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Jorge Britto – UFF and RedeSist

Brazilian software industry: a general view of its structure, specialization and competence building processes. Jorge Britto – UFF and RedeSist. “Comparative Study of the National Innovation Systems of Brazil, Russia, India, China and South Africa ”

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Jorge Britto – UFF and RedeSist

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  1. Brazilian software industry: a general view of its structure, specialization and competence building processes Jorge Britto – UFF and RedeSist “Comparative Study of the National Innovation Systems of Brazil, Russia, India, China and South Africa” April, 2007 Hotel Glória, Rio de Janeiro, Brazil

  2. Main Topics ....and Some Myths • 1- Technological regime and international trends • 2 - Historical perspective of policies issues and institutional learning in Brazilian software. • 3 - The heterogeneity of Brazilian software industry: main figures • Dimension of software markets • Characteristics of labor market • Characteristics of industrial structure • Regional Distribution of software activities • 4 - Export orientation and outsourcing: the perspectives • 5 - Sectoral system of innovation • 6 - Software Specialization and new opportunities • 7 - Concluding remarks and policy issues

  3. Characteristics of technological regime and innovation in software • Driving force of the structural changes generated ICT paradigm • Pervasive impacts of innovations generated to virtually all economic activities • Decisive role to improve intra and inter organizational learning and industrial productivity • Critical factor: intangible assets and knowledge embodied in qualified and creative people • Structural heterogeneity: variety of competitiveness determinants in each segment of software industry • Innovative dynamics varies according to the characteristics of each segment, being not necessarily R&D intensive. • Increase of internalization through outsourcing practices: emergence of new players in international markets through successive waves of entry.

  4. Market for software and IT for selected countries (2003) - US$ millions Canada, India and Ireland are the main export markets China and Brazil have large and diversified internal markets Canada China Brazil Singapore Argentina Poland Malaysia Czech Republic India Ireland South Africa México Russia Hungry Philippines Chile Domestic Exports Note: 1) Data sources providing supply market information for software and IT services are diverse with different definitions for what is included in software, hardware and IT services. This data does not include BPO figures. sources: www.nasscom.org, neoIT Mapping off-shore Markets (2004), EIU figures, web.ita.doc.gov/ITI/itiHome.nsf/ExportITReports?OpenForm, Slicing the Knowledge-Based Economy in Brasil, China and India: A Tale of 3 Software Industries (2003), A.T. Kearney analysis

  5. Emerging economy IT spending by segment, 2000-2005 - USD millions in current prices – OCDE Information Outlook 2007

  6. IT markets for BRICS countries Source: IDC – BSA White Paper: Expanding the frontiers of our digital future (2005)

  7. Software policy – the SOFTEX experience • The organization of software Brazilian industry is deeply articulated with the orientation of industrial policy to the IT sector as a whole. • SOFTEX-2000 was created in 19992 with the target of exporting US$ 2 billion in the year 2000 and of creating around 50,000 new skilled. The strategy was based on the establishment of local offices abroad (Beijing, Tokyo, Silicon Valley, Boston, etc.). Offices assisted interested firms in market studies, participating in major trade fairs (e.g. Comdex, Cebit, etc.). • In 1997, SOFTEX launched Prosoft, a pilot credit program for software firms in partnership with BNDES, with a budget of USD 35 million to run until December 2003, providing loans up to USD 2 million to software firms with gross revenues under USD 30 million. • SOFTEX moved into sponsoring incubators and regional software nuclei through the creation of 21 regional nuclei which were responsible for coordinating and assisting company activities that associate to this program, trying to take advantage of the potential of each region. • The main real reason for the failure of Softex export strategy was the absence of a client-led drive. The strategy does not have a focus in which segments and which markets could be properly exploited

