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Appendix 1: Preliminary List of Brazilian and Chilean Multinational Enterprises

Table A1.1 The main Brazilian and Chilean firms with foreign direct investmentoperations according to Chudnovsky and Lopez (1999)

* Denied access. ** Was acquired. Source: Daniel Chudnovsky and Andres Lopez, ‘Las empresas multinacionales de AmericaLatina’, Boletin Informativo Techint, no. 297, Buenos Aires: Techint, Enero/Marzo 1999, p. 34.Reproduced with permission.

Conglomerate or firm Sector Country

Amil* Health systems Brazil Andrade Gutierrez* Engineering and construction Brazil Brahma* Beverages Brazil CVRD* Iron Brazil Garantia* Beverages Brazil Gerdau Steel Brazil IKPC* Paper Brazil Iochpe-Maxion* Autoparts, motors Brazil Itau* Banks Brazil Odebrecht* Engineering and construction Brazil Petrobras* Gasoline Brazil Sao Paulo Alpargatas* Textile Brazil Randon Participacoes* Transport equipment,

autopartsBrazil

Vasp* Airline Brazil Abumohor* Banks, packaging Chile Angelini Forestry Chile Arisco* Food Chile Bofill* Food Chile Chilgener (Gener on

our list)**Electrical energy Chile

Del Rio* Commerce, banks Chile Enersis** Electrical energy Chile Errazuriz* Commerce Chile Hurtado Vicuna* Electrical energy, insurance Chile Larrain* Food and beverages Chile Luksic Food Chile Matte Forestry Chile Pathfinder Forestry Chile Sigdo Koppers* Electrical energy Chile

List of Brazilian and Chilean Multinational Enterprises 159

Table A1.2 The main Brazilian and Chilean firms with foreign direct invest-ment operations according to Peres Nunes (1993)

Source: Wilson Peres Nunes, ‘The internationalization of Latin American industrial firms’,CEPAL Review, no. 49, Santiago de Chile: UNCEPAL, April 1993, p. 70.

Table A1.3 Own compilation of the main Chilean firms with foreign directinvestment operations based on Calderon and Griffith-Jones (1995)

* Denied access. Source: Alvaro Calderon and Stephany Griffith-Jones, ‘Los flujos de capital extranjero en laeconomia Chilena’, Desarrollo Productivo, no. 24, Santiago de Chile: UNCEPAL, Setiembre de1995, based on pages 37–40.


Gerdau Steelworks Brazil Brastemp (Embraco) Electric and electronic goods,

refrigerator production Brazil

Hering Shirt factory (Euro-Disney) Brazil Chilectra Electricity Chile Chilgener Electricity Chile Masisa Construction of a particle board plant Chile Compania Manufacturera de

Papeles y Cartones (CMPC) Purchase of a diaper factory Chile

Cemento Polpaico Cement Chile Ceramicas Cordillera Purchase of a ceramics plant Chile Indura Purchase of an industrial gases plant Chile Grupo Luksic Brewery, electricity, food Chile Madeco Electrical industry, copper pipes Chile


Jumbo* Candy Chile Di Foto* Supermarket Chile Compania de Aceros del Pacifico (CAP) Steel Chile Unimarc Supermarket Chile Ekono-Almac Supermarket Chile Boher* Supermarket Chile Angelini Conglomerate Chile Cemento Polpaico Cement Chile Costa-Carozzi* Food Chile Laboratorio Chile Pharmaceuticals Chile Sipetrol (Enap subsidiary)* Gasoline Chile Lord Cochrane* Publishing Chile Industrias Ambrosoli* Food Chile Embotelladora Andina Beverages Chile

160 Appendix 1

Table A1.4 The main Brazilian firms with foreign direct investment operationsaccording to Wells (1988)

* Denied access. All efforts were made to obtain permission but ended up in failure.Source: Christopher Wells, ‘Brazilian multinationals’, Columbia Journal of World Business,Winter 1988, p.16.


Grupo Brasmotor Electrical and electronic goods Brazil Grupo Gerdau Steel Brazil Hering Textile Brazil Grendene* Plastic footwear Brazil Incasa Iodine salts Brazil Inepar* Electrical control equipment Brazil Tenenge* Industrial engineering Brazil Veplan* Shopping malls Brazil Perdigao* Agroindustry Brazil Artex Textile Brazil Sadia, Concordia* Food Brazil Industrias Villares* Lifts Brazil Brahma* Beer Brazil Caraiba* Copper mining Brazil Caloi* Bicycles Brazil Cica* Canned foods Brazil Eluma* Autoparts Brazil Weg Motores Capital goods Brazil

161

Appendix 2: Summaries of Transcriptions of Case-Study Interviews

1 Gerdau

1.1 Rodrigo Krause, Director of Investor Relations, Gerdau 1. What were your major criteria for selecting the location of your subsidiaries/

affiliates/sister companies? We started expanding abroad in the 1990s: we acquired two clients in Canada(in Toronto and in Winnipeg). Then we expanded in Chile.

Our criterion for expansion: we consider potential investments in the Americas,and look for an existing plant with good operations but weak management, andwe acquire it. Indeed, we only have one greenfield project in Chile which wasinaugurated on 16 June 1998, the Aza la Colina plant. It has a production capacityof 5,000 tons per year and it meets all specifications for the environment. Webuilt a brand new plant there. It is the only greenfield operation we have outsideBrazil because greenfield is not so cost-effective. It is cheaper to acquire a firmthat is up and running.

Our multinationalization motive: we grow abroad so that we can leverage ourassets and minimize the volatility of sovereign risk in the Brazilian market. Nowwe have 20 per cent of our assets abroad and 80 per cent in Brazil. There is volatilitybecause there is misgovernment at the political level and whoever is democraticallyelected does not curb spending. We also go abroad because our installed capacity isclose to 5m tons: that makes us comfortable among world players, but we wantto reach a capacity of 8m tons, hence the need to expand.

The crucial lesson we have learnt from our multinationalization is to let localsrun their business. Indeed, in 1980 we acquired a plant in Uruguay. We proudGauchos expatriated a large number of our staff from the headquarters downthere. This was a big mistake. It was also a lesson: while Uruguay is a neighbouringcountry, where people speak Spanish which is close to Portuguese, it is not Brazil.It is mostly composed of Spanish descendants, whose population could fit intoour state. We made the mistake of forgetting that various Latin American culturesare not equal. You don’t get to know people over night. It was impossible for usBrazilians to establish a presence on the Uruguayan market without goingthrough the locals. We now know that we have to be humble, give them autonomy;we have moved towards more decentralization since that experience. Locals areresponsible now.

162 Appendix 2

2. What are the competitive advantages of your company which enable it to competeeffectively with other firms in host countries?

Our advantage as opposed to the former owners of the firms we acquire is ourfinancial skill. We are the only company in Brazil that has increased profit quarterafter quarter despite the crises. This is due to the austerity of our finances.

3. Does your firm undertake Research and Development? We do not have a lab that develops basic technologies. We have R&D for steelproducts. For instance, if you want to buy special rods to produce door knobsthat contain non-toxic steel, we will get the lab to research on it. It refines thequality and specification of products based on customer requisites. We reinvest900 million dollars per year in technology and technology maintenance.Otherwise we would be out of business. Roughly 100 people are employed in theseactivities.

4. Major technological improvements of the firm in the past few years havebeen . . .

Our Corfac product is an example of our innovations: it consumes less cuttingtools in the production of steel. We have also developed different wires forvarious bars. We always have different programmes of quality control in operationin the firm. They range from tailored programmes for a particular operation toa programme called 5S, which is a Japanese programme that teaches cleanlinessin organization.

5. What percent of your technological activities do you perform outside of your homecountry?

No response.

6. Why do you perform localized technological activities? We hire locally and that helps us understand local tastes.

7. Why did you decide to become multinational? We want to expand and there are limits within the Brazilian market. There isa constraint within the country both in terms of the growth of Brazilian GDPand of market share. We cannot be a monopoly, and we already have 45 per centof the market. Antitrust authorities could come knocking on our door, as thegovernment has decided it does not want a company that has a stronghold on thesector. We have to divest and invest according to that constraint. We have a needfor growth. We can grow through greenfield investment or expansion of existingcapacity. Since it is not in our interest to export due to the high level of freight costsin the steel industry, we go abroad through greenfield investment or acquisition.

8. Do you build technological advantages by adapting foreign technology? No response.

9. Is the establishment of a local capital goods industry important in the enhancementof the bargaining power of local firms in relation to imports of foreign technology?

We have an alternative and it is not a bargaining power. It is a restraining power.For example, the naval industry has gone down the drain because of bad manage-ment. Because I am a free-market person, I would give up whatever Braziliantechnology exists for foreign technology. The existence of local supply givesbargaining power but does not help the import of foreign technology. In the past,

Case-Study Interviews 163

the government’s argument has been that one has to give locals enough time tocatch up with foreign technology, so that one should not import. As a result ofsuch government policies, the computer industry still has not emerged in Brazil.Until Collor, government policy was a big disaster but he stopped import restriction.

10. Does your firm ever produce or adapt and modify significantly machinery andequipment for its own use?

No response.

11. Do you find that the more experience you have of international investment, thebroader your scope for technological innovation?

We learn technologically from our partners abroad. We exchange notes, techniques.We imported our star-shaped bars from Chile.

12. Presently, or within two years’ time, does or will your firm use flexible automationin the following areas: design area, production area, planning area?

Yes, yes, yes.

13. Please indicate the approximate percentage of your operations that are now andwill be controlled in the future by CAD/CAM techniques.

There is some CAD/CAM, but I don’t know the percentage. In design, I don’tknow.

14. Please indicate the approximate percentage of your labor force (production workers)that are now and will be involved in the future with the organizational techniqueslisted below. Quality circles, total quality control, internal just-in-time.

(1) 81 per cent. (2) 81 per cent. We implemented SAP/R3 (which integrates operations withadministration). It curbs costs, decreases the number of stages in processing. (3) 81 per cent.

1.2 Marcos Oliveira, Technology Manager, Gerdau 1. Does your firm engage in R&D activities? R or D? Are its development activities

highly applied or not? We engage in development to improve product quality. New product developmentis a systematic activity at our firm, as it is essential for any commodity-producingfirm. But our development is quite small. It is restricted to the melting process,so in a sense it is restricted to sub-product development. Development is restrictedto particular units. We don’t have a development division at the corporate level.It is very much oriented towards the consumer. A product from our Rio subsidiarymay require particular characteristics, which means that we must have periodicalmeetings with our clients. Development is a partnership with the consumer. We onlydevelop something for a particular objective. You start from an already existingproduct and from it you develop a sub-product. We also have a more basicresearch activity which is related to processes; it consists mainly of statisticalmeasures of steel quality, etc . . .

