1 Innovation, R&D Investment and Productivity in Colombia Bogotá, october 15th 2008
2 General Overview Summary Background and Issues Research Questions Description of the data to be used in the study and data availability Survey and questionnaires Case Studies Plan of Analysis for Part I: Econometric explorations at the firm level Plan of Analysis for Part II: (Case Studies) Research Team Economic Proposal Appendixes...21
3 Innovation, R&D Investment and Productivity in Colombia A Proposal by UNIVERSIDAD DE LOS ANDES SCHOOL OF MANAGEMENT General Overview UNIVERSIDAD DE LOS ANDES Mission The University is an autonomous and independent institution which fosters pluralism, diversity, dialogue, debate, criticism, tolerance and respect for ideas, beliefs and values of its members. Also, it seeks academic excellence, and offers its students a critical and ethical formation designed to strengthen their awareness of their social and civic responsibilities, and their commitment to the analysis of the problems of their country, and the quest for solutions. For this purpose, Los Andes develops and implements innovative methods in teaching and research, designed to make students the main agent of their own formation, and to solve problems presented to them with creativity and responsibility. Further, as part of its encouragement of Integral Education, the University provides an interdisciplinary environment with all the flexibility required for the articulation of the arts, the sciences, the humanities and technology. Los Andes seeks to foster the formation of honest, responsible and creative professionals, who will achieve the highest standards in their disciplines and contribute to the cultural and economic development of the country. ACCREDITATION Uniandes, in accordance with the principles of quality and innovation, has been following the Integral Development Program (PDI) in recent years with clear objectives, goals and indicators which have allowed the University to adequately direct its efforts to obtain the best results in its quest to be an excellent research University. This has made Uniandes the only private university in the country to have received Institutional Accreditation, awarded by the National Ministry of Education in June of 2005, for nine years. In addition, all of the undergraduate programs are accredited; the postgraduate programs are not accredited yet due to the fact that the National Government doesn t have this accreditation available. Furthermore, Los Andes has received international accreditation such as that given to the Engineering School in 1992 and 1996 by the Accreditation Board of Engineering and those given to the Management School and the MBA program which were awarded by the European Foundation for Management Development (EQUIIS) and the Association of MBA (AMBA), respectively. RANKINGS The Universidad de los Andes was included among the top 500 universities worldwide in a classification done by Times Higher Education QS of London and which took some 25,000 universities into account. Los Andes was the only Colombian University included and is among a
4 group of 15 Latin American universities classified in the ranking along side 4 Argentine universities, 4 Brazilian, 2 Chilean, 2 Mexican, 1 Peruvian and 1 Uruguayan. Additionally, in a ranking done in 2007 by American Economics, the MBA of the Universidad de los Andes took the 7th place of 48 programs evaluated at different Schools of Business Administration in Latin America. The School of Management Founded in 1972 Universidad de Los Andes School of Management (UASM, Bogotá, Colombia) is one of the leading business schools in Latin America. We are committed to develop first rate research, teaching and consulting for private and public organizations in Colombia and Latin America. The fields of Competitiveness and Innovation are a priority for the School. From this perspective, we present a country proposal for the project Innovation, R&D Investment and Productivity in Latin American & Caribbean firms, responding to the call for proposals issued by the Inter American Development Bank. The UASM is uniquely qualified for the country study of Colombia. The School leads in the internationalization of academic institutions in the field of management. UASM was ranked 5th overall in the region by the Chilean business magazine América Economía in 2008 (while it occupied the 13th position only three years ago). The leading accreditation agencies for management schools in the world (EQUIS and AMBA, from Europe, and AACSB, from the United States) have recognized the quality of research and teaching at the UASM. The School is presently accredited with EQUIS and AMBA, and is advancing to obtain the AACSB accreditation (see the Appendix for more information on Universidad de Los Andes and UASM). UASM has put together a highly qualified team for this project, combining the following distinctive features: i) We put at the service of the project the extensive experience and the knowledge we have gained in supporting the advancement of industrial clusters in Colombia, as well as in giving practical consulting advice to domestic firms; ii) We have a leading research group in the field of innovation. The UASM Research Group on Public Management (Classified by Colciencias, the national agency for the advancement of the sciences, in Category A, the top level) hosts the Innovation Studies Seminar since 2003, is in charge of the Seminar on Innovation in Developing Countries of our Ph.D. program, and has produced research publications based on firm-level data. iii) We have substantial experience and hard-gained access to private firms all over the country, since we keep close ties with private businesses in Colombia and we maintain multiple points of contact with business leaders all year round. MISSION To contribute towards the well-rounded education and development of socially responsible citizens, embracing an international perspective, committed to their country and capable of creating, understanding and furthering the advancement organizations. To contribute, as an academic community interacting with organizations, to the construction, embodiment, teaching and dissemination of management knowledge for society s development.
