Industry and Innovation

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LOCAL SYSTEMS OF INNOVATION IN MERCOSUR

COUNTRIES

Jos Eduardo Cassiolato & Helena Maria Martins Lastres

To cite this article: Jos Eduardo Cassiolato & Helena Maria Martins Lastres (2000) LOCAL
SYSTEMS OF INNOVATION IN MERCOSUR COUNTRIES, Industry and Innovation, 7:1, 33-53,
DOI: 10.1080/713670250

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 Industry and Innovation, Volume 7, Number 1, 3353, June 2000

LOCAL SYSTEMS OF INNOVATION IN

MERCOSUR COUNTRIES
JOSE EDUARDO CASSIOLATO AND HELENA MARIA MARTINS LASTRES

I t is widely recognized that the capacity to generate and use knowledge is the most
important element of the sustainable competitiveness and growth of rms and
countries. In fact, as particularly emphasized by the evolutionary approach to
innovation, knowledge creation and diffusion are fundamental sources of economic
dynamism. Learning, the key source of change, is seen as the most important
mechanism for knowledge accumulation, innovation and growth. Of course rms are
in the centre of these processes. However, it is increasingly noted that the interactions
among them and with a number of other organizations (dealing with education,
training, R&D, nancing and policy support, and so on) play an important role in the
process of knowledge creation and diffusion.
To deal with such complexity the notion of systems of innovation was developed.
Based on the arguments that: (a) technical change both determines and is determined
by the institutional environment in an interactive process; and that (b) the analysis of
the different national systems of innovation is fundamental to an understanding of
why technological dynamism occurs more rapidly and efciently in some countries
than in others, emphasis to the national character of systems of innovation was given;
and the concept of national systems of innovationNSIswas introduced (Lundvall
1985; Freeman 1987).1
There have been, however, very limited attempts to use the idea of NSIs in less
developed countries. In fact, until recently, development theory has focused on
comparative wage rates, natural endowments and other related static advantages as
necessary preconditions for less developed countries to participate in the world
market. It is true that a number of authors have emphasized the role of technological
change in the growth of developed countries. However, even if a large and important
body of literature on technical change and development has recently emerged,
industrialization has not been typically thought of in terms of technical change by
development economists.
The basic aim of this paper is to discuss part of the results of a research project on
national and local systems of innovation in Mercosur countries co-ordinated by the
authors. The research project is gathering information of local productive clusters in
order to discuss the idea of systems of innovation in developing countries, characterized
by even higher levels of diversity and institutional instability than advanced economies.
1 See Freeman (1999) for a discussion of the case of Britain in the eighteenth century, the USA in the second half of
the nineteenth and rst half of the twentieth century and other cases of catching up countries at the end of that
century.

1366-271 6 print/1469-839 0 online/00/010033-2 1 2000 Taylor & Francis Ltd

34 INDUSTRY AND INNOVATION

Following the steps of this research project, the paper attempts to address the
impact of structural reformsprivatization, deregulation and liberalizationon local
and national systems and is organized in the following way. First, the paper discusses
specicities of systems of innovation in developing countries. Particularly addressed
are diversity and institutionstwo central elements of the evolutionary viewand
the impact of globalization on local innovative capabilities. Next the paper presents
the main features of systems of innovation in Mercosur, during import substitution
industrialization, and analyses the results of the project. Finally the paper develops
some conclusions and discusses lessons that could be learned from the research.

SYSTEMS OF INNOVATION IN DEVELOPING COUNTRIES: DIVERSITY,

INSTITUTIONS AND THE LOCALIZATION/GLOBALIZATION OF TECHNOLOGY
The idea of diversity is central to the concept of national systems of innovation. With
this in mind, a number of Latin American and Caribbean authors have aimed at
identifying and analysing the main characteristics of their countries systems of
innovation. Most of them emphasize the specicities of local environments, imposing
many conditions to scientic and technological development, innovation, industrial
and economic development.2
These contributions stress that the evolutionary literature on innovation systems
tend to give little attention to problems related to the instability or vulnerability of
the macroeconomic, political, institutional and nancial environment, which have
been a marked characteristic of less developed countries. Additionally, some of them
point to problems such as hyperination, high external debt and high interest rates
as common important constraints to technological (and productive) development in
these countries. These analyses also stress the subordinate character of innovation
activities by local rms when compared with the importance given to coping with
macroeconomic instability.
In fact, this literature, during the last 25 years, has stressed that economic conditions
in general, and macroeconomic policies in particular, are important elements shaping
microeconomic behaviour regarding innovation and hence performance. Since the
early 1970s, at least in Latin America, it has been widely accepted that these policies
(sometimes called implicit technology policies) have much greater inuence on a
rms innovation behaviour than explicit technology policies (Cassiolato 1992).
There is a similarity of this view with some fundamental aspects of NSI since this
concept involvesat least implicitly a very strong idea that diversity in macro-
economic performance is related to differences in national systems of innovation.
Interestingly, the NSI literature deals very little with this micromacro relationship. One
might argue that, besides the obvious theoretical difculties in dealing with this rela-
tionship, there had been, in advanced economies, and at least till now, comparably
little macroeconomic turbulence, that could make mandatory the incorporation of
macroeconomic problems in the NSI literature. Of course this situation has been gradu-
ally changing. For one example, it has been argued that the globalization of nancial
2 See Villaschi (1993), Girvan (1996), Melo (1996), Viotti (1997), Cimoli (1999) and Katz (1999).
 LOCAL SYSTEMS OF INNOVATION 35

activities is accompanied by intrinsic instability in nancial markets (Chesnais and Ieto-

