Exploring State-anchored District:The Case of Iron and Steel Industry in Ciudad

Guayana, Venezuela

A Research Paper presented by:

Luis Enrique Vargas Osorio(Venezuela)

in partial fulfillment of the requirements for obtaining the degree of

MASTERS OF ARTS IN DEVELOPMENT STUDIES

Specialization:Local Development Strategies

(LDS)

Members of the examining committee:

Dr. Peter Knorringa (Supervisor)Dr. Bert Helmsing (Second Reader)

The Hague, The NetherlandsNovember, 2011

Disclaimer:This document represents part of the author’s study programme while at the Institute of Social Studies. The views stated therein are those of the author and not necessarily those of the Institute.

Inquiries:Postal address:Institute of Social StudiesP.O. Box 297762502 LT The HagueThe Netherlands

Location:Kortenaerkade 122518 AX The HagueThe Netherlands

Telephone: +31 70 426 0460Fax: +31 70 426 0799

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Acknowledgements

I would like to thank my Supervisor, Dr Peter Knorringa for giving me helpful advice, guidance, comments and inputs as well as for his patience. I would like to thank my Second Reader, Dr Bert Helmsing for his valuable comments and inputs.

I am grateful to all LDS staff for their inputs and support; and to my classmates for their comments and advice.

I am grateful to MIBAM staff Mr Francisco Bosque and CVG staff Mr Luis Piña for providing me useful information and their help during my fieldwork. My special thanks go to Firms’ staff and Municipality of Caroní staff with co-operation makes it possible to undertake this research.

I am grateful to Banco Central de Venezuela for giving me support to undertake this academic endeavour.

Last but not the least, I am grateful to my wife Orleny and my daughters María José and Mariana for their support and understanding during my studies.

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Contents

List of Tables viList of Figures viList of Acronyms viiAbstract viii

Chapter 1 Introduction 11.1 Background 11.2 Indication of problem area 31.3 Research objectives 41.4 Research questions 41.5 Methodology 41.6 Scope and limitations 51.7 Structure of the paper 6

Chapter 2 Conceptual and Analytical Framework 72.1 Introduction 72.2 Industrial districts and clusters 7

2.2.1 Typology of industrial districts 82.2.2 Inter-firm co-operation 92.2.3 Role of the state 102.2.4 Firm size 102.2.5 Local and non-local embeddedness 10

2.3 Ownership structure 112.4 Analytical framework 11

Chapter 3 Exploring Inter-firm Interactions 133.1 Introduction 133.2 Mining 133.3 Pelletizing 153.4 Briquetting sector 163.5 Steel-making sector 183.6 Conclusion 20

Chapter 4 Exploring State-anchored District 214.1 Introduction 214.2 Conceptualizing Ciudad Guayana’s I&S industry 214.3 Mapping out Ciudad Guayana’s I&S industry 254.4 Conclusion 29

Chapter 5 Ownership Structure and Other Factors 30

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5.1 Introduction 305.2 Changes in inter-firm interactions due to ownership

structure 305.2.1 Mining 305.2.2 Briquetting sector 325.2.3 Steel-making sector 36

5.3 Changes in inter-firm interactions due to other factors 39

5.4 Conclusion 42

Chapter 6 Conclusions 43Appendices 46References 48

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List of TablesTable 4.1 Local and non-local uses of I&S production

2011 24Table 5.1 Supply and demand of pellets in the district

(Million tonnes) 40

List of FiguresFigure 2.1 Analytical Framework 12Figure 3.1 I&S industry chain of production 2011

(Million tonnes) 14Figure 4.1 Mapping out state ownership 25Figure 4.2 Mapping out private ownership 27Figure 4.3 Mapping out state ownership and workers’

self-management 28Figure 5.1 Destiny of iron ore production in Venezuela

1968-2010 31Figure 5.2 Photo of Palua Port 32Figure 5.3 Hot briquetted iron production in the district

1991-2010 34Figure 5.4 Destiny of steel production in Venezuela

1968-2010 37Figure 5.5 SIDOR’s labour and steel production 1990-

2010 39

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List of Acronyms

BRIQVEN: Briquetera de Venezuela, SA; Venezuelan Briquette, SACASIMA: Siderúrgica del Turbio, SA - Planta Casima; Casima PlantCOMSIGUA: Complejo Siderúrgico de Guayana, CA;

Guayana Steel Complex, CACVG: Corporación Venezolana de Guayana;

Guayana’s Venezuelan CorporationFMO: CVG Ferrominera del Orinoco, CA;

Orinoco Iron-mining, CAI&S: Iron and steelMATESI: Materiales Siderúrgicos, SA; Steel Materials, SAMIBAM: Ministerio del Poder Popular para las Industrias Básicas y

Minería; Ministry of Popular Power for Basic Industry and Mining

O.IRON: Orinoco Iron, CA; Orinoco Iron, CAOPCO: Operaciones al Sur del Orinoco; Orinoco South OperationsRYP: EBS Rieles y Perfiles, CA; Rails and Structures, CASIDETUR: Siderúrgica del Turbio, SA; Turbio Steel,

SASIDOR: Siderúrgica del Orinoco Alfredo Maneiro,

CA; Orinoco Steel Alfredo Maneiro, CASIZUCA: Siderúrgica Zuliana, CA; Zulian Steel, CASNAC: EBS Siderúrgica Nacional, CA; National Steel, CATSC: EBS Tubos sin Costura, CA; Seamless Tubes, CAVENPRECAR: Venezolana de Prerreducidos Caroní, CA;

Venezuelan Prereduction Caroni, CA

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Abstract

Industrial districts and their developmental features have been of the interest of many scholars. Most of the literature refers to the traditional Marshallian or Italianate district where inter-firm negotiation with co-operation is assessed within a production system characterized by a geographical and sectorial concentration of private- small and medium enterprises (SMEs). Such production systems are less likely to observe in developing countries where can play an important role in promoting and sustaining industrial districts. This academic endeavour claims that ownership structure matters for industrial district analysis. The findings suggest that under state ownership, the state tends to induce initial competitive advantages whereas under private ownership tends to emerge voluntary co-operation.

Relevance to Development StudiesFor developing countries it is worth to explore different types of clustering initiatives. The case of Ciudad Guayana’s I&S industry in Ciudad Guayana offers a great opportunity to explore inter-firm interaction patterns in state-anchored districts which have not been sufficiently researched. Additionally, this research attempts to contribute to scholar knowledge by bringing the issue of ownership structure into the debate of industrial districts.

KeywordsState-anchored district/typology of industrial districts/ownership structure/ iron and steel industry/Ciudad Guayana/Venezuela

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Chapter 1Introduction

This thesis analyses inter-firm interactions both inside and outside the iron and steel (I&S) industrial district in Ciudad Guayana, Venezuela, and explores the question of to what extent those interactions change as a result of changes in ownership structure as well as other factors. It seeks to find out the nature of co-operation among firms under a given ownership form. Other factors are also taken into account to explore interaction patterns. The study builds on typology of industrial districts put forward by Markusen (1996).

1.1 BackgroundFirms within Ciudad Guayana’s I&S industry have experienced changes in ownership structure throughout their trajectory that are linked to broader political economy context. This trajectory can be split into three distinct stages where a distinct ownership structure was prevalent: state ownership, private ownership and state ownership with workers’ self-management.

State ownershipThe first stage of state ownership in Ciudad Guayana’s I&S industry can be framed in the context of state-led and import-substituting approach to industrialization that was on fashion in Latin America in the early 1950s. At that time had been discovered iron ore deposits in “Cerro Bolívar” and “El Pao”, located 130 kilometres from the district. That was the outset of I&S activity in Venezuela, albeit it was primarily a private-foreign controlled and export-oriented activity. But the prevalence of state ownership in Ciudad Guayana started in 1960 with the creation of Corporación Venezolana de Guayana (CVG), a state agency with the mandate of seeding a growth-pole in a virtually unpopulated zone in the Southeast of Venezuela. Ciudad Guayana started from scratch as part of a comprehensive plan designed by a small group of specialists from Massachusetts Institute of Technology (MIT), Universidad Central de Venezuela (UCV) and CVG (Interview 10b). The plan in broader sense was to channel oil revenues to industrialization projects and “deflect migration away from ‘core’ coastal population centres like Maracaibo and Caracas” (Hite 2004: 63). In 1964 was created the steel mill

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SIDOR and in 1975 with the nationalization of the iron industry the two foreign-owned mining companies were transformed into “CVG Ferrominera del Orinoco” (FMO). These two large state-owned firms have shaped the landscape of I&S in Ciudad Guayana as from the mid-1970s.

Private ownershipThe neoliberal agenda was widely adopted in Latin America. Accordingly, it was believed that privatisation was an option to promote competitiveness in I&S industry. The rationale behind this policy was to recover investment levels, reduce fiscal deficit, promote industrial development and enhance collective welfare motivated by technological changes and public sector distress (Corporación Venezolana de Guayana 1990: 4).

In 2008 SIDOR was sold to Amazonia Group, a foreign consortium with a little participation of SIVENSA, a domestic firm. According to one respondent (Interview 11b) there were two major events prior SIDOR’s privatisation. First, in the early 1990s SIDOR started a reconversion program determining that former Siemens-Martin plant would not meet the international standards in terms quality and cost, and consequently it was shut down. As a result, the production capacity of SIDOR dropped from 4.8 tons per year to 3.6 tons per year and 4000 workers were fired. From that time onwards, SIDOR would depend on a new steel mill (Plan IV) which construction had started in 1974 and finished in 1982. It can be argued that this decision concurred with the neoliberal certainties that were on fashion at that time, namely the reduction of the state size. Second, a debt burden to finance construction of Plan IV: even though there was an increase in the productivity as well as in the operative standards due to the reconversion program, it was difficult to recover the profitability of the firm because of the debt burden (Interview 11b).

As from 1998, I&S industry experienced a decade of private-foreign ownership over SIDOR. Moreover, both private-foreign and domestic ownership was also present in the district in other sector: the briquetting sector, encompassing five medium enterprises that employ between 200 and 700 workers (Briquetera de Venezuela. 2011, Complejo Siderúrgico de Guayana. 2011, Venezolana de Prerreducidos Caroní. 2011, Orinoco Iron. 2011). Private-foreign investment constructed: i) OPCO (nowadays FMO briquetting plant) which started operation in 1989 and operated by the Japanese Kobe Steel, ii) COMSIGUA

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which started operation in 1998 with a majority participation of Japanese capital with the 73% of the shares (Interview 06), and iii) POSVEN (nowadays BRIQVEN) which started operation in 1999 with a majority participation of Korean POSCO.

The other two private-owned briquetting mills were established in the locality by domestic capital. SIVENSA Group started up VENPRECAR in 1990 also with participation of CVG with 13% of the shares (Interview 07). The other briquetting plant was initiated as a lab with participation of both FMO and SIVENSA Group to develop a technology that could produce briquettes from iron ore fines that was the strength of FMO (Interview 15). The technology was approved and in 2000 started up Orinoco Iron (O.IRON) with SIVENSA Group as the major shareholder (Interview 08).

State ownership and workers’ self-managementThe process of nationalization (it is still going on) of I&S industry in Ciudad Guayana began in a context of rethinking the national economy with impacts at local level. During the last decade Venezuelan National Government has been promoted a radical change towards the so called “Socialism of 21st Century”, which industrial policy has been framed in this study under the neo-developmentalist approach since it resonates with some of its features, namely the recall of state-drive development and the importance of manufacturing-based industrialization for national and local development. Nationalization process is led by MIBAM somewhat diminishing CVG ascendancy on the district (Interview 06). OPCO was nationalized in 2007 followed by SIDOR in 2008 after a period of dispute between them and the labour unions (Interview 12). Then in 2009 were nationalized COMSIGUA, O.IRON, VENPRECAR and BRIQVEN (Interview 06, Interview 07, Interview 08, Interview 09). More recently in 2010 started the process of nationalization of SIDETUR which owned CASIMA plant in the locality. The majority of these firms are nowadays operating under the supervision of a transition committee composed of representatives of the government and the labour unions.