2. Has your firm had experiences with public technology institutes? We have been involved in various projects with the Financiadora de Estudes e Projetos:one consisted of the set-up of an ISO quality line, another in the set-up of line

164 Appendix 2

equipments, and currently our training schemes are being restructured by Financia-dora de Estudos e Projetos. They help us in quality, technology, and management.We are satisfied with them. As a large firm, we find the Financiadora de Estudes eProjetos useful to help us carry out small projects. We work a lot with Financiadorade Estudos e Projetos and Banco Nacional de Desenvolvimento Economico e Social.We also work with Servico Brasileiro de Apoio a Empresas, which awards a prize tothe suppliers of the region. With them, we have set up a total quality structure forthe transporters that supply our Cosigua plant in Rio (which accounts for more than50 per cent of Gerdau production). The interest of the programme for us as a largefirm is that as a result of the programme we are now a member of the nationalquality programme. Gerdau has received the Balridge excellence prize, which isbased on seven criteria, one of which is the management of the value chain. This iswhy it is important to measure the satisfaction of the supplier. It is not only our processthat matters. If we improve the processes of our suppliers, we will also improve.

3. Do you find university curricula conducive to the generation of innovation? Anysuggestions for improvement?

Today, there are few foci of technological learning. Those that exist are very embry-onic. This is why universities have to enter in partnerships with firms. To date, itis Gerdau (and not universities) which has had to make efforts towards the creationof partnerships with universities; for instance, with the Federal University of RioGrande do Sul. With this university, we have established a programme for thefive best students in metallurgy: we work in partnership with them and theycome and practise in our firm. We draw from their intellectual capital by havingthem work in the firm.

4. Can you provide some examples of innovation projects carried out in your firm? Example: statistical control of processes. This is carried out by our lab of materialsciences. We stabilize our processes on the basis of statistical measurements. Wedo not have flexible automation in design, in other areas we do. We use CAD/CAM in design in 80 per cent of our activities, in production in 20 per cent ofour activities, and this will not change. Today, we use quality circles in 40 percent of our activities, and total quality in 70 per cent of our activities. In thefuture, we are planning on a target of 100 per cent. We use JIT in 40 per cent ofour activities and aim towards 60 per cent in the future. We have a Gerdau qualitymanagement manual. Until last year, we had various quality foci. Ever since ourobtention of the Balridge prize, we have had an integrated management system,which groups ISO, quality circles, 5S. We need to have an organized area to carry outprocesses. We need statistics to stabilize them. Strategic planning is also necessary.We use the seven criteria of the prize as the criteria of our unique managementstyle: these are leadership, client, strategy, training and analysis, human resourcemanagement, process management (ISO), and result. They provide us with a generalvision. Strategy is the basis of the programme. Nothing can belong to a parallelprocess. Everything must be linked to strategy. Until five years ago, everythingwas management but without result or planning. We had to associate result withall of management, as there is no point in having management without results.One of the areas which changed the most was human resource management.Human resources are always involved when the structure of a firm changes.Restructuring in business cells changed everything. A cell includes componentsof commerce and production. In addition, there has been increasing integration


between management and labour. Before, there were eight hierarchical levels:director, manager, chief . . . Today there are three: director, facilitator, operator.This is empowerment. You are the master of your process. You are responsiblefor your result. Also, our remuneration system is now based on the attainment oftargets set up by the operator himself. There are five targets per team (notindividual). This is also emphasized by our focus on auto-training.

5. Does your firm carry out improvements on technology transfer? Reverse engineering? We do not. We buy ready-made technologies. This is how we introduce automation.The same applies to the development of SAP/R3, but it was tailor-made for thesteel industry. We mostly innovate in management.

6. Does your firm hold patents? We patent some of our products.

7. Is your firm represented at the Mercosur level? We are participants in the Mercosur Forum. We have legal representatives whoparticipate in the establishment of technical norms.

We send a staff member to Argentina regularly to participate in the normalizationcommittee.

8. Does your firm engage in pre-competitive collaborative research with other firms? No. What we do share is Gerdau management. We were the first firm to master totalquality management in Brazil. Our doors are always open for the purpose ofmanagement system exchanges.

9. Does your firm hire local staff in its local subsidiaries? Our firm is decentralized. Local engineers take decisions. For example, our subsidiaryin Rio developed a technology for the identification of products through bar codes.Then there was a feedback to other subsidiaries. Equipments are also rotatedacross different subsidiaries.

10. Does your firm adapt equipments to local requirements in its subsidiaries? The equipment is different in every subsidiary. We have steel plants in allregions. The managers of each area get together to exchange information andtechnology every two months. The specificities of each subsidiary are the fruit oftheir particular age. Their structures are more or less old. Information exchangewith foreign subsidiaries is lower but it exists. In Aza, our Chilean subsidiary, thereis a management project based on the shop-floor worker. Towards this project,training and processes were all adapted for Chilean staff. So was quality training.And a part of our training system was developed in our Canadian subsidiary. Ithas now been transferred from Manitoba.

The staff in our subsidiaries are from the host country. Few of them includemembers from the Brazilian corporation. Sometimes the engineering personnelis Brazilian.

11. Do you subcontract R&D outside your firm? Do universities do research and yourfirm develops? Can you quote an example of technological cooperation betweenyour firm and a university?

Only occasionally within the logic of benchmarking, with non-competitors. We alsocooperate with Shell on strategic planning, through Arthur Andersen and con-sultancies.

166 Appendix 2

12. Does your firm favour agreements with universities or with other firms? In general, we prefer to cooperate with universities because we can absorb morecapacity from them.

2 Weg Motores

2.1 Alidor Lueders, Administrative Director, Weg Motores 1. What were your major criteria for selecting the location of your subsidiaries/affili-

ates/sister companies? The multinationalization of our firm was preceded by diversification. Brazil was aclosed economy in the 1980s. The market was preserved. Everything you producedwas uncompetitive. In the 1980s, Weg produced good electrical three-phasedmotors. We had a large market share, which meant we were going to run out ofroom to expand. That’s why we had to start on a new strategy. We had to go intoengineering and components to sell an entire package to our clients. In 1979, wecreated divisions within Weg: Weg Maquinas (machines and tools), and WegAutomacao (automation). Indeed, we use a strategy of verticalization in motors,where we have a good scale, but we do not use it in drives. We decided upon thisstrategy for a simple reason. In 1961, the company was very small. Because Jaraguais remote from the big agglomeration centres, at that time, we had no opportunityto draw on different sellers of different products. Our strategy could have beendifferent if we had not been in this geographical location: indeed, our competitors,such as General Electric, don’t have their own melts, copper, and so on. But oursituation was different: first, we had a problem with purchasing copper, thena problem with purchasing melts, then with packaging. We therefore had toimprove in these areas by ourselves. We decided that we could have a goodtechnology and a good scale if we verticalized. And there was no other option.Of course, when the market was in expansion, our strategy was problematic: wewere above full capacity.

Following this strategy of diversification, as our market share in electricalmotors in Brazil was very high, we had to internationalize through exports. Webegan to export in 1970. After 1979, we began to think about what we could dobeyond exports: we decided to have our own distributors abroad. We now have 11distributors in 11 countries.

(1) First, we had local distributors which only sold to small original equipmentmanufacturers (OEMs), and to small resellers. But we wanted big OEMs and bigresellers. How could we achieve that? There was a big market potential in the US,Germany and Belgium. Therefore, we created our own distribution networkthere.

(2) With our own distribution, we can now speak with bigger OEMs to improvemarket conditions.

(3) Through our own distribution, we also know about the market. If you arein the market, you can have a better view of what competitors are doing. You seethe tendency of the market. Also, information about the market includes informa-tion about technology. And you can’t have big customers if you don’t know abouttheir technology. We wanted to know what other competitors were doing in themarket in terms of technology and design.


Overall, the following factors determined our multinationalization. Market poten-tial was an important factor, unlike political stability, which already existed in Brazil,just like the presence of good infrastructure, and the cheap cost of labour. Butgeographical location counted the most in our decision to invest in Mexico andthe United States. Cultural considerations also played a role in our decision toinvest in the case of Germany. We are German descendants. Facility for exportsto developed countries also mattered.


We are a market leader in Brazil: we have scale, good products and quality; thebest up-to-date plant in the world, at least physically in terms of machinery andmotors. We have a good distribution network and technical assistance. We havestate-of-the-art technology, tailor-made products and services. We have a strongbrand name and a wide range of products. In motors alone, we sell a whole rangeof products from small ones (26 horses) to larger ones (20,000 horses). Of course,technology is also an advantage. Last, the fact that we are present in fiftycountries is also an advantage. If you want to sell to companies that are presentin different countries, you get preferential agreements only if you too are presentin different countries.

3. Does your firm undertake Research and Development? We devote 3.5 per cent of revenues and 200 employees to R&D, not in motors,but in different products.

4. Major technological improvements of the firm in the past few years have been . . . Tailor-made products. Also, by changing our machinery, we are always up todate. Our investment policy is that if we have a bottleneck, we invest until themachinery is up to date.

5. What percentage of your technological activities do you perform outside of yourhome country?

0 percent.

6. Do you perform localized technological activities? Yes, to exploit local natural resources.

7. Why did you decide to become multinational? It is all because of the market.

8. Do you build technological advantages by adapting foreign technology? Yes, through scientific innovation.


It is important to have a local capital goods industry, since most of our productsare sold to the capital goods industry. The larger the Brazilian capital goodsindustry, the bigger our market. Sales to the capital goods industry represent 70per cent of our sales.


We produce some of our machinery.

168 Appendix 2


Yes.


Yes, yes, yes.


Design: 100 per cent. Production: 100 per cent.

14. Please indicate the approximate percentage of your labour force (productionworkers) that are now and will be involved in the future with the organizationaltechniques listed below. Quality circles, total quality control, internal just-in-time.

(1) Quality circles will be used by 25 per cent of the labour force in the future.Team work is important. (2) 20 per cent. (3) If you use ERP (integrated system), you decrease stock via an integrated logic.

3 Lucchetti

3.1 Fernando Pacheco, General Manager, Lucchetti Does your firm engage in R&D activities? Has it had any experiences with publictechnology institutes? Does it engage in pre-competitive collaborative research withother firms? Does your firm favour agreements with universities or with other firms?Canada is the main producer of hard wheat. To ensure the stability of our pro-duction costs, we needed to produce hard wheat locally. We signed a technicalassistance agreement with INIA (the Chilean institute of research in agronomy)and the Catholic University of Chile for 4m dollars, to develop the cultivationof hard wheat in Chile. This project has been in existence for eight years. In1996, with a view to opening a plant in Argentina, we also signed a contractwith INTA (the Argentine institute of technology for agronomy) for the sum of5m dollars. This agreement involved a group of five Argentine competing firmsfrom the pasta industry. Molinos Rio de la Plata (which belongs to Bunge y Born)and Virgilio Manera were amongst them. The purpose of the contract was toproduce hard wheat in Bahia Blanca, Argentina. It was subsequently renewed. The companies involved provided:

• credits • technical assistance and assistance in agronomy • seeds, fertilizers.