  8. Software policy and institutional learning: the case of SOFTEX There are some evidences of changes in the main policy focus: • “New Brazilian Software and Services Industry Support Program” carried by SOFTEX and APEX is a medium term program of certification, utilizing the high degree of quality reached in some segments, such as: financial and banking, security, telecommunication, electronic business, enterprise management and public services automation. • Software and Services Integrated Sectorial Project (PSI-SW) created in 2004 focuses its activities where the Brazilian software is competitive (banks, telecoms, health, business management, government, security and Internet in general) and incentives companies export of five business models (outsourcing, semi-customized software, package software, ASP – Application Service Provider – and software for download). • Brazilian Software Process Improvement (MPS-BR) is an initiative oriented to the creation and dissemination of a Reference Model for the Software Process Improvement . The project involves a set of public and private agencies to create and improve a Process Reference Model (PRM) and a Process Assessment Model (PAM), compatible with CMMI, based on the reality of Brazilian firms.

  9. Localization of Softex Regional Nuclei

  10. Companies from the Software and Services Sector 2005 Source: ABES-IDC (2006)

  11. Main Brazilian Market Indicators - 2005 Source: ABES-IDC (2006)

  12. Brazilian software labour market

  13. Brazilian software labour market

  14. Comparison of salaries in IT industryThe annual salary of an graduated employee in Brazilian software industry was around USD 12.000 – 15.000, increasing with additional labor costs Annual salaries of IT manager (US$ - 2004) Annual salaries of a programer (US$ - 2004) India India Philippines Philippines Malaysia China Brazil Malaysia China Brazil Mexico Mexico Poland Poland Czech Republic Czech Republic Singapore Singapore Canada Canada Source: Economist Intelligence Unit, A.T. Kearney cost database,; Note: Amount paid includes salaries, bonus and benefits

  15. Industrial structure: general figures • multinational enterprises tend to reinforce their positions in the horizontal market, leaving for the Brazilian companies the vertical segment, as is the case of national banking software. • software firms often have various lines of business and simultaneously develop service and product activities, • majority of software companies were established from existing firms, part as a true “spin-off” of the mother company and the majority as independent companies created by employees of the mother company that spotted a new opportunity • limited number of university spin-offs, most of them oriented to segments where the previously market experience seems not to be indispensable. • Some strong government software firms, usually specialized in the manipulation of a high volume of data (SERPRO, as example). • between 2002 and 2004 the number of software firms between the largest of the Informatics sector decreased from 33 to only 20 firms. • total sales of the firms included in the list increase from US$ 1,28 billion in 2002 to US$ 1,68 billion in 2004. • Sales per firm included in the list also increased from US$ 38,9 million in 2002 to US$84 million in 2004

  16. Largest Software Firms in Brazil (2003-2004) – sales in US$ 1000

  17. Regional Distribution of Software Activities • software industry in Brazil is strongly spatial concentrated. The states of São Paulo, Rio de Janeiro and Minas Gerais, aggregated with the Federal District, are responsible for more than 87% sales revenues and for 70% of the jobs generated in the informatics activities. São Paulo alone is responsible for almost an half of firms and sales.

  18. Regional Distribution of Software Activities • The analysis develops an attempt to map the spatial distribution of some agglomerations of software firms. The methodology is based on data extracted from the RAIS – 2004. • Methodology tries to measure four elements: (1) the agglomeration of activities in the space; (2) labor and income distribution in two segments of software industry considered (package or custom made software); (3) the amount of salaries paid per year to software employees; (4) the relative specialization of the micro-region 30 agglomerations were identified - Main Trends: • Most of those agglomerations were located in the most developed areas of the country: eleven agglomerations were located in São Paulo state, comprising approximately 35,3% of the jobs. • There are strong differences between the patterns of software specialization to the different agglomerations selected. In seven micro-regions the specialization index is higher than three indicating a strong specialization in software activities. • There are also differences in the average size of firms in the agglomerations selected, stressing the fact that the exigencies of firms’ integration and consolidation can vary a lot from one region to another. • The analysis of the salaries paid by the firms in the agglomerations selected also points out strong differences between them. So, the general argument that the salaries paid in Brazilian software are relatively high might be qualified.