5 1. Summary We intend to develop the TOR proposed by IDB regarding the relationships between R&D investment, innovation and productivity in Colombian manufacture in two parts: a quantitative firm-level study and an in-depth comparative case-study of two industrial value chains. In the first part, the relationship between R&D investment and innovation, and between innovation and productivity, are subsequently analyzed. An econometric structural model integrates these two relationships. Data is obtained from the Second Innovation Survey on Development and Technological Innovation in Colombian Industry (EDT II), and from the Annual Manufacture Survey. As many of the firms in the Survey do show very low expenditures in R&D or innovations, the analysis is headed to explain both the probability of initiation and the levels of R&D and of innovation results. The relationship between innovation and productivity is explored in different ways, trying to overcome statistical reserve limitations. In the second part, two value chains (Petrochemicals-Plastics and Cosmetics) are analyzed with the purpose of understanding how managerial decisions regarding R&D+I are made by Colombian firms in these value chains. The cases examine how specific factors become salient in the decision making processes regarding investment in R&D+I, with a special focus on the relationship between R&D+I and productivity, as it is evaluated by managers. The industrial structure and the governance patterns of the value chains are examined in order to formulate exploratory hypotheses that may contribute to the understanding of how decisions to invest in R&D+I may be affected by structure and governance patterns. 2. Background and Issues i. Objectives of the study Motivated by the slow growth of productivity and the potential of innovation to increase productivity indicators, IDB-RES are calling for proposals to study this relationship and the determinants of R&D investment and of innovation output in Latin American and Caribbean countries. According to the TOR, country studies called for have three main objectives: - To establish whether private investment in R&D+I has an impact on productivity growth in the region, the extent and characteristics of that impact (by type of firm, by sector, by type of investment), and how and why such impacts are taking place; - To produce a thorough characterization of the innovative behavior of firms in selected Latin American countries, as portrayed in the national innovation surveys available, or other relevant sources; - To establish the main determinants of innovation behavior at the firm level, following a consistent methodology and a comparable analytical framework.
6 Pursuing these objectives, and following the general terms for the research drafted by RES - IDB, this country-study proposal on R&D investment, innovation and productivity in Colombia has two parts: 1. Microeconomic analysis of innovative behavior in firms and linkages to productivity 2. Case study of two innovative value chains in Colombia: Petrochemicals- Plastics and the Cosmetics value chains. The methodology proposed for the first part emphasizes the importance of firm level studies, following the work of Crepon, Duguet and Mairesse (1998) 1. Besides the studies cited in the terms of reference, David Teece s classical work (1986) 2 on the distribution of the benefits of innovation and its implications for collaboration and licensing is worth mentioning. Teece demonstrates that when imitation is easy, markets do not work well, and the profits from innovation may accrue to the owners of certain complementary assets (Teece, 1986). Brusoni, Cefis and Orsenigo (2006) 3 consider that evidence on the relationship between between innovation and performance remains scattered. They identify a problem of time lag and of permanence of benefits in the empirical exploration of this relationship. They identify a problem of level of analysis, while showing the advantages of firm-level studies, and confirm the necessity of firm complementary competences as a condition to take advantage of innovation. These results are relevant in the analysis of the relationship between innovation and productivity. The research team has used methodologies which are similar to those employed by 3. Research Questions b. Part I: Econometric explorations at the firm level In the case of developing countries, should one expect a weaker relationship between innovation and productivity? Even in the more successful explorations that the literature suggests for studies at the firm level the issue may be raised. Uncertainty about the appropriation of the benefits of innovation and asymmetric 1 Crepon, Bruno, Emmanuel Duguet and Jacques Mairesse (1998) Research, Innovation, and Productivity: An Econometric Analysis at the Firm Level, Economics of Innovation and New Technology, 7:2, Teece, David J. (1986). Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy, Research Policy, Vol.15: Brusoni, Stefano; Cefis, Elena; Orsenigo, Luigi. (2006). Innovate or Die? A Critical Review of the Literature on Innovation and Performance, Working paper 179, Centro di Ricerca sui Processi di Innovazione e Internazionalizzazione, Università Commerciale Luigi Bocconi.