Gillies 1997) which may force the literature to deal properly with this issue.
The environment of developing countries, however, has always been characterized
by macroeconomic instability. Despite of that, important differences in national
economic performance are expected to remain, particularly between richer and
poorer countries. At least two structural differences, identiable at national level, are
important for variances in NSI. One is institutional and the other technological. Both
interrelated, suffer strong inuences from macroeconomic instability and are partially
responsible for the greater diversity that is found in NSI in developing countries.
The evolutionary literature suggests that institutional differences concern major
and persistent variation in systems of governance. It also suggests that (i) innovative
diversity is related to diverse competences and learning processes and that (ii)
technical interdependencies are pervasive at local and regional levels. This greater
diversity is found in less developed countries since they are characterized by greater
disparities in income distribution and patterns of consumption. Also, there is probably
more diversity in institutions and technologies in these countries than what should
be expected in advanced economies that are characterized by relatively more homo-
geneous and stable patterns.
These specicities have been confronted, in the last decade, with the so-called idea
of globalization of technology. Under this idea, the wide dissemination and easy
access to technology and knowledge provided by the global activity of large rms
would make national boundaries capabilities irrelevant. Interestingly, this is in opposi-
tion with basic aspects of the NSI approach that stress the local character of innovation
in development processes. In fact, techno-globalism is contradicted by the ndings
of the evolutionary work on innovation carried out since the late 1960s, which
emphasize the tacitness and cumulativeness of knowledge and that knowledge
(differently from information) is hardly transferred. These ndings point out the
importance of localized learning, of externalities associated with proximity, and of
national systems of innovation. Moreover, this idea is inconsistent with the facts that
show that the last decades of the millennium have witnessed a greater degree of
concentration than ever in the international ow of technology among the OECD
countries, notably those belonging to the Triad (Freeman and Hagedoorn 1993; Lastres
1993; Chesnais and Ieto-Gillies 1997). Therefore, a number of authors have argued
that localization is an important dimension of innovation and that glocalization
should be a more appropriate term to use (Humbert 1995).

INNOVATION SYSTEMS IN MERCOSUR DURING IMPORT SUBSTITUTION

INDUSTRIALIZATION
National systems of innovation in Mercosur countries (as in all Latin American
countries), during the import substitution period had very specic features. As
compared with other developing countries, they demonstrated persistently low levels
of innovative efforts, particularly when compared with OECD and Southeast Asian
countries. Also, most R&D activities were performed by state-owned labs and techno-
logy institutes, public universities and R&D departments of state enterprises. Nearly
36 INDUSTRY AND INNOVATION

all training of human resources took place in the public sector, particularly state-owned
universities. The public sector played the most important role in the development of
national innovation systems. The state provided the bulk of funding, trained the
people, and ran the development banks and the great majority of rms R&D labs.
Therefore, the narrow NSI dened as comprising institutions which are directly
involved in science and technology as a wholein Mercosur countries have historic-
ally had this marked feature of strong state inuence.
The broad NSIwhich attempts to describe the social economic and political
context of innovationhave displayed in these countries other specicities. One of
the most importantcommon to the general Latin American experienceis that
import substitution industrialization (ISI) was based almost exclusively on technology
imports. Although countries like Japan and South Korea also imported technology
during their industrialization strategies, there was an important difference. In Mercosur
countries, these strategies were typically disconnected from signicant innovative
activity by technology importing rms. They were usually not preceded by, accompan-
ied by, or followed by substantial complementary research, development or engineer-
ing efforts by importing rms. As a consequence, technology imports were only
rarely assimilated into a continuous process of technological accumulation. Obviously
they were often followed by some degree of improvement in process efciency and
product performance as learning-by-doing and minor adaptation occurred. But the
intensity of such incremental technical change was often inadequate to sustain
competitiveness in technologically dynamic international markets, and it rarely created
new bases of competitiveness in progressively higher value-added activities (Bell and
Cassiolato 1993).
In fact, across the majority of technology importing rms of the region and over
four decades from the 1950s to the 1980s, the acquisition of foreign technology was
not part of a broader process of technologically dynamic industrial development.
Instead, industrial rmsusually technologically insulated from others and from the
wide range of technological institutionsacquired foreign technology to achieve one-
off steps in changing their products and processes.
One implication of this pattern has been the limited intensity of technical change
in industry. As is well known from numerous studies of technological learning
during the 1970s, there was often some degree of adaptation of technology and
signicant mastery of its basic operation (for example, Katz 1987). There was also
some elements of learning-based further improvement and development of the
imported technology, although some detailed studies suggest that even that type of
active improvement and dynamic assimilation of acquired technology was often very
limited (Bell and Cassiolato 1993).
More generally, it seems clear that the assimilation of imported technology seldom
amounted to a trajectory of persistent improvement and development that matched
the rates needed to sustain international competitiveness. These ex-post patterns of
limited dynamism in assimilating what had been imported were typically associated
with only limited ex-ante efforts to create the technological capabilities required
for effectively exploiting international sources of technology. This conformed a pattern
where most rms were not designed to evolve. The majority were meant to operate
 LOCAL SYSTEMS OF INNOVATION 37

mature technologies, supposed to be already optimized. Firms were not expected to

reach competitiveness on their own (Perez 1989).
It would obviously be misleading to suggest that the general pattern outlined above
has been totally uniform across all rms. It is quite clear that some rms have drawn
intensively on foreign technology to enhance their own technological capabilities,
and they have linked that to the development of trajectories of rapid technical change
and rising competitiveness. Other rms have taken strategic approaches, linking
foreign technology directly into their own intensive product development and design
activities by setting out R&D facilities in advanced countries.3 Most of these important
cases were strongly inuenced by the role of the state in providing institutional
arrangements which, like telecom and energy in Brazil, aeronautics, oil, steel, and
several agroindustrial systems in Brazil and Argentina provided the basis of successful
systems of innovation.
Low levels of internal innovative activities by rms were accompanied by very
weak linkages with government-owned industrial research institutes and universities.
Then, the norms of innovation during ISI were typically different from most
countries that were successfully incorporating the Fordist norms of production from
the end of World War II till the 1980s. However, a more important characteristic of
the broad system of innovation, refers to the norm of nancing. In Latin American
countries, the state has been the main, if not only source, of long-term funds for
productive activities. The stock market is very small and private nancial institutions
concentrate on highly protable short-term operations. A chronic problem of internal
(and increasingly external) debt has contributed to keeping interest rates high bringing
together a high degree of macroeconomic instability. Both problemslack of long-
term nance and persistent macroeconomic instabilityare important components
of the broad NSI which put extra burden on rms decisions regarding innovative
activities (Melo 1996; Erber 1999).

