Technological Innovation in Brazilian Industry

Technological Innovation in Brazilian Industry: An Assessment Based on the Sa˜o Paulo Innovation Survey RUY QUADROS, ANDRE´ FURTADO, ROBERTO BERNARDES, and ELIANE FRANCO

ABSTRACT This article presents results of the technological innovation section of the PAEP survey, which is a large sample survey of firms in the most industrialized Brazilian federate State. The first PAEP collected data in 1997, referring to 1996, in more than 10,000 industrial firms. Innovation questions followed the OECD guidelines. The article starts with a methodological summary. It shows that the rate of innovation output in Sa˜o Paulo—that is the share of innovative firms—revealed a considerably extensive adoption of technologically new or improved products and/or processes in the period 1994/1996. The innovative performance of Sa˜o Paulo industrial firms is examined for distinct firm groups, taking into account firm size, the origin of capital ownership (national vs. transnational firms) and industrial sector. The article reveals that the distance between Sa˜o Paulo industrial firms and their counterpart in industrialized countries is even more substantial in terms of R&D activities. The findings about the sources of information for innovation and their motivation for innovation reinforce the features of the pattern of innovation presented in the article, that is, there has been quite substantial innovation but little knowledge in the innovation process of the industry of Sa˜o Paulo.  2001 Elsevier Science Inc.

Introduction This article explores the results of the technological innovation section of the PAEP/ SEADE1 survey. PAEP, “Pesquisa da Atividade Econoˆmica Paulista,” which stands for Survey of Economic Activity in the State of Sa˜o Paulo, is a large sample survey of firms in the most industrialized Brazilian federate State. The first PAEP issue collected data in 1997, referring to 1996, in more than 10,000 industrial firms, in respect to a large 1 PAEP was carried out by Fundac¸a˜o SEADE, the Sa˜o Paulo State agency for statistics production. RUY QUADROS is Assistant Professor at the Department of Science and Technology Policy, University of Campinas (DPCT/IG/UNICAMP). ANDRE´ FURTADO is Livre-docente Professor at the Department of Science and Technology Policy, University of Campinas (DPCT/IG/UNICAMP). ROBERTO BERNARDES is a researcher at Fundac¸a˜o SEADE and lecturer at the MBA of Fundac¸a˜o ´ lvares Penteado (FAAP). Armando A ELIANE FRANCO is a researcher at Fundac¸a˜o SEADE.

Technological Forecasting and Social Change 67, 203–219 (2001)  2001 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY 10010

0040-1625/01/$–see front matter PII S0040-1625(00)00123-2

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number of economic variables. The manufacturing industry segment of the first survey was based on a questionnaire that included nine questions about firms’ innovation activities. The conception of such questions has aimed at getting as close as possible to the OECD guidelines for innovation surveys—Oslo Manual [1]. In this article, the findings of the first PAEP issue are analyzed in the light of the literature, which reports similar innovation surveys carried out in other industrialized and industrializing countries. Little is known about the major features of recent innovation-related activities in industrial firms of developing countries. Katz [2] and, more recently, Furtado et al. [3] and Coutinho and Ferraz [4] have led research on the technology-related aspects of Latin-American industrialization. They have found that the internal effort made by local manufacturing industries in technological activities is feeble, and rather oriented towards incremental innovation [5]. However, these studies have been based either on case studies or in secondary information. The lack of empirical, comprehensive, and aggregate data on firm innovation performance and activities has been an obstacle to the better understanding of the nature of the innovation process in developing countries. In this connection, the Sa˜o Paulo industrial survey is an useful tool to improve the knowledge of firms’ innovation performance and its determinants, in a very significant part of the Latin-American industry. Moreover, being based on the methodological guidance of the Oslo Manual, it contributes to the accomplishment of comparative research on the theme. In this article we intend to present the major features of the pattern of technological innovation of manufacturing industrial firms located in the State of Sa˜o Paulo. The article starts with a summary of the main methodological aspects of the survey (section 2). The following section (3) shows that the rate of innovation output in Sa˜o Paul—that is, the share of innovative firms—revealed a considerably extensive adoption of technologically new or improved products and/or processes in the period 1994/1996. Even tough the rate was lower than that of more industrialized economies, it was very close to the rate of the Australian survey in a similar period. Moreover, the innovative performance of Sa˜o Paulo industrial firms is examined for distinct firm groups, taking into account firm size, the origin of capital ownership (national vs. transnational firms), and the nature of industrial sector in terms of its technological opportunities2. Section 4 reveals that the distance between Sa˜o Paulo industrial firms and their counterpart in industrialized countries is even more substantial when we turn to the comparison of their R&D activities. This argument is based on data on the size of the graduate staff deployed in R&D activities, which has made possible the classification of Sa˜o Paulo industrial sectors (based on the ISIC Rev 3) by research intensity and volume. Finally, the analysis of the findings about the sources of information for innovation that were used by firms and about their motivation for innovation (section 5) reinforce the features of the pattern of innovation presented in the previous sections. The main conclusions of the article are presented in section 6: the Sa˜o Paulo survey suggests that there has been quite substantial innovation but little knowledge in the innovation process of the industry of Sa˜o Paulo.

2 In this article, the concept of technological opportunity is related to the creation of new businesses and/or new markets that are based on the development of new technologies or new application of existing technologies.

