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FGV). He holds a PhD in technology and innovation management from SPRU – Science and. Technology ... (Financiadora de Estudos e Projetos – FINEP).

Discussion Paper Series

#2005-4 Firms’ Creative Capabilities, the Supporting Innovation System and Globalization in Southern Latin America: A Bleak Technological Outlook or a Myopic Standpoint? Evidence from a Developing Region in Brazil

Paulo N. Figueiredo and Conceição Vedovello August 2005

UNITED NATIONS UNIVERSITY, Institute for New Technologies, Keizer Karelplein 19, 6211 TC Maastricht, The Netherlands Tel: (31) (43) 350 6300, Fax: (31) (43) 350 6399, e-mail: [email protected], URL: http://www.intech.unu.edu

FIRMS’ CREATIVE CAPABILITIES, THE SUPPORTING INNOVATION SYSTEM AND GLOBALIZATION IN SOUTHERN LATIN AMERICA: A BLEAK TECHNOLOGICAL OUTLOOK OR A MYOPIC STANDPOINT? EVIDENCE FROM A DEVELOPING REGION IN BRAZIL1 Paulo N. Figueiredo and Conceição Vedovello2 Abstract

This paper examines empirical evidence of the technological capabilities of firms in the industrial pole of Manaus, in a developing area of northern Brazil. It also investigates the links these firms have with supporting organizations of the innovation system such as universities, research institutes or business incubators. Firms’ capabilities are classified by type and level of development, and we also identify the nature of the links between them and the supporting organizations. The paper draws on a sample of 75 organizations from Manaus: 46 firms (in two sectors: electro-electronics and motorcycle and bicycle industries, and their major suppliers) and 29 research-oriented support organizations. The evidence was collected through extensive fieldwork at both the industry- and firm-level as well as from first-hand accounts. From the study we find that all the sampled firms have progressed beyond basic operational capabilities. At the time of the fieldwork, several firms possessed a high level of innovative capabilities in diverse technological functions. Many of these firms have actively established a variety of informal, human resource-based and even research-based links with innovation supporting 1

This paper is derived from a broader research project that ran from September 2002 to January 2004

within the Research Programme on Technological Learning and Industrial Innovation Management at the Brazilian School of Public and Business Administration (Escola Brasileira de Administração Pública e de Empresas – EBAPE) of the Getulio Vargas Foundation (Fundação Getulio Vargas – FGV). An earlier version was presented at the DRUID Summer Conference 2004 (Elsinore, Denmark, 14–16 June) and during a seminar given by the first author at INTECH (Maastricht, Holland, 21st June 2004). 2 We would like to thank the Superintendency of the Manaus Industrial Pole (Suframa, Ministry of Development, Industry and Trade, Brazilian Federal Government) for sponsoring this study. We also thank Lincoln Campos, Superintendent of the Institute of Economics and Administration (Instituto Superior de Administração e Economia do Amazonas – ISAE Amazonas) for his support during our fieldwork in Manaus. Special thanks also go to EBAPE FGV for providing the support to implement this study. We thank Hubert Schmitz and Erik Baark for their very positive and helpful comments on the version presented at the DRUID Summer Conference 2004. We are deeply grateful to Martin Bell for his detailed, insightful and encouraging comments on earlier drafts. The criticisms and helpful comments of two anonymous referees are also gratefully acknowledged. The usual disclaimers apply.

organizations. These findings oppose prevailing generalizations and assumptions that, as a consequence of globalization and outward-looking industrialization regimes, firms in southern Latin American economies lack technological capabilities. Furthermore our evidence does not support the view that there is a prevailing weakness in the innovation system in this region. Although this study does not explicitly examine technological development over time, we believe it offers an alternative (and more optimistic) view of the industrial reality in this developing area of Brazil. This view, which differs from existing conventional (and myopic) standpoints, could potentially support the design of more realistic industrial strategies. Key words: Firm-level technological capabilities, innovation system, globalization, southern Latin America. JEL codes: O14, O32, O38

UNU-INTECH Discussion Papers ISSN 1564-8370

Copyright © 2005 UNITED NATIONS UNIVERSITY Institute for New Technologies, UNU-INTECH

UNU-INTECH discussion papers intend to disseminate preliminary results of the research carried out at the institute to attract comments

Authors’ biographic notes Paulo N. Figueiredo is professor of technological learning and industrial innovation in the Brazilian School of Public and Business Administration, Getulio Vargas Foundation (EBAPE FGV). He holds a PhD in technology and innovation management from SPRU – Science and Technology Policy Research, University of Sussex, UK. In 1999 he established – and still heads up – the Research Programme on Technological Learning and Industrial Innovation Management in Brazil at EBAPE FGV. He is the author of the book Technological Learning and Competitive Performance, published in 2001 by Edward Elgar Publishing. Additionally, his research has been published in academic journals including Research Policy, Technovation, International Journal of Technology Management, Industrial and Corporate Change and Oxford Development Studies.

Conceição Vedovello is an economist. She holds a PhD in science and technology policy studies, from SPRU, University of Sussex, UK. Her main areas of research, in which she has worked extensively, are: public policy; science and technology policy; national and local systems of innovation; the interaction between technological infrastructures and the industry sector; and related mechanisms and assessment methodology. She has worked as a researcher and consultant for national and international organizations such as the National Bank for Economic and Social Development, Brazil (Banco Nacional de Desenvolvimento Econômico e Social – BNDES), the United Nations Economic Commission for Latin American (Comisión Económica para America Latina – CEPAL), and the International Labour Organization (ILO). She is a researcher at the Technological Research Institute of the State of São Paulo (Instituto de Pesquisas Tecnológicas – IPT SP), but also works at the Brazilian Agency of Innovation (Financiadora de Estudos e Projetos – FINEP).

Corresponding author: Paulo N. Figueiredo Praia de Botafogo 190, Room 510, 22250-900 Rio de Janeiro RJ Brazil Tel: + 55 21 2559 5742, Fax: + 55 21 2559 5710, E-mail: [email protected], URL: http://www.ebape.fgv.br

TABLE OF CONTENTS

1. INTRODUCTION 2. DESCRIPTIVE FRAMEWORKS

9 13

2.1 FIRM-LEVEL TECHNOLOGICAL CAPABILITIES 13 2.2 LINKS BETWEEN FIRMS AND SUPPORTING ORGANIZATIONS OF THE INNOVATION SYSTEM 14 3. THE EMPIRICAL SETTING

3.1 THE INDUSTRIAL POLE OF MANAUS 3.2 THE BRAZILIAN INNOVATION SYSTEM: SOME KEY FEATURES 4. RESEARCH DESIGN AND METHODS

4.1 SAMPLE DESIGN FUNCTIONS AND NUMBERS OF THE SAMPLED ORGANIZATIONS

4.2 DATA COLLECTION STRATEGIES 4.3 DATA ANALYSIS 5. MAIN FINDINGS

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19 20 23

23 23

24 24 25

5.1 TYPES AND LEVELS OF TECHNOLOGICAL CAPABILITIES IN THE SAMPLED FIRMS

25

5.2 INNOVATION SYSTEM LINKAGES: FIRMS AND SUPPORTING ORGANIZATIONS

29

5.3 LINKS AMONG SUPPORTING ORGANIZATIONS OF THE INNOVATION SYSTEM

34

5.1.1 Electro-electronics firms 5.1.2 Two-wheel firms 5.1.3 Supplier firms

5.2.1 Electro-electronics firms and innovation system supporting organizations 5.2.2 Two-wheel firms and innovation system supporting organizations 5.2.3 Major supplier firms and innovation system supporting organizations

25 27 28

32 33 33

6. DISCUSSIONS AND CONCLUSIONS

37

REFERENCES

41

APPENDIX

45

THE UNU-INTECH DISCUSSION PAPER SERIES

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1. INTRODUCTION There are some people who claim that, as a direct result of changes in economic policy in southern Latin America and Brazil in the 1990s, the region’s innovative capabilities are declining. Specifically, it has been argued that industry deregulation and the opening-up of the economy to foreign competition – a change to the existing import substituting industrialization (ISI) policy – combined with the intensification of globalization, have led to a pervasive deterioration of national and industrial technological capabilities. In other words, critics argue that globalization creates a production divide whereby research and development (R&D) and engineering activities are increasingly carried out by mature industrialized countries, while economies such as those in Latin America tend to specialize only in the production of industrial commodities and ‘in-bond’ assembly industries, which are linked to overseas companies (see Cimoli and Katz 2003). Furthermore it has been argued that innovation systems in Latin America, particularly in a country like Brazil, barely exist. If they do they do, they are generally embryonic and weak (see Cassiolato and Lastres 2000; Cassiolato et al. 2001; Katz 2004; Sutz and Arocena 2004; Viotti 1997; 2000). Most of these studies work on the generic assumption that there has been a continual erosion of the innovative capabilities that existed during the 1980s down to the current ‘trivial’ level, and that the kinds of linkages within the innovation system are weak, and so forth. However, most of these assumptions come from a very high-level overview and are based on macro-level official data; little is known about the extent to which such assumptions stand up to close scrutiny from fieldwork and organization-level investigation. Similar types of generalization are held about specific industrial areas. In a country like Brazil that has huge regional and industrial diversity, generalizations – especially negative ones – about technological development are easily believable. These assumptions are even more pronounced in the less developed regions of Brazil like the northeast, north and mid-west, where little time has been devoted to studying the issue of technological development. Specifically, in Manaus (northern Brazil), there have been very few studies of technological capabilities over the past 30 years. Any studies that have been done have focused on macroeconomic issues rather than on firm-level technological development. Strikingly, even today, the over-riding view of technological development in Manaus has not changed since the late-1980s.3 At that time, it was argued that “[during the late 1980s] companies continued doing simple assembly

