Software industry: An opportunity for Latin America?

World Development, Vol. 18, No. 11, pp. 1587-1598,199O. Printed in Great Britain.

0305-750x/90 $3.00 + 0.00 0 1990 Pergamon Press plc

Software Industry: An Opportunity for Latin America? CARLOS MARIA CORREA* UNDPIUNZDO Regional Coordinator, Programme on Znformatics and Microelectronics, Buenos Aires Summary. Many developing countries are looking for entry points to the expanding informatics market. Software has been viewed in some of them as offering an opportunity to exploit low wage and capital requirements. This paper presents the main characteristics of the software market and industry in Latin America. It analyzes the local supply of (traded) software, including the origin, scope of activities and size of firms, their main products and technology in use. Export experiences from several Latin American countries are also briefly presented, recognizing that further research on the issue is still required. On the basis of this empirical evidence, the comparative advantages and obstacles that the region faces to establish a solid software industry are discussed. It is argued that considerable efforts would be required to transform current expectations into reality. A basic point is that even if good software can be developed, marketing and distribution barriers, particularly for packaged software, are difficult to penetrate. The main policy issues relating to the building up of a software industry are summarized, taking the heterogeneity of markets and products into account.

1. INTRODUCTION The establishment of a dynamic software industry has been identified in many developing countries as essential to meet the needs of a growing number of domestic users of informatics systems. In some. of those countries (e.g., India and Singapore), software has been viewed, moreover, as opening up new and substantial export opportunities (Dataquest 1987, p. 83; Schware 1989). Expectations of this kind have also emerged in a number of Latin American countries. It is often argued (ANIPCO, 1987; CES, 1987; Chilesoft, 1987) that there are clear comparative advantages (mainly low capital requirements and low wages of programmers and system engineers) to cater to the international market. Recent literature has supported this view (O’Connor, 1985, p. 314; Cohen. 1987, p. 5; Munasinghe, 1987, p. 318; Schneider, 1988, p. 29). Certainly, the software market is one of the most dynamic and attractive segments of the information technology industry. In 1987 the world software market accounted for around US$50 billion. It has grown at an annual rate of nearly 22% from 1984 to 1987 (OECD, 1988, p. 21). The software industry, however, is a highly concentrated sector’ where hardware pro-

ducers and a few specialized software firms control a large part of production and world trade. US firms alone account for more than 70% of world software sales (US Department of Commerce, 1984). The participation of developing countries in the global software market is almost insignificant. In 1984, OECD (Organization for Economic Cooperation and Development) countries accounted for nearly 97% of the world market (at the supplier level). Developing countries, such as India, that have attempted to develop an exportoriented software industry have only had modest success. Paradoxically, some developing countries have more easily entered into hardware production. The aggregate production of the largest hardware producers in the newly industrializing countries reached US$12.4 billion in 1988, including complete systems and peripherals. Singapore and Taiwan are among the 10 major exporters of such equipment (Junqueira Botelho, 1989). Empirical observation of software the industry’ in developing countries seems to suggest that the comparative advantages that these *This paper is based on a research project conducted under the auspices of IDRC by the Asociacion Argentina para el Desarrollo Tecnologico (ADEST).

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countries may have in this field are offset by several inhibiting factors. To overcome these obstacles, well-articulated, long-term policies need to be established. 2. MARKET

CHARACTERISTICS

The diffusion of informatics in Latin America is very limited compared to developed countries. It accounts for about 2% of the computers installed in the world (Delapierre and Zimmermann, 1984). The statistics on hardware installations in the region are poor and do not permit detailed, intercountry comparisons. Brazil has the largest number of installed computers, but a small country like Costa Rica has the highest per capita density (Table 1). The basic features of the software market in Latin America have been largely determined by the prevalent patterns of computerization. In most Latin American countries, foreign hardware suppliers have greatly influenced the rate and mode of equipment use. The major suppliers. particularly IBM, promoted centralized informatics systems, especially in public administration. This strategy was very profitable for suppliers, allowing them to keep clients dependent on maintenance and the supply of new equipment for long periods. Pressures exerted to install centralized systems continued even after microcomputers became powerful and versatile enough to cope with user requirements that Table

1. Number America

of computers installed in Latin (selected countries)

Country

Year

Number

Computers per 1,000 inhab.