Working programmes were controlled by agronomists. The farmer supplied theproduct, in conformity with the standardization of wheat, based on the manualof standardization of raw materials. Premiums were added onto the base pricedepending on the quality of the product (percent of humidity, percent of proteins,colour). INTAL controlled the evolution of the cultivation, while Lucchetti/Carozzi


in Chile or their competitors in Argentina financed the project. The programmebegan in Chile in 1986/7 with the production of 10,000 tons of wheat. The currentproduction amounts to 120,000 tons. In Argentina, in 1996, the production was2,000 ha, and now amounts to 23,000 ha or 40,000 tons.

Lucchetti signed another agreement with Lever, to create a joint company forthe production of oil seeds. A firm called Promosol was created by the two oilindustry firms in order to promote the use of seeds in Chile. The only competitiveseed is called canola (it is Canadian; contains 45 per cent of oil for 55 per cent ofskin; a process of hybridization allows this oil to be rid of acid). Lever and Lucchettiprovided credits to 3,000 farmers to develop this seed; they facilitated technicalassistance by human resources trained in Canada. Ten million dollars wereinvested to purchase and process the seeds. From 1996 to 1997/8, 18,000 tons wereproduced. In 1999, 80,000 tons were produced. This agreement allowed farmersto increase their profitability by 40 per cent.

In my opinion, firms benefit from agreements with other firms more thanthey do from agreements with public organisms. The administrative regulationof public institutions does not allow firms to be flexible on a case-by-case basis.The system is too regulated to be operational.

3.2 John Bucher, Chief of Financial Planning, Lucchetti 1. What were your major criteria for selecting the location of your subsidiaries/

affiliates/sister companies? We first exported, and then invested abroad in 1995. We control practically 12per cent of the pasta market in Argentina, where there was a rapid expansion ofour market share. We had to invest to grow further.


Experience in production. Our subsidiaries are completely new firms technologi-cally. FDI does not mean that there is a transfer of human resources from thematrix. However, only one manager is Argentine in Argentina.

3. Does your firm undertake Research and Development? No.

4. Major technological improvements of the firm in the past few years have been . . . We have improved our storage of wheat and semola, our transportation systemfrom the mill to each line, we have introduced new machines for packaging andelaboration, a new flow of packaging for product delivery. These innovationshave taken place through centralization, a new plant, new bodegas, and barcodes.

We have new equipments for our lab (to colour semola and pasta), and a newquality sub-manager since 1997.

We are more efficient in our consumption of energy and we have switchedfrom oil to natural gas production. We have also laid off staff (between 260 and450 people) following the introduction of our new packaging flow for delivery.


Little.

170 Appendix 2

In Peru, staff has come up with new processes to increase the extraction ofsemola. In Chile, we tried to do the same through reprocessing, but we were lesssuccessful.

6. Do you perform localized technological activities? In Argentina, the local candial wheat is used.

7. Why did you decide to become multinational? We first engaged in internationalization through exports, and then throughproductive presence. We had to introduce a long-term element to our inter-nationalization in order to stay in the market, and to give value to the firm interms of sales. We wanted to add not just fixed capital value but also brandvalue.

8. Do you build technological advantages by adapting foreign technology? The building of our advantages was a two-phased process. We sent our staff onmissions to Europe and they purchased Italian technology. Then we adapted thistechnology for our Argentine plant. We optimized foreign technology, we didnot just copy it. In our new plants, we set up a flow rather than a matrix produc-tion process, where all activities were integrated. It used to be the case that eachfloor of the plant specialized in one area (elaboration, packaging). In our newplants, a flow allowed us to optimize processes.

9. Is the establishment of a local capital goods industry important in the enhance-ment of the bargaining power of local firms in relation to imports of foreigntechnology?

In Argentina, there are local packaging machines but they are not very efficient.In Chile they are not efficient either. We prefer to call on global producers(there was competition between two Italian firms selling us machines). Butfor the transformers, there was competition between Argentine and Frenchproducers.


No.


Before multinationalization, we had not undertaken an overhaul of the produc-tive process. Multinationalization allowed us to see that there was an alternativeto what was being done at home. It gave us the disposition to see that there werealternatives. It helped us to get out of a mindframe of standardization.


Planning is still a little manual.


We have computerized production lines but we do not programme ourmachines.



We have engaged in critical control point methodology, which is the basis ofISO 9000, since 1997. We also have JIT in the reduction of bodega inventoriesand in supermarket delivery.

3.3 Fernando Pacheco, General Manager, Lucchetti 1. What were your major criteria for selecting the location of your subsidiaries/

affiliates/sister companies? Size of host country’s local market, then political stability, then efficiency ofgovernment, then cheap cost of labour.


Better management skills, then longer experience in production and operation,then more advanced technologies.

3. Does your firm undertake Research and Development? No.

4. Major technological improvements of the firm in the past few years have been . . . New production processes, machinery and equipment.


We perform some technological development in subsidiaries. Themes such aspersonnel training and adequacy of equipment to our installations are treatedhomogeneously across subsidiaries.

6. Do you perform localized technological activities? Local abilities in Argentina are industrial engineering and layout. The Argentinefirm Altecnica did our layout and packaging design because they are moreadvanced in this area in Argentina than they are in Chile.

7. Why did you decide to become multinational? FDI is a development strategy. We prefer not to export because aggregate value islarger in production. You lose competitiveness if you do not produce locallybecause of tariffs. The cost is too high. Our type of product obliges us to elaboratenear the product market.

In addition, the Chilean market is growing by 2 per cent per year, which is thegrowth of the population. As we have a basic product, it is difficult to associateproduct growth with growth in people’s purchasing power. We need new markets.

Mercosur was chosen because of its population of 150m inhabitants. Brazil isthe most important market but there is also stability in Argentina.

8. Do you build technological advantages by adapting foreign technology? We do benchmarking before any adaptation. In 1996, we did benchmarking inEurope. We believe in the importance of productivity in competitiveness. Ourmodel was the Spanish prototype of Pastas Gallo.

172 Appendix 2


It represents long-term investments. Local production does not give us an advantagebecause the market is not sufficiently large for us to develop R&D. The long-termeffect is that there is no wild competition between different suppliers here. There isa stability of capital goods supplier relations, hence the absence of bargaining.


Our equipment is integrated to a production line. We have adapted robots thatpackage pasta. We adapt the production line to a new technology.


FDI increases our sensitivity to new technologies, data processing and transmission.Geographical distance forces us to incorporate new technology such as commu-nication systems and management control. And we transmit capacities to othersubsidiaries. We brought local managers and professionals to Chile and explainedour technology to them, in terms of models of systems of control and informationmanagement. We familiarized them with the culture of our organization andlinked them to us through these technologies.


Production and planning areas.


Design: 0/2. [This reads ‘between 0 and 2 per cent’.]Production: 51/70 then 71/100. Planning: no response.


(1) They were introduced in 1993 but were gradually abandoned, as we wereunable to maintain an appropriate incentive system. (2) 41/60 then 61/80. (3) 41/60 then 61/80.

3.4 Santiago Vasquez, Industrial Division Manager, Lucchetti 1. What were your major criteria for selecting the location of your subsidiaries/

affiliates/sister companies? Size of the host country market and political stability, in particular for Argentina.


Longer experience in production and operation.

3. Does your firm undertake Research and Development? Development of new products, not research.


4. Major technological improvements of the firm in the past few years havebeen . . .

In the past, we used to mix different types of wheat. Now we don’t anymore andwe have improved our wheat quality.


60 per cent.

6. Do you perform localized technological activities? In dehydrated products and pasta, where we have different formulations forArgentina.

7. Why did you decide to become multinational? To exploit indigenously created ownership advantages which can be utilized ina related country as a part of the growth strategy of the firm.

8. Do you build technological advantages by adapting foreign technology? By imitation of organization and reconstitution of types of production processesin use.

9. Is the establishment of a local capital goods industry important in the enhance-ment of the bargaining power of local firms in relation to imports of foreigntechnology?

Yes.


No.


No.


Design: no. Production: yes. Planning: yes.


We don’t have CAD/CAM.


(1) 0/20. (2) 41/60. (3) 21/40.

174 Appendix 2

4 Madeco

4.1 Alvaro Garcia, Director of Investor Relations, Madeco 1. What were your major criteria for selecting the location of your subsidiaries/

affiliates/sister companies? Our first criterion in deciding on a host country is its political stability.


Our strategy at the regional level is to become the number-one supplier of non-iron metal products in the Southern Cone. We manufacture cables and tubes. Atthe local level it does not seem profitable, but at the regional one it does becauseof economies of scale. Indeed, we have two needs: efficiency in productivity andlow capital cost. To have high productivity, we need economies of scale. Wewant high volume and higher margins and productivity so as to generate morecash flow. In addition, we have to resort to financial markets that finance invest-ment at lower rates. This investment will increase our production at a given cost.Then we can increase the total volume of sales and specialize each one of oursubsidiaries.

3. Does your firm undertake Research and Development? We buy technology, we do not develop it. It is too expensive to compete withSumitomo. We buy technology from Europe and the US and machines fromNokia.

4. Major technological improvements of the firm in the past few years have been . . . Innovations in design. We also have a good department of cables, which hasreceived ISO 9002 certification.


44 per cent. We started to manufacture fibre optics in 1997. Brazil had already developed

this technology. We entered the fibre market via acquisition of a Brazilian firminstead of having to learn how to master the technology (which would havemade us lose two years). We looked for a company that had the know-how andthen bought it. It was the second biggest fibre optics company in Brazil and ithad Siemens technology.

6. Do you perform localized technological activities? Yes. There are different components in mining. Salt and the sun burn thecolours of our cables. They are dangerous. Therefore, based on the climate ofdifferent regions, we use special components for each region.

7. Why did you decide to become multinational? To exploit indigenously created ownership advantages which can be utilized ina related country as a part of the growth strategy of the firm.

8. Do you build technological advantages by adapting foreign technology? We take technology from abroad and adapt it to our machinery. The systems ofmachinery control are of the latest technology but our machines are from the


1960s. There is a problem of compatibility between the two: to bridge theelectronics technology and electricity-based machines, we develop what is calledan ‘interface’, which is an adaptation device, within the firm. But we buy thePLC type of electronics equipment which we use from abroad.


When you are considering an investment of half a million dollars, if you havethe alternative to buy Siemens technology, you prefer it to local technology. Welook at what our competitors do (for instance, Comex from Mexico). They useNokia machines. Besides, clients come and see our machinery: we cannot affordto show them machines from Perez Inc.


Not the machines we buy.


We did not have experience in the fibre optics and submarine equipmentsbusinesses. In Brazil, they had a lot of experience in these areas. Therefore, wedecided that in these areas we would let our Brazilian subsidiary produce fromBrazil and despatch products by trucks over here. Our motto is indeed no toduplication, yes to specialization.


