Fundacion Chile and the public sector continue to provide s

1
Cycles of destruction and creation of productio
n capacity and the building up of domestic
technological capabilities. JORGE KATZ
Santiago de Chile September 2005
2
Our basic argument

• Structural reforms and economic globalization
  have triggered off a major transformation of the
  LA production structure.
  
• Said process involved macro-to-micro interactions
  and the co-evolution of economic, institutional
  and technological forces that have retrofitted
  into each other. Received theory does not provide
  adequate lens for the understanding of the
  above.
• Major changes have occurred in the structure and
  performance of individual sectors associated to
  the exit and entry of firms to the economy,and to
  productivity growth of incumbents. Business
  concentration and structural heterogeneity have
  increased.
• Production capacity has gone through a major
  episode of destruction and creation and of change
  in ownership. As a result of said process
  domestic technological capabilities have changed
  quite dramatically.
• Examples of the above are the destruction of
  capabilities in engineering intensive activities
  (capital goods and metalworking, with the
  exception of airplanes and some vehicle firms in
  Brazil) and the expansion in natural resource
  processing sectors such as salmon farming and
  wine in Chile, fresh flowers in Colombia,soja
  beans and biotech in Argentina.

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Presentation consists of three sections

• Stylized facts.
• Conceptual framework.
• Policy prescriptions.

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The conceptual framework

• Neoclassical vs evolutionary theories of growth.
• Sources of productivity growth in the adjustmet
  process.
  
• Entry and exit of firms to and from the economy.
• The creation and destruction of technological
  capabilities resulting from changes in the
  production structure..

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Neoclassical and evolutionary theories of
economic growth provide different views as to
how economic development takes place.

• For neoclassical economics equilibrium is an ex
  ante state of the system and not an outcome
  that gradually obtains from the functioning of
  the economy.Furthermore, the State should act in
  a neutral way and not as a coordinating agent .
• In Europe and Asia - and in China now - the State
  plays a crucial role coordinating economic
  activites and changes are introduced gradually in
  the economy.
• This contradicts the Washington Consensus dictum
  that growth requires a neutral government and
  macroeconomic stability as a pre
  condition.(Amendola and Gaffard, 2005)
• As far as LA is concerned market-oriented reforms
  following WC advice - have induced cycles of
  destruction and creation of production capacity.
  Said process resulted in a major transformation
  of domestic technological capabilities.

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Moments in the
adjustment process.

B
Q
A
time
II
Destruction Stabilization Reconstruction
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labour saving technical change in old plants.
Computer-based new plants
8
Productivity growth resulting from entry and
exit
M 1
M
M
M1
M Productivity prior to trade liberalization.
M1 Productivity after entry and exit of firms.
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Macro-to-micro interdependencies during the
adjustment process

• Phase 1. A very uncertain macroeconomic
  environment prevailed, negatively affecting the
  investment rate. Labour productivity expanded as
  a result of plant re-structuring efforts and of
  thousand of SMEs exiting the market. Structural
  unemployment increased in most countries in the
  region reaching in many cases 20-25 of the
  labour force.
• Phase 2. Macroeconomic uncertainty diminished and
  the economy moved closer to fiscal and external
  equilibrium. Animal spirits gradually returned
  but imports have now gained a major share in most
  markets in the economy. FDI and MA induced a
  major proceess of economic concentration, with
  local SMEs loosing share in GDP
• Phase 3. New more capital intensive
  computer-based production facilities have been
  erected in the economy, mostly by the large
  firms, and a modern digital environment is
  gradually emerging, involving a fraction of the
  local population - ( 30 (?) The newly emerging
  sectoral technological and competitive regimes
  are evolving into mature oligopolies, presenting
  new technological, regulatory and international
  competitiveness questions to local economic
  authorities.

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A brief review of stylizedfacts

• The global pictue.
• Growth rates of GDP and GDP per capita .
• International competitiveness.
• Structural changes.
• The labour productivity gap.
• The equity divide
• Domestic technology-generation efforts.
• Cycles of destruction and creation of
  technological capabilities.

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A stylized view of the process uncoordinated
reforms mostly relaying on markets.
Has productivity growth improved ?
Has the international productivity gap
been reduced? How were local technologi
cal capabilities affected ?
A more open and de-regulated regime
Inward Oriented growth
destruction process.
1975
The debt crisis
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Structural Changes natural resource processing
activities in the Southern Cone and
maquiladoras in Mexico and the Caribbean Basin.
17
RELATIVE LABOR PRODUCTIVITY IN MANUFACTURING Not
much has happened.
18
The international gap. Example access to ICTs
Source Martin R. Hilbert, ECLAC, 2002
19
The domestic equity divide. Example access to
ICTs
Source Martin Hilbert, ECLAC, based on ITU, BCG,
1999 eMarketer, 2001.
20
RD expenditure as a of GDP in 2002.
Source G.Lugones, 2005 RICYT, 2004
21
RD expenditure as a of GDP. A comparative
perspective.