Argentina Brazil Colombia Costa Rica

1985 1987 1987 1988

29,769 722.619 11,667 30,000

0.97 5.11 0.49 10.74

Chile Ecuador

1987 1985

10,298* 2,OOOt

0.82 0.21

Mexico Paraguay

1986 1987

30,335$ 3226

0.13 0.08

Peru Uruguay Venezuela

1987 1987 1988

12,000 7.623

0.58 2.49

Source: Forero

108,000//

5.91

Pineda (1988); and data supplied informatics authorities. *Home computers: 47,9Sl. tlmported equipment. $Number of entities and enterprises equipped. SExcluding microcomputers. j)Only microcompurers included.

by

previously could only be satisfied by the acquisition or lease of a mainframe. Given the newness and lack of appropriate formal education in informatics. hardware suppliers also played an important role in training personnel. This training, however, emphasized and operating computers and peripherals. neglected the design and implemention of information systems. The information systems. therefore, in most countries of the region are inadequate. The systems are often overdesigned and operate with largely underused equipment. In Venezuela, for instance. the Oficina Central de Estadistica e Informatica (OCEI) has estimated that only 45% of the computer capacity installed in the public sector is effectively used. That percentage is even lower (39.8%) if the departments of the central administration are considered alone (OCEI 1989, p. 35). Application software for the public sector which has been developed “in-house,” is frequently ill-documented, and is difficult to maintain. The demand for externally supplied software by the public sector has been low. In Argentina, about 80% of the systems in use in 1984 had been internally developed (Galina, 1987). Between 1983 and 1987, only 4% of total expenditures made by the Venezuelan government were for software. As a result. the public sector, being the major purchaser of computer hardware in many countries. has had no substantial impact on the development of a national software supply. In Latin America software production is limited to custom-made applications, mostly for administration and accounting. Only a few packages have been developed and are being marketed. Systems software has been produced in exceptional cases (see next section). The majority of commercialized software in the region is of foreign origin. In Argentina, imported computer programs amounted to 21.1% of total software sales in 1985. Of this proportion 92.3% was system software, tools, and utilities. Similar proportions were observed in Brazil (Pereira de Lucena, 1988). In 1986, 33.5% of the computer programs registered with the Secretaria Especial de Informatica (SEI) had been nationally developed. Imported software clearly prevailed in basic software and utilities, and was also important in applications. In Mexico, about 60% of the market is foreign software (de Mateo and Carner. 1988). It is difficult to determine the size of the Latin American software market. Data for Argentina indicate sales of about US$160 million for 1988 (Network. 1988). A similar value has been estimated for Mexico: 46% of which corresponds

SOFTWARE

to software for microcomputers, 35.3% for minicomputers, and 18.7% for mainframes (INEGI 1988). The Brazilian software market is the largest in the region. as is its market for hardware (which was above US$3 billion in 1988). According to Pereira de Lucena (1988), software sales in Brazil represent US$700 million annually, out of which US$SOO million is of foreign origin. The data on commercialized software, howunderestimate the efforts in software ever, development actually being made in a country. A large and growing part of development costs of computer, telecommunications. and other professional electronic equipment is accounted for by “embedded” software. A Venezuelan firm that manufactures PABX, for instance, estimates that 80% of its professional staff is devoted to the related software. In Brazil, hardware producers spend an average of 3.15% of total sales on software development and acquisition (SEI, 1987, p. 65). Although the quantitative importance of this phenomenon needs to be measured more precisely, it is clear that significant software projects are sometimes carried out by firms that do not sell the software separately. In addition, public research and development institutes (such as the Instituto de Investigaciones Electricas of Mexico and the Fundacion Instituto de Ingenieria of Venezuela) and public enterprises (e.g., Telebras of Brazil) also develop software for public and private clients. In some cases. these products are very sophisticated. The largest software development project in Brazil (involving hundreds of thousands of code lines) has been the “Tropico” project, which included the design of a family of telecommunications (switching) equipment (Pereira de Lucena, 1988).

3. THE SOFTWARE INDUSTRY AMERICA

IN LATIN

(a) Origin, scope, and size offinns The composition and characteristics of the software industry in Latin America have only recently been examined from an economic perspective. Studies have been conducted in Argentina, Brazil, Mexico. Venezuela. and the Andean Group countries.? Available information indicates that. overall. the industry is still at an early stage of development and that, notwithstanding obvious differences. many common regional characteristics can be identified. First, as in industrialized countries. local software industries are fragmented and. typically, small and medium-size enterprises predominate.