3

For a review of these generalizations see Ariffin and Figueiredo (2004). 9

manufacturing, characterised by a high degree of technological dependence” (Baptista 1988, 313–314). Additionally, there is a widely held view that the industrial pole of Manaus is nothing more than a set of screwdriver plants or warehouses doing simple assembly only to take advantage of tax benefits (see Fleury and Fleury 2004; Forbes Brasil 2000). Even though Ariffin and Figueiredo (2004) have generated evidence that contradicts such generalizations in the case of electroelectronics firms in Manaus as well as for other areas with similar circumstances such as Malaysia, there is still a need to conduct longer, wider and deeper empirical investigations to inform the research community, industry and governments about what is really going on in the region. This paper seeks to address such negative perceptions by examining empirical evidence of technological capabilities at the firm level and within supporting organizations of the innovation system in the industrial pole of Manaus – a developing area in Brazil. Specifically, it examines the extent to which 46 firms (both local and transnational subsidiaries) – consisting of 18 electro-electronics, 9 motorcycle and bicycle (two-wheel) and 19 major suppliers – have progressed beyond simply undertaking basic operational activities to gain some form of innovative capability. The paper also examines the extent to which these firms have formed agreements with 29 supporting organizations of the innovation system (universities, research institutes, technological centres, technical schools, business incubators and consulting firms) in Manaus and what has resulted from these.4 One limitation of this paper is that we only partly address the argument that there is pervasive deterioration of technological capabilities. Our findings refer purely to the time of the fieldwork; we do not have evidence of firms’ technological capabilities or the nature of the innovation system before changes were made to the industrial policy environment in the 1990s. Thus, this paper does not cover the issue of technological development or the dynamics of capability building. Nevertheless, we seek to offer some clarification of what is going on in term of firms’ capabilities and the nature of their relationships with other organizations of the innovation system. A second limitation is that we do not examine the causality between a firm’s capabilities and its links with supporting organizations. The objective here is simply to shed a different kind of light

4

In this paper we follow the distinction between ‘organizational’ and ‘institutional’ dimensions of innovation systems as suggested by Edquist and Johnson (1997). Thus, institutions refer to things that govern behaviour such as routines, rules, norms, shared expectations and the ground rules for economic behaviour. Organizations refer to more specific and concrete formal structures, usually consciously created with explicit purposes (e.g. firms, technical institutes, training centres, business associations, etc.). In order to distinguish firms from other organizations within the innovation system the latter will hereafter be referred to as ‘innovation system supporting organizations’.

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onto the above-mentioned debate by assessing the extent to which these generalizations would stand up to close scrutiny of industry- and firm-level evidence based on detailed fieldwork. The paper is organized as follows: section 2 presents the frameworks used to examine firm-level technological capabilities and the nature of the links among supporting organizations of the innovation system. The setting for the study is briefly described in section 3, followed by an outline of the research design and methods in section 4. The main findings of this study are presented in section 5, which are then discussed in section 6 together with some policy recommendations.

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2. DESCRIPTIVE FRAMEWORKS 2.1 Firm-level technological capabilities This paper focuses on a wider range of firm-level capabilities than R&D, patenting or production output alone. Technological capability is defined here as the resources needed to generate and manage technological change including skills, knowledge, experience and organizational structure (Bell and Pavitt 1995; Figueiredo 2001). In order to examine firm-level expertise, we make use of the framework developed in Figueiredo (2001), adapted from Lall (1992) and Bell and Pavitt (1995), because it uses a relatively fine disaggregation of different levels and types of technological capability. Following the pattern of other recent studies that have applied such a framework to these types of product-based industries (e.g. Ariffin 2000; Ariffin and Figueiredo 2004), this paper distinguishes between a firm’s ability to use or operate existing technologies and production systems (‘routine’ production capabilities) and the ability to invent and implement new technological activities (‘innovative’ technological capabilities). Routine production capabilities are those that enable a firm to produce goods at a given level of efficiency with a given input requirement; they may be described as technology-using skills, knowledge and organizational arrangements. Innovative technological capabilities are defined as those that enable creation, change or improvement of products, processes, organization or equipment. They may be described as change-generating skills, knowledge, experiences and organizational arrangements. Tables 1 and 2 in the Appendix contain the frameworks used to assess types and levels of technological capabilities in electro-electronics (EE) firms, bicycle and motorcycle (two wheel – TW) firms and their strategic suppliers. The columns set out the technological capabilities by function; the rows by level of difficulty. Technological capabilities are assessed on the basis of the type of activity each firm undertakes on its own. For EE firms and their suppliers, the framework used to assess technological capabilities is the same as was previously applied in empirical studies in Malaysia (Ariffin 2000) and Brazil (Ariffin and Figueiredo 2004). In order to assess technological capabilities of TW firms and their suppliers, this framework was adapted and validated for their particular operational activities. Both frameworks identify capabilities related to three technological functions: process and production organization, product-centred activities and equipment-related activities. For all types of firm, Levels 1 and 2 cover routine capabilities, while innovative capabilities range from Levels 3 to 6.

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Even though high-level research at Level 6 – the ‘tip of the iceberg’ – may be less relevant for EE and TW firms in a late-industrializing location such as Manaus, studying it does provide a link with total technological activity in the global EE and TW industries.5 Thus, this framework provides a basis for describing one of the two trajectories of technological development: progress from routine production capability to higher levels of creative and innovative technological capability.

2.2 Links between firms and supporting organizations of the innovation system Governments and policy-makers alike are engaged in the search for new policy ideas with the goal of supporting innovative business activities; one of the critical ways of achieving industrial competitiveness. There are many different agents that contribute to and support innovation (such as universities, research and technology institutes, technical schools, consulting firms, business incubators, etc). However, there is no apparent pattern to the links and partnerships they forge with industrial firms. In addition, the innovative process within firms is not homogeneous; it can take many forms and make use of different sources of knowledge. It varies from firm to firm within sectors and between sectors, and also depends on the stage of technology development in any particular sector as well as on a firms' capacity to cope with that technology. Since the mid-1990s, several studies have attempted to investigate the contribution of particular innovation system organizations to industrial R&D performance, as shown in table 1. These studies also explored how such organizations have contributed to the establishment and/or strengthening of national innovation systems, especially in the context of industrialized economies. However, the studies lack any detail about the links – their nature, output and relevance – that such organizations establish with firms.

5

There are other frameworks used to assess technological capability in latecomer firms, e.g. the ‘reversed product-cycle’ (Hobday 1995) and the ‘acquisition-assimilation-improvement sequence’ (Kim 1997). However, these frameworks, despite their merits, are more focused on production capabilities; they do not cover other technological activities like process and production organization or equipment-related activities.

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Table 1: Some key contributions on innovation systems supporting organizations Approach

Main authors

Main contribution

Technology transfer mechanisms

Autio and Laamanen (1995)

Research and technology organizations (RTOs)

Kandel (1994)

Research and technology institutes (RTIs)

Rush et al. (1995)

Technological infrastructure

Justman and Teubal (1996)

Identification of activities developed by technological institutes that may contribute to firms’ innovative capabilities. Activities are clustered in terms of: (i) process mechanisms/services (e.g. consultation, continuing education, contract research or information services); (ii) process mechanisms/organizational arrangements (e.g. co-operative research programmes, high-tech centres and broker organizations); and (iii) output mechanisms (e.g. congresses, workshops, seminars, doctoral and master theses, new products, resource and research databases, and scientific publications). Examining the contribution of technology transfer to the innovative activities of firms as being more important than research activities. RTOs are not uniform institutions; they vary between countries, regions and sectors. They may be a response to a very particular set of industrial problems and circumstances. With a focus on RTIs located in the US, Europe and Asia. It suggests that there is no common modus operandi for all of them. There is a need for tight interaction between networks established between industry, academia and government. This study focused on human capital related activities (e.g. formal education and skills resulting from both training and experience), physical capital (e.g. instrumentation), institutional infrastructure (e.g. patent system), knowledge and capacity to deal with production, investment and innovation (design methodologies), and firms’ organizational flexibility (such as establishment of networks linking users of technology services with a technology centre supplying them).