7 information are presumably higher in developing countries. How should this disparity, if it exists, be interpreted? Are the determinants of innovation output the same that have been found in studies of innovation in industrialized countries? In the project Networks, Human Capital and Innovation in Colombian Industry ( ), presently being developed, our team has explored some models similar to those proposed by the CDM study, and has found that the relationship between investment in R&D and four indicators of innovation output is robust. While the influence of sector and size is important in determining innovation performance, are networks and the structure of human resources in the firm determinants of innovation output? Is the presence of foreign capital a determinant of the innovative behavior of firms? What types of innovation (product, process, managerial) are more influenced by these variables? One preliminary observation is that, while 71 % of the 6,670 firms in the EDT II Survey report some investment in R&D, only less than 5% of the firms report investments larger than 1,000 US dollars. Is it possible to predict the probability that a firm engages in significant amounts of R&D investment? Can any of these variables be considered as a policy instrument? c. Part II: Innovation in value chains (Case Studies) The list of items on page 4 of the Call for Research proposals outlines a wide number of issues that are useful to characterize the behavior of a value chain. We understand that the key research question relates to the relationship between R&D+I and productivity and that the items in page 4 are useful guides regarding the context in which this decision is made. The questions on page 4 of the Call for Research Proposals (IARDB, 2008) will be addressed by examining five basic issues for two value chains in Colombia (Petrochemical-Plastics and Cosmetics). The case studies will focus on how these major issues affect decisions to invest in R&D+I. In particular, the cases will study how specific factors become salient in the process that leads to a managerial decision to invest (or not to invest) in R&I+D, including how productivity is specifically considered in this decision by managers. The key issues that will be examined in each case are:. Characterization of the Value Chain. Value Chain mapping and description of its basic structure and industrial organization, both from a domestic and an international perspective.. Governance: Identification of the mechanisms that determine power asymmetry in favor of specific actors in the Value Chain and how governance issues affect decisions to invest in R&D+I.
8 . Competitive dynamics: Analysis of how the industrial organization of the Value Chain and the intensity of competition at each link affect decisions to invest in R&D+I.. Associative behaviors: The presence of associative activities among firms at different links of the value chain may have significant effects upon decisions to invest in R&D+I.. Institutional environment: Trade, environmental, labor and other type of regulations (both domestic and international) may have effects upon decisions to invest in R&D+I.. Innovation and R&D+I: Although the connections between R&D+I and all the previous issues will be explored in each of the questions, some topics are quite specific and separate of the previously named influences, and deserve a separate treatment. 4. Description of the data to be used in the study and data availability d. Part I: Econometric explorations at the firm level Secondary sources The quantitative analysis of the first part will be based on the Second Innovation Survey on Development and Technological Innovation in Colombian Industry (EDT II) 4. The survey was conducted in 2003 and 2004, and covers 6,702 industrial establishments. It allows the analysis of innovation output, innovation effort and innovation determinants at the firm level. Size is observable only by the number of employees. No indicator allowing the estimation of productivity indicators is included in this survey. A previous survey gathered information in , for a sample of 885 industrial establishments. Dynamic analyses using these two surveys are not possible at the firm level, because the identification of firms is limited by statistical reserve. The information on innovation and technology coming from either one of these two surveys can be crossanalyzed, at the three-digit CIIU level, with the financial and employment information of the Annual Manufacturing Survey from DANE. Productivity indicators at the three-digit CIIU level were calculated by the project Evolución de la Rentabilidad y la Productividad en la Industria Manufacturera Colombiana (Eslava, Haltiwanger, Kugler and Kugler, 2007) 6 several production value indicators are included in this database, as well as employment indicators. Approximate results on productivity could be produced at 4 DANE (2005). INNOVACIÓN Y DESARROLLO TECNOLÓGICO EN LA INDUSTRIA MANUFACTURERA COLOMBIANA DANE (1997). Encuesta sobre Desarrollo Tecnológico en el Establecimiento Industrial Colombiano See for example: Eslava, M., J. Haltiwanger, A. Kugler and M. Kugler (2007). Trade Reforms and Market Selection: Evidence from Manufacturing Plants in Colombia, mimeo, 2007.