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In Argentina, Venezuela, and Mexico, an average of 200 enterprises are active in the field. In Brazil, the relevant private association has around 500 members. Most software firms are very new. In Argentina, 64% of the firms covered by the 1986 enquiry had been established after 1980. In Venezuela, 35% had been set up between 1978 and 1983 and 24% between 1984 and 1986. The origin and range of activities of software firms vary. In many cases, the firm supplied computer services and subsequently diversified into the commercialization of internally developed software. In Argentina and Brazil. such firms play an important role. In Argentina, 42% of the firms studied fell within this category. The dominant enterprise in software development in 1987 was also involved in data processing. In Brazil, such data processing is still the strongest segment of the computer services market (Table 2) and has provided a base for entering the software market. In fact, computer services firms are generally better positioned in terms of equipment, software tools, personnel, and knowledge of the market than “software houses” to develop large or complex projects. A second important source of software production is linked to the commercialization or production of hardware. The supply of “integrated systems” provides an opportunity for local firms to add value in equipment sales. In Brazil, for instance. the large integrator companies have rapidly expanded their software operations for general computers as well as for industrial automation. Consultancy firms have also diversified into the software market, particularly for administration and accounting. In Argentina, such firms accounted for 14% of the locally developed software. Their main advantage is their expertise in certain fields of software application and their ability to offer clients integral computer-based solutions for different areas of enterprise or government activities. Finally. some firms have emerged and remain specialized in the production and sale of software. In Argentina, such “software houses” arc responsible for 40% of total sales of software developed in the country. Such firms are, however, generally smaller and more fragile than firms that include other activities along with software production. In the Argentine case. only two of the 10 major software suppliers are specialized software houses. In Brazil. technical skill in software houses is considerably lower than that of the national hardware producers and integrators. Notwithstanding the large number of active

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Table 2. Computer services in Brazil -

local firms’ total revenue3 1985_87* 1986

1985 Firms

$ million

% Total

% million

% Total

1987t $ million % Total

PUBLIC Software DP$ Others5

485.56 1.10 429.29 55.17

37.6 0.1 33.2 4.3

616.91 4.53 548.44 63.94

45.4 0.3 40.4 4.7

274.45 2.95 241.40 30.10

37.7 0.4 33.2 4.1

PRIVATE Software DP Others

808.34 25.17 190.26 592.91

62.4 1.9 14.7 45.8

739.89 37.41 249.66 452.82

54.6 2.8 18.4 33.4

452.97 33.71 171.30 247.96

62.3 4.6 23.6 34.1

TOTAL Software DP Others

1,293.90 26.27 619.55 648.09

100.0 2.0 47.9 50.1

1,356.80 41.94 798.10 516.76

100.0 3.1 58.8 38.1

727.42 36.66 412.70 278.06

100.0 5.0 56.8 38.2

Source: SE1 (1987). cited by Gaio (1989). *Data from a sample with 32 public firms and 218 private firms. The private includes data from hardware firms supplied by ABICOMP. tEstimated. SDP: data processing, data entry, facilities management. Bothers include: - information services such as data management, video-text electronic - consultancv, systems inteeration. technical assessment - technical &pp&t, and maintenance - training - other technical services.

firms, high.

market

concentration

seems

to

be

very

In most countries of the region, a few medium-size firms coexist with many very small enterprises. In Argentina, only three firms had more than 35 employees devoted to software development, and eight firms claimed to possess equipment worth more than US$lOO,OOO (the total figure for the industry being US$2.5 million). In 1985. most Mexican enterprises had four to six persons devoted to development and two or three to marketing. Only a few enterprises had more than 20 employees. In Venezuela, two enterprises have more than 100 employees. Of the 23 enterprises sampled in Venezuela, the average number of employees was 27. Foreign capital has a minor role in software development in Latin America. This is clearly in contrast with the significance of foreign software and, particularly, of software sales by hardware manufacturers established in the region.’ IBM, for example, is the major software vendor in Argentina. but undertakes no local development. There are no indications, moreover, of international hardware suppliers executing or showing interest in significant software-development projects in the region. Therefore, project development is an activity almost entirely left to national enterprises. in spite that foreign direct invest-

sector also

mail

ment regulations have been substantially relaxed all over Latin America during the 1980s (UNCTC, 1988). Furthermore, in some countries, such as Venezuela, foreign investment in the informatics sector is promoted through a more liberalized regime. The lack of interest by foreign firms may be attributed to a multiplicity of factors, including market size, limited availability of qualified personnel, and lack of an appropriate telecommunications infrastructure. The low propensity of software producers in developed countries to delocalize productive and research and development (R&D) activities (OECD, 1988) may also help to explain the lack of foreign investment in software development.