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Main Features of the Survey Design and Implementation The first PAEP survey was designed as an ample, multipurpose survey of economic activity in the State of Sa˜o Paulo. Data were collected in 1997, referring to economic activity in 1996. Regarding the scope of issues on which information was collected, the survey combined the investigation of quantitative economic variables that are common in economic surveys and the research of other quantitative and qualitative variables related to technical change. The main typical “economic survey” variables comprised value-added, employment, wages, and investment. Information related to technical change varied according to the sector of economic activity. The entire PAEP survey comprised the investigation of the following sectors: industry (manufacturing and construction) and commerce (retail and wholesale). Moreover, a few segments of services were investigated (IT services and banks). The main level of investigation was the firm. Considering all sectors investigated, PAEP was able to collect almost 23,000 questionnaires, corresponding to 80% of the effective sample of firms. In the following, a more detailed picture of the survey of the manufacturing industry is presented; this is the relevant sector for the purpose of this article, as the investigation of the innovation process was restricted to the manufacturing industry. In the manufacturing industry, the investigation of PAEP comprised a group of questions, mostly qualitative, about the process of technological innovation in the industrial firm, which was based on the OECD guidelines for innovation surveys. Questions about the innovation process were part of a larger block of questions on technical change, which also included the investigation of the diffusion of Information Technologies, both in the plant and in the office, the adoption of organizational innovations, the extension of outsourcing, and the employment and training practices adopted by management. The industry questionnaire was completed with a block of questions focusing the same economic variables investigates in other sectors (value-added and so on). Regarding the statistical methodology, the investigation of the manufacturing industry by PAEP adopted the following procedures. The survey investigated a stratified sample of firms, which were identified and selected from the national registry of industrial firms. The design of the sample comprised two main strata. The first one was composed by all firms with 30 employees and above, which were 100% covered by the survey. The choice of 30 employees for the 100% coverage was influenced by the need of comparability with national industrial surveys, which adopt the same procedure. The second stratum was composed by a random sample of firms with employment varying between 5 and 29 employees. The random sample was divided by subgroups that were formed according to the need of keeping statistical significance for 21 industrial segments3 and two regional areas.4 The selection of firms for each of these subgroups was based on systematic random choice. The effective total sample5 comprised 13,075 firms, whereas the number of collected and valid questionnaires was 10.658, or approximately 82% of the sample. The loss of responses from the effective sample was mainly due to firm refusing to respond, with a minority of cases due to either operational loss or to a wrong understanding of the questionnaire. As the rate of response to innovation questions of 3 The industrial classification of PAEP followed the ISIC-rev3 classification; sampling took into account the four digit breakdown. 4 The regions considered were the Great Sa˜o Paulo and the rest of the state. 5 The effective sample was smaller than the planned one, as the registry on which the planned sample was based presented dated information regarding the closing of firms, change of business, loss of address and so on.

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the collected and valid questionnaires was above 90%6, it could be considered that the overall rate of response to the innovation questions was approximately 74% (against the effective sample). Such a high rate of response can be explained by the fieldwork strategy adopted by Fundac¸a˜o SEADE. First, it has organized an ample mobilization of employer associations, which have lent their names and institutional support to the survey. This was reflected in the cover of the questionnaire, which displayed the logos of some of the major regional and sector-level industrial firm associations. Moreover, instead of sending a postal questionnaire, the statistical agency sent field researchers to hand the questionnaires to firms, to answer basic doubts and to collect the questionnaire. Field researchers were supported by regional offices, which were able to answer to more complicated questions and problems, and which were in charge of fieldwork follow-up. The phrasing of the questions about the innovation process closely followed the first Community Innovation Survey questionnaire (CIS 1); yet, not all questions of CIS-1 were included. The questions that were strictly similar to CIS-1 refer to (1) the adoption of innovation—including subquestions on whether it is product or process innovation, and whether radical or incremental innovation; (2) the motives/objectives of innovation; (3) the sources of information for innovation; and (4) the employment of staff performing R&D (continuous and occasional). One major focus of CIS-1, namely information about the costs of innovation, received na adaptation in the PAEP survey. Giving the fact that it covered a large sample, and considering that most firms in Brazil are not used to produce information regarding the cost involved with designing and starting production of new products/processes, the questionnaire asked firms to estimate a percentage breakdown of innovation costs. However, as we will discuss below, this approach did not work adequately. The most important lessons learned with this first experience with the PAEP survey are related to the usefulness of the adoption of the OECD guidelines and to the approach to fieldwork. These lessons have been considered in the planning of PAEP 2000, which is expected to start data collection in middle 2001 (referring to 2000). The adoption of the Oslo Manual concepts and the adaptation of the CIS questionnaire for the phrasing of questions rendered the survey results comparable to other similar surveys, as the exercise presented in the following sections suggests. For PAEP 2000, the advances of the CIS-2 questionnaire and the methodological outcomes of the preparation of CIS-3 are being taken into account. The mobilization of firm associations was very important in Sa˜o Paulo to obtain a high rate of response. This is a strong point in the Fundac¸a˜o SEADE strategy. As to more complicated questions for firms to answer, such as the breakdown of innovation costs, the conclusion is that the question should be left out in the next survey, at least as part of the general questionnaire. The idea, for the next round, is to follow the general questionnaire with a more detailed questionnaire covering only the innovative firms. In this second stage, referring to a much smaller sample, the investigation of innovation costs could be carried out adequately. This would include the investigation of the values of expenses made by firms in R&D and other costs. Because there is no R&D survey in Brazil, such a procedure would also help producing a reliable figure for the business sector’s expense in R&D. 6 Response rates to innovation questions, in the collected and valid questionnaires, were above 95% in most industrial sectors. The sectors in which such rate was between 90 and 95% were oil and alcohol refining and computers and office equipment.

