Argentina - Industry and Technology Policy

Document of The World Bank FOR OFFICIAL USE ONLY CONFIDENTIAL Report No. 13546-AR ARGENTINA Industry and Technology Policy January 11, 1995 FILE COPY CONFIDENTIAL Report No: 13546 AR Type: SEC Country Department I Country Operations Division Latin America and the Caribbean Region Acronyms AENOR Spanish Association for Norms and Regulations (Asociaci6n Espaiola de Normas y Regulaciones) ASADECC Argentine Association of Quality Control (Asociaci6n Argentina de Control de Calidad) BANADE National Development Bank (Banco Nacional de Desarrollo) BCRA Central Bank of the Argentine Nation (Banco Central de la Repfblica Argentina) BNA National Bank of Argentina (Banco de la Naci6n Argentina) CEPAL UN Economic Commission for Latin America and the Caribbean (Comisi6n Econ6mica para America Latina y el Caribe) CGI General Confederation of Industry (Confederaci6n General de Industria) CITEFA Center for Technological Research of the Armed Forces (Centro de Investigaci6n Tecnol6gica de las Fuerzas Armadas) CNEA National Commission for Atomic Energy (Comisi6n Nacional de Energia At6mica) COFEA Federal Advisory Council (Consejo Federal de Asesoramiento) CONICET National Council for Scientific and Technical Research (Consejo Nacional de Investigaci6n Cientifica y Tgcnica) CQC Committee for Quality Control (Comitg para el Control de la Calidad) DFI Direct Foreign Investment (Inversi6n Extranjera Directa) EEC European Economic Community (Mercado Comfn Europeo) FINEP Finance Innovation Agency (Financiadora de Estudios y Proyectos) FONTAR Argentine Technological Fund (Fondo Tecnol6gico Argentino) IACC Institute for Quality Control in Argentina (Instituto Argentino de Control de Calidad) INDEC National Institute of Statistics and the Census Instituto Nacional de Estadistica y Censos INTEC Chemical Technology Institute (Instituto de Desarrollo Tecnol6gico para la Industria Quimica) INTA National Institute for Agricultural Technology (Instituto Nacional de Tecnologia Agropecuaria) INTI National Institute of Industrial Technology (Instituto Nacional de Tecnologia Industrial) IPRs Intellectual Property Rights (Derechos de Propiedad Intelectual) IRAM Argentine Institute of Materials Rationalization (Instituto Argentino de Racionalizaci6n de Materiales) ISO International Standards Organization (Organizaci6n Internacional de Normas) JICA Japan International Corporation Agency (Agencia Internacional del Jap6n) MERCOSUR Common Market of the Southern Cone (Mercado Comfn del Cono Sur) MWs Megawatts (Megabits) NGOs Non-Government Organizations (Organizaciones no gubernamentales) NTBs Non-Tariff Barriers (Barreras no arancelarias) OC Customer Orientation Services (Orientaci6n al Cliente) PEVI Extension and Industrial Linkage Program (Programa de Extensi6n y Vinculaci6n Industrial) PNCI National Program for Industrial Competitiveness Programa Nacional de Competividad Industrial) QRs Quantitative Restrictions (Restricciones quantitativas) RECyT National Science and Technology Computer and Communications Network (Red Cientifica y Tecnol6gica Nacional) R&D Research and Development (Investigaci6n y Desarrollo) SATI Technical Assistance Service to the Industry (Servicio de Asistencia T9cnica a (a Industria) SEBRAE Brazilian S&M Support Agency (Servicio Brasilero de Apoyo a Pequefias y Medianas Empresas) SECyT Secretariat of Science and Technology (Secretar4a de Ciencia y Tecnologia) SIPRI Investment Promotion and Technology Transfer System (Sistema de Promoci6n de Inversiones) SMEs Small and Medium Enterprises (Pequefias y Medianas Industrias) S&T Science and Technology (Ciencia y Tecnologia) TQM Total Quality Management (Control de Calidad Total) UBA University of Buenos Aires (Universidad de Buenos Aires) UIA Argentine Industrial Union (Uni6n Industrial Argentina) UVTs Technology Linking Units (Unidades de Vinculaci6n Tecnol6gica) Preface This report was prepared as part of the World Bank's economic and sector work program. The task was initiated by Aura Garcia de Truslow, who was also the General Manager for the project. The report was written by Claudio Frischtak on the basis of a mission to Argentina in February 1994. Peer review was provided by Nagy Hanna and Melvin Goldman. Useful comments were received from many Bank staff and from Carl Dahlman, Manager (PSD) and Danny Leipziger, Lead Economist (LA 1DR), who reviewed the various drafts and guided the project in its final stages. Diane Leslie Bouvet prepared the final manuscript. Table of Contents Summary and Highlights ....................................... i 1. Introduction ......................................... 1 2. Argentine Industrial Policies and Performance .................. 4 The Export Response of the Late 1980s ................. 4 The Post-1989 Policy Reforms and their Impact onlndustry ........................ 6 The Post-Reform Industrial Policy Regime ................. 9 The Future Outlook for Industry ....................... 11 3. The Technology PolicyRegime ............................ 13 Access to Foreign Technologies ....................... 13 Technology Development: Fiscal and Financial Incentives .... 7................. 17 SME Restructuring and Modernization Finance ............. 19 Areas for Improvement ............................. 20 Annex Tables Chapter3 ............................ 24 4. The Science and Technology Institutional Network ............... 34 S&T Expenditure Patterns ........................... 34 Current Structure and Key Institutions ................... 35 Quality Management ............................... 44 SME-Oriented Productivity-Improving and Quality-Enhancing Support Institutions ................ 46 5. Policy Reform and Institutional Strengthening .................. 48 The Industrial PolicyRegime .......................... 49 The Focus of Technology Policy and the Institutional Delivery System .................... 51 SM E Development ................................ 53 Annex A. Quality Control and Total Quality Management .......... 56 Endnotes ...... ........ ................... ...... 58 Summary and Highlights Industrial Policy What should one envision for Argentina's industrial future? A vibrant industrial In recent years, Argentina has become a sector, significant in size, internationally substantially more open and more competitive, integrated into regional and competitive economy, a reflection of world markets. Attracting direct foreign decisive policies of Government. A good investment (DFI), and expanding the volume deal of the country's future success now and quality of exports, are the centerpieces hinges on the modernization and of a strategy directed at improving the development of the industrial sector. competitive standing of the country. Incentives in recent years have shifted Attaining these objectives will depend on attention to the production of non-tradables; continued economic stability and greater moreover, considerable effort has been efficiency in factor markets. In the concentrated on industrial retrenchment. industrial arena, it will be aided by Now, a result of improved regional addressing remaining weaknesses in prospects, and with major increases in technology transfer, elimination of gaps in capital goods imports, this trend may be the intellectual property rights regime, and changing. the effective provision and coordination of information. To facilitate the modernization of industry, the Government needs to remove 0 A jointly managed, public-private impediments in factor markets, stimulate institutional platform, to help coordinate competition, and, in cooperation with the the actions of different government private sector, develop an industrial agencies in the area, support private-led strategy. In that connection, the absence of trade and investment missions, and serve a clear industrial policy framework has as an information clearinghouse and generated uncertainty regarding the direction dissemination center, would be an of reforms, and attracted demands for ad- appropriate initiative. hoc protectionist measures and special programs. Technology Policy * To establish such a framework, the first Argentina's technology regime -- the set step is to develop a private sector of policies that directly affects how consensus around a vision of Argentina's technology is generated, acquired and industrial future; define in an diffused -- is characterized by relatively few unambiguous way the scope and limits of barriers to the inflow of foreign government action; and specify the technologies. However, two aspects of the instruments and mechanisms that technology policy regime require further government intends to use and those action. which it will avoid. ii Summary & Highlights First, there isn't an adequate approach to * The initial step would be to draw a the dissemination of knowledge among the blueprint for restructuring Argentina's mass of small and medium enterprises quality control system. The Government, (SMEs), that face significant technological in close coordination with the productive lags with respect to industry leaders, despite sector, should assign the task of the fact that SMEs are the object of a implementing the blueprint's number of promotional government recommendations to an apex institution of programs. the system, to be established preferably under public-private management. 0 It may be advisable to strengthen current attempts at SME support in Argentina by The challenge of disseminating total establishing an institutional mechanism quality management throughout Argentina's focussed on promoting and coordinating industrial (and service) fabric will need to SME support services, and which would be tackled by a complementary set of act as a national advocate for SME measures, including: development: it could be a privately run and funded program, possibly with some 0 Promoting the establishment of quality government seed money. It would work management consulting firms and in partnership with government agencies, certification bodies; engaging training of and take the lead in devising and carrying quality "multipliers", focussed on smaller out SME support programs. Prior to producers; and marketing the importance launching this initiative, however, it is of, and the benefits derived from, total necessary to rationalize and consolidate quality management. Over the longer the existing programs of SME support. term, it is necessary to improve and extend management education, critical for Among its priorities would be fostering improved managerial attitudes and effective subcontracting programs; practices, by providing support for stimulating the diffusion of total quality curricula improvement and management management among SMEs; certifying SMEs training programs, focussing on the of greater competitive potential to facilitate requirements of an increasingly open and entry into credit markets; and creating a competitive economy. market intelligence and technological information network, in cooperation with Science and Technology Institutions RECyT, the existing national science and technology network. The program would Argentina's complex and unfocussed take up much of the operational science and technology (S&T) institutional responsibility for SME support that currently delivery system has generally produced falls on government shoulders, and be marginal results despite considerable staffed with high-caliber, results-oriented, expenditure of resources. Most S&T experience professionals, and headed by a activities are financed by and take place in highly visible executive. the public sector. There are an estimated 1,900 S&T-related institutions, employing Second, Argentine firms, on the whole, some 35,000 scientists, engineers and are well behind in adopting internationally technologists. In 1993, S&T spending was accepted quality standards, and efforts in close to US$700 million, with the private this area are still modest. sector accounting for just a 10% share (compared to 70% in developed and some Summary & Highlights i rapidly industrializing countries). In bound). general, linkages to the real sector are tenuous. By contrast, in other countries 0 An important part of restructuring plans effective connections between the S&T should be devoted to stimulating labor institutional network and the productive mobility, in view of the fact that many, if sector, and maximum leverage for publicly not most, agencies and institutions are financed projects, were achieved by overstaffed. The government may want conditioning applied research grants on to assign researchers to companies with explicit co-financing commitments by the active technological strategies, through private sector. Therefore, major reforms the use of research fellowships which are recommended to force institutions to would cover a declining share of the increasingly be exposed to the "market." salaries of researchers (for instance, 50% in the first year, 30% in the second and * All applied research institutions funded 10% in the third). by Government resources should be submitted to a full evaluation every 2-3 The core of Argentina's S&T system is years by a joint public-private monitoring made up of four agencies. Some areas for organ. A smaller number of such immediate reform are indicated to. improve institutions should be subject to closer their effectiveness and responsiveness. scrunity by peers and the public at large, including through public hearings. CONICET: It is the key S&T agency in Argentina, absorbing 42% of . the * All major agencies and their key government's total S&T expenditures, with institutional components which are focus on basic sciences. "Applied" funded by the budget should be required disciplines -- engineering and computer to prepare implementable restructuring sciences, agriculture and veterinary sciences programs and specific actions plans, with -- combined are responsible for less than assigned responsibilities and well-defined 15% of expenditures (excluding regional timeframes.. Those restructuring plans centers), and account for an equally small should be a condition for future share of researchers. allocations of budgetary funds. * A reallocation of CONICET's budget to * Tight budget constraints find concrete more applied disciplines is recommended. expression in establishing ex-ante what A target rate of resource reallocation the- expected base line is for non- should be established to fully reflect the governmental funding. One option is to new priorities. set an initial 10% requirement. The private share should increase over time, INTA: This agricultural technology and reach at least 30% of current agency has had a substantial impact on expenditures by year three of the observed improvements in the country's program. agriculture and dairy industry, through genetic improvement and dissemination of * Applied research funds could be only new varieties. allocated to an institution, team or individual researcher, if counterpart * Despite the large externalities the agency resources are committed (30% coverage provides to the agricultural sector of program costs being the possible lower (including agroindustry), INTA should iv Summary & Highlights recover a far larger proportion of its Government's role is still key as a budget through the sale of services (than facilitator, coordinator, and potentially as a the current 2% or so). strategist, but its role as financier should be reduced and the private sector asked to take CNEA: It is generally accepted that up the dominant role in the science and CNEA has been successful in complying technology area. with its mandate, despite the budgetary instability it has faced since the mid 1980s. * CNEA needs to define more clearly its core activities, and examine the possibility of divesting some of its non- core business and entities. INTI: The national industrial technology institute's activities are performed through a network of laboratories and research centers. INTI's units were able to recover in 1994 on average just 27% of their direct costs. Although a few are quasi-viable, most, in order to become financially self sufficient, need to be restructured: on the revenue side, by aggressively searching new clients, offering new services and properly costing them; and on the expenditure side, by cutting costs, merging or exiting. * The corporatization of INTI and its units (with the imposition of a tight budget constraint), appears to be essential to improve their performance. The units need to establish a clear commitment to complete financial autonomy within a certain period of time (say, three years). In the medium term, options should be urgently explored to divest public agencies involved in S+T activities to the non- government sector. Options may include privatization, as has been done in some developed countries, or forms of corporatization under non-profit independent corporations, as has been done elsewhere. The ultimate aim, however, is to use public monies catalytically rather than to provide full support for S+T activities. 1 Introduction 1.1 The fundamental economic forces of began to diverge. Since 1985, DFI has the last decade-and-a-half -- intense grown four times as fast as GDP, twice as competition and an accelerated rate of fast as domestic investment, and two and technical progress -- have generated half times the rate of growth of exports'. powerful undercurrents that pushed firms to globalize (and simultaneously regionalize) 1.4 Firms are not only internationalizing their production activities, continuously their operations, but globalizing (or restructure and internationalize their regionalizing) their production and sourcing operations, and adopt radically new models activities. Thus, the rapid expansion of of management and production. manufactured exports, which has been growing since the late 1980s one-and-a-half 1.2 During this period, technology has times as fast as domestic output, has relied become the object of considerable attention to a significant degree on intrafirm trade. by business managers and policy makers Estimates now place these transactions at alike. Resources were channelled towards 25% of worldwide trade'. R&D as well as to the more mundane, but equally important factors behind technical 1.5 Argentine firms, in relative isolation progress, such as training and quality- from international markets and networks, oriented programs. The result was the rapid were on the whole unresponsive to these introduction of new or differentiated changes. Indeed, on a cross-country products (as product cycles shortened), and comparative basis, and using international a large and continuous improvements in trade/GDP ratios as indicators of the degree production processes, and in the overall of integration into world markets, Argentina productivity of the firm. was and remains considerably less open than industrializing (and other comparator) 1.3 Driven by the need to increase economies, including those of large and productivity, improve quality, establish traditionally more autarkic economies like closer relations with clients and earn India and Brazil (Table 1.1). innovation rents, firms have moved to internationalize their operations. 1.6 Nevertheless, a significant number of Throughout the 1970s, direct foreign mostly large and group-based producers investment, domestic output and domestic broke the relative isolation which investment grew at similar rates. Yet in the characterized the economy in the 1980s, and early 1980s, with firms facing growing were able' to successfully penetrate the competitive pressures, these rates of growth international market on the basis of 2 Chapter 1 1.8 The major challenge that Argentine Table 1.1: Trade Indicators - 1993 firms face is the new paradigm of (percent of GDP) structuring production and organizing business. The fundamental objective of this Country / M/ (X+M0 new mode of organization is to improve country__x/ _M/ _firm performance by (i) facilitating the flow of information within the firm and between Chile 27.1 29.3 56.4 the firm and its network of suppliers and South Korea 25.2 25.5 50.8* clients; and (ii) establishing a new incentive Spain 13.1 17.2 :303 regime for labor, whose greater involvement and increased responsibilities for quality Italya/ 14.6 15.1.29.3: would be matched by longer tenure, Mexico 10.9 multiskill-focussed training, and better India 7.9 9.5 17.4 compensation. Brazil 7.9 5.3 13.2 1.9 "Total quality management" is a key Argentina 5.1 7.2 72.3 concept capturing these organizational Source: IMF, Direction of Trade, International Finance Statistics, innovations, which finds concrete expression 1994. in a set of standards established by the X (exports) M (imports) GDP (gross domestic product) International Standards Organization -- the ISO 9000 (as well as 10000 and 14000) series. In their search for managerial industrial exports (which doubled as a share excellence, and in order to enter and sustain in total exports, for example, in the period their competitive position in international 1968-88). They entered the market despite markets, a growing number of firms are the volatility of the macroeconomy, the abiding by these standards. The process of sharply falling investment rates, and the attaining them implies profound changes distortions inherent in the policy regime. within the firm -- particularly in terms of labor-management relations -- and in the 1.7 As argued in this Report, despite this quality of the relationship with suppliers and somewhat surprising performance, numerous clients. problems persist in the industrial sector. First, the presence of a mass of small and 1.10 As will be argued in this Report, medium enterprises that remain isolated Argentine firms, despite the considerable from international markets and locked in progress achieved in the last few years (with outdated technological techniques and the growing exposure to competitive forces), managerial methods. Second, the still are still distant from entering the incipient advances of Argentine firms "productive revolution" just described. The beyond defensive restructuring, which has economic reforms of the early 1990s, focused on labor-shedding and other short- making Argentina a relatively open and term productivity-enhancing measures, even progressively more competitive economy, among those relatively well performing in have made it imperative for Argentine firms the international market. And third, the fact to play a growing role in international that very few firms have been engaged in markets. The fact that very few are engaged total-quality . management, product in the managerial and organizational changes innovation or design-intensive activities. gripping firms in most developed and a significant number of industrializing Chapter 1 3 countries (including its major Mercosur the S&T delivery system. partner), poses a major challenge to policymakers. 