(b) Technology

undproducts

The local software industry is quite heterogeneous. Many differences exist in terms of technical skills. type of products by standardization and use. and quality levels, to name a few. In general terms, however. the Latin American industry has the following main software features. First, the industry’s sales are highly dependent on custom software, which is the main activity of

SOFTWARE existing local firms. Some enterprises in various countries (Argentina. Brazil, Mexico. Venezuela) have attempted to produce packaged software, in most cases building on a software developed for a particular client. In Mexico. for example. the firm Kuazar had sold (at the end of 1985) 5.630 copies of its programs. The 38 most successful Mexican companies in the field had sold 616 copies of their computer programs by the end of 1985 (most of them for microcomputers). These cases are, however. the exception rather than the rule. One important limitation is the small market size. which does not justify the investment required for developing a software package. This limitation applies even in the case of Brazil (Takahashi and Lucena, 1988), although it is, as mentioned before. the largest software market in the region. The stiff competition of imported software (often “pirated” and sold cheaply) is another constraint. The lack of technical and. especially, marketing skills is also significant. There is no single package developed in the region with international or regional diffusion. Second, the majority of programs sold are unsophisticated products for administrative and accountancy tasks. In many cases, even the software developed for large users (particularly in the public sector) is limited to routine tasks and badly documented. There are some noticeable achievements. for instance. in banking, but these do not yet constitute the standard in the industry. Some efforts in systems software have been undertaken. in most cases by hardware suppliers and often with the cooperation of university centers. In Brazil. for instance. the Pontificia Universidade Catolica. Rio de Janeiro. and the State enterprise COBRA developed the first Brazilian operating system for minicomputers (“COBRA 500”). More recently, and partially as a response to the unwillingness of AT&T to provide a UNIX source code license. COBRA invested about USS20 million to develop a UNIX-like system. 50X.” A private firm also developed a MS/DOS-like system. Although 143 firms are involved in the development of compilers, operating systems. and data bases for microcomputers, and 74 for minicomputers and “supermicros,” there are no local suppliers of basic software for mainframes. The production and marketing of such software is still controlled by foreign enterprises (Pereira de Lucena. 1988). Third, production methods and management are generally poor. In fact. many analysts question whether the existing productive basis for software actually constitutes an “industry”; many

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projects often lack systematization and professionalism. It is widely accepted (even within the industry) that local products generally lack good documentation and are of low quality. In Argentina. 41% of the software production workforce had a university degree related to informatics; 11% had a university degree in another discipline. In Venezuela. 62% of employees held a university degree. However, most professionals were trained in COBOL language, one of the most popular for administrative applications. and have little or no experience in the use of software engineering tools. In the benefits Brazil, “it is difficult to transfer produced by tools capable of increasing productivity to the vast majority of analysts and programmers. since they do not have the level required to understand the concepts upon which these tools are based” (Pereira de Lucena. 1988). Consequently, local firms are not technically prepared in general to design and specify innovative projects. The weaknesses of local firms on the management side are as important (if not more). Many firms set up and managed by computer professionals lack appropriate marketing. They some’times produce a good piece of software. but it is extremely difficult for them to actually put it on the market. The firms face difficulties in identifying potential demands and adequately advertising their products. Serious management problems also arise in large softwaredevelopment projects, which require detailed coordination and supervision. This applies even to countries like Brazil, where 10 postgraduate programs are available, with a strong emphasis on software. Fourth, national firms generally have low capital resources, which limits their ability to get financing for large projects or to develop packaged programs. Equipment and software investments are generally low, except in cases where the firms perform other related activities, such as data processing. The lack of venture capital and the reluctance of the banking system to take risks over “intangible” assets significantly limit the growth opportunities of national firms. Finally, it is not surprising that the research and development efforts of the software firms are very low. Most projects are undertaken by universities or other public institutions, with limited enterprise participation. The lack of inhouse research and development at the enterprise level is certainly a major difference compared with the software houses of the industrialized countries, particularly those that hold significant segments of the software market (US Department of Commerce, 1984).

