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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
Download by: [b-on: Biblioteca do conhecimento online UMinho] Date: 07 March 2017, At: 07:00
Industry and Innovation, Volume 7, Number 1, 3353, June 2000
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.
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.
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
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.
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
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
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.
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.
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
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
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