1.14 Although, Argentina has an extensive and differentiated network of Government 1.11 This Report focuses on the role of agencies with the mandate of supporting technology policy and institutions. Its aim S&T development in the productive sector, to provide guidance to enhance the their impact has not been sufficiently competitive position of Argentine firms. evaluated. Chapter IV attempts the This may well be critical in underpinning beginning of such a assessment, noting that the sustainability of the reforms. the country already spends a sizeable sum on S+T, but seemingly with very limited 1.12 Chapter II provides a brief review of returns to industry. Argentine industrial policies and performance in the 1980s, as a background 1.15 The object of Chapter V is to lay to the discussion on the post 1989 reforms down an agenda for policy reform and and their impact on the industrial sector. improvements in S&T delivery system. There is little question that the sharp Three areas are highlighted: (i) the overall reduction in macroeconomic instability, industrial policy. regime which provides combined with trade and regulatory reforms, industry with its economic and financial propitiated an economic recovery and incentives; (ii) the national technology stimulated modernization efforts. Still, policy; and (iii) the S+T delivery system. industry's competitive position is relatively Particular emphasis is paid to the real fragile in the absence of significant demands of industry and, within the sector, improvements in quality management, to the future requirements of the SMEs. product differentiation, and innovation. The chapter ends with a discussion of the post- reform industrial policy framework, which, while now much more efficient, has yet to provide an effective vision of Argentina's industrial future and clear rules of behavior. 1.13 Chapter III describes the current technology policy .regime in Argentina. It notes that relatively few barriers are imposed on the inflow of foreign technologies or access to domestic technologies. It assesses the institutions and incentives related to technology policy, and identifies some obstacles for international competitiveness. Among these are the scarcity of mechanisms that could effectively stimulate the technological and managerial upgrading of the mass of small and medium enterprises; the extremely limited diffusion among Argentine firms of all sizes of international quality norms; and a lack of a clear forward-looking policy direction for 2 Argentine Industrial Policies and Performance 2.1 The dominant economic phenomena of the 1980s in Argentina were the pervasive macroeconomic instability and repeated policy shocks that rendered the economic environment particularly volatile. Combined with a stagnant domestic market, this caused investment rates to fall sharply over the decade, contracting from 25% of GDP in 1980 to 14% of GDP in 1990, in the immediate aftermath of a hyperinflationary bout, and after a brief recovery occasioned by the Austral Plan. Table 2.1: Argentine Industrial Exports A. The Export (average growth rates) Response of the Late Industrial 1980s Total Industrial Agro Based Based Period Exports Exports Manufac. Manufac. 2.2 W h i 1 e investment 1980-84 0.27 -3.33 -2.49 -4.96 remained inhibited 1984-87 -7.77 2.01 0.93 4.19 by the instability of 1987-90 24.77 24.44 19.33 33.12 the economic environment and a 1980-90 4.41 5.97 4.68 8.09 stagnant domestic Source: Calculations based on data from Kosacoff, B. el at, "El Desaffo de la Competividad: market, exports La Industria Argentina en Transformaci6n, CEPAL/Alianza Editorial, 1993, Table 1, p. 121. were dampened by the differential profitability between the domestic and to little over 20 percent. The opening was international market, and limited access to particularly pronounced in the 1987-1990 inputs at international prices. The inflexion period, when export-output coefficients point can be traced to the October 1988 doubled (see Table 2.2). Although the removal of approximately two-thirds of the coefficient of exposure was highest in agro- non-tariff barriers, starting off a process of based and traditional products, it also liberalization which continued for the next increased sharply in the chemical industries two years. - As the decade wore on, and the metal-mechanic complex. manufactured goods of industrial origin became the most dynamic segment of the 2.4 The export response of the second export sector (Table 2.1) half of the decade was the product of a multiplicity of factors. First, the lowering of 2.3 For all industrial subsectors, export- protection. While export incentives output ratios increased substantially. During (including temporary admission and the decade, the manufacturing sector as a drawback systems, domestic tax content whole nearly quadrupled its export exposure rebates, and interest rate subsidies on export Chapter 2 5 domestic demand. The decomposition of the Table 2.2: Argentina - sources of growth in industrial output (which Manufacturing Industry for the period 1981-88 actually increased by Export-Output Ratios an average annual rate of 2.49%), shows (percent) that the growth in export demand (2.93%) is offset by negative import substitution and Industry 1980 1987 1990 domestic demand effects (respectively 7.17% and 7.62%)4. Food, Beverage & 2.5 Finally, the export dynamism of Tobacco 9.24 17.58 29.24 some (but not all) agro-based and natural- Textiles, resource intensive segments, was induced by Garments & the capacity creation and modernization Leather 10.49 13.63 20.03 efforts of leading firms in seed oil Wood processing, chemicals and petrochemicals, Products & steel and basic metals, among others. The Furniture .0.23 . 1.01 7.36 very rapid output expansion of soy beans Paper and sunflower seeds (which tripled and more Products, than doubled in the decade, respectively) Printing & stimulated the build-up of considerable Publishing .6-3 3.14 8. capacity around some 40 highly efficient oil Chemical and pellet-producing plants, operating at Industries 4.43 4.71 12.99 international scales with frontier Non-Metallic technologies, by both national groups and Minerals 0.67 2.34 7.01 transnational firmss. Basic Metal Industries `4.11 9.92 19.47 2.6 In petrochemicals, large investments Metal Prod., undertaken by domestic groups (which Machinery & totalled US$ 1.4 billion in the 1980s) Equipmente3.5 5.55 14.72 materialized in modem plants following other *.international engineering parameters. Manufacturing Updated plant vintage and technology, Industries . 2.62 1 .16 S.9 combined with efforts at de-bottlenecking Manufacturing and optimization of operations, allowed the Industries 5.72 9.91 20.37 subsector to penetrate the international market at a rapid pace in the second half of Source: Adapted from Kosacoff, B., o2 cit., Table the decade (export growth averaged 13.8% 3, p. 126. in 1986-90), when the growth rate in domestic consumption contracted (from finance) partially offset the anti-export bias 10.5% to 4.6% between 1981-86 and 1986- of the old regime, their effect was magnified 90) and international prices were quite with the post-1988 trade reforms. Second, favorable.6 Similarly in the steel sector, the movement in the real exchange rate, where the growth in exports (at a rate of which more than doubled in the 1980-90 11.5% in the 1981-90 period) was driven by period, and became increasingly competitive a combination of rapid capacity creation in in the outer years. Third, the excess mostly modern plants (output doubled from capacity generated by the contraction of 1.87 to 3.67 million tons between 1981 and 6 Chapter 2 1990), and the contraction of domestic consumption (which decreased at an average 2.9 It could be argued that investment in of 4.9% yearly)'. physical capital is a poor proxy for a firm's modernization efforts, particularly if capital 2.7 Although the export response was not is being used more efficiently and if these limited to just few producers -- there were efforts are being undertaken within the new in fact a growing number of industrial production mode -- where change is guided exporters in the decade (5,728 in 1988, by organizational and managerial compared to 4,750 four years earlier) -- improvements whose aim is to make the 70% of all exports in 1988 were carried out firm's products internationally competitive. by a core of 123 firms'. Outside this core, Yet, concern with international quality exports averaged just US$ 368,000. The standards has remained extremely modest extent of export concentration suggests that (see paras 3.40-3.42), even among major firms in general made limited progress in industrial firms, and despite the reforms moving from a defensive, survival-oriented which have forced producers to operate in a posture, in an environment characterized by more open and competitive environment. extreme volatility, to positive restructuring. B. The Post-1989 Policy Reforms and 2.8 The degree of modernization in their Impact on Industry Argentine industry was and remains incipient. Though investment has started to 2.10 A "policy offensive" pursuing recover, the industrial sector is still saddled macrostability, privatization, deregulation, with years of net depreciation of its capital and a more neutral incentive regime, was base. It is true that labor productivity aggressively pursued by the Government advanced in response to industrial elected in 1989. To strengthen the incentive restructuring, and prompted by recessionary regime for private investment and the forces, particularly in the latter part of the modernization of Argentine industry, the decade (Table 2.3). But this was Government lifted all sectoral and other fundamentally a defensive movement, restrictions on direct foreign investment. focused on labor shedding. Table 2.3: Argentina: Selected Industry Indicators (percentage change) Industry 1973- 1975- 1978- 1981- 198 1987- 1989- 1991- 75 78 81 84 87 89 91 93b Gross Production 1.0 -2.2 -2.6 2.1 0.2 -4.9 14.2 11.4 Employment 1.4 -8.7 -4.9 10.2 3.3 -14.8 -5.1 -1.9 Labor Productivity -0.4 6.5 2.3 8.1 3.1 9.9 19.3 13.3 Source: INDEC and BCRA Notes : a. Calculated from figures in 1970 constant Australes b. Provisional. Chapter 2 7 Further, the process of trade reform was 2.13 The sectoral allocation of new accelerated, with the removal of most investment outlays and of the expanded remaining quantitative restrictions (QRs) and inflow of capital goods is yet unknown. the reduction in tariff levels. While QRs Thus, although it is unquestionable that the were reduced to 7% of domestic production economy is being modernized, it is unclear coverage by late 1990 (automotive and the extent to which those investment electronics being important exceptions), the resources are being directed to export- ad valorem tariff band was narrowed from oriented segments and their support 0-115 percent to 0-24 percent, with an infrastructure, which are critical for the average rate of about 18 percent. sustainability of reforms. 2.11 In February 1991, the Government 2.14 The other major incentive-related announced that specific duties would be initiative was the deregulation of domestic converted to ad valorem tariffs, while the markets for goods and services. By the end number of tariff rates was to be reduced to of the last decade, the Argentine economy three (0, 11 and 22 percent). Finally, most was gripped by a regulatory maze which export restrictions were lifted, customs functioned as a barrier to competition by: procedures simplified and related taxes constraining the mobility of factors; unified, the production coverage of segmenting markets; and distorting or industrial export taxes reduced to 30 percent impeding their operation, particularly in and the statistical tax on exports eliminated. their price-setting and allocative role. Firms faced a multiplicity of internal and external 2.12 The relatively low tariffs on capital tax wedges, mostly inefficient, growth- goods (which oscillated between 0% and inhibiting but easy to collect tax "handles". 5%) and the absence of non-tariff barriers, Combined, they dampened efforts to facilitated the modernization and the improve efficiency and added to the costs of technological upgrading of firms. As doing business in the country. investment recovered, capital goods imports expanded at a fast rate; they grew by 31.9% 2.15 The State Reform and the Economic in the 1992/93 period, whereas overall Emergency Laws of 1989 not only provided imports expanded by 10.5%. In contrast, the the legal basis for the macroeconomic and imports of consumer goods expanded at just fiscal program, and for the trade reforms, 7.7% and passenger vehicles at 5.2%. In but also for the encompassing Deregulation fact, the share of capital goods imports in Decree 2284 of 1991. They allowed the gross domestic investment more than Government to intervene to change the legal doubled in 1991-93, reaching 34% status and organizational frame and to sell, (according to INDEC). As a matter of liquidate or dissolve any state entity, comparison, in 1985 that proportion was including public enterprises and regulatory 36.4% for South Korea and 38.2% for agencies.9 Taiwan (China), at a time when these economies were well on the way of building 2.16 In the period 1991-93, a number of strong domestic capital goods industries and markets were deregulated: port, undergoing fast modernization. Yet, while transportation services for cargo (including the 1993 share is promising, it will need to . mail) and passengers (road, air, sea and be maintained to rebuild the badly river); the wholesale of fruits, vegetables depreciated Argentine capital stock. and other fresh food; the services of the medical and teaching professions; the import 8 Chapter 2 and sale of pharmaceuticals; insurance; did not converge uniformly. Between April cement; and oil and gas. The removal of 1, 1991, and August 30, 1993, the consumer regulatory barriers in these activities was price index increased by 50.7%, fueled by complemented and reinforced by the services, including health and education, dissolution of ten key regulatory authorities transportation, and telecommunications. In (including the National Grain Board, the contrast, the wholesale price index expanded National Meat Board and the Special by just 8.5% during the period, with upward Tobacco Fund), and the special funds that pressure from construction (46.9%), supported their functioning. This agriculture and livestock (5 1.0%), while that deregulation lowered costs and strongly of imported goods actually contracted by supported trade liberalization -- for example, 5.8%". The situation is considerably the cost of freight transport and port use full different in the last 18 months, however, as by as much as 35-40 percent over the 1991- consumer price inflation has been severely 93 period'. reduced. 2.17 The Impact of the Reforms. The 2.19 The divergence in price paths price stability that followed the economic between tradables, and non-tradables and reforms of the early 1990s was accompanied services, is seen in the terms-of-trade by the remonetization of the economy, an experienced by manufactures since 1989. increase in the supply of credit and an Between 1989 and 1991, relative prices of expansion in real incomes. Combined, they manufacturing goods vis-a-vis services fell brought about the resumption of economic by nearly 50%, and were the lowest in over growth. The expansion of production was a decade (Table 2.4). stimulated by the growth in real incomes and the positive wealth effects from lower Table 2.4: Argentina - Evolution inflation, as well as the reduction in interest of Prices of Manufactures to rates and an ample supply of consumer Servces credit. It was centered on the automotive (1986-100) sector, certain consumer durables (such as Manufactures refrigerators and washing machines) and Year to Services non-durables. The housing industry also underwent a major expansion, accompanied 1980 90.2 by their industrial inputs -- paints and 1981 90.5 portland cement. Generally these are income-elastic goods, the demand for which 1982 139.4 had been compressed in the previous years. 1983 146.3 Among the major industrial subsectors, only 1984 131.7 metal products suffered an absolute decline, 1985 120.0 while the growth performance of the 1986 100.0. chemical and paper industries was modest. 1986 1987 99.7 2.18 The driving force behind the growth 1988 126.7 in output and most dramatic result of the 1989 155.1 reforms was, in fact, a sharp decrease in the 85 rate of inflation to 7.5 percent in 1993, and geealy admpnngi tedere1991 81.0 more generally, a dampening in the degree Source: Machinea, J.L. and Kacef, 0., in "Ahorro, 1nversi6n y of volatility of the economy. Yet inflation Crecimiento: Un Analisfs do sus Perspectivas en el Caso Argentino', Fundaci6n Unbln industrial Argentina, Documento de Trabaio 0.1, . Table IX, p. 18. Chapter 2 9 This fall was consistent with an economic C. The Post-Reform Industrial Policy environment of asymmetric competitive Regime conditions. Strong import competition forced domestic manufacturers to pass on to 2.21 The following characterized consumers improvements in productivity, Argentina's industrial policy regime in the which in the post-adjustment period have immediate aftermath of the 1989/1991 been quite significant; in contrast, reform: competition in the services sector (including but not limited to education, health and First, a fairly simple system of telecommunications) has been feeble or protection: few non-tariff barriers (covering excluded by regulatory fiat, resulting 7% of production), and a tariff structure generally in escalating prices. with just three levels: zero for capital goods, 11 percent for intermediates and 22 percent for final goods. In addition, quantitative Table 2.5: Argentina - export restrictions and related fees were Net Profit Margins by removed. Economic Sectors at (percent) Second, the absence of any major Sector Mar. 1991 Dec. 1992 distortionary promotional policies, with the suspension of regional and sectoral fiscal Tradables -13.46 -13.63 incentives." It should be recalled that these incentives were not only fiscally costly, but bles -11.98 2.47 introduced major biases in industry's .tradables Services 7.75 13.84 production structure and location decisions. ..Total -4.9. 1.79.. Third, a post-reform regulatory Source: Coloma, G., in 'Desempeflo Empresario y environment characterized by the elimination Contexto Econ6mico: Un Andlisis del Perfodo 1991-92," of most policy-generated barriers to g.cit., table 7, p.19. domestic competition and mobility. Most a/ Based on a sample of 52 firms listed in the Buenos important, deregulation underscored the Government's commitment to an economy free of impediments to the entry and 2.20 The differential sectoral performance operation of firms. The key legislation -- reflected in such divergent inflation rates - established an unambiguous frame of - is also observed when one compares net reference that oriented economic agents with profit margins (Table 2.5). While for respect to the Government's views and services and industrial non-tradables margins intentions on regulation. they were positive, reflecting their hold on captive or quasi-monopolistic markets, those 2.22 Although there were subsectors and activities subject to more intense competition agents shielded from the reform process -- showed negative results. The reversal of the electronics remained under a special regime, latter could have come in 1993, as sales and the newly privatized entities were continued to expand briskly, international protected from the forces of competition as commodity prices improved, and a means of guaranteeing attractive rates of restructuring efforts of the previous two return (particularly in services) -- one would years paid off, but this requires further be hard pressed to argue that the regime was study. not oriented towards neutrality. 