Design has a lot to do with the experience of a person, you can’t automatize it.You need the skills of a person.


(a) Design: 31/50. To manufacture a tube, you use CAD. To manufacture a cableyou don’t, because the separation of cables matters a lot and it cannot beautomated. (b) Production: 6/10. (c) Planning: 11/30. We are trying to introduce computer-assisted layout andplant flux.

14. Please indicate the approximate percentage of your labour force (production work-ers) that are now and will be involved in the future with the organizational tech-niques listed below. Quality circles, total quality control, internal just-in-time.

(1) 41/60. (2) 0/20. (3) 0/20.

4.2 Eduardo Vasquez, Technology Manager, Madeco 1. Does your firm engage in R&D activities? R or D? Are its development activities

highly applied or not? Only large EU and US firms can do R&D for product innovation. Only firms witha huge sales volume can finance a real R&D area. Here, we do not create new

176 Appendix 2

products. We adapt to the market but we do not signal new paths to the market.We adapt to the requirements of the market because the market changes,because leading firms create barriers and levels of requirements which oblige usto engage in development. ISO 9000 is an innovation barrier to enter a market.Within the EU, technological barriers and certifications are created. Thisincludes non-tariff barriers. In general, if we are going to export we have to dowhat the market requires. We have a very small percentage of the export market,we have to adapt.

This is also an internal necessity. We have operations in Chile, Argentina, Peruand Brazil. When you buy firms with an inferior technological level, this createsa problem. If there is a higher technological level in Brazil, we adapt Brazilianproducts and bring them to Chile. In general, in Chile, there is nonethelessa good technological level because of a longer period of trade liberalization. InArgentina, we bought a firm producing electrical conductors whose owner wasEricsson. It was a good firm.

2. Has your firm had any experiences with public technology institutes? No answer.

3. Do you find university curricula conducive to the generation of innovation? Anysuggestions for improvement?

In Chile, the budgets of universities allocated to innovation have fallen. Previously,the country used to spend a lot more on education. Now, with private education,there is less money available for innovation. Universities used to be social concepts,but now only finance matters. Private universities do not have funds for innova-tion.

4. Can you provide some examples of innovation projects carried out in your firm? In general, if you want to become up to date in technology, you pay a Germanfirm which has created a machine. For a small market, you cannot pay becausethere is no internal market to absorb costs. Therefore, you start to do somethingsimilar to the machine the German firm does, because the internal market doesnot allow you to invest in the original machine. But you have to reach a level ofproduct quality which is close to that produced by the German machine. Youlook for own solutions with lower investments. If you wanted to install a newplant to make laminates and alloys of copper and aluminium, your alternativewould be to buy a new plant, which would cost you 6m dollars.

In the domain of electrical conductors, things are different. There, you canbuy the technology. You buy the machine which allows your plant to run tentimes faster. Your firm becomes involved in technological development inequipment. In electrical conductors, there have been some product improve-ments because there is a mix of rubber and plastics. In equipments, you also buythe adequate machine. You have no alternatives.

In products, it is different. You choose the best mix of technologies. If you aremanufacturing tubes, bars, and non-ferrous products (aluminium, copper, steel),and if you are in Chile, Argentina, or Peru, you have a limited market. Instead ofa machine which used to produce ten products, you can make it produce tentimes more by changing particular machine controls. You programme your tradi-tional machine through a computer. We engage in product innovation, althoughthere have been few product improvements in metal lamination plants.


Another type of innovation lies in the use of the labour force. In the old days,you would process something that weighted 100 kilos. Now, instead of 100 kilos,units weigh 5,000 kilos. In the old days, ten machines processed a unit of 100kilos, now one machine processes 5,000 kilos. Units have become larger andproduction uses less labour force. That is the best innovation: extracting moreproduction from a piece of equipment with less labour force. Instead of wasting10m dollars, you spend 1m dollars in equipment. You are able to cater to yourmarket.

5. Does your firm carry out improvements on technology transfer? Reverse engineering? The machine has already been designed. What is the point? Unconsciously, onedoes reverse engineer, but this is not a methodology.

6. Does your firm hold patents? The defence of small countries is to be pirates that copy others. It is not in ourinterest to defend the concept of patents. We do not spend anything on R&D. Ifyou weigh that which you can win versus that which you can lose, you can winmore by copying. We steal rather than pay for technology.

7. Is your firm represented at the Mercosur level? The industrial associations which we belong to (Asimet, Sofofa, Asexma) representus in the Mercosur.

8. Does your firm engage in pre-competitive collaborative research with other firms? We are a quasi-monopoly (there are only four of us in the market), so that we arenot pro cooperation. Cosesa and Covisa are the only large competitors we have.Each one of them has particular interests.

In brass mills, we develop aluminium profiles: in that domain, no one hidestechnology because the market grows so fast, we all inform each other of thelatest innovation. But in laminates of copper or aluminium, each one of us hideswhat he knows. Brass mills is a growing market which is taking away market sharefrom steel and copper, therefore there is not much competition. In laminates ofcopper or aluminium, it is the contrary.

9. Does your firm hire local staff in its local subsidiaries? In Brazil, requirements are created by our clients. The Brazilian market allows usto invest in machinery and important technologies. Therefore, there is a synergywith Chile. Consequently, there are few Chilean staff members in our subsidiaries:in Brazil, there is only one, in Argentina, there are three. We use the local capacityof executives.

10. Does your firm adapt equipments to local requirements in its subsidiaries? Yes. At the beginning, in our flat products, machines from the 1960s were trans-formed by technologies of the 1990s. That strategy was profitable.

11. Do you subcontract R&D outside your firm? Do universities do research and yourfirm develops?

We have a subsidiary which manufactures coins. The firm is in Quilpuhe. Thereis a good technical university in the area called Santa Maria, which is located inValparaiso, with whom our subsidiary has conducted joint research. We alsocontract individuals. But this is not systematic.

178 Appendix 2

Studies relating to particular market requisites are subcontracted to privatefirms, while product development is subcontracted to universities.

We try to use internal staff, when we can, otherwise we use external agents. InFrance, subcontracting is easy. Here, it is less so. We don’t have the resources.

12. Does your firm favour agreements with universities or with other firms? No response.

179

Appendix 3: Question Guidelines for Interviews with Technology Institute Representatives

1. What is the main goal of your institute? 2. The majority of Brazilian/Chilean firms develop but do not research. Do

you attempt to foment the transition between the two? If so, how? 3. What is the profile of an innovative firm in Brazil/Chile? What sector, what

size? 4. What institution do you know, if any, which is specialized in the technolog-

ical development of MNEs or large firms? Do you find that there is a linkbetween multinationalization and innovation?

5. What efforts, if any, have been made towards a common innovation policyat the Mercosur level?

6. How can the problem of technology diffusion be solved, according to you? 7. The majority of your projects are demand-led. How do you promote the

supply-side and why this preference for demand? Does this asymmetryreflect the lack of stimulation of firms to innovate?

8. Is there a tendency in your institution to privilege the financing of associa-tive projects between firms in order to promote the creation of strategicalliances?

9. How do you rate the contribution of technology parks to national techno-logical development?

10. Does your institute promote the creation of supplier networks?

180

Appendix 4: Responses of Technology Institute Representatives

For reasons of space, we cannot present all the different responses to theseinterviews, but for indicative purposes, we present below the responses providedby Mr Gonzalo Herrera, the Executive Director of the Chilean Programme ofTechnological Innovation.

1. What is the main goal of your institute? To increment the national innovation effort mainly in the private sector. We privi-lege the development of Fonda de Famento al Desarrollo Cientifico y Tecnologico.

2. The majority of Chilean firms develop but do not research. Do you attempt tofoment the transition between the two? If so, how?

It is worthwhile to foment the transition between development and research.This is the great subject of discussion in Chile in the elaboration of programmesfor the next government. Innovation efforts are not always related to research.One must simultaneously improve research in universities and firms. Firms thatresearch are in the forestry sector for pine and eucalyptus. Other firms thatresearch are in the microelectronics industry and the fruit industry.

A solution to foment the transition between development and research couldbe the training of human resources in science and research both in the firm andthe university. We have good engineers but the theme of innovation is hardlyever present in what they do. They are not very informed on innovation. Curriculamust be modified as well as company incentives towards the hiring of postgrad-uates. An example of curriculum modification took place last year, when theUniversity of Santiago created a course on technology management, which isabsent from traditional curricula. One must increase the contact between firmsand students, and it must be a lively contact. Also, there has to be a generationof incentives for the development of theses related to the innovative develop-ment of firms.

A second solution could be a diversification of incentives for R&D at the firmlevel through tax incentives. This idea was rejected by the Ministry of the economybut in the long run a reform of tax incentives should come through via taxrebates. In the future, R&D costs will be deducted as current year costs. The sameshould apply to personnel costs and materials for R&D. This is based on theCanadian model.

Interestingly, the majority of innovation projects in the world are orientedtowards higher value added goods production. However, we must make animportant distinction. There are three concepts which are often associated butare different: these are technology, industry, and value added. When one thinksabout value added, one thinks industry, but this is not correct. Apples now havemuch more value added than they used to. Value added is not synonymous withindustry. Increase in value added often takes place in natural resources. This

Responses of Technology Institute Representatives 181

takes place through genetic improvements, and chemical changes. With theexception of information technology, in Chile, we should start from our basicmaterials. Instead of developing a microelectronic industry which others master,we should develop our forestry industry and biotechnology in the fruit industry.And these can be very high-tech developments.

3. What is the profile of an innovative firm in Chile? What sector, what size? There are three types of firms.

(a) Mainly firms related to natural resources more than to industry andinformation technology. These firms develop particular natural resources, asin the case of acquaculture and salmon. They introduce fish cultivation andthey engage in innovative activity in production and protection againstdiseases or ecological aspects. In this category, you have salmon, the forestryindustry, and agroindustry.

(b) Firms that perform adaptations which are improvements on technologiesimported from abroad. They incorporate and adapt that which existsabroad. This includes processes of reverse engineering yielding a product ofa similar quality but a lower cost than the original.

(c) Individual innovators which have little contact with other firms from theirsector and little contact with universities. They are risk-takers.

4. What institution do you know, if any, which is specialized in the technologicaldevelopment of MNEs or large firms? Do you find that there is a link between mul-tinationalization and innovation?

We don’t have an institution which deals specifically with MNEs. This is fora simple reason: if we were to fund large firms, we would only fund two or threeprojects a year: because we have so few funds, it makes more sense to approachSMEs. In any case, MNEs are not interested in the small contributions we can make.However, there is a relationship between multinationalization and innovation:firms that invest in many countries are more likely to be involved in processesthat have a higher technology content.