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TABLE 1 Share of Innovating Industrial Firms in the Total Number of Firms and in Total Value Added by Firm Size (State of Sa˜o Paulo, Brazil—1994/1996) Size group (No. of employees)

Total No. of firms

% of Innovating firms on total no. of firms of size group

% of Value added of innovating firms on total value added of the size group

37,582 2,198 804 610 41,193

21.7 51.7 59.4 69.7 24.8

33.0 56.6 61.7 82.4 68.0

5–99 100–249 250–499 500 and more Total Source: PAEP/SEADE.

The Innovative Performance of Industrial Firms in Sa˜o Paulo At the aggregate level, the innovative performance of industrial firms in Sa˜o Paulo has been significant. Table 1 reveals that 24.8% of industrial firms in Sa˜o Paulo introduced technologically modified products (either new or improved products) and/or technologically changed processes, in the years 1994–1996. This information refers to an expanded sample of all manufacturing firms above five employees. Such a share of innovating firms is distant from comparable results of innovation surveys carried out in some industrialized countries. For instance, Licht and others [6] reported that the rate of innovative firms in Germany, in 1995, was 53%, referring to the population of firms employing five people and more. The percentage of innovative firms was also considerably higher (41%) in the 94–95 French survey [7]. However, the French case is not comparable, as the sample represents only the population of industrial firms with 20 employees and more. Even an older experience, like the 1981–1985 Italian CNRISTAT survey, reported a higher share (35%) of innovating firms, in a sample of 24,000 firms of all sizes [8]. However, the Sa˜o Paulo experience shows that the Brazilian industry does not rank below other more recently industrialized countries, like Australia and Spain, in terms of innovation output. The comparison with findings of the Australian survey reveals striking similarities: 26% of manufacturing firms of all sizes in Australia introduced product and/or process technological innovations in 1997 [9]. In Spain, the rate of innovative firms in the universe of firms with five employees and more, in the period 92–94, was 17.3% [10]. However, the economic weight of innovating firms in Sa˜o Paulo is substantially greater than their numerical proportion. Even though innovating firms represented onefourth of all manufacturing firms, they accounted for more than two-thirds (68%, Table 1) of industrial output in Sa˜o Paulo. A similar concentration of output in innovating firms has been found in the Italian survey referring to the period 1990–1992. Evangelista et al. [11] report that, while representing 33,3% of the total of firms with more than 20 employees, innovating firms covered 70.7% of sales in the Italian manufacturing industry. Such a concentration is connected to the fact that large and medium sized firms in Sa˜o Paulo, in addition to accounting for the largest share of industrial output, were found to be significantly more innovative than small firms (Table 1). We shall return to this point later in this section. Before this, let us address some of the factors behind the innovation output of manufacturing businesses in Sa˜o Paulo. In explaining the innovative performance of Brazilian industrial firms, it is important to take into account the features of the special period to which the PAEP measurement

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R. QUADROS ET AL. TABLE 2 Distribution of Innovating Industrial Firms by Type of Innovation and Firm Size (State of Sa˜o Paulo, Brazil—1994/1996)

Size group

Product and process (%)

Only product (%)

Only process (%)

Total (%)

5–99 100–249 250–499 500 and ⫹ Total

57.8 69.3 74.3 81.6 63.1

28.2 14.0 9.8 5.9 23.3

14.0 16.7 15.9 12.5 13.6

100 100 100 100 100

Source: PAEP/SEADE.

refers (1994–1996). Until the 1990s, industrial firms located in Brazil benefited from high level of protectionism. This hampered firm’s innovative performance, particularly regarding the introduction of new, technologically transformed products. Protectionism has been phased out in the 1990s, but inflation and recession restrained firm’s investment in new products. Economic stabilization, in 1994, prompted substantial growth of the internal market in the following 2 years. Moreover, these economic conditions and capital flow liberalization attracted new entrants, particularly via mergers and acquisitions of local companies. Greater competition has forced the long established firms to restructure in order to survive. Thus, this period, which coincides with the period of reference for the innovation-related questions of PAEP, was marked by an intensive product mix and process renovation in many Brazilian industrial sectors.7 Here we resume the issue of the connections between innovation and firm scale. The results of the PAEP survey suggest that the propensity of firms to innovate increases steadily in line with firm size. Small manufacturing firms correspond to the least innovative group in Sa˜o Paulo, both in terms of the share of innovating firms in the total number of firms in the size group (21.7%) and of participation of innovating firms in the output of the group (33%, see Table 1). Yet, the rate of innovating firms in medium(up to 500 employees) and large-sized firms is substantially higher, and increases with scale (Table 1). Thus, at the aggregate level, the PAEP survey would seem to bear the neo-Schumpeterian thesis of a positive correlation between firm size and innovative performance, which was reinforced by Archibugi et al. [8] with reference to the Italian innovation survey.8 However, the statistical processing of these data (for instance, an exercise of multivariate analysis) would be required to be conclusive in this respect. Unfortunately, such analysis is beyond the scope of this article. Table 2 indicates another interesting feature of the innovation output of industrial firms in Sa˜o Paulo. Within the group of innovating firms, the share of adopters of product and process innovation is by far the largest, when compared with firms adopting only product or only process innovation, in all size groups. This seems to support another central point of the neo-Schumpeterian argument, that is, the accumulative nature of technological learning. 7 For an illustration of this point, in regard to the motor vehicle industry, see Quadros et al. [12]. Quadros and Bernardes [13] stressed the importance of product innovation in the adjustment strategies of leading Brazilian firms. 8 However, Archibugi and his colleagues also stressed that such a conclusion at the aggregate level is limited, because distinct technological opportunities and structural characteristics in different industrial sectors entail distinct innovative roles for small firms.