THE IMPACT OF STRUCTURAL REFORMS ON LOCAL SYSTEMS OF INNOVATION

IN MERCOSUR
The discussion about National and Local Systems of Innovation in Mercosur below is
based on a research project co-ordinated by the authors. The project was set up with
the objective of analysing experiences of selected local productive arrangements in
Mercosur. It aims, also, at investigating local bases of productive and innovative
capacity in order to design S&T policy propositions at national and regional level.4
Two questions, addressed by the research, are the object of this paper: (i) how
structural reforms, the macroeconomic environment and innovation policies (both
explicit and implicit) of the 1990s, have affected selected local productive arrange-
ments; (ii) what have been their trajectories and evolution paths.
3 See Bell and Cassiolato (1993) and Katz (1987) for a detailed account of these experiences in Brazil and Argentina,
respectively.
4 Papers produced in the rst phase of the project (21) are found in Cassiolato and Lastres (1999a), and at
www.race.nuca.ie.ufrj.br/gei/gil/shtml.
38 INDUSTRY AND INNOVATION

These topics are analysed with the results of empirical research of 12 selected
case studies of local productive arrangements in Brazil and Uruguay and three
agglomerations of small and medium enterprisesSMEsin Argentina.5 Table 1
presents a summary of the 15 local productive arrangements analysed in Brazil,
Uruguay and Argentina.
In Brazil, four agroindustrial arrangements were analysed: tobacco in Rio Grande
do Sul, cocoa/chocolate in Bahia, tropical fruits in Northeast Brazil and wine produc-
tion in Rio Grande do Sul. Five hi-tech clusters were also studied: biotechnology in
Minas Gerais, software in Rio de Janeiro, telecom in Campinas, telecom in Parana and
advanced materials, ne mechanics and IT in Sao Carlos. The remaining clusters
studied in Brazil were the ceramics tiles productive arrangement in the State of Santa
Catarina and the steel industry cluster in the State of Esprito Santo. In Uruguay the
wine production cluster was analysed while in Argentina evidence comes from three
studies about innovative and co-operative behaviour of SMEs situated in three localities
with different levels of development: the city of Tres de Febrero in the Great Buenos
Aires, Rafaela and Mar del Plata.
Factors affecting processes of learning, innovation, use and diffusion of technolo-
gies, as well as how these processes have become dependent on local capabilities
will be discussed in this item. Therefore, it will focus on changes observed during
the 1990s in terms of: innovation strategies of rms, co-operative behaviour and
evolution of institutions.

INNOVATION STRATEGIES OF FIRMS

There are two clusters where large local rms co-ordinate the local productive
structure: the privatized steel rms of Esprito Santo and ceramics rms in Santa
Catarina. Although they share some general characteristics regarding innovation
strategies, some important differences are found.
In both cases R&D expenditure, although slowly growing, is kept much lower
than international standards. During the 1990s, technology efforts concentrated
on production organization and product quality and modernization of production
processes, normally through equipment import. There has been an increase in
learning capacity, with the emphasis on organizational efciency, skills and production
organization. For both cases the purchase of new equipment is the most important
form of introduction of new technologies.
But then, innovation strategy by rms differed in the sense that steel rms kept
their efforts on improvements in their production processes and ceramics rms
decided also to focus on new products. In other words steel rms kept producing
commodities, highly standardized products, with very low value-added while ceramics
rms developed new products. This strategy is reected in the information gathered
during interviews: 71.4% of ceramics rms declared that they intend to increase
further their R&D and innovation expenditure in the future and most rms set up in
5 Interviews took place in 1998. All the empirical papers of the second phase of the project (15), which provide the
material for the analysis, are available on the homepage of the project www.race.nuca.ie.ufrj.br/gei/gil/shtml.
TABLE 1: SUMMARY OF SURVEYED LOCAL PRODUCTIVE ARRANGEMENTS IN MERCOSUR COUNTRIES
No. of Main market Market structure Innovative Co-operative
Cluster State/region rms orientation and governance capability behaviour

Brazil
Tobacco Rio Gr. do Sul 10 Mostly exports MNEs oligopoly Med. decreasing Med. decreasing
Cocoa and chocolate Bahia 3 Internal MNEs oligopoly Low Low
Tropical fruits CearA , R.G. Norte 11 Mostly exports Local SMEs Med. increasing Lowslightly
and Pernambuco increasing
Wine production Rio Gr. do Sul 18 Internal Mostly local SMEs Med. increasing Increasing
Biotechnology Minas Gerais 17 Internal Local SMEs Highincreasing Highstable
Software Rio de Janeiro 12 Export Local SMEs Highstable Lowstable
Telecom and IT Campinas, Sao 34 Internal Local SMEs and large Highdecreasing Med. stable
Paulo MNEs
Advanced materials, Sao Carlos, Sao 15 Internal Local SMEs Highstable Med. stable
ne mechanics and Paulo
instruments
Technical ceramics Santa Catarina 22 Export and internal Large and medium- Med. increasing Med. increasing
sized locally owned
Steel Esprito Santo 4a Export Large local and Med. stable Lowslightly
LOCAL SYSTEMS OF INNOVATION

MNEs, oligopoly increasing

Telecom equipment Curitiba, Parana 2b Internal Large (one MNE and Med. stable Med. stable
one local), oligopoly
Uruguay
Wine production Uruguay 10 Mostly exports Local SMEs Lowincreasing Med. increasing
Argentina
SMEs Mar del Plata 41 Export and internal Local SMEs
SMEs Rafaela 31 Export and internal Local SMEs
SMEs Tres de Febrero 113 Export and internal Local SMEs
39