9 the level of three-digit CIIU, crossing the variables of EDT II and Annual Manufacturing Survey, on the assumption that the surveyed firms are the same 7. Relevant variables available from the Eslava, Haltiwanger, Kugler and Kugler (2007) project are: Real output, number of employees, total employment hours, Total factor productivity, Fixed assets and Capital. The Annual Manufacturing Survey provides information on: Total Assets, Sales, Net Investment and Value Added. e. Part II: Innovation in value chains (Case Studies) Descriptive quantitative data will be used to provide a basic framework to understand the dynamics of the selected value chains in Colombia (Petrochemical-Plastics and Cosmetics). Detailed maps of the manufacturing value chains in Colombia, as well as data on the performance of these value chains, have been assembled and are available at the Departamento Nacional de Planeación, an agency of the government of Colombia, using data from the Manufacturing Survey and the Import and Export database that is managed by the Departamento Nacional de Estadística of Colombia (DANE). Secondary sources will also be used extensively. Interviews The research will include extensive interviews with 12 to 15 executives, leaders of trade associations and experts who are knowledgeable of the decision making processes and routines in the selected value chains 5. Survey and questionnaires Case Studies This section presents a preliminary version of the guide that will be used in the interviews with industry leaders in the value chains (both the phrasing and the content of the questions are subject to revisions at this point). The topics are organized in five major sections. Characterization of the Value Chain. This includes the mapping of the Value Chain and the description of its basic structure and industrial organization, both from a domestic and an international perspective. A map of each value chain and basic descriptive data are provided. Data from the official manufacturing survey (available at DANE) and financial statements (available at the Superintendencia de Sociedades) will be used to create concentration indexes at the different stages of the value chains and to construct diagrams of profit pools for both value chains (as precisely as possible, for in some sectors it is not possible to disaggregate the information to the required ISIC four-digit level). Some of the questions in this part of the interview are: 7 The Second Innovation Survey on Development and Technological Innovation in Colombian Industry, the Annual Manufacturing Survey, and the project Evolución de la rentabilidad y la productividad en la Industria Manufacturera Colombiana both provide information for
10 . Please provide some basic information about your company (name, activity, date of creation of the company, domestic vs. foreign investment, number of employees, percentage of production exported, number of patents used, R&D expenditures as a percentage of total expenditures). Please describe the specific activity your company is engaged in.. Please provide a brief description of the Top Management Team (education and professional trajectory). Governance The mechanisms that determine power asymmetry in favor of specific actors in each value chain are identified and the impact of governance issues upon managerial decisions to invest in R&D+I is specified. Some of the questions in this part of the interview are:. Please describe the value chain in which your firm is active and specify the position that your firm occupies within it.. Please describe what you would consider are the essential transactions that define this value chain. How can you describe these transactions in terms of their degree of complexity?. Please qualify the present state of capabilities of your supply base. Do you consider that this level of capabilities is adequate for Colombia? How does it compare to the state of capabilities development in the same industries in other countries in Latin America? How does it compare to the state of capabilities in the countries of origin of your competitors?. Please identify which are, in your opinion, the most influential actors in the value chain (explain the reasons). Do some decisions by these actors constrain or effectively support your ability to act within the value chain?. Are your technology sourcing strategies affected in any way by decisions made by the most influential actors in the value chain?. Do you believe that investment in R&D+I is important in your industry? Do you see a relationship between investment in R&D+I and productivity in your industry? Do you see a relationship between investment in R&D+I and profits in your industry? Is this relationship affected by the actions of influential actors in the value chain? Competitive dynamics The industrial organization of the Value Chain and the intensity of competition at each link are examined in order to identify affect decisions to invest in R&D+I. Some of the questions in this part of the interview are:
11 . Where is it easier to make profits: at your link in the value chain, at the previous link (your supplier) or at the following link (your customer)?. How high would you say are the barriers for new actors who would want to entry your industrial activity at the present time?. Do substitutes to your product exist, from the perspective of your customer? How do you think the situation regarding this point will evolve over the next three to five years?. How would you qualify the stance of your competitors regarding their aggressiveness in the competition? Why? Through which kinds of competitive actions do your competitors express their aggressiveness in the competition (price cuts, introduction of new products, copying your moves, fighting for your market spaces )?. To which extent are competitive advantages in your sectors derived from the availability of natural resources? How do you think this factor affects the state of investment of R&D+I?. Has your decision to invest in R&D+I been related to the level of aggressiveness of your competitors? Would you change your decisions regarding investing in R&D+I if your competitors changed this stance? Associative behaviors The presence of associative activities among firms at different links of the value chain may change the effects that could be expected if the basic forces were left undisturbed. This, in turn, may affect the results of R&D+I investments. Some of the questions in this part of the interview are:. Are there scenarios in your value chain or your industrial sector for associative activities between firms? At the same stage of the value chain? At different stages of the value chain?. If there are such associative activities, what do you think is the limit of their scope of action? If such activities exist today but you do not participate, what is the reason? If such activities existed in the past but are no longer present, what do you think are the explanations for their disappearance?. To what extent would you get involved in such activities? Which objectives would move you to participate actively in such activities? What kinds of guarantees do you need for participating?. What is the importance of informal networks on R&D+I activities in your value chain?