5. What efforts, if any, have been made towards a common innovation policy at theMercosur level?

We don’t have a common innovation policy at the Mercosur level, but weexchange knowledge. We have contacts with the Argentine CECYT, with Uruguay,with the Ministry of science and technology of Brazil. We get information fromthem. But there are also excellence centres in science (not innovation). Dr Teitelboimis the Assistant to the President for scientific issues, and he organizes this initiative.His ‘millenium projects’ are meant to generate excellence centres which createflows of researchers from other regional countries. These centres are supposed toprovide infrastructure capacities. For instance, there is a centre of astrophysics inthe North. But there are no Mercosur common policies.

6. How can the problem of technology diffusion be solved, according to you? There are some incipient initiatives in this area. Innovation diffuses very slowly.We need mechanisms of technological diffusion not so much from one firm toanother (where the problem is one of intellectual property appropriability) butfrom research institutes to firms. The key is that they be able to place the

182 Appendix 4

solutions they generate in the market and that they already have a localizeddemand when they start their projects. They should not have to look for potentialusers afterwards. Demand should be pre-existing.

Fondo de Fomento al Desarrollo Cientifico y Tecnologico and Fondo deDesarrollo y Innovacion take care of diffusion: they bring together public researchefforts towards the needs of firms. Even so, this is insufficient: although theyhave good intentions and their results are technologically satisfactory, they haveproblems with productive and commercial applications.

7. The majority of your projects are demand-led. How do you promote the supply-sideand why this preference for demand? Does this asymmetry reflect the lack of stimu-lation of firms to innovate?

There is a basic confusion with respect to issues of supply and demand: we neverspecify ‘supply of what’, ‘demand of what’. We are talking about demand forfunding and resources held by the Fondo Nacional de Desarrollo Tecnologico yProductivo. But we privilege the supply of technology. The demander ofresources to the state is the technological institute. That institute of technologyis a supplier. We must understand that demand for funding is synonymous withtechnology supply.

8. Is there a tendency in your institution to privilege the financing of associativeprojects between firms in order to promote the creation of strategic alliances?

It is a key issue to change the profile of the isolated Chilean technological innovator.There are various instruments which can facilitate associativity.

At the level of the SMEs, there are the Profos. They subsidize joint initiatives offirms from the same sector. They deal with technology, trade or management.

The technological funds offer incentives for larger joint initiatives, involvinga credit line for a project of technological infrastructure (quality lab, forinstance). A subsidy for three firms is larger than for one. But this type of line isnot often used.

Centres of technological transfer consist of the organization of the technologicaldemand of a group of firms towards more rationalized transfer processes. Associ-ativity is meant at the commercial level here. It is not very strong.

There are few strategic alliances in Chile. But last year, a group of forestry firmswon an American prize of the best project in operations research. Their projectwas supported by the Fondo de Fomento al Desarrollo Cientifico y Tecnologico.It was related to transport management: it involved the optimization of the cuttingof tree trunks and the improvement of storage of products. It was a project ofapplied materials to solve management problems. The five main forestry firmswere involved, including Mininco, Celco, BioBio.

9. How do you rate the contribution of technology parks to national technologicaldevelopment?

There are no technological parks in Chile, but things might change. There is aproject by the University of Chile to construct a park in the Carete laguna outsideSantiago. This requires a huge investment. In Corfo, there have been studies forprospective industrial rather than technological parks. Industrial parks exist inlocations of industrial agglomeration.

Responses of Technology Institute Representatives 183

10. Does your institute promote the creation of supplier networks? To foment vertical associativity, the Corporacion de Fomento a la Produccion hasset up a programme of supplier development. It incentivates a more fluid rela-tionship between a large firm and its suppliers. In the agro-industrial context,large firms that process the products of small producers (tomatoes, for instance)are involved in this programme. These programmes promote the improvementof technological relationships and commercial relationships between large firmsand suppliers for quality and JIT. The idea is to improve productive linkages and toreduce the exploitative relationship between large and small firms. For instance,dairy suppliers do not have stable links with large firms nor do they havebargaining power. The project started one year ago.

184

Notes

Introduction1. The definition of globalization that we use is ‘the multiplicity of linkages and

interconnections between the nations and societies that make up the presentworld system’ (McGrew, 1992, p. 23).

2. We use the definition of the MNE given by Cowling and Sugden: ‘A multina-tional is the means of coordinating production from one centre of strategicdecision-making when this coordination takes a firm across national bound-aries’ (Cowling and Sugden, 1994, pp. 39–40). Although the distinctionbetween a multinational and a transnational corporation has been discussedat length in the literature, we choose not to use this distinction in our bookbecause it is not relevant to our particular research. For a differentiationbetween multinational and transnational, see Bartlett and Ghoshal (1999,p. 304). For them, a transnational has the ability to manage across nationalboundaries, retaining local flexibility while achieving global integration.Conversely, a multinational company operates as a decentralized federationof units able to sense and respond to diverse international needs and oppor-tunities.

3. By innovation, we mean both technological and organizational innovation.We refer in particular to improvements in the field of information andcommunication technologies, and to organizational patterns which enable asystem to take full advantage of these technologies.

4. At one level, Krugman (1994) explains the particularity of firm competitive-ness: he argues that ‘the bottom line for a corporation is literally its bottomline: if a corporation cannot afford to pay its workers, suppliers, bondholders,it will go out of business. So when we say that a corporation is uncompetitive,we mean that its market position is unsustainable – that unless it improvesits performance, it will cease to exist’ (p. 4). At another level, d’AndreaTyson (1992) defines the competitiveness of a nation as its ability to producegoods and services that meet the test of international competition while itscitizens enjoy a standard of living that is both rising and sustainable.However, as Krugman (1994) shows, both in an economy with very littleinternational trade and one with high levels of trade, ‘the growth rate ofliving standards equals the growth rate of domestic productivity – notproductivity relative to competitors, but simple domestic productivity’ (p. 7).We follow Krugman’s logic and equate the competitiveness of a nation withits productivity.

5. Lall did, however, signal the growth-enhancing potential of 3WMNEs, if theywere to engage in reverse technology transfer through investment indeveloped countries. But only a minority of 3WMNE investment is directedto developed countries.

Notes 185

2 The Theory of the Developed Country Multinational Enterprise and the Third World Multinational Enterprise

1. While 3WMNEs already existed in Argentina at the end of the nineteenthcentury (for instance Bunge y Born, Alpargatas), it was only in the 1950sthat the phenomenon gained importance.

2. The Mercosur is a common market between Brazil, Argentina, Paraguay,Uruguay, with special status for Chile and Bolivia.

3. As he puts it, ‘if there were no nation states, all we would need is a theory ofthe growth of the firm’ (Pitelis, 1999, p. 96).

4. By resource linkages, Kay means marketing, production, finance, research,or country linkages between the resources of the firm and those it is tryingto integrate from the external environment through an outbound manoeuvre,whether it be through diversification, exporting, or multinationalization.

5. Another manifestation of this process lies in the relationship between multina-tionalization and industrial concentration. As a result of their developmentprocess, MNEs end up being large and diversified compared to non-MNEs (Kay,1997, p. 167), which indirectly implies the low rating of MNEs in terms ofresource linkages. The increased concentration of firms that multinationalizedoes not mean that multinationalization offers increased oligopolistic power,but rather that the firm is running out of room to expand.

6. ‘It is when the firm is loaded with a high level of potential research econo-mies that the MNE is more likely to appear as a substitute option as [export]opportunities are exhausted’ (Kay, 1997, p. 167).

7. It is important to note that we are not offering a comprehensive survey ofall theories of the MNE. Cantwell (1991) also signals the existence ofapproaches based on the analysis of competitive interaction in internationalindustries and of approaches that deal with the role of financial factors inFDI, but we choose not to present them in the context of this book as theyare not especially relevant.

8. For more information on these particular circumstances, see Cantwell (1991,p. 30).

9. As Cowling and Sugden note, ‘a firm will manipulate and shape its environ-ment to ensure that the environment is not competitive’ (Cowling andSugden, 1994, p. 42).

10. Or in the terms of Ietto-Gillies (2002, p. 133), ‘the internalization theory ofthe multinational enterprise considers decisions to internationalize as partand parcel of decision to internalize’.

11. Faced with such difficulties, and considering the risks that simple and there-fore incomplete contingent claims contracts pose, the firm may decide tobypass the market and resort to hierarchal modes of organization’ (William-son, 1987, p. 75).

12. Teece finds that ‘when continuous exchange of proprietary know-how betweentransferor and transferee is needed, and where the end use application of know-how is idiosyncratic (not accomplished previously by the transferor), morethan a classical market contracting structure is required’ (Teece, 1996, p. 260).

13. Throughout the book, we use Porter’s definition of a cluster: ‘a critical massof companies in a particular location (a country, state, region or even a city)’(Porter, 1998, p. 1).

186 Notes

14. Yet, even demand-side theories are already determined by supply-sideconditions: demand-side deficiencies are themselves the outcome of supply-side competition leading to monopolization. While demand-side deficienciescan be a direct motive for multinationalization, they are indirectly a productof market structure conditions and supply-side developments. Becausedemand-side explanations already imply an underlying supply-side process,and because they do not explain the choice of multinationalization relativeto other forms of growth, we rely primarily on supply-side explanations ofmultinationalization.

15. In fact, some have argued that it is not organization in itself that is a com-petitive advantage of the DCMNE, but the knowledge which organizationallows to circulate: ‘knowledge, including market knowledge is increasinglybecoming the key source of competitive advantage’ (Bettis and Hitt, 1995,quoted in Cantwell and Mudambi, 2001). This has required MNEs to leanever more heavily on their subsidiary network to continually maintain theirknowledge advantage (Cantwell and Mudambi, 2001, p. 6).

16. ‘On the one hand, the decentralized unit does not need to invest in thewhole process of design and development of innovation in order to satisfylocal demands. It can skip part of this process by attaining useful knowledgefrom the network, and using this for local applications. On the other hand,the generation and accumulation of context-specific, applications-orientedknowledge that is necessary to mould technology according to local needscan be at least partially generalized, circulated and reutilized on differentsites of the transnational corporation’ (Zanfei, 2000, p. 525).

17. As mentioned by Cantwell and Mudambi (2001, p. 7), ‘the loosening of thetraditional hierarchical structure and increased subsidiary role has madeMNEs more like political coalitions and less like military formations’. Indeed,‘higher local spillovers through local integration may be a short-term benefitif they come at the expense of the subsidiary’s engagement with the rest ofthe intra-firm network’ (p. 17).

18. Unfortunately, there is a high likelihood that ‘subsidiaries embedded inleading technological centres of competence may be sources of potentialcompetitive advantage that remains unrealized due to the internal politicalstructure of the MNE’ (Cantwell and Mudambi, 2001, p. 8).