Note: MNEs 5 multinational enterprises. a Plus 14 suppliers of intermediary inputs and nine suppliers of equipment. b Network of suppliers.
40 INDUSTRY AND INNOVATION

the decade internal design teams in order to increase the value-added of their
products. This strategic difference is clearly related to the co-operative behaviour, as
it will be discussed below.
There is a parallel situation regarding the behaviour of steel rms and multinational
enterpriseMNEsubsidiaries interviewed in the agroindustrial clusters of tobacco
and cocoa and in both telecom clusters. The new production organization model
adopted by these rms has resulted in a reduction of local technological efforts. Some
interviewed rms, complained that this decision was reluctantly made, but was
inevitable given the present policy regime. In the Campinas telecom cluster, MNE
subsidiaries that recently set up locally were also interviewed. These newcomers are
setting up import-intensive facilities and, at least up to now, are very reluctant to
make a signicant contribution to local technological development.
The evolution of learning and innovation capabilities of SMEs analysed depended
very much on the type of relationship they maintain with other rms across the
production chain and how they could react to changes in the policy regime. For
example the clusters of fruit processing in Northeast Brazil and wine production in
Uruguay and South Brazil are based on domestically owned SMEs. Local market is
important but exports are becoming more signicant. Also state-owned agricultural
research centres have had an important role in the development of new plant varieties
and in their diffusion to industrial production. A signicant improvement in quality
and efciency during the last decade was found by the research. Export strategies
andin the case of wine productionthe need to compete with foreign products
have pushed local producers to strategies that are based on strong increase in
innovative capacity. This progress is associated with continuous experimentation and
very little formalization of activities (such as R&D). There are, however, marked
differences regarding co-operative behaviour as is going to be discussed below. But
even if the rate of disappearance of rms has been signicant, most rms were able
to survive and grow during the decade.
In the hi-tech clusters analysed, however, the situation is very different. Competition
in these sectors is strongly related to the capacity to design, develop and market new
products. This type of competition puts intense pressure on SMEs willing to survive
and grow. For product development, internal capability although important, is limited
and the role of the environment (particularly the possibilities of networking), policy
regime and pattern of competition is essential.
In the biotech cluster most rms were set up as spin-offs of the oldest and largest
Biobras. Instead of creating their own R&D facilities, rms rely on the Biobras R&D
lab for their technological work. Then interaction is a basic feature of their process
of creation and growth. In this sense, these rms coped well with the environment
of the 1990s and are able to sustain competition. Nevertheless, Biobras itself has
faced difculties in growing. However, lack of management expertise and the competi-
tive pattern of the sector are serious problems for product introduction. Even when
entry conditions into a niche market are easy, these biotech rms have great difculties
in stabilizing sales due to lack of good marketing, commercial services support and
distribution channels. Here the scale factor matters, since externalities are weak or
absent, particularly if the product line is very different from other rms in the cluster.
 LOCAL SYSTEMS OF INNOVATION 41

This seems also to be the case of the domestically owned, export intensive rms of
the Rio de Janeiro software cluster. These rms in Rio were all set up as spin-offs of
local universities, but they are not connected to each other. Although technology-
intensive, these rms are facing problems with management capabilities and marketing
expertise. Growth, again is a serious problem for these rms.
SMEs of the telecom cluster in Campinas have also faced difculties. There has
been an impressive rate of disappearance of rms in the 1990s, several being acquired
by MNEs. For those that survived (as well as for those which were acquired) a
reassessment of their manufacturing and technological strategies was inevitable, given
the policy regime and macroeconomic instability. They narrowed the range of
intra- and inter-rm manufacturing activities and changed signicantly the nature of
innovation activities performed. Firms decreased those activities with higher innova-
tive intensity such as R&D and engineering for new products and increased activities
of lower technology intensity such as software development, adaptation of foreign
products and technical services.
In a related way, there has been a signicant decrease in the employment of more
specialized personnel. Interviews conrmed that some of the engineers that remained
employed were downgraded in their occupations. Some that were previously engaged
in innovation activities were transferred to other activities, such as marketing,
production, sales and technical assistance. Then, one of the most important assets
accumulated before, and that is essential for learning processes, is being lost. Finally,
domestically owned rms that survived (and that were interviewed) faced, similarly
to the cases of biotech and software, difculties in growing in recent years.
The nal hi-tech cluster analysed is that of Sao Carlos, where there is a concentration
of SMEs in advanced materials, ne mechanics and IT. Here again, there were several
rms which experienced difculties in growing. However, a higher number of rms
was found that did well in the 1990s, particularly those that either sell to the nal
individual consumers or were not tied to one big industrial customer. This shows
that, at least in this case, rms that are tied-up to production chains are more prone
to face difculties than rms that are not dependent on one single customer.
In summary, for all the hi-tech clusters analysed, one could point out the generalized
growth difculty of rms that survived in the 1990s. Most SMEs either disappeared
or are facing growth constraints. Of course several new SMEs were set up. Most of
these face the same growth constraints.
The understanding of the growth constraints and the difculties faced by SMEs is
better understood with the help of the ndings of the Argentinian case studies. The
survey suggested that innovative capability of SMEs is very low, as it may be gathered
from Table 2.6 All rms in Tres de Febrero, 92.7% of rms in Rafaela and 90.3% of

6 With the information provided by the questionnaire an indicator of innovative capacity was developed. This
indicator was dened as a weighted average of the following variables: (i) efforts in training human resources for
development (0.25); (ii) degree of quality assurance (0.25); (iii) percentage of engineers and technical personnel
in the formal or informal development team (0.07); (iv) share of new products on sales (0.08); (v) number of areas
and of engineers and technicians in innovative activities (0.20); and (vi) technological co-operation with other
agents (0.15). See Boscherini et al. (1999) for the methodology.
42 INDUSTRY AND INNOVATION

TABLE 2: INNOVATIVE CAPABILITY OF SMES IN ARGENTINAS SELECTED AGGLOMERATIONS

1998
Innovative capability Mar del Plata (%) Rafaela (%) Tres de Febrero (%)

High 7.3 9.7 0

Average 48.8 51.6 28.3
Low 43.9 38.7 61.7
Number of surveyed rms (41) (31) (113)

Source: Yoguel and Kweitel (1999).