Source: Elaborated by the authors.

While there is a lot of discussion about the relationship between a firm’s level of innovation and its partnerships with research organizations, there are very few frameworks that can be used to examine the links themselves. To compensate, Vedovello (1995; 2001) designed a taxonomic classification around the formality of links, based on the levels of commitment and payment involved between the partners. This resulted in three main groups: informal links, human resource links and formal links.6 Tables 2 and 3 present the criteria used to classify relationships within this framework.

6 There are diverse types of links within each of the three groups. It should also be noted that interviewees were encouraged to add/specify any other link they consider important.

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Table 2: Types of links between firms and innovation system supporting organizations 1. Informal contacts with researchers/business people 2. Access to specialized literature 3. Access to the research of specific departments Informal links 4. Participation in seminars and conferences 5. Access to equipment of research institutes and universities and/or firms’ research institutes 6. Participation in specific programmes (education and training) 7. Other informal-related links 8. Involvement of students with industrial projects 9. Recruitment of new graduates 10. Recruitment of experienced scientists and engineers Human resource links 11. Formally organized training programmes to meet human resources needs 12. Other human resources-related links 13. Consultancy developed by researchers or consultants 14. Analysis and tests (technical trials) 15. Service agreements to update records (e.g. technical procedures, patents) Formal links 16. Technical responses (e.g. diagnosis of problems in terms of production process) 17. Signing up of research contracts (e.g. software development) 18. Establishment of joint research projects 19. Other formal-related links Source: Vedovello (1995; 2001).

Table 3: Classification of links between firms and innovation system supporting organizations In terms of frequency

In terms of results achieved

In terms of benefits achieved Source: Vedovello (1995; 2001).

F1 = Up to twice a year F2 = 3–6 times a year F3 = Once a month F4 = Once a week or more R1 = Verbal technical advice R2 = Provision of information R3 = Reports R4 = Implementation of specific programmes R5 = Technical and organizational improvement activities R6 = Design specifications R7 = Prototypes R8 = Patents R9 = Other B1 = None B2 = Small benefit B3 = Moderate benefit (complementary) B4 = Great benefit (crucial)

Informal links. In general, firms establish informal links or casual relationships to help with their ongoing search for technical solutions or in implementing innovations. By creating a ‘pool’ of information and knowledge, firms tap into the expertise and equipment available in, for example, universities, private or public research institutes, training centres or consulting firms. From the point of view of the supporting organizations, contact with firms can help to boost

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their technological capabilities. The establishment of such links does not imply that there is any formal contract between the partners, even though small fees may sometimes be involved on an ad-hoc basis. Human resources links: These are related to the improvement, training, recruitment and/or allocation of qualified staff. Firms may wish to strengthen their links with, for instance, R&D organizations by hiring qualified people from them. Creating human resource-based links also allows a firm to promote its own technical and educational interests for future recruitment needs. From the perspective of the supporting organizations, individual researchers or a specific unit within the organization may wish to: (i) increase the supply of jobs available to their qualified people; or (ii) extend the range of their educational basis or research portfolio. Human resources links can also provide more structured training for a firm’s employees and research staff. Formal links: Firms are likely to establish a formal relationship if they have a specific requirement – knowledge, information, human resources or physical systems for example – that they know is available from a supporting organization of the innovation system. Such a relationship can often result from an earlier informal link. For a formal agreement, firms may set up a contract for the use of laboratories or research projects or enter into a joint research agreement that supports and complements their internal technological efforts. From the other perspective, the supporting organization gains familiarity with the industrial environment and the technical and scientific capabilities, and they may be able to use industrial equipment or offer scientific expertise to firms. More often than not, this is a money-making agreement for the supporting organization that results in them enlarging their income or broadening their research portfolio. Usually, these links involve formal contracts between the partners and a payment of fees.

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3. THE EMPIRICAL SETTING 3.1 The industrial pole of Manaus The Manaus Industrial Pole was set up in 1967 under the ISI policy and internal market protection regime in Brazil. By setting up a large industrial site in the heart of the Amazon rainforest, the government sought not only to stimulate economic development in that region but also to integrate it with the rest of Brazil. While other international initiatives implemented by governments at that time were based on an export-oriented model (e.g. those in India, Malaysia, South Korea and Taiwan), the industrial pole of Manaus was designed to supply the domestic market through an inward-looking industrialization model (Frischtak et al. 1994; Tigre 1988) Over the past 35 years, the industrial pole has gone through three distinct phases (see table 4). Although it was originally created as a free-trade zone, the Manaus Industrial Pole today has two levels of tax incentives: federal and state. For the former, these include: (i) up to 80% reduction in import tax for inputs needed for manufacturing; (ii) exemption of tax on goods manufactured domestically; (iii) income tax reduction of 75% based on net profit; and (iv) exemptions in social integration tax (PIS) and social security tax (COFINS) for transactions within the Manaus Industrial Pole. At the state level there is between 55% and 100% compensation in value added tax. In 2004, Manaus’s fiscal regime, including these tax incentives, was extended to 2023 (Suframa 2005).

Table 4: Main phases in the Manaus Industrial Pole Phases Phase 1: 1967–1976

Main industrial strategy Import substitution policy

and market regulation

Phase 2: late-1970s to early-1990s

• • • •

Phase 3: 1991–

Competition and market de-regulation

• •

Major events Beginning of industrial activity in September 1968 Dominance of commercial activities Establishment of a policy based on minimum proportion of domestically produced components to be used for products manufactured in Manaus Establishment of maximum limits for annual imports Opening-up of Manaus to foreign competition and implementation of the new industrial policy and foreign trade agreement The policy of minimum domestic proportion of product components replaced by the basic or minimum production process policy

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The Manaus Industrial Pole is home to companies from 17 different industrial sectors. Seven manufacturing sectors account for about 90% of total revenue: chemicals, disposables, EE, computer equipment, thermo-plastics, TW and watch making. Combined annual revenue has grown from US$ 7.2 billion in 1999 to US$ 13.8 billion in 2004. In 1990, exports represented only 1.5% of Manaus’s total revenue; however, since the deregulation and opening up of the Brazilian economy in the early-1990s the proportion of annual exports has risen, reaching 5.2% in 1999 and 11.6% in 2003. During the 1992–2004 period, exports grew by an average of 20.5% per year, compared to 3.8% annual growth for the 1988–1992 period. The industrial pole houses nearly 400 firms, of which 128 are owned by foreign investors. Foreign investment mainly comes from the US, Japan and South Korea, which together represent nearly 50% of all foreign firms in Manaus. In 1999 there were 43,095 people directly employed by firms in the Manaus Industrial Pole; by December 2004 that number had risen to around 66,000. According to Suframa, the inward investment agency in charge of the industrial pole of Manaus, by February 2004 there were nearly 390,000 people employed overall – including both direct and indirect jobs (Suframa 2005).

3.2 The Brazilian innovation system: some key features Before describing the innovation system in Manaus – the actual focus of this study – we will briefly describe some of the features of the broader innovation system in Brazil. In the 1970s the Brazilian government brought scientific and technological policy to the fore with the implementation of the first National Development Plan (Programa Nacional de Desestatização – PND; 1972/74) and the first Basic Plan for Scientific and Technological Development (Plano Básico de Desenvolvimento Científico e Tecnológico – PBDCT; 1973/74).These were followed, during the late-1970s and early-1980s, by the second and third PBDCTs. Since then, several institutions and government bodies dealing with coordination, funding and execution of scientific, technological and innovative activities have been established and strengthened. The most recent development came during late 1990s when the Brazilian government, through the Ministry of Science and Technology, drew up a list of the various scientific, technological and innovative (STI) organizations considered necessary for national development. As a result, the White Book on Science, Technology and Innovation was launched in September 2001. Its main objective was “to find ways in which STI may contribute to building up a dynamic, competitive and socially fair country”, with a target date of 2012 (Ministério da Ciência e Tecnologia/Academia Brasileira de Ciências 2002). However, few of the central ideas and propositions contained within the White Book were new. Many had already been identified more than 30 years ago in the first PBDCT. There are several reasons why these ideas may have been neglected: (i) lack of policy convergence among several