12 . Do you see a space for associative activities focused on R&D+I with other firms in your value chain? Please explain. Institutional Environment Trade, environmental, labor and other type of regulations (both domestic and international) may have effects upon decisions to invest in R&D+I. Some of the questions in this part of the interview are:. What do you think of the present state of trade and tariff regulations in Colombia? What is your opinion about the Free Trade Agreement between Colombia and the United States? Have you taken any action regarding the issues that worry you on the topic of trade and tariff regulations?. What do you think of the present state of environmental regulations in Colombia? Have you taken any action regarding the issues that worry you regarding this topic?. What do you think of the present state of labor regulations in Colombia? Have you taken any action regarding the issues that worry you regarding this topic?. What do you think of the present state of intellectual property regulations in Colombia? Have you taken any action regarding the issues that worry you regarding this topic?. How would you qualify the offer of financial services in Colombia for your sector and your value chain?. How do you qualify the activity of government agencies regarding your sector? Is it effective? Where is improvement needed? Can you provide suggestions? Innovation and R&D+I Some of the questions in this part of the interview are:. What kind of expenses related to innovation is your company engaged in? How would you describe your form s activity in innovation, including items such as R&D+I, use of patents, connections for knowledge creation and diffusion with universities, etc.?. How does your firm engage in the activities proposed by the national innovation system? How do you think other firms in your value chain get involved in activities in this system? Would you say that your stance regarding this topic is different from what the majority of the firms do, or is it similar?. To what extent is your firm affected by the dynamics of the technological frontier at the world and country level? Does your value chain experience a rapid expansion in the technological frontier when such an expansion happens in the leading countries in your sector in the world? Which factors do you think affect the strength of this connection?. How difficult do you think it is for firms like yours to appropriate the benefits of innovation?
13 6. Plan of Analysis for Part I: Econometric explorations at the firm level i. Structure of the quantitative analysis Following the general lines of the Crepon, Duguet and Mairesse (1998) model, this component of the study is organized in four parts: 1. Analysis of the determinants of investment on R&D at the firm level. 2. Analysis of the determinants of five types of innovation output at the firm level. 3. Analysis of the relationship between innovation output and productivity of firms, including a set of environmental variables. 4. Integration of the previous analyses in one structured model with simultaneous equations. ii. Analysis of the determinants of investment on R&D at the firm level Besides the standard determinants which are available in EDT II (size by number of employees, three digit sector, percentage of foreign capital participation), other variables may be included in the exploration: external network links with government, private financial institutions, other firms and universities and research centers). Based on EDT II, indicators for these variables have been constructed by this team for the project on Networks, Human Capital and Innovation in Colombian Industry ( ). iii. Analysis of the determinants of three types of innovation output at the firm level. Innovation in firms generally refers to new products and processes. Implementation of new or improved management practices, and new or improved commercialization forms have traditionally been included in innovation studies since Schumpeter. Members of the proposing team have built indicators of these three types of innovation, for the project on Networks, Human Capital and Innovation in Colombian Industry, which can be readily used for this module. Also, it is possible to compare indicators of innovation output with indicators of innovation projects, obtaining an approximation to the problem of success in innovation initiatives at the firm level. Besides investment in R&D, there are important determinants of innovation performance. We have developed different indicators of human capital and human capital composition that have shown to have an impact on this relationship. Also, we have constructed four different indicators of innovation-related networking with the data available in EDT II. The explorations so far have shown a significant relationship between the intensity of networking and innovation output. It has also clarified the role of important determinants of the probability of a firm to become innovative. An econometric problem has to be specifically addressed at this stage, since indicators of innovation output are count variables, and in any regression involving them the number of