10 Chapter 2 2.23 During this period, larger, better one-to-one basis), possibly motivated by the structured and generally group-based firms importance of the industry to the economy, further restructured their operations or and the need to spur exports and expand moved to areas where competition was less production scales. intense -- particularly the production and distribution of non-tradables -- and/or 2.27 This regime (together with the one acquired privatized assets, the improved for electronics in Tierra del Fuego) management of which allowed great gains. signalled, however, that exceptions were. Smaller and medium-sized firms, by possible. Pressures from domestic producers contrast, with profits being threatened by started to build up, and led nominal tariffs imports, generally adopted a more defensive on locally-produced capital goods and posture. intermediates to be raised to 5% and 13% respectively, though on the whole the 2.24 Firms supported the reforms for average tariff on imported goods decreased bringing stability, restoring consumer slightly. The Government also increased the confidence and credit, while criticizing some across-the-board statistical tax from 3 of the changes, particularly in the trade percent to 10 percent. Thus, while nominal regime. It was argued that the removal of average ad valorem taxes fell slightly, the protective barriers was being effectuated average effective tariff rose from 14.8 without having in place a defensive structure percent to 19.8 percent. At the same time, (in terms of instruments and mechanisms) the Government lowered the maximum ad against predatory dumping and export valorem tariffs from 35 percent to 20 subsidies by Argentina's trading partners. percent, thus narrowing tariff dispersion. Moreover, it was claimed that time was needed for industry to restructure to 2.28 In May 1993, tariffs on most capital effectively face external competition. goods imports were again eliminated in order to reduce investment costs. Since July 2.25 As the reform process unfolded, the 1993 import duties have been 0% on pressures to reerect certain barriers industrial equipment and machinery increased. In an industrial policy void -- (although some exceptions are taxed at 15- with distortions being removed in a 20%); 0/5% on raw materials; 5/10% on movement towards neutrality, without at the intermediate products and 15/20% on same time an industrial policy framework finished goods." being clearly defined, it was inevitable that such pressures would eventually translate 2.29 Although tariff levels are not far into some ad-hoc, protectionist measures. from the original three-tier arrangement, concern about alleged unfair practices 2.26 The motivation of the ad-hoc post- contributed to the reelection of non-tariff reform policy changes cannot be attributed barriers. These included a July 1993 to a single factor. After Decree 2284/91 was reintroduction of limited quantitative promulgated establishing the three-tier tariff restrictions on paper imports (for one year), structure, Decree 2677 of December 1991 tariff surcharges on textiles, sport shoes, departed from the general trade orientation sweets, and tariff-quotas on refrigerators.14 and introduced the first significant In January 1994, the Government announced exception: the quota-driven automotive a tariff increase for certain foodstuff (canned regime (where import quotas are awarded to food, beverages, powdered milk, poultry, vehicle producers against prior exports on a chocolate) to 20% (which previously varied Chapter 2 11 from 5% to 12.5%). and volatility: the frequent changes in tariffs rates, the reintroduction of some NTBs and 2.30 The deterioration in the trade the creation of special regimes may raise balance, a consequence of massive capital questions regarding the long-term durability inflows and fixed convertibility that deprived of the reforms, particularly in their trade the Government of the exchange rate dimension in the minds of some in the instrument, made the use of commercial industrial sector. A major reversal, policy attractive as partial, stop gap however, has not occurred, in part because alternative to devaluation. In October 1992, the Government attempted to respond to the the Government announced measures to pressures for defensive measures through increase the competitiveness of exports in initiatives other than reimposition of trade the form of a partial tax rebate; on average, barriers, and generally focussed on the rebates would be raised from 8 to 13 competitive standing of SMEs. percent. The promotion of exports was also behind the "Industrial Specialization 2.33 In the absence of such reversal, the Regime" (decree 2641) introduced in structure of economic incentives for firms to December 1992. modernize, improve product quality and upgrade their technology remains, to a 2.31 The "specialization regime" allows considerable extent, in place. Despite ad-hoc manufacturing firms to import at steeply changes introduced in the aftermath of the reduced tariffs (2% plus 3% statistical tax reforms, international trade continues to be until end 1996, and then converging to the a very strong force for structural full duties by the year 2000) the same improvements in industry, progressive category of products that the firm exports technological behavior, and the (i.e., those that come under the same modernization of processes and products. chapter of the "Numenclatura de Comercio Exterior"), or their parts, components and subassemblies (in which case, at least 25% D. The Future Outlook for Industry of the value of such components have to be procured locally from independent 2.34 Argentina will face three critical providers). Import values have to challenges in improving the performance of correspond to incremental exports on a one- the industrial sector and its underlying to-one basis, with 1992 being the base year. competitive position. To engage in this regime, firms must submit their import-export commitments to the * First, the significant change in domestic Secretary of Industry, and obtain the relative prices (and profitability) against "opinion" of the industry chambers involved industrial goods, and in favor of (that is, those that produce the goods that services and other non-tradables, has will enter at reduced duties). The induced major groups to progressively involvement of the "camaras", not as move into the latter. The rededication of service-oriented centers, as some were the economic groups and large firms to already being oriented for, but as political the production of tradables -- in which filters, is not fully consistent with the spirit they became engaged quite effectively in of Government reforms. the late 1980s -- and a reallocation of investment flows accordingly, will 2.32 Starting in 1992, one therefore require a redressing of relative prices observes a regime of increased complexity (though greater competition in services 12 Chapter 2 and other non-tradables) in favor of Ultimately, it may be necessary to define an manufactured production and exports. industrial policy framework, just as the frame for deregulation was established, to * Second, Argentine firms, as they help government ward off these demands. become increasingly oriented to the Although major barriers to competition have international market and the attainment been removed and have yet to be 'of a competitive standing, must not only reintroduced, particularly in the tradable continuously reduce costs but "create goods sector, the appearance of special value". This implies moving beyond regimes and exceptions may ultimately rationalization efforts typical of a undermine the Government's aim for an defensive restructuring stage, adopting open and competitive economy. To prevent the total quality management culture, such an outcome, it may be time for the and building capabilities for product Government to provide agents with a vision differentiation, innovation, design, and of Argentina's industrial future, its position marketing. And this applies not only to in the international economy, and those large firms but to the mass of SMEs, areas legitimate for government action. A which are the object of a multiplicity of key element of this vision in an effective not always effective initiatives, technology policy, the subject of the following chapter. * Third, the competitiveness of the industrial sector will be based on continuous modernization efforts. Gross domestic investment is expanding and so are capital goods imports. These trends are positive and need to be maintained. If the market for Argentine goods and services continues to expand, and investors remain confident, there is no reason for the current modernization process to suffer a reversal, as long as an open trade regime and a competitive environment is maintained. 2.35 As was argued, trade and regulatory policy reforms at the beginning of the decade enhanced, no doubt, the incentives for the restructuring and technological upgrading of firms, by stimulating competition in domestic and export markets, and facilitating access to capital goods, parts and components. Yet, in the aftermath of the reforms, and in the absence of a industrial (and trade) policy framework, a number of ad-hoc, reactive measures have been taken, particularly in the trade arena. 3 The Technology Policy Regime 3.1 Argentina's technology regime -- the (iii) Argentina's complex and set of policies that directly affects how differentiated science and technology technology is generated, acquired and institutional delivery system has diffused -- is characterized by relatively few produced marginal results overall. barriers to the inflow of foreign technologies Operating without clear policy or access domestic technologies. However, directives concerning what is three aspects of technology policy require expected from the system and further examination: without a well-defined clientele for its output, institutions drifted -- the (i) There isn't an effective approach to better groups did good science, but the dissemination of knowledge for science sake; many others, among the mass of small and however, were even less effective in medium enterprises (SMEs) that face their use of public resources (a point significant technological lags with to be taken up in greater detail in respect to industry leaders, despite Chapter IV). the fact that SMEs are the object of a number of promotional A. Access to Foreign Technologies Government programs. 3.2 In most industrializing countries, the (ii) Argentine firms on the whole are major carrier of foreign technology are well behind in adopting foreign firms directly investing in the internationally-accepted quality country. The regime regulating direct standards, and efforts in this area are foreign investment in Argentina is very still modest. In particular, a liberal, by any standard, and on the whole minuscule number of firms have does not create artificial obstacles to the obtained the International Standards inflow of capital." Foreign investors are Organization (ISO)-9000 series not required to obtain prior approval for certification. Introduced in 1987, this their investments, and the Foreign certification has become an important Investment Law and supplementary rules signal of a firm's overall establish the principle of equal treatment, competence, of particular relevance with Argentine and foreign investors for countries that still need to assert enjoying the same rights and duties.'6 the quality of their products in world markets. 14 Chapter 3 3.3 This unrestricted policy, which also applies to 100% foreign-owned companies, Table 3.1: Argentina - Non-resident extends to investment in the manufacturing, Withholding Taxes mining, commercial and service sectors, as for Technology Payments a/ well as to such areas as defense, telecommunications, power, gas and Withhold insurance." Investments may be made not Type of Payment ing Tax just in currency, but in capital goods as well Rate as intangible assets (including those of technological nature); after a 30% flat rate Technology not available in on income, investors may remit profits Argentina (lump sums)18.0% wihout withholdings. Royalties or Payments for the transfer of patent rights or for 3.4 Licensing, technical assistance and technoly available in 24.0% other forms of disembodied technology flows are governed by a specific legislation tesr r p t gov without prior government enacted in 1981 (Law 22,426)." According approval or transaction not at to this legislation, transactions between non- arms-length basis 27.0%. related parties can been contracted and paid Technology Law Copyright for without government interference, and royalties 6.4 such transactions are required to be al Maximum rates for countries with Tax Treaties with Argentina: registered only for information purposes. 15% for Austria, Germany and Sweden; 18% for France and Italy; registeredforlyofiriinformationnpurposes This approach is consistent with Argentina's 24% for Bolivia, Brazil and Chite. technology needs. Further, it is in line with most countries that have liberalized the technology imports regime, but stands in they vary in the range of 25-35%. contrast to its major Mercosur partner (in which case, all technology contracts are still 3.6 For related-party transactions to be subject to Government approval, if payments accepted, they are supposed to be conducted are beyond a specified threshold). on an arms-length basis. This condition would be fulfilled if the payment does not 3.5 In case companies are related, prior exceed 5% of the sales of the products government approval is required. The manufactured or the services rendered with absence of such approval does not invalidate the supplied technology, while other the technology transfer contract, but contractual conditions must be consistent disallows payments to be deductible from with market practices (according to Decree taxable income, and makes them subject to 580). It seems that the 5% limit is the 27% withholding tax, the maximum rate. exceedingly low in view of the shortening of If the transfer is approved, the withholding technologies' life cycle as the rate of tax rates of royalties and other technology technical progress accelerates. payments are either 18%, 24% or 27%, with the 24% rate applying in most cases 3.7 The impact of the 1981 legislation on (Table 3.1). Such withholding taxes are not technology flows appears to have been considered out of line with international substantial, at least initially, with technology experience: in Brazil, for example, a payments nearly doubling between 1980 and potential competitor for technology flows, 1981, and increasing again to record levels Chapter 3 15 Table 3.2: Payments for Table 3.3: Licensing Payments Imported Technology Relative to Industrial Value-Added (Millions of $US) Country 1971-80 1981-90 Year Value % of GDP South Korea 0.16 0.32 1980 257 0.24 0.16 0.26 1981n:C in)::::,.,. 458 0.496 1981 458 . 0.491. Hong Kong 0.09 0.48 1982 518 1.13 Singapoe 0.48 1.66 1983 .469 0 .87 China 0.04 0.08 1984 432 0.64 Indonesia 0.10 0.28 95. .379 . . 0.65 Malaysia 0.18 0.41 1986 250 0.35 Thailand 0.17 0.38 1987 255 0.34 Argentina 0.10 0.10 1988 260 0.30 Brazil 0.12 0.03 19897272.0.. Ce .0.03 Mexico 0.30 0.21 Source: 'Registro do Transferencia do Tecnalogfa", INTI, 1990. M 0 0. U.K. 0.36 0.4 France 0.23 0.34 in 1982 (Table 3.2). In that year, these Germany. 0.17 .0.26 payments were equivalent to 1.13% of Japan 0.13 0.14 GDP, a relatively high share when compared to other industrializing economies' (which have generally been in the order of Source: C. Dahiman, H. Pack and L. Westphal, Technoloy 0.5%). Since then, and until the end of the Database, 1994. decade, one observes a downward trend in payments, consistent with the depression in economic activity in the period (as payments payments (relative to industrial value-added) such as royalties are related to sales have risen between 1971-80 and 1981-90, in volumes). Clearly, the pattern for the last 4 contrast to Argentina (and other major Latin years needs to be analyzed to see whether American economies), where that ratio has this trend has been reversed. either stagnated or decreased. 3.8 From a narrower perspective -- 3.9 Capital goods are embodied focussing only on licensing payments to the technology and the diffusion of new vintages U.S., U.K., Japan, France and Germany -- are an . important element in the a cross-country comparison suggests that dissemination of new knowledge, and the technology acquisition by Argentine introduction of more efficient and cleaner producers has been quite limited (Table processes. For all open economies, 3.3). Moreover, for most rapidly (first and imported capital goods are an instrument of second generation) industrializing countries, technological modernization; they should as well as industrial economies, technology therefore be subject to minimal restrictions. 16 Chapter 3 At the same time, domestic production under discussion in Congress. Argentina is should not be discriminated against. a signatory of the 1883 Paris Convention for the Protection of Industrial Property (and Table 3.4: Argentina - Imports subsequent amendments). As a result, According to Economic Use Argentine legislation grants inventors the 1993 exclusive right to exploit their inventions for (in US$ millions) a period which varies from 5-15 years Value (according to the merits of the invention). ( over 1993/92 Patents registered abroad are also protected total) Growth Use Category in Argentina if registered within 12 months of registration in the country of origin, in 3588.5 3which case protection extends for 10 years Cpita -Goodls" 38. (23.9) or up to the time the patent lapses in the country of origin, if earlier. Intermediates 4572.7 3.8 (30.4) 3.12 There is, however, a major patent Fuel 357.5 -10.7 rights exception: pharmaceutical products. (2.4) This is an area where Argentina has Parts and 2561.5 7.1 developed an important domestic industry Components at (17.0) based on reverse engineering and important Consumer Goods 3163.4 7.7 local innovation efforts. The present law (21.0) has been criticized, in addition to its sectoral Passenger 769.1 5.2 exceptions, for the weaknesses in its Vehicles (5.1) provision of remedies and degree of Other 29.9 7.6 enforcement. Specifically, it does not (0.2) consider preliminary injunctions in Total 15042.2 10.5 infringement cases. In addition, the burden 00.0) of proof lies with the infringed party and the Source: INDEC remedies include only a maximum criminal sentence of 1-6 months and a minimal fine.19 3.10 Currently, capital goods imports in Argentina do not have to overcome major 3.13 A 1990 evaluation of Argentina's obstacles. Similarly, domestic production IPR regime by U.S. firms concerning the does not appear to suffer overt policy-related impact the of regime on the probability of barriers. Combined with a far more these firms engaging in joint venture with favorable macroeconomic environment, this local partners, transferring the newest or has allowed for a resumption of investment most effective technology to wholly-owned embodied in both domestically-produced and subsidiaries or through arms-length licensing imported capital goods. The importance of arrangements, is quite revealing (see the latter is shown in Table 3.4. Chapter Annex Tables). Compared to other Latin American countries, Argentina was 3.11 Finally, the intellectual property not assessed unfavorably -- it had a superior rights (IPR) regime is in a state of perception than either Mexico or Brazil, and transition, with Government-sponsored was on par with Chile -- though its legislation to substitute Law 111 currently intellectual property rights were far weaker Chapter 3 17 than those in Spain or Japan, for example. additionality. The problem areas were chemicals (which included pharmaceutical) and electrical 3.16 As in most industrializing countries, equipment, technology-intensive industrial market-based innovation finance is close to segments. nonexistent in Argentina. Although it is arguable that the fiscal regime does impose 3.14 If one regards foreign firms to be the a barrier to the emergence of venture capital major knowledge carriers, it may be to the funds, insofar as capital gains are taxed at advantage of Argentina to strengthen its IPR the same rate as income (at a flat 30%), it is regime, particularly in view of the country's unlikely that a more generous tax treatment intentions to further integrate with the global of such gains would by itself be sufficient to trade and technology networks. Moreover, spur venture capital finance. Such in an era of growing techno-nationalism and specialized services require highly technical awareness of the value of technology, it is people able to identify attractive unlikely that foreign firms will part with opportunities and appraise the commercial their technology unwillingly without and technological risks of innovative pressing their countries for retaliation. ventures; and institutional arrangements Finally, strengthening of IPR may be an which provide liquidity to and allow the inducement for Argentine researchers to issuing of shares of emerging technology- orient themselves to the productive sector intensive companies (such as an over-the- and commercialize their innovations, which counter market). Neither are yet present in to a large extent, still remain on the Argentina. "shelves" of their institutions. 