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The 1980s: Towards a new socio-economic and technological scenario

Bearing in mind the fact that there are important inter-country differences which I shall briefly examine later when looking at the experience of Argentina, Chile, and Brazil - let us start by summarizing some of the most outstanding features of the contemporary socio-economic scenario:

These various aspects add up to a major structural change and not just to a marginal adjustment. The role and modus operandi of manufacturing industry, the organization of production at the individual plant level, the pattern of foreign trade, the degree of business concentration, the participation of foreign capital, the functioning of the labour market, trade union bargaining strength, a new breed of regulatory institutions- all seem to be part of a far-reaching socioeconomic transformation whose final form and consequences are still far from clear.

What is the impact of this transformation likely to be upon the national system of innovation and the development of domestic technological capabilities? Is there any reason a priori to believe that scientific and technological institutions and micro patterns of behaviour relating to technical change and innovation are going to change as a consequence of this socioeconomic restructuring process?

The available empirical evidence in this respect is as yet imperfect. We lack basic knowledge about major issues, and further research is certainly needed if we want to achieve better understanding of what is happening at present. Nevertheless, in a very preliminary way, we can identify some interesting new trends that we now briefly examine for Argentina, Chile, and Brazil.


Savings and investment have both fallen quite sharply relative to the 1960s and 1970s. A much higher degree of macroeconomic uncertainty and volatility account for the fact that capital flights out of Argentina increased dramatically during the course of the 1980s. The lower propensity to invest locally is reflected in the low level of imports of machinery and equipment that has prevailed throughout recent years and still obtains today. Direct foreign investment has also fallen sharply during the 1980s, indicating the lack of interest and low expectations foreign firms now have concerning the future of the Argentine economy. This macro scenario appears to be associated with an expansion of opportunistic and rent-seeking activities on the part of the local business community and with a general decline in entrepreneurial dynamism that permeates the whole production structure and particularly affects the industrial sector.

Within this general climate, three basic points reflecting recent patterns of technological behaviour in Argentina stand out. First, as manufacturing output is smaller today than two decades ago, and as the structure of industry has changed quite considerably with the contraction of engineering and capital goods industries and the concomitant expansion of raw materials processing sectors, the country's industrial R&D and engineering efforts have significantly contracted in recent years. In the mid-1970s, Argentina produced some 350,000 cars, 25,000 machine tools, and 60,000 tractors per annum. The equivalent output figures now are only 120,000, 6,000, and 5,000 respectively, and the factories have changed dramatically as regards production organization, import content, subcontracting practices, etc. The metalworking sector alone has reduced its payroll by more than 200,000 workers compared with the early 1970s. By contrast, Argentina increased its production of petrochemical products from 865,000 to 1,794,000 tons, its steel output from 2.25 to 3.67 million tons, and its sunflower oil production from 630,000 to 2 million tons. Very little new employment has been generated by these expanding sectors, which now constitute the backbone of the country's manufacturing exports.

Metalworking firms and capital goods producers have cut back their product design activities, as well as their production planning and organization efforts, considering them to be an indirect cost of production largely unjustified at their present low level of operation. As a result, and concomitantly with the contraction in the volume of output, metalworking firms have proceeded to reduce their engineering departments and the use of technologists and engineers.

On the other hand, raw materials processing industries involved in the production of industrial commodities such as steel, petrochemicals, aluminium, pulp and paper, and edible oil have expanded rapidly in recent years on the basis of new and highly capital-intensive facilities demanding minimal domestic R&D and engineering efforts. Most of these new firms produce low value-added standardized products that are sold in highly competitive, undifferentiated, international markets in which Argentina is a marginal "price taker."

Secondly, a slow and gradual diffusion of computer-based technologies seems to be taking place among medium-size and small family enterprises. Industries such as shoe manufacturing, garments, made-to-order machines and equipment (industrial boilers, canning and bottling plants, etc.), where family businesses are an important source of supply, seem to be increasingly adopting computer-aided design and manufacturing technologies and new ideas concerning production organization and subcontracting.

Lastly, another important dimension of Argentina's contemporary technological situation concerns the country's primary sector. After a rather long period - nearly 30 years - of technological stagnation, agriculture started a process of rapid technological transformation in the 1960s with the introduction of agricultural machinery and production organization technologies. The pace of technological change quickened thanks to the massive diffusion of maize hybrids, agrochemicals and, more recently, various kinds of biotechnological developments.