19. See also Pearce (1990), Warrant (1991) and Fors (1997). 20. See also Castellani and Zanfei (1998). 21. According to Hymer (1960, pp. 48–51), the choice between licensing and

MNE is determined by the degree of imperfection in the market for thefirm’s advantage: ‘impurities in the market are not the only kind of imper-fections which are relevant here. In a world of uncertainty there may bea conflict of evaluation which makes co-operation difficult . . . Aside fromcausing a conflict of evaluation, uncertainty makes it difficult for buyersand sellers to achieve a satisfactory contract. If a contract provides rigidprovisions, changing conditions will hurt one party and benefit theother . . . A reluctance to license may also arise from the inherent danger oflosing the advantage. The licensee may discover a process which substitutesfor the advantage.’

Regarding the choice between franchising and MNE, Hennart (1991)mentions that the efficiency of franchising depends on the extent to which

Notes 187

trademarks are protected from counterfeiting. If consumers are mobile, thetrademark becomes a public good to all those who are using it, in the sensethat the quality of goods and services supplied by anyone using the trade-mark will affect all those who share in the trademark. A trademark user canmaximize his income by reducing the quality of the good he produces andsells under the trademark. Consequently, franchisers write contracts thatcarefully stipulate minimum quality standards. Another way of reducinga franchiser’s incentive to free-ride is to transform him into an employee.As an employee, the trademark user is paid a straight salary and gains noth-ing from reducing quality. Hence, the choice between franchising independ-ent owners and establishing company-owned outlets will depend on thecomparison of two types of cost: that of monitoring the work effort ofemployees versus that of specifying and enforcing a minimum level of qualityby contract.

22. ‘The concept of the investment development cycle is therefore a frameworkwithin which [the product life cycle model and the localised technologicalchange model] can be analysed’ (Tolentino, 1993, p. 86).

23. That is one prerequisite of localized technological change theory: ‘ThirdWorld firms need to gain access to foreign technology and engage in com-plementary activities with MNEs from developed countries in developingtheir technology’ (Tolentino, 1993, p. 80).

24. That is, an ability to exploit existing knowledge from the environment. 25. A firm’s technological capability consists of its investment, production,

linkage capabilities, skills needed to transmit information, skills and tech-nology available to component or raw material suppliers and firms.

26. National technological capability consists of ‘the complex of skills, experience,and effort that enables a country’s enterprises to efficiently buy, use, adapt,improve and create technologies’ (Lall, 2000).

27. As a result, the ownership advantages of 3WMNEs vary by activity and homecountry, as they are determined by levels of education, degree of exportorientation and sophistication in science and technology infrastructure, andthe extent to which governments intervene to develop indigenous technologyand deepen industrial structure.

28. See www.pensionreform.org/libertad/multinacionales.html 29. Incidentally, this process is the opposite of the one we are examining in this

book: we want to investigate how home countries can increase their com-petitiveness by drawing on that of their MNEs, which is the reverse of whathappened in East Asia, where MNEs benefited from the competitivenessimprovements of their home countries.

30. ‘In the context of this process of strategy redefinition, a significant part ofthe GEs in these countries have initiated or deepened their productiveinternationalization trajectory via FDI’ (Chudnovsky and Lopez, 1999,p. 43).

31. This was for instance the case of Cofap (Cia. Fabricadora de Pecas), a Bra-zilian car-parts firm and the largest in Latin America, which was acquiredby Magneti Marelli, the parts division of Fiat, the Italian car-maker, in1997.

32. This was the case of Artex for instance, which had to close its US subsidiary. 33. www.economist.com/countries/Chile/index.cfm.

188 Notes

3 Fieldwork on Brazilian and Chilean Multinational Enterprises 1. We select our cases partly on the basis of their competitiveness, so that in

Chapter 5 we can identify the sources of this competitiveness. 2. Chapter 5 is dedicated exclusively to a survey of the competitive advantages

of case-study firms; however, we briefly summarize here the nature of eachfirm’s advantage in order to present a preliminary profile of the Brazilian andChilean MNE at the end of this chapter.

3. However, one of the targets Weg sets for itself is specifically Mercosur-related: ‘tobecome a reference company in electronic systems and transformers within theMercosur’ (Weg Group Document, 1999, p. 7).

4. ‘American Depositary Receipts are negotiable certificates which are issued byUS banks (“depositary banks”). They represent shares of a foreign firm. ADRsfacilitate the access of foreign issuers to the US stock market, given that theyare freely traded in the US, valued in dollars, and their dividends are paid indollars. ADR issues have to be previously approved by the Securities andExchange Commission, which is the entity which regulates the US stockmarket’ (Calderon and Griffith-Jones, 1995, p. 52). In May 1993, Madecoissued ADRs with great success, which allowed it to finance its investmentsin Argentina and Peru.

5. Exceptions to this rule were the following. Gerdau did not support Kay’s (1997)hypothesis of a progression from diversification to multinationalization throughexports, as it had explored various modes of expansion at once. Nor did itsupport Richardson’s (1990) theory that firms tend to avoid subcontractingbecause they are contract-averse; indeed, Gerdau was deeply involved insubcontracting with its suppliers. Finally, neither Gerdau nor Lucchettisupported Pitelis’ (1999) statement that a firm’s multinationalization strategyis determined by that of the conglomerate it belongs to: both Gerdau andLucchetti’s multinationalization strategies were different from those of otherfirms within their conglomerates.

4 Competitiveness of Multinational Enterprises 1. We use the definition of technology of Nelson (1996, pp. 157–8), who sees

technology purely as knowledge. He notes that there is both a private anda public aspect to technological knowledge. ‘Technology itself is a hybrid termwith two roots – one “technique”, referring to a way of doing something, andthe other “logy”, referring to the theory. The practice of making public the logywhile maintaining property rights on techniques makes considerable sensefrom a social point of view’ (Nelson, 1996, pp. 157–8).

2. Organizational changes which enable a system to take full advantage ofa technology.

3. Although we argue that organization is a key determinant of firm competi-tiveness, we consider that the traditional indicators described above are stillgood proxies of its measure, and that there is no need to find new measuresof competitiveness based on an organizational focus; this is why we assessMNE competitiveness based on sales growth and profit/sales ratios inChapter 5.

Notes 189

4. As the Japanese have demonstrated with their incremental innovationprocesses (Lazonick and West, 1998).

5. As Freeman writes, ‘[innovation does not merely consist] of matching orassociating ideas in the original first flash; it is far more a continuous crea-tive dialogue during the whole of the experimental development work andintroduction of the new product or process’ (Freeman, 1982, p. 112).

6. For some industries, organizational integration is more important to com-petitiveness than for others, yet it is always an important determinant ofdifferences among companies in the same industry.

7. Penrose is very useful in explaining the difference between the two. ‘Penrosewould often remark, “But what is an industry?. . .” The concept of an industrialsector of homogeneous firms producing homogeneous products, a necessaryassumption of equilibrium theory, denies a role for entrepreneurship. But italso limits understandings of the processes of enterprise differentiation andeconomic integration that are central to understanding economic progressin our times’ (Best and Garnsey, 1999, p. 192). This means that, throughaggregation, the concept of industry masks the specific capabilities of eachfirm in the industry. Aggregation does not mean that inter-firm relations donot exist, but they are best seen as a meeting of sets of specific capabilities.

8. According to Zanfei (2000, p. 520), ‘[dynamic forces such as] technicalchange and the globalization of markets are the main determinants of thealleged evolution in the organization of international activities [towards theformation of networks]’.

9. ‘Considering local contexts more as sources of competencies and of techno-logical opportunities, and less as constraints on the action of MNEs, marksa fundamental departure from the conventional approach to internationalbusiness’ (Zanfei, 2000, p. 521).

10. ‘The main idea is that the foundations of competitive advantages no longerreside in any one country, but in many. New ideas and products may comeup in many different countries and later be exploited on a global scale’(Hedlund, 1986, p. 21).

11. ‘Value added has a precise, standard meaning in national income accounting:the value added of a firm is the dollar value of its sales, minus the dollarvalue of the inputs it purchases from other firms, and as such it is easilymeasured’ (Krugman, 1994, p. 10, footnote 4).

12. As mentioned by Cantwell and Mudambi (2001, p. 6), ‘in some cases, highlytacit knowledge is sourced from foreign subsidiaries and this tends to bedriven either by particularly strong and unique local competencies or by partic-ularly strong company-specific network capabilities’.

13. ‘To be able to compete in a country in the future may require, at a cost,learning how to manage operations and sales in a new environment. . . . Inits more advanced evolution, this process alters the global knowledge of thefirm and may result in its transformation towards a network of subsidiariescharacterized by the cross-border transfer of learning’ (Kogut and Zander,1993, p. 640).

14. A secondary conclusion is the following. The specific ability of the MNE to‘articulate’ tacit knowledge implies that if foreign affiliates are able to absorbtacit knowledge, the multinational organization will be able to codify it inorder to exploit it within the firm. As a consequence of this ‘encoding’ activ-

190 Notes

ity, knowledge can be more easily imitated by other firms in the homecountry once it has been transferred back to the parent company.

15. This takes place through ‘the articulation of the effective performance of thefull range of basic scientific research necessary to cover all the disciplinesthat are likely to contribute to the underlying progress of a technological basethat can support commercial evolution in any plausibly relevant direction’(Papanastassiou and Pearce, 1999, p. 93).

16. ‘The objectives of a global innovation strategy imply a two-phased approach.The initial phase targets the first objective [described above], and thus seeksto assemble a programme of precompetitive research that enriches group scopein logical directions. This involves a centrally-coordinated, but internationally-dispersed, network of precompetitive research-oriented laboratories, whichseek to access all appropriate areas of specialized inputs’ (Papanastassiou andPearce, 1999, p. 94).

17. Thus, ‘the new product reaches global markets through a series of more-or-lesssimultaneous differentiated innovations that result in a set of product variants,each of which meets the detailed needs and conditions of a separate national orregional market’ (Papanastassiou and Pearce, 1996, p. 40).

5 Case-Study Evidence on Multinational Enterprise Competitiveness

1. Its net income to shareholder equity ratio equalled 0.11 in 1998. 2. Its net income to shareholder equity ratio equalled 0.24 in 1998. 3. The most well-known total quality management technique is the zero defects

technique, whereby defects are detected and eliminated as the product isbeing built instead of permitting defects to be built into the product.

4. While quality management was conducted independently in each productionactivity until last year, it is now run homogeneously across the firm. Asa result of this change, Gerdau received the National Quality Award fromthe National Quality Award Foundation. This award is based on the samecriteria as the Malcolm Baldrige Award in the US. The Baldrige prize of excel-lency is awarded by the National Institute of Standards and Technology ofthe US Department of Commerce. This prize promotes total qualitymanagement as an increasingly important approach for improving the com-petitiveness of companies. It is awarded to firms which record an outstand-ing performance in the management of seven different areas: leadership,customer service, strategy, training and analysis, human resources, processmanagement (ISO 9000 quality certification), and profits. These seven areasare administered by a unique management system. Indeed, the Baldrigeprize brings together concerns as varied as ISO 9000 and quality circlesbecause they all contribute to help the firm meet the objective of optimiz-ing the production process.