14 firms with zero output is large 8. The method proposed is using Poisson regressions. The high number of zeroes may be overcome using these regressions, to the advantage of the research proposed: one can separate the impact of any of the determinants in two parts: The marginal effect of the determinant on innovation output, for firms showing innovation outputs. The effect of the determinant on the probability that the firm is innovative (has a non-zero innovation output). This methodology is a variant of the CDM model. As to using patents as a measure of innovation output, one should make a careful interpretation in the case of a developing country, where the number of patenting firms is very small. One could, alternatively, consider innovation behavior as different from patenting behavior, and attempt to explain patenting, using innovation as a determinant. In a recent study (Marin, Laureiro, Forero, 2007), we have shown that SMEs owning patents display less efforts and obtain relatively less innovation results than firms operating in a more competitive setting. iv. Analysis of the relationship between innovation output and productivity of firms, including a set of environmental variables. This relationship can be analyzed in three different ways: 1. A three-digit sector analysis of the relationship between innovation output and productivity, using EDT II and Annual Manufacturing Survey databases. 2. We have requested the authorization of DANE, the Colombian Government Statistical Agency, to cross variables from the Annual Manufacturing Survey with the EDT II survey, a firm level analysis could be developed, with some productivity variables, following more closely the methodology proposed by CDM (1998). v. An approximation to this relationship for small and medium enterprises could be obtained using the 246-firm sample of Marin, Laureiro and Forero (2007) 9, which has different indicators of output and performance. Several productivity indicators could be derived. This survey however was limited to SMEs. vi. Econometric models 1. Following the methodology proposed by CDM (1998), we will perform a simultaneous estimation of the determinants of the probability to invest, and an estimation of the amount to invest, given that investment is nonzero. 2. Innovation output will be defined as a count-data variable. A Poisson regression with two parts may be used to simultaneously estimate marginal effect of different variables on the probability of having at least one innovation result, and on the number of innovation results, when firms have at least one such innovation result. In this two-part analysis, 8 R. Winkelmann (2008). Econometric Analysis of Count Data. Fifth Edition. Springer Berlin. 9 Alejandra Marín, Daniella Laureiro y Clemente Forero Pineda (2007). Innovation patterns and intellectual property in SMEs of a developing country. Galeras de Administración, Junio
15 our explorations for the Networks, Human Capital and Innovation project show that financing innovation through external sources has an incidence on the level of innovation output; nonetheless, its impact is not significant on the probability that a firm has at least one innovation. Five different indicators of innovation output have been built for the above-mentioned project, referring to products, processes, management methods, existence or sums of these variables. Also a distinction may be made between products new to the world, new to the country and simple imitations. 3. The relationship between innovation and productivity will be explored following the three methods described above. 4. As suggested by the CDM study (1998), a simultaneous run of these regressions is expected to stabilize the estimations. 7. Plan of Analysis for Part II: (Case Studies) Value Chains, Governance and Innovation The construct of Value Chains has been used to understand the complete set of activities, or links, that are required for a product or service to arrive to the final consumers, starting from raw materials and going through the different stages of production. For Value Chains to exist, a pattern of repetitive interactions between links is necessary (Kaplinsky and Morris, 2001) 10 Value Chains are particularly useful to understand systemic determinants of firm competitiveness and profitability. It has been observed empirically how value chains tend to have specific links where rents are concentrated. In general, this concentration of rents vary directly with the amount of power that firms in specific links exert along the value chain. The more powerful links influence key decisions regarding the interfirm division of labor, the development of capabilities, capital intensity, standardization and innovation across the rest of the links in the value chain. The pattern of power asymmetry and the mechanisms used to exert this power constitute the governance of the value chain (Gereffi, 1994) 11. It is possible to identify five value chain governance types, depending on the complexity of transactions, the ability to codify transactions and the capabilities of the available supplier base (Gereffi, Humphrey & Sturgeon, 2005; see Appendix 1 for the taxonomy of governance types that these authors define based on these factors) Kaplinsky, R., and Morris, M. (2001). A Handbook of Value Chain Research. Report prepared for IDRC. 11 Gereffi, G. (1994). The Organization of Buyer-Driven Global Commodity Chains: How U.S. Retailers Shape Overseas Production Networks, in G. Gereffi and M Korzeniewicz (eds.) Commodity Chains and Global Capitalism. London: Praeger. 12 Gereffi,G.; Humphrey, J. and Sturgeon, T. (2005) The Governance of Global Value Chains. Review of International Political Economy. Volume 12, Number 1, pp (27).