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TABLE 3 Share of Innovating Firms in the Total Number of Firms and in Total Value Added by Industrial Sector (State of Sa˜o Paulo, Brazil—1994/1996)

Sector Computers and office machines Instruments and automation equipment Electronics material and telecom Chemicals and pharmaceuticals Mechanical machinery Other transport (aircraft and rail equipment) Rubber and plastic products Motor vehicles Oil refining and alcohol Electrical machinery Basic metals Metal products Pulp and paper Publishing, printing and recorded media Textiles Nonmetalic mineral products Other industries Leather products and footwear Food products and beverage Clothing Mining Total

Total No. of firms in industrial sector

% of innovating firms on total firms of sector

% of VA of innovating firms on total VA of sector

109 577 459 1,818 2,864

63.8 43.8 43.0 39.9 34.0

87.2 76.5 72.8 77.0 75.6

202 2,698 1,133 91 1,178 12,451 4,390 937 2,584 2,038 2,684 4,418 1,547 4,047 5,600 594 41,213

33.4 32.2 31.9 30.0 29.0 28.1 26.7 24.6 23.3 23.0 23.0 23.0 21.2 17.5 13.9 7.1 24.8

65.1 64.9 87.5 46.7 78.7 66.6 52.6 80.4 55.2 59.1 67.9 48.5 47.1 60.5 28.0 34.6 68.0

Source: PAEP/SEADE.

The distribution of innovating firms by industrial sector reveals that the adoption of innovation is also influenced by sector-related patterns of technical change and technological opportunities. Table 3 suggests that those firms belonging to the sciencebased sectors [14] related with the electronics industry are more likely to introduce technologically changed products and/or process than those belonging to others sectors. Industrial sectors presenting a share of innovating firms above 40% in the PAEP survey—office machinery and computing, medical and precision instruments and automation equipment, and electronic material and telecom equipment—are all characterized by high technological opportunities. The following group of sectors, which present a share of innovating firms between 25 and 40%, is mostly made up by scale-intensive industries in the Pavitt taxonomy, like the chemical industry,9 rubber and plastic products, motor vehicles and basic metals, or either by specialized suppliers of mechanical machinery and electrical equipment. In the other end, industries such as pulp and paper, printing, textiles, nonmetalic mineral products, leather products, food and beverage, clothing and mining, which are composed by firms with lower technological opportunities, are in the least innovative group. However, these figures show firms’ propensity to innovate, but not the weight of innovating firms on sector output. The share of innovating firms on sector value added 9 At the two digit level of ISIC (rev 3), the chemical industry comprises the pharmaceutical segment, which is science based.

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TABLE 4 Share of Innovating Firms in the Total Number of Firms and in Total Value Added by Origin of Capital and Size (State of Sa˜o Paulo, Brazil—1994/1996) National

Size group 5–99 100–249 250–499 500 and more

% of innovating in total of size and origin group

% of VA of innovating in total VA of size and origin

% innov. in total

% innov. in VA

% innov. in total

% innov. in VA

21.5 50.5 59.2 65.0

31.2 54.6 63.4 75.4

43.5 57.1 63.2 80.6

56.5 61.0 59.9 90.1

39.7 83.0 56.3 89.2

58.7 83.1 43.2 85.8

Foreign

National and foreign

Source: PAEP/SEADE.

(Table 3) is higher in some of the sectors classified as technologically intermediary or even low tech than in some of the sectors with larger technological opportunities. This is the case of motor vehicles, pulp and paper, electrical equipment, and mechanical machinery. This is due to the higher level of economic concentration in these sectors. The last, but not the least, important feature in the innovative performance of industrial firms in Sa˜o Paulo is related to the country origin of capital ownership. In the Brazilian case, this is particularly important, given the large participation of transnational companies in most sectors of the industry. Table 4 suggests that firms that are wholly or partially controlled by foreign capital have presented a higher propensity to introduce new products/processes than those wholly controlled by Brazilian national capital. In terms of both the share of innovating firms in the total number of firms and the share of innovators’ value added in the value added of each size group and type of capital control, wholly foreign controlled firms and firms with mixed control (national and foreign) have scored larger shares than those that are controlled by local capital. The only exception refers to the size group of medium firms with workforce between 130 and 499 employees. Such a result can be explained by the influence of many factors that improve the capability and competitiveness of foreign companies, such as their access to less costly investment capital (compared to high interest rates paid by local firms) and their average larger size. Regarding the concern of this article, the most important aspect is the prompt access of foreign companies to various sorts of knowledge and technological transfer from parent companies abroad, which facilitates the acceleration of product and process renovation. The general situation is that technologically new products and processes are originated in the industrialized countries, where transnational companies locate their major R&D centers. They transfer such innovations to the South American market by adapting new products and processes to the local market needs or to the technical constraints to supply of materials and components. Yet, the activities connected to product and process adaptation carried out by foreign controlled firms, which has been named “tropicalization,” account for the largest share of the graduate staff employed in R&D functions in industry in Sa˜o Paulo. Other research carried out by the authors has revealed that foreign firms’ product development units that are located in the State of Sa˜o Paulo tend provide technological adaptation services to other South American markets. This is the subject of next section.