3.17 Partly to compensate for this lacunae, B. Technology Development: Fiscal a Secretariat of Science and Technology and Financial Incentives (SECyT) initiative -- Resolution 443/92 -- contemplated providing some firms and 3.15 Explicit fiscal incentives for technological link units ("Unidades de technology development are not provided: Vinculaci6n Tecnol6gicas" -- UVTs -- as research and development expenses may be defined by Law 23877) with approximately deduced as they are incurred or they may be US$ 20 million over a two-year period capitalized and subsequently amortized over (1992-1993) to finance up to 80% of project a period not exceeding five years2o. Even costs (with interest capped by the lowest though a number of countries practice more Banco de la Naci6n loan rates, a four year generous regimes -- it is not uncommon that repayment period and a maximum grace R&D expenses may be expended at twice period of three years).' The scope of such the value actually incurred, or that projects include R&D, the engineering and equipment used for R&D activities be scaling-up of processes, and productivity purchased free of value-added or sales taxes, and quality-focussed technical assistance. or entitled to accelerated depreciation -- it is probably wise for Argentina not to introduce 3.18 It is not clear, even on an ex-post similar incentives. The fiscal and basis, the actual criteria that were used by administrative costs of such regimes are not the consultants hired to appraise individual small, and resources might be more projects in deciding to award Resolution 443 productively used in promoting and low-interest loans (some of which are fully disseminating throughout industry cost- or partially conditional), or how effective reducing, quality-enhancing programs. supervision of the projects has been, once Moreover, such fiscal incentives are often the loans were awarded. At the same time, redundant, bringing little resource it is too early to assess the results. 18 Chapter 3 Nonetheless, it is unlikely that this approach repayments conditioned on the success of the to innovation finance is the most project). appropriate. 3.22 The design of both subprograms 3.19 The major problem is that such an raises some questions regarding how initiative has not led to a systematic and effective those subprograms will be in institutionalized accumulation of specialized attaining their stated objectives. First, both knowledge. In order to lead to sustainable pay very limited attention to the capacity of and market-driven innovation finance, such the S&T delivery system to respond to the knowledge should be concentrated and demands stimulated by the provision of reside in market-oriented financial finance. Many of the institutions face soft institutions. Yet the consultants' experience budget constraints and are unable (or in appraising and supervising innovation unwilling) to restructure their operations to finance projects remains dispersed, and little respond to the requirements of the market. seems to have been learned in the process. Additional resources made available directly or through the UVTs will not necessarily 3.20 The Government is currently engaged improve things. In addition, if the ultimate in strengthening its pilot innovation finance aim of the program is to improve the program (with support from the competitive status of Argentine firms, to InterAmerican Development Bank, allocating foster the technological capabilities of a total of US$ 190 million (US$95 million research institutions, and to promote the from IDB, US$62.5 million from the links between the two, the object of Federal budget, and US$ 32.5 million from appraisal should be the research institution the Banco de la Naci6n Argentina) over a or the industrial (or service) firm, and its four-year period to finance firms' ability to bring the output successfully to the technological activities undertaken either in- market. The technological risks and returns house or within research institutes. Called of the project should be considered only "Technological Modernization," this after the unit that is undertaking the R&D program is expected to start in 1994, and (and engineering) activity is itself appraised. will supersede the Resolution 443 promotional system. 3.23 Further, just as with Resolution 443, the program centralizes within the 3.21 The program will be made up of two Government the appraisal and supervision subprograms of roughly the same size: the process. The fact that Fontar will be first is located in SECyT, and finances operating out of the BNA increases the projects submitted by the UVTs and non- probability that specialized knowledge profit public and private R&D units. Its acquired in the innovation financing process objective is to link existing S&T assets from will find an institutional locus closer to the universities and other public institutions with market. Still, it is highly unlikely that a the productive sector. The second transition to a market-driven financing subprogram will be implemented by the mechanism will be accomplished if a critical Fondo Tecnol6gico Argentino (FONTAR), mass of specialists with strong financial in cooperation with the Banco de la Naci6n. sector background is not assembled, Fontar will be directed to finance private preferably clustered around small groups firms, in addition to (on a more limited operating on a decentralized basis in private basis) public research institutions outside the financial institutions. university structure, though regular and conditional loans (that is, loans with 3.24 In this regard, it is worth noting that Chapter 3 19 in the case of India, the relative success of of 7 years (with a two years grace period), an innovation-focussed venture capital at 70% of a standard rate (prime + 6%). financing mechanism was predicated on Projects are evaluated by INTI to determine establishing specialized units within banking if firms in fact intend to engage in institutions, and providing training (in "restructuring, " defined as significant technological risk assessment) to a staff that changes in the capacity of firms to produce, was already well versed with the financial commercialize and distribute their products. appraisal of projects and the economic viability of clients. In Brazil, the main 3.28 In addition, for SMEs based outside institution involved in innovation finance the greater Buenos Aires region, US$135 (FINEP) has developed over the years million is available in the context of the strong capabilities in appraising both "Federal Productive Agreement" (Acuerdo commercial and technological risks of Federal Productivo) to finance individual projects, and having for reference organizational improvements (up to the competitive standing of the firm that will US$100,000 per loan), as well as for be carrying out the project. working capital and fixed investments (up to US$250,000 per loan); US$10 million for 3.25 In sum, the success of innovation credit insurance; and US$ 25 million for finance schemes depends on the presence of microenterprises. The latter will also clusters of trained specialists, preferably benefit from a US$60 million line of credit, operating on a decentralized basis within for loans averaging US$10,000 to finance private financial institutions. The object of working capital and the purchase of capital their analysis would be the commercial and goods. technological viability of innovation projects, and the technological risks 3.29 It seems, therefore, that SME- involved, but most important, the capability oriented term credit for technological of the firm undertaking the project. innovation and modernization is not lacking in Argentina. On the contrary, there are C. SME Restructuring and numerous credit lines targeting such firms, Modernization Finance with considerable overlap. The major public effort -- that of the Subsecretariat of Small .3.26 The major domestic source of SME- and Medium Enterprises -- has reached a oriented credit is the Government, through significant number of firms, though at a the Subsecretariat of Small and Medium fiscal cost for which the Government has yet Enterprises. By end 1993, a total of US$1.2 to establish a ceiling, and with an impact yet billion had been auctioned off to commercial to be assessed. banks, at a nominal interest rate of 10-12%, some four percentage points below market rates; 24,500 loans had been made by these banks to SMEs, of which 9,500 had yet to be disbursed in mid 1994. The loans averaged US$33,000 for capital goods and US$36,000 for working capital." 3.27 Low-cost restructuring credit is also available from Banco de la Naci6n, for amounts up to US$ 1 million (though priority is given to loan amounts in the range of US$ 100,000-200,000), for a term 20 Chapter 3 D. Areas for Improvement extent German experience shows. Neither arrangement is currently prevalent in Argentina's technology policies could Argentina. be improved in at least three areas. 3.33 The knowledge that effective SME 3.30 First, the dissemination of support is predicated on targeting groups or technological and managerial knowledge cluster of firms, has prompted the among small and medium-sized producers. Government to support industrial The Government's National Program for restructuring ("reconversi6n industrial") Industrial Competitiveness (PNCI) is an efforts of firms clustered around regional important initiative in this regard: it will be "productive poles". Under these agreements, coordinated by the Secretary of Industry and the Government commits to provide market jointly undertaken by the Secretary of information, managerial training and support Economic Programming and INTI (Instituto for organizational improvements, in addition Nacional de Tecnologia Industrial), in to BNA finance, loan guarantees and access collaboration with large firms. Initially, the to inputs at reduced tariffs (under the SMEs to join the program are suppliers. and "Specialization Regime"), while producers subcontractors of larger producers. The precommit to attain production and export program has three modules: quality, design targets. Among others, the following and technological modernization. industrial segments signed agreements with the Government by early 1994: furniture 3.31 To what extent the Program will producers from Chaco, Formosa and Santa succeed is an open question. It will Fe; fruits and vegetables producers from fundamentally depend on the willingness of Mendoza; metalmechanics, plastics and. the larger producers to cooperate and extend agroindustry firms from Santa Fe; olive oil support to SMEs, and the quality and from La Rioja; and concentrated juices from network of the SME-oriented extension Neuqu6n. Nine other industries concentrated services. The Government intends to use in regional productive poles were in the INTI as its extension arm; although this is in process of negotiating agreements in. that principle a positive approach, much will period.24 depend on a radical improvement of INTI's operations, based on significant restructuring 3.34 Although it is too early to assess of its modus operandi (Chapter IV). results, the Government acknowledges that they so far have been quite limited in view 3.32 Moreover, even if INTI were an of the resource constraints it faces. In fact, effective extension agent, it is well known even more that financial resources, effective that most countries face difficulties in support of such geographical clusters tends reaching SMEs, and improving their to be predicated on the existence of technological and managerial base. Those institutions able to support geographical and that have been most successful have relied sectoral clusters of SMEs on a decentralized either on quality-focussed large firms (for basis. This should preferably be the work of whom the capabilities of "just-in-time" local producers' associations in cooperation suppliers is critical) to develop the SMEs or with Government agencies and other on their being clustered around "industrial relevant parties, including teams specialized districts". The latter would significantly in fostering SME networks ("consortia") on decrease the transaction and other costs the basis of existing regionally-based involved in assisting firms, as the Italian, sectoral clusters. In this regard, the Danish. Taiwanese (China) and to a lesser Government has instituted in late 1993 Chapter 3 21 (Resolutions 126 and 158 of the Secretary of upgrading of SMEs through Industry and Commerce) a fund which advanced, partnership-based, covers up to 40%'o of the operation costs of subcontracting relationships; SME consortia (up to 60% in the first two years) oriented to the improvement of the (ii) In Argentina, vertical integration of competitive standing of members. activities within a firm incurs lower tax obligations (and transaction costs) 3.35 Just as important for SME than subcontracting arrangements. development are subcontracting There are taxes on gross revenues as arrangements with larger producers. In well as on the execution of each many industrializing countries, these sales contract. The cascading nature producers are increasingly disseminating of the tax system built-in a bias high, exacting standards of costs, quality against subcontracting; and overall managerial and productive performance among subcontractors and (iii) The limited managerial and suppliers. It is, of course, well known, how technical capability of SMEs to important Japan's extensive and deep meet the standards and quality subcontracting network has been for the requirements of modern Japanese postwar economic development. manufacturing6, has served to The intention of the Government is to further deter the few large firms stimulate the growth of a similar networks that could effectively structure a in Argentina. quality-oriented subcontracting network. SME-focussed managerial 3.36 The domestic subcontracting network education and assistance to improve has on the other hand shrunk considerably their technical capabilities would following the industrial restructuring process provide further impetus to the still that took place since the mid 1980s. In incipient movement by larger firms addition, with the elimination of compulsory towards subcontracting and vertical domestic content rules and liberalization of disintegration; and international trade, firms are no longer compelled to resort to non-competitive local (iv) The legal costs and the lack of suppliers. Though there are significant gains expedient processes to enforce allowed by subcontracting from contracts has functioned as a further specialization and vertical disintegration, as deterrent on the establishment of well as a result of lower inventory and subcontracting relationships, which quality control costs and tight user-producer generally involve detailed relationships, there are numerous constraints contractual arrangements among for firms to enter such relationships. Among parties. them are: 3.37 These constraints should not be (i) First, the traditional managerial regarded as insurmountable, but relevant culture of most large enterprises in enough that in the few instances where Argentina, and the lack of focus on advanced subcontracting networks have been improving the quality of their built, they have been called to the attention relationship with suppliers, workers of Argentine analysts. Such has been the and customers. The fact that few case with IBM's Martinez plant." In this firms have joined the "total quality case, IBM provided suppliers with the revolution" (see discussion below) is design and process technology to produce indicative of a major obstacle to the components that it integrated into complex 22 Chapter 3 systems. It should be stressed that significant changes in the plant preceded this more advanced type of relationship: access Table 3.5: ISO-9000 Series to information generated in IBM labs was Certified Firms facilitated by closer ties with headquarters; October 1994 plant personnel were retrained; and most Number of important, a new style of management was Country Firms introduced, which extended the company's focus from product quality to total quality. A 17 Argentina Thus, a partnership was established between the Martinez plant and subcontractors, Colombia 25 which is now common among world-class Mexico 133 producers, yet, is an exception in the fa 410 industrial fabric of Argentina. Denmark 600 3.38 The dearth of total quality-oriented a soo large firms is most surprising, and the Canada 1500 "silence" of technology policy in this regard France 2480 is the second area of concern. In fact, U. 4500 Argentina does not compare well to what is fast becoming the internationally accepted Source: Government of Brazil, Instituto Nacional de Metrologra. standard of quality -- not only product quality, but the quality of the firm's producers. relations with suppliers, clients and workers, in sum, total quality management, 3.40 In most countries, innovation is an encapsulated by a set of norms: the ISO activity often undertaken in-house; yet 9000, 10,000 and 14,000 series -- the latter increasingly science and technology (S&T) related to environmental standards. So far, institutions are being called upon to few Argentine firms have been certified with contribute to firms innovative efforts. The the ISO-9000 and related series (Table 3.5). range of possibilities is large: (i) S&T institutions are being asked to transfer to the 3.39 The extent to which firms have been productive sector technologies that are on able to become accredited in this set of the "shelves" or remain at laboratory stage; norms or in the "standards economy" has to engage in joint research; (ii) to provide become one indicator of how well prepared technology services, using more efficiently they are to face integration in world the advanced equipment and instrumentation markets. For instance, firms without this (as, well as specialized personnel) that is certification will face increasing difficulties often too costly for firms to retain in-house; in entering the EEC and other markets. In and (iii) exchanging personnel with industry, fact, after 1996, non-certified firms will be shifting to the productive sector highly precluded from entering the EEC, although trained scientists and engineers, and moving the Community has already started to to the S&T network skilled and experienced restrain entry of products manufactured in personnel that might profit from short-term facilities which do not conform to such assignments, or be engaged in joint projects. standards. Moreover, their adoption is even more critical for firms that have yet to build 3.41 Argentine S&T institutions have their reputation as quality providers, as do considerable capabilities as yet unexploited the immense maiority of Argentine by the productive sector. The third critical Chapter 3 23 weakness of technology policy is thus profit by steering their activities towards related to the S&T delivery system. The clients capable of materially contributing, system absorbs considerable resources, with effectively monitoring and being directly limited results. A clear policy is needed to interested in the results of their research ensure that Government-supported S&T- efforts. This is the theme of Chapter IV. related initiatives and institutions respond to concrete demands of firms, associations, and NGOs. 3.42 For example, an important initiative such as RECyT (the National Science and Technology Computer and Communications Network) is only accessible to official research institutions, universities, other research-oriented non-profit institutions and researchers supported by official entities. It should be accessible to producers, particularly those already engaged in technology related activities, industry and trade associations and other organizations. RECyT's broadening would be particularly important in view of the dearth of effective information systems able to collect and disseminate technological and market information and support decision-making in Argentina. 3.43 A strongly formulated policy directive, stating that any Government S&T initiative (of an applied nature) should respond to a concrete demand, behind which there should be a well-identified client would do much to curb the endogeneity that presently characterizes the S&T establishment. The Government's monitoring and supervision capabilities are quite limited, with a long-standing symbiotic relationship with the S&T delivery system that has allowed this system to avoid needed reforms. 3.44 Thus, the S&T system needs a new set of incentives. To be allocated government resources, applied research institutions should have a clientele from outside the SECyT delivery system, willing to match Government resources with their own. Facing a tighter budget constraint, applied research agencies and teams would 24 Chapter 3 Annex Chapter 3 Annex Table 1 Percentage of Major US Firms Reporting that Intellectual Property Protection is too Weak to Permit them to Invest in Joint Ventures with Local Partners by Industryo and Selected Countries (1990) Transp Elec Country Chemb Equip Equip Food Metals Machin Mean Argentina 0 29 12 0 27 18 Brazil 47 40 31 12 0 65 32 Chile 31 20 29 12 0 23 19 Japan 7 40 10 0 0 0 10 Mexico 47 20 24 25 0 17 22 S. Korea 33 20 21 12 25 25 26 Spain 0 0 10 0 0 4 2 Taiwan, 27 40 41 25 20 17 28 China Source: Table 5-3, p.117, Mansfield, Edwin, "Unauthorized Use of Intellectual Property: Effects on Investment, Technology Transfer, and Innovation", in Wallerstein, Mogee and Schoen (eds.) Global Dimensions of Intellectual Property Rights in Science and Technology, 1 993. Notes: a/ The number of firms in the sample in each industry is chemicals, 16; transportation equipment 6; electrical equipment 35; food 8; metals 5; machinery 24. However, not all firms in the sample responded to all questions. b/ The chemical industry includes pharmaceuticals. Chapter 3 25 Annex Table 2 Percentage of Major US Firms Reporting that Intellectual Property Protection is too Weak to Permit them to Transfer their Newest or Most Effective Technology to Wholly Owned Subsidiaries by Industrya in Selected Countries (1990) Transp Elec Country Chemb Equip Equip Food Metals Machin Mean Argentina 44 20 21 12 0 14 18 Brazil 50 40 24 12 0 39 28 Chile 47 20 21 12 0 27 21 Japan 0 0 14 0 0 0 2 Mexico 31 20 21 25 0 22 20 S. Korea 31 20 28 12 40 22 26 Spain 0 0 7 0 0 13 3 Taiwan, 19 40 41 25 0 35 27 China Source: Table 5-4, p.118, Mansfield, Edwin, "Unauthorized Use of Intellectual Property: Effects on Investment, Technology Transfer, and Innovation", in Wallerstein, Mogee and Schoen (eds.) Global Dimensions of Intellectual Property Rights in Science and Technology, 1993. Notes: a/ The number of firms in the sample in each industry is chemicals, 16; transportation equipment 6; electrical equipment 35; food 8; metals 5; machinery 24. However, not all firms in the sample responded to all questions. b/ The chemical industry includes pharmaceuticals. 