2.3.1 ICT as a Production Sector

The global networked economy offers opportunities for developing countries not only to respond to market opportunities in developed economies, but also to develop national capacity and create domestic spillover effects and niche opportunities for nationally-located enterprises, including small and medium enterprises (SMEs).

The following case studies illustrate these two different approaches to the development of ICT: leveraging ICT for export opportunities (Costa Rica) and as a sector—building national capacity for domestic market development (Brazil).

1. Costa Rica: Focusing on ICT as an Engine of Export Growth
Like many other Central and South American countries, Costa Rica has focused on developing its export sector and on increasing foreign direct investment (FDI) as a means of generating employment and foreign exchange. However, instead of concentrating in labor-intensive industries like some of its neighbors, Costa Rica focused its attention on the high-tech sector.

In 1996, faced with declining prices of its primary source of exports and growth, Costa Rica saw the need to develop alternatives to coffee production. The government recognized the potential of the emerging ICT sector and the importance of attracting a global corporation such as Intel to locate in the country.30 Today, the Costa Rican factory is Intel's second largest for final assembly and testing of computer microprocessor chips. One-third of all Intel microprocessors used in computers around the world come from the Intel plant in Costa Rica.

Costa Rica's location vis-à-vis North and South American markets, its peaceful and stable political environment, the business-friendly policies it adopted in the 1980s,31 its excellent infrastructure,32 and its educated and skilled workforce have all made it an attractive location for high-tech, export-oriented firms and other IT-enabled industries. Once the success of Intel in Costa Rica was demonstrated, other major US companies followed, including consumer products maker Procter and Gamble, medical devices manufacturer Abbott Laboratories and money transmitter Western Union.

Costa Rica’s export focus is being broadened to include software and IT services exports. Over one hundred software development companies currently operate in Costa Rica, employing more than 1,000 professionals and exporting to countries in Latin America, the Caribbean, North America, South East Asia, Europe and even Africa. The total exports of the six largest software development companies in 1997 surpassed US$25 million. The target for 2001 is to export over US$200 million. According to the Costa Rican government, "software is destined to become in the coming century what coffee represented for the Central American country for over two centuries."

A critical element of Costa Rica's approach has been a focus on education. Not only does Costa Rica have high national standards of education, it has also worked on ensuring that education institutions produce appropriately skilled workers and professionals. Given the limited number of engineers and technicians, the government has embarked on an aggressive campaign to transform the knowledge base of the country in alignment with the requirements of the high-tech sector. The Instituto Nacional de Aprendizaje (INA), an autonomous institution financed with public resources and private contributions, and the private Instituto Tecnológico de Costa Rica (ITCR) are the main providers of engineering professionals. Costa Rica has been supported in its efforts to upgrade its education system by the Inter-American Development Bank and private investor funding.

To encourage demand, computer duties were removed in the 1980s. The falling computer prices stimulated usage and Costa Rica now has one of the highest rates of usage in Latin America.

Achievements and Limitations. Intel's impact on the Costa Rican economy is indisputable. The balance of trade turned positive due to the dramatic increase in exports (20 percent annual increase). Traditional exports, such as bananas and coffee, could not create such a boost in exports and in any case were declining. The gross national product (GNP) also grew by approximately 6.4 percent and 8 percent in 1998 and 1999, respectively. In 2000, computer products accounted for 37 percent of Costa Rica's exports. This is higher than bananas at 10 percent and coffee at 5 percent, making the technology free trade zone regime the most important foreign exchange earner for the country.

This kind of export focus requires developing countries to compete with each other for limited foreign capital. Offering financial incentives can have a costly impact on the budgets of small countries, particularly when foreign companies’ operations do not create many linkages with the rest of the economy. Countries such as Ireland have experienced growth in local satellite industries around large foreign investment such as that of Intel. Although this has not yet happened in Costa Rica, the government is trying to use foreign companies' presence to spur development of domestic-owned suppliers and other satellite businesses such as software development firms.

The Costa Rican Government has launched several separate initiatives to use ICT to address developmental goals (for example, schoolnets and public access sites), but these are not integrated with the wider export promotion approach.