rms in Mar del Plata have low average innovation capacity. Innovation capacity is
not totally necessary to survive in less development environments.
The survey found that size of rms is positively associated to the innovative capacity
only in the case of rms located in the agglomeration of Tres de Febrero, a place
where institutional change did not occur in the decade. Here the bigger the rm, the
better its innovative capacity, even though no rm with high innovative capacity was
found in the agglomeration. In the case of rms located in the two other agglomera-
tions (Rafaela and Mar del Plata), where important institutional developments are
occurring, the relative size of rms has no relation with the degree of innovative
capacity. The suggestion is that the environment has a big inuence on the innovative
capacity of SMEs.
The third point to be singled out is that, in the agglomerations studied, no common
sectoral pattern was found regarding innovative capacity. Then, in Mar del Plata, rms
with higher innovative capacity are found in sectors such as chemicals and mechanics
that are typically diffusers of technical progress, while in Rafaela the most innovative
rms belong to traditional sectors. For the analysed Argentinian SMEs sector is not
related to innovative capacity. Also, the dynamism of rms (their capacity to survive
and grow) since structural reforms began, is only associated to their innovative
capacity if they are located in the areas of Rafaela or Mar del Plata, with no relationship
being found in the case of Tres de Febrero.
Finally, the fact that rms are export-intensive or not does not have any signicant
association with the degree of innovative capability.7 Exposure to international markets
is not necessarily associated with innovative capacity.

CO-OPERATION AND COMPETITION

Needless to say that the idea of innovation systems immediately implies that networks
of innovation are fundamental in determining rms innovative performance and
efcient diffusion in local markets. In fact, innovation and diffusion depend increas-
7 This corroborates a study that found that Chilean SMEs, with fewer than 50 workers, make virtually no internal
technology efforts, nor benet to any signicant degree from being exposed to a more demanding technological
environment as a result of their participation in export activities. The learning processes associated with
expenditure on engineering and R&D efforts and with export activities tend to be concentrated in the large-scale
group of rms (Katz 1999).
 LOCAL SYSTEMS OF INNOVATION 43

ingly on access to advanced linkages between rms and knowledge ows.8 This type
of network has hardly been found in the import substitution period in Mercosur
countries. Although surveyed rms still maintained little technological communication
channels, the research project uncovered that in several ways co-operation was
established. Better performance by rms and clusters were not at all dissociated from
setting up and maintaining co-operative links.
In the agroindustrial fruit processing cluster, a very slow increase in formal co-
operation with local institutions was detected. However, information for innovative
activities is acquired through constant contacts with specialists, both local and foreign.
This helped rms to increase exports, install better quality control systems and attain
more stringent levels of product quality required by large foreign customers. Inter-
rm exchange of information is a signicant characteristic of the wine production
clusters, but not of the fruit processing one.
Export strategies andin the case of wine productionthe need to compete with
foreign products have pushed local producers to a slow increase in co-operative
behaviour. In fact, innovative rms are still facing difculties in organizing their
knowledge activities collectively. Both sectors are far from constituting integrated
networks of local and national agents, institutions and policies that would assure the
generation, diffusion and use of scientic and technological knowledge similar to
sectoral systems of innovation. Nevertheless, the progress obtained was signicant.
As already pointed out, co-operation is the most important characteristic of the
biotech cluster. However, the export-oriented software rms of Rio do not maintain
technical contact with each other and have also gradually disconnected from the local
technology infrastructure, which in Rio is particularly good. This isolation may be part
of the explanation for the growth difculties faced by these rms. For the Sao Carlos
cluster, although practically all surveyed rms reported continuous commitment to
innovation and technological development, some interesting differences were unco-
vered by the research regarding co-operation. Firstly, there is a marked difference
regarding the level of co-operation and co-operative behaviour according to sectors
and range of goods they manufacture. IT and ne mechanics rms showed a greater
propensity to engage into R&D partnerships with local rms, including competitors.
On the other hand, rms in scientic instruments and advanced materials showed no
signicant tendency to co-operate with other local rms. In general, however, all
rms have good userproducer relations with suppliers and customers and also strong
relations with local R&D infrastructure. It is also worth mentioning that for those rms
that engage in co-operation with other local rms, it was found a high level of informal-
ity in the relationship, not only in this cluster but across the studied cases. This
informality, which was also characteristic of the relationship with other institutions of
the local innovation system, implies a relatively high level of transfer of tacit knowledge.
Among the analysed cases, it is in the ceramics cluster where technical co-operation
is being pursued further. Interviews suggest, for example, that one of the most
important forms of development or incorporation of new technologies is joint
collaboration with input suppliers (42.9% reckoned that it was very important and
8 See, for instance Dosi et al. (1990).
44 INDUSTRY AND INNOVATION

42.9% suggested it was important). Co-operation with equipment suppliers and with
other local institutions was also considered important. An indirect outcome of this
up-grading strategy was the attraction of new foreign rms specializing in the supply
of key, technology-intensive inputs. In fact, interviews suggested that some MNEs set
up local production facilities during the 1990s, basically to establish technological
relations with local rms and to participate in the process of designing new products.
More generally, a strong trend towards technological co-operation between ceramics
rms and their local suppliers of inputs was found. In fact, more than 80% of the
interviewed rms declared they maintain monthly, weekly or daily technical contacts
with suppliers/clients for activities related to development and improvement of
products, design of products and technical assistance and to exchange ideas and
information. Although this type of collaboration with input suppliers and the local
technological infrastructure is increasingly being pursued, the same could not be
found as far as collaboration with local suppliers of equipment are concerned. As a
result, for this cluster comprising nationally owned large, medium-sized and small
rms producing ceramics goods, structural changes associated with liberalization had
a positive impact. It forced rms to co-operate and pursue more aggressive and
innovative trajectories.
In the privatized steel cluster of Esprito Santo, large rms are still reluctant to
collaborate with each other, suppliers or with the local technological infrastructure.
This relates to their strategy of keep competing internationally in the low-end
segment of commodities. Only recently, because of pressure from European customers
regarding the social costs of pollution, these rms have engaged in environment-
related projects with local research institutions, setting up a joint programme for the
development of software for environment management. But this is still an exception.
As for the Argentinian cases, their interviews found no relation between co-
operative behaviour and specic sectors.9 These cases suggest that that co-operative
behaviour is associated with the specicities of the local system. Also informed by
these cases is the importance of informal channels and the role of technical advisors,
conrming the nding of the Brazilian cases. Finally, also in line with the ndings for
Brazil and Uruguay, there is observed in the Argentinian clusters a high positive
correlation between the competitive position of rms and their co-operative behav-
iour: rms that co-operate have better economic performance than those that do not
co-operate, irrespective of the sector or locality.