Between 1974 and 1983, manufacturing output fell by nearly a quarter, from 25.5 per cent to 19.9 per cent of the GDP. Some 5,000 industrial plants closed, with a loss of nearly 150,000 jobs [34]. De-industrialization has been particularly severe in metalworking and textiles. By contrast, the foodstuffs industry has substantially increased its share of manufacturing production. Employment, investment, and exports in the sector have all expanded rapidly. A major part of this expansion relates to fresh fruits and vegetables: grapes, apples, asparagus, etc. - all products in which Chile has managed to capture important markets in industrialized countries.

The spread of agrochemicals and hybrids as well as of new production organization techniques has been significant. In areas such as packaging, freezing, and transportation, Chilean exporters have become markedly more sophisticated than in the past. New institutions and different social structures within production - including much higher proportions of women in employment, the emergence of a new vintage of very dynamic rural entrepreneurs, and the development of a fairly concentrated intermediary sector handling transportation and distribution have appeared in association with the expansion of the Chilean foodstuffs industry. Moreover, the modification and local production of agricultural equipment are also showing signs of substantial advance, in what could be interpreted as a case of "learning by doing" and adaptive R&D efforts in the mechanical engineering sector linked to the expansion of agriculture.

In contrast to the experience of Argentina, Chile is one of the few Latin American examples - Colombia is another one - in which public fiscal accounts as well as the country's external sector seem to be close to equilibrium and do not constitute a major source of macroeconomic turbulence and declining entrepreneurial dynamism. In fact, and basically due to political and ideological circumstances, the flow of external financing never constituted a major constraint on the country's growth process in the way that it has in many other developing countries. Chile is probably the example that best supports the modern neoclassical advice of "get your macro accounts right and let the market mechanism carry out your resource allocation task," though we should not forget that a long period of repressive military intervention, massive unemployment, and plentiful external financing preceded this rather peculiar liberal experiment.


Throughout the 1960s and 1970s, Brazil was one of the fastest growing economies in the world. Between 1965 and 1980, the country's overall rate of expansion was 8.8 per cent per annum - in fact, not very different from Korea or Hong Kong, which most observers consider extremely successful cases - while the rate of growth of manufacturing production reached about 10 per cent per year. This process of expansion slowed down significantly during the course of the 1980s. Between 1980 and 1988, the GDP managed to grow at only 2.9 per cent per annum, and manufacturing activities at an even lower rate, 2.2 per cent. Although not as dramatically as in Argentina or Chile, the industrial sector's contribution to the GDP has declined over the last decade. In fact, between 1981 and 1984, industry experienced three consecutive years of worsening performance, particularly in areas such as electrical and non-electrical machinery, transport equipment, and instruments, i.e. the core of the metalworking and capital goods sector. After very rapid expansion - 25 per cent per annum during the 1970s, the Brazilian capital goods sector contracted significantly by 12 per cent per year - during the 1980s.

Albeit less dramatically than in Argentina, the Brazilian metalworking industry is also showing signs of decline. The adverse technological consequences of this process are probably similar to those previously mentioned for Argentina. Among them are the contraction of investment and the cutting back of R&D and engineering activities. An interesting possible difference is the fact that Brazil has managed to establish a relatively more sophisticated segment of metalworking firms involved in the production of aircraft, military equipment, etc., where product design and process engineering R&D efforts and capabilities have been maintained, largely on the basis of public sector subsidies that might very well be cut off in the immediate future because of current macroeconomic difficulties. Yet another interesting difference between Brazil and Argentina concerns the computer industry, where Brazil had a consistent - and also controversial policy of market reservation throughout the 1970s. While supporters of this policy tend to emphasize its positive impact upon investment and R&D activities, as well as in the development of domestic technological capabilities, critics have pointed to the high cost of locally produced small computers and the adverse effect this has had on the rate of diffusion of computer-controlled techniques throughout the economy.

Brazil has also managed to develop a considerable production infrastructure and strong export capabilities in non-durable consumer goods such as shoes, orange juice, instant coffee, frozen meat products, etc., as well as in industrial "commodities" such as cast iron, steel, pulp and paper, etc. R&D and engineering activities are less significant- though by no means negligible - in these more traditional segments of industry. In particular, market organization know-how is highly relevant in many of these cases, as the lion's share of the action is in the hands of medium-size and small family enterprises supported by a network of trading firms that handle the international side of the operation. As in Chile, packaging, transport, and marketing technologies are crucial and constitute an area where Brazilian trading companies have in recent years developed valuable proprietary technology.

On the whole, it is fair to argue that Brazil has so far maintained a more consistent policy of domestic market reservation than Argentine or Chile. It still has a strong and well-qualified civil service retaining much of the spirit of the "old" import substitution industrialization period, and in spite of external pressure and official talk about de-regulation and free market operation, still manages - through non-tariff barriers - to maintain a more closed local economy than other Latin American countries. Whether that has been a good or a bad thing for technological change and innovation and for the development of domestic technological capabilities, and whether or not Brazil will be able to maintain such strong regulatory positions in the future, are major, still unresolved issues.