Nowadays, the state-owned I&S industry in Ciudad Guayana comprises de following firms which interactions are the focus of this study:

Firm Activity

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CVG Ferrominera del Orinoco, C.A. – FMO MiningSiderúrgica del Orinoco Alfredo Maneiro – SIDOR a/

Manufacture

FMO Planta de Briquetas, S.A. – FMO briquetting plant b/

Manufacture

Briquetera de Venezuela, S.A. - BRIQVEN c/

Manufacture

Complejo Siderúrgico de Guayana - COMSIGUA c/

Manufacture

Orinoco Iron, CA – O.IRON c/ Manufacture

Venezolana de Prerreducidos Caroní - VENPRECAR c/

Manufacture

Siderúrgica del Turbio, SA - Planta Casima - CASIMA d/

Manufacture

a/ Privatized in 1997 and nationalized in 2008. b/ Nationalized in 2007. c/ Nationalized in 2009. d/ Nationalized in 2010.

Additionally, I&S industry is likely to expand since three state-owned firms are now in process of construction, albeit just one in the locality. These three firms are also included in the study sample:

Firm ActivityE.B. Siderúrgica Nacional, C.A. – SNAC ManufactureE.B. Tubos sin Costuras, C.A. – TSC ManufactureE.B. de Rieles y Perfiles, C.A. – RYP Manufacture

1.2 Indication of problem areaIndustrial districts and their developmental features have been of the interest of many scholars. Most of the literature refers to the traditional Marshallian or Italianate district where inter-firm negotiation with co-operation is assessed within a production system characterized by a geographical and sectorial concentration of private- small and medium enterprises (SMEs). Such production systems are less likely to observe in developing countries, where the state and large firms can play an important role in promoting and sustaining industrial districts. Thus, it is worth to explore other strategies of clustering so as to identify inter-firm

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interaction patterns and the type of production system that is taken place. This research attempts to contribute to scholar knowledge by bringing the issue of ownership structure into the debate, albeit it is acknowledge that other factors play a role in affecting interaction patterns.

1.3 Research objectivesThe aim of this research is to explore inter-firm interactions both inside and outside Ciudad Guayana I&S industry. It explores the question of to what extent those interactions change as a result of changes in ownership structure. The study additionally searches other factors influencing inter-firm interactions and builds on typology of industrial districts proposed by Markusen (1996). Within Markusen’s framework it is also explored changes in direction of local and non-local embeddedness.

1.4 Research questionsThis research analyses the main question of to what extent inter-firm interactions change as a result of changes in ownership structure in Ciudad Guayana’s I&S industry?

Sub questions:

What are the inter-firm interactions among state-owned firms in Ciudad Guayana’s I&S industry?

How can be conceptualised and mapped out Ciudad Guayana’s I&S industry?

How does ownership structure influence inter-firm interactions in Ciudad Guayana’s I&S industry?

How do other factors influence inter-firm interactions in Ciudad Guayana’s I&S industry?

1.5 MethodologyThis thesis adopts primarily a qualitative approach to explore the research questions. Accordingly, the research strongly relies on inductive analysis based on semi-structured interviews undertaken in the locality. As stated by Markusen (1994: 478):

Evidence to test these newer theories has come increasingly from qualitative data, especially from interviews of firms and other industrial and regional actors such as trade associations, business service providers, labour unions, and economic development officials…This makes sense because a key focus in recent theory is the

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degree to which firms are “embedded” in local economies, through relationships with competitors, customers, suppliers, regional business organizations, and public sector forums.

Accordingly, a fieldwork was carried out in Ciudad Guayana, Venezuela, where I&S industrial district is located. It was targeted managers of the firms, government officials from Ministry of Basic Industries and Mining (MIBAM), the municipality of Caroní (local government) and CVG as well as representatives of workers among firms. In order to substantiate findings, both qualitative and quantitative data is examined from primary and secondary sources.

Primary DataFor data collection semi-structured interviews were conducted to gather data of the firms and in-depths interviews were implemented for other actors. It was considered to apply a questionnaire to collect standardized data. The firms identified above represented the whole stated-owned complex. Accordingly, the questionnaire was sent attached to them, but the sampling was too short that it was considered not representative to report them. This quantitative endeavour was dropped out of the analysis, albeit respondents’ comments on questionnaire were used as fruitful source of relevant data. All the interviews occurred in interviewees’ place of work from 28th July 2010 to 25th August 2010. Primary data collected was mainly qualitative although quantitative data was also gathered. In data processing, most of the qualitative data was used in its original state and coded where necessary using Atlas.ti 6.2.

The selection of key respondents was made purposively and snowballing technique was used to locate fruitful respondents. The main strategy was sending a letter to the head of the organisation asking for key resource persons at planning, procurement or personnel area. The respondents were selected by the organisation based on their knowledge and/or position in the organization. Due to time and financial limitations, a total of 16 interviews were conducted in the field that comprised 22 key respondents: 14 from I&S firms, most of them strategic planners and personnel managers. Additionally, it was selected 1 informant from MIBAM, 2 from the municipality, 1 from CVG and 4 from the workers representatives. Interviews were conducted in Spanish and needed to be transcribed and translated from Spanish to English.

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Secondary DataTo substantiate the study a set of quantitative data was gathered from available information provided by Banco Central de Venezuela (BCV) and CVG. Additionally, a set of data was used from desk review of different materials that could be found on internet (books, journals, articles, newspapers) as well as any published and unpublished materials related to the topic.

1.6 Scope and limitations As for the scope of this study, the focus was on I&S industry in Ciudad Guayana, Venezuela, hence, its findings may not be generalised to either resource-based state-owned industrial district. Therefore, further research is needed on this regard.

There could be some selection biased since it was targeted the managers of the firms and they might not be always the most appropriate respondents. Also the researcher made use of his working relationships with some officials from these organizations as an entry point. However, it was always up to the organization the selection of key informants. As mentioned before, it is acknowledged that due to lack of time and financial resources the sample size was small especially to apply a questionnaire, which limited the researcher to obtain different points of views to confirm the responses. To overcome this limitation there was discussion on the questionnaire and the secondary data was gathered from desk review.

1.7 Structure of the paper This paper has been organised into six chapters. Chapter one presents the background of the case study, indication of the problem area, objectives, research questions and the methodology. Chapter two shows the relevant concepts as well as the analytical framework to address the research questions. Chapter three explores inter-firm interactions among state-owned firms. Chapter four explores the role of state, the role of large firms and local and non-local embeddedness as to conceptualize and map out the district. Chapter five builds on the main research questions; the analysis aims to find out whether ownership and other factors influence inter-firm interactions. Chapter six presents the conclusions of the study.

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Chapter 2Conceptual and Analytical Framework

2.1 IntroductionThis chapter introduces the conceptual and analytical framework. It addresses concepts of industrial districts and clusters, draws on typology of districts, discusses nature of inter-firm interactions, the role of the state and firms in shaping industrial district configuration, defines the concepts of local and non-local embeddedness and finally shows the analytical framework used to address the research questions.

2.2 Industrial districts and clustersIndustrial districts and clusters have been of interest of scholars for the last three decades. The concept of clusters focuses on the advantages that accrue to firms and the area in which they operate due to sectorial and geographical concentration of firms, while industrial district additionally implies the existence of co-operation (Schmitz 1995: 536). Piore and Sabel (1984) made an important contribution to the study of industrial districts by identifying “networks of technologically sophisticated, highly flexible manufacturing firms in central and northwestern Italy” (1984: 17) as an alternative to Fordist mass-production. Porter (1990, 1998) gave clusters prominence as a source of competitive advantage. Pyke and Sengenberger (1992) clarified that an industrial district is not merely a concentration of firms within the same sector and locality, but they characterised by “strong networks of (mainly) small firms which, through specialization and subcontracting, divide among themselves the labour required for the manufacture of particular goods” (1992: 4) that bring about collective efficiency. Schmitz and Nadvi (1999) identified an “incidental and deliberate effects into the concept of collective efficiency defined as the competitive advantage derived from external economies and joint action” (1999: 1504). The former is termed passive collective efficiency and include external economies such as a pool of skilled workers, access to suppliers of specialized inputs and new knowledge spillovers. The latter is called active collective efficiency meaning a “conscious pursuit of joint action”.

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However, the production system this paper is intended to analyse differs substantially from the above features of industrial districts. Markusen contribution to the debate of industrial district expanded to a large extent the scope of the analysis. This thesis adopts the definition of industrial districts given by Markusen as:

A sizable and spatially delimited area of trade-oriented economic activity which has a distinctive economic specialization, be it resource-related, manufacturing, or services (Markusen 1996: 296)

2.2.1 Typology of industrial districtsMarkusen’s definition of industrial district broadens the typology of production systems that may bring about both passive and active collective efficiencies. This is especially important for developing countries. As some scholars have discussed (Hilhorst 1998, Altenburg and Meyer-Stamer 1999), it is less likely to find such a sophisticated system of production in developing countries. For example, Altenburg and Meyer-Stamer elaborated about typology of clusters in Latin American countries. They distinguished three types of cluster: i) survival cluster of micro and small-scale enterprises, ii) more advanced and differentiated mass production clusters, and iii) cluster of transnational corporations; albeit they did not consider resource-based clusters, such as the metallurgical industry in Ciudad Guayana (Altenburg and Meyer-Stamer 1999: 1695). In this paper is taken the typology of industrial districts put forward by Markusen which contributed to industrial district analysis by characterizing other form of ‘sticky places in slippery space’. According to her, there are four basic types of industrial district: Marshallian and Italianate district, hub-and-spoke district, satellite platform and state-anchored district.

• Marshallian and Italianate district is “a region where the business structure is comprised of small, locally owned firms that make investment and production decisions locally. Scale economies are relatively low, forestalling the rise of large firms. Within the district, substantial trade is transacted between buyers and sellers, often entailing long-term contracts or commitments.” (Markusen 1996: 297-9)

• Hub-and-Spoke Industrial District is “another quite different type of industrial district is present in regions where a number of key firms and/or facilities act as anchors or hubs to the regional economy, with

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suppliers and related activities spread out around them like spokes of a wheel”. (Markusen 1996: 302)

• Satellite Platform is “a congregation of branch facilities of externally based multiplant firms. Often these are assembled at a distance from major conurbations by national governments or entrepreneurial provincial governments as a way of stimulating regional development in outlying areas and simultaneously lowering the cost of business for competitively squeezed firms bristling under relatively high urban wages, rents, and taxation”. (Markusen 1996: 304)

• State-anchored Districts “where a public or nonprofit entity, be it a military base, a defence plant, a weapons lab, a university, a prison complex, or a concentration of government offices, is a key anchor tenant in the district. Here, the local business structure is dominated by the presence of such facilities, whose locational calculus and economic relationships are determined in the political realm, rather than by private-sector firms”1. (Markusen 1996: 306)

The contention is that Ciudad Guayana’s I&S industry resonates with state-anchored district category, which features are being analysed in chapter 4.

2.2.2 Inter-firm co-operationThe source of competitiveness in industrial districts depends highly on inter-firm co-operation:

According to the industrial district model, there is intense competition between firms producing the same things and co-operation between firms producing similar but non-competing goods or between firms engaged in different staged of production (Schmitz 1992: 95)

It is acknowledged that there are several forms of co-operation. Literature on industrial districts tends to identify the more frequent forms of co-operation. For example, Kristensen surveyed some instances of co-operation in Italian industrial district:

Co-operation is manifest in the collective organisation of services, the strength and political influence of the small business trade associations, the collaboration between units in a production chain over questions of design and 1 The hypothesized features of state-anchored district

can be seen in Appendix II.

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technology, and the general atmosphere of openness that encourage the spread of ideas and innovation so crucial to the district’s success (Kristensen 1992: 124).

The question is: would a group of state-owned firms co-operate to take advantage of sectorial and geographical concentration? As it is implied in Markusen’s typology of districts, the answer could be affirmative, but what form of co-operation? As mentioned above, co-operation can take many forms. For the purpose of this study, interactions will be analysed within Markusen’s framework of state-anchored district (1996: 299).

Additionally, to draw on the nature of interactions, this thesis adopts the framework of ‘resource-exchange analysis’ which “builds on but goes beyond Weber's formulations, exploring macro and micro relationships by considering normative, instrumental, and coercive elements of politics” (Uphoff 1989: 296). This framework accepts Weberian notion that authority is a special kind of power (in Uphoff 1989: 300) and that the state claims “legitimate use of physical force in the enforcement of its order” (in Uphoff 1989: 302):

The authority of the state exists to the extent and to the degree that its leaders and their agents successfully uphold the claims they make upon their subjects for compliance - regardless of the basis upon which that success rests (Uphoff 1989: 302).