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TABLE 5 Distribution of Graduate Staff in R&D and Technological Intensity by Industrial Sector (State of Sa˜o Paulo, Brazil—1996)

Sector Other transport (aircraft and rail equipment) Computers and office machines Electronics material and telecom Instruments and automation equipment Motor vehicles Electrical machinery Chemicals and pharmaceuticals Rubber and plastic products Leather products and footwear Mechanical machinery Clothing Oil refining and alcohol Metals products Basic metals Publishing, printing and recorded media Textiles Non-metalic mineral products Pulp and paper Food products and beverage Total

Firms with graduate employees in R&D (units)

Graduate employees in R&D (units)

Graduate staff in R&D on total employment of firms with R&D (%)

24 14 61 45 177 147 253 259 125 323 220 13 302 124 150 271 141 124 384 3,422

613 185 454 239 2,803 617 956 445 69 751 89 48 266 193 80 283 222 144 448 8,905

13.6 5.2 3.1 2.4 2.0 1.7 1.2 1.0 0.9 0.9 0.9 0.8 0.8 0.7 0.6 0.5 0.5 0.5 0.4 1.2

Source: PAEP/SEADE.

Industrial Firms’ Effort Toward Innovation in Sa˜o Paulo Regarding firms’ input into innovation activities, the most important quantitative data in the PAEP survey is the number of employees that are engaged in R&D10 in firms with more than 99 employees. The results of this question point to three important features. First, the relative intensity of the innovation effort of each industrial sector is generally in line with the sector’s innovative performance. Second, the R&D effort is generally feeble, when compared to that of industrialized country firms. Third, in terms of volume, the R&D activity in Sa˜o Paulo is rather concentrated in sectors that are ranked as intermediary, in terms technology intensity and opportunities. The latter point is a produce of the nature of Brazilian industrialization, which has emphasized the creation of technological capabilities in these sectors. Table 5 illustrates these points. With a few significant exceptions, the ranking order of sectors in Table 5 is similar to that of Table 3, in terms of technological intensity, that is, the ratio of graduate staff employed in R&D to total employment of firms carrying out R&D (last column, Table 5). Most science-based sectors present indicators of technological intensity that are higher than those of scale-intensive and of equipment supplier sectors. These, in turn, present higher technological intensity than that of traditional sectors like nonmetallic mineral products, textiles, and food products. The 10 Given the large size of the survey sample, and the fact that it comprised small firms, it was considered that any question on the value of cost of innovative input—for example, expenses in R&D, design, marketing, etc.—would have produced very unreliable data. The PAEP research strategy is to complement the first survey with a second one, which will be focused only on firms which declared the existence of R&D activity.

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R. QUADROS ET AL. TABLE 6 Scientists and Engineers Employed in R&D in the Manufacturing Industrya (Selected Countries—various years)

Country

Year

Scientis and engineers in R&D

Brazil (State of Sa˜o Paulo) Mexico Spain Australia Canada Italy Germany France Hungary Sweden Japan United States

1996 1995 1993 1995 1994 1994 1993 1994 1995 1995 1995 1994

8,905 1,339 8,084 8,541 22,662 24,136 121,705 55,857 2,069 14,890 368,960 540,700

Source: PAEP/SEADE; OECD, Basic Science, and Technology Statistics, 1997. a Data refer to number of scientists and engineers for all countries but for Brazil/State of Sa˜o Paulo; for the latter data refer to graduate staff.

chemical industry is lower ranked in terms of technological effort (Table 5) than in terms of innovative performance (Table 3). This fact seems to reveal that the innovative product performance in the chemical industry is mostly connected to the R&D activities carried out by transnational firms abroad (this is particularly the case of the pharmaceutical industry). In contrast, the volume of adaptation activities carried out by transnational companies in the motor vehicle industry is such that its ranking in Table 5 is higher than in Table 3. Another important difference is the positioning of other transport equipment. This sector is the first ranked in terms of technological intensity, while its innovation output is in a middle range position. This result can be attributed to the heterogeneity of this sector, which comprises both the high-tech aircraft and aerospace industry and industrial activities with lower technological dynamism in Brazil, such as shipbuilding and railway equipment. It can also be noticed the unexpected relative high ranking of the clothing and leather industries, which could possibly be related to firms (wrongly) considering design staff as R&D staff. However, the size of the participation of graduate R&D staff in industrial employment is generally small compared to equivalent data in industrialized countries.11 Only three industrial sectors display a ratio of technological intensity above 3%, namely other transport equipment, computers and office machinery, and electronics materials and telecommunications equipment. Indeed, 16 out of 20 industrial sectors present a ratio below 2%. Though imprecise, an attempt to situate the R&D technological activity of the industry in Sa˜o Paulo, as revealed by the PAEP survey, is made in Table 6. Despite the differences between measurement time references and of measurement concepts, the absolute gap between R&D activity in the most industrialized countries (United States, Japan, Germany, and France) and that in the newly industrializing countries (Brazil, Mexico, Spain, and Hungary) is overwhelming.12 11