We have so far examined three quite different situations within Latin America. It is obvious that the dynamics of the present socioeconomic restructuring process varies enormously across nations and that no simple generalization can be offered as a substitute for detailed research. Nevertheless, several points stand out from the foregoing discussion.

First, savings and investment as well as the rate of new capital formation have decreased in many of the "late industrializers" in the 1980s compared with the immediate post-war period. With few exceptions - such as the vehicle industry - foreign direct manufacturing investment has also fallen relatively to the 1960s and 1970s. Entrepreneurship seems to be at a particularly low ebb, and entrepreneurs tend to have turned more to opportunistic and rent-seeking activities than to technological and innovative efforts. Macroeconomic stability, fiscal equilibrium, and capacity for growth are still difficult to obtain in many developing countries, even in those that achieved an impressive growth performance in the 1960s and 1970s, as was the case of Brazil, Mexico, or Argentina. Chile and, to a lesser extent, Colombia belong in a different category, where a more stable macroeconomic environment, external financing, and fiscal equilibrium have managed to sustain a reasonably high level of entrepreneurial dynamism among local businessmen.

Secondly, the contraction of engineering and capital goods industries has clearly induced a fall in domestic R&D and engineering activities, as well as in the use of highly qualified staff. Low value-added industries have gained ground within the newly emerging pattern of international trade. In this respect, the experience of Argentina does not seem to be very different from that of Brazil, in spite of the fact that the production of arms, aircraft, and small computers has probably allowed Brazil to develop- and so far maintain - a somewhat larger stock of domestic engineering skills and technological capabilities than the one Argentina has been able to preserve.

Thirdly, both the primary sector and different branches of the foodstuffs industry seem to be involved in a rapid process of technical change. The diffusion of hybrids, agrochemicals, biotechnological processes, etc., seems to be slowly taking place among rural producers. On the other hand, downstream service sectors such as packaging, freezing, and transportation also seem to be experiencing a number of important institutional and technological transformations, adapting themselves to new opportunities in the international market-place. The Chilean example is probably the most interesting of these cases within the Latin American region.

Fourthly, raw materials processing industries such as petrochemicals, steel, pulp and paper, and edible oil have expanded significantly in recent years. Exports have grown rapidly in these sectors, but, with few exceptions for example, Usiminas in Brazil [10] - most of these firms did not themselves engage in state-of-the-art R&D and technological activities. "Specialty" chemicals or steels - where a much higher degree of technological sophistication and value added is involved - have not so far received much attention. Such "downstream" industries might, however, become very important in the future once these countries have managed to develop a strong raw materials processing sector.

Fifthly, medium-size and small family enterprises engaged in the production of shoes, garments, made-to-order pieces of capital equipment, etc., are gradually introducing- probably more so in Brazil than in Argentina computer-based technologies and new forms of market and production organization. It would be wrong to assume that such phenomena constitute a generalized and sweeping process, but it would also be a serious mistake a priori to believe that small and medium-size local firms are entirely left behind by current developments in micro-electronics and informatics.

Lastly, the degree of technological heterogeneity seems to be growing within the industrial structure as a dramatic process of "creative destruction" takes place on a massive scale. A much higher degree of economic concentration and a noticeable slide in welfare standards also seem to be part of the contemporary Latin American scene.

It is thus quite clear that a major socio-economic transformation is under way in the region and that it is going to have a deep impact upon the rate and nature of technological change and innovation, as well as upon the growth process of many of these nations. It is also quite clear that this transformation is far from complete and that we still do not fully grasp its principal consequences in very many spheres besides those for the national system of innovation. Structural unemployment, an extremely adverse impact upon income distribution, equity and welfare standards, increasing and more complex forms of social conflict, etc., appear to be possible consequences of the ongoing socio-economic restructuring process, which should certainly be examined because they affect fundamental aspects of social equity and political governability. It is, however, outside the scope of the present paper to explore such aspects in any detail.

Concluding remarks

The above discussion naturally leads us into policy issues. For the sake of brevity, I shall touch upon only three major aspects that, in my opinion, deserve serious consideration on the part of policy-oriented researchers. The first relates to macro-policy management and to the role of the state in the process of capital accumulation. Many developing countries are now dealing with a complex situation in which extreme forms of external and fiscal disequilibrium demand a very rigorous macroeconomic policy management if negative expectations are to be reversed and the process of capital accumulation and growth revitalized. It seems unlikely that without a significant flow of external financing, the present vicious circle of stagnation and diminishing entrepreneurial dynamism could be easily overcome in the near future. The industrialized countries probably need to revise their views in this regard if they seriously want to help developing countries to enter into a new sustainable growth path.