26 Chapter 3 Annex Table 3 Percentage of Major US Firms Reporting that Intellectual Property Protection is too Weak to Permit Licensing their Newest or Most Effective Technology by Industry' in Selected Countries (1990) Transp Elec Country Chemb Equip Equip Food Metals Machin Mean Argentina 62 0 26 12 0 29 22 Brazil 69 40 29 25 0 73 39 Chile 47 20 22 12 0 25 21 Japan 12 20 17 0 0 0 8 Mexico 56 20 28 25 0 36 28 S. Korea 38 20 34 12 40 29 29 Spain 6 0 14 0 0 14 6 Taiwan, 44 40 55 25 20 36 37 China Source: Table 5-4, p.1 18, Mansfield, Edwin, "Unauthorized Use of Intellectual Property: Effects on Investment, Technology Transfer, and Innovation", in Wallerstein, Mogee and Schoen (eds.) Global Dimensions of Intellectual Property Rights in Science and Technology, 1993. Notes: a/ The number of firms in the sample in each industry is chemicals, 16; transportation equipment 6; electrical equipment 35; food 8; metals 5; machinery 24. However, not all firms in the sample responded to all questions. b/ The chemical industry includes pharmaceuticals. 4 The Science and Technology Institutional Network A. S&T Expenditure Patterns 4.1 Argentina has a complex and differentiated science and technology (S&T) institutional network, with 35,000 scientists, engineers and other S&T-related personnel. It is estimated that in 1993, total S&T expenditures for the country were on the order of US$700m,.or 0.49% of GDP (Table 4.1). This proportion is small when compared to developed and rapidly industrializing countries, which spend somewhere between 2-3 % of GDP; moreover, while most comparator middle-income countries have significantly increased their resource commitments to S&T in the past two decades, the increments observed in Argentina-are of a considerably lesser magnitude and concentrated in the 1970s. In the 1982-1993 period, expenditures have remained constant. 4.2 The relatively small Table 4.1: S&T Expenditures for Selected Countries volume of resources committed (as a % of GDP) to S&T in Argentina has historically had an asymmetric Country 1970 1977 1982 Last Year pattern: most S&T activities are financed by and take place in Argentina 0.25 0.32 0.40 0.40 the public sector. In 1992, for (.993) . example, while federal and Brazil 0.24 0.70 0.85 0.72 provincial expenditures were on (1990) the order of US$510m. and Mexico 0.20 0.30 0.50 0.60 US$70m. respectively, private (1984) sector spending only added India n1a 0.50 0.76 1.00 another US$60-70m. to the (1985) total of US$650m. In 1993, S. Korea 0.9 0.60 0.02.00 S&T spending was closer to .: (1992) US$ 700m. This modest 10% Taiwan n/d n/d 0.90 1.06 share for the private sector is (1985) too distant from the share of Japan 1.90 2.00 2.40 2.90 the private sector in Brazil (1992) (which averaged 20% in the U.S. 2.60 2.10 2.50 2.80 1980s); moreover, it diverges (1992) to a significant degree from Japan, U.S. and S. Korea, Source: Nelson, Richard (ed.), National Innovation Systems - A Comparative Analysis, Oxford University Press, 1993, Table 3.14, p. 438; The Economist, January 9, 1993; R. Bisang, oRc., p. where approximately two-thirds 36; and own calculations. 1993 GDP for Argentina was estimated at US$ 175 billion. of S&T expenditures are undertaken privately. Chapter 4 35 4.3 Moreover, the international trend for times. It has been under the Ministry of state finance of S&T is predicated Culture and Education, the Secretariat of increasingly on an explicit co-financing Planning, and the Ministry of Education and commitment by the private sector (except, of Justice. A Federal Advisory Council course, for basic research activities). (COFEA), created in 1989 and presided by Projects must be structured as joint ventures SECyT, has allocated the funds provided by or undertakings to be financed. Such is the the Technological Innovation Law, and case with the EEC and Japan, where by the helped strengthen SECyT's coordinating role late 1980s, respectively two-thirds and four- with respect to the provincial level of fifths of publicly financing S&T activities government. were for projects based on public-private partnerships. 4.7 In 1991, SECyT established broad sectoral. priorities to guide the activities of 4.4 Such a cost-sharing mechanism not the S&T institutional network, and within only stimulates the private sector to increase them, a set of national programs to promote its expenditures in S&T-related activities, scientific and technological research. The but more importantly, improves effective following areas were targeted: food, monitoring of the activities sponsored, biotechnology, natural resources and the financed and executed with public sector environment, materials, fine chemistry and institutions. Such an arrangement could health. Although ex-ante these priorities serve to decrease the high supervision and seem sensible in view of Argentina's monitoring costs of centralized agencies. endowments and strong tradition in life Although Argentina does not rank high in its sciences, SECyT's limited monitoring, R&D/GDP ratio, in absolute terms, S&T supervision and evaluation capabilities expenditures are significant, and how they translates into an inability to ensure that are allocated and used should be subject to S&T institutions effectively respond to the close scrutiny. demands of society at large, expressed though the market and otherwise. Further, B. Current Structure and Key key S&T agencies' budgetary resources are Institutions allocated funds on a basis that is quite independent of SECyT's objectives and 4.5 In Argentina, there are altogether an priorities.29 estimated 1900 S&T-related institutions, of which some 400 can be considered relevant 4.8 The S&T delivery system is made up to the production, transfer or dissemination of four core agencies: the National Council of scientific or technological knowledge." for Science and Technology (CONICET); They include numerous research units and the National Institute for Agricultural service-oriented entities that depend on Technology (INTA); the National ministries, provincial and municipal Commission for Atomic Energy (CNEA); governments, universities, as well as private and the National Institute for Industrial research institutions. Technology (INTI). Combined, they absorbed 72.1% of the federal S&T budget 4.6 The Secretariat of Science and in 1992 (Table 4.2); and their staff Technology (SECyT), a line agency of the comprised (in 1993) 61.2% of the human Presidency, is the apex S&T institution in resources dedicated to S&T. The other the country, being responsible for policy major implementing agencies that receive formulation and the coordination of activities federal resources are six major of governmental agencies. Established in universities"o and the Center for Scientific i oAQ Rw.rvT hqq been restructured six and Technological Research of the Armed 36 Chapter 4 Table 4.2: Argentina - Budgetary Allocations to Major S&T Institutions (in constant 1992 US$) Instit. Roles 1986 1988 1990 1991 1992 CONICET R, T 183.5 5 128.9 144.4 181.3 INTA R D 123.5 8 60.6 113.3 103.0 CNEA R, D,.M 172.5 35.9 45.5 51.5 INTI D n/a 619.2 24.7 32.0 Univer. R,T 35.8 30.8 24.5 24.6 41.7 Defense R 16.7 23.2 20.1 9.0 19.8 Others -- 6.7 8.7 8.0 9.1 9.0 Subtot. -- 538.7 380.0 297.2 370.6 438.3 S&T Ad. P 4.1 2.9 3.6 5.7 72.6 TOTAL - 542.8 382.9 300.8 376.3 510.9 Source: R. Bisang, ., Table 4, p. 38 Notes: R- research; D - development and engineering; T - training; M - manufacturing; P - policy and regulation Forces (CITEFA). There are, in addition, managed by a President and five directors a number of provinces which have proposed by SECyT. Patterned after the structured executive units (secretaries and French centralized model of S&T subsecretaries) to direct S&T provincial development, the agency's main objective activities, including Cordoba, Buenos Aires, has been the promotion of scientific research Mendoza, San Juan, Catamarca and Rio in universities and professionalization of Negro, among others. scientific activities. 4.9 CONICET. The National Council 4.10 The definition of CONICET's for Scientific and Technical Research is the priority areas and the evaluation of research key S&T agency in Argentina; in 1993, its activities financed by the agency has been budget of US$ 224.8 million was equivalent based on peer review mechanisms or to 42.2% of the Government's total "advisory commissions", which in the past expenditures for S&T, a share slightly above were often undermined by political and other the average for the 1986-93 period (41.4%). considerations. CONICET's support is With a staff of 7,400, the agency had 3,511 provided through a number of mechanisms, researchers in 1993, a significant growth including: a researcher career stream that over the years (viz., there were 1,768 provides 2,300 researchers with annual researchers in 1984 and 2,376 in 1988). stipends and a scholarship program, which CONICET is an autonomous body, with combined, absorbed 69% of its 1991 budget; both advisory and executive roles, but that subject-specific research grants; and direct has also set and strongly influenced S&T resource transfers for research facilities. policy since its establishment in 1958. It is Since inception, the council has created 116 Chapter 4 37 such facilities in joint association with and account for an equally small share of universities, other government agencies and researchers. Moreover, for engineering and NGOs: there are seven regional and 40 computer sciences, per researcher allocation specialized centers, 54 institutes, and 15 of CONICET's expenditures is less than a laboratories." It has traditionally fifth of the average, a reflection of the emphasized the basic sciences and related relatively low priority for the area. disciplines: in building the human and institutional foundation of S&T in 4.12 Since 1984, with the establishment of Argentina, the agency has assigned a Technology Transfer Area, and the relatively low priority to the translation of creation a year later of an Office of abstract into applied knowledge. Technology Transfer, CONICET has been paying greater attention to the use of its Table 4:3: CONICET's Expenditures endowments in response to concrete and Career Researchers by Major demands. Numerous linkage agreements Disciplnes in 1991 were signed in the late 1980s between (percent) CONICET, its research institutes and third parties (227 in the period 1984-88), and in Career 1991 SECyT reiterated the need for Discipline Researchers Expenditures CONICET to generate its own resources by 28. transferring technology and selling services. Biosciences 28.2 2 4 .4 On a prima facie basis, there are at least 20 Chemistry 12.8 1 4 .5 of CONICET's research institutes concentrated in areas of direct relevance to Math/Phys. 12.1 13.5 technology development that could play such Cosmo 11.8 16.4 a role (Table 4.4). Sciences Social 20.4 7.8 4.13 However, one has yet to observe a Sciences significant shift either in CONICET's Engineerings priorities, programs or activities. There isn't a strong mechanism or rule -- such as a Agriculture/ decision to only allocate applied research Vet 3.5 10.7 funds, on either a "matching grant" basis or Sciences after client willingness to commit Regional -- 11.8 counterpart resources has been identified. Centers al Such a mechanism would induce the Others 0.4 agency's institutions and researchers to Source: CONICET aggressively search for clients; and it would Note: a/ Regional Centers are of multidisciplinary nature. allow for the supervision and evaluation of the scientific and technological output of 4.11 The composition of CONICET's individual institutes, programs, and career expenditures and career researchers reflect researchers, effected on a more and the relatively greater emphasis that the decentralized transparent basis. agency has placed in the accumulation of basic scientific endowments (Table 4.3). It is particularly striking that "applied" disciplines -- engineering and computer sciences, agriculture and veterinary sciences -- combined absorb less that 15% of its expenditures (excluding the regional centers) 38 Chapter 4 Table 4.4: CONICET's Major Applied Research Institutes Services Institutes Promoter(s) Staff to Industry CBME Bectronk Components CITECA/ SECyT/ Sec. of Com. 26 TD OC CE1MN- Mineral Resources CIC IN. U. of Le Plata 29 AR C3C4- Frozen Foods Technol. N.U. of Ltar/ 44 AR TD TC PE CAE9V,PaiWrs Technology CxC :146F AR TO TC LS CJIECA4- Catalytic Process N.U. of La Plata 70 AR LS TD TC TE CANA3 Indust. Fermentation N.U. of La Plar 20 AR TD M4- AppOed Mechanics SENID 73 TD TC AtMS Minerala P1ocessing N. U. of Safte 24 AR TD TC MC4UECatalysts & Petroch. N.U. of Lraraf 78 AR TD TC StEMICS Nanconventional Enegy CONICET 54 AR TD Maa Developenrt and Design institure CONICET 65 TD TC PE E Soft Deve1op M1FTA- Applied & Thearetical PhysicochWrnistry N. U. of Le Plata 755 AR TD 1tWS Chemical Industry N.U of Sata 6 AR TD TC BlVYC Chemical Technology N. U. of Ltoral 146 AR TD TC PE Soft Develop IC iIMB4- Matenals Techology N.U. Mar del Plata 45 AR PE TD TC FHEOW Chemical Technology N.U. of Sen Lids 19 AR MWAS Organic Natural and Synrhat Products N.U.of Ltoral 25 LS AR PEAPRN Chemical Engreering Pfor Plant N.U.of Sur 110 AR LS TD PE IC PROAI MicrobiologIcal Industral Process Plot Plant PECIC 31 AR TD TC LS Key to Services: AR- Applied Research; IC- Information Center QC- Quality Control; SE- Engineering Services LS- Chemical or Biological Laboratory Services TC- Technical Consulting-Trouble Shooting TD- Technological Development; E- Engineering Projects Met- Metrology Services; PE- Process Engineering 4.14 In addition, there are no between researchers and industry. 4.15 arrangements that stimulate cross- This syndrome is reinforced by SECyT's institutional mobility of CONICET's current program to attract back the estimated researchers -- particularly to the productive 30,000-50,000 Argentine researchers and sector. Generally speaking, most S&T technologists working abroad. Most personnel not only reside in official returnees (70% of 134 so far) have gone to institutes and universities, but more official research institutions and universities. importantly, there is little mobility. How productive have they become is Researchers enter the institution, and few unknown. Yet the lack of effective move even on a secondment basis. As a monitoring and evaluation, and thus result, there is very limited interchange ultimately of accountability, tends to Chapter 4 39 stimulate an attitude of disengagement and a -- of questionable efficacy and apparently behavior characterized by "doing science for unlinked to INTA's own efforts. Clearly, science sake" among those in supposedly there is scope for greater rationalization. applied areas. It is therefore doubtful that SECyT's program will have more than a 4.19 INTA's joint ventures with private marginal impact, until returnees are firms and royalties from patents have stimulated to join demand-driven R&D generated approximately US$ 2 million units, in the public or private sector, or yearly in revenues for the institution; though form of independent, technology-based significant in absolute terms, this is small enterprises. relative to its budget and still leaves the larger question of the payoff from INTA's 4.16 INTA. Created in 1956, INTA has basic research and other activities for which focused on agricultural research and the it cannot engage in direct cost recovery. introduction of productivity-enhancing technologies to the sector. It has 4.20 There is little doubt that Argentine traditionally emphasized its agricultural agriculture, agroindustry and dairy business extension functions (technology transfer and underwent major improvements in the last diffusion). The agency has 40 experimental 20 or so years, and is one of the industries stations working on genetic improvement of where Argentina presents a strong plant and animal varieties, and soil comparative advantage, comparing favorably management and conservation. INTA's basic with other major countries of the Continent. research is concentrated in the Castelar In 1991-92, labor productivity (measured in facility, where there are 15 institutes monetary values) in Argentina's processed working, among others, in virology, food industry, though only 52% of the U.S., biotechnology and natural resource stood considerably ahead of that of husbandry. There are, in addition, 40 Colombia (36%), Brazil and Venezuela experimental stations, three substations, and (29%), and Mexico (29%). In addition to 217 extension branches. the meat processing subsector, major productivity differentials were observed in 4.17 The agency is governed by a board the fats and oils subsector, and in the dairy of 10 directors, five appointed by the segment of the industry. In the latter case, Government, and five by the private sector. labor productivity in Argentina stood at 73% It is known to be efficiently run, being one of the U.S. average, in contrast to Colombia of the least bureaucratized agencies in the (34%); Brazil (24%); Venezuela (12%); and country (2.5 regular employees per Mexico (25%).32 professional staff, where the former includes extension workers, and administrative and 4.21 The gains observed in crop yields other support staff). Since 1980, its staff has (particularly in soy, wheat, sunflower and actually shrunk by 22% (from 5607 to 4391 cotton) have spurred the growth of world- in 1993), which stands in contrast with class oil and pellet producing plants (see major agencies, such as CNEA and Chapter II). Similarly, productivity growth CONICET. (and quality strides) in the production of milk has allowed for a dairy industry that is 4.18 Still, there appears to be considerable by far the most advanced in Latin America. overlap between some of INTA's activities Although a rigorous assessment of the causal and other government agencies. This is links between its work and observed most striking in the case of INTI (see improvements have yet to be established in below), which undertakes work in a systematic basis, INTA has had reportedly agriculture, agroindustry and biotechnology a substantial impact, particularly through its 40 Chapter 4 work on genetic improvement and considered by industry a highly effective dissemination of new varieties". Its instrument for technology transfer and efforts have been related, for example, to upgrading. The agency has provided the large gains in the productivity of soy assistance in the development of alloys, beans (which evolved from 980 kg/ha in superconductive ceramics, in the engineering 1965-70 to 2300 kg/ha in the late 1980s); to of materials and chemical processes, and in a 50% improvement in the yield and quality the application of radioisotopic technology to of cotton; and to the dramatic gains in wheat medical and agricultural areas. CNEA has yields (through the dissemination of also spun-off joint ventures such as INVAP Mexican germ plasm). Still, it is arguable (uranium enrichment), Mendonza Nuclear that despite the large externalities provided (uranium concentration and preparation) and by INTA's work, particularly - in the CONVAR (fuel for nuclear plants). generation and dissemination of new varieties, it should be able recover a far 4.25 It is generally accepted that CNEA larger proportion of its budget. has been successful in complying with its mandate: providing education and training in 4.22 CNEA. Created in 1950 as an atomic energy-related areas; authorizing and autonomous entity under the Presidency, controlling the production, manufacture and CNEA is engaged in research, development, commercialization of nuclear materials, engineering and applications of nuclear radioactive substances, and equipment power and related activities, including producing ionizing radiations, and building university and postgraduate education in and operating nuclear installations and physics and nuclear engineering (with an power plants; and exploring and exploiting average graduating class of 20). " As of minerals for nuclear industry. Not only is 1993, CNEA had a staff of 6550, of which CNEA's mandate relatively well defined, 1360 (20.8%) engaged in R&D. but the institution has concentrated its efforts in establishing a human resource base 4.23 The agency has been quite successful ' consistent with the objectives and scope of in acquiring the technology for the complete its mandate, and applying existing production cycle of atomic energy. It owns knowledge with a strong emphasis on a plant for the production of nuclear experimental sciences and engineering combustion elements, and for special alloys processes. The non-academic focus of for nuclear reactors; two CNEA's work, and its attempts since the mining/manufacturing complexes for early 1960s (starting with SATI in 1961) to uranium mineral production; and a plant for establish close links with the industrial concentrating and producing uranium sector, were critical for the relative success dioxide, in addition to a heavy water plant of the agency in attaining many, if not most, (in construction), a pilot nuclear reactor of of its goals. domestic design (Atucha), two nuclear power plants generating a total of 946 MWs, 4.26 Still, CNEA has not been immune to and a third one under construction (Atucha budgetary instability, which has adversely 2 for 692 MWs). affected its programs and human resource base (many of its scientists have emigrated). 