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interrelated areas (e.g. industry, STI and education policies); (ii) lack of continuity of both STI programmes and the financial resources to run them; and (iii) a lack of leadership and cohesion that has permeated the design and implementation of STI policy in Brazil. Even so, it is impossible to ignore the huge efforts that the Brazilian government has made in order to design and implement policies and mechanisms to build up a dynamic system of innovation, in order to support industrial development. At the system level, the existing structure consists of institutions and organizations dedicated to articulation and coordination activities (e.g. the Science and Technology National Council, an advisory body linked to the Ministry of Science and Technology), funding activities (e.g. the Brazilian Innovation Agency, National Council for Scientific and Technological Development and National Development Bank – all linked to the Ministry of Development, Industry and Foreign Trade) and executive activities (e.g. federal, state and private universities, research and technology institutes, technical schools and technological centres). This scientific and technological framework has allowed the country to achieve remarkable advances on several fronts. For instance, the number of PhD students, trained in Brazil and abroad, grew from less than 600 in 1980 to around 8,000 in 2003. Additionally, the number of Brazilian scientific papers quoted by the Institute for Scientific Information grew from around 1,500 in 1980 to more than 12,000 in 2003. Thus, in terms of the availability of highly qualified human resources – their training and their scientific production – Brazil today shows a much more robust performance than it did 20 years ago.7 In addition, since the late 1990s the government has established a set of funds to complement the traditional financial resources available to support scientific, technological and innovative activities. These sectoral funds have been fed with financial resources from selected industrial sectors (e.g. oil and gas, information technology, aeronautics, health or biotechnology) and they are designed to guarantee a constant flow of money into STI activities and, simultaneously, to generate a new management model that can plan long-term strategies and define priorities focused on results. Among the challenges faced up by the management of such funds are the: (i) modernization and broadening of STI infrastructure; (ii) promotion of synergies among universities, research and technological centres and institutes, and industry; (iii) creation of new incentives for private STI investment; (iv) generation of knowledge and innovation that may contribute to the solution of national problems; and (v) achievement of better links between science and technological development. 7 See Brazilian Ministry of Education, National Plan for Post-graduate Studies (2005–2010) [http://www.capes.gov.br]

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3.3 The Manaus innovation system: a brief overview There are several supporting organizations that make up the innovation system in Manaus, with activities that are similar to those of other industrialized regions of Brazil. As at the national level, these organizations deal with STI activities at various levels: •

Articulation and coordination, e.g. the Secretary for Science and Technology of the state of Amazonas, and the Industrial Pole of Manaus Technological Centre



Funding, e.g. Fundação de Amparo a Pesquisa do Estado Amazonas – FAPEAM – the Research Support Foundation of the Amazonas state



Execution: represented by 20 public and private universities and research organizations – e.g. the Technological Institute of Amazônia, the National Institute of Research of Amazônia, the Desembargador Paulo Feitoza Foundation, the Genius Institute of Technology, the Nokia Institute of Technology, Federal and State Universities of Amazonas; one completed business incubator – CIDE – with another four under construction – INPA, CBA, Agrotechnical School and InCEFET; and four technical training centres – SENAI, the Nokia Foundation, SEBRAE and the Plastic Injection School.

In addition, it should be noted that other organizations not directly involved with STI activities also contribute to the local innovation system, such as the Centre of Industries of the Amazonas State.8

8

Derived from fieldwork interviews and systematic search into archival records and institutional publications by government and private organizations in Manaus.

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4. RESEARCH DESIGN AND METHODS 4.1 Sample design The criteria used to select the 46 firms and 29 supporting organizations of the innovation system were based on purposeful sampling. As opposed to probabilistic sampling, the logic and power of purposeful sampling is to select information-rich cases from which one can learn a great deal about issues of central importance to the research purpose (Patton 1990). The sample composition is outlined in table 5. At the time of sampling the EE firms accounted for about 90% of the production volume and market-share in Brazil, whereas the sampled TW firms held 100% of both. They represented around 80% of the population of EE firms and all TW firms in the industrial pole.

Table 5: Sample composition: firms and innovation system supporting organizations Sampled organizations of the innovation system

Total FUNCTIONS AND NUMBERS OF THE SAMPLED ORGANIZATIONS Research Government institutes universities

6 Sampled Firms ElectroElectronics Two-wheels Suppliers Total

3

Funding, liaison, and normative organization s

Training centres

Consulting firms

Business incubators

12

4

2

2

29

Numbers and nationality of the capital ownership of the sampled firms US

Europe (1)

Japan

South Korea

Brazil

6 1 2

3 0 0

3 2 6

1 0 0

5 6 11

18 9 19 75

Note: 1 Finland, Germany and France.

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4.2 Data collection strategies Data collection in Manaus was implemented over three phases (table 6). In each phase, in-depth interviews, casual meetings and direct-site observations were used to collect first-hand empirical evidence from all sampled organizations. In the sampled firms, empirical evidence was collected from areas such as design, engineering, quality and maintenance department, and production, in collaboration with directors, managers, engineers, technicians, crew supervisors and even operators. Additionally, firms’ publications in the form of reports, brochures, books, videos and other sources (e.g. websites and press releases) were collected as sources of complementary empirical evidence. Table 6: Phases of fieldwork Phases and time period Phase 1: Exploratory work (March–April 2002) 9 organizations researched Phase 2: Pilot work (October–November 2002) 20 organizations researched Phase 3: Main fieldwork (February 2003–March 2004) All sampled organizations researched

Activities The implementation of this phase sought to confirm the feasibility of the study and open up access to some firms in Manaus and São Paulo and to some organizations of the innovation system in Manaus. Twenty supporting organizations of the innovation system and 10 firms from the electro-electronics and two-wheel sectors were researched. Each interview was followed by a tour around the premises. In-depth face-to-face interviews with managers, engineers and technicians from all sampled firms (electronics, two-wheels and suppliers – including those researched during the pilot work) and all sampled supporting organizations in Manaus. Each interview took two hours, on average, and was followed by tours and direct-site observation. During this phase, evidence gathered during pilot work was validated within each firm. Indeed, this phase started by researching the offices of some of the sampled firms in São Paulo (south-eastern Brazil). Having finished this phase, the researchers moved on to the implementation of the main fieldwork in Manaus.

4.3 Data analysis Following the pilot study and main fieldwork, the analytical process consisted of a systematic building of tables (see Miles and Huberman 1984). The analysis was validated through meetings with key members of each researched firm during and after the fieldwork. Supplementary discussions and fact-checking took place during the writing process via short visits to the firms, telephone calls and/or e-mail. Initially, the original data were entered into an Access database since it allowed qualitative interview data to be inputted. To allow statistical analysis to be conducted more efficiently, most of the qualitative text and memo data were converted into quantitative data according to the statistical package SPSS 12.0 format. Previous qualitative data on firms’ activities were quantified according to the various categories in tables 2 and 3 as well as tables 1 and 2 in the Appendix. For qualitative analysis, the activities of all 75 sampled organizations in Manaus were systematically examined. 24

5. MAIN FINDINGS This section describes the empirical evidence of this study. Section 5.1 presents the findings relative to technological capabilities of the sampled firms. Section 5.2 describes the links set up between the sampled firms and supporting organizations of the innovation system. Finally, linkages among the supporting organizations of the innovation system are examined in Section 5.3.

5.1 Types and levels of technological capabilities in the sampled firms 5.1.1 Electro-electronics firms All 18 sampled EE firms have achieved Levels 1 and 2, whereby they have accumulated the technological capabilities required to master basic operations in all three areas: process and production organization, product-centred activities and equipment-related activities (table 7). In terms of process and production organization, all 18 firms engage in basic innovation activities at Level 3. These firms are able to independently undertake activities such as moving from design to manufacture; optimizing process layout and flow; time, motion and ergonometric studies (filming); building quality systems (to ISO 9002 and 14001 standards); trial implementation9; in-line quality control (QC); on-line, real-time integrated production control systems; material requirements planning (MRP); detailed failure analysis (FMEA); 6 sigma statistical process control (SPC); just in time (JIT) delivery by parts and component suppliers to the consumer electronic firms; and JIT within production operations (the Kanban system).

9

This is a management tool that combines the principles and techniques of continuous improvement with systematic tracking of improvements in technical performance indicators across the plant.