NEW INSTITUTIONAL FORMATS TO FOSTER CO-OPERATION

In the analysed productive arrangements in Mercosur, it was the institutional develop-
ment both for co-ordination and innovation that presented most interesting results.
The agroindustrial clusters dominated by MNEs (tobacco and cocoa) present some
common features regarding their relationship with local technology institutions and
9 An indicator of co-operative behaviour was used in the Argentinian sample. It was dened as a weighted average
of formal co-operation (80%) and informal co-operation (20%). Formal co-operation includes four variables: number
of objectives, complexity of objectives, number of agents and frequency of contacts. Informal co-operation
includes also four variables: frequency of informal contacts, complexity of thematic areas of linkages, number of
agents and stability of informal linkages. See Boscherini et al. (1999) for the detailed methodology.
 LOCAL SYSTEMS OF INNOVATION 45

the setting up of co-ordinating institutions. In fact, the institutional design of the

tobacco productive arrangement shows that associations and organizations were
created primarily to co-ordinate labour relations and to provide a common, organized
relationship with suppliers to settle prices. Even if such organizations carry out an
important role in the maintenance of the integrated production system and in the
organization of labour relations, they have a very limited role for establishing
technically efcient, resource enhancing relations.
Compare this with the upgrading process of the wineries in Rio Grande do Sul or
Uruguay where new institutional designs aimed at supporting innovation and learning
strategies were envisaged. These institutions fostered a reasonable degree of co-
operation between local actors. The constitution of the Brazilian Institute of Wine
(IBRAVIN), in the 1990s, is one of several examples of the joint efforts by local rms
for upgrading products and improving quality. The institute provides information
about market and improved viticulture practices, supports co-operation between
growers and wineries, targets quality. The existence of different rms segments
allowed for the creation of several associations aimed at the interests and specic
needs of each segment. Moreover, these institutions play a signicant role for
information diffusion and for improving innovative capabilities of rms and co-
operation. This is accomplished through the promotion of contacts between local
rms, in the organizations of study travels, participation of international fairs and in
contacting local and international experts. The relations of rms with research
institutions are also different. In the wine case, there is a network of organizations
aiming at providing research and training for local rms. On the other hand, interaction
between the tobacco industry and universities and technological centres in the region
is mostly limited to the lab analysis and certication.10
As for the hi-tech clusters, in biotechnology, an important institutional innovation
was set up in the 1990s. The municipal government and the Biominas Foundation
the association representing most rms of the clusterjoined efforts and created an
institution responsible for promoting the setting up of new rms and for providing
common services. In the case of the software cluster of Rio, despite the fact that
there is a specic government programme to support software-exporting rms, the
institutional arrangement does not properly deal with common, general problems
such as nancing and management.
In Campinas, the privatization of Telebras and the transformation of the most
important Brazilian R&D centre for telecom (CPqD) into a private foundation at the
end of the 1990s have changed completely the conguration of the innovation
system.11 The inevitable transition from the old institutional environment to the new
10 In 1997, the tobacco sector rms signed an agreement with the Federal University of Santa Maria granting
US$250,000 for the setting up of a special lab dedicated to tests and analysis aiming at identifying residues of
agricultural pesticides in the tobacco. The objective is that in the next years Brazilian tobacco can be exported
with an environment quality seal.
11 In fact, the Campinas Telecom innovation system was considered, up to the early 1990s, one of the few
efciently developed in Brazil. Hobday (1990), for instance, points out that policies used by the Brazilian
government and the institutional arrangements set up intense co-operation between CPqD, local rms (national
and foreign-owned) and universities that enabled joint development in exchange, transmission and peripheral
telecom technology of world class.
46 INDUSTRY AND INNOVATION

one (with liberalization and privatization) was accompanied by uncertainty and no

new institutional arrangement was designed specically targeting the innovation
system. These two factors, together, with the absence of any policy signals from the
government, had a great impact on the strategies of rms, leading to a more defensive
behaviour.
In the opposite direction, the ceramics cluster of Santa Catarina developed in the
1990s a sophisticated institutional arrangement. Firms set up co-ordination associ-
ations and a technology institution was createdthe Center of Technology in
Ceramicsby the Federation of the Industries, the Federal University of Santa
Catarina, and the Association of Ceramics Firms, aiming at product certication and
product development. Its main current project is the building of a pilot-plant targeting
experimentation of the whole ceramic productive process.
The Argentinian ndings have put even more stress on the existence of a local
institutional arrangement targeting co-operation. Co-operative behaviour and better
economic performance were associated with the fact that rms were located in areas
where a strong impetus on institutions dealing with co-operation was attained. In
successful cases besides the involvement of local organizations (rms, technology
institutions, etc.) the role of local government was fundamental.

INNOVATION SYSTEMS IN MERCOSUR IN THE 1990S

The two nal decades of the millennium have witnessed signicant transformations
that include the transition from the Fordist to the knowledge-based techno-economic
paradigm. This has certainly brought several new challenges to developing countries
and their Systems of Innovation. Research on this issue has up to now been extremely
concentrated in advanced economies. This paper presents a discussion of the main
ndings of the initial phase of a research project, which is being conducted in
Mercosur countries as an attempt to understand the specicities of the local and
national innovation systems and how they are facing the changes of the 1990s.
Such changes, which include in particular structural reforms, have signicantly
affected innovative behaviour in Mercosur countries. It is noteworthy that although
rms followed different paths, improvement in rms innovative capacity in all
analysed clusters and in most rms, even though just a few cases an improvement in
R&D expenditure was noticed. Nevertheless this improvement meant different things
for each of the cases. Initially, across the board, rms targeted the modernization of
production processes, product quality, etc. This certainly involved organizational
innovation since it incorporated in production novel computer-based techniques. The
introduction of new process technologies has been an important development of the
1990s in all examined clusters.
For example, the privatization in steel and the entry of international operators in
services such as telecommunications have dramatically increased the productivity of
these sectors. In these clusters, then, although innovation occurred, the overall R&D
and innovation efforts are still rather poor in comparison with those at the techno-
logical frontier since they are mostly focused on the above-mentioned modernization
 LOCAL SYSTEMS OF INNOVATION 47