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(c)

Comparative

DEVELOPMENT

advantages

The problem of the comparative advantages of the software industry needs to be considered in a comprehensive framework (Table 3). Among the factors favoring the development of software, “low wage scales” is certainly applicable to most Latin American countries. In Costa Rica, the monthly salary of a programmer is around US$400. Chilean programmers earn about 75% less than their US counterparts (Hurtado, 1989). Although wages may be higher in other countries of the region (particularly Brazil), wage scales are undoubtedly advantageous to the software industry, particularly when compared with thbse prevailing in the United States. Given that wages (including but not limited to programmers) may represent 35-55% of total expenditures for a software firm (Katz. 1987, p. 21), this is an area where Latin American countries possess a certain advantage. It is not clear, however, to what extent such low wage scales contribute to the industry’s competitive edge. In the production of packages for microcomputers, for example, development costs represent a minor part of total sales revenues (around 15%, against 50% for marketing and

management) (US Department of Commerce. 1984). The impact of low programmers‘ salaries on the competitive capacity, therefore. may be important in this case but not as significant as sometimes assumed. Its importance IS certainly higher for the production of custom-designed software. where marketing and other administrative costs are lower than for packaged software. Assuming. in any case. that low wages confer an advantage, is this. in combination with other factors mentioned in Table 3. sufficient to create competitive strength? The reply is. unfortunately, no. Domestic markets are simply too small to justify the development of certain types of software, particularly packages. In the absence of a national hardware industry, it is very difficult to enter the systems software field. The average qualifications

twlims

Factors retarding the development of software

Low capital availability

software backlogs

Increasing development, and maintenance costs Lack of specialized conditions

dewloping

Small domestic markets

Low wage scales Growing

personnel,

insufficient

Table 3. Factors in the development of software by Factors favoring the developmenr of software

of available

operating

software for local

Lack of marketing

expertise

Absence of an informatics computer industry policy

or

Proliferation of international subcontracting for software development; joint training centers

Absence of raxation/fiscal and R&D for software producers; regulatory restrictions on importation of technology and software

support services requirements Modifications requested by users

Shortage of labor with required skills; retention of highly skilled labor necessary

New communications

Shift toward semi-automated programming

Local

technology

incentives

Language

barriers

Severe competition companies in R&D

from large and marketing

Difficulties in providing adequate maintenance and support

Source:

Schware

(1987).

p.

1256.

moreover,

in most countries to produce high-quality software. Higher investments in equipment and software engineering tools are required to create high-quality software. The capital intensity of the software industry seems. The lack of marin fact, to be growing. keting ability and resources is another crucial shortcoming. Another problem is that the labor advantage are

SOFTWARE

may decrease over time. There are three reasons for this: there is a trend toward the growing automation of software production. particularly routine programming; the availability of skilled software professionals is becoming more important than labor costs; and higher wages may reflect higher productivity levels and quality performance. In sum, ‘.though labor costs are still relevant to assessing a country’s competitiveness, by the 1990s they may not be the important fact they now are” (Schware. 1989. p. 37).

(d) Software exports The export of software presents many difficulties for Latin American firms. The proximity of the potential user is essential to correctly identify its needs and, when a system has been delivered, to provide adequate post-installation maintenance and support. Even if a very competitive price for the development of custom software is offered, potential clients will often put a premium on reliability, good quality, and maintenance guarantees. Price may be one element to consider when selecting bids, but previous work and the nature of the projects the bidding firm has executed may actually be more important in the final selection.’ For packaged microcomputer software, the nature of the distribution systems in potential foreign markets is a major barrier. For instance, it would be very difficult for a small. foreign firm to enter the distribution channels of the United States. Almost 90% of programs are sold through retailers; three of the largest companies in this field hold about 60% of total sales. These companies deal with a limited number of programs (70 on average). mainly those sold at low prices but at high volume (Katz. 1987, p. 25). Finally, language may be a source of a relative advantage within Latin American countries and Spain. However. the Spanish-speaking market is small and, even there, Latin American producers need to compete with many programs written in English. A study of major Argentine software producers, regarding the perception of their comparative advantages showed a consensus on the i,mportant limitations facing the industry. The small local market, the shortage of R&D resources, the lack of marketing strength, and the low availability of capital were the constraints most often cited. The problems arising from marketing were pointed out in particular as hindering export opportunities (SECYTADEST-IDRC, 1988). A similar study undertaken in Chile identified the lack of experience in

