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7 Assembling the components of national information infrastructures

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7 Assembling the components of national information infrastructures 7.1 Introduction - Producing and effectively using ICTs The rst six chapters of this report focused on the uneven di usion of ICTs throughout
7 Assembling the components of national information infrastructures 7.1 Introduction - Producing and effectively using ICTs The rst six chapters of this report focused on the uneven di usion of ICTs throughout the world, the learning processes involved in the scienti c and technological innovation process, and the potential of ICTs for developing countries, as well as the experiences of the least developed countries. The UNCSTD Working Group on IT anddevelopment concludedthatthe costs of not building national information infrastructures in developing countries are likely to be very high and that each country is at a di erent starting point in this task (see Chapter 1). Stakeholders and the governments in the developing world have very di cult choices to make about how to strengthen their capabilities in the ICT eld. This rst arises in deciding how to allocate their limited resources most e ectively to gain some of the bene ts of ICTs and to use them to build innovative and distinctive `knowledge societies'. The economic, political, and social conditions aswellas the cultural mores in eachcountrydi er substantially. Many of the advantages of ICTs will depend on the availability of an advanced national information infrastructure and on the human capabilities to integrate and use it e ectively. There is debate about how to strengthen ICT production capabilities and it is being recognised that e ective use of ICTs depends upon knowledge of how they are designed, how they can be tailored to local conditions, and how they can be maintained. Even when the choice must be to buy, rather than to produce, the necessary technologies and services, an understanding of the range of alternatives is needed ificts are to be harnessedto developmentgoals. Some developing countries have built up a considerable knowledge base for producing components of their nationalinformationinfrastructures andtheyare developing export markets for these products. Other countries are building their capabilities to select and implement ICTsystems and services without necessarily engaging in local production activity. This chapter uses the experiences of countries that have achieved a combination of technological, institutional, and human capabilities to enable them to assemble the technological components or the content for the national information infrastructure. Assembling the technological components and the capabilities involves measures to strengthen the science and technology base (section 7.2). It may, in some countries, also involve building capabilities in the hardware industry such as the case of semiconductors (section 7.3). Opportunities may be created for the wider accessibility of communication networks through technical innovations as in the case of Low Earth Orbiting Satellites (LEOS) (section 7.4) and by entry into the software development market (section 7.5). The information content industries are considered together with the cultural implications for developing countries of the increasing ows of international programming and services in section 7.6. All the experiences reviewed in this chapter involve countries that have started to assemble their national information infrastructures based on a relatively high level of pre-existing literacy and formal education. Each has moved relatively quickly along a learning curve and considerable investment has been necessary. The least developedcountries donothave the technological components, the necessary capabilities in place, or the nancial resources to invest in assembling the infrastructure on a large scale. For the most part, these countries will be `buyers' of ICTs and services. However, this does not mean that they must simply be recipients of goods and services developed elsewhere, or necessarily be excluded from bene ting from the new technologies.there will be opportunities for them to become creative, innovative users if policies and private sector strategies encourage the development of key assembly capabilities. 