As stated by Boulding “power in any social system invariably involves some combination of self-interested, coerced, and altruistic relationships” (in Uphoff 1989: 305). Accordingly, for the purpose of this paper, it is made the distinction between negotiated, coerced and voluntary co-operation: i) negotiated, when co-operation is combined with more degree of self-interest, ii) coerced, when co-operation is combined with more degree of “legitimate force” as in the Weberian notion, and iii) voluntary, when co-operation is combined with more degree of altruism.

It can be argued that qualitative feature of industrial district that differentiate from mere geographical and sectorial concentration of firms, is the emergence of voluntary co-operation among firms.

2.2.3 Role of the stateThe role of the state at national and local level has not been ignored in industrial district analysis (Pyke and Sengenberger 1992, Schmitz 1992, Benton 1992, Parrilli

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2009, Sabel 1992), albeit the state is seen more as enabler rather than a producer. For developing countries and transition economies state-owned enterprises are existing phenomenon: “the state may be a major shaper of industrial geography, especially in developing countries” (Markusen and Park 1993: 157).

This thesis adopts a broaden approach of role of state, as put forward by Markusen:

As rule maker, as producer and consumer of goods and services, and as underwriter of innovation, with consequences for the distribution and anchoring of employment within and across regions (Markusen 1996: 295)

2.2.4 Firm sizeThe bulk of scholars’ attention is given to production systems of SMEs (Schmitz 1995, Schmitz and Nadvi 1999, Parrilli 2009, Brusco 1992). The contention, as stated by Pyke and Sengenberger (1992: 7), is that most of employment is generated by SMEs and that “small firms are more flexible, more efficient, and more capable of adapting to market requirements than large, cumbersome, bureaucratised enterprises”. Thus, it is often neglected the role of large firms as Markusen stated:

The study of industrial districts and networks within them has generally been confined to smaller firm in particular industries; their links to larger firms and to other firms and institutions outside the region have been ignored (Markusen 1996: 309).

There is empirical evidence that large firm may play role in sustaining the growth and development of industrial districts (Scott 1992). Scott stated that:

Industrial districts may comprise varying combinations of both large and small establishments and that large producers are often quite instrumental in inducing and sustaining agglomeration (Scott 1992: 273).

This study explores the hypothesized role of large firms put forward by Markusen (1996: 299).

2.2.5 Local and non-local embeddednessThe notion that economic relationships are embedded is social structures can be seen in Granovetter who stated: “most behaviour is closely embedded in networks of

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interpersonal relations” (Granovetter 1985: 504) including economic behaviour of firms.

In this paper, the concept of local and non-local embeddedness is taken as in Markusen (1996: 296): the former refers to networks within the district and the latter refers to networks extending across national and international space. The contention is that more degree of local embeddedness leads to integration of district, whereas more degree of non-local embeddedness leads to disintegration of district.

Networks approach is taken to define integration. As stated by Birner and Ege: “network approach…offer perspectives for integrating coordination and cooperation into a unified theory of social stability” (Birner and Ege 1999: 749). Birner and Ege elaborated on the convergences and divergences of Durkheim’s argument of co-operation and Hayek’s argument of competition and evolution of coordination as basis of social cohesion. Thus, it is assumed that networks of competition and co-operation lead to integration to district, whereas disintegration is taken as the opposite direction where networks lead to differentiation from district.

2.3 Ownership structureThe literature on industrial districts tends to focus on private sector initiatives somewhat undermining the role that can play the firm’s management structure. For example, Vakhitov and Bollinger (2010) have claimed that it might be an effect of ownership structure on agglomeration economies. They analyzed data from Ukrainian firm and suggested that state-owned firms gained little from agglomeration externalities, while private-owned firms gained more and that foreign-owned firms might gain the most from agglomeration economies. Luong and Weinthal (2006) also analyzed transition economies and have suggested that might be a relationship between ownership structure and institutional capacity.

It seems that there is little research regarding the relationship between ownership and industrial districts. This thesis seeks to contribute to this debate. For this purpose is taken the types of ownership used by Vakhitov and Bollinger (2010: 2): state-owned, private-domestic-owned and private-foreign-owned. It is included a fourth category of ownership: a cooperative or non for profit organization. In this study is made the assumption that ownership structure may influence nature of interactions.

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The contention is that state-ownership tends to influence the nature of firm interactions in the district through the state exerting its ‘legitimate force’ to impose political interest, thus enforcing coerced co-operation. Meanwhile private-ownership tends to influence the nature of firm interactions through firms exerting negotiated co-operation. A third effect could be hypothesized when ownership structure adopts the form of cooperatives which may bring about voluntary co-operation.

2.4 Analytical framework The researcher has surveyed different theoretical frameworks from which to approach the study case, but none of them seem to embrace the case entirely. The concepts discussed above are taken to construct an analytical framework to address the research questions. Figure 2.1 shows schematically the causality relations of the research arguments. As can be seen, this approach stresses the importance of ownership structure for industrial districts analysis. It is argued that ownership structure influences nature of co-operation: i) state-ownership is expected to bring about coerced co-operation, ii) private ownerships both domestic and foreign are deemed to produce negotiated co-operation, and iii) cooperative ownership is expected to generate voluntary co-operation. As a result, it is envisioned to observe different pattern of inter-firm interactions due to changes in ownership structure.

This argument does not imply that ownership structure alone can influence nature of co-operation. As mentioned above, co-operation may take several forms. Accordingly, other factors may play a role in shaping the nature of co-operation. Thus, the research seeks to identify such factors in the study case. Following the suggested approach, factors other than ownership structure may lead to coerced, negotiated or voluntary co-operation depending on bargaining power of stakeholders that also influence inter-firm interactions. Then, the analysis follows Markusen’s framework that takes into account the role of the state at national and local level, the firm size, inter-firm connections and local and non-local embeddedness as to determine the typology of industrial district. As a further contribution to the analysis, it is argued that local embeddedness lead district to integration whereas non-local embeddedness lead district to disintegration which shape configuration of industrial district.

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Figure 2.1 Analytical Framework

Source: Author’s own elaboration based on Markusen (1996)

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Chapter 3Exploring Inter-firm Interactions

3.1 IntroductionThe aim of this chapter is to answer the first sub question. It explores what are the inter-firm interactions among state-owned firms in Ciudad Guayana’s I&S industry. It seeks to answer to whom do they relate? What do they exchange? What nature of co-operation do they have? The chapter is divided into four sections that show how firms interrelate through the chain of production of I&S industry in Ciudad Guayana: mining, pelletizing, briquetting and steel-making.

3.2 MiningThe mining activity represents the starting point of I&S value chain in Ciudad Guayana. Ferrominera del Orinoco, CA (FMO) is the state-owned firm that has the exclusive right to mine iron ore deposits in Venezuela; the totality of those ore deposits are concentrated in Bolívar State, around 130 kilometres from Ciudad Guayana. FMO constitutes the second state-owned hub of the district because of its labour force, production capacity and networks. FMO stood at 6600 workers by 2010 and is expected to have 6700 by the end of 2011 (Ministerio del Poder Popular para las Industrias Básicas y Minería. 2010)representing the second largest firm in the locality in terms of employment. Figure 3.1 shows the chain of production state-owned firms in Ciudad Guayana’s I&S industry. Arrows represent flow of output inside and outside the locality estimated by the end of 2011. Figure 3.1 also presents production capacity of firms.

Interactions between mining and pelletizing sectorAs seen in Figure 3.1, production chain of I&S industry goes from mining to pelletizing processes. In these processes are involved FMO and SIDOR which would exchange 72% of iron ore fines production by the end of 2011. It can be argued that FMO iron ore fines production has led to a thick relationship with SIDOR, the other hub of the district. This relationship was created by the state since the outset of SIDOR giving rise to a SIDOR technology production designed to use fine material as input. The

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nature of this relationship can be regarded as coerced as it is implied by one respondent:

FMO was used to develop SIDOR…the two firms were always seen as totally integrated…the state was fixing everything in such a way the two firms (were integrated), actually SIDOR’s iron ore courtyard was constructed in FMO…FMO had to make SIDOR a train, FMO did it, had to support to develop SIDOR, FMO did it. Because FMO was the first firm in the locality it owned the land…and it was the only income-generating firm as it exported mineral, so the revenues it generated were used to develop everything, of course, along with state grants since FMO alone could not do it, but it was to develop SIDOR (Interview 15, emphases added).

Figure 3.1I&S industry chain of production 2011

(Million tonnes)

Source: (Ministerio del Poder Popular para las Industrias Básicas y Minería. 2011),own elaboration.

The second local user of iron ore fines is FMO itself which owns a pelletizing plant. Here the relationship is sort of transferring of costs from one unit of production to the other. Iron in pellet shape is a form of value added from

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iron ore fines and represents one of the inputs used in direct reduction processes2.

Interactions between mining and briquetting sectorFMO exchange iron ore fines production with O.IRON which is the only world-wide briquetting plant that uses fines material as input. The reduction technology (FINMET) was actually developed in the locality through a partnership between FMO and the private-owned Group SIVENSA as from the late 1970s (Interview 08, Interview 15). One respondent elaborated:

FIOR gave birth O.IRON…FIOR was a laboratory that created FMO jointly (with private sector), FMO was 50% of FIOR, private sector and us made a laboratory to use fine material to produce briquettes, that generated what is O.IRON nowadays…that laboratory lasted for 20 years…the research development (R&D) lasted for 20 years to create O.IRON (Interview 15, emphases added).

This co-operation between the state and private sector can be regarded as negotiated. Actually, briquetting sector seems to have grown up with deliberate support of the state. According to one manager:

If you saw the financial statement of those briquetting firms you might see FMO as shareholder…the command at that time, I am talking about the 1990s, was the state as a promoter not as producer (Interview 15).

This example illustrates how the state through FMO functions as a promoter of I&S industry upgrading. When it comes to what do they exchange, the relationship between FMO and O.IRON seems to be very thick since FMO is the only supplier of mineral fines, albeit this relationship appears to be coerced as one manager complained:

We have been facing problems with dispatches and reception (of fine material) leading us to lagging behind, basically, we have lost a lot of production, the contract between FMO and O.IRON was handled with biased, very reserved, the firm might have had good reasons for doing that, I don’t know, but it was little known…the issue of mineral provision has been very hard, since we have got just one supplier (Interview 08, emphases added)

On the other hand, FMO exchange iron ore lumps with briquetting plants: FMO briquetting plant, VENPRECAR,

2 Direct reduction technology consists of industrial processes to separate the oxygen from iron (Interview 06, Interview 08, Interview 09).

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COMSIGUA and BRIQVEN. Similarly to the case of O.RION, FMO has actively participated in promoting these briquetting plants (Dam et al. 1998: 10) which exemplifies FMO’s role in district upgrading, somewhat fostering local embedded networks. The relationship between FMO and its briquetting plant can be considered as a transferring of costs. However, the relationship between FMO and VENPRECAR, COMSIGUA and BRIQVEN can be regarded as coerced, in the same meaning as in the relationship with O.IRON.

The raw material you are asking, is basically pellets and iron ore lumps supplied by FMO (Interview 06)

3.3 PelletizingPelletizing process is of a great importance for the district inasmuch as it supplies one of the critical inputs, the pellets, to produce DRI (Direct Reduced Iron) and HIB (Hot Briquetted Iron), both products are concentrated iron to produce steel. SIDOR and FMO each have a pelletizing plant to produce pellets which are used exclusively by local firms. SIDOR production of pellets is intended to supply its own demand of pellets for its reduction plants. This functions as a transferring of cost from one plant to the other. Whereas FMO produces pellets to cover local demand of state-owned briquetting sector (except for O.IRON that uses iron ore fines, as mentioned above). They are highly dependent on FMO pellets dispatches leading to a coerced relationship, as one respondent argued: “basically, the whole region depends on FMO, if FMO does well, we mentioned that yesterday, if FMO does well we are all fine” (Interview 08).

3.4 Briquetting sectorThe briquetting sector is perhaps one of the most successful experiences in the district upgrading, albeit it is still an intermediate product to produce steel. As can be seen in Figure 3.1 the briquette production is committed to external markets leading to disintegration of district inasmuch as this product could be used locally by the steel mills.