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international marketing as the major obstacle, followed by language barriers and complexity of distribution systems (Sanhueza. 1989). There is scattered information on the experience of software exports from Latin American countries. In Argentina. a small firm (AUTOM) directly exported an integrated package for file management (“Autofile”) to various Latin American countries and established distribution contracts with local firms in Australia. Venezuela, Paraguay. Costa Rica, and Spain. To gain greater acceptance by potential users. the package was presented as nationally developed in many of these importing countries. The total volume of exports of this product has been modest; the lack of marketing resources has been pointed out by AUTOM as a major constraint to expanding export activities (SECYT-ADESTIDRC, 1988). Chilean companies have also reported some successes in the export of software, particularly specific applications that run on mainframe computers. SONDA, Chile’s second-largest computer company. sold an automated banking package to Indonesia’s Overseas Express Bank. Another company, Sistemas Integrales. developed a package for statistics that was translated into four languages and is in use in Brazil. Cameroon, France, Mexico. Morocco, and Tunisia. Other exported products include “Dunga,” a tool that has been software-development licensed, among others, by PEMEX. the Mexican state oil company (Hurtado, lY89. p. 92). Several firms of the Andean Group countries have undertaken software exports mainly to other countries of the region. Colombian and Venezuelan firms are among the most active. One Venezuelan company developed a banking system that was later commercialized by a leading hardware firm on an international scale; it also obtained a large contract for a custommade system for Iberia Airlines. Software exports from Venezuela have involved, according to one source, Colombia, Mexico, Spain, and the Spanish-language market in the United States (Martinez Mottola, 1988, p. 28). Cuba is actively pursuing the export of software to Western and Eastern Europe and to Latin America. It intends to sell packages in Spain and Italy through associated local firms. Software for health-care, software tools, and automated systems for control of industrial processes are among the exportable products. Finally, a few companies from Costa Rica are achieving success in exporting computer programs (e.g., a package for foreign exchange conversion). Such exports accounted for about

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USS500,OOO between 1986 and 1989: 50% from sales to other Central American countries and 50% from sales to South America and the United States. It is impossible to extract. on the basis of the available information. general conclusions on the extent and nature of software exports from Latin America. The data seem to indicate that exports include custom software and packages for microcomputers and mainframes; however, there is no clear profile of specialization. Further research is needed to examine, in particular, marketing channels and constraints. It is not surprising to find that, overall, the export performance in the software field is modest. India has tried for almost 20 years to develop a strong export-oriented industry in the field on the basis of a significant perceived comparative advantage (language. low labor cost, high personnel qualifications). The results, nevertheless. have fallen short of expectations.h

(e) Policy issues Only a handful of developing countries have established specific policies to orient and promote the software industry. Many countries in Asia, including China, the Republic of Singapore, South Korea, and Taiwan are, under different schemes, trying to cater to the expanding software market. In South Korea, a Software Promotion Law came into effect in July 1988. It established a Council of Software Industry Promotion composed of government officials. scientists, and industrial experts for software development, productivity improvement, labor development, and the establishment of a software-development environment. A functionally specialized software complex is to be established as an industrial base in the Seoul area. The complex will eventually be a platform for expansion to the international market. In addition, the South Korean government is considering guaranteeing loans from domestic commercial banks to software companies without any collateral, and building up a system for implementation of software quality assurance. Furthermore, guidelines for estimating softwaredevelopment costs are being prepared so that software is valued correctly. To efficiently use the scarce local software-development resources and to assist marketing local software products domestically and abroad, a software information center is also to be established.’ In Chile, a law passed in 1988 promotes the exports of services, including software. It especially applies to nontraditional exporters, i.e..

