the total of firms legally established; Brazilian SMEs employ 44 per cent of the total workforce and account for 20 per cent of the country’s GDP. In the state of Rio de Janeiro, SMEs represent 26 per cent of the total of legally established firms in the country. In the state of Rio de Janeiro, the level of exports of SMEs is inferior to the national average. SMEs established in Rio de Janeiro managed to export only 6.9 per cent of the total exports in the state. If the medium-sized enterprises, say those employing from 50 to 100 people, are excluded from these statistics, small and very small (micro) firms account for less than 1 per cent of the total exports. These results are indicative of a paradox pertaining to a booming telecommunications and energy economy that is also the second GDP in the country, responding to 12.8 per cent of the Brazilian GDP. If Rio de Janeiro was an independent country, it would have been the sixth largest Latin American economy (FIRJAN 2006). This apparent socioeconomic paradox has important implications for the establishment of local production systems of SMEs in Rio de Janeiro. Local Production Systems of SMEs in Rio de Janeiro are more strongly spread in the metropolitan region (the capital city and surrounding municipalities) and in parts of the south and south-east of the state, given the proximity of the latter to ‘Porto de Sepetiba’ (the main port in the state) and to the state of São Paulo, the larger consumer market in Latin America. Local production systems are growing in importance in Rio, although not much is yet known in terms of the real strength of SMEs to promoting quality cooperation, for creating quality jobs and for attracting long-term private and public external investments. The main motivation behind this reasoning can be derived from the low presence of local production systems formed by SMEs in the state. The most relevant industrial segments in Rio are, on the one hand, those of commodities, like the production system of petroleum and renewable energy formed around the northern coastal city of Macaé, and strongly dominated by Petrobras – the Brazilian state-owned oil giant – and major international oil companies. In addition, there are those local production systems in the auto-parts segment, formed in the south-eastern cities of Resende and Porto Real, particularly around the facilities of Volkswagen and Peugeot-Citröen, who have been attracted less than a decade ago by higher fiscal incentives offered by the state government. The same applies to the petrochemicals local production system, located on the edge of the metropolitan area of the city, and also strongly dominated by large firms, as well as the shipping local production system in Niterói and the steel industry cluster of Vale do Paraíba region. In these systems, small and mediumsized firms are mostly embedded in hierarchical networks of suppliers or by outsourcing parts of the production processes of larger firms (Avgerou and La Rovere 2003; Pinto 1999). That is to say, the existence of larger firms

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established in those municipalities conditions the attractiveness of firms of more reduced dimensions, as well as suppliers of services, private and public universities and schools. The innovative potential of these smaller firms tends to be conditioned by the technological development strategies of those larger firms dominating the respective production chains of these local production systems. Technological innovations in SMEs operating in these industrial segments, whenever there are, tend to be more concentrated on the improvement of existing industrial processes (process innovations) rather than on radical product innovations that could have promoted disruptive changes in the production chains to which these firms belong. This is indeed a characteristic of the Brazilian industry whose innovation is much below international standards (De Negri and Salerno 2005). In the other sectors, the production process is much more concentrated on SMEs, and the system’s governance is thereby less influenced by larger firms. However, apart from the IT and media production sectors, those industries are mostly formed around low-tech and highly labour-intensive sectors. The mapping of local production systems in Rio, as the ones already carried out with the institutional support of capillary institutions as SEBRAE RJ and FIRJAN, although very important for stimulating a debate on more targeted public policies to stimulate the growth of local production systems, has so far neglected the different character of those SMEs willing to operate on the edge of existing technological prowess. The needs of these firms and the characteristics of these production systems, in terms of collective goods and local governance specifications, imply different policy designs and institutional support, as exhaustively discussed in this research work. The IT sector is no different reality in Rio de Janeiro – and in Brazil as well – even though it is among the fastest growing sectors of the Brazilian economy. The strategic importance of mature local production systems in industries that demand significant IT products and services is somehow substituting incipient public support, in that sense indirectly stimulating the development of this sector in Rio de Janeiro. Nevertheless, the higher value-added demand of those industries for IT solutions manages to cover only the most competitive IT firms in Rio de Janeiro, which are usually those of medium and larger dimensions. In addition, these more dynamic sectors can manage to cover only a fraction of the potential demand of other important sectors who demand IT products and services from local firms. According to Riosoft, an export promotion agency for IT firms originating in Rio de Janeiro, the market for IT firms in Rio is divided as follows: 40 per cent public administration; 40 per cent financial sectors; 20 per cent other sectors (ASSESPRO 2005). The major chains – of international relevance – hosting important local production systems in the state of Rio de Janeiro, such as shipping, oil and renewable energy and tourism evidence a more dynamic expansion of certain layers of the IT sector in Rio de Janeiro, thereby presenting interesting