4.24 CNEA has established strong links Since 1984, the allocation of federal funds with industry, starting with the creation of has shrunk from US$79.4m. to US$51.5m., its metallurgical department and the after reaching a nadir of US$ 35.9 million Technical Assistance Service to Industry in 1990 (the high figures for 1986 and 1987 (SATI) in 1961, jointly sponsored with the reflect budgeted reactor construction funds). Association of Metallurgical Industrialists, This constraint has imposed the need for Chapter 4 41 CNEA to define more clearly its core its network of laboratories and research activities and examine the possibility of centers. There are departmental laboratories divesting some of its non-core businesses -- in physics, chemistry, mechanics, and entities. construction, energy and food technology -- and those of sectoral nature, namely, in 4.27 A project to transform and privatize applied microelectronics, applied the National Commission of Atomic Energy electrochemistry, project and prototypes, (CNEA) was announced by the Secretary of and computer and calculus. Most of those Energy, in August, 1994. It consists in the laboratories and 18 of its research centers creation of two enterprises, Nucleoelectrica are concentrated within a single facility in SA and At6mica SA, and a nuclear Miguelete, in Buenos Aires. There are in regulatory entity. Nucleoel6ctrica SA will addition four other centers in the city and be devoted to the generation of nuclear another four in the Province of Buenos energy and will be in charge of the Aires. Only six function in other provinces. operation of the nuclear plants: Atucha I, Embalse, Hidroelectrica Rio Grande and 4.31 The research centers are semi- Atucha II. Sixty percent of the equity of autonomous non-profit corporations, which Nucleoel6ctrica will be sold to the private fulfill some 8,500 work orders per year. sector, 10% will be sold to employees and Though able to freely sell their services, the 30% will be kept by the State. At6mica SA centers are still subject to rigid federal civil will be kept by the State and it will be in service employment regulations when it charge of the cycle of nuclear fuel and waste comes to hiring and firing provisions, and products, the production of "radiois6topos" wage scales (that often remunerate better and the activities of research. The longer term administrative staff than highly regulatory entity will be financed by a trained scientists and engineers retained for percentage of the sales of Nucleoel6ctrica. specific tasks), among others. The centers are jointly set up by INTI, other agencies, 4.28 INTl. Created in 1957, The National universities, industry and trade associations. Institute of Industrial Technology has Although the centers generally have a remained an autonomous agency dependent specific sectoral or technical focus, their on, and run by an eight-member Council activities often overlap with those of the with a president appointed by the Secretariat laboratories, with substantial duplication of of Industry. The council's role in INTI's activities. Both perform development work, structure is ambiguous, as it both sets policy and provide technical and quality control and has managerial functions. assistance to industry. 4.29 It's mandate is to assist in the 4.32 The establishment of a research improvement of the competitive standing of center is dependent upon an explicit demand the industrial sector, with a particular focus by a sponsor. All promoters have the right on manufacturing methods, testing and to sit on the board of directors, independent handling of * raw materials, and quality of the extent to which they contribute to the control. It comprises nine central financing of the center. In fact, this amount laboratories and 32 research centers, with a is often small, not exceeding 5-10% of total total staff of 1,400, of which some 40% are operating costs, but confers an inordinate university-level professionals. Since 1989, amount of power to joint sponsors, which INTI's budgetary allocation per staff has often are in a position to "capture" the grown by nearly 170%. centers. As a result, their coverage of potential clients is narrow and fragmented, 4.30 Its activities are performed through and Centers (as well as the Departments) are 42 Chapter 4 still dependent of INTI's budgetary transfers differential institutional base, and in view of to cover not only investment outlays, but a the requirements of the industrial sector, significant proportion of current particularly those of SMEs. A major expenditures. Thus, on average, these units improvement in INTI's performance will were able to cover in 1993 just 27% of their depend on a profound change in the modus direct costs. Although a few of the Centers operandi of the research centers and the and Departments are quasi-viable, most, in laboratories. First, by having these units order to become financially self-sufficient, establish a clear commitment to complete would need to undergo major restructuring: financial autonomy within a certain period on the revenue side, aggressively searching of time (say three years); second, by a new clients, offering new services and having them draft a restructuring plan properly costing them; on the expenditure regarding both their internal organization side, by cutting costs, merging, or exiting. and external links. The latter is quite relevant insofar as many might not be able 4.33 The corporatization of INTI and its to survive as individual, stand-alone units, units (with the imposition of a tight budget and would therefore have to merge with constraint), appears to be essential to others to survive. improve its performance. After a number of reforms, the agency is still criticized for: the 4.36 The objective would be to excessive time that routine services take; corporatize the centers (as well as INTI's their low quality; and their failure to reach laboratories), giving them full administrative the mass of SMEs, which would constitute autonomy, making them responsible for all its natural clientele. The reasons underlying transactions, and forcing them to properly INTI's performance problems are related to cost their activities and aggressively sell the lack of a client-oriented management, their services. They would then be able to excessive bureaucracy that delays response pursue their objectives, free of the barriers to market needs, and obsolescence of that typically constrain government agencies equipment and lack of trained personnel. and related units. If government would like them to pursue certain activities that have 4.34 In the last few years, INTI has positive and significant externalities, such as attempted to establish new arrangements to more support for SMEs, the services improve its connection with the productive rendered would need to be properly "costed" sector. For example, the agency shares and paid accordingly by the recipient and through its INNTEC-LAB system some of the public sector on a pre-agreed basis. the development costs, risks and potential The critical aspect of these changes is to returns of developing prototypes and introduce a strong measure of transparency manufacturing processes with small and in the transactions of INTI's executive units, medium-sized firms. More generally, and to promote more efficient management. services such as the Extension and Industrial Linkage Program (PEVI) and the Customer 4.37 University Research Institutions. Orientation Service (OC) have fostered more Argentina's strong academic tradition has effective use of INTI's resources by not been translated into significant establishing direct channels (such as a cadre technological advances in university of extensionists -- industrial specialists) laboratories. Universities have concentrated between INT and clients. on teaching and professional training, with less emphasis on research activities, and 4.35 Though in the right direction, these when these exist, they are usually focused efforts are nonetheless quite modest given on theoretical disciplines and basic the resources available to the agency, its sciences.3s Except for specific cases in the Chapter 4 43 University of Buenos Aires, the National activities, both in the context of Law 23,877 University of La Plata, and the University of of 1992, is basically in the right direction. Mar del Plata, university laboratories have Still, further improvements are possible. On failed to commercialize their research results the "supply side", one would argue that it or monitorate researchers to engage in work does not go far enough. Applied research, that can be appropriated by society and its and technology development and extension productive sector. This is, in large institutions (and their units and teams), do measure, due to restrictions on the payments not face hard enough budget constraints. of honoraria to researchers when their work On the "demand" side, it is unlikely that is done in university labs for private firms. private sector "aloofness" to R&D activities will change to any significant degree with 4.38 The case of the University of Buenos existing financial and other incentives Aires is illustrative of the actions required to. embodied in Law 23,877. The way funds establish stronger linkages between were allocated in 1992-93 involved interalia university research and the productive excessive discretionary decision-making and sector. Despite an interest by the University ad-hoc procedures in SECyT's selection in deepening those links (in no small process, discouraging bona fide applicants. measure for budgetary reasons), it was only in 1987 (with the "Regulation for Contracts 4.41 For many firms, immediate concerns and Services to Third Parties") that UBA's involve reducing costs, improving quality researchers were able to receive payments and progressively rebuilding their capital from public or private sources in exchange stock. By contrast, the fruits of R&D are for their services. Most importantly, more distant, and thus this activity generates researchers may now receive up to 50% of less interest. Firms will be attracted to the benefits accruing to the University from engage in R&D activities only under their the sale of their services. More than 120 own idiosyncratic circumstances. This is R&D, technology transfer and consulting particularly true for small and medium contracts were subsequently established enterprises, which are still being challenged under that norm from end 1987 to end 1990. by basic weaknesses in management and access to information. One of the useful 4.39 In 1991, UBATEC, a private non- functions of the state, quite distinct from profit consortium of the University, the financing, is to provide information, and Municipality of Buenos Aires, the Argentine raise the level of awareness on issues such Industrial Association and the General as technological and quality improvements. Confederation of Industry, was established In this context, total quality management is to 'mobilize university endowments and becoming the critical lever for greater supply technological services, without the productivity and profits for firms of all sizes University having to assume the liabilities in the global economy. associated with its activities (as it was bound to under the 1987 regulation). In order to increase UBATEC's flexibility, it became the first "linkage unit" (Unidad de Vinculaci6n) established under Law 23,877. 4.40 The Government's policy to push university (and other public sector institutions) to sell services and transfer technology, and conversely. to stimulate greater private sector participation in S&T 44 Chapter 4 4.44 In 1989, the Presidential Overall C. Quality Management Quality Control Program was created to set quality control policy and guide 4.42 Adoption of "total quality organizations involved in quality matters. management" and corresponding ISO norms The Committee for Products and Service provide three critical advantages to firms. Quality is its executive body. It consists of a Committee for Quality Control (CQC) that * First, it forces them to "reengineer" brings together representatives of their operations, rethink their Government departments, public entities, production processes, provide clients universities and relevant private with differential services, establish organizations to formulate policy and closer connections with suppliers in suggest specific measures, and a technical their quest for "zero defect" inputs, group to follow-up on proposals. Despite and change in a radical way their the broad representation of the Presidential relationship with labor. The latter is quality control program, its effectiveness in increasingly regarded as a key asset of convincing managers and industrialists of the the firm, the source of ideas for importance of total quality management for continuous improvement of the the competitiveness of the Argentine production process, and the basis for economy, and in disseminating the total major productivity gains. quality management methodology has been quite limited. The media, particularly * Second, it allows firms to jump new specialized business newspapers and quality-driven trade barriers, which magazines, have maintained a certain find a supporting echo among distance from the objectives of the program. developed country consumers. It is More broadly, any quality management expected that in the next 3-5 years, program needs a well structured marketing other developed country trading blocks plan, with a clear definition of the target will be excluding non-ISO conforming public, key messages, vehicles and the products. expected time frame (and material resources) required to achieve its goals. It is critical to * Third, ISO certification provides firms involve not only industry leaders and with a powerful marketing tool, and managers, but to raise the awareness of the helps the relatively unknown producer public at large. to build credibility with major potential clients, which are generally quite 4.45 The Council of Norms is an inter- aware of the steps needed to obtain it. ministerial body that considers proposals submitted by the technical level, and decides 4.43 Quality issues are addressed by on the adoption of norms and standards at service-oriented entities in Argentina, both the national level. The main entity that public and private. The former deal mainly actually designs and establishes norms and with material and product quality, and the standards at the national level is the Instituto latter -- most of them NGOs -- with Argentino de Racionalizaci6n de Materiales consumer protection establishing and (IRAM), a non-profit organization founded monitoring the use of norms, standards and in 1935, and which maintains working nomenclature, and pursuing quality control relationships with similar institutions measures and training. worldwide. IRAM has drafted 8300 national standards, licenses and certifies their use, provides a quality seal, and sells related services to business and Chapter 4 45 4.46 The IRAM quality control system relatively narrow quality control concerns, consists of: (a) the "Mark of Conformity", as opposed to total quality management. which indicates that products exhibiting this seal comply with the appropriate IRAM 4.48 Finally, the Institute for Quality norm; and (b) the Certification of Lot Control in Argentina (IACC), the principal Conformity, applicable to a specific lot of member of the Presidential Overall Quality goods. Still, despite its long established Program, and the Argentine Association of presence and perhaps due to past Quality and Reliability (ASADECC), are protectionism of local industry, IRAM's involved in raising the awareness of the standards and certification procedures are importance of quality management, not sufficiently understood or recognized by consulting on quality matters and train manufacturers and consumers in Argentina, quality control technicians. Yet, despite their and its reach and impact are still modest. In efforts, their reach has been extremely fact, IRAM-certified consumer goods area limited. rare, so IRAM's quality mark (which by mid-1993 reached 83 products manufactured 4.49 A preliminary assessment of the by 81 firms) is not well known by the effectiveness of quality control institutions regular consumer. IRAM does not provide indicated that although there is interest in quality control services other than checking quality control issues among business and for product conformity with its established industry leaders, a clear understanding of standards, and serving as a conduit for ISO quality control methodologies and 9000 certification undertaken by AENOR applications, and its role in enhancing (the Spanish Association for Norms and competitiveness are still lacking.." Certification). Manufacturers of internationally traded goods such as 4.50 The diffusion of international norms automobiles, electrical appliances, high- will require certain critical drivers. precision machines and textiles in particular, use standard systems, generally foreign, First, the aggressive work of other than IRAM's. With the support of consulting firms -- both national and AENOR, IRAM is currently revising its international -- to sell managers and norms to make them compatible industrialists on the importance of total internationally. quality management to their competitive survival. In the Brazilian case, such 4.47 Public agencies (such as the consulting services were instrumental not Argentine Calibration Service), INTI's only in preparing firms and specific facilities associated centers and some private concerns to be certified (a process which takes test materials and provide metrology and anywhere from 18 to 36 months for the ISO- quality control services.7 The scope and 9000 series), but more broadly, in quality of these services appear adequate, "spreading the gospel" of total quality but they face significant funding restrictions management. to expand coverage. Both public agencies and INTI's centers have had their Second, the entry of other investment programs basically financed from certification entities, both foreign and bilateral and multilateral (IDB) funding, national, stimulating a degree of competition insofar as their budgetary allocation is among them. One of the factors responsible mostly consumed by current expenditures, for the rapid rate of diffusion of ISO norms while they have been unable to properly cost throughout the Brazilian economy (see Table their services. More important, their 3.5) was the presence of ten certifying approach is still traditional, with a focus on bodies -five national (including INMETRO, 46 Chapter 4 which performs equivalent functions to subcontractors. The Program, being market IRAM) and five foreign (such as Bureau -- driven and decentralized - an approach Veritas and others). with strong merits -- depends on the presence of a significant number of Third, the massive training of producers functioning within the new quality "multipliers", whose basic role is to paradigm and being able to effectively reach and disseminate among SMEs an disseminate it upstream. Yet, there are very adapted or "configured" set of ISO few Argentine firms, large or small, that norms39. These must take into account the have adopted total quality management material constraints facing SMEs, which norms and standards. It is unlikely, make it extremely costly for the vast therefore, that large producers can act as majority to hire relatively expensive effective "multipliers". More broadly, the consultants; the lack of information that linkages among firms are generally weak, afflict owner-managers regarding TQM and perhaps exacerbated by the insularity of the advantages of internalizing TQM family-owned industrial firms. procedures; and the frequent need for SMEs to conform to the requirements of large 4.53 The Government also intends to buyers, which imposes an additional bolster the networking needs of SMEs with constraint on their behavior. the support of a federalized INTI, functioning as an extension arm of the D. SME-Oriented Productivity- Secretariat of Industry. There is no question Improving and Quality- that Argentine SMEs would profit from an Enhancing Support Institutions effective extension service, not only to diffuse quality techniques, but more broadly, 4.51 The future of Argentine industry will to provide technical and marketing depend on firms, large and SMEs, becoming assistance, as well as information. The task increasingly immersed in the international ahead is formidable, however, since there market, adopting its quality and cost are over 4,500 small and medium industrial parameters, establishing technology and firms with over 30 and fewer than 200 commercial links with foreign employees, which would be prime extension producers/distributors, being part, in sum, targets. It is doubtful, moreover, that INTI of the virtual network that acts as will be able to deliver the multiplicity of "gatekeeper" to the global market. The services required of an extension agency, Government's National Program for even though it is in the process of being Industrial Competitiveness (PNCI) is an federalized, and has eight regional initiative that attempts to address the need subcenters ("delegaciones"), established with for major improvements in the managerial the specific purpose of supporting SMEs. and productive performance of Argentine Again, INTI's potential must be reassessed industry, particularly its SME segment, in before the Government put "too many eggs" three key aspects: quality, design and in one single basket. technological modernization (as discussed in Chapter 3). To this, of course, must be 4.54 SME support, to be effective, both in added finance and marketing/distribution. terms of the quality of the services, and its sectoral and spatial reach, should be 4.52 The "Achilles heel" of the Program institutionally decentralized. This could is its institutional support base. Larger start with a national campaign, or strong producers will need to join the PNCI to marketing effort to involve a multiplicity of disseminate competitive standards and agents. It should be carried out in the exacting requirements among suppliers and context of a partnership between government Chapter 4 47 and business. As argued in the next chapter, these efforts will need to be coordinated and organized. Possible mechanisms include an existing agency, a new government-seeded, privately-run independent institution, or another entity of this type that will act as a promoter and advocate of SMEs. 5 Policy Reform and Institutional Strengthening This report has discussed and that is starting to percolate throughout the identified weaknesses in three interrelated industrial sector and related services. areas: Technology policy should broaden its traditional innovation or technology- 5.1 In industrial policy, the critical issue development scope, and steer Government is the need to define in an unambiguous way action to support producers in their efforts the scope and limits of government action. to become competitive through managerial The current situation has made it more changes as well as improvements in quality, difficult for the Government to resist the cost, product differentiation, design and demands for ad-hoc, protectionist measures innovation. and some special regimes favoring incumbent industrial segments. At the same 5.4 In the science and technology time, this void is providing mixed signals to delivery system, the major issue is the lack Argentine producers regarding of effective connections between Argentina's Government's medium and long-term significant institutional endowments and the intentions. Indeed, there may be cause to productive sector at large (despite some push the export sector much more important exceptions, such as INTA). The vigorously. point of departure for a reorientation of the system is a tighter budget constraint, where 5.2 In technology policy, the applied-research and engineering Government has yet to clearly articulate that institutions, agencies, groups and teams can science and technology (S&T) endowments be progressively induced to "earn their have to be mobilized and directed to respond keep", by finding clients to supply their to national demands. S&T programs should scientific and technological services. therefore be guided, at the policy level, to answer well-defined needs and requirements. 