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Table 7: Number of sampled firms that possessed specific types and levels of technological capability at the time of fieldwork

Types and levels of technological capabilities Mastery of basic operations Level 1 Mastery of basic operations Level 2 Basic innovation Level 3 Intermediate innovation Level 4 High-intermediate innovation Level 5 Advanced Innovation Level 6

Electro-electronics (EE) Process and Equipmentproduction related organization PRODUCT– activities CENTRED ACTIVITIES

Two-wheel (TW) PRODUCT– CENTRED ACTIVITIES

Equipmentrelated activities

Process and production organization

Suppliers

PRODUCT– CENTRED ACTIVITIES

Equipmentrelated activities

18 (100%)

18 (100%)

18 (100%)

9 (100%)

9 (100%)

9 (100%)

19 (100%)

19 (100%)

19 (100%)

18 (100%)

18 (100%)

18 (100%)

9 (100%)

8 (89%)

4 (44%)

18 (95%)

18 (95%)

15 (79%)

18 (100%)

13 (72%)

9 (50%)

8 (89%)

3 (33%)

3 (33%)

14 (74%)

9 (47%)

5 (26%)

14 (78%)

3 (17%)

2 (11%)

3 (33%)

1 (11%)

2 (22%)

7 (37%)

1 (5%)

1 (5%)

11 (61%)

0 (not attained)

0 (not attained)

2 (22%)

1 (11%)

1 (11%)

1 (5%)

0 (not attained)

0 (not attained)

0 (not attained)

0 (not attained)

0 (not attained)

1 (11%)

1 (11%)

1 (11%)

0 (not attained)

0 (not attained)

0 (not attained)

Source: Derived from the empirical study

Note: ( ) Incomplete accumulation of the capability level.

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Process and production organization

In relation to product-centred activities, 13 EE firms (72%) perform basic innovative activities by setting up specific departments or groups in product engineering. Beyond basic innovation, only three firms (17%) have begun to build higher levels of product-centred capabilities. At Levels 3 and 4, firms are able to carry out activities including making some modifications to product design; establishing a product-process interface; achieving ISO 9001; engaging in new product development efforts with companies in other regions or countries; transferring software into integrated circuits (ICs); feature design; customized IC design and prototyping; and on-line product design transfer. With respect to equipment-related capabilities, beyond the routine operation level, nine EE firms (50%) have reached Level 3 capability (basic innovation). From these, only two (11% of all firms) have moved into the accumulation of Level 4 capabilities. At these levels, firms can carry out, independently, activities such as: developing own testing jigs and burn-in equipment; re-engineering or developing own automatic sensors in conveyor systems and a vision system for testing; setting up mechanical or pneumatic devices to speed process flow; developing automated movement system for incoming, work-in-progress (WIP) and finished goods; creating and filing patents; developing automated test equipment and multi-product software testing tools (own TestCAD); and undertaking fairly precise plastics moulding and mould modifications for consumer electronics and telecommunications products. As shown in table 7, no sampled firm is confined to Level 1 for any of the three types of capability; neither have the sampled firms been limited to one type of capability. This evidence supports the findings of a previous study that focused on a sample of 29 firms in Manaus and compared them to 53 in Malaysia (Ariffin and Figueiredo 2004). Thus, these findings permit us to argue against some of the common generalizations about technological development in the EE industry in Manaus.

5.1.2 Two-wheel firms As shown in table 7, all nine firms (100%) have accumulated technological capabilities at Levels 1 and 2 to master basic operations in process and production organization. Beyond this, eight firms display basic innovative capability at Level 3. Five firms remain at this level, whereas three firms (33%) – one bicycle producer (Companhia Brasileira de Bicicletas – CBB) and two motorcycle makers (Honda and Yamaha) – have moved onto Level 4 innovative capability. From these, two firms (22% of total) have reached Level 5, while only one (Honda Amazônia) has reached Level 6 innovative capability for process and product organization. In relation to product-centred activities, all nine firms have Level 1 capabilities while eight firms (89%) have moved to Level 2. Beyond routine technological capability, three firms (33%) have reached Level 3 basic innovative capability. However, only one firm (Honda) has moved 27

further to Levels 4 and 5 – although the accumulation of Level 6 is still incipient. At the time of the fieldwork, Honda had begun to build up an organizational basis to support late-stage product innovation activities. For example, since the end of 2003 it has gradually been bringing small groups of Japanese engineers into the Manaus site to help build up a product design and development unit. Interviews with Honda management have revealed that this practice is part of a broader corporate product development strategy that combines globalization and localization strategies.10 Additionally, Honda Amazônia is implementing an ambitious expansion plan in Manaus to become one of the world’s largest (if not the largest) motorcycle production sites. As far as equipment-related activities are concerned, all nine TW firms operate at least at Level 1. Four firms (44%) have moved into the accumulation of Level 2 capabilities, meaning that five firms are confined to Level 1, doing very basic equipment activities. Of the three firms that have developed Level 3 capabilities, only two have moved into the accumulation of pre-intermediate equipment-related capability (Level 4). From all nine sampled firms, only one firm (Honda Amazônia) has proceeded further to Level 5 and begun to accumulate Level 6 innovative capabilities for equipment activities. Whereas in the EE industry in Manaus there is a relatively even distribution of innovative technological capabilities (Level 4 and beyond) among the sampled firms, in the TW industry it is concentrated in two companies: Honda and Yamaha, with the former achieving higher levels of innovative capability than the latter. It should be noted, however, that Honda has around 88% of the market share in Brazil, while Yamaha has about 11%. A third firm, bicycle producer (CBB), is somewhere between Levels 3 and 4 for all technological functions. Even though Honda alone has moved to Level 6 for all three functions – albeit in an incomplete manner – it is still engaged in the building of layers of local suppliers around itself, as described below.

5.1.3 Supplier firms The evidence in table 7 shows that there is a diversity of types and levels of capabilities for different technological functions across all 19 sampled supplier firms. All firms (100%) undertake routine procedures for the three technological functions at Level 1. In relation to process and production organization capability, 18 firms (95%) have achieved Level 2 (basic operations). From these, 14 firms (74% of total) have moved beyond routine capabilities to engage in basic innovation at Level 3. Seven firms (37%), however, have moved into the accumulation of pre-intermediate capability (Level 4), while one firm has progressed to Level 5.

10

As mentioned by one important manager, Honda Manaus is in a strategic technologic and geographic position to engage in product design and development activities to supply products specifically for consumers in the Americas.

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As far as product-centred capabilities are concerned, 18 firms (95%) have capabilities at Level 2 (basic operation), meaning that just one firm remains at Level 1. Nine firms (47%) have moved to Level 3, but only one firm is engaged in the development of Level 4. In relation to equipment-related capabilities, four firms are stuck at Level 1, whereas 15 firms (79%) have moved into the accumulation of Level 2. From these, five firms (26% of total) have developed capabilities at Level 3 (basic innovation), whereas only one firm has proceeded into the development of Level 4 innovative equipment-related capability.

5.2 Innovation system linkages: firms and supporting organizations In this section we describe the links that have been set up between the sampled firms and the supporting organizations of the innovation system (section 5.2.1 for EE, 5.2.2 for TW). Such links are examined on the basis of the frameworks laid out in tables 2 and 3. Table 8 shows the number of links established between the 46 sampled firms (EE, TW and suppliers) and the 29 supporting organizations. Table 9 shows the kinds of output that have emerged from such links.

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Table 8: Types of links between firms and supporting organizations of the innovation system Innovation system organizations /types of links Research institutes Consultancies Universities Support organizations Training centres Incubators Other Total

Electro-electronics

30

Major suppliers

Supporting organizations

Informal

HR

Formal

Informal

HR

Formal

Informal

HR

Formal

Informal

HR

Formal

34 (54.8%) 2 (3.2%) 23 (37.1%) NF

6 (20.0%) 1 (3.3%) 12 (40.0%) 1 (3.3%)

17 (56.7%) 9 (30.0%)

6 (22.2%) 2 (7.4%) 14 (51.9%) NF

5 (16.7%)

1 (33.3%) NF

3 (23.0%) NF

3 (8.1%) 2 (5.4%)

15 (27.3%)

2 (66.7%) NF

5 (53.8%) NF

6 (16.2%) 2 (5.4%)

NF

1 (1.6%) NF

10 (33.3%) NF

NF

NF

NF

4 (14.8%) NF

1 (7.7%) NF

22 (59.5%) NF

2 (33.3%) NF

85 (45.0%) 12 (6.3%) 61 (32.3%) 16 (8.5%) NF

32 (30.5%) 4 (3.8%)

11 (36.7%) 1 (3.3%) 12 (40.0%) NF

1 (16.7%) 3 (50.0%) NF

2 (3.2%) 62 (100.0%)

NF

NF

2 15.4%) 11 (100.0%)

2 (5.4%) 37 (100.0%)

NF

30 (100.0%)

1 (3.3%) 30 (100.0%)

NF

30 (100.0%)

1 (3.7%) 27 (100.0%)

Source: Derived from the research

NF = not found

Two wheels

4 (13.3%) NF

NF

NF

3 (100.0 %)

6 (100.0%)