The data presented in this article on R&D personnel refer to firms with more than 99 employees. A more adequate comparison would be between country ratios of R&D personnel to total industrial employment. 12

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The third important evidence concerning the technological effort made by industrial firms in Sa˜o Paulo has to do with the distribution of the volume of R&D between sectors. The ranking of sectors shows a different hierarchy (compared to that of Table 5), if only the absolute figures of R&D graduate staff is taken into account. For the better understanding of the pattern of technological innovation in Sa˜o Paulo, we have redistributed the graduate staff in R&D in a more aggregate classification, which has been inspired in the Pavitt taxonomy [14], taking into account the sector-related nature of technological opportunities. The result is presented below. Industrial Classification According to Technological Opportunity Science-based (high technological opportunities) Other transport equipment (aircraft), Computers and office machinery, Electronics materials and telecom equipment and Instruments and automation equipment Conventional Engineering Industries (medium technological opportunities) Specialized equipment suppliers (Mechanical machinery and Electrical machinery) and Scale intensive sectors (Motor vehicle and Metal Products) Intermediary Goods (medium technological opportunities) Scale intensive sectors (Chemicals,13 Oil refining, Basic Metals, Rubber and plastic products, Non-metal mineral products and Pulp and paper) Other Industries (low technological opportunities) Supplier dependent sectors (Printing, Textiles, Leather and footwear, Food and beverage, Clothing and Mining)

Graduate Staff Employed in R&D 1,491

4,437

2,553

969

The distribution above suggests that the volume of R&D effort in Brazilian industry is concentrated in nonscience-based industrial sectors, which present less technological opportunities. This is not by chance. As suggested by other research [3], the group of industries producing intermediary goods and some of the conventional engineering industries comprise the most competitive industries in Brazil, and are the only ones that have developed considerable technological capabilities (beyond production capabilities). Before finishing this section, a further aspect of the nature of the industrial firms’ input into innovation, in Sa˜o Paulo, is addressed. As well as we have done regarding the innovative performance, it is important to look into the influence of capital ownership on the distribution of the technological effort. As shown in Table 7, the technological intensity of firms wholly or partially controlled by foreign capital, in Sa˜o Paulo, is systematically superior to that of nationally controlled firms. For the total sample of the manufacturing industry (final line, Table 7), the technological intensity of firms either wholly or partially controlled by foreign capital is double that of national firms. Brazilian national companies present higher or as high technological intensity in a number of sectors that do not present high technological opportunities: textiles, clothing, footwear, and plastic products. Mechanical machinery and Computers and office machinery are the only sectors with intermediate or high opportunities in which national companies compare with foreign ones. The higher technological effort made by foreign controlled firms is in line with their better innovative performance, as commented in the previous section. The same reasons discussed there seems to be behind this tendency. Technological transfer and product adaptation is relatively an 13 The chemical industry is more adequately classified as intermediary, in this exercise, because most R&D activity is located in basic and intermediary petrochemicals.

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R. QUADROS ET AL. TABLE 7 Technological Intensity by Origin of Capital and Industrial Sector (State of Sa˜o Paulo, Brazil—1996) Share of graduate staff in R&D in total employment of firms with R&D (%)

Sector Food products and beverage Textiles Clothing Leather products and footwear Pulp and paper Publish, printing, and recorded media Oil refining and alcohol Chemicals and pharmaceuticals Rubber and plastic products Nonmetal mineral products Basic metals Metal products Mechanical machinery Computers and office machinery Electical machinery Electronics material and telecom Instruments and automation equipment Motor vehicles Other transport equipment Total

National

Foreign

National and foreign

0.3 0.3 0.2 0.3 0.2 0.1 0.1 0.9 0.5 0.5 0.5 0.3 0.7 3.3 1.1 1.3 1.8 0.7 0.3 0.5

0.4 0.0 0.3 0.0 0.4 0.0 — 1.5 0.5 0.6 1.0 0.6 0.7 3.4 0.9 1.1 2.8 1.1 0.9 0.9

0.9 0.0 0.0 — 0.8 0.2 — 0.6 1.2 1.2 0.1 1.0 0.6 — 1.0 5.3 — 1.5 8.7 1.0

Source: PAEP/SEADE.

intensive activity in transnational companies, and have been particularly concentrated in their South American regional center, in Sa˜o Paulo. Even though limited in scope, these firms and activities employ a larger graduate staff in R&D than that of their national counterpart. This is revealing of the weakness of national firms’ technological activities. To draw a broader conclusion from this section, the findings of section 3 should also be taken into account. While having presented a remarkable innovative performance in terms of the adoption of new products and processes, in the period 1994–1996, industrial firms in the State of Sao Paulo (and therefore in Brazil) have not primarily relied in R&D effort/activities to achieve such a performance. Compared to industrialized country R&D effort, that of firms in Sa˜o Paulo is relatively weak. Moreover, it has been concentrated in industrial sectors, which are intermediary in terms of technological opportunities. Foreign-controlled companies carry out more robust R&D activities than their national counterparts which, given the adaptative and limited nature of these activities, suggest that national companies put very little importance in internal R&D. Thus, other innovation-related activities and expenses should be considered as accounting for innovative performance. The following sections, which focuses others aspects of the innovation process, throw some light on this issue.