16 Our research will first characterize the Petrochemicals-Plastics and the Cosmetics value chains in Colombia in terms of the taxonomy proposed by Gereffi, Humphrey & Strugeon (2005), and will seek to identify if investments in R&D+I, and the perception of managers regarding the productivity of such investments, keep a systematic relationship with the governance typology created by these authors. We expect that more complex and less codifiable transactions will be related to higher investments in R&D+I, and that a more capable supplier base will be related to higher investments in R&D+I. We also expect that the complexity of transactions will be higher and the ability to codify transactions will be lower in the Cosmetics value chain, given the greater number of participant firms, the wider product portafolio, the larger number of market segments, the much faster product cycle and the hedonic character of the products. We have no a priori hypothesis regarding which of these two value chains has the more capable supplier base in Colombia. The Case Study Methodology The case study methodology is appropriate in formulating explanations for why and how specific phenomena take place (as opposed to questions such as how much or how often, or questions related to the relative importance of different constructs). Case studies allow to explore in depth the characteristics and relevance of the context in which the phenomena of interest occur (Eisenhardt & Grabner, 2007) 13. The case study methodology is used in this research to identify factors that are influential in the managerial decision to invest in R&D+I. In particular, we seek to identify how specific factors that are salient to decision makers may determine the amount, quality and duration of R&D+ I activities in relation to productivity performance in selected value chains in the Colombian economy. The case study methodology is particularly useful to tackle the problem of identifying how different actors see themselves within the context of the value chain and make decisions following their perception of the causality relations between critical factors. In particular, the decision to invest in R&D+I is determined by the perceived causality between R&D+I and productivity, in the context of the value chains where their activities take place. The list of items on page 4 of the Call for Research proposals outilines a wide number of issues that are useful to characterize the behavior of a value chain. We understand that the key research question relates to the relationship between R&D+I and productivity and that the items in page 4 are useful guides regarding the context in which this decision is made. Instruments 13 Eisenhardt, K., Graebner, M. (2007) Theory Building from Cases: Opportunities and Challenges. Academy of Management Journal. Volume 50, Number 1, pp
17 The study will perform a series of interviews and will synthesize available descriptive data on the selected value chains in order to answer the research questions. The specific data that will be used and the interviews that will be obtained have been described above. Selected industries The research will be performed for two value chains: Petrochemicals-Plastics, and Cosmetics (see Appendix 2 for a graphical mapping of these value chains). The Petrochemicals-Plastics value chain generated close to US$2,9 billion in production (this is value of production at the factory) in 2005, the last year for which this figure has been updated by the Departamento Nacional de Planeación. The chain generated exports for US$1,3 billion and imports for US$2,9 billion in The creation of this value chain in the country happened at the height of the era of government involvement in the development of capital intensive, strategic sectors in Colombia, and was led by the Empresa Colombiana de Petróleos (Ecopetrol) in The value chain is incomplete in Colombia and there are important missing links, such as the absence of local production of inputs such as aromatics and olefins. Trade tariff rates for the products in the value chain tend to cluster around 15%. Effective rates tend to be above these nominal rates. Production is concentrated in a small number of firms. The Cosmetics value chain shows a relatively larger number of firms and a wide variety of products. The Cosmetics value chain generated close to US$1,5 billion in production (this is value of production at the factory) in 2005, the last year for which this figure has been updated by the Departamento Nacional de Planeación. The chain generated exports for US$398 million and imports for US$384 million in The main players in the industry comprise a varied mix of multinational (both from developed and emerging countries), and domestic countries. There is a dense segmentation with numerous market niches and product cycles at different income levels. The analysis will be complemented by considering similarities and differences between the two value chains and the impact of these upon the focal issue. Regarding similarities, both of the selected value chains require strong chemical-processing capabilities and are important in Colombia because of their volume; their impact upon other industries; the fact that both take advantage of local natural resources (although there are also significant restrictions in both cases to the full use of these natural resources, often related to missing links in the value chains); the presence of significant domestic investment as well as international investment; the completion of acquisitions of important Colombian firms over the last few years; the growing importance of environmental concerns in the business and the relatively high intensity of R&D+I activities in comparison to other manufacturing sectors in Colombia. As for dissimilarities, the minimum efficient plant scales, the number of players within each industry and the intensity of domestic competition, the pressure from international competition, the scope of markets and the trajectory of associative behavior are quite different in