9 (4.8%) 6 (3.2%) 189 (100.0%)

38 (36.2%) 14 (13.3%) 11 (10.5%) 2 (1.9%) 4 (3.8%) 105 (100.0%)

10 (18.2%) 28 (50.9%) 2 (3.6%) NF NF NF 55 (100.0%)

Table 9: Results from linkages between firms and innovation system supporting organizations Innovation system support organizations/fi rms

EE firms

TW firms

Innovation system supporting organizations

Suppliers

Results/Links

Informal (%)

HR (%)

Formal (%)

Informal (%)

HR (%)

Formal (%)

Informal (%)

HR (%)

Formal (%)

Informal (%)

HR (%)

Formal (%)

Verbal advice

6.5

NF

16.7

NF

NF

NF

NF

NF

33.3

6.4

7.6

9.1

Provision of information

17.7

13.3

30.0

14.8

10.0

NF

15.4

2.7

66.7

88.8

41.9

58.2

Reports

22.6

NF

36.7

3.7

3.3

NF

7.7

2.7

66.7

83.4

45.7

61.8

Specific programmes

53.2

63.3

53.3

51.9

60.0

66.7

30.8

64.9

50.0

80.2

90.5

65.5

Technical and organizational improvements

15.0

22.5

NF

26.2

25.1

33.3

49.7

29.7

16.7

11.2

8.9

22.3

Design

11.3

NF

10.0

NF

NF

NF

NF

NF

NF

NF

1.9

1.8

Prototypes

4.8

NF

3.3

3.7

3.3

NF

NF

NF

NF

NF

NF

1.8

Patents

NF

NF

NF

NF

NF

NF

NF

NF

NF

1.6

2.9

9.1

1.1 1.8 Other Source: Derived from the research HR = Human resources links

NF

3.4

1.6

NF

4.1

2.7

NF

1.6

0.6

1.4

NF = not found

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5.2.1 Electro-electronics firms and innovation system supporting organizations As shown in table 8, out of the three types of business it is the EE firms that are generally more engaged in interaction with innovation system organizations for informal links (62%) and formal (76.9%) links. For human resources links, this proportion is 30.9%. In relation to the type of supporting organizations with which EE firms establish linkages, this table also shows that they are primarily set up with research institutes (54.8%) and universities (37.1%) for informal links; universities (40.0%) and training centres (33.3%) for human resources links; and research institutes (56.7%) and consultancies (30.0%) for their formal links. Considering all sampled firms, EE firms are those most involved with the establishment of formal links with both local and non-local innovation system supporting organizations. In fact, the rate of formal links set up with non-local supporting organizations is not irrelevant, achieving the proportion of 26.7%. Through the interviews with managers and engineers, it was possible to learn that firms do engage in formal link with these organizations in order to complement their knowledge for innovative activities. For local supporting organizations, these links are deemed as an opportunity for further interactions, particularly for R&D activities. Evidence on the frequency of links (not shown in the table) indicates that on average EE firms set up both informal and human resource-based links twice a year. On the other hand, formal links are established with less regularity, varying from two to six times a year. However, 20% of formal links require regular monthly contact between the firm and the supporting organization, because in general they are more related to entrepreneurial R&D activities. A closer interaction between partners involved with R&D activities is crucial, particularly during the initial phase when plans, priorities, and methodological concept and design are decided upon. Table 9 shows some of the results generated by links set up between the sampled firms and innovation system supporting organizations. More often than not these linkages will result in the implementation of specific programmes within the EE firm, for example, designing and implementing a specific training programme and related activities. This is the outcome for 53% of informal links, 63% of human resources links and 53% of formal links. Other results include writing of reports, which occurs for 37% of formal links and 23% of informal links, while technical and organizational improvements result from 22.5% of human resources links. Overall we found that establishing linkages was quite a variable process. As one top manager put it: “Our relationship with the local federal university started in a modest way. Then, day-byday we began to increase our mutual trust because of the concrete benefits achieved. Now we are building a much stronger relationship”.

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5.2.2 Two-wheel firms and innovation system supporting organizations On the whole, TW firms have fewer links with the sampled supporting organizations of the innovation system than EE firms. Most of the links have been set up with local institutes, which account for 83% of human resources links and 67% of informal links. Only a third of the relationships are formal. As shown in table 8, more than 50% of informal links set up by TW firms are with universities while 22% are with research institutes; 40% of human resources links are established with training centres, followed by 37% with universities. There were only three formal links established by TW firms in the sample: two of them were with universities and the other was with a research institute. In terms of frequency, both informal and human resources links occur up to twice a year while formal links are established anything from two to six times a year. As shown in table 9, for all types of links the most frequent outcome for TW firms – as with EE firms – is the implementation of specific programmes (e.g. specific technical training, or process or equipment automation): occurring after 52% of informal links; 60% of human resource-based links; and 67% of formal links. Technical and organizational improvements are the result of a third of formal links, 26% of informal links and 25% of human resources links. Additionally, in relation to benefits that such linkages generate for TW firms, we found that 56% firms consider informal links to be of moderate benefit (not crucial to the development of the firms’ activities), while a third think of them as being a great benefit (crucial for firms’ innovative activities). Slightly over a half of firms assessed human resources links as being of moderate use.

For instance, as pointed out by one manager, “the [geographic] proximity

between our firm and local supporting organizations provides us with agility in terms of exchanging experience and information. This allows us to suggest specific modifications to course syllabuses, so that we can get better human resources for the firm”. However, for formal links, 100% of firms considered them to be only of moderate benefit. This suggests that, for most of these firms, formal links do not have a strong impact on the development of the firms’ activities.

5.2.3 Major supplier firms and innovation system supporting organizations The proportion of alliances set up by the sampled suppliers is lower than for either the sampled EE or TW firms. Of their links, 69% are human resource-focused, 20% are informal and 11% are formal. Also, most of the links are with local organizations, comprising 54% of informal links, 81% of human resources links and 83% of formal links. Table 8 indicates that the supply firms establish 53% of their informal links with universities and 23% with research institutes; for human resources, nearly 60% of the links are set up with

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training centres and 16% are with universities. Half of all formal links are set up with consulting organizations and a third are with training centres. Both informal and human resources links are set up around twice a year. As in EE and TW the frequency of establishment for formal ties varies from two to six times a year. Table 9 shows that for all informal links, the most frequent results are those related to technical and organizational improvement activities (50% of links) followed by the implementation of specific programmes (31%), normally based on training and related activities. Nearly two-thirds of human resources links lead to the implementation of specific programmes and, again, technical and organizational improvements activities (30%). Finally, most formal links are related to provision of information and the presentation of reports (67%), followed by the implementation of specific programmes (50%). Indeed, the provision of adequate training courses is a particular result recognized by interviewees since professional ‘upgrades’ can heavily influence a firm’s performance. In relation to the benefits these linkages generate to supplier firms, 100% of the informal links and 65% of the human resources links have produced moderate benefits. As far as formal links are concerned, 67% of them are considered to have produced a great benefit – one that is crucial for the development of firms’ activities – while 33% were thought to be of moderate benefit.

5.3 Links among supporting organizations of the innovation system Supporting organizations of the innovation system normally establish links among themselves: (i) to strengthen and complement their own capabilities, and (ii) to combine their actions, strengthening, in this way, the local supporting innovation system, which in turn broadens the possibilities of interaction with industry. A total of 349 links were found among our sampled organizations, of which 54% were informal links, 30% were human resource-based, and 16% were formal (table 8). Given the nature of these organizations, whose activities are, on the whole, almost entirely related to R&D activities, it is striking that there was such a low incidence of formal links. Of the links, 61% of informal links, 70% of human resource links and 51% of formal links were set up locally. Table 8 shows that 45% of informal links are set up with research institutes, and 32% are with universities; human resource links are set up with universities 36% of the time followed by 31% with research institutes. Slightly more than half of formal links are with universities, followed by 27% with research institutes. All these types of links occur roughly 3–6 times a year. As shown in table 9, the most frequent outcome of informal links between organizations is the provision of information (89% of outcomes), followed by filing of reports (83%) and implementation of specific programmes (80%). More than 90% of human resource links lead to

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specific programmes being implemented, 46% result in reports being written, and 42% lead to the provision of information. For formal links, the main results are the implementation of specific programmes (66%), reports (62%) and provision of information (58%). As far as the benefits of these are concerned, most relationships provide only a moderate benefit, resulting from: 94% of informal links; 81% of human resource links; and 63% of formal links. More than a third of formal links are considered to have been a source of major benefits. During our fieldwork one major local research institute emphasized the importance of links among innovation system supporting organizations, saying that it is one the ways that they can deepen their capabilities and therefore enhance regional development. Private research institutes – considered a newcomer type of organization in Manaus – have been particularly active in their efforts to build up links with firms and public research institutes (including universities). The majority of links by these institutes are in the form of support for postgraduate courses and establishing research laboratories in government universities. However, important formal links do exist. For instance, the Genius Institute of Technology is collaborating with Siemens, as are Fundação Paulo Feitoza and Nokia together for software development. Private research institutes have also sought to build up linkages with non-local innovation organizations, either in the rest of Brazil or abroad, as part of their strategy to acquire knowledge for their researchbased activities.