Interactions between briquetting sector and SIDORThe respondents from briquetting sector unanimously agreed that their firms were created to produce for exports, so they exchange little with local steel mill SIDOR (Interview 06, Interview 07, Interview 08, Interview 09).

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For the research this was a striking finding because it was expected more integration between the briquetting sector and SIDOR, the largest steel mill in the locality.

There are two ways of explaining why the briquette is made for exports and its networking with SIDOR seems to be weak. First, as one respondent stated: “the product in the shape of briquette is made to be exported” (Interview 09). The briquette is basically concentrated iron manufactured in a soap-like shape. Its international standard is known as HBI (Hot Briquetted Iron) which shape and physical properties (less likely to ignite) makes it easier and safer to transport by sea to international markets (Interview 09); HBI could be used in SIDOR steel production since it is concentrated iron, but it is not widely used because SIDOR steel production chain uses a pellet-shape DRI (Direct Reduced Iron) that is smaller than the HBI (Interview 06, Interview 09). It seems that the relationship between briquetting firms and SIDOR tends to be more through a sub-product called CHIPS, albeit this is a negligible part of the process of HBI production. The process of producing HBI generates a sub-product fine (CHIPS) that has the same properties as the HBI (they are little pieces of HBI when briquettes are being cut or screened); those CHIPS are more suitable for SIDOR conveyor belts system designed for handling small materials (Interview 06, Interview 09). Moreover, this size-and-shape issue between SIDOR and briquetting sector somewhat triggered an innovation at local level and tested district capacity to adapt. One respondent from O.IRON elaborated:

From 2006 we were working on an innovation to produce a mini-briquette which is a better briquette for in bulk handling…the (standard) briquette we used to send to SIDOR did not work but the mini-briquette was excellent…we produced mini-briquette for them to improve their material handling (Interview 08, emphases added).

This example may serve to support the argument that state ownership tends to generate coerced co-operation. Private sector may not produce at higher cost without compensation:

This process let us innovate but it increased our cost of production, the cost of producing a mini-briquette is higher than that of producing a standard briquette, but SIDOR has not paid us, as far as I know SIDOR owes us the mini-briquette, SIDOR has not paid us, but actually, there was a negotiation with them to improve their handling (Interview 08).

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Second, there was a state policy leading to promote export-oriented activity based on natural resources. Through FMO, the state promoted the briquetting sector by attracting to the district both private-domestic and private-foreign investment. By doing so, the state gained in upgrading iron ore to a more sophisticated tradable iron. Moreover, briquette production appears to be a way of making better use of local resources such as natural gas which deposits in the region are 130 kilometres from the district. As mentioned by one respondent “a briquette is the more profitable form to export natural gas” (Interview 15). Natural gas is one of the critical inputs in direct reduction process to separate oxygen from iron. Briquette production also takes advantage of hydroelectric power generation in the region, abundant source of industrial water coming from Caroní River, a navigable channel through Orinoco River that allows a passage to Atlantic Ocean and a pool of skilled workers mainly trained in FIOR laboratory as from the late 1970s (Interview 06, Interview 07, Interview 08, Interview 09, Interview 15). The combination of these local resources leads briquetting sector to lessen cost of production as compared to international standards (Dam et al. 1998: 5) and benefit from exporting the product.

Interactions between briquetting sector and CASIMAThe findings suggest that CASIMA has had interactions with all of briquetting plants and those interactions can be regarded as negotiated, as stated by one respondent:

If FMO briquetting plant offered us better selling conditions, better that VENPRECAR…or better prices or quality than O.IRON, we bought them, we were indeed very good customers of FMO briquetting plant, but we also were supplied by COMSIGUA and MATESI, we have been supplied by all of them…although we are very close to VENPRECAR (nowadays BRIQVEN) (Interview 14, emphases added)

However, interactions between VENPRECAR and CASIMA seem to be stronger. First, because of their proximity, one is located next to the other, as mentioned by respondent above, and second, both used to be part of private Group SIVENSA (Interview 14).

Interactions within briquetting sectorWithin briquetting firms seem to have emerged voluntary co-operation as it is expected to find in industrial districts according to the literature. Although they seem not to exchange their products, they do exchange assets. For

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example, they jointly created in 1998 an operator called Compañía Puerto de Palua (COPAL) which was in charge of managing Palua Port. In the case of BRIQVEN and COMSIGUA, they were constructed one next to the other by private-foreign investors (Korean and Japanese, respectively) also very closed to FMO pelletizing plant. They have a common space to upload the briquettes to transport by train the product to Palua Port where “two trains can be uploaded simultaneously” one for each firm (Interview 06). Additionally, one respondent mentioned they share the conveyor belt that carries pellets from FMO to the plants (Interview 09).

Additionally, knowledge seems to be shared among briquetting sector; during the fieldwork the researcher got the sense that everyone knows very well about everyone else’s process of production. One respondent from O.IRON elaborated:

COMSIGUA does benchmarking with VENPRECAR (they use MIDREX technology for direct reduction), if they have a problem with a reactor, they might advise to the other to cut the flux of gas, increase or decrease the temperature and so on, they can do that. Our benchmarking was Port Hedland (in Australia) but that plant shut down and we have survived with our own people (Interview 08, emphases added)

It is worth mentioning that VENPRECAR and O.IRON also used to be part of the private Group SIVENSA. Although the two firms were constructed with different technology for direct reduction, they both shared administrative personnel; as elaborated by one respondent:

VENPRECAR and O.IRON worked with a high level of cooperation and integration. The Board of Directors was common between the two firms; VENPRECAR was like an administrative and productive department of O.IRON. Their products did not compete they used different production technologies. Business process management were common between the two firms…the process of nationalization broke up this relationship (Interview 07).

3.5 Steel-making sectorSteel manufacturing sector comprises two firms at local level: SIDOR and CASIMA. SIDOR is the largest hub in the district which predominated with 94% of steel production capacity in the district, as seen in Figure 3.1. It encompasses 2880 hectares of land, 86 hectares of constructions, 80 kilometres of roads for internal transport,

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160 kilometres of railways for transporting material and a Port with a length of 1037 metres with a capacity of anchoring six vessels at a time (Siderúrgica del Orinoco "Alfredo Maneiro". 2010). Additionally, it stood at 6911 workers in 2010 (Siderúrgica del Orinoco "Alfredo Maneiro". 2011) representing the largest firm in the locality in terms of employment. Whereas CASIMA is an establishment of a firm (SIDETUR) headquartered outside the district. It uses briquettes as input to produce billets that are sent to other establishments of the same firm. Then they would be transformed into final steel products such as steel rods and beams for construction (Interview 14).

Interactions between SIDOR and FMOInteractions between SIDOR and FMO are deemed to be thick as mentioned above. Not only because FMO exclusively supplies iron ore fines to SIDOR’s pelletizing plant, but they appeared to be closely integrated as well, albeit through a coerced form of co-operation driven by CVG. One respondent explained:

FMO’s directors used to be SIDOR’s presidents and vice versa…the Management and Board of Directors were all integrated, that was normal because it was a sole vision directed by CVG…that was created from the beginning, but that relationship obviously started to break down. When? When it (SIDOR) was privatized (Interview 15, emphases added)

As suggested by the respondent, this relationship cannot be considered totally harmonious since the mining and manufacturing personnel seem to be rather different, not only because mining activity tends to require less professional personnel than the steel industry, but also they might be different in cultural terms leading to a competitive relationship at personnel level.

Interactions between steel-making firms and external markets

As can be seen in Figure 3.1, steel production is exchanged non-locally, either to domestic markets outside the locality or exports. These exchanges can be regarded as negotiated:

Our (SIDOR’s) main customers are located outside Ciudad Guayana…Here in Ciudad Guayana there is nobody which transforms steel, all (steel) transformers are located in the centre (of the country), the tube manufactures, structural mills, they are in the centre (Interview 11a, emphases added)

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Our (CASIMA’s) production is not of final product, but intermediate product that would finally be transformed into a final product in rolling mills that owns the firm (SIDETUR) outside the zone. We had three destinations for our products: rolling mill in Caracas, rolling mill in Guarenas and eventually exports…we used to export billets (Interview 14, emphases added)

Interactions within steel-making sectorInteractions between SIDOR and CASIMA appear to be voluntary. CASIMA has function independently from SIDOR since it was created as a private initiative in 1989 until its nationalization in 2010. Because negotiations have not been completed, CASIMA continues to function quite independently and its administrative structure remains the same. However, being in the same business seems to have benefited both SIDOR and CASIMA leading to voluntary co-operation. As one respondent suggested (Interview 14), the two firms have maintained a collaborative relationship throughout the time. They have benefited from technologies they have acquired to improve process of production. Typically, SIDOR might attract cutting-edge technology firms because of its large size and CASIMA takes advantage of that as they are in the locality. They have common suppliers and information about what inputs have been dispatched to each firm seems to go back and forth so they might negotiate lending some inputs when needed. The respondent also reported CASIMA supporting SIDOR:

Some years ago SIDOR did not produce in its continuously cast, in its steel mill, did not produce high and low carbon steel and eventually we (CASIMA) dispatched them billets with those steel characteristics for them to produce high and low carbon steel. Afterwards they acquired experience and the technology and we stopped dispatching them. You might know that few months ago they had many troubles because of the power issue and we sent them again billets for them to roll (Interview 14, emphases added)

3.6 ConclusionThis chapter has explored inter-firm interactions among state-owned firms in Ciudad Guayana’s I&S. It has sought to answer to whom do they relate? What do they exchange? What nature of co-operation do they have? The findings suggest that along the productive chain: mining, pelletizing, briquetting and steel-making, the nature of co-operation seems to change. At the beginning of the chain the nature of co-operation seems to be coerced as FMO

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functions as the only supplier of mineral for the district. But among firms within the same sector, voluntary co-operation seems to emerge, as seen in briquetting sector creating a joint operator to manage a Port, and in steel–making sector lending to each other specialized inputs and outputs which is in line with literature on industrial districts.

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Chapter 4Exploring State-anchored District

4.1 IntroductionThis chapter aims to answer the second sub question on how can be conceptualised and mapped out I&S industry in Ciudad Guayana? First, it builds on typology of districts put forward by Markusen (1996); it addresses the role of state, the role of large firms and the local and non-local embeddedness as to conceptualize the typology of district. Second, the district is mapped out according to the three distinct stages in which a particular ownership structure was prevalent. The contention is that I&S industry in Ciudad Guayana resonates with state-anchored category proposed by Markusen (1996).

4.2 Conceptualizing Ciudad Guayana’s I&S industryThis section explores the presence or absence of hypothesized features of industrial districts put forward by Markusen (1996). It aims to conceptualize a district through a case study of I&S industry in Ciudad Guayana, Venezuela. The contention is that Ciudad Guayana’s I&S industry resembles the features of a state-anchored district, albeit in shape seems to be akin to the hub-and-spoke district. As suggested by Markusen (1996: 295-6).

Role of state at national and local levelMarkusen and Park (1993) have researched on the role of the state in shaping and anchoring industrial districts. Similarly to case study of the South Korean military industry researched by Markusen and Park, Ciudad Guayana’s I&S industry cannot be fully understood without looking at the national context that framed such an industrial development in an inhospitable area in the east-south part of Venezuela. In the case in point, a national government policy was designed to promote socio-economic development in Ciudad Guayana. For that purpose national government created CVG, its regional agency with devolved authority to execute a comprehensive developmental plan. As Hite stated:

Along with control over half the national territory, hundreds of billions of dollars in raw mineral wealth, and

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long-term access to national oil revenues, the CVG has a mandate to “sow” Venezuela’s oil wealth as industrial and urban development based in Ciudad Guayana. This bureaucracy/holding company/quasi-government promotes physical, economic, and social development in the region through study, planning, industrial development, coordination among agencies and businesses, infrastructure provision, operating firms, making loans, and any number of other functions (Hite 2004: 63-5)

As mentioned above, Ciudad Guayana’s I&S industry can be typified as a state-anchored district:

Where a public or non-profit entity, be it a military base, a defence plant, a weapons lab, a university, a prison complex, or a concentration of government offices, is a key anchor tenant in the district (Markusen 1996: 306).