5.5 At the same time, the Government As a corollary, and with the possible needs to promote the design and exception of basic science, financing should implementation of realistic, time-bound be oriented to programs that are driven by restructuring plans, the core objective of clients (firms, associations, NGOs, which is to transform the delivery system to municipalities, among others), willing to a service-oriented institutional base, with a match Government resources with their well-defined clientele. No program should own. Financing for endogenously-driven be structured and financed without having applied research activities should be identified a specific client materially progressively phased out. interested both in the results and the means through which they are to be achieved. The 5.3 One important demand derives from client, and not just the Government, should the search for international competitiveness be the monitor of S&T activities and Chapter 5 49 projects. In all cases there should be a attain in the international economy; that concerted effort to attract private finance, as denotes the legitimate arena of Government counterpart to public funding. Yet, even in action; and that specifies the instruments and the case when programs are financed purely mechanisms that government counts with to by the Government, a private or non- help realize that vision. Conversely, the governmental agent should be brought in to statement should set in definite terms what closely monitor processes and outcomes, to is unacceptable and won't be condoned: avoid the still widespread tendency of uncompetitive and rent-seeking practices at institutions to be driven by endogenous home; and policies that give direct or needs. indirect support to such practices. Although a well-formulated policy statement is a first 5.6 Finally, the area of SME important step, the Government may want to development has been singled out for special follow suit with legislation that provides attention. The institutions comprising the legal substance to policy and sanctions those delivery system should be more fully agents who ignore it. engaged in the current efforts to support excellence among small and medium 5.9 What should one envision for enterprises, not only by transferring Argentina's industrial future? A vibrant technology to innovation-oriented SMEs, or industrial sector, significant in size, those in technology-intensive fields, but by internationally competitive, integrated into helping SMEs in the multiplicity of "minor" regional and world markets. At the core of technological problems they face, most of Argentina's national industrial strategy must which are management and process related. be the country's integration in the global Of particular importance is the adaptation economy and the investment, trade and and use of state-of-the-art technology and technology networks that regulate it. The the dissemination of total quality underlying forces that shape the world at management techniques among SMEs, this end-of-the-century are international in which should be supported by INTI and nature: direct foreign investment, intra and other S&T agencies, under the overall interregional trade and the international coordination of. a new institutional flows of technology; growth is to an mechanism dedicated to this purpose. increasing extent being driven by such forces. A. The Industrial Policy Regime 5.10 In its efforts to steer Argentina to be 5.7 As argued and noted before, the part of this movement towards globalization, Government has yet to establish a clear the Government has already undertaken industrial policy framework, standing in major reforms in the trade and regulatory contrast to the deregulation efforts, which regimes, removing barriers to mobility, has a well-delineated and unambiguous competition and structural change in the frame of reference. The policy void has domestic economy; facilitating the flows of generated uncertainty regarding the DFI and technology; and the growth of directions of reforms, and has attracted exports. The increasing importance of DFI demands for ad-hoc protectionist measures and of industrial exports as sources of and special programs. investment and economic growth -- consistent with the trend towards 5.8 The first step to establish such a internationalization of firms' operations and framework is to issue a statement which globalization of their production articulates a vision of Argentina's industrial requirements -- suggests that successful future and position the country aspires to manufacturing strategies hinge upon the 50 Chapter 5 internationalization of domestic economies to regime, particularly in the provision a far greater extent than it did up to two of remedies (where maximal criminal decades ago. sentences lie in the range of 1-6 months and a minimal fine) and 5.11 Attracting DFI, and expanding the enforcement (insofar as preliminary volume and quality of exports, are the injunctions are non-existent, and the centerpieces of a strategy directed at burden of proof remains with the improving the competitive standing of the party that is claiming the law has country. These two objectives should guide been infringed). An additional government policy. Although DFI is not regulatory gap relates to the discriminated against and the overall anti- promotion of domestic competition, export bias of the trade and regulatory with a particular focus on services regimes has been eliminated, there are a and non-tradables; equality of number of actions that could be undertaken opportunity for all economic agents to further improve Argentina's position in requires rules and institutions that the competitive gradient for capital and strive to maintain an open market markets. They relate to the: and deter explicit or implicit anti- competitive behavior. (i) Continued Stability. Investors, domestic or foreign, act on (iv) Coordination and Information. The expectations concerning returns. The Government is no doubt a strategic more stable the economic rules are, player in the competitive game, as a the more attractive a given investment partner -- neither isolated from nor project becomes. Conversely, ad-hoc, captured by, but in working unpredictable moves by the cooperatively with -- the productive Government deter investment activity. sector. Such partnerships between Ensuring stability is probably the government, business and labor are action with the highest payoff, higher observed in a number of successful than any interventions undertaken by industrializing countries and they are the Government in the industrial often geared at opening new markets policy area. and attracting direct foreign investment. A jointly managed, (ii) Selective Restrictions. The public-private institutional platform, Government may want to eliminate which helps coordinate the actions of all hurdles to technology transfer different government agencies in the after a short period of transition. In area, supports private-led trade and particular, intrafirm technology investment missions, and serves as transfer (between parent and an information clearinghouse and subsidiary) should not be the object dissemination center would be an of prior authorization by INTI or any appropriate initiative. It is equally other agency. If the Government necessary to improve the system and feels the need to scrutinize these the institutional components that transactions for tax-related reasons, gather, process and make available it may be done ex-post, on a information that are vital to sampling basis. businesses in their locational, production and trade decisions, by (iii) Regulatory Gaps. There may be upgrading the production and room in Argentina for strengthening dissemination of economically vital the intellectual property rights statistics by INDEC, the Central Chapter 5 - 51 Bank and sectoral agencies, while the quality of the results. The lax fostering the related efforts of trade management of S&T resources which associations and other private agents. resulted from the absence of effective monitoring of inputs and evaluation of B. The Focus of Technology Policy outcomes, must be stopped. and the Institutional Delivery System 5.14 In fact, the general orientation of the Government towards S&T institutions might 5.12 The acceleration of technical change be grounded on the following principles and calls for the rapid dissemination of new actions: knowledge throughout industry and a far more effective use of existing infrastructure. 5.15 First, the decentralized rmancing Having invested substantial resources in the and monitoring of S&T activities. As technology delivery system, knowledge already argued, the Government's ability to generated in universities and official R&D effectively monitor the use of its resources institutes needs to flow to the productive and the quality of output derived from sector, and to society at large. At the most activities it finances is very limited. As a general level, this orientation should be the result, there is no credible evaluation of the major trust of the technology policy regime. quality and relevance of these activities. Every applied research and technology 5.13 The new policy would reflect the development program funded by CONICET Government's commitment to: or other government agencies should be catering to a "clientele" directly interested in (i) place maximum priority on promoting the utility of the output and the efficiency effective connections between the with which it is produced. It is critical that S&T institutional network and the teams and units engaged in applied research productive sector. Science and and using public funds to identify clients technology for their own sake should that can monitor and evaluate S&T be avoided; programs. One option is for grant-giving agencies to condition approval for grant (ii) impose a tight budget constraint on requests to those projects with pre-identified applied research and other S&T clients which commit to a minimum share institutions. All such institutions of the estimated total cost of the project and (except those engaged in basic to the full share of cost overruns, should if science) should be encouraged to there be any. This would foster greater restructure their activities in order to oversight and accountability. progressively become financially self- sufficient by selling services, training 5.16 In addition, insofar as the and recycling researchers from the Government will continue to fund S&T private sector, and seconding in-house institutions for a considerable period of research staff to enterprises for time, it is necessary to develop an objective, periods of up to three yearse; and broadly accepted performance evaluation system, based on objective criteria, to help (iii) deny funds to applied S&T activities in its resource allocation decisions. All of unless a client is willing to applied research institutions funded by contribute counterpart funds; all Government resources should be submitted clients must have a material interest to a full evaluation every 2-3 years by a in how efficient is the institution (or joint public-private monitoring organ. A the research division or group) and smaller number of those institutions should 52 Chapter 5 be subject to closer scrutiny by peers and and their flexible deployment. In order for the public at large, including through public institutions and teams to respond to their hearings. clientele and approach financial self- sufficiency, it is essential that S&T 5.17 Second, increasing financial resources -- particularly technical staff -- be autonomy and accountability of research movable to other institutions of the system, institutions and teams. Government to private firms (on a secondment basis, for resources should be matched by private example), or be declared redundant, if funds in the financing of S&T activities of necessary. The current system of de facto. applied nature. More broadly, all major lifetime employment in many, if not most, agencies and their key institutional S&T institutions, does not generate the components which are funded by the budget incentives either for individual or should be required to prepare well-designed institutional efficiency. Conversely, these and implementable restructuring programs institutions should be ready to "open" their and specific action plans, with assigned laboratories, train and recycle technical staff responsibilities and well-defined time of private firms. frames. Those restructuring plans should be a condition for future allocations and 5.21 An important part of restructuring disbursement of budgetary funds. plans should be devoted to stimulate mobility, in view of the fact that many, if 5.18 One critical step in the Government's not most, agencies and institutions are efforts to induce the restructuring of S&T overstaffed. The Government may want to institutions is the definition of the expected issue broad guidelines regarding the shares of public and private financing of the secondment of technical staff to private institutions' expenditures. Tight budget firms and institute a pilot program that constraints find concrete expression in establishes material inducements for mobility establishing ex-ante what the expected base (viz., in the case of Germany, for example, line is for non-governmental funding. One a proportion of the researcher's salary is option is to set an initial 10% requirement. covered for an initial period of time). Thus, The private share should increase over time, the Government may want to assign and reach at least 30% of current temporary, or permanent, researchers to expenditures by year three of the program companies with active technological (a much higher percentage may be non- strategies, through the use of research credible). fellowships which would cover a declining share of the salaries of researchers (for 5.19 At the same time, the Government instance, 50% in the first year, 30% in the should be sensitized to the adverse impact of second and 10% in the third). the rigidities associated with Law 23,877 (Unidades de Vinculaci6n) on the incentives 5.22 Fourth, emphasis should be placed for institutions and teams within them to on the so-called "transfer disciplines and become more independent. It this regard, it sciences" -- those situated at the interface is imperative to make the application of the between basic knowledge and the solution of Law (and the corresponding norms) more concrete problems, such as engineering, flexible and expeditious, by facilitating information, materials, chemical, biological payments by outside clients to researchers and agricultural sciences. This would and professors for R&D done in the involve a reallocation of university resources premises of official institutions. to those areas and a reorientation of CONICET's budget towards these 5.20 Third, mobility of S&T resources disciplines. In the latter case, a target rate Chapter 5 53 of resource reallocation should be subcontracting network; or a combination of established to fully reflect the new priorities. both. CONICET should also engage in reassessing the agency's career research track program 5.25 The promotion of vertical to respond to growing need of applied work (subcontracting) networks, in particular, is in those disciplines. generally based on a "hands-on" approach to SME promotion, often involving a C. SME Development significant degree. of sectoral and firm targeting. This has been the case, for 5.23 Small and medium-enterprise example, with Singapore's Local Industry development has been traditionally the object Upgrading Program, Taiwan's Center- of supportive policies and mechanisms in a Satellite Factory Production Program and large number of countries. The result of Ireland's National Linkage Program, as well those efforts has been uneven, with as South Korea's SME assistance program. substantial administrative and financial These programs effectively focus on specific resources often spent with limited results. subsectors which concentrate the largest There is growing consensus that SME's number of potential buyers (often assembly ability to enter vertical or horizontal industries and producers of intermediate networks is critical for their market materials); and, from the vendor side, resilience and success, and in large measure segments in which the country possesses dependent on the quality of management. It strongest comparative advantage and/or is through those relationships -- with larger adequate production capability.41 buyers (on a subcontracting basis) or with Typically, the latter includes metal working, other SMEs grouped in clusters and acting light engineering, plastic parts and cooperatively (as in industrial districts) -- components, and mold and die that technical assistance and finance is manufacturing. Within those subsectors, supplied on the most effective, incentive- potential suppliers are chosen on the basis of driven basis. quality of management, product and services, as well as reliability, delivery and 5.24 SME development must therefore be cost competitiveness.42 approached from a somewhat different perspective that has prevailed up to now. It 5.26 The promotion of horizontal must emphasize networking while focusing consortia of geographically clustered SMEs on improving the entrepreneur's ability to to internalize collective efficiencies, and of "look beyond the immediate horizon", backward linkages within subcontracting understand the environmental factors at play networks should be part of a broader effort in the industry, -- such as the nature of at SME development. This should involve demand, industry technological trends, the improvements in the country's policy behavior of competitors -- and be able to regime, including the elimination of transact and negotiate with competitors, Argentina's cascading tax structure, that buyers, government agencies. This encourages vertical integration of production approach to SME development requires the processes, by making subcontracting a more Government to reassess its past strategies. costly alternative; and assistance in four key An SME program would have to reflect the clusters: product testing, standardization, importance of developing networks, either in calibration and technology development; the Italian tradition of horizontal articulation finance, including financial planning; within industrial districts; following the East management, with a strong focus on training Asian and Irish experience of vertical towards total quality management (See linkages between larger producers and their Annex A for details); and marketing, 54 