2. Brazil: Building National IT Capacity for Domestic Market Development
Brazil's ICT policy has been consistently focused on the development of a domestic ICT sector and market, although the mechanisms to secure this have changed. In the early phase (1980-90s), the focus was on the creation of a diversified industrial structure and the development of the technical capabilities of national firms. In more recent years, with greater liberalization of the economy, the strategy to support domestic capacity has shifted from protection to promotion. Development of the sector is taking place with a greater presence of, and collaboration with, external partners. Brazil is now poised to become a major production center for export as well as domestic demand. Brazil offers a large market, manufacturing capabilities, installed industrial base and access to other South American markets. Having encouraged the growth of the IT sector, the Brazilian Government is now moving to extend the benefits of ICT to a broader base in society.

Brazil was among the first developing countries to put in place policies promoting the development of a national ICT industry. The Brazilian ICT (principally computer) sector drew on a skilled population base, strong research and development (R&D) networks, a relatively extensive telecommunications infrastructure33 (put in place by the end of the 1970s) and a strong level of government commitment.

Brazil's IT policy in the early 1980s came in the wake of the debt crisis, the attendant need to reduce imports and the desire to avail the country of the opportunity to expand and diversify its industrial base. Its so-called "market reserve" policy was established to create a "greenhouse" environment that could nurture locally-owned companies (for micro and mini-computers) and protect them from direct imports and competition with world industry leaders for Brazil’s relatively large and fast growing national market. Domestic R&D grew because technology transfer agreements were difficult to obtain. Local firms developed their own products based on reverse engineering or in-house design. By the end of the 1980s, Brazil had attracted a set of IT corporations that brought significant local market presence and job creation benefits. Among the 50 main ICT firms involved in hardware production, total employment increased from 43,000 in 1984 to over 74,000 in 1989. The output of local computer hardware producers grew from less than US$200 million in 1979, to more than US$4 billion in 1990.

However, the debt crisis also led to a decline in telecommunication services.34 Partly in response, the government introduced liberalization measures in the telecommunications sector. The first step was a constitutional amendment abolishing the telecommunications monopoly. This was later followed by legislation allowing private enterprise to bid for cellular licenses. Lower prices resulted and telecommunication services were not only restored, but grew, making the expansion of the domestic computer industry more viable.

Following an initial decline in the production of hardware with liberalization, production expanded again in the 1990s on the basis of local production led by Compaq, Itautec (a national company) and IBM. Liberalization thus resulted in the computer industry being rebuilt on new terms, although based on the legacy of previously created technological capabilities. In 1997, the Brazilian PC industry produced over 1.2 million systems worth US$2.5 billion, or 37 percent of the Latin American market. Opening up the market has also led to rapid growth of contract manufacturing in Brazil. Compaq and Epson are outsourcing their production of integrated circuit boards to Brazil. Hewlett Packard does the same for its printers.

Another development is that software has risen as a proportion of the IT industry, going from 15.7 percent in 1991 to 21.3 percent in 1997, and it is currently growing at 25 percent a year. Software production accounts for over 10,000 firms in Brazil, and for more than 200,000 jobs. Brazil is the largest "packaged software" market in Latin America. The growth of the Brazil IT market has encouraged a number of foreign software and information services firms to set up local subsidiaries for customization and various service functions, but national firms, given their previous experience and well-established user-producer relationships, were also able to find profitable niches in banking automation and R&D.

Achievements and Limitations. Thanks to the IT policy pursued over two decades, Brazil is poised today to become a major production center. Brazil offers a large market, manufacturing capabilities, installed industrial base and access to other South American markets with which it has trade agreements. Several major computer hardware firms have located regional production centers in Brazil, and this has slowly begun to attract component suppliers as well as major parts distributors and specialized contract manufacturers. Brazil has a tradition of excellence in IT-related research and a large university trained workforce that, taken together with the size of its domestic market, provide good opportunities to create both demand for and production of software and services aimed at local users.

With the current income distribution, growth of the internal market is limited and skill shortages are emerging. In addition, the focus on developing ICT as a sector has resulted in limited impact on development goals. Aware of these issues, the government launched the "Information Society Program” in December 1999. The Program’s scope includes: promoting business competitiveness, universal access for citizens, education, e-government, research and development in key technologies, local content development, and basic infrastructure deployment.


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