CVG has served as the key anchor tenant where major locational calculus and clusters interactions have been determined. According to respondents (Interview 10a, Interview 10b, Interview 15), CVG has built Ciudad Guayana as it is. Through CVG, national government has channelled large investments for building the two hubs in the district: FMO and SIDOR where the bulk of district’s production is concentrated, as it was seen in previous chapter. The influence of CVG on Ciudad Guayana has been overwhelming. It seems that every local issue regarding urban roads, housing, industrial zone infrastructure and even the universities’ degree courses to raise skilled labour have been controlled by CVG in function to support local industry (Interview 10b). Moreover, respondents stressed CVG’s interaction with other district actors such as the briquetting sector:

As far as I know the relationship between CVG and private-owned firms (briquetting firms) started with land negotiation…land was owned by CVG. CVG said I let you build your enterprise but I have got the land, I want to be your partner. Then according to land’s market value it determined the share value in the firm (Interview 14, emphases added)

As for the local government, in state-anchored district is expected to find a weak local government (Markusen 1996: 298-9). It was found that in the case study of Ciudad Guayana the involvement of local government in regulating and promoting I&S industry is consistent with the hypothesized feature of state-anchored district. It was garnered from the field that a weak local government has been present in the district since 1989 when the first free

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election of governors and mayors took place in Venezuela. Prior to 1989 the locality had a Municipal Council led by an appointed official with limited authority and independence, ultimately accountable to national government. One respondent elaborated:

Municipal Council of Caroni…was overwhelmed by the investment to develop such a huge program…urban development, industrial development, the settlement of service-provider firms, all of this overcome what a Municipal Council could have done (Interview 10b)

According to respondents (Interview 10a, Interview 10b) to understand the interaction between the municipality and I&S firms it is worth to look at the relationship between the municipality and CVG. Governance at local level had been exercised by CVG upon arrival of a mayor elected by the people in Ciudad Guayana in 1989; local necessities such as waste collection and disposal, schools and hospital construction and maintenance were satisfied by CVG. Then the advent of a nominally devolved local government gave rise to overlapping responsibilities between local government and CVG. Negotiation between the two seems to have been conflicting. One respondent elaborated after being asked about the relationship between the municipality and the firms:

First, to look at the relationship between municipality and firms we need to see how the negotiation started: I am the mayor of this city (for instance), but CVG was too strong. Then the major said: I was elected and these are my responsibilities. At first it was a process of negotiation between them, for CVG to acknowledge mayor authority, I remember the struggles that took place with the minister; taking with the minister was very difficult, he was the one who had the ascendancy over the city (Interview 10a, emphases added)

Apparently CVG’s ascendancy at local level continued to be strong leading to weakening local government action during the first two mayoral periods. As one respondent argued “CVG normally continued taking over matters that were supposed to be responsibilities of the municipality” (Interview 10b). So interactions between local government and I&S firms are deemed to be weak basically because of CVG control over the industry. However, as from 2005 with the creation of MIBAM, the ascendancy of CVG on the district seems to have diminished substantially. The potential creation of an Iron and Steel Corporation may

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weaken a bit more the role of CVG in coordinating I&S industry in Ciudad Guayana:

CVG is already weak; I don’t know what it is supposed to do (after creation of I&S Corporation) (Interview 06, emphases added)

Role of large firmsThe role of large firms is deemed to be important for understanding district dynamics. Markusen’s hypothesis regarding state-anchored district is that business structure tends to be dominated by large firms, surrounded by suppliers and customers (1996: 299). The case study of Ciudad Guayana’s I&S industry seems to show this feature. As gathered from the field, the business structure appears to be dominated by the presence of two large state-owned, vertically integrated firms: FMO and SIDOR. First, they are the oldest firms in the district with half a century operating. Second, related to the former, they have created the most extensive networks in the district. Third, their production capacity and actual production is the highest among local firms. Fourth, they are the largest firms in terms of employment. These elements provide a feel for the scale and it can be argued that scale economies seem to be relatively high as hypothesized (Markusen 1996: 306). Additionally, supplier and customer sector did grow up surrounding the hubs as reported by respondents (Interview 10b, Interview 11a). Scott stated that:

Industrial districts may comprise varying combinations of both large and small establishments and that large producers are often quite instrumental in inducing and sustaining agglomeration (Scott 1992: 273).

In the case of Ciudad Guayana I&S industry, the district ability to expand seems to be associated with FMO. Briquetting sector represents the best example, as one firm (O.IRON) has spun-off from FMO (Interview 08, Interview 14, Interview 15) and an active participation of FMO in promoting this sector (Dam et al. 1998: 10, Interview 15).

Local and non-local embeddednessMarkusen has argued that focusing only on local networks might limit the analysis of industrial district since local actors also are embedded in external relationships that influence their commitment to the locality (Markusen 1996: 309). She anticipated for state-anchored districts: substantial intradistrict trade among dominant institutions and suppliers (Markusen 1996: 299). Ciudad Guayana’s I&S industry supports this hypothesis. Table 4.1 shows the local

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and non-local uses of I&S estimated production in the district by the end of 2011. Local iron production is used for intermediate consumption by local and non-local users. As can be seen, iron production is largely produced by the two hubs with 90% of the total production. Iron production tends to be used locally as 7 out 10 units of iron are to consume locally. Additionally, respondents reported proximity of other inputs that are produced and consumed locally, such as industrial water, natural gas and electricity. I&S industry highly depends on these four inputs, all of them provided by state-owned firms (Interview 11a). Firms seem to subscribe long-term contract and commitments with local suppliers of mineral, natural gas, industrial water and electricity, as reported by 5 out of 6 interviewees. One respondent stated: “contract with FMO was 20 years, natural gas 20 years, then long term contracts” (Interview 11a). This feature appears to be contrary to anticipated commitment since short-term contract between dominant institutions and suppliers are to be expected in state-anchored districts (Markusen 1996: 299). Apparently, political change has not influenced commitment with local suppliers as hypothesized. Additionally, it was reported a strong interaction between hubs and local private sector basically providing services: surveillance, consultancy, maintenance, freight transport (Interview 11a).

Table 4.1Local and non-local uses of I&S production 2011

Local Non-localIron production 72% 28%

FMO 38% 21%SIDOR 31% 0%Other local producers 2% 7%

Steel production 0% 100%SIDOR 0% 93%Other local producers 0% 7%

Total 64% 36%

Source: (Ministerio del Poder Popular para las Industrias Básicas y Minería. 2011),own elaboration.

However, due to the nature of I&S activity, other imported inputs are also important. For instance, refractory material, ferro-alloys, and spare parts are imported (Interview 08, Interview 09, Interview 11a, Interview 12). Interactions with non-local suppliers are deemed to be substantial and negotiated, as respondents reported:

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In steel industry, regarding suppliers as local is half a true; normally suppliers to steel industry are external because of the imported material. Logically, spare parts are imported because of the nature of the industry, being large, being one of great complexity and strength (Interview 14)

There are spare parts that are specific for the industry that are sold by a few suppliers, you cannot go to the market and buy them freely, there are specific suppliers for that purpose (Interview 09)

As for non-local embedded networks, Table 4.1 shows that 36% of total I&S production is traded non-locally. For instance, it was informed by respondents that steel production is committed to clients outside the district (Interview 11a, Interview 14). Both steel mills at local level, SIDOR and CASIMA, seem to have long-term commitments with their customers. Respondent of the former explained: “the bulk of those (private-owned) firms have born and grown along with SIDOR in terms of a long-term project” (Interview 11a, emphases added). Respondent from the latter explained that CASIMA used to send its production to other establishments of the same firm outside the district, thus committed in a long-term fashion (Interview 14). Additionally, as seen in Table 4.1, 28% of iron production is to be exported, out of that 21% would be raw material and 7% would be briquettes, a more sophisticated iron presentation.

4.3 Mapping out Ciudad Guayana’s I&S industryCiudad Guayana’s I&S industry has shown a dynamic throughout the time that can be presented schematically. Figure 4.1, Figure 4.2 and Figure 4.3 show firm relationships within the district depicted inside the circle and firms relationships outside the district illustrated by arrows coming in and out the circle. The size of the bubbles shows relative size of the firms. The visual models were elaborated based on the information garnered from the field.

The history of Ciudad Guayana’s I&S industry can be split in three periods taking into account the prevalence of ownership structure. The first stage corresponds to the early 1960s to 1998 where state-owned firms dominated business structure. For the purpose of analysis, this period will be known as state ownership. It is shown schematically

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in Figure 4.1. As can be seen, it resembles in shape, the hub-and-spoke district suggested by Markusen (1996: 297).

Figure 4.1Mapping out state ownership

Source: author own elaboration based on Markusen (1996) and fieldwork 2011

The district seems to be dominated by two large vertically integrated state-owned firms: FMO and SIDOR, which developed a thick relationship of cooperation (Interview 15) shown by the width of the arrow. These two hubs also succeeded in inducing positive agglomeration externalities, for example, the creation of a pool of skilled workers:

SIDOR has been a school for Venezuela and the World, a lot of people have left from here to work somewhere else in the centre of the country: engineers, graduates, economists all kind of professionals that worked here in Plan IV when this pole was created, but still there many people here that can be useful because of their knowledge (Interview 05)

FMO supported a lot the Mutun in Bolivia, with our miners, our geologists, that was a deposit that Bolivia opened…FMO supported that exploration, then we have got the (skilled) personnel, our geologists are good, if they can open a mine abroad they are good…if you go abroad is because you are competitive (Interview 15, emphases added)

Additionally, negotiated collaboration between FMO and private sector gave rise in the 1970s to a lab called FIOR to produce briquettes from iron ore fines which benefited the district from the creation of a pool of skilled workers in direct reduction (Interview 06, Interview 08, Interview 09). Small bubbles within the circle represent local-public and -private suppliers of inputs for the hubs. The large size of SIDOR generates several networks with private sector both upstream and downstream. It was gathered information about a sizable private sector (SMEs) that provides services

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to SIDOR at local level: surveillance, consultancy, maintenance, freight transport and the like (Interview 11a). According to one respondent, the municipality revenues come primarily from tax collection, being central government transfers of less importance for them and taxes levied from local state-owned firms null (Interview 10b). This was a striking finding since municipalities tend to rely on central government transfers and it was expected stated-owned firms to pay municipal taxes. However, it might suggest a sizable local private sector that thrives along with the state-owned firms as municipality respondent elaborated:

Here are the basic industries, but around them it developed an important commerce and service sector, the main revenues are taxes levied on licenses…you can see many private firms that provide services to state-owned firms…the municipality has survived out of own tax collection (Interview 10b)

Other respondent from SIDOR explained:Thanks to SIDOR, the zones you can see nearby grew significantly, what it is called small and medium enterprises SMEs…some of them provides services exclusively to SIDOR (Interview 12)

Private sector downstream spin-off was also reported, albeit non-local embedded since the majority is located outside the locality in the northern-coastal region of Venezuela (Interview 11a). There are approximately 306 domestic SMEs that are users of SIDOR’s steel production (Siderúrgica del Orinoco "Alfredo Maneiro". 2010).

As mentioned above, Ciudad Guayana’s I&S industry highly depend on inputs supplied by local firms both from public and private sector. State-owned firms provide iron ore, industrial water, natural gas and electricity whereas SME’s provide services to I&S industry. Just after 30 years, in the early 1990s private-owned I&S producers started to establish in the district: a) CASIMA, a private-domestic-owned steel mill which production is committed to non-local producers; b) VENPRECAR a private-domestic-owned briquetting plant which production is used by CASIMA and external markets and c) OPCO (nowadays FMO briquetting plant), a private-foreign-owned briquetting plant which production is committed to external markets. Bubbles outside the circle represent external suppliers which are deemed to be of a great importance for I&S industry. Arrows coming out the circle show non-local commitment of the district. As seen, steel production (SIDOR and CASIMA)

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tend to be non-locally embedded while iron production (FMO and briquetting firms) is committed both locally and non-locally.

The second stage will be known as private ownership structure and comprises the years from 1998 to 2008. During this period I&S producers within the locality were private-owned firms, except for FMO. Figure 4.2 shows the visual model for this period. As can be seen, it still resembles in shape the hub-and-spoke category of district. The largest steel mill, SIDOR, is now a private-foreign-owned firm. CASIMA remains operating as a private firm which interactions appear not to have changed significantly in this period. Private-owned briquetting sector expanded substantially during this stage. OPCO was nationalized in 2007 and transformed into FMO briquetting plant, so it functioned as a private-owned firm a greater part of the period as it was previously. FIOR transformed into O.IRON a briquetting plant that uses iron ore fines to produce briquettes for export. VENPRECAR consolidated as the oldest private-domestic briquetting firm in the district. COMSIGUA showed up in 1998, a private-foreign-owned plant to produce briquettes for exports. Finally, MATESI (former POSVEN and nowadays BRIQVEN) started in 2000, a private-foreign-owned and export-oriented briquetting plant.