The Sources of Information for Innovation and the Motivation for Innovation Innovation is a multifaceted process that uses a complex mix of inputs. The PAEP data on the sources of information for innovation contribute to clarify the links between innovation and its origins. Table 8 suggests that, for most industrial firms in Sa˜o Paulo, innovation activities are mainly influenced by their commercial ties with clients, suppliers, and competitors. Even though this is an evidence of their strong market-oriented

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TABLE 8 Ranking of Sources of Information for Innovation by Firm Size (% of Innovating Firms declaring “very important” or “crucial”; State of Sa˜o Paulo, Brazil—1994/1996) Source

Total

Large firms

Medium firms

Small firms

Clients/costumers Material suppliers Competitors Internal R&D department Fairs and exhibitions Capital goods suppliers Other department in firm Research institutes Publications Licences and patents Universities Consulting firms Other sources Others firms in the group

67.4 41.5 31.3 26.0 24.8 17.9 14.9 12.6 12.3 10.5 8.3 6.6 5.7 5.0

67.8 45.4 41.9 52.7 36.9 32.5 28.2 15.1 20.5 20.9 9.4 10.8 9.4 19.3

71.5 45.2 36.0 37.1 32.6 23.3 23.8 15.5 16.1 16.0 11.8 10.5 6.9 9.9

66.6 40.6 29.8 22.4 22.6 16.1 12.5 11.8 11.2 8.8 7.5 5.7 5.3 3.3

Source: PAEP/SEADE.

approach, which has been augmented by increasing competition in Brazilian economy since 1994, it also reveals the relative weakness of firms’ internal effort (for instance, in R&D activity) to anticipate market tendencies and to explore technological opportunities. This characteristic is closely linked to the fact that Brazilian firms tend to react to market stimulus rather than being active innovators, in the Schumpeterian sense. It also reveals a gap between firms and public institutes of research, which reflects the weak connections between institutions inside the national systems of innovation. This general picture is most evident in the case of small- and medium-sized firms, as indicated in Table 8, which shows the ranking of sources of innovation declared by firms. Clients/costumers, suppliers of materials and competitors are ranked first by smalland medium-size firms. Internal R&D is only the sixth factor in importance for small firms. The fact that the influence of other firm’s departments is next after the influence of suppliers and clients seems to reinforce the idea that innovation starts in areas that are not directly related to technological activities (marketing or sales, for instance). Yet, large firms constitute a partial exception to this picture, because they ranked R& D internal activity second, but far from clients/customers that have been ranked first. This is further evidence of the gap between large firms, on the one hand, and medium and small firms, on the other, as discussed in section 1. However, even large firms seems to follow a demand pull pattern of innovation, which seems connected to the fact that incremental innovations based on the adoption and improvement of existing technologies are dominant. In contrast to the Brazilian picture, the French survey has shown that for both large and small firms, internal R&D effort is the most important source of information for innovation [15]. This finding reinforces the structural differences found in the level of internal R&D activity between Brazilian and developed country industries. Moreover, firms’ ranking of sources has brought empirical evidence to the muchcommented weakness of the ties between firms and universities and public research institutes in Brazil.14 The low level of firm integration with universities and research 14 In this regard, the findings of the Brazilian survey are quite similar to the results of the Hungarian [16] and of French surveys [15]. In the French survey R&D Institutes and Universities are only better positioned in the case of very large firms, with 2000 or more employees.

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TABLE 9 Ranking of Objectives of Innovation by Firm Size (% of Innovating Firms declaring “very important” or “crucial”; State of Sa˜o Paulo, Brazil—1994/1996) Objectives

Total

Large firms

Medium firms

Small firms

Product quality improvement Production cost reduction Increase in the market-share Creation of new markets Increase in production flexibility Improve work safety Environmental conservation Widening of product mix Product obsolescence Other

86.1 76.2 70.8 63.6 55.4 52.9 43.2 34.8 34.7 11.0

86.8 78.6 79.5 64.5 57.6 56.7 52.5 56.5 36.7 11.5

80.0 73.5 70.6 62.1 53.7 59.4 43.3 45.7 32.1 12.6

71.5 62.1 56.4 51.6 45.1 51.4 34.2 31.5 28.8 8.1

Source: PAEP/SEADE.

laboratories, as revealed in firms’ answers, is influenced by the low degree of formalization of R&D activity in Brazilian firms. The fact that only few firms have drawn on professional and scientific publications is further evidence to the latter point. Let us now consider the objectives firms have aimed at with their innovation activities. The question referring to the motives pursued by innovating firms in Sa˜o Paulo intended to produce information about the influence of innovation activities in the economic performance of firms. The PAEP results in this respect reinforce the existence of a strong link between innovation performance and market evolution. They bring further evidence to the fact that innovating firms have dedicated little effort to R&D activities to either create new markets or enlarge product mixes. The survey has found that innovating firms intended to improve their product or process performance rather than creating new markets. For large, medium, and small firms the most frequent objective of innovation was improving product quality (Table 9, below). The liberalization of Brazilian economy increased the competition from imports. To face such competition, firms have sought to introduce better-quality products. Increased competition has also induced firms to cut costs. Production cost reduction was well ranked as an objective of innovation in all firm sizes. However, despite increasing competition, innovating firms seems to have given no priority for the extension of product mixes, which denotes a rather reactive attitude of Brazilian firms towards innovation. Neither environment and labour issues are important motivates for innovation in these firms.