18 petrochemicals-plastics and cosmetics. The petrochemical value chain is known because of the success of a trade association (Acoplasticos), which has produced significant advances in the creation and diffusion of knowledge in the industry. There are no associative efforts of similar scale in the cosmetics value chain; although in recent times some associative initiatives are beginning to take place (of lesser size and involving smaller percentages of firms in the value chain than Acoplasticos does). On the other hand, the cosmetics sector has seen recent developments in domestic companies that have explored natural, local components to develop new products oriented to the external markets, while the development of innovative products for external markets in the petrochemical-plastics vale chain has been relatively limited. The case studies will focus on how decisions to invest in R&D+I are influenced by the value chain and, in turn, exert influence upon the value chain. In particular, the cases will study how specific factors become salient in the process that leads to a managerial decision to invest (or not to invest) in R&I+D, including how productivity is specifically considered in this decision by managers. 8. Research Team f. EXPERIENCE OF UNIANDES SCHOOL OF MANAGEMENT IN THE ANALYSIS OF VALUE CHAINS AND INNOVATION Universidad de los Andes School of Management (UASM) has a unique experience in the analysis of value chains and clusters in Colombia, and has developed a research line on innovation. The UASM Research Group on Public Management (Classified by Colciencias in Category A) hosts the Innovation Studies Seminar since 2003, is in charge of the Seminar on Innovation in Developing Countries of the Ph.D. program, and has produced research publications based on firm-level data. The Group participated in a Survey of SMEs in six Colombian cities, focused on intellectual property and innovation. In January 2008, it started the research project Networks, Human Capital and Innovation ( ), where the influence of external networks, the structure of human capital and other variables on innovation performance is analyzed at the firm level. The Centro de Estrategia y Competitividad (CEC), a research and consulting think-tank of UASM, has developed a long standing practice in topics related to competitiveness and cluster analysis, regional economics, regulation, institutional analysis and public affairs, capital markets, business strategy, information and telecommunications technologies, logistics, environmental affairs and corporate social responsibility. Some of the research and consulting works performed by the CEC, that are important antecedents for this project in terms of the experience acquired in the analysis of clusters and value chains, are the following (a more complete list of research and consulting projects performed by the CEC is included in Appendix 3):
19 Year (ongoing project) Client organization Inter American Development Bank (IADB) Research Project Support for Cluster Competitiveness The CEC was chosen as the entity that executes an IADB program that is designed to increase the competitiveness of business clusters in Colombia, promote productive linkages and create business networks and partnership work plans. The CEC has implemented a mechanism to identify and lend technical and financial support to eight business clusters in Colombia. These clusters will benefit by combining the resources of individual firms to create economies of scale and improving their access to business development services, which should lead to greater competitiveness and efficiency. The program started in 2004 and is currently advancing toward the designed objectives United Nations Development Program (UNDP) As part of this process, the CEC designed a methodology for the selection of the clusters that would participate in the initiative, coordinated the selection, conducted instructional workshops with leaders from the firms and the promoting entities that are supporting the development in the clusters in the regions, provided consulting support to adjust the plans developed by the clusters, and has implemented a monitoring system that overviews the implementation of these activities, identifying best practices and making them available to other participants in the project. Development of Connectivity in Strategic Sectors in Colombia within a Globalization Context. The CEC finished a key research project for the UNPD, which identified 18 value chains where the implementation and development of Information and Telecommunications Technologies can be expected to have a high impact upon economic growth and to provide demonstration effects that would motivate other sectors and value chains to invest in IT in Colombia (Centro de Estrategia y Competitividad, 2007). The CEC performed a survey and organized workshops with key actors in the selected value chains, in order to obtain the information needed to complete the analysis. This research identified policy options for stimulating the use and reducing barriers to the appropriation of Information and Telecommunication Technologies in these selected value chains. The project provided the CEC with a wealth of information and valuable contacts in the firms and the non profit organizations that work for the development of these industrial activities Barrancabermeja Chamber of Commerce Development of a Petroleum Cluster The CEC provided academic and consulting support for the development of the Petroleum cluster in Barrancabermeja, a key region in Colombia where the Ecopetrol oil refinery is located. The project gave support to institutions in the region who are committed to the
20 Year Client organization 2004 Inter American Development Bank (IADB) Research Project development of this cluster. Promotion of associations for firms in conglomerates The CEC designed a program for support of conglomerates, with efficient and transparent procedures to promote associative work among firms. 9. Economic Proposal Concepto FIRST PART Documenting productivity differences in the overall economy SECOND PART Case study Profesional fee USD 20,402 USD 16,363 Direct expenses USD 1,098 USD 509 Databases USD 3,000 - Trips - USD 3,813 Taxes USD 500 USD 315 TOTAL USD 25,000 USD 21,000 Uniandes Contribution In Kind USD 10, USD 8, Note: According to Article 92 of Law 30 of 1992, higher education institutions, high schools and no formal education entities are not responsible for VAT for education, advisory or research services rendered. Therefore, in case this proposal is accepted, it will not have VAT charges.
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