Figure 4.2Mapping out private ownership

Source: author own elaboration based on Markusen (1996) and fieldwork 2011

The expansion of briquetting sector seems to be associated with further development of competitive advantages created in previous stage, notably, access to skilled labour, specialized inputs and technology spillovers. As seen in preceding chapter, voluntary co-operation emerged during this stage, somewhat suggesting a connection between private ownership and the expected

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source of qualitative advantages that accrue to industrial districts according to the literature.

The third stage will be known as state ownership and workers’ self-management. It comprises the years from 2008 to the present. From 2008 onwards the state through MIBAM, progressively has been taken over the former private-owned firms and has been claiming its dominance over the district business structure. All I&S producers in the district are now state-owned firms. A new dimension: workers’ self-management is added this time which colours differently the district from the first stage of SOS.

Figure 4.3Mapping out state ownership and workers’ self-management

Source: author own elaboration based on Markusen (1996) and fieldwork 2011

Figure 4.3 shows the current map of the district. As can be seen, the district is akin to the prior period, although MATESI is nowadays known as BRIQVEN and OPCO was transformed into FMO briquetting plant. Additionally, three state-owned firms are currently being constructed and represented in the map in dotted shapes which would spin-off from the district. TSC will be located in the district while RYP and SNAC will be located outside the district. All of them are expected to grow along district positive externalities.

The general finding regarding workers’ self-management suggests it is not in full swing so far. There is some advancement, for example the president of some firms has been designated from the transition committees, and former workers have been designated as president of the firms. Although, it seems too early to evaluate workers’ self-management and it appears not to be fully understood by some respondents. One reacted: “we don’t know what workers’ self-management is all about” (Interview 07).

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Some internal and external factors may have curbed the process:

We are progressing slowly and with difficulties, but logically it has to be like that, for the workers to assume the control of the firm, but it is not that easy, there are factors even within the government that are opposed to this process…it has enemies, many of them within and outside the government, within and outside the firms, that is why it has been difficult to progress (Interview 12).

4.4 ConclusionThis chapter has shown that I&S industry in Ciudad Guayana could be categorized as a state-anchored district according to the hypothesized features proposed by Markusen (1996). The role of the state has been addressed; it was shown that national state have played an important role in promoting and sustaining the district; it was found a weak local government in promoting core industries as hypothesized by Markusen. The role of large firm, notably FMO and SIDOR, in shaping district business structure has been addressed; it was shown their success in attracting private sector investment both upstream and downstream. Local and non-local embeddedness has been analysed; it was found that local commitment is higher than that of non-local. Although, not all features have been tested and the district has shown that some features are contrary to that of state-anchored district, but according to Markusen:

A real-world district may be an amalgam of one or more types, and over time districts may mutate from one type to another (Markusen 1996: 296)

This chapter has also shown that I&S industry in Ciudad Guayana has undergone a trajectory that can be split into three historical periods where a distinct form of ownership was prevalent. The first stage of state ownership was dominated by the presence of FMO and SIDOR both under the egis of CVG (the state agency with mandate to develop Ciudad Guayana) which appears to have succeeded in inducing initial competitive advantages in district. The second stage of private ownership depicted a district which seems to have further developed competitive advantages from previous stage as to show voluntary co-operation (joint action) which according to literature, it is expected for an industrial district to succeed. The third stage of state ownership with workers’ self-management shows a district in redefinition. MIBAM took the lead in coordinating nationalization process of former private–owned firms

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which seems to have created a climate of uncertainty among firms, especially from briquetting sector.

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Chapter 5Ownership Structure and Other Factors

5.1 IntroductionThe aim of this chapter is to answer the last two research questions. It explores how ownership structure influences inter-firm interactions in Ciudad Guayana’s I&S industry as well as other factors. The analysis is based on interviews undertaken with key respondents during fieldwork and substantiated with desk review. First, it draws on how ownership structure influences inter-firm interactions in Ciudad Guayana’s I&S industry. Second, other factors are explored to explain changes in inter-firm interactions.

5.2 Changes in inter-firm interactions due to ownership structureThis section builds on the question of how ownership structure influences inter-firm interactions. It aims to find out whether nature of interactions has changed among sectors that have experience changes in ownership. Those sectors are: mining, briquetting and steel-making. The hypothesis is that ownership structure influences nature of co-operation: state-ownership is expected to bring about coerced co-operation while private ownership is deemed to produce voluntary co-operation, as it is implied in the bulk of industrial district analysis. As a result, it is envisioned to observe different pattern of inter-firm interactions due to changes in ownership structure.

5.2.1 MiningAs seen in previous sections, state-ownership over iron ore mining was consolidated in 1975 when FMO was created and maintained thereafter. Prior to 1975, iron ore mining was dominated by two private-foreign-owned firms: Orinoco Mining Company and Iron Mines Company of Venezuela, subsidiaries of US Steel and Bethlehem Steel, respectively, both North American transnationals. From one respondent’s elaboration it is possible to observe how nature of interaction between FMO and SIDOR changed, when FMO experienced change in ownership leading to more integration between them:

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By the late 1960s, between the middle and late 1960s, when the plan started, FMO was owned by two foreign enterprises, iron mining concessions were given to Bethlehem Steel and US Steel, both North American firms. What happened in the interim? Nationalization of iron ore mining came. Why? Because it was necessary, you had a policy…you wanted to create value added, that was the mandate that was given to CVG. The concessions were given to CVG and CVG created FMO for managing the concessions…then SIDOR was created and FMO was used to develop SIDOR, FMO constructed SIDOR’s ports, and so on, the two firms were always seen as totally integrated…the state was fixing everything in such a way the two firms (were integrated) (Interview 15, emphases added)

The respondent continued her elaboration stressing what FMO and SIDOR exchange:

Actually SIDOR’s iron ore courtyard was constructed in FMO…FMO had to make SIDOR a train, FMO did it, had to support to develop SIDOR, FMO did it. Because FMO was the first firm in the locality it owned the land…and it was the only income-generating firm as it exported mineral, so the revenues it generated were used to develop everything, of course, along with state grants since FMO alone could not do it, but it was to develop SIDOR and the rest of mining (Interview 15, emphases added).

The interaction between FMO and SIDOR can be regarded as coerced since they were driven by CVG as a centralized policy leading to FMO mandate to develop SIDOR.

FMO commitment to the district can be depicted through the uses of iron ore production. It seems that commitment to district has changed due to change in ownership. Figure 5.1 shows destiny of production of iron ore in Venezuela from 1968 to 2010. As can be seen, during the decade 1968-1978 when iron ore mining was mainly private-foreign controlled, the production was almost entirely committed to external markets.

Figure 5.1Destiny of iron ore production in Venezuela 1968-2010

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Source: (British Geological Survey., Banco Central de Venezuela. 2011). Own elaboration

During the fieldwork was gathered the opinion that mining commitment was primarily export-oriented since it was developed to satisfy the demand of transnational corporations. One respondent elaborated:

In the case of the Venezuelan southern region, what I can remember when we were told about a growth pole, is that it was meant to supply raw material to transnational corporations, namely it was not meant to develop a region that had an immense amount of natural resources that could have served to develop the country, to industrialize the country. Instead of that, it was to guarantee raw material to transnational corporations and developed countries. (Interview 13)

However, as seen in Figure 5.1 the trend of iron ore production dedicated to exports have decreased substantially from the decade 1968-1978 to the decade 1998-2008 when exports stabilized at round 40% of iron ore destiny of production. Currently, almost two third of iron ore production is used locally by SIDOR and briquetting sector. Since this trend has been driven by the state-owned FMO as from 1975, it can be argued that for mining activity, change in ownership structure from private-foreign ownership to state ownership seems to have influenced fostering of local embedded networks leading to integration of district.

5.2.2 Briquetting sectorBriquetting sector throve during the decade 1998-2008 when private ownership was prevalent in Ciudad Guayana’s I&S industry. Among this sector, clustering externalities and co-operative behaviours emerged beyond locational advantages coming from proximity to inputs (mineral, industrial water, electricity and natural gas). As seen in

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chapter 3, external economies were reported, such as free availability of skilled labour (Interview 06, Interview 07, Interview 09) and information flows about technologies of production (Interview 08). But also private-owned briquetting firms seem to have shown voluntary co-operation as it is expected to find in industrial districts according to the literature; respondents from these firms informed autonomy from any governmental influence during their stage of private ownership. As stated above, advantages arising by the presence of local resources appear to have elicited briquetting sector agglomeration in Ciudad Guayana. But also collective action was reported by respondents during private ownership. For example, the Palua Port was conceded by FMO to briquetting firms for them to have a facility to export their products through the navigable Orinoco River (Interview 06, Interview 09).

Figure 5.2Photo of Palua Port

Source: (Complejo Siderúrgico de Guayana. 2011)

The firms jointly created in 1998 an operator called Compañía Puerto de Palua (COPAL) which was in charge of managing Palua Port. After being granted Palua Port, the firms cooperatively made investments to adapt it premises for reception, stacking and loading the briquettes into the vessels. Figure 5.2 shows Palua Port and its facilities. As seen the Port has the capacity to anchor one vessel at a time. The photo shows two of the material piles; there are actually four piles, one for each firm that co-ordinately transport by train their products from plants to designated

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piles in Palua Port. They also invested in a soft-loader system that prevents briquettes from breaking down and to be downloaded softly into the vessel.

Firms also reported (Interview 06) being part of the Hot Briquetted Iron Association (HBIA) headquartered in the USA that according to its webpage is a:

Not-for-profit Corporation whose purpose is:

- To promote HBI as the preferred source of merchant steelmaking metallics.

- To inform ship owner/operators and charterers and terminal operators of the handling, shipping, and storage benefits of HBI.

- To assist iron and steel producers in the effective use of HBI (Hot Briquetted Iron Association.).

By joining this association they gained in promoting their product and benefit from world-wide information and networks of producers, suppliers and traders of HBI. It seems that for private-owned briquetting firms in Ciudad Guayana, interacting in proximity within the same sector somewhat triggered collective action, as reported above.

Other forms of co-operation were also reported. As seen in chapter 3, interactions between briquetting sector and hubs have been source of innovations, for example co-operation between O.IRON and FMO gave rise to developing a unique technology to produce briquettes from iron ore fines called FINMET and co-operation between O.IRON and SIDOR triggered the fabrication of a new product: mini-briquette, much more suitable for SIDOR steel-making process. When it comes to inputs, the briquetting sector local embedded networks are strong. One respondent elaborated:

Our inputs are pellets, natural gas, electricity and water; those are the four basic inputs. In the case of pellets we have a contract with FMO. They fabricate pellets at the plant next to us. Natural gas comes from PDVSA, through gas pipes. The electricity comes from EDELCA (local producer) and industrial water comes from HIDRO BOLIVAR (local producer). Those are the four basic inputs that represent around 70% of production costs (Interview 09, emphases added)

However, when it comes to customers, they exchange mainly with external markets and their relationship with SIDOR seems to be weak (Interview 06, Interview 07, Interview 08, Interview 09). The briquette production is

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committed to external markets leading to disintegration of district inasmuch as this product could be used locally by the steel mills:

The firm have not been related with SIDOR, because this firm was created to produce briquettes to export, that was its purpose (Interview 06)

VENPRECAR was created to export; in that sense it had little relationship with SIDOR…the only local client was CASIMA (Interview 07)

We are basically exporters, we do not sell to domestic market, some material around 10% or 15% with low content of iron, we used to sell it to CASIMA and other portion to SIDOR, but basically firm’s business vision was to export (Interview 08)

Briquette is made to export (Interview 09)

To answer how ownership structure influences inter-firm interactions, it is worth to look at the evolution of briquette production. Figure 5.3 shows briquette production (HBI) from 1991 to 2010. As can be seen, HBI production stood at around 2 million tonnes per year in the 1990s up to 1998. Then it grew up substantially from 1998 to 2005 when briquetting sector reached its maximum level of production with slightly more than 5 million tonnes.