5. Quality control circles are small groups of departmental work leaders and lineoperators who have volunteered to spend time outside their regular hours tohelp solve departmental quality problems.

6. The Five Senses Cells is a methodology for organizing, cleaning, developingand sustaining a productive work environment, which is also instrumentalin building employee morale.

Notes 191

7. For us, less than seven subsidiaries represents low multinationalization, sevenor eight subsidiaries average multinationalization, at least nine subsidiarieshigh multinationalization. A more subtle categorization can be based on thepercentage of direct linkages abroad in relation to the total number of directlinkages.

8. A hypothesis which could explain the success of Weg’s asset-seeking strategyhas to do with the ethnic/cultural makeup of the population of Brazilianmanagers from Santa Catarina: they are mostly of German descent (as thename Weg – that is, ‘path’ in German – indicates). Therefore, the connectionsbetween Santa Catarina and German managers are quite strong.

9. While commenting on these strategic alliances with both firms and publicinstitutions, the general manager of Lucchetti specified that he preferred toengage in agreements with firms rather than public institutions. He foundthat the administrative regulations of public institutions did not allow firmsto be flexible. He thought the public system was too regulated to be of anyuse to his firm.

10. The only competitive seed in world markets is called canola. It is Canadianand contains 45 per cent oil and 55 per cent husk.

6 Innovation Policy and the Competitiveness of Less Developed Countries

1. Our definition of innovation policy is very broad; we are not just concernedwith policies stimulating the creation and diffusion of technological inno-vations, but also with that of managerial innovations, including organizationalinnovations.

2. Krugman was challenged on this by Thurow (1994) and Prestowitz (1994), butthe role of trade remains a controversial issue. A more balanced viewpointon this theme from new trade theory is Grossman and Helpman’s (1991).

3. Yet the Lucas, Romer, Best, Porter and Pitelis models still present one limita-tion: they were developed in a DC context, which means that they may notbe entirely applicable to an LDC context. We try to remedy this problemby covering an LDC-specific literature on innovation policy for nationalcompetitiveness in section 6.7.

4. Human capital can be defined as educated, specialized labour, which is tech-nology-literate.

5. Similarly, according to Best (2001, p. 4), ‘productivity might increase fromincreasing returns to scale, whether directly within the production functionor through the application of produced R&D or through the production ofhuman capital’.

6. The residual is the part of growth which cannot be explained by growth oflabour and capital inputs.

7. Besides ignoring the environment of innovation, endogenous growth theoryalso fails to address innovation itself. The main feature of endogenous growththeory is that it places knowledge at the centre of economic activity. Despitethis significant contribution, endogenous growth theory ironically emphasizesits own limitations, for the immediate consequence of the shift in economicparadigm it calls for is that the creation and diffusion of knowledge takeplace within the firm. This means that organizational perspectives are

192 Notes

important. Knowledge is a firm-specific factor, and it will evolve differentlyin various environments. Endogenous growth theory adds new factors –that is, human resources and innovation – to the growth equation, but itsimply endogenizes them. One must look at the dynamics of these factorsper se, and how they are processed within the firm.

8. See definition in note 13 of Chapter 2. 9. It can be defined as ‘enterprise organization for processes of capability

development’ (Best, 2001, p. 11). 10. A production system creates a particular set of production capabilities which

are ‘an expression of an underlying but unifying principle of productionand organization’ (Best, 2001, p. 12).

11. Here, the focus is on ‘the supply of engineering and scientific personnelrequired to staff rapidly growing firms’ (Best, 2001, p. 13).

12. Additional factors are macroeconomic policy and institutional framework,whose inclusion implies that the Wheel is a model of macro competitiveness.While macroeconomic policy and institutional framework are macro elementsin the Wheel, the majority of factors that are endogenous to the modelcorrespond to Penrose’s ‘bundle of resources’: indeed, human resources,technology and innovation are some of the firm-specific resources thatPenrose focuses on. While Pitelis’ Wheel remains a model of macro com-petitiveness, it presents the sources of firm competitiveness as the mainsources of macro competitiveness.

13. For us, ‘technology and innovation’ includes organizational innovation; wethereby avoid the oversimplification of the economic theories of technologicalinnovation mentioned above.

14. It will become clear that the enlarged innovation policy we propose alsoaddresses a number of non-technological issues through its linkages withindustrial policy, via infrastructure, related and supporting industries, andfirm strategy, structure and rivalry.

15. Indeed, development requires a coherent set of different policies, allinformed by the continuity of one focused strategy oriented towards thedevelopment goal. Ideally, one should be able to see the common thread ofdevelopment policy cutting across industrial, competition, and innovationpolicies. Of course, this implies previous agreement on the essence of thedevelopment goal. We argue that the acquisition of competitiveness couldbe a good proxy of the development goal.

16. This also holds in the case of 3WMNEs and their linkages with their homecountries: the strong embeddedness of 3WMNEs in their home countries(see Chapter 2) may allow for the realization of spillover potential from theparent company to other firms (for instance SMEs) in the home country,hence increasing national competitiveness.

17. ‘Many of the large American and Japanese companies invest continuously inshop-floor skills. In fact, the “invisible college” of company skill formationis considerable in Penang’ (Best, 1995 p. 25). Best mentions the case ofHitachi’s use of small group activity in Penang which has facilitated the‘transfer’ of skills to the local industry.

18. For an application of these arguments to particular cases, see http://www1.oecd.org/dev/ENGLISH/NEW/documents/Goldstein-HighTech-Ind.pdf.

Notes 193

19. ‘High-technology industries fund a disproportionate amount of industrialR&D, and thus generate spillover effects, and they provide quasi-rents orhigher returns to labor than those available in most other economic activities’(d’Andrea Tyson, 1992, p. 39).

20. ‘Government can hasten or raise the odds of gaining competitive advantagebut lacks the power to create advantage itself’ (Porter, 1990, p. 128).

21. National systems of innovation are networks of agents and sets of policiesand institutions that affect the introduction of new technology to the eco-nomy, sets of public and private institutions and organizations that fund andperform R&D, translate results of such activities into commercial innova-tions, and affect the diffusion of technologies within the economy.

22. In other words, ‘the dynamics of technological change are considerablyenhanced by interaction between users and producers at an early stage ofthe development process’ (Schmitz and Cassiolato, 1992, p. 281).

23. ‘The challenge of shaping competitive forces to promote a rapid and widediffusion of new technologies is central to strategic industrial policy-making’(Best, 1995, p. 28).

24. They mention that ‘adoption-oriented or demand innovation policy includesinstruments from industrial policy such as financial subsidies, provision ofinformation via extension and demonstrations, conditions for foreign tech-nology transfer, technical standards, and regulation of intellectual propertyrights’ (Bastos and Cooper, 1995, p. 76).

25. Foray and Freeman also call for a policy of networks, based on the currentproduction system: ‘in an information-intensive production system with amultiplicity of micro markets, . . . the only possible access to . . . diversityis through cooperation with other producers’ (Foray and Freeman, 1993,p. 72). With this new model of innovation, the firm can access the know-how of firms in connected areas, which increases the value of its ownhuman capital.

26. According to Carlos Bonzoni, director of the Rio Grande do Sul RegionalBank of Development (Bonzoni interview, 1999), ‘the National Bank forEconomic and Social Development is the most important source of financefor firms. It finances investment, and capital associated with investment, aswell as risk capital. The only source of long-term capital in Brazil is theNational Bank for Economic and Social Development. It manages theBrazilian system of compulsory savings, and has 40 years of experience.’

27. The BRL, also known as the real, is the Brazilian currency. BRL1 = $0.41 onMonday 18 February 2002.

28. UNCTAD defines an industrial district as ‘regional small-firm industrial clus-ters within a specific sector; process-specialized and interlinked by subcon-tracts; located in close proximity to one another within a well-definedgeographical space and bound by various sets of common social categoriesand values’ (UNCTAD, 1994, p. 191).

29. An incubator is defined as ‘the business conducted by a teaching andresearch institution or an entity associated to a university, or a non-profitorganization, destined to help new firms. Clear criteria for entry, permanenceand exit of firms are applied and there is a limit of permanence for thefirms, which is of five years’ (Firjan, 1998, p. 63).

194 Notes

30. For a full coverage of all the competitiveness indicators used by the BrazilianMinistry of Science and Technology, including effort, efficiency and train-ing indicators, see mct.gov.br/publi/Compet/ntt-ind.pdf.

31. www.innovacion.cl

7 Fieldwork on Innovation Policy 1. We were told that in Chile ‘emergency rules over importance: health and

education are emergencies, technology is only important’ (Badilla Ohlbauminterview, 1999).

2. For one of its consultants, the most innovative sectors in Chile were tele-communications, mining, genetics, fisheries, biotechnology, while accordingto the Chilean Programme of Technological Innovation, these were forestryfor pine and eucalyptus, microelectronics, and fruit.

3. However, the Incubator of Technological Firms constitutes an exception withrespect to the profile of its firms, in that the entrepreneurs that apply toparticipate in the incubator already have a high degree of scientific andtechnological knowledge, and come from scientific university departments,and hence need commercialization rather than innovation opportunities.

4. This programme was established to provide a basic information infrastructurefor EU competitiveness, as a key aspect in a common European R&D policy.

5. Although, whether policy should interfere with processes internal to thefirm is not straightforward. Therefore, our prescriptions regarding the policystimulation of internal networks are only indicative.

6. The new Automotive Regime primarily affected the access of developedcountry investors to the Mercosur market (Mortimore, 1998). It allowedauto assemblers to import more parts and components to modernize theirvehicles, but only if they were able to do so without aggravating the balance-of-payments situation. They had to compensate imports with exports. Atthe same time, important federal incentives for foreign investors weredefined (sharply reduced tariffs on imported capital goods, price stability,accelerated depreciation for capital equipment, tax reductions for auto partsfirms that started to export). Considerable incentives were given to foreigninvestors by state governments in North and Northeastern Brazil to influencethe location of the new plants of auto MNEs. Domestic prices were reducedto promote sales. Thus, producers received strong incentives to invest in therationalization and modernization of their plants and in the developmentof exports, to allow for more imported vehicles, components and parts.

7. There has been a huge decrease in budget expenditures allocated to scienceand technology following structural adjustment, stabilization, and liberal-ization policies in the region. Chile is the prime example of the Latin Americancountry where policy-makers consider that technology diffusion is best leftto the market, and where externalities are ignored; therefore, innovationpolicy is not deemed to be justified.

8. Indeed, technology is at least as important as organizational innovations forthe success of the PDP (Eduardo Silva interview, 1999).

9. That is, it has rejected the option of vertical integration/hierarchy, wherebythe firm produces the required input in-house and maintains control overboth the sourcing unit and the buying unit. Vertical integration is preferredwhen inputs must be highly customized because the buyer reduces the

Notes 195

transaction costs associated with bargaining over the profits generated ina customized exchange.