7.2 Science and technology policy in the Brazilian ICTindustry An important aspect of the national information infrastructure in developing countries is the strength of R&D capabilities in rms, and their propensity to invest in R&D to enable them to participate in construction of the infrastructure. Brazil has the largest information and telecommunication industry in Latin America, and the second largest in the Americas, with a market of US$ 10 billion in The number of professionals working in the sector whose levels of education include undergraduate and postgraduate degrees is greater than the sum of all other Latin American countries. The size of the Brazilian market, combined with a competitive environment, has o ered a challenge to Brazilian rms operating in the ICT sector. Firms have invested increasingly in R&D and employed the highly skilled workforce to innovate and compete, initially in the domestic market and subsequently, in the international market. Brazilian science and technology policies are aimed at strengthening and expanding R&D activities in the ICT sector. Brazil o ers an example of the stimulus to investment that can be achieved as a result of policies that employ 120 7 Assembling the components economic incentives to raise the level of investment and to target it in speci c areas. In 1991 the Brazilian government sought to create conditions whereby rms could bene t from investing in R&D activities. A new law established policy tools to promote R&D in the ICT sector and required complementary actions by rms. 1 First, scal bene ts available until 1999 consisted of a waiver of the Industrialised Goods Tax resulting in a reduction of 15 per cent in the nal cost of production. Until 1997 a discount of 50 per cent on the income tax on expenditures on R&D activities was available and support was provided for new capital investment as a result of a discount of 1 per cent on the income tax payable by companies investing in ICT rms. Second, government procurement policy was changed to favour the purchase of ICT goods with larger proportions of local industrial content. In order for rms to take advantage of the scal bene ts and procurement conditions, the legislation required complementary actions by rms. These actions include investment of at least 5 per cent of after-tax revenues from sales of ICT products and services in R&D activities of which 2 per cent must be through joint projects with universities, research institutes, andthe main government programmes for the ICT sector. Firms have also been required to comply with a minimum use ofadvanced technologies in each class of product enabling companies to operate in production chain niches and to select products, parts or components for local production. Firms were required to achieve certi cation for meeting ISO 9000 quality standards within a period not exceeding two years. By 1997, 248 rms with a total net revenue of approximately US$ 5 billion in 1995, had bene ted from these legislative measures and the government was projecting intra- and extra- rm investment of more than US$ 1billion in R&D by1998. The Brazilian Ministry of Science and Technology is responsible for implementing current policy and approving joint projects that bring the private sector into close interaction with academic researchers. The Ministry of Science and Technology veri es compliance with legislative measures supported by the Ministry of Industry, Trade and Tourism and the Ministry of Planning. It also investigates R&D investments by rms bene ting from the legislative provisions supported by the Federal Treasury and Ministry of Treasury and observes compliance with the quality assurance standard. The objective of these actions is to ensure consistency and continuity of the industrial and technology policy. In addition to these policy tools, the National Bank for Social and Economic Development (BNDES) opened a credit line of US$ 150 million to nance the acquisition of goods and services for the information and automation sectors of domestic rms. This credit line is intended to provide favourable nancing conditions for the purchase of locally produced software and hardware.the objectives are to support the modernisation of the localict industry and to stimulate the di usion of ICTs throughout Brazilian society. The scal bene ts for rms and their compliance with the complementary actions are linked to their eligibility for R&D projects and the Ministry of Science and Technology's priorities for R&D programmes. The impact of the ICT policy on each programme is monitored by the Ministry. The main programmes are shown in Table 7.1. Table7.1-MinistryofScienceandTechnology,mainR&D programmes, 1996 Programme National Research Network (RNP), Internet Brazil National Programme of Software for Export (SOFTEX-2000) Multi-institutional thematic programme in computer science Advanced technologies for industrial automation Quality and Productivity in Software Micro- and macro-structures High performance processing Support for the development of the software industry Support for technological capability of the teleinformation industry Responsible agency CNPq CNPq CNPq CTI CTI CTI CTI FINEP FINEP Key: CNPq - National Council for Scienti c and Technological Development; CTI - Foundation Technological Centre for Informatics; FINEP - Financing Agency for Studies and Projects. Source: Ministërio dacieª ncia etecnolog a (1996). The growing availability of funding for R&D in the ICT sector in Brazil, whether within companies, through joint projects with research centres and universities or within the framework of a large government programme for ICT R&D is linked directly to scal policy.the results of the policy are shown in Table 7.2 indicating the scal bene ts received by rms and