peculiarities in the demand for sophisticated IT solutions. Hence, the dynamics of the demand for IT products and services in Rio de Janeiro is directly dependent on the expansion of major production chains and to the purchasing power of the public apparatus. SMEs are also considered as important sources for IT products and services, although the sophistication of IT solutions targeting SMEs tends to be much more modest, for most of the SMEs in the state of Rio de Janeiro pertain to traditional sectors of the economy as well as to services-related areas (Avgerou and La Rovere 2003). On the supply side, though, there can be seen a major concentration on the development, adaptation and customization of products and services to SMEs, rather than onto higher value-added customers who demand more sophisticated solutions from IT firms. According to the Brazilian SME Support Agency – SEBRAE, the market distribution of IT solutions originating from SMEs is fundamentally concentrated onto other SMEs. Only a very few IT SMEs are capable to export their outputs, most of them exploring foreign market niches in other Latin American and in Portuguese-speaking African countries. Those SMEs exploring potentially new markets are solely the start-ups originating in business incubators and in science parks. The provision of IT solutions in Rio de Janeiro is much concentrated on SMEs. According to the Association for Information Technology Firms in the State of Rio de Janeiro-ASSESPRO data from 2004, 94 per cent of IT firms in Rio de Janeiro have a turnover below R$5 million a year (or US$2.9 million), and 84 per cent of them earn less than R$2 million a year. In addition, according to the same survey, 90 per cent of IT firms have fewer than ten employees. The national reality is no different, for 53.1 per cent of Brazilian IT firms earn less than R$1 million a year, according to the Brazilian Software Promotion Agency (SOFTEX). According to ASSESPRO, the market segments covered by IT firms from Rio de Janeiro concentrate on vocational training, technical support, sales and Internet access provision. Although presenting one of the most important IT industries in the country, hosting national leaders in the development of IT solutions in certain sectors, as those specifically targeting, for example, the oil and tourism industries, the IT industry in the State of Rio is losing position relative to other regions. The state of Rio Grande do Sul, for example, presented a sustainable 11 per cent average growth rate from 1998 to 2004 (ASSESPRO 2005). There are no official – that is to say, agreed by all – statistics on the real number of IT firms in the State of Rio de Janeiro. The Brazilian Bureau of Statistics-IBGE, the Ministry of Science and Technology-MCT, Riosoft, SEBRAE and ASSESPRO have each of them different methodologies and hence reach different indicators. The number usually agreed upon as the most approximate is the one offered by ASSESPRO, on the basis of its National Register of Enterprises of Information Technology Services,

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indicating that, in 2006, there were almost 10,000 firms in the IT business in the state of Rio. The question that intrigues businesspeople and policymakers alike tends to be then geared towards understanding why, despite having capillary institutions, top research centres and so many firms of different sizes and technological capacity-building statuses, the level of institutional and interfirm cooperation is practically non-existent, and consequently technological innovation among high-tech firms in Rio de Janeiro is so modest. There are public financing programmes, some of them old, some others new; there are private equity investors interested in new investment opportunities; there is a community of business angel investors looking for prospective investment opportunities; there are business incubators and science parks covering the most relevant areas of scientific knowledge with prospective business development potential; there are some legal attorneys prepared for dealing with complex intellectual property issues. Albeit with varying degrees of institutional maturity, the presence of these agents, most of them object of past industrial policies, tend to target the variables that hamper the competitiveness of existing firms, in particular those in the traditional sectors of the economy. Even those programmes specifically targeted to high-technology firms, such as the Sector Funds of FINEP, the tax exemptions from the state and city governments, and the export-oriented policies and so forth have been designed for individual firms themselves. The collective nature of knowledge continues to be neglected. The reason for this is the persistent institutional refusal of local economic development as the driver for the building up of the local collective goods needed to strengthening the innovation potential of established and new high-tech firms. 5.4.1.4 Collective goods: How important for software firms in LIS? Although recognized as an important driver of territorial development in Rio de Janeiro (ASSESPRO 2005; SEBRAE 2004), the growth of the SSI industry rooted in SMEs is facing significant barriers towards a more sustainable development. In contrast to other technologies like bio and nanotechs, which fundamentally target potentially new markets for their products, most ITs – software in particular – are mature technologies whose development is consistently dependent on the demand side. That is to say, the more sophisticated the demand for IT solutions is, more high-tech-based products and services in IT could have been developed so that firms would naturally tend to engage in complex networks for being able to meet those more sophisticated demands of customers. In terms of innovation, the role of government tends to be more limited than other channels, as could have been the market itself and the strengthening of R&D in universities and firms. The complex, costly and long-term nature of innovation limits the potential of governments as an inducer of technological innovation in firms by means of its purchasing capacity. The overall disbursements of the