Figure 5.3Hot briquetted iron production in the district 1991-2010

Source: (Briquetera de Venezuela. 2011, Complejo Siderúrgico de Guayana. 2011, Venezolana de Prerreducidos Caroní. 2011, Orinoco Iron. 2011, Instituto Venezolano de

Siderurgia.)

It is worth mentioning that HBI production experienced a decline in the early 2000s due to worldwide steel crisis. One respondent (Interview 07) observed that Venezuela positioned as the first producer of HBI in the world.

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However, as from 2006 briquette production has decreased 16% between 2006 and 20103. Briquetting firms reported as main explanation of poorly perform: pellets and mineral (fines and lumps) shortages, worldwide steel crisis starting in 2008, prices to fall in competitor products (metal scrap) in 2008 and transition from private to state ownership starting in 2009 (Interview 06, Interview 07, Interview 08, Interview 09).

Change in ownership structure as from 2009 appears to be just one among other factors that influenced briquetting sector performance. But it may not be the case. The change from private to state ownership seems to have created an environment of uncertainty among briquetting firms:

Currently we are in process of transition from private to public, but we are not yet a state-owned firm…because negotiation between the state and SIVENSA has not been completed yet (Interview 08, emphases added)

Moreover, private owned firm could have anticipated potential nationalization that could have reduced necessary investment leading to poor performance of firms:

In its (O.IRON’s) SWOT (strengthens, weaknesses, opportunities and threatens) analysis, there was threat of nationalization…they stop investing because they thought they were going to be nationalized (Interview 08, emphases added)

Additionally, exchanges to customers are likely to change due to change in ownership structure as it was stressed by respondents, leading to coerced co-operation. The potential creation of an Iron and Steel Corporation, that would coordinate the whole I&S industry may induce coerce co-operation. One respondent from briquetting sector speculated about the influence of nationalization on interactions:

Let’s talk hypothetically, the fact that briquetting firms have been nationalized to integrate them into the so called Iron and Steel Corporation, it was, for instance, to make COMSIGUA to produce and send products to SNAC in Ciudad Piar for them to make slabs, so in theory, it would change the purpose of the firm (Interview 06)

One respondent from a firm that had been inoperative in 2009 and started operations in 2010 after central

3 Own estimation based on geometric mean of annual percentage change between 2006 and 2010.

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government financial support, reacted to the question whether they would keep exporting their products:

There is a particular situation: the government wants us to satisfy local market, which is our priority now, but we face a reality, namely, our reality is that SIDOR is our local market (Interview 09)

When the researcher asked about potential changes in industry due to implementation of workers’ self-management respondents from briquetting sector stated:

We don’t know what workers’ self-management is all about (Interview 07).

That makes me feel uneasy an uncertainty about (Interview 08)

Along with nationalization of briquetting firms other forms of co-operation between them and the hubs were observed that led to integration of district. For example, one respondent mentioned:

Due to steel crisis in 2008 the briquette prices fell down. FMO financed VENPRECAR through dispatching pellets for a whole year without any compensation, thus subsidizing raw material (Interview 07)

It appears that when state ownership is prevalent, interaction tends to strengthen local embeddedness leading to integration of district.

5.2.3 Steel-making sectorSteel manufacturing in the locality is largely dominated by SIDOR which has undergone changes in ownership structure throughout its trajectory. SIDOR started operations in 1964 and functioned as a state-owned firm until 1998 when it was privatized and eventually the firm was nationalized again in 2008. The main question is whether these changes in ownership have influence inter-firm interactions.

As seen above, interactions between SIDOR and FMO seem to have changed due to changes in ownership. The trend appears to show a coerced interaction under state ownership as FMO had the mandate to develop SIDOR. However, the trend seems to have changed as a result of change in ownership: when SIDOR was privatised they could no longer continue to be as integrated as before:

FMO’s directors used to be SIDOR’s presidents and vice versa…the Management and Board of Directors were all

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integrated, that was normal because it was a sole vision directed by CVG…that was created from the beginning, but that relationship obviously started to break down. When? When it (SIDOR) was privatized…the relationship was different because private sector has different goals than the state. The state needs to think about the forest while private firms generally see the tree which is normal (Interview 15, emphases added)

However, the respondent stated that when SIDOR was private-owned, negotiated co-operation gave rise in terms of setting iron ore prices:

Private-owned SIDOR accepted our (FMO’s) price rise, while as a state-owned firm it was much more difficult…the private tries to negotiate the prices, it tries to get the best price possible…but they accepted price to rise…however, state-owned SIDOR did not (Interview 15, emphases added)

The respondent speculated on the change in interactions due to re-nationalization of SIDOR and the eventual creation of Iron and Steel Corporation:

The (I&S) corporation is different, because SIDOR, We, everyone will become a centre of cost, that would be another thing (Interview 15, emphases added)

On the other hand, interactions between SIDOR and briquetting sector seem to be weak under private-owned SIDOR but it appears to be somewhat strengthening under new state-ownership with workers’ self-management, as seen in this example:

We started to supply SIDOR a bit more volume as compared to what we used to supply (before nationalization). We are dispatching now almost 1000 tonnes per weak, thus there was a negotiation which I am not fully aware of, but I do know the volume I managed it statistically (Interview 08, emphases added)

Interactions between SIDOR and CASIMA seem to be voluntary as mentioned in chapter 3. As in the case of briquetting sector, these firms within the same sector seem to have developed co-operative behaviour. Apparently, this behaviour has not changed significantly due to changes in ownership. One respondent from CASIMA stated:

We have maintained a relationship with SIDOR more as associates rather than as competitors. I can tell you, if SIDOR is lacking something and we has it, no in excess, but enough quantity…we have lent SIDOR many things as well as SIDOR has lent us many things when we have

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needed them, because we are in the same business. That was true when SIDOR was state-owned in its first stage, when it was private-owned by Ternium too, and now (re-nationalized SIDOR) it is the same (Interview 14, emphases added).

However, SIDOR commitment to the district seems to have changed due to changes in ownership. Figure 5.4 shows destiny of steel production in the three distinct periods starting in 19684. These figures correspond to a large extent to SIDOR since according to data given by the firm it accounted for 90% of steel production in Venezuela from 1990 to 2010. Prior 1990 CASIMA did not exist and SIZUCA has been always a small firm nowadays accounting for only 2% of steel production capacity in Venezuela. As can be seen in Figure 5.4, steel production seems to be committed to non-local domestic market throughout the series. Nonetheless, it is observed that the pattern of share changes when ownership structure changes.

Figure 5.4Destiny of steel production in Venezuela 1968-2010

Source: (World Steel Association.). Own elaboration

During the period 1968-97 when SIDOR was a state-owned firm, 70% of steel production was exchanged to non-local domestic markets on average, but during the period 1998-07 when SIDOR was a private-foreign-owned firm, it tended to lower the level of exchange with non-local producers to favor external markets. As can be seen, the share of exchange with external markets increased 12% between 1998 and 2007, somewhat resembling a growing export-oriented strategy during this period. This argument was mentioned by respondents.

4 It was not possible to find data for the years from 1964 to 1967.

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When SIDOR bought HYLSA (in Mexico) they already had steel mills abroad; they were interested in exporting slabs; they satisfied local market and the remaining they could export it, they played at saturating local markets and exporting. The external prices were good and the costs of production were very low: the labour, other inputs. They sent slabs to their own steel mills abroad to produce more value added abroad (Interview 12, emphases added)

The product that they (SIDOR) sold the most…- and I can tell you because at that time I was not in Human Resources Department but in a technical-productive area - was the steel slabs that they sold at briquette price, namely as if they did not have any transformation…logically they (SIDOR) were transferring (the slabs) to Mexico to add value (Interview 13, emphases added

SIDOR increased its productivity with privatisation, that’s not a secret, they invested money, and they had comparatives advantages because they had many firms (abroad) to which they could trade and make business plans, they could purchase many things at lower prices and they focused on exports (Interview 14, emphases added)

This pattern of interaction with external markets changed when SIDOR was nationalized in 2008. As can be seen in Figure 5.4, during the years 2008 and 2010 the share of exchange with non-local domestic market increased by 23% somewhat resembling a substantial change towards an increase in district commitment to domestic market rather than to external market. One Respondent’ reaction supported this argument.

SIDOR has changed from being an export-oriented firm to increase what exchange domestically, nowadays is 70% domestic markets and 30% exports (Interview 11a)

We (SIDOR) do have competitor abroad, but because we are not exporting now, they are taking over those markets (Interview 12, emphases added)

Another respondent elaborated on the new plan for state-owned firms:

Socialist Guayana Plan established a new scheme for the firms towards integrated value chains; we started that at MIBAM in 2006. It was thought creating value chains and those value chains led us to design productive trains, every single wagon represented one process linked to another and a single locomotive, one orientation, one purpose…then came up the idea of creating an Iron and

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Steel Corporation…I do believe in that to make possible a national development, a national value added, a downstream transformation of raw material to import-substitute products and generate wealth and employment down here (Interview 11b)

This Plan seems to be the main explanation to the extent state-ownership is likely to change SIDOR’s interactions. The way it would relate with other state-owned firms would largely depend on a deliberated policy to integrate firms around a corporation ultimately accountable to central government. Thus, coerced co-operation would lead to integration of the district.

Patterns of SIDOR’s labour and steel production seem to have been influenced by changes in ownership. Figure 5.5 shows SIDOR’s labour and steel production from 1990 and 2010. Left axis shows numbers of employees and right axis level of production. The vertical dotted lines advert changes in ownership

Figure 5.5SIDOR’s labour and steel production 1990-2010

Source: (Siderúrgica del Orinoco "Alfredo Maneiro". 2011). Own elaboration

As can be seen, the firm showed an important decline in its labour force which dropped at a constant percentage change of 4% between 1990 and 1997 prior to privatisation. Then labour force dropped 30% in 1998, when it was fired more than 3000 employees in one year. Private-owned SIDOR kept firing employees until 2007 when labour force stood at nearly half of that in 1997. Finally, as from 2008 when SIDOR was nationalized, it was hired more 1000 workers because they were considered to be related to core operations and (Interview 12). Similarly, production grew up steadily from 1990 to 1997. Then steel production systematically increased from 1998 to 2007 when it reached production record of 4.3 million tonnes. According to one respondent (Interview 11b) SIDOR managed to add one million ton to its production capacity without adding of

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a new steel mill, but improving operations: they invested in information technology, they invested in slab making process, they invested in training young professionals and they outsourced processes that were not directly related with slab production. Finally, steel production has dropped at a constant percentage change of 20% between 2008 and 2010. According to this findings, changes in ownership structure seems to have influenced changes in patterns of exchanges, albeit do not seem to entirely illuminate about those changes. A number of other factors were gathered to explain changes in district interactions. Next section draws on those factors.

5.3 Changes in inter-firm interactions due to other factorsThis section draws on changes in inter-firm interactions among state-owned firms in Ciudad Guayana’s I&S industry due to factors others than ownership. It is acknowledged that ownership alone cannot explain changes in pattern of interactions, accordingly, a number of others factors were reported: pellets shortages, worldwide steel crisis starting in 2008, government power saving program, lacking of financial resources coming from the state and reconversion plan as factors that triggered changes in interactions.

Pellets shortagesComplaining about FMO current inability to provide sufficient pellets to satisfy local demand were gathered from briquetting sector (Interview 06, Interview 07, Interview 08, Interview 09). Currently, neither SIDOR nor FMO have the capacity to supply growing demand for pellets of briquetting sector. Table 5.1 shows the estimated supply and demand of pellets in the district from 2011 to 2013. As can be seen, there is need to import 1.2 million tonnes of pellets in 2011 since the estimated production would be 7.9 million tonnes as opposed to 9.1 million tonnes of local demand. This gap is projected to continue in 2012 and 2013 that reinforces the argument of local incapacity to satisfy growing local demand of pellets which has been triggered by a recovery of briquetting sector in a current scenario of attractive international prices of briquettes (Interview 07, Interview 08, Interview 09). The local pellets demand is expected to stand at around 12 million tonnes by 2013 since the firms might reach their full capacity of production.