their R&D investment over the period (estimated for 1996 and 1997). Table 7.3 shows the distribution of investment within rms, and collaborative R&D investment.the scal bene- ts granted to rms increased almost fourfold between 1993 and 1995 and were expected to continue growing throughout The most attractive scal bene t is the waiver of the Industrialised Good Tax. Firms appear to be willing to make cost reductions in order to become more competitive. Total investment in R&D grew almost vefold from 1993 to On average within-company R&D investment comprised more than two-thirds of the total during this period.the data also indicate substantial growth in the allocation of funding for joint projects with 121 universities and R&D centres suggesting a tendency for Brazilian rms to expand their R&D activities in the ICT sector into extra- rm activities. Table Fiscal benefits for the Brazilian ICTsector, Items 1993 US$ m Eligible firms, total Gross revenue in the domestic market Gross revenue of supported firms Net revenue during the period Fiscal benefits, total Investment in R&D, total 1994 US$ m 1995 US$ m 1996* US$ m 1997* US$ m ,430 9,795 11,299 12,700 14,100 3,845 5,680 7,500 8,400 9,400 1,401 4,128 4,900 5,400 6, withinfirm joint projects with universities and R&D centres programmes Note: Under Law 8248 of 23/10/91; *Estimates Source: Compiled from various sources. 2 Table Scope of investment in R&D in the Brazilian ICT sector, Scope 1993 % 1994 % 1995 % 1996* % 1997* % Within-firm Joint-projects with universities and R&D centres Programmes Total Note: * Estimates Source: Compiled fromvarious sources, see note 2. The competitive environment inbrazil andin the international market is forcing rms to reduce costs and improve quality and this, together with the scal incentives, is resulting in an increase in investment in R&D activities. Firms are seeking to enhance their products and services to compete globally in the ICT market. 7.3 The Republic of Korea's successful specialisation in memory chips The development of the semiconductor industry in the Republic of Korea is a dramatic instance of success in building new capabilities for a newly industrialising country. In little more than a decade, Korean chaebol rms such as Samsung have been able to catch up and move to the frontier of semiconductor production, speci- cally in the memory chip segment of the market and in Dynamic Random Access Memories (DRAMs). This is a highly technology-intensive industry and success was achievedinaveryshorttime.korean rms arenow becoming major global players in the world memory chip market. 3 This section highlights the factors which have contributed to success in assembling the capabilities to exploit the export market for semiconductors. Samsung became the world market leader in Metal Oxide Semiconductor (MOS) memories and the DRAM segment by 1993 (Integrated Circuit Engineering 1995) from a virtually zero market share in memory chips in Hyundai and LG Semicon (formerly Goldstar) also have been very successful in the world DRAM market, attaining fourth and fth place, respectively, in the DRAM segment in1996 (Electronic Business Asia1997). Many structural problems, including the highly fragmented industrial structure, remain to be addressed (EIAK 1995) if the growth of the Korean semiconductor industry is to be sustained over the longer term. Korean successes have been limited largely to the DRAM-segment, the low value-added mainstay of the semiconductor industry. The performance of the Korean semiconductor industry is very impressive (Kim 1998 forthcoming). Successful specialisation by Korean rms and export sales on the world market maybe attributable to a cleverstate industrial targeting policy, to luck, and to timing to market, an instance of chaebol success in pursuing the strategies that were timely to achieve export market success by the second half of the 1980s. In fact, the evidence suggests that success is attributable to many factors including the politics surrounding state actions The importance of chaebol governance and the state The Korean state was important to the success of Korean rms in the semiconductors market but in an indirect way. Korean chip producers, especially during the second half of the1980s, were fortunate to be able to capitalise on the gap in the world market which opened up after the US-Japan Semiconductor Agreement of 1986 (renewed and extended ve years later). In addition, the strategy of narrowly focusing on DRAMs was a singularly appropriate one with Samsung acting as the DRAM `path nder' while Hyundai concentrated on static RAMs. The success of the chaebol- rms depended on the will as well as the ability to succeed. An explanation of their 122 7 Assembling the components success requires consideration of the chaebol-governance process and the political institutional arrangements for the state- rm relationship based on the `politics of reciprocal subsidy'. These subsidies have been conducive to the emergence of e ective chaebol-governance, 4 and the structure of the governance system is well