government of the state of Rio de Janeiro in science and technology (S&T) research has not reached R$140 million a year (or US$82 million a year) in 2005. On the other hand, in the state of São Paulo in that same year, the S&T disbursements of the government of that state was of R$1.5 billion a year (about US$900 million). In part this discrepancy is explained by the fact that Rio de Janeiro has more federal institutions than São Paulo, so that Rio takes advantage of federal investments in R&D science and technology research. The most important R&D institutions in Rio de Janeiro are federal, not state ones. The differences in terms of infrastructure for research, programmes for the qualification of researchers and scientists and the quality of the workforce trained among federal and state institutions is remarkably significant. There are many more federal universities and R&D labs spread throughout the country, so that Rio increasingly hosts just a fraction of them. Furthermore, federal investments in education have been decreasing in recent years, and there is a growing tendency for these funds to become even more. If state governments, as that of Rio de Janeiro, do not engage in supporting more R&D activities, the most likely outcome will be translated as a significant loss of R&D disbursements in Rio de Janeiro in respect to other Brazilian states. Without a proper R&D base working together with firms in complex projects, there cannot be developed the set of innovation-oriented competencies that are in line with domestic and international demands for advanced and intensive knowledge-based products. As a consequence, most R&D institutions in Rio de Janeiro suffer from lack of scale for long-term R&D and brain losses to other Brazilian states and countries (particularly the US). In addition to these institutional deficiencies, there is a ‘project seeking’ culture within universities and research institutes – in particular among young researchers – thus transforming these institutions in service support organizations to industry, rather than into true partners to strengthen the technological capabilities of the private sector. University– industry cooperation is acknowledged today as a pillar of technological innovation, given the externalities arising out of such cooperation in terms of learning opportunities, shared resources and competences put together for achieving common objectives. The local presence of science parks and business incubators is not a determinant for the innovative success of high-tech firms. However, the recent growth of these is indicative of the growing awareness of the need to bring together firms and the centres of knowledge production so as to increase the potential of researchers and entrepreneurs to engage in potentially innovative scientific projects as well as in start-up creation. As international evidence suggests, innovation tends to take place more easily when there is a sustainable combination of domestic and international market demand as well as a local R&D base sustaining the formation of quality workers, researchers and scientists together with quality research

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with business development potential. In both these aspects – market and R&D structure – the state of Rio de Janeiro is not well positioned to spur on IT-based innovations. International market demand for advanced IT products and services is being addressed by more competitive Indian, Taiwanese, Israeli and US firms (Botelho 2005; Bresnahan et al. 2001; Saxenian 2006). The domestic market is limited and conditioned, in respect to international standards, by the more limited investments of Brazilian firms in the acquisition of capital goods (hardware and software comprised) and in the development of new products, in that sense hampering the internal market development potential for higher value-added IT solutions. In the cases of larger firms – national or multinational ones – the demand for ITs is usually met by larger foreign and Brazilian IT firms, leaving a very limited room for SMEs and start-ups to get into these markets. On the R&D side, the situation is not different. The evaluation on the impact of R&D in the ICT sector in Rio de Janeiro and other Brazilian cities has not yet been determined, although the importance of R&D to stimulate the development of an IT industry together with spin-offs and start-ups from local universities and larger firms cannot be ignored, being thereby sufficiently explored in the international literature (Saxenian 1994; Shavinina 2003; Storper 1997; Swann et al. 1998). In Rio de Janeiro, institutions of a corporate, governmental and support nature coordinate a number of activities dedicated to the IT sector. The state government of Rio de Janeiro has an IT development programme named ‘Rio Conhecimento’, giving fiscal incentives to firms in that sector. The highest investor in support programmes is SEBRAE RJ, which invests more in support programmes for the IT sector in Rio than all the other institutions together (including BNDES and FINEP). A recent survey, carried out by ASSESPRO in 2004, concluded that Rio lacks an institutional articulation of agencies, projects and programmes. Actually, no general guidelines, objectives and development strategies are shared, in that sense hampering an effective mobilization of existing instruments, as well as legitimating new ones. The state of Rio de Janeiro has most of the critical institutions to reformat an innovation-oriented IT cluster. Nevertheless, there has never been established a thorough local economic development strategy in line with its institutional development potential. The complex socioeconomic situation partly conditions the growth of high-tech firms, thereby impacting the overall technological innovation potential of the state. This scenario demands an equally complex solution in order to, at the same time, improve the quality of jobs, quality of life of individuals and families, social inclusion and social security. While lives of innocent people keep being lost in the constant confrontations among policemen and criminals in the middle of crowded streets of Rio; and while the culture of tension and fear takes possession of the lives of citizens, the city will continue to be afflicted in its capacity to attract qualifying investments, thereby being powerless to