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6. DISCUSSIONS AND CONCLUSIONS This paper has examined the empirical evidence gathered on firms’ capabilities and the links they establish with supporting organizations of the innovation system in a developing area of Brazil. Using frameworks available in the literature, we have examined these issues for a sample of 75 organizations (46 firms and 29 supporting organizations), all located in the industrial pole of Manaus in northern Brazil. The study has found a variety of types and levels of capabilities for diverse technological functions. In EE firms informal agreements represent slightly more that half of the links found while human resource-based and formal links each account for around a quarter. In comparison, around half of TW firms’ links were focused on human resources, followed by informal links; almost no formal links were found. It was a similar pattern for supplier firms where around twothirds of links were based on human resources followed by informal links and then formal links roughly a tenth of the time. Of all the companies, EE firms set up more formal links (usually related to R&D activities) with both local and non-local supporting organizations than either TW or supplier firms. This seems to reflect EE firms’ technological requirements and their need to complement their knowledge base. By examining these issues and drawing on first-hand industry- and firm-level empirical evidence – albeit in a descriptive manner – this paper sought to contribute to existing discussions of late-industrializing technological development in southern Latin America, particularly in Brazil, operating under a global, outward-looking industrialization regime. More specifically, our findings suggest that: 1. There is a diversity of types and levels of innovative technological capabilities in the researched firms. As firms move up into the accumulation of higher levels there is space to build up new innovative capabilities, for instance, for design and product development and equipment-related activities. In line with a previous study (Ariffin and Figueiredo 2004), the evidence here also suggests that the generalizations mentioned in section 1 related to firmlevel technological activities do not reflect the reality found in the industrial pole of Manaus. 2. Additionally, it has been argued that the Brazilian innovation system is characterized by a pervasive weak linkage pattern in all parts of the ‘systemic’ spectrum, that in Brazil linkages do not exist and, if they do, they are trivial, leading to a passive innovation system (see e.g. Viotti 2000). However, our findings contradict this kind of argument.

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3. The evidence here and our research observations across Brazil suggest that the innovation system in Manaus has characteristics that are similar to those of other regions in Brazil, taking into account differences in levels of magnitude and industrialisation. To put it differently, the supporting innovation system is able to set up links with firms in order to perform, locally, the initiatives and procedures adopted at the national level concerning STI activities. 4. In relation to linkages set up between the sampled firms and supporting organizations of the innovation system, our study has shown that they do occur in all categories: informal links, human resources links and formal links. However, it should be noted that formal links, by their own nature, ask for specific commitments and conditions for their establishment. As a result, their incidence tends to be lower than those of informal or human resources links. This has also been observed in studies undertaken in other (industrialized) contexts – for example the United Kingdom, Portugal and even in Brazil (see Vedovello 1995; 2000; 2001). Partners, however, do not meet these conditions easily, which depend on firms’ technological capability levels, their ability to integrate new knowledge with existing knowledge basis, the quality of human resources involved (for both firms and supporting organizations of the innovation system), and financial capacity to support more robust R&D activities. 5. We recognize, though, that our study has some limitations. We have not analysed the interconnection between firms’ technological capabilities and their linkages with innovation system supporting organizations. We have not traced out the development of firms’ capabilities and linkages from the early 1980s up to the time of fieldwork. Thus, we have not captured any kind of change before and after the 1990s. Even so, we have examined industry- and firm-level empirical evidence, gathered on the basis of an original and detailed fieldwork, which describes the current types and levels of technological capabilities in a sample of EE, TW and supplier firms, and the nature of linkages they set up with supporting organizations of the innovation system in the context of Manaus. 6. Indeed, some assumptions and generalizations pointing to a bleak technological outlook have been easily spread across Latin America and Brazil (see Cassiolato et al. 2001; Cimoli and Katz 2003; Katz 2004; Sutz and Arocena 2004; Viotti, 2000). This calls for field investigations – even in a cross-sectional and descriptive manner such as this. As suggested here, such assumptions and generalizations do not stand up to a proper empirical scrutiny based on first-hand and industry- and firm-level empirical evidence, as we have done in this paper. Thus, our study offers an alternative (and more optimistic) view of the industrial reality in this developing area in Brazil that differs from what would be expected of existing conventional (and myopic) standpoints.

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7. Our findings suggest that one has to consider variations within the industry in Latin America and Brazil and within specific industrial sectors and regions – and even within firms – in terms of technological capabilities levels and innovation system linkages. Studies designed on the basis of macro-level aggregated data hardly capture the nuances of intracountry, intra-industry or intra-regional diversity of technological capabilities and innovation systems. Additionally, studies that are heavily based on conceptual arguments (e.g. Viotti 1997; 2000) or that lack a proper treatment of empirical evidence (e.g. Cassiolato et al. 2001) tend to generate a picture that usually does not reflect the industrial reality. This may obfuscate or even mislead the decision-making, design and implementation of government and business strategies on investments in industrial innovation. 8. Finally, our study also makes a methodological contribution in terms of applying frameworks (or metrics) to examine firms’ technological capabilities and their links with other supporting organizations of the innovation system. The application of such frameworks to other industrial settings may contribute to deepening the understanding of technological development not only in Brazil, but also in other industrializing contexts. This, in turn, would contribute to illuminating – and calibrating – the design and implementation of government and business strategies relative to industrial development of specific industrial regions and sectors.

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APPENDIX Appendix Table 1. A framework for technological capabilities in the electro-electronics industry (producer firms and suppliers) Types and levels of capability

Process and production organization

Product-centred activities

Equipment-related activities (e.g. tool and die, metal stamping, plastic moulding)

Routine technological capabilities: capabilities to use given technologies Mastery of basic operations: Level 1 Mastery of basic operations: Level 2

Basic innovation: Level 3

SKD (semi-knocked down): part or final Routine QC to maintain basic standards: inBasic maintenance with equipment suppliers assembly. Assemble, dissemble or recoming, final product and out-going inspection. stationed at plant. assemble kits. PPC. Organizing basic process flow. Visual testing only. Process flow, line balancing. Assemble Replication of fixed specification. Routine QC to Routine maintenance of tools and equipment. separate parts into complete assembly. maintain existing standards: in-line QC. Minor Total preventative maintenance and total CKD (complete knocked down): clean-up of design to suit production or market. productive maintenance. Replication of complete assembly. PCBA and product unchanging items of equipment. assembly. Efficiency improvement from experience in existing tasks. Routine testing. Innovative technological capabilities: capabilities to generate and manage technical change Establishing process, production or industrial engineering departments. Improved layout and debugging to optimize production. ISO 9002, statistical process control (SPC), quality control circles (QCC), total quality management

Establishing product engineering and design departments. Product design for manufacture (DFM) and cost-effective, incremental product development for local or different markets. Cosmetic and mechanical design.

Repair and trouble-shoot equipment problems. Copy and simple adaptation of existing designs and/or specifications. Establishing equipment design, tool, die and mould development centres. Engineering precision metal and plastic parts.

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Intermediate innovation: Level 4

(TQM), in-circuit testing, burn-in. MRP or JIT systems. Automation of processes. Flexible and multi-skilled production. Business process re-engineering. Development of new process specifications. Ability to transfer to production directly from R&D design or drawing by HQ. Radical innovation in organization. Owndeveloped CIM with customers, vendors or group. In-depth failure analysis. Developing manufacturing, FA and TestCAD software tools. Filing patents.

Design Centre upgraded to separate firm. Own product design for local or regional markets. Electrical, PCB, chassis, chip-on-board, platform designs. Design for testability and debugDFT/DFD. ISO 9001. Software development, systems engineering. Rapid prototyping, VLSI design. Package electrical design. Substrate and piece parts design. High-intermediate Materials and surface analysis. Upgraded to innovation: regional or worldwide design centres or world Level 5 product mandates. Providing design services to TNC group or customers. Process and software development to Is a leading regional or international R&D, product produce and test high yield, miniaturized development, ASIC or software design centre/s. Advanced and higher performance HDD products R&D into new product generations using leadinginnovation: and chips. Time-to-volume production. edge technology: larger wafers, higher Level 6 Research into advanced material and new performance HDD and chips. R&D into more specifications to produce future or uniform crystal growth, improved magnetic cutting-edge products. orientation and advanced materials. Source: Drawn from Ariffin (2000). Adapted from Lall (1992), Bell and Pavitt (1995), and Figueiredo (2001)

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Development of automated equipment. Equipment design centre upgraded to separate firm. Mould and die design. High precision tooling, progressive metal stamping, plastic injection moulding. R&D for specifications and design of new high precision tools, complex automated equipment or production systems. Patent filing. Set up of recognized training institutes with universities in precision tool and die or precision plastic moulding. Fast time-to-design, cutting-edge and hiprecision equipment to produce latest or cutting-edge products and components. Is among regional or global leader of CNC complex equipment, high-precision tooling, stamping, die and mould, prototype models.