those exporting less than US$l million a year. In Argentina, some attempts were made to establish a software policy (“Argensoft Program”). However, no specific policies have yet been implemented. Brazil is the only Latin American country where an explicit software policy has been set forth. on the basis of Software Law No. 7646 of 1987. Although the main purpose of the Brazilian Software Law has been to settle the problem of software legal protection.” it also included a sophisticated regime for the commercialization of local and imported software in the domestic market. It provides a “market reservation” in favor of locally developed programs that are “functionally equivalent” to foreign programs. The registration of imported programs is compulsory, and they have to be distributed by national companies (except for programs compatible with equipment commercialized by foreign companies). The Brazilian government has also promoted the adoption of UNIX as a standard for 32-bit machines, a decision that may provide a conducive environment for the development of portable systems and offer an alternative strategy regarding software for vertical markets (Gaio. 1989. p. 15). The issues at stake in the design of a software policy are numerous and complex. They certainly include, as a first priority. establishing human resources. This should not only involve training new professionals in the required disciplines but also building up capabilities for the management of software development projects and retraining personnel currently working in software production. Such retraining should aim at, among expanding the use of software other things. engineering tools and enhancing quality. This is not. however. a simple task; completely new concepts and methodologies need to be transmitted. Universities should certainly have a major role in this respect. In some countries Mexico, postgraduate (Brazil, Venezuela). courses that emphasize software development are available. This is also the focus of the highlevel education offered at the Escuela Superior Latino-americana de Informatica (ESLAI) established in Argentina in 1985. Overall. however, a lot remains to be done to improve university teaching related to software and to create entrepreneurial capabilities in the field. This task requires long-term planning and good articulation between university and industry. It should also be noted that sending a few graduates abroad to improve their qualifications is a good starting point but is insufficient. The level of the average professional needs to be improved, in some cases very substantially.

SOFIWARE

The capital requirements for software development and commercialization are growing. Support should be given to local firms to finance the acquisition of software tools and equipment. as well as to undertake more effective marketing strategies. As provided for by the South Korean law, special norms for access to bank loans should also be considered (see ANIPCO. 1987). The state’s role may be also decisive in creating a domestic demand for locally produced software. In some countries (e.g., Mexico). public organizations have an enormous influence overall in informatics demand. If purchasing policies improve, the development of applications could become an opportunity to enhance local qualifications and, occasionally, to generate products that could be later sold to third parties and countries. The undertaking of large projects by the state may also be vital to train human resources that can later be transferred to the software industry. Further, no viable software industry seems possible without increased public support to R&D at universities and other public institutions, as well as at the enterprises themselves. Local firms are generally too small and understaffed to undertake the R&D activities needed to follow and absorb international developments in the field. Standardization in the area of languages, interfaces, quality standards, and documentation should also be promoted (Takahashi and Pereira de Lucena. 1988. p. 17). Another relevant issue is legal protection. The debate on the most adequate form of software protection is still open. Although the main international trend is toward the application of copyright, software is being now patented in the United States. The enforcement of a copyright type of protection in developing countries will mainly benefit the enterprises that are already in the market. particularly those that import foreign packages (Correa 1989b). Contractual law is perhaps both more appropriate and effective than copyright when the production of custom software prevails, as is the case in most Latin American countries. In any case. the establishment of a regime of protection should adequately balance the public and private interests at stake. particularly those of local producers and users. .Without prejudice to the importance of these issues, it is crucial to define the developmental strategy to be followed in terms of market orientation and type of products. A major question is whether a policy based on the protection of the internal market, like the “market reservation” policy of Brazil. is conducive to the development of a software industry. The intangible nature of software and the ease

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with which it may be transferred (even across boundaries) substantially limit the effectiveness of any policy based on tariffs and other traditional trade measures. In fact, it is practically impossible to close a national market and introduce any sort of protectionist mechanism in the early growth phase (Gaio. 1989. p. 18). Many national software firms, at least in accordance with the studies made in Argentina. do not believe that protection could significantly help growth. Demand pressures to obtain good and cheap packaged products (original or “pirated”) are too strong to be neutralized by restrictive policies. It is also essential to design a strategy on markets and products. National firms have an almost naturally protected market in connection with a wide range of applications that must +uit local conditions: for example. accountancy rules. administrative practices, and professional practices. Given the limited size of the national market, however, growth prospects based on this segment are limited. In most cases, the local market alone will not justify the investments required to develop standard products. In the area of packages for microcomputers, for instance, the important economies of scale involved in the development. marketing and distribution of such products will. even without considering other factors, probably frustrate many attempts in this field. Exports appear as a necessity to growth. Different export alternatives need to be considered. Packaged software is an option but often a difficult one. Custom software has been. in fact, the main item in Indian software exports. The marketing requirements are completely different from those in the case of packages (particularly for microcomputers) and the labor cost advantages may be more fully exploited. Programs for mainframes may offer better opportunities as shown by the Chilean and Indian experiences. Another alternative would be to concentrate on developing different standardized software tools (Pereira de Lucena. 1988). In this case, of course, the requirements for personnel qualifications and development tools are much higher than for typical application programs. This path only seems viable for countries with a good level of graduate and postgraduate training. Finally. Latin American countries could specialize in software customization and modification and in systems integration. The experience of some Asian countries (e.g., India, and the Republic of Singapore) suggest that these areas show great opportunity (Schware, 1987, p. 41). In any case, the formation of a software policy depends on the capabilities existing in a country,