qualify its existing local collective goods and to develop new ones. Among the most important of the city’s assets are individuals with the business, scientific, legal and other competencies considered important for innovation to take place. But those people are not engaged in professional communities so that cooperation among them is neither strengthened nor encouraged. In light of the above, it is proposed that there is a missing ‘bridge’ between R&D and technological innovation, which are different things per se, and which must be established through the building up of local collective goods. These collective goods, considering the complex framework of the city of Rio de Janeiro, may be built by a local governance capable of setting up a broad and encompassing local economic development agenda. In order to understand the relevance of collective goods for high-tech SMEs, a questionnaire with a list of desirable local collective goods (Table 5.2) was passed to a sample of 11 IT start-ups which underwent incubation on the premises of local research universities. They were asked to rate their importance and pattern of use in the course of their evolution. Results showed that 77 per cent of the entrepreneurs interviewed declared they had used some sort of mentoring from experienced professionals in the marketplace; all of them use (and they do need, obviously) telecom infrastructures in their daily professional activities; all of them have made use of the infrastructure provided by business incubators and science parks in universities and research centres. Moreover, 66 per cent of them had made use of some sort of public seed capital, against only 10 per cent who claimed to have been invested in by venture capitalists and another 30 per cent who declared to have received funding from business angels. Coaching from academics, usually from former professors and supervisors in research projects, have been rated 4 (i.e., considered fundamentally important for them) by only 30 per cent of the entrepreneurs who admitted to have used this in the lifecycle of their start-up companies. When asked whether they consider they have the required knowledge to create new products and services, all of the entrepreneurs interviewed declared to possess such competences, thereby indicating the strategic importance of cooperation for technological innovation in start-ups is not considered relevant for them. This view can be derived by the existing gaps in entrepreneurship educational programmes in Brazil, where cases of best practice derived from real experiences of technological innovations that have become possible due to cooperation tends to be more limited and not treated on a primary perspective. Structured entrepreneurship educational programmes in Brazilian universities are practically non-existent. In Rio de Janeiro, the only comprehensive programme of this kind is provided by the business incubator of the Catholic University of Rio de Janeiro (PUC-Rio). This programme is geared at undergraduate students from any knowledge discipline of that university – technological, scientific and even humanities – who are willing to undertake a start-up, whether or not in the premises of PUC-Rio’s business incubator. This educational


Technological

Table 5.2

Local collective goods for the City of Rio de Janeiro

• Business angels’ communities. • Business incubators and science parks. • Coaching from academics in universities. • Management consulting companies (marketing, cost engineering, etc.). • Mentoring from experienced market specialists. • Public and private universities strongly engaged in R&D related to ICT sectors. • Public support to technological capacity programmes in start-ups. • R&D laboratories of large firms. • Seed capital (public and private). • Technological consulting companies (business plans, technology selection, engineering design, etc.). • Telecommunications infrastructure. • Venture capital (public and private).

Institutional

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• Technical schools. • Technological capacity in public administration to improve the quality and extension of its services. • Traditional financial system (banks, credit unions, etc.). • Territorial marketing promotion on the part of the public sector. • Introduction of competencies for increasing the management skills of bureaucrats (project management) in large projects aimed at benefiting the territory. • Entrepreneurship educational programmes at schools and universities. • Centres of excellence in higher education (undergraduate and graduate courses as well as advanced vocational training). • Transport infrastructure (airports, roads, etc.).