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Table 5.1Supply and demand of pellets in the district (Million tonnes)

2011 2012 2013Pellets production 7.9 9.9 10.3

SIDOR 6.6 7.6 7.6FMO 1.3 2.3 2.7

Pellets demand 7.9 9.9 10.3SIDOR 5.4 6.6 6.6FMO 0.7 1.0 1.1VENPRECAR 0.7 1.0 1.0COMSIGUA 1.2 1.4 1.5BRIQVEN 1.1 1.2 1.5Exports (1.2) (1.3) (1.4)

Source: (Ministerio del Poder Popular para las Industrias Básicas y Minería. 2011)

Pellets shortages are likely to change local interactions. As seen above, both briquetting and steel manufacturing sectors depend on local supply of pellets. Current deficit of pellets may trigger necessity of importing pellets which it is envisioned in MIBAM corporative plan (see Table 5.1) leading to disintegration of district due to an increase in linkages to non-local suppliers. Respondents elaborated:

Basically the decline of production was due to raw material shortages, which one? Pellets, pellets shortages; (FMO) pelletizing plant started to have problems…they could not manage to supply the amount of pellets needed. There was need to import pellets from Brazil, Qatar, we had to import pellets in 2007 and 2008 had we not imported pellets the plant would have shut down. (Interview 06, emphases, added)

Nowadays there is no enough pellets and the quality of pellets have decreased (Interview 07)

The plant (FMO pelletizing plant) next to us was inoperative in 2010 and part of 2011, I think it started recently the pelletizing plant (the interview was in August 2011) (Interview 09, emphases added)

Steel crisisBriquetting sector and hubs developed another form of co-operation that gave rise after nationalization of firms that tends to integrate networks to the district. That was tolling agreements, where FMO or SIDOR dispatched pellets to briquetting firms for them to fabricate briquettes and everyone could keep producing after steel crisis in 2008 when metal prices dropped sharply including metal scrap which is a substitute of briquettes. One respondent elaborated:

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What did we do in 2010? We made a tolling agreement with SIDOR, they dispatched us pellets and we produced the briquettes. Because a ton a briquettes had more value added than a ton a pellets, we sent them the proportional material and we kept the remainder (Interview 09)

We implemented tolling agreements as an opportunity to keep doing business. FMO supplied pellets and VENPRECAR fabricated briquettes, then we charged FMO transformation services and FMO exported the briquettes (Interview 07)

One respondent reported variations in exchanges due to steel crisis:

We began here (in 2008) and sold the steel in 1250 to 1300 dollars per ton and it dropped to 380 to 360 dollars per ton, the international market declined as well as the domestic market… we had an important crisis, we had to export our inventories of finished products in disadvantage (Interview 11b, emphases added)

Government power saving programI&S industry is one of highly demanding of electricity to produce. A government power saving program launched in 2010 due to climate factors that diminished hydroelectric production, influenced greatly I&S production. This kind of government decision seems to reinforce coerced interactions among local constituents. The effect of power savings program was notably observed in SIDOR production as one respondent explained:

The plant needs 750 megawatts to be operative, and the government put a top of 300 megawatts…we had to reduce production by 80%” (Interview 11b)

This is not a Guayana’s curse, aluminum and steel are highly electricity consumers, one furnace, one electric arc furnace and we have got 6, one furnace can consume the power that needs Maracay, the whole city of Maracay with all air conditioners, malls, discos, households everything switched on (Interview 11b)

Lacking of central government resource allocationOne common claim among respondents was the lack of resources that were supposed to be allocated by central government once again leading to coerced interactions within the district.

On top of other issues we have not received resources from the state…neither in quantity nor in opportunity (Interview 11b)

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Guayana needs to receive large investments because we are too old in steel world, SIDOR has more than 35 years that is very old in steel world when you are old after 20 years, an old firms needs more maintenance…this a financial resource issue, we need to renovate including technology, nowadays exists green technology although it is more expensive. I think there is a financial resource issue and there has always been (Interview 15)

Because of nationalization and investment shortages, namely because we don’t have financial resources coming from the state, we haven’t received a penny, that’s the truth, we hope we will receive in the near future (Interview 08)

Reconversion planAs can be seen in Figure 5.5, SIDOR showed an important decline in its labour force which dropped at a constant percentage change of 4% between 1990 and 1997 prior to nationalization. This decline in labour force was explained due to implementation of a reconversion plan that involved shutting down of old plant Siemens-Martin and firing more than 4000 employees. One respondent elaborated:

In 1990-1991 we (SIDOR) started what we called a reconversion plan. It was determined that one steel casting in Siemens-Martin lasted 9 hours while making it in electric arcs of Plan IV it lasted 1 hour… Siemens-Martin was shut down and we had to fire 4000 people or so. We kept Plan IV only; Plan IV had already a learning curve of 14 years (Interview 11b, emphases added)

The reconversion plan was probably a government attempt to keep SIDOR competitive towards external markets (Interview 11b) or perhaps preparing the firm for its imminent privatization (Interview 13).

5.4 ConclusionThis chapter has shown that there are good reasons to believe that ownership structure matters for industrial district analysis. The case of Ciudad Guayana showed that when state ownership was prevalent, coerced co-operation tends to occur and the state appears to induce local embedded networks leading to integration of district. On the other hand, when private ownership was preponderant, voluntary co-operation seemed to emerge somewhat suggesting a connection between private ownership and the expected source of qualitative advantages that accrue to industrial districts according to the literature. These

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findings may not be generalized, but it might explain why industrial districts tend to succeed within production system of private SMEs that happen to be geographical and sectorial concentrated.

This chapter has also shown that ownership alone cannot explain patterns of interactions. It was found that both domestic and external factors have influenced pattern of interactions. Interestingly, when it comes to domestic factors (pellets shortages, power saving program, resource allocation and reconversion plan) the state seems to be involved somewhat highlighting the importance of ownership structure for industrial districts.

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Chapter 6Conclusions

This thesis analyses inter-firm interactions both inside and outside the iron and steel (I&S) industrial district in Ciudad Guayana, Venezuela, and explores the question of to what extent those interactions change as a result of changes in ownership structure as well as other factors. Theories on industrial districts stresses the advantages that accrue to production systems based on private SMEs that are geographical and sectorial concentrated. Positive external economies could emerge from agglomeration of firms that are known as ‘passive collective efficiency’ and include external economies such as a pool of skilled workers, access to suppliers of specialized inputs and new knowledge spillovers. But what distinguish an industrial district from mere agglomeration of firms is the qualitative feature derived from voluntary co-operation called ‘active collective efficiency’ meaning a “conscious pursuit of joint action” Schmitz and Nadvi (1999: 1504).

The study builds on typology of industrial districts put forward by Markusen (1996) to explore Ciudad Guayana’s I&S industry. Markusen contribution to industrial district analysis was designing a comprehensive framework that includes inter-firm connections, the role of national and local government, the role of large firms and embeddedness in local and non-local networks to conceptualized typology of industrial districts. Ownership structure is not directly addressed within Markusen’s framework, although she claimed that “the study of industrial districts requires a broader institutional approach” (Markusen 1996: 293). This research attempts to contribute to industrial district analysis by introducing ownership structure in the debate.

This study has explored inter-firm interactions among state-owned firms in Ciudad Guayana’s I&S. The findings suggest that along the productive chain: mining, pelletizing, briquetting and steel-making, the nature of co-operation seems to change. At the beginning of the chain the nature of co-operation seems to be coerced as the state functions as the only supplier of mineral for the district leading to greater bargaining power. It was also found that among firms within the same sector, voluntary co-operation seems to emerge, as seen in briquetting sector creating a joint operator to manage a Port, and in steel–making

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lending to each other specialized inputs and outputs which is in line with literature on industrial districts.

I&S industry in Ciudad Guayana could be categorized as a state-anchored district according to the hypothesized features proposed by Markusen (1996). The role of the state was addressed; it was shown that national state have played an important role in promoting and sustaining the district; it was found a weak local government in promoting core industries as hypothesized by Markusen. The role of large firm, notably FMO and SIDOR, in shaping district business structure was explored; it was shown their success in attracting private sector investment both upstream and downstream. Local and non-local embeddedness was analysed; it was found that local commitment is higher than that of non-local. Although, not all features have been tested and the district has shown that some features are contrary to that of state-anchored district, but according to Markusen: “a real-world district may be an amalgam of one or more types, and over time districts may mutate from one type to another” (Markusen 1996: 296).

The study has shown that I&S industry has undertaken a trajectory that can be split into three historical periods where a distinct form of ownership is preponderant. The first stage was characterized as state ownership. Here the business structure of the district was dominated by two large state-owned firms: FMO and SIDOR. The role of CVG (the state agency with mandate to develop Ciudad Guayana) was deemed to be significant; it has served as key anchor tenant in the district. Through CVG leadership, the district appears to have succeeded in inducing agglomeration externalities, notably, access to skilled labour, specialized inputs (i.e. pellets) and technology spillovers (i.e. FIOR lab). Co-operation behaviour between firms was exhibited during this stage, albeit in a coerced fashion due to CVG ascendancy on the district which centrally commanded the construction of Ciudad Guayana with little participation of local authorities.

The second stage depicted a district where the business structure was dominated by private sector. The district exhibited co-operative behaviour (i.e. creation of joint port operator: COPAL) leading to collective action among briquetting sector. This sector comprised by medium enterprises, largely benefited from positive externalities created in prior stage. The nature of co-operation between FMO and now private-owned SIDOR became mainly negotiated. The ascendancy of CVG on the district diminished substantially during this period and involvement

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of local authorities in promoting district seem to remain weak. It appears that there was a shift towards more commitment of firms to external markets leading to disintegration of district.

The third stage of state ownership with workers’ self-management shows a district in redefinition as it is nowadays. The state owns the whole I&S industrial complex in Ciudad Guayana after being nationalized the private firms from 2007 and 2010. The nature of co-operation between state-owned firms seems to be in line with expected behaviour. They appear to interact under coerced fashion, albeit this time coercion is exerted by MIBAM (Ministry for Basic Industries and Mining) which in turn purports to implement workers’ self-management approach. The success of this approach seems to be undefined, as managers, especially from newly nationalized briquetting sector, manifested uncertainty of strategy. It was found that when state ownership is prevalent, interactions tend to strengthen local embeddedness leading to integration of district.

This study has shown that there are good reasons to believe that ownership structure matters for industrial district analysis. The case of Ciudad Guayana showed that when state ownership was prevalent, coerced co-operation tends to occur and the state appears to induce local embedded networks leading to integration of district. On the other hand, when private ownership was preponderant, voluntary co-operation seemed to emerge somewhat suggesting a connection between private ownership and the expected source of qualitative advantages that accrue to industrial districts according to the literature. These findings may not be generalized, but it might explain why industrial districts tend to succeed within production system of private SMEs that happen to be geographical and sectorial concentrated. It is acknowledged that ownership alone cannot explain patterns of interactions. It was found that both domestic and external factors have influenced pattern of interactions. Interestingly, when it comes to domestic factors (pellets shortages, power saving program, resource allocation and reconversion plan) the state seems to be involved somewhat highlighting the importance of ownership structure for industrial districts.

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Appendices

Appendix I. List of Interviewees

Code Respondent Organisation

Date

Interview 01

Administration Director

MIBAM 28-07-2011

Interview 02

Advisor to the President

CVG 29-07-2011

Interview 03

Planning Executive

TSC 02-08-2011

Interview 04a

President TSC 04-08-2011

Interview 04b

Worker Representative

TSC 04-08-2011

Interview 04c

Worker Representative

TSC 04-08-2011

Interview 04d

Worker Representative

TSC 04-08-2011

Interview 05

Finance Director SNAC 05-08-2011

Interview 06

Planning Manager Comsigua 08-08-2011

Interview 07

Planning Supervisor

Venprecar 09-08-2011

Interview 08

Planning Supervisor

OI 11-08-2011

Interview 09

Planning Manager Briqven 12-08-2011

Interview 10a

Advisor to the Planning Coordinator

Municipality

16-08-2011

Interview 10b

Planning Employee

Municipality

16-08-2011

Interview 11a

Planning Manager Sidor 17-08-2011

Interview 11b

Advisor to the Industrial Director

Sidor 17-08-2011

Interview 12

HHRR Head-of-Department

Sidor 17-08-2011

Interview Former Worker Sidor 19-08-

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13 Representative 2011Interview 14

Plant General Manager

Casima 22-08-2011

Interview 15

Planning Manager FMO 24-08-2011

Interview 16a

Technical Department Engineer

RYP 25-08-2011

Interview 16b

Technical Department Engineer

RYP 25-08-2011

Appendix II. Hypothesized features of state-anchored district

Source: Markusen (1996: 299)

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