Appendix Table 2. A framework for technological capability accumulation in the two-wheel latecomer industry (producer firms and suppliers) Types and levels of capabilities Mastery of basic operations: Level 1

Mastery of basic operations: Level 2

Basic innovation: Level 3

Intermediate innovation: Level 4

Process and production organization

Product-centred activities

Equipment-related activities

Routine technological capabilities: capabilities to use given technologies Lay-out of acquired technology across the Production of limited variety of models. Basic maintenance assisted by equipment plant. Routine production co-ordination Production focused on national market. suppliers present in the plant. Basic mastery across plant. Semi-knocked down (SKD) Products based on SKD production. Routine of tool maintenance. Routine replacement of production – simple assembly of QC for incoming material and final products. equipment components. components. Absorbing plant-designed capacity. Basic PPC and visual tests. Basic co-ordination of process flows and Increase in the variety of models for national adjustments to the production line. markets. Products derived from CKD Maintenance of jigs and of devices of Complete knocked down (CKD) production. Replicating given product assembly/testing. Participation in production. Efficiency improvement on the specification from the group. In-line QC. installations and performance testing. Total basis of accumulated experience from Product quality for export markets. Routine preventive maintenance (TPM). existing activities. Routine testing. product QC awarded international certification Organization of the maintenance Achieving certification for routine process (e.g. ISO 9002, QS 9000). department/division. QC (e.g. ISO 9002, QS 9000). Innovative technological capabilities: capabilities to generate and manage technical change Establishing departments of process, Creating local product specifications. Maintenance to casting, machining, welding production and industrial engineering. Diversification of product line. Building of and dying equipment. Total productive Layout improvement, problem solutions, Product engineering department. Cosmetic maintenance. Replication of simple minor and intermittent adaptations in and mechanical design. Minor adaptation of equipment components. Adaptation of process, de-bottlenecking and ‘capacityproduct design to meet local market equipment components to local inputs and stretching’. Systematic studies of new conditions and/or demand (‘tropicalization’). to characteristics of production process process control systems – SPC, TQC/M, organization. Adjustment to tools, devices ZD, MRP, Kanban/JIT. and moulds. Manufacturing of jigs. Automated precision machining. Automated processes for innovation (e.g. Systematic improvements to given product Autonomy to carry out periodic revision of production process system control, specifications. Licensing new product equipment and machinery without technical automation to speed up process flow), technology. Own/local production of product assistance. Basic and detailed process flexible and multi-skilled production. components. Development and local suppliers engineering. Own complete maintenance. Production ramp-up. Failure analysis (e.g. (for 40–50% of whole product components). Precision mechanics for tooling and FMEA). Production process improvement Early design for manufacturing (DFM). stamping by plastic injection. Moulds for the development and use of local maintenance.

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suppliers (for 40–50% of all product components). High-intermediate innovation: Level 5

Quality assurance programmes with suppliers. Plant and business reorganization. Integrating automated process control and PPC. Application of CATIA, and/or ProEngineering. Logistics systems for JIT delivery. ISO 14000 certification. Development of local suppliers/supply chain (for 50-80% of whole product components). Engagement in new production processes. Integrated automated operations systems with corporate control systems. Engaging in process innovation based on research and engineering. Strengthening and management of whole supply chain aiming for total local supply. World-class production. New process design and development via E and R&D.

Product development certification (e.g. ISO 9001). Early engagement in product design, prototyping and local development of products. Own launch of new products. Award of product in international markets. Building of product development group. Speeding up of prototype development. Building of dedicated product design and development unit. Design of components. Complex JIT systems with suppliers. Leadership within the group in terms of product R&D. Local project and development of all products. Launching of internationally innovative products (new concepts). Product patenting.

Own manufacturing of equipment components. Design of pressing and moulding. Development engineering of components for new products. Software development for equipment and production lines automation. Design and development of sensors for equipment and product tests. Early engagement in moulds design.

Complex and high-precision mechanical and electronics engineering. Moulds design, development, application and maintenance. Advanced Maintenance assistance to other firms in the innovation: group. High-precision mechanics. R, D & E Level 6 for new specifications of design and highprecision tooling, automated equipment, production system and moulds. Filing of patents. Centre for moulding and highprecision mechanical engineering strongly linked with university research. Sources: Adapted from Bell and Pavitt (1995), Figueiredo (1999; 2001) and Lall (1992), plus authors’ own elaboration based on the research. Notes: E = engineering; JIT = just-in-time; PPC = production planning and control; QC = quality control; TQC/M = total quality control / management; ZD = zero defect.

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THE UNU-INTECH DISCUSSION PAPER SERIES # 2005-4 Firms’ Creative Capabilities, the Supporting Innovation System and Globalization in Southern Latin America: A Bleak Technological Outlook or a Myopic Standpoint? Evidence from a Developing Region in Brazil by Paulo N. Figueiredo and Conceição Vedovello # 2005-3 Science and Technology Development Indicators in the Arab Region: A Comparative Study of Gulf and Mediterranean Arab Countries by Samia Satti O. M. Nour # 2005-2 Learning Through Inter-Organizational Interactions: Public Research Institutes in the Nigerian (Bio)pharmaceutical System of Innovation by Banji Oyelaran-Oyeyinka and Padmashree Gehl Sampath # 2005-1 Systems of Innovation and Underdevelopment: An Institutional Perspective by Banji OyelaranOyeyinka #2004-18 A Systems Perspective on Inter-Firm and Organizational Collaboration in African Industry by Banji Oyelaran-Oyeyinka # 2004-17 Regional Innovation Systems: A Critical Synthesis by David Doloreux and Saeed Parto # 2004-16 Growth of Employment and the Adoption of E-business by Kaushalesh Lal # 2004-15 Learning, Innovation And Cluster Growth: A Study of Two Inherited Organizations in the Niagara Peninsula Wine Cluster by Lynn K. Mytelka and Haeli Goertzen # 2004-14 Determinants of E-business Adoption: Evidence from Firms in India, Nigeria, Uganda by Banji Oyelaran-Oyeyinka and Kaushalesh Lal # 2004-13 Agricultural Biotechnology: Issues for Biosafety Governance in Asian Countries by Padmashree Gehl Sampath # 2004-12 A National System of Innovation in the Making. An Analysis of the Role of Government with Respect to Promoting Domestic Innovations in the Manufacturing Sector of Iran by Sunil Mani # 2004-11 Demanding Stronger Protection for Geographical Indications: The Relationship between Local Knowledge, Information and Reputation by Dr. Dwijen Rangnekar # 2004-10 Are Foreign Firms More Productive, and Export and Technology Intensive, than Local Firms in Kenyan Manufacturing? by Rajah Rasiah and Geoffrey Gachino # 2004-9 Learning New Technologies by SMEs in Developing Countries by Banji Oyelaran-Oyeyinka and Kaushalesh Lal # 2004-8 Building Research Capacity in Social Sciences for Development in Bolivia: A Case of Institutional Innovation by Prof. Léa Velho, Maria Carlota de Souza Paula, Roberto Vilar # 2004-7 Sectoral Pattern of E-business Adoption in Developing Countries by Banji Oyelaran-Oyeyinka and Kaushalesh Lal # 2004-6 Non-Tariff Measures, Technological Capability Building and Exports in India's Pharmaceutical Firms by Frederick Nixson and Ganeshan Wignaraja # 2004-5 Technological Intensity and Export Incidence: A Study of Foreign and Local Auto-Parts, Electronics and Garment Firms in Indonesia by Rajah Rasiah # 2004-4 Science and Technology in Latin America and the Caribbean: An Overview by Léa Velho # 2004-3 Coping with Globalisation An Analysis of innovation capability in Brazilian telecommunications equipment industry by Sunil Mani # 2004-2 Learning and Local Knowledge Institutions in African Industry by Banji Oyelaran-Oyeyinka # 2004-1 Productivity, Exports, Skills and Technological Capabilities: A Study of Foreign and Local Manufacturing Firms in Uganda by Rajah Rasiah and Henry Tamale

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