Territorial • Leisure infrastructure (parks, green areas, etc.). • More reduced levels of corruption in the public administration at local, regional and national spheres. • Public health system. • Public security (quality, efficient and less corruptive police, lower levels of criminality). • Rule of law (or a legal system that fastens judicial processes, as well as that guarantees the fulfilling of the terms of business and civil contracts). Source: Alves (2007).

programme offers 11 courses ranging from entrepreneurial finance to marketing, from business planning to accounting, from notions of psychology for entrepreneurs to oral presentation techniques, and so on. About 600 undergraduate students attend these courses every year at PUC-Rio. All of the entrepreneurs from PUC-Rio’s business incubator have passed through one or more of these courses. Nevertheless, the main feature of entrepreneurship educational programmes in Brazil is that these courses are designed to be, at the same time,


both practical and in an accessible language to its target public, usually consisting in young undergraduate students. In most cases, these programmes include theoretical discussions of the phenomena of technological innovation and entrepreneurship, in that sense concentrating in themes with a more firm-oriented (individual) nature – like business planning, finance, accounting, marketing, etc. – rather than on incentives for the firms to work on jointly since their very start, as may happen in other international contexts. These are indeed part of a territorial development strategy, given that initiatives like technological entrepreneurship educational programmes need to be designed with the support of qualified local actors who need to be acquainted on the importance of this as well as other issues for establishing a functional framework at territorial level to strengthen the innovative potential of those risky ventures of more reduced dimensions. In terms of institutional collective goods – that is to say, those local collective goods whose presence in a given territory enhances the capabilities of local institutions of fulfilling their territorial missions – there have been considered as more important ones: transport infrastructure (rated 3.25); universities (rated 3); technological educational programmes (rated 2.75), and the project management competences in the public bodies (rated 2.75). Given that this survey concentrated on firms graduated from business incubators, it is quite natural that these firms point out universities as a very important local collective good. Local collective goods whose externalities produce conditions of the quality of life of citizens have a more apparent indirect impact in the activities of start-up companies. It can be noted that the rule of law was considered as critical (rated 4 by all interviewees). Among the entrepreneurs interviewed, 70 per cent of them declared their businesses had been affected by the slowness and lack of clear rules in the Brazilian judiciary system. The way in which the Brazilian legal system is structured, according to most of the entrepreneurs interviewed, does not enhance cooperation among firms for their fear that intellectual property rights and terms of contracts are not properly secured. The other aspects that condition the quality of life of citizens have been rated, on average, as such: public security, rated 3.25; corruption, 3.25; leisure infrastructure (squares, parks, green areas, etc.), rated 2.75; and public health, rated 2.25. Matters like public security and corruption have been considered as impacting the business of the interviewees in a very important manner.

5.5

Conclusions

While issues of a socioeconomic nature are not properly treated, the capacity of the city of Rio de Janeiro to attract qualified professionals and investment in the large scale will not come about as spontaneously and gradually as it did for the remote industrial policies of the past, even though the software

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service clusters in India are also plagued by poverty-related issues. But, until quite recently, economic opportunities for professionals in India were more limited than in Brazil. Moreover, different times require different rules, and different rules, different policies. Without a local economic development strategy capable of bringing to life (or even of reformatting some of) these technological, institutional and territorial collective goods, it will be very difficult to place the city of Rio de Janeiro in the same high-tech route as other cities in developing countries. Technological innovation in new uncertain sectors – such as some areas in IT such as software and services – is also a by-product of social inclusion. The ability to produce the right mix of local collective goods becomes crucial today, not only to an individual area but also to an overall national economy. However, local collective goods favouring new knowledge creation can be more efficiently built by local institutions rather than by national policies. The latter should have a coordination role, in particular for those collective goods whose externalities produced in a territory directly condition the development of high-tech companies in local production systems of SMEs. In the prevailing cluster policy-making vision, similar policy recipes tackle similar problems. The foundations of innovation taking place in rather different local production contexts are interpreted as the same production phenomena, in a similar way to a prototypical view of the Italian industrial district experience. It is indeed a consequence of the novel character of the theme in Brazil, in which it has looked upon previous successful international experiences in order to identify interpretative models for the Brazilian case. In this view, the Marshallian industrial district experience has proved providential to an extent. That is to say, the acceptance of the role of external economies as both the result of cooperation and the motivation for the attractiveness of qualified professional newcomers and the overall recognition on the importance of collective goods as the hidden elements behind the systems’ performance. However, it has not been considered in the Brazilian public policy debates that collective goods need to have different natures in order to produce those external economies required for innovation to take place. The main remaining question about the transformations of industrial agglomerations or local productive arrangements in the context of developing countries is how to convert these inherently static firm agglomerations into evolving dynamic local innovation clusters. The European Union started to pursue a similar strategy a long time ago, without significant results in terms of innovations created in respect to what has been invested so far. Such policy debate is still under way here as there, but it must be recognized in both places that at least a lot has been done to understand the specific characteristics of innovation-based local production systems of SMEs. Rio de Janeiro is no exception and its still unfulfilled experience of reformatting an innovation-led software cluster exemplifies the scale