• Source RICyT, (2000) and Inter-American
  Development Bank, 2001.

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New technological and competitive regimes have
emerged. Examples

• Argentina
• Genetically-modified soja beans and
  bio-tech.
  
• CHILE
• Salmon farming, wine,
• COLOMBIA
• Fresh flowers
• BRAZIL
• Airplanes

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• Soja beans and vegetable oil production (1)
• The diffusión of transgenic crops
  started in the world in 1995. By 2002 nearly 60
  mill has were under cultivation world-wide, 14
  mill. of which were in Argentina. Said process
  involves the transition from a conventional to
  a GM production organization scenario dominated
  by cero tillage(siembra directa) and
  agricultura de contratos New institutions
  emerge, such as IPRs on seeds, herbicides, and so
  forth. Also un-registered seeds sales from
  previous campaigns, violating trade marks
  (Bolsa blanca). Subcontractors, financial
  intermediaries and agricultural consulting firms
  have now become central in the new industrial
  organization model while the farmer has mostly
  turned into a rentier who sublets its land to
  other agents. Monsanto has becomes the dominant
  agent in the new production organization model
  although its enforcement capabilities of IPRs has
  been fairly weak so far . GM crops still appear
  as an open ended story in world scenarios as
  public opinion is yet quite ambivalent about it.
  Trazability and compulsory labelling will
  probably become the rule during the course of the
  next decade. The impact of GM crops upon
  biodiversity and soil preservation is still under
  discussion. The entry of GM crops involves a
  major change in Argentinas agriculture and opens
  up the path for future technological developments
  in biotech activities.Some 80 firms now perform
  knowledge generation activities in this field.
• Obschatko, 2003, Trigo et al. 2002 , Ablin
  et. Al. 2001, Bisang 2005
  
• s

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Number of plants, employment and labor
productivity in the Argentine vegetable oil
industry 1973-74 y 1993-94

• New more capital intensive and automated plants
  now produce vegetable oil using catalytic
  processes.

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• Salmon farming
• From an almost negligible participation
  in total world exports the Chilean salmon farming
  industry has become second world wide, accounting
  for about 8 of total Chilean shipments. The
  sector was successfully incepted in the country
  through the joint effort of Corfo and Fundacion
  Chile and was initially mostly a world of SMEs
  which underwent a rapid process of technological
  learning and expansion. Pari pasu institutions
  developed and a dynamic regional cluster of
  related activities emerged supplying vaccines,
  net reparing services, boat construction,
  insurance and many other goods and services.
  Large externalities underlie the expansion of
  salmon farming in Chile as we notice by looking
  at the expansion of cities like Puerto Montt or
  Coyhaique. This means that there systemic
  externalitiesbehind the inception of new
  activities in the economy. After two decades of
  successful expansion the industry is now turning
  into a mature oligopolly with major MNCs having
  entered the sector. The aquaculture industry
  appears as a major source of future opportunities
  for Chile. Fundacion Chile and the public sector
  continue to provide support.
• J.Katz, 2004, C.Montero et.al, 2003 ,
  Acquanoticias,
  

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Fresh flowers in Colombia.

• Exports of fresh flowers started in Colombia in a
  quasi-artisan fashion in the mid-1960s. By 2004
  Colombia exported close to US 700 mill. Some 400
  firms - most of them SMEs are actively engaged
  in this activity providing employment to some 90
  thousand workers. Firms employ a sophisticad
  logistics two days after harvest flowers are
  selling in Miami but the sector could gain
  significantly from further RD efforts, the
  adoption of ERM software and ICTs, more
  institutional support in plant genetics, trade
  marks and geographical denominations, etc
• O.L.Giraldo and A.Herrera, 2004. El
  Mercurio, 2005.

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Airplanes design and construction in Brazil

• State financial and technological support for the
  aeronautical industry started in Brazil in the
  mid-1940s.
  
• Embraer was created in 1969, and production
  started in 1970 with two nationally designed
  planes the Tucano, a military trainer and the
  19-seat Bandeirante. More than half of the
  latters value consisted of imported parts.Both
  attained success with the Tucano being sold to
  British and French air forces and produced in
  Egipt under license and the Bandeirante
  accounting for about one third of 10 to 20 seat
  commuters by 1982.
• Following six failed attempts the firm was
  privatized in 1994. The government injected new
  capital and retained a minority participation.In
  1997 the company undertook a major program of
  engineering upgrading, including ISO
  9001certification and a large investment in ICTs.
  