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in both the public and private sectors, and on the possibility of implementing an integrated, longterm program with the participation of government, research and development institutions, universities, and enterprises. Immediate results should not be expected: the creation of a software industry in Latin America will require substantial improvements in production and marketing methodologies in the framework of welldefined product strategies.

4. CONCLUSION The development and commercialization of software may certainly be an opportunity for Latin America. However, the Latin American software industry is still poor in terms of quality, has shown only modest achievements with respect to product sophistication, and has demonstrated an emerging but very modest export performance. The idea that Latin American countries could easily build up comparative advantages in software is, unfortunately, an illusion. These countries could certainly attempt to exploit the growing software market and look for export

niches, but this will not occur until substantial changes are introduced in the ways software is produced and marketed. A long-term integrated strategy is needed in which technical capabilities are created or reinforced, and management and marketing resources and skills are significantly upgraded. The software industry clearly shows the constraints that developing countries face before jumping into the “new paradigm“ created by the emergence and diffusion of information technology. To “leap-frog” in this field, a solid process of knowledge accumulation would be necessary to overcome the obstacles posed by internal shortcomings and the structure of the world industry. The development of a competitive software industry is a challenge that many Latin American countries can face. They should be aware, however. that success will not come without considerable effort, political willingness, and entrepreneurial competence. If the importance of the conditions to set up such an industry are not fully recognized, the emergence of a software industry in Latin America may remain more a myth than a tangible reality.

NOTES 1. In 1987, 10 suppliers controlled 58% of the world market of software and computer services (Humbert. 1989. p. 161). The concentration is significant and growing even in the field of software for microcompu-

delivering a good-quality system quicker than most US competitors was another competitive advantage. Price as such was not viewed as having a critical weight (interview held in New Delhi. 1987).

ters (Katz. 1987. p. 22). 2.

This paper

focuses on traded software and hence excludes the consideration of the important areas of software development and of software “inhouse” embedded in hardware. 3. The information analyzed in this section is based on the following studies: Argentina, data for 1986 on

180 enquired firms SID (1987); Brazil. Pereira de Lucena (1988) and Gaio (1989); Mexico. Infocus (1986) and ANIPCO (1987): Venezuela. Ortega rt al. (1987). based on a sample of 23 firms: other Andean Group countries. Forero Pineda (1988). 4. Hardware manufacturers account for about onehalf of the world software market. Although their strength lies in systems software. they have also explored. with modest success, the application software field (OECD, 1988). 5. According to executives of one of the major software exporters of India, the Tata Consulting Group. their previous activity in data processing for US cards was an important factor in gaining acceptance by US clients for their software. The possibility of

6. Under the policy to promote software exports established in 1970. the Indian government expected to reach sales of US$l billion in one decade. In 19X8. software exports only amounted to around US$150 million, a great proportion of which (probably 60%) is still “body shopping” (see Correa. 1989a). 7. South Korea has also Included the development of software as a part of the National Research and Development Piogram Smce 1982. It also launched a large software-develoDment project. The SUPER (Siftware Usability. and Probuciivity Enhancement Research) project 1s a R&D program to enhance software usability and productivity. It is directed by the government with wide participation of private companies. university research centers. and government research organizations (UNIDO. 1988). X. After considerable internal debate and tension with the US government. Brazil finally opted to recognize copyright protection for software. but subject to a number of important special conditions regarding duration, right to make copies and adaptations. etc. (see Chaves, 198X).

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