10. ‘Dedicated assets are investments in factories, equipment, processes, andpeople that are customized to a particular customer or supplier. Theseinvestments improve the productivity of the network and the speed withwhich the network can coordinate in developing unique products’ (Dyer,2000, p. 37).

11. In this section, we focus on evidence on the Brazilian PDP. However, therealso exists a PDP in Chile. In Chile, the PDP is only a three-year-old pilotprogramme. Over the years, the programme has slightly changed. When theprogramme was set up, all firms were from the agroindustrial sector. In2000, 700 million pesos went to the agroindustry, and 200 million wereallocated to manufacturing. While only 18 large firms participated in theprogramme in 1999, it now involves 16 large firms with 1,688 SMEs. Onlytwo firms have asked for contract renewal. Indeed, the relationship withsuppliers often perdures spontaneously after the first year of the programme,without the need for a policy push. In Chile, the PDP functions throughagents, that is, non-profit organizations, or sectoral associations. The PDPfunds are sent to them. The agents structure the plan of the programme andpresent it to the Corporation for Productive Development. The SMEs maketheir interest in the PDP known to the agents but at the same time theagents try to stimulate the large firms. There is no direct relationship betweenthe SMEs and the large firms; they both have to go through the agents.

12. In the Brazilian programme, technology and product innovation are not themain foci. The programme mainly concerns management innovation, whichaccording to many is the urgent problem faced by Brazilian firms.

13. Moreover, on the supply side, ‘[large firms] are more willing to transfer know-ledge about management than about technology’ (UNCTAD, 2000a, p. 8).

14. Brazilian and Chilean MNEs are mostly from the manufacturing or servicesector, except for the forestry sector. These sectors are not covered by PDPs.But recently, in Chile, given that the manufacturing sector has beenincluded in the PDP since the year 2000, MNEs can enter the PDP, if theydecide they are unhappy with their existing suppliers. Nonetheless, lookingthrough the list of large firms involved in the Chilean PDP, we only foundone Chilean MNE: Costa Carozzi, which is the most important Chileanpasta producer, and has subsidiaries in Argentina and Peru. Costa Carozzi isthe embodiment of the Chilean MNE, which is involved in a PDP in its homecountry and hence is a player in its NSI, but it is an exception. Traditionally,MNEs have not been incorporated into national innovation policy initiatives.The public sector’s financial contribution to MNEs through most pro-grammes is too low to be of any benefit to MNEs, hence their lack of interestin policy programmes so far.

15. Interview with Mr. Klauch, export agent, Novo Hamburgo, 1999. 16. This is emphasized by Chudnovsky and Lopez: ‘to overcome the low tech-

nological intensity of Latin American firms, as firms enter a sustainablegrowth path, they can generate a network of linkages forwards and backwardsin production chains, advance in the modernization of their national sys-tems of innovation and create incentives for investment in brain-intensiveactivities, all of which could end up in the obtention of proprietary assets

196 Notes

that would be more solid than the ones the firms presently possess’ (Chud-novsky and Lopez, 1999, p. 62).

8 Summary, Conclusions, Policy 1. Although some of the case-study firms had developed external networks with

their host countries, we chose to ignore these networks. We preferred tofocus on the case of spillovers on home country firms through external net-works, as the literature specified that they were more likely to exist thanspillovers on host country firms.

2. In fact, even the very nature of the organizational characteristics of 3WMNEsis itself under-researched, with one exception: the only survey of 3WMNEorganizational characteristics is Chen and Chen (1998). However, this studyfocuses on Taiwanese MNEs, and not Latin American ones.

197

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210

Index

asset specificity, 16

Best, M., 101–4, 109–11, 113, 115, 117–18

Brazil competitiveness, 121–2 innovation policy, 122–5, 129–37 multinational enterprises, 40–5,

48–53

Cantwell, J., 15–20, 29–30, 64–6, 185–6, 189

Chile competitiveness, 121–2 innovation policy, 125–7, 129–37 multinational enterprises, 40–5,

53–6 Chudnovsky, D., 40–8, 59–60,

124–5, 156 clusters, 18–25, 52, 74, 103–6,

185–93 competition, 15, 34, 103–6,

170–2, 184–6 New Competition, 103–4, 113,

115, 119, 128 policy, 117–18

competitive advantages Brazilian and Chilean

multinationals, 50, 53–6 developed country

multinationals, 20–4 Diamond of Competitive

Advantage, 104–5, 113 New Competitive Advantage,

103–4, 113, 117 Third World multinationals, 34–6

competitivenessof Brazil and Chile, 121–2 of Brazilian and Chilean

multinationals, 81–93 indicators, 63–4, 80, 98–9 of multinationals, 20–26 of nations, 98–106

coordination, 11–12, 39, 65, 76, 142–3

core competencies, 71, 137, 144 Cowling, K., 12, 14, 16–17

Dunning, J.H., 14, 36–7, 41–3, 71, 97

investment development cycle, 30–3

ownership, location, internalization (OLI) paradigm, 17–19, 20

endogenous growth theory, 100–3 external networks, 4, 62, 70–3,

78–80, 88–92 in innovation policy, 138–40, 146 compare multinational

enterprise competitiveness, 22–4, 153–7

flexibility, 54, 57–61, 145, 151, 184 foreign direct investment (FDI)

motives Brazilian and Chilean

multinationals, 49–50, 52–6 developed country

multinationals, 9–20 Third World multinationals, 33–4

form of entry Brazilian and Chilean

multinationals, 48–9, 52, 54–5, 59

developed country multinationals, 28–9

Third World multinationals, 37–8 franchising, 9, 28, 186 Freeman, C., 65, 115, 189, 193

GDP, see gross domestic product globalization, definition of, 299 greenfield investment, 28, 48,

55–6, 61, 162

Index 211

gross domestic product (GDP), 45, 49, 121, 162

growth of the firm, 9–11, 14, 56–7, 185

Helpman, E., 119, 191 hierarchy, 67, 194 home countries, 22–3, 33–8,

70–3, 155–7, 195–6 host countries

Brazilian and Chilean multinationals, 48, 51–5, 57, 59–60

developed country multinationals, 24–8

Third World multinationals, 36–7

Hymer’s theory, 14–15, 35

Ietto-Gillies, G., 11, 15, 20, 24–5, 185

industrial policy, 138–9, 192–3

compare innovation policy, 116–18

innovation, 62–70, 75–6 policy, 106–27, 129–42 compare multinationalization, 95

intangible assets, 18, 20, 59 integration

in organizations, 12, 40–1, 62–3, 66–70, 73–4

of regions, 41, 43 inter-firm relations, 189 internal networks, 62, 72–3,

153–5 v. Brazilian and Chilean

innovation policy, 138–9

of Brazilian and Chilean multinationals, 81–90

of multinationals, 22 internalization, advantages, 2,

13–14, 16–19, 31–3 internationalization, 30, 43,

51–5, 73–4, 159 investment development cycle,

see Dunning, J.H. investment flows, 24, 32

Japan innovation policy, 117–18 management techniques, 6,

21, 63–70 joint ventures, 39, 43, 109

Kay, N.M., 12–14, 58, 62, 64, 185–8

knowledge in the firm, 17 in the multinational firm, 19,

21–4, 35–6, 82–4, 137–40

Kozul-Wright, R., 25 Krugman, P., theory of innovation

policy, 99, 184, 191

Lall, S., 30, 35–7, 59–60, 107–9, 155learning, 35, 65–6, 106–9,

117–19, 125 liberalization, 18, 32, 59, 176 licensing, 9, 18–19, 28 locational advantages, 17–19,

31–2, 51–2, 55–6, 171–2 Lopez, A., 40–8, 59–60, 136–9,

150–8

M&As, see mergers and acquisitions

management transfer, 140–1, 146–50

evidence of, 142–5 mergers and acquisitions (M&As),

28–9, 37–8 MNE, see multinational enterprise multinational enterprise (MNE)

theory of the developed country, 1, 8, 14–20, 24

theory of the Third World, 29–33

compare supplier networks, 145–50, 154

multinationalization characteristics of, 58 degree of, 96 fieldwork conclusions on, 57 compare innovation, 95

Narula, R., 22–3, 72

212 Index

organization, 62–70 of multinationals, 1, 70–3, 76

ownership, location, internalization (OLI) paradigm, see Dunning, J.H.

ownership advantages, 2, 14, 17–19, 157

in investment development cycle, 31–3

of Third World multinationals, 33–7, 59, 173–4, 187

Papanastassiou, M., 21–2, 75, 86, 190

Pearce, R., 21–2, 75, 86, 190 Penrose, E.T., 9–14, 57–60, 64–6,

151, 189–92 Pitelis, C.N., 12–13, 18–20,

99–100, 105–6, 191–2 policy, see innovation privatization, 28, 41, 44 product

new, 172 quality, 162–5, 167–9, 171–3,

175–6, 181–3 productivity

v. competitiveness, 64–5, 67, 73, 76, 81–2

of the firm, 43, 51–4, 171, 174 of the nation, 99–104, 107,

111–12, 114 paradox, 102

profit, 14–15, 54–5, 162, 169, 174–7v. innovation, 64–6 of multinationals, 79–80 sales ratio, 46, 63, 188 turnover ratio, 63

R&D, see research and developmentresearch and development (R&D),

14, 63–70, 133–6 decentralization of, 21–2, 72–6 of Third World multinationals, 30

resource-based approach, 9–14, 57 Richardson, G.B., 11, 57

sales, 1, 46, 63–8, 167–70, 174–5 compare profit, 86, 90, 108,

123, 188–9

services, Third World multinationals, 39

small and medium enterprises, 109–10, 135–7, 143–4, 146–8, 181–2

Solow, R., 100–3 specialization, 12–18, 88–92,

119, 142–4, 175 states, 185 strategy, 40–4, 50–1, 75–6,

153–4, 190–2 of innovation, 67–70

subcontracting, 19, 143–4, 146, 148, 178

by multinationals, 146 v. supplier networks, 141–2

subsidiaries, 21–2, 47, 73–6, 153–4, 189–91

Sugden, R., 12, 184–5 bargaining power, 14–16

supplier networks, 1, 4, 131, 139, 154–7

of Brazilian and Chilean multinationals, 149–50, 154

in Brazilian innovation policy, 140–5, 183

of multinationals, 145–9

technology, 1, 65, 67–73, 75 institutes, 122–3, 125–7,

129–37 management, 103 transfer, 140–5, 147–9

transaction costs, 11, 13, 16–17, 148, 195

UNCTAD, see United Nations Conference on Trade and Development

United Nations Conference on Trade and Development (UNCTAD), 28–9, 36–7, 109–10, 146, 193–5

Williamson, O.E., 14, 16–17 World Bank, 98, 121–2

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