of production processes. Although a necessary condition for an upgrading of innova-

tive capabilities, it is not a sufcient condition for establishing long-run efcient
competitiveness, because it not only disregards the systemic character of innovation
but, when taken in isolation has a very disruptive effect on local systems. That is
precisely why it is these cases that limited themselves to improvements on process
technologies are also those where co-operation was hardly established, new institu-
tional development was absent and local SMEs suffer most.
In some productive arrangements, such as ceramics, wine andto a lesser extent
tropical fruits, rms strategies comprised the search for new products and a different
insertion in the world economy. In a few cases this strategy was export-oriented
(tropical fruits in Brazil, wine in Uruguay), in others the internal market was more
important (wine in Brazil) and in one both internal and external markets were impor-
tant (ceramics in Brazil). In the hi-tech SME arrangements (biotech, software, advanced
materials) several closures were noticed since local content decreased and surviving
locally owned rms, with few exceptions, are experiencing difculties in growing.
The cases where the innovative strategies are based on adding value to production
experienced increased commitments to innovation and co-operation. Also new institu-
tional arrangements were devised as part of this upgrading. Some of these institutions
were created to provide information (market and technological), foster co-operation,
spread the high costs of R&D and to reduce uncertainty. Others were created to co-
ordinate efforts of rms belonging to clusters. Some were sponsored by external
institutions (such as in Argentina) and most have different participation of federal,
state and local government.
In fact it is widely acknowledged that innovation and co-operative behaviour are
deeply affected by the evolution of institutions and institutional change. In Brazil and
Argentina, for example, they had an important role in explaining the few successes in
developing technological capabilities in areas such as the oil industry (Petrobras and
IPF), aeronautics technologies (Embraer), telecom (CPqD), etc. State-run agricultural
research institutes such as INTA in Argentina and Embrapa in Brazil also played an
important role in developing agricultural technologies (Katz 1999).
Obviously those few institutional arrangements that were instrumental during
import substitution (and those that were not, as the most industrial R&D institutes)
became inadequate to deal with the changes of the 1990s. So a creative destruction
process for them was inevitable. There has been a contraction and in many cases the
complete elimination of innovation networks which state enterprises developed in
the past.
Although this process was set into motion, interaction between rms and knowledge
producing institutions remains poor, while rms keep considering internal sources to
be more important for their innovation activities. Most of the case studies here analysed
conrm this general trend. In the hi-tech sectors, with one exception, the process of
creative destruction of institutions was conned to the destruction part only.
Nevertheless, the research also showed that with structural changes new institutions
and institutional arrangements were set up as the ceramics, biotech and wine cases
show. These were not only determined by needs to satisfy norms concerning the quality
48 INDUSTRY AND INNOVATION

and certication of products and processes but, most important, because rms decided
to upgrade their insertion in the global economy. However, the diversity of situations
suggests that a general model for institutional development is not to be found.
Finally, regarding the impacts of structural reforms on innovative strategy of rms,
we have to consider the following points. First, liberalization has lowered the cost of
imported capital goods and therefore encouraged their substitution for domestically
produced machinery and equipment. In Brazil, for instance, the coefcient of import
penetration in machinery and electronics goods jumped from 29% in 1993 to around
70% in 1996. The same coefcient for some important inputs, such as chemical raw
materials, fertilizers and resins, grew from 20 to 26% in 1993 to around 3342% in
1996 (Cassiolato and Lastres 1999b). As a result, both in the case of the expansion of
domestically owned conglomerates in resource processing industries and the privatiza-
tion of state enterprises, the setting up of new production capacity has been based
on the use of imported machinery and equipment and intermediate products. How-
ever, this strategy has signicantly affected local processes of learning and accumula-
tion of innovative capabilities.
The evidence here presented shows that these processes were not affected in the
same way, in all agglomerations. In the case studies of steel and those co-ordinated by
MNE subsidiaries (tobacco, cocoa and telecom in Brazil) the situation was precisely
the same as the above-mentioned general pattern. In fact, this pattern seems to be a
common feature of the Latin American experience in the 1990s. As suggested by Katz
(1999: 2425) MNEs subsidiaries changed signicantly their innovation strategies, as
they increased the import content of their products. They have discontinued local
engineering activities that they undertake in order to adapt or improve product and
process technologies.
In Mercosur, several of the MNE subsidiaries set up in the ISI period have made
substantial adaptive local technological efforts. Although they kept strong technology
links with their parent companies, efforts to increase local inter-rm linkages were
found in several sectors (Cassiolato 1992). Now, as they can operate on the basis
of imported parts and components, these rms have reformulated their adaptive
engineering strategies of the ISI period and have discontinued domestic technological
programmes that were justied in the more closed economies in the past. This fact
appears to be producing a signicant negative impact upon local systems as it destroys
production chains in which a larger number of locally owned SMEs had served as
suppliers of foreign-owned companies.
In the case of new foreign investment, either through green eld investment or
acquisition of existing local rms, recent surveys show that they are basically import-
intensive and direct their production to the internal (Mercosur) market and are not
geared to exports (Laplane et al. 1998). The case studies analysed in this paper have
also revealed that, as a general rule, newcomers are not interested in establishing
productive networking locally and operate totally isolated from the domestic innova-
tion system.
To sum up: the project has uncovered some interesting cases where rms reacted
positively to the new environment; important as they are they do not obscure some
very disturbing conclusions drawn from the research project:
 LOCAL SYSTEMS OF INNOVATION 49