and scope of the challenge. The evaluation of potentially innovative ideas requires skills, competences and priorities that cannot be found in the public administration. Making territories capable of building the cognitive and normative collective goods required to have the right people in for innovation to take place demands long-term commitment, responsibility, leadership and engagement from all-important territorial actors. This chapter has contributed to bringing out additional elements and boundary conditions and reinforcing the role of existing ones in a modified flowchart model for an innovation-driven service industries cluster. Transforming a service industry agglomeration into a true LIS in SSI, which aims to compete on factors other than labour costs in a rapidly evolving and expanding complex market, requires innovation-driven demand and pragmatic collaboration (Helper et al. 2000) among firms with learningby-monitoring; and large firms as anchors, a necessary but not sufficient condition. For, increasingly, large anchor firms in the SSI industry, either domestic or multinational, are beginning to realize that by growing small firms and promoting their joint growth into a innovation-oriented cluster is also a means for them to compete internationally beyond labour costs due to the following emerging trends: (1) the scope of offshore outsourcing is increasing and is deepening with the rise of business process outsourcing; (2) SMEs software and services demand is growing in size and sophistication thus constituting an increasingly important market for the SSI industry; and (3) the growth in increased market fragmentation demands from software developers and service providers gives a different level of flexibility associated with diverse expertise and continuous quality enhancements.

Notes 1. In the mid-1980s IBM Brasil had just 2,200 direct employees versus 7,200 in 2007, completed by 3,000 indirect posts. Its software services growth in Brazil has been spectacular and in 2005 over 1,000 programmers were hired at the Hortolândia Centre, which is expected to have 10,000 employees by 2010. 2. For comparison, at the end of 2007, EDS employed 38,000 people in India, expected to reach 25,000 at the end of 2008. 3. This section builds upon the discussion of industrial districts in Alves (2007). 4. It must be further noted that the idea of a compact social structure does not imply an absence of clashes of interests and conflicts and that a local production system, as defined, can be characterized by a social situation which is highly disintegrated, or even by the presence of a booming illegal economy, as in certain southern Italian regions. The latter aspect is also a very present – and worrisome – issue in the slums of Rio de Janeiro in Brazil, where drug lords hinder local economic development by dictating rules and roles to be followed, affecting, in a substantial way, the lives of most of their inhabitants and, more importantly, of the city as a whole. 5. There is great divergence in studies about the number of firms in the SSI: foreign consultants say 10,000, ASSESPRO counts 27,000, of which 4,200 are in software

200

6. 7.

8.

9.


development and the Brazilian statistical office (Instituto Brasileiro de Geografia e Estatística IBGE) estimates 38,000 IT firms employing 220,000 people. This spurred over the next few years the creation of the data processing services industry cluster in Brazil. However, several of these micro software firms have fiscal headquarters in neighbouring counties with lower services taxes, which represent the major financial charge on their business activity. Over the past decade new poles have emerged from the southernmost state capital city of Porto Alegre to the north-east economic capital of the state of Pernambuco, Recife as well as in more recent years increasingly in the interior middle-sized cities of the state of São Paulo (e.g., Sorocaba), in the São Paulo city neighbouring towns of Campinas and Barueri, and in the reconverted declining industrial areas of the so-called Greater São Paulo ABC (municipalities of Santo André, São Bernardo and São Caetano) region, the hub of Brazil’s automotive and manufacturing industries. According to ‘Software Engineering Institute (SEI)’ CMMI or Capability Maturity Model® Integration (CMMI) is a process improvement approach that provides organizations with the essential elements of effective processes. It can be used to guide process improvement across a project, a division or an entire organization. CMMI helps integrate traditionally separate organizational functions, set process improvement goals and priorities, provide guidance for quality processes, and provide a point of reference for appraising current processes.

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