• At the 1999 Paris air show Embraer announced a
  new model 70 to 108 seats - which was finally
  brought to the market in 2002. Production
  capacity had to be significantly expanded given
  the large backlog of orders received for that
  model.
• In 1999 French capital acquired a minority
  participation and the new firm quicly moved into
  the military aircraft market jointly promoting
  the Mirage 2000 and the Rafale combat aircraft.
  The company has also recently proceeded to
  establish strategic alliances with China, with
  the purpose of participating in the raqpidly
  expanding Chinese market.
• A.Goldstein, August 2002.

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EXPORTACIONES E IMPORTACIONES DE EMBRAER
(Mill. US)
Fuente Embraer, Andrea Goldstein, OECD, Paris,
2000

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A brief summary of the facts

• Most countries in the region are worse off in
  terms of long term GDP growth rates.Chile stands
  out as an exception.
  
• The labor productivity gap (manufacturing) is not
  being reduced.
  
• Most countries in the region have lost share in
  world trade. Mexico and Chile are exceptions but
  impact upon the domestic structure is
  significantly different.
• The domestic equity divide has worsened.
  Unemployment and informality have grown. Chile
  has reduced levels of absolute poverty (but not
  income differentials).
• RD expenditure continues to be just a fraction
  of expenditure in emerging LDCs and DCs. Here
  Chile is similar to the rest of LA.
  
• New technological and competitive regimes have
  emerged in natural resource processing activities
  and in a few engineering industries.

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Towards a new policy agenda
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Technological policies should concentrate on two
main topics the equity divide and international
competitiveness

• Precondition the State as a coordinating agent
  building up markets and institutions. Market
  mechanisms are not enough
  
• Export lead growth has to be thought as
  associated to the inception of new economic
  activities in the economy and the building up of
  domestic technological capabilities
• The domestic equity divide provides a window of
  opportunity for growth. Health services, medical
  technologies vaccines, pharma. Education
  technologies, ICTs. Infrastructure clean water.
  Natural resource-based growth and the
  environment.
• However low per capita income and early
  saturation effects suggest that low incentives
  would prevail for private provision. Public
  sector involvement becomes a sine qua non for
  equity .

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Competitiveness is not just a function of an
adequate exchange rate. It also requires

• Horizontal policies building up the physical
  infrastructure supporting exports. Roads or
  shipping facilities are examples of the above.
  
• But, public action is also needed creating a
  suitable institutional framework. This includes
  adequate international trade agreements, defense
  for local trade marks and geographic
  denominations, protection of bio-diversity and
  reverse engineering. Also, trazability, ISO
  standards, and other intangibles
• Selective policies venture capital - inducing
  the inception of new more knowledge intensive
  activities in the economy. Biotechnologies,
  nutraceuticals, cultural industries, tourism.
  

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Financing technology-generation efforts.

• Fiscal incentives (Benavente, 2003)
• Risk-sharing programs (Crespi Benavente,
  2003).
  
• National Funds (Brazil, Pacheco, 2003)
• Public tenders
• The Pension Fund System as a financing
  mechanism supporting innovative SMEs. Legal and
  Institutional constraints.(Quebec. C.Sauviant,
  Chronique Internationale de IÍREs N 68,.Jan.2001)
  
• Others (A.Bartzokas and S.ManiFinancial
  systems,Corporate investment in innovation and
  venture capital.Elgar, 2004 ).Case studies for
  Taiwan, China, Hungary.

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The socio-economic and institutional conditions
for the construction of a venture capital market
capital
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Policies addressing the transition to a digital
production organization environment and the use
of ICTs .

• Regulatory, financial and human capital issues
  involved in the transition to a digital
  production organization environment and to the
  use of ICTs in society. The development of
  competition in the basic physical infrastructure
  Plataforms and standards.
• Financial and human capital requirements in the
  SME world
  
• The need for a domestic content industry. Culture
  and identity as a public good. The role of the
  creative industries.
  
• Equity of access to ICTs in a low income per
  capita environment Early saturation effects
  and the lack of profit incentives for private
  provision. Rol of the public sector
  
• The need for a national strategy for the
  transition to a digital production organization
  environment. Chile Digital and other
  experiences in Latin America.

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Policies addressing the strengthening of the
national innovation system.

• Fiscal and other forms of support addressing the
  need for expanding domestic technological
  capabilities. Horizontal and sector-specific
  strategies.
• Building up new forms of relationship between
  universities and firms. Industrial parks and
  technological incubators. Property rights on RD
  efforts carried out in University labs. Bye-Dohle
  and other institutional arrangements used in DCs.
  Venture capital for knowledge-intensive SMEs.
• Public sector involvement in orphant areas such
  as health, environmental protection,
  biotechnologies, the creative industries should
  be explored as new windows of opportunity.