Secondly, beyond sound macro-policy management, i.e. of "getting the macro prices right," developing countries require explicit industrial and technological policies capable of dealing with market failure in areas such as education, technology generation and diffusion, etc. Downward linkages towards high value-added industries in fields where strong, resource-based sectors have already been created in recent years - i.e. petrochemicals, pulp and paper, steel, etc. have to be developed, and there are strong reasons a priori to believe that the "invisible hand" will encounter significant difficulties in inducing a socially optimal pattern of development in this direction.

Thirdly, questions of social equity and political governability should be examined closely. The process of socio-economic restructuring is far from being fair to the poorest one-third (or even more) of the local population, and those are the people who are now "paying for" the current structural transformation. Public expenditure in areas such as health, education, and social security have contracted sharply in recent years. to the severe detriment of welfare standards. Science and technology policies could be called upon in these areas in order to improve their performance and thus reduce the damaging impact of current trends.


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8 Technological capabilities

Sanjaya Lall

Slightly revised version of the article "Technological Capabilities and Industrialization" published in World Development, Vol. 20, No. 2 (1992), pp. 165-86.

Firm-level technological capabilities (FTC)
National technological capabilities
National technological capabilities: Some evidence from developing countries
Conclusions and implications

This chapter is a review of the nature of technological activity in developing countries and the case for government interventions to strengthen technological and, hence, industrial development. Much of the traditional literature, theoretical and empirical, has neglected the need for, and production of, technological activity in developing countries. Simple neoclassical writing simply assumes the problem away. In the highly simplified models used in trade theory, for instance, technology is taken to be freely available to all countries and, within countries, to all firms. Countries simply settle on an appropriate level of capital/labour intensity in accordance with their factor price ratios, determined by their relative endowments of physical capital and labour. Firms in a given industry are all on the same production function and select their techniques, again, with reference to the relative factor price ratio, shifting costlessly along the function as this ratio changes. To the extent that technological lags are admitted, developing countries are assumed to receive all relevant improvements from developed country innovators: there is no problem in assimilating the transferred technology in the developing country; there are no adaptations required, since alternatives are available for all factor prices; all firms remain equally efficient; firm-specific learning or technical effort are unnecessary and irrelevant; and so on [53].

These traditional approaches to technology also assume that innovation (movements of the production function rather than along it) is a completely distinct activity from gaining mastery of technology or adapting it to different conditions (because the only admissible differences between countries in theory are capital/labour ratios, adaptations are necessarily restricted to movements along the function). Innovative activity is an investment in something unrelated to production. In theoretical modelling, such investment is guided by a known innovation possibility frontier, with marginal returns equalized with other returns [52]. The model assumes that major innovations all occur in the advanced industrialized countries; developing countries select and costlessly apply those innovations that are useful or appropriate. As the general level of capital accumulation (and skills) rises, more capital-intensive (or complex) technologies become economic - these are also bought from the international technology shelf.

The general thrust of conventional approaches is to minimize not just the role of technological activity in developing countries, but also the need for policies to support, protect, and induce such activity [62]. What are now termed "neoclassical approaches" to development (associated with Balassa, Krueger, and others) tend to confine themselves to prescriptions like "get prices right," "reduce or eliminate protection," or "free international flows of capital and technology," and cut back on government intervention in industrial activity. Where more moderate neoclassicals admit the need for interventions in industry, they favour neutral (or "functional") rather than selective interventions (i.e. those that support the functioning of markets, like education or R&D, rather than those that promote some industries or technologies over others). These approaches disregard the peculiar nature and costs of technological learning in specific activities, the externalities it generates, and the complementarities it enjoys, which may lead to market failures and may call for a more selective approach to policy than conventional theory admits [47]. Yet selective interventions can be justified within the neoclassical framework if such sources of market failure are taken into account.

In contrast to the analyses just mentioned, a number of "unconventional" approaches to the issues of technology in developing countries have appeared in the past decade or so. These have assigned a central role to indigenous technological effort in mastering new technologies, adapting them to local conditions, improving upon them, diffusing them within the economy, and exploiting them overseas by manufactured export growth and diversification, and by exporting technologies themselves. They can be framed in neoclassical terms but their emphasis is often on reasons why markets are not efficient. This chapter provides a brief review of these approaches. It draws out the industrial policy implications that arise from the specific characteristics of technological development and illustrates their relevance with reference to the experience of the newly industrializing countries (NICs) of East Asia and other, less spectacularly successful, countries.

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