matched by the technological and economic competitive conditions in the memory chip segment of the semiconductor market. The development process of Korea's semiconductor industry took place over two periods before and after Until 1983, Korean rms were merely specialised within the international division of labour, while world market dynamics and the `visible hand' of foreign investors, played an important role. The dominant form of governance was the rm-hierarchy of foreign investors, resulting in limited development of Korea (Rep. of) as an assembly site for foreign semiconductor rms. The state remained relatively passive between 1965 and 1972, with limited interest in a general export-promotion policy (Kim 1991; EIAK 1989). Between 1973 and1979 there was a state-led push into the heavy and chemical industries (HCI) (Haggard and Moon 1986; Leipziger 1987), but no similar promotion policy was pursued for the semiconductor industry. Among the State incentives and measures after 1983, the most important and most frequently used policy instrument for encouraging large rm entry into the HCI industries was credit.the rms, and above all the chaebols, that invested in targeted industries such as steel and petrochemicals received so-called `policy loans'. The share of these policy loans amounted to as much as 60 per cent of the total lending by the big Korean banks (Hahn1993). An important condition attached to the policy loans was that the receiving rms should export their products almost from the outset and demonstrate their strength in export markets.this condition amounted to a `reciprocal subsidy' between the state and the rms and worked as a positive incentive for the subsidy-receiving rms to increase their production e ciency and to sell their products on the export market (Amsden1989).The implementation of the HCI policy based upon the `politics of reciprocal subsidy' also had signi cant implications for the development of semiconductors. From 1983, the Korean semiconductor industry attained momentum mostly as a result of the strategic initiatives of the chaebol- rms. The Very Large Scale Integrated (VLSI) chips era was initiated in 1983 by the chaebols that had grown enormously during the preceding HCI-drive era and now recognised the economic potential of the semiconductor industry. The breakthrough came in 1987 with favourable world market conditions induced mainly by the international semiconductor politics between the United States and Japan. The world market dynamics provided an important `window of opportunity' and the DRAM `boom' rewarded the Korean rms for the DRAM trajectories they had established. The three large chaebol chip producers had decisive structural advantages in terms of capital and human resource mobilisation as well as the opportunity for cross- nancing.w thout these advantages, they would not have been able to start their newdram businesses as quicklyor to sustainhuge nancial losses until1987 when the `window of opportunity' in the world market nally opened (Korean Semiconductor Industry Association 1993; Samsung Electronics Co. 1994). Korean chaebol- rms are hierarchically structured and centrally organised. The member companies are grouped around the chairperson and a central o ce which is responsible for resource allocation and often for personnel decisions at the chaebol group level. This structure enables quick and uni ed support for new business areas. Chaebol-governance implies a combination of a `hierarchy' (built around the Chief Executive O cer and central o ce) and a `network' (consisting of a chaebol-level network organisation). Resources can be mobilised very quickly through internal transactions and cooperation within the chaebol on a non-price basis. This permits focused and e ective investment in the new semiconductor business. Chaebol-governance was an important institutional factor in the rapid entry of Korean companies into DRAM production, a market characterised by very high entry barriers. Chaebol-governance ts well with the technological innovation characteristics of DRAMs and the `technological regime' (Malerba and Breschi 1995). DRAM technical advances proceeded through ever-increasing integrated circuit capacity and a continuous series of product and process innovations.the incremental process innovations and learning e ects from manufacturing (for example, learning-by-doing) were important sources of technological innovation and productivity gains. High yield rates were achieved through experimentation over details in the manufacturing process at which DRAM producers like Samsung and Hyundai proved very adept (Howell et al. 1988; Tyson and Yo e1991). These technical innovations and the associated technological capabilities resulted in rm-speci c patterns of knowledge. Each rm's capability to learn-by-doing was a decisive determinant of its competitive success. In the case of DRAMs, the Korean producers do not seem to have been penalised by the relatively low quality of the national system of innovation which exis
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