Chapter 5 through information centers, trade and center, in charge of implementing existing investment promotion fairs, training and and developing new programs that serves as consulting services. an ombudsman for SMEs and helps in airing their demands. And they have helped 5.27 The supply of market intelligence and organize SME trade association to gain technological information to SMEs, on a economies scale in dealing with problems decentralized basis, using the existing public and encouraging cooperation and and private infrastructure would be collaboration. particularly valuable. To foster the establishment of countrywide networks that .5.30 This experience suggests that it may make available up-to-date information about be advisable to strengthen the current international markets, their requirements and attempts at SME support in Argentina by supply of technologies, the Government may establishing an institutional mechanism want to maintain updated information focused on promoting and coordinating databases on available foreign technologies, SME support services, which would act as alternative suppliers, contract terms, market a national advocate for SME trends; including seasonal variations, and development: it could be a privately run minimum standards. Non-discretionary and funded program, possibly with some access to such databases should be provided government seed money. It would work in to producers and trade associations. . partnership with government agencies and take the lead in devising and carrying out 5.28 There are a number of institutional support programs. Among its priorities models of technological information cum would be to foster effective subcontracting market-intelligence that can be examined to programs, helping set up both vertical and assess their suitability to Argentine horizontal networks; stimulating the conditions (Korean Institute of Economics diffusion of total quality management among and Technology, Taiwan, China's Market SMEs; certifying SMEs which hold the Intelligence Center, among others). It greater competitive potential to facilitate appears, at least in the short to medium their entry into credit markets (see below); term, that the first priority would be to and creating a market intelligence and expand the informational scope and user technological information network, in base of RECyT - the official S&T electronic cooperation with RECyT. mail network - to include users from business and industry, both SMEs and larger 5.31 The program would take up much of firms, on a cost-for-services basis. It may the operational responsibility for SME be useful as well to link up with the support that currently falls on government Brazilian SME-oriented SEBRAE network, shoulders, and be staffed with high-caliber, in view of the growing integration of the results-oriented, experienced professionals, two economies.43 and headed by a highly visible executive. The promotion and first contact functions of 5.29 All these measures are predicated on the SME program could be spun off to a shared understanding and broadbase Enterprise Promotion Centers located, inter political commitment to SME development. alia, in business and industrial associations. Countries with successful SME programs Others involved would include research have attracted strong political support, institutes and technology development placing their development high in the organizations (such as INTI, which is political agenda. Further, they have placed already involved in SME assistance), overall responsibility for the SME program universities and consulting firms. All in a highly visible and adequately funded actions would be under the framework of Chapter 5 55 new, results-oriented national SME policy. 5.32 Finance is often an important restriction to technology development. It can be a binding constraint for SMEs, in view of the lack of guarantees that smaller producers can offer and the intangible nature of technology-intensive firms' assets, particularly at the initial stages of production. In Argentina, the financial system remains ill-prepared to deal with innovation and productivity-related term finance, particularly that of SMEs. Government initiatives, on the other hand, are still at an early stage, although both the Government and IDB have stepped in to fund and create an institutional base to increase the volume and effectiveness of innovation and modernization finance. 5.33 The challenge remains, however, as to how to facilitate access to market-based finance for SMEs committed to innovation and managerial modernization, areas that are generally associated with "soft" investments, not always easy to be appraised or guaranteed. In this regard, the proposed institutional mechanism for SME support could develop screening processes to help certify those SMEs (or consortia of SMEs) that would be most capable of effectively using financial resources available in the market. At the same time, technical assistance should be provided to commercial banks for developing capabilities to process such lending. Prior to this, however, a serious review of the effectiveness of existing programs of SME support would be advisable. Finally, the Government may want to fund a detailed study regarding the potential commercial viability of innovation- oriented venture capital funds, and the specific measures that could be implemented to develop. venture capital finance in Argentina, based on experiences elsewhere. Annex A. Quality Control and Total Quality Management 1. There is still limited awareness in of Quality and Reliability (ASSADEC). Argentina of the relationship between quality management and competitiveness. Yet 4. In addition, the country's system of increasingly, being price competitive is not standards, testing and quality control is enough for a firm to sustain its market faced with insufficient provision of testing position, and consumer advocacy activities and inspection equipment, and trained staff are gaining ground; quality, broadly (on a minimally uniform basis), to support construed (to include product-related pre and quality control efforts within firms; limited post-sales services), is determining if a acceptance of standards developed and product is not successful. This calls for certified by IRAM; insufficient more effective systems of standards, testing, dissemination of quality control information measuring, calibration, total quality and (undertaken by INTI and the agency's follow up mechanisms. libraries) in view of resource constraints. Texts prepared by quality control 2. Ideally, firms should have ready organizations are few and printed in limited access to an agency that maintains primary numbers due to resource constraints and or internationally accepted standards, and lack of organization. Finally, managerial provides the basic reference for calibration (and official) understanding of the and documentation. Producers equally need importance of quality control (and of total the measurement and testing services quality management) for the firm's provided by certified private and/or public competitive standing and the marketability of laboratories, adequately equipped and its products lags behind Argentina's major staffed. Firms require their own equipment, trading partners'. laboratories and staff to undertake quality control and testing. Finally it is also 5. Argentina's quality control system necessary that producers provide post sales will require the development of a working services or effective guarantees. partnership between the Government, and the country's major trade associations and 3. Argentina has made progress toward federations, to coordinate more effectively developing -many of these institutions, and integrate different public and private facilities and services, but they lack the institutions that provide quality checking, necessary integration and coordination, measurement and testing facilities. despite the Government's efforts to create a Moreover, the system requires capillarity Program which brings together the and active promotion among its target Standards Certification Organization public, in order to operate effectively. (IRAM), the Argentine Institute for Quality Control (IACC), INTI, the Argentina 6. A first step would be to draw a Industrial Union (UIA), the General blueprint for restructuring Argentina's Confederation of Industry (CGI), major quality control system, based on previous universities, and the Argentine Association diagnoses of its weaknesses, the material, Annex 57 organizational and human resource 10. Such measures would, no doubt, constraints it faces, and the experience of make a significant difference. Nonetheless, the Presidential Overall Quality Control it should be noted that the major barrier that Program. Second, the Government, in close impedes the dissemination of quality coordination with the productive sector, management techniques is related to the should assign the task of implementing the managerial culture that still predominates in blueprint's recommendations to an apex Argentina, and is only slowly changing with institution of the system, to be established, economic liberalization and increasing preferably under joint public-private competition. Although culture cannot be management. The overhaul of the unified transformed overnight, a combination of industrial standards and certification system market pressure and society's involvement would be a key task of such body. in this process will hasten the process. 7. The challenge of disseminating total 11. It is thus necessary to mobilize quality management throughout Argentina's society and bring a greater understanding of industrial (and service) fabric will need to quality management to producers and be tackled by a complementary set of consumers by aggressively marketing the measures, including, inter alia: importance of, and the benefits derived from, total quality management. In this 8. Strengthening the dissemination of task, Government, industry leaders, quality management techniques. The consumer protection NGOs and producers' Government and industry leading associations should lead with a national associations should stimulate entry of media campaign, with a clear message: the national and international consulting firms, future of Argentina's industry and its local or sectoral associations, as well as position in the international market depends some to-be-restructured institutions of the on a national effort at improving the quality S&T delivery system, into the quality of its goods and services, and the control and management business. At the competitive strength of its small and medium same time, the Government should lead the producers (see Chapter V and below). effort in the massive training of "quality multipliers" to be engaged in the diffusion 12. Over the longer term, it is necessary of basic quality control and management to improve and extend management techniques among the smaller producers. education, particularly critical for improved managerial attitudes and practices. It would 9. Establishing official certification be highly desirable to provide support for laboratories for international standards curricula improvement and management and inducing entry of foreign (and training programs, focussing on the national) certification bodies in the requirements of an increasingly open and country. The business of certification is competitive economy. The (re)training of potentially attractive, if a growing number SME managers (often the owners and family of Argentine firms commit themselves to the members) would provide quite large returns, process of internalizing the norms and in view of the managerial nature of the key procedures of the International Standards weaknesses in SME development. Organization, including the environmentally- focussed ISO standards (the ISO-14000 series norms, which will be required by the EEC and other countries after 1996), and a simplified set of SME-oriented norms, for which there is a very large market. Endnotes 1. See United Nations, World Investment Report: Transnational Corporations as Engines of Growth, New York, 1992, p. 51 and seq. Note as well that in 1990, the Asia region attracted 61 percent of DFI inflow to developing countries, whereas flows to Latin America and the Caribbean reached 32 percent. 2. Ibid., p. 53. 3. See Kosakoff, B., op cit., Table 3, p. 126. 4. See D. Chudnovsky et. al. "Apertura, Productividad y Desarollo Tecnologico: El Caso Argentino," Documento de TrabaJo 116a, IDB, March 1992, Table 6. 5. See B. Kosakoff et al, o2. cit, p. 156. 6. See D. Chudnovsky et al, 2g.c., pp.25-6 and Table 8. 7. Ibid, pp. 26-7. 8. See B. Kosakoff et al, 2p.cit., p.151, Table 10. 9. See P. Rojo and A. Canosa, "El Programa de Desregulaci6n del Gobierno Argentino," Boletin Informativo Techint, n. 269, Jan-March 1992, and E. Sguiglia and R. Delgado, "Desregulaci6n y Competitividad: Evaluaci6n de la Experiencia Argentina," Boletin Informativo Techint, n.276, October-December 1993. 10. See Spuiglia and Delgado, p2.g., pp37-8, 47-8 for details. 11. See Confederaci6n General de la Industria, Informe Econ6mico, Septiembre 1993 12. In addition, the National Development Bank (BANADE) closed its branches in March 1990 and is in the process of liquidation. The Government is moving to form a "second-tier" bank that will be managed and ultimately owned by the private sector for its investment needs. Concerning the fiscal incentive regime, some firms still enjoy benefits granted by previous administrations. Most remaining benefits will expire by the middle of this decade, and new incentives are not expected to be granted. 13. In February 1994, import duties on inputs, parts and components required for the domestic production of capital goods were eliminated so as not to discriminate against domestic production. Under this new regime, zero-duty licenses would be awarded to capital goods producers that presented an acceptable annual production plan. 14. The majority of these measures have been aimed at Brazil and are generally consistent with remedies afforded under the Mercosur agreement. 15. "Argentina.. .laws governing foreign investment are among the most liberal in the world. In general, Argentina encourages investments though a free-market policy and low income tax rates rather than through subsidies. Tax exemption for new investments, accelerated depreciation of fixed assets and tax reimbursement on exports are granted under identical conditions to nationals and foreigners." See Ding Business in Argentina, Ernst and Young, 1992, p.1. The discussion on direct foreign investment draws Endnotes 59 heavily on this document. 16. A survey of multinational corporations published in the December 1991 edition of "Latin America" rated Argentina's foreign investment policy a 3.8 on a scale of 0 to 5, with 5 being the best. Chile with a rating of 4.3 was the only higher score on the survey. The average score was just below 3.2. 17. Registration with the Registry of Foreign Investment is optional (and easy to accomplish), though advisable if the Government were to impose restrictions on access to or remittance of foreign exchange. 18. The rules regulating international technology transfer were initially established in Law 19231 of 1971, the primary objective of which was to constrain the outflow of foreign exchange and stimulate labor-intensive activities. The provisions of this law were made more discriminatory by Law 20794 of 1974, which increased the discretionary power of the State to regulate technology transfer. In 1967, Law 21617 partially liberalized the process of acquisition of foreign technology, followed by Law 22426, which eliminated most remaining barriers. 19. See M. Rowat, "An Assessment of Intellectual Property Protection from Both a Legal and Economic Perspective - Case Studies of Mexico, Chile and Argentina," mimeo, World Bank 1991. 20. A roundabout mechanism used by strong firms/groups is to create of a non-profit foundation, which allows pooling of R&D funds from various sources and provides other advantages 21. See World Bank, "Argentina: Capital Market Study", 1994 22. The UVTs are non-profit public and private institutions engaged in "linking" existing technological assets and potential demand for their services. 23. There are other financing mechanisms with a potentially strong impact on the technological status of SMEs. Since the Argentine economy became credibly stable from a macroeconomic standpoint, the supply of term credit became of interest to private financial institutions (prior to that, only Banade, now in the process of liquidation, was effectively engaged in investment lending). Currently term credit is available from both foreign and domestic sources with the former is mostly oriented towards the acquisition of capital goods - - embodied forms of technology -- and range from suppliers credit to import loans offered by official institutions (generally from OECD countries -- such as Eximbank, of the U.S., E.D.C., of Canada, Hermes of Germany, among others). Loans average 3-6 years repayment period and rates vary from Libor + 4% to Libor + 7%. 24. They were wood industry from.Esquel; honey producers from Chaco; agriculture machinery firms from Las Perejas; producers of olive oil and furniture from C6rdoba; wineries from Chilecito; producers of concentrated juices from Tucumin and Rio Negro; and citrus producers from Misiones. 25. See R. L6pez Murphy, "Informe para el Banco Mundial sobre la Politica Tecnol6gica Argentina", mimeo, Buenos Aires, 1992. 26. See JICA, "The Study of the Promotion of Total Quality Control in Small and Medium Scale Industries and Certification System for Industrial Export Products in the Argentine Republic," Volumes I and II, Buenos Aires, November 1990. 27. See B. Kosakoff and A. Vispo, "Difusi6n de Tecnologias de Punta en Argentina: Algunas Reflexiones sobre la Organizaci6n de la Producci6n Industrial de I.B.M.," Cepal Working Paper n. 38, Buenos Aires, 1991. 28. For a detailed description and updated overall discussion of the Argentine S&T establishment, see Roberto Bisang, "Industrializaci6n e Incorporaci6n del Progreso Tdcnico en Argentina," Documento de Trabaio n.54, Cepal, Oficina de Buenos Aires, January 1994. 29. See R. Bisang, on!it., p. 25. 60 Endnotes 30. The Universities of: C6rdoba, Buenos Aires (UBATEC), Cuyo (Instituto Balseiro), del Litoral, del Sur and Salta. 31. CONICET also supports one astronomic station, two pilot plants and specialized services, including consulting services for industry. 32. See Mckinsey Global Institute, Latin American Productivity, Washington, D.C., June 1994. 33. In addition, "la Serenisima", the country's main processor of milk and milk products, traces its technological take-off to technical assistance received from two of INTA's researchers--who later joined the firm formally. 34. CNEA also funds about 20 long-term and 100 short-term overseas scholarships per year. 35. See R. L6pez-Murphy, "Informe para el Banco Mundial sobre la Politica Tecnol6gica Argentina," mimeo, 1992. 36. CQC members are appointed by: the Ministry of Public Works; the Ministry of Economic Affairs; the Ministry of Defense; the Energy Department; CNEA; Secretary of Industry; SECyT; the Secretary of Agriculture; the Office of State Corporation; INTI; UIA; CGI; CGE; UAES (Federation of Service Sector Industries); IACC; IRAM; the Dean of the University of Buenos Aires Mechanical Engineering Department; and the chairman of the National Technology University. 37. One important unit is the Center for Scientific and Technological Research of the Armed Forces (CITEFA). Though relatively small, it has consistently provided useful quality, standards, material testing and metrology services to industry. 38. See Japan International Cooperation Agency, "The Study on the Promotion of Total Quality Control in Small and Medium Scale Industries and Certification System for Industrial Export Products in the Argentine Republic," Volumes I and II, Buenos Aires, 1990. 39. For illustrative purposes, it is worth mentioning that about 70,000 such "quality multipliers" are currently being trained in Brazil (with Bank support). 40. Indeed, one may think of ultimately privatizing certain functions or institutions as has happened in the U.K., South Africa and New Zealand. 41. See J. Battat, "Transfer of Technology Through Backward Linkages of FDI - A Policy, Program and Institutions Approach," FIAS, The World Bank. 42. These programs offer the following services: searching for specific backward linkage opportunities, usually within targeted sectors; matchmaking individual firms for linkages; advising domestic SMEs on business development and planning; and providing support to buyer firms to develop vendor networks. The latter may need to be sensitized to the potential gains of closer and more durable relations with SME subcontractors, possibly with the help of study tours and expert advice from individuals with actual experience in establishing subcontracting systems. 43. SEBRAE, in fact, presents an interesting model of SME informational support with its decentralized network of one-stop "windows" and the recently launched Investment Promotion and Technology Transfer System (SIPRI). This project allows SMEs to connect themselves to information sources and data bases concerning international flows of technology, investment and trade. SMEs register in the system in one of SEBRAE's windows, supplying information concerning their needs and commercial interests, including the formation of joint ventures and other types of partnerships, which is then relayed through the network of Brazilian commercial attaches in 33 countries.