Conclusion The main objective of this article was to discuss the basic features of the pattern of technological innovation of manufacturing industries in the State of Sa˜o Paulo, by exploring some results of the innovative chapter of the PAEP survey. The exercise carried out in this article produced evidence about the nature of technological innovation in Brazil, which had not yet been empirically demonstrated at the aggregate level. The analysis of aggregate figures by firm size, industrial sector, and capital ownership brought to light three important aspects about the nature of the innovation process in a highly industrialized region of Latin America. The first conclusion is that, in general terms, there has been much innovation and little knowledge in the innovation process of the industry of Sa˜o Paulo. The period 1994–1996 was one of intensive introduction of product and process technological inno-

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vation by industrial firms, which seems to have been firms’ response to increasing competition combined with market growth. Yet, the evidence of research pointed that such innovative performance has relied little on internal R&D activities carried out by firms. They rely primarily on sources of information other than R&D to innovate, such as clients and competitors and other firm departments. The group of firms that presented the best innovative performance, that is, transnational firms, has presented a relatively higher level of technological activity. However, this is generally limited to technology transfer and R&D for adaptation. These aspects of the innovation process in the industry of Sa˜o Paulo explain the huge gap between the latter and the most industrialized countries, in terms of technology intensity and in terms of volume of technological activities. These findings are in convergence with those of Bielschowsky’s research on the nature that he has called the minicycle of investment and modernization in Brazil [17]. His argument is that recent investment has been directed rather towards cost reduction, debottlenecking and equipment renovation than towards R&D activity. A second general conclusion refers to a set further promising lines of investigation, which would rquire additional statistical work with the PAEP data. The first hypothesis suggested by the simple distribution of data is that the size of firm and its sector context matters. PAEP data has indicated that innovative performance and technological intensity are related to size. Large firms have generally presented substantially better innovative performance than medium and small firms. Moreover, only large firms in the sample declared to use their internal R&D as an important source for innovation. Research has also revealed (second hypothesis) that technological intensity/activity is connected to the nature of industrial sectors, in terms of technological opportunities. Thus, in Sa˜o Paulo, the highest rates of technological intensity were found in scaleintensive sectors, which present greater technological opportunities. In this respect, the PAEP survey has confirmed patterns of innovative performance and technological activity that had already been revealed in other countries’ innovation surveys. What was shown in this research as being particular to the Brazilian case (compared to industrialized countries) is the concentration of the volume of R&D in scale intensive industries and in suppliers of mechanical and electrical machinery. The latter aspect reflects the evolution of industrialization in Brazil in the previous three decades. After strong government support to developing intermediary industries in the 70s and 80s, the progress of high-tech industries was almost entirely left to the market, from the 90s. A third and final conclusion is related to the role of foreign controlled companies in the process of innovation. In this respect, this research has contributed to bring light to important issues that have hardly been addressed at the aggregate level of the Brazilian manufacturing industry. PAEP data revealed that these firms present higher rates of innovative performance and of technological intensity than their national counterparts. Yet, most of their technological activities are about the adaptation of products and processes originated abroad. The fact that foreign controlled firms in Sa˜o Paulo account for the largest share of R&D activity suggests two conclusions. On the one hand, it is possible to hypothesize that the concentration of adaptation-related R&D by transnational companies in their subsidiaries located in Sa˜o Paulo, to service the Brazilian and other South American markets, would help explain their relatively large share of R&D activity. This “peripheral” R&D hypothesis deserves further investigation. On the other hand, it seems clear that national companies place much less importance to R&D as a means to achieve competitiveness. At a time when Brazilian social actors and policy makers are increasingly concerned with upgrading Brazilian manufactured exports, the pattern of innovation presented in

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this article reinforces worries about the future prospects of such an upgrading. Indeed, this research has shown that most of the effort put by firms into technological innovation is concentrated in the so-called intermediary and scale-intensive industries. They also account for the largest share of Brazilian manufactured exports. Yet, most of the goods produced by these industries for export are commodities, which have been under the strong and steady pressure of price decline in international markets. Industrialists and policy makers suggest that Brazilian industry needs a policy for promoting the export of brands. Embraer, the Brazilian aircraft maker, which is controlled by a mix of national and foreign capitals, has proven recently that investment in knowledge-based brands can pay large dividends in terms of export performance and the creation of skilled jobs. Examples like this and concern with the future of exports call for the resumption of the discussion on industrial and technological policies aimed at high-tech manufacturing and service industries in Brazil.

This article is part of a paper presented at the 3rd International Conference on Technology Policy and Innovation, Austin, 30 Auguat–2 September, 1999. The authors acknowledge the entire PAEP/SEADE team’s effort and particularly the support from PAEP coordinator, Maria de Fa´tima Infante Arau´jo. We are very grateful to Wadih Scandar for his help in data preparation. Annamaria Inzelt, from IKU–Innovation Research Centre, Hungary, gave valuable suggestions regarding data preparation. None of ˜ O SEADE, bear responsibility for opinions and views expressed them, nor FUNDAC ¸A in this paper, which are assumed by the authors.

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