although innovation for new processes was a common characteristic among the
analysed clusters, there were a majority of cases indicating the decrease of innova-
tion efforts towards new products, affecting both their core capabilities and learning
processes;
some important former productive and innovative networks are being disarticulated
and there is no new signicant articulation between the new investments and the
local R&D infrastructure; this is particularly true of the case of hi-tech clusters;
in general, production is becoming less intensive in the use of local engineering
and technical capabilities;
in hi-tech clusters and also in those where privatization occurred, the relatively
small technological capital accumulated during the import-substitution industrializa-
tion (ISI) years is being rapidly eroded.
All these facts and trends are even more serious in this new Knowledge Era. Part
of the difculties discussed above may be traced to macroeconomic instability,
imperfections of financial markets, high interest rates and so on (Lastres and Albagli
1999).12 Part of them may be related to other aspects of the policies adopted by
Mercosur countries as well as by most countries in the region. These policies
following structural reforms have targeted different goals and were mostly based on
a competitive insertion model which assumes that technology, innovation and
knowledge are globalized and have led to the virtual abandonment by government of
its role as co-ordinator and promoter of industrial and technology policies.
However, its effectiveness can be questioned even in terms of one of its very basic
targets: the increase of international competitiveness and an effective insertion in the
globalization process. Although the export prole of the Mercosur economies has
evolved in such a way that industrialized goods are increasingly important, the
insertion of Mercosur countries in the international market is still characterized by
the exports of commodities that are intensive in natural resources and/or energy and
in low wage. As it is known, these commodities have shown a tendency to low
dynamism, excess supply and a consequent price stagnation (Lastres 1992).
The progressive erosion of international competitiveness of Mercosur countries is
associated with the loss of world market shares as indicated by the data shown in
Table 3. Export growth of these countries has been much slower than the increase
in world trade. Brazil, for example, accounted for 1.5% of world exports in 1984; in
1993 and 1996 the same gures were 1 and 0.93%, respectively. However, the situation
is even worse if intra-Mercosur trade is excluded. In this case, Brazils share declined
from 1.42% in 1984 to 0.79% in 1995, Argentinas from 0.31% in 1986 to 0.28% in
1995 and Uruguay from 0.037 to 0.022% over the same period. In the globalization
period these countries are all losing importance in export markets.

FINAL CONSIDERATIONS
The implications of the discussion above are important for developing countries for
two related reasons. First because policies that are being pursued by Mercosur
12 Additionally important for the discussion of local systems of production and innovation is that, as rms are
seeking primarily to survive, they have been forced to abandon long-run concerns.
50 INDUSTRY AND INNOVATION

TABLE 3: MERCOSUR COUNTRIES SHARE IN WORLD TRADE

Brazil (%) Argentina (%) Paraguay (%) Uruguay (%)
Selected
years 1 2 1 2 1 2 1 2

1984 1.500 1.426 NA NA NA NA NA NA

1986 1.116 1.026 0.342 0.315 0.012 0.005 0.056 0.037
1990 0.943 0.903 0.371 0.316 0.029 0.017 0.051 0.033
1995 0.916 0.794 0.413 0.279 0.016 0.007 0.042 0.022

Source: Cassiolato and Lastres (1999b).

(1) Total exports of country over total world exports.
(2) Same as (1) less exports to other Mercosur countries.

countries, are based on the idea that technology and knowledge have become global
and that like a commodity, they could be acquired internationally under market
conditions. Under such a view, policies geared to attract foreign investment and to
put pressure on local rms to achieve better quality and improve productivity would
sufce in order to increase their competitiveness. They should be complemented by
neutral policies such as to the concession of scal incentives to R&D, the deregula-
tion of the screening of technology transfer contracts and the enforcement of
internationally agreed industrial property legislation.
One of the results of these policies has been the downgrading on innovative
activities by rms that survived. Of course one could argue that moving to testing
and quality control from previous commitment to product innovation should be
viewed as a positive, important achievement, as a necessary way to integrate into the
world economy. In fact, in a globalized economy it is impossible for rms be isolated
and not be linked to international sources of technology. This is not the point.
Evidently, opening up to international trade implies that not every production
technology should be developed locally. The point here is that, from an evolutionary
perspective the capacity to use the technology is intrinsically related to the capacity
to understand and absorb it. In short, central to the idea of innovation systems is the
idea that the capacity to innovate is essential for the efcient diffusion since innovation
is neither a linear process, nor the balance between invention and diffusion, but
is rather a process not independent from the diffusion process, both being simulta-
neously dened. Efcient diffusion depends on efcient capacity to innovate, at least
in the evolutionary framework.
Additionally, and as corroborated by this and other empirical research, technological
activities carried out by MNEs in host countries are still relatively small even among
advanced countries themselves (Lastres 1993; Patel and Pavitt 1994; Archibugi and
Michie 1995). As argued for instance by Chesnais and Ieto-Gillies (1997), what is
happening in technology is also an indicator of a larger phenomenon concerning
international production, namely that some core competences of rms (which include
the generation of technological capabilities) are still largely concentrated in the home
country of the MNEs.
 LOCAL SYSTEMS OF INNOVATION 51

Therefore, this discussion is also important for the understanding of national

systems of innovation in developing countries since the very idea of NSIs implies
different roles for rms according to their capital ownership, their innovation
strategies and links with their local arrangements. This has been explicitly recognized
by different authors who developed the concept. Nelson and Rosenberg, for example,
dened system of innovations as a set of institutions whose interaction determine
the innovative performance of national rms (1993: 4). However, it is recognized
that, even in the case of developed countries, this issue is not very much debated.
On the whole the results of our research project suggest, rstly, that a simple
exposure to international competition is not at all sufcient to foster rms to increase
their innovative activities and their competitiveness. The few success stories analysed
highlight, in particular, the importance of continuous public and private policies and
efforts aiming at promoting the capacity to acquire and use knowledge and to innovate.
They also show that these policies and efforts should be based on strengthening local
resources, organizations and institutions, as well as on the quality and intensity of
their interactions. Setting up of local systems of innovation in development conditions
in a globalized world requires a type of intervention that needs to be much more
sophisticated than a simple bid to attract foreign direct investment.
Finally, it should be recognized that much more empirical analysis should be done
to use the concept of National Systems of Innovation in the context of development.
This effort may help to answer the ever present question about its usefulness in
underdeveloped systems, where innovation efforts are scarce, sources of technology
are mostly foreign and institutions hardly interact.

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