  19. Export Figures • in 2004 71 companies exported software products or services, generating an amount of approximately US$ 235 million of exports, from which US$ 110 million came directly from software exports and US$ 125 million from services and outsourcing. • sales of export firms reached approximately US$ 1,5 billion in the same year, with software exports corresponding to 15% of the amount . • twenty largest exporters were responsible for approximately 98% of the total value of software exportations. • Software become a priority in the new industrial policy announced by Lula´s government in 2004 with the definition of a target of US$ 2 billions of software exports to be reached in 2007 • largest markets for Brazilian exports in 2004 were Mexico (with US$ 78,3 million of exports, corresponding to 33,3% of the total) and USA (with US$ 48,1 million of exports, corresponding to 18,3% of the total. • 79% of Brazilian exporters are multinational companies that use Brazilian subsidiaries to attend international customers. • multinational intra-corporate transactions and of other exports that are hardly accounted by the Payments Balance: an amount of approximately 85% of Brazilian exports takes part of a “grey” market. • local firms, responsible for 21% of the amount of exports, tend to privilege the segments of industrial automation and integrated management in their exports. • They usually to use small offices abroad and customers´ connections as the main channels to access international markets.

  20. Export performance weaknesses of Brazilian exports: causes? • limited experience of companies and lack of a market-led focus • fragmented structure generates disincentives to cooperation • absence of an image that can be associated with Brazilian Software abroad. • Absence of a salary level difference for competing in the low value segment • lack of formal qualification to compete in high value segments. • tributary structure and absence of incentives for exportation. Opportunities to export growth: • growth of global outsourcing in 2004, the global outsourcing market of IT services reaches an amount of US$ 607 billions, with the perspective of getting a 6% annual growth until 2008. The offshore outsourcing was responsible for a share of US$ 18 billion of this market, facing a perspective of annual growth of 40% until 2008. • Brazil is relatively well classified as outsourcing alternative by specialized market monitors. • competences in applicative and software solutions to broader range of activities, (financial markets, insurance, oil exploitation, social welfare and governments activities). • dynamic niches where some small Brazilian software firms began to position themselves, such as digital games and applicative to telecommunications. • Local initiatives to strengthen cooperation and coordination among Brazilian exporters: BRASSCOM and NEXT

  21. Exports Sales of Brazilian Software Companies (2004) and expected Sales (2005-2009) Main markets of Brazilian software exports (2004) Software exports – targets of industrial policy

  22. Perspectives of outsource markets to Brazil • attractiveness has been affected by structural conditions, such as the general level of education, the relative inflexibility of the labor market and the appreciation of the local currency. • relative advantages: (1) size and sophistication of the internal demand; (2) qualification to develop world-class solutions for specific segments (such as financial services and e-government; (3) the business culture similar to the main market targets (North America and Europe); (4) good infrastructure of telecommunications (compared with other countries); (5) proximity with the main market targets. • challenges: (1) construction of an image of technological reputation; (2) improvement of the quality of services provided; (3) improvement of local human resources; (4) reduce the gap of foreign languages skills: (5) investments in innovation to domain new technological platforms; (6) adaptation of the local the tax burden to international patterns. Key point: outsource drive as an imperative to Brazilian software growth?

  23. Sectoral system of innovation • dynamism of software sector is intrinsically articulated with the dynamism of the IT as a whole. Dynamism of IT market in Brazil is extremely connected to the expansion and sophistication of Internet basis. • The e-business area is one in which Brazil is leader in Latin America (40% of the total and 60% of the B2B) and which may leverage the international competitiveness of Brazilian companies. The market for e-commerce in Brazil estimated in US$ 13 bi in 2005 • Concerning the question of property rights of software, we can note that the piracy rate of 64% is still high, but not as high as China or India, and Brazil is making efforts to reduce it • match between quality and innovation: only a small number of Brazilian software firms have high maturity certification in the software development process (CMM level 3 or higher). • The university systems annually provide approximately 29.000 IT bachelors, most of them qualified people. The basis for the generation of qualified people came from around 875 Graduation Courses in the areas of computer sciences with approximately 160.000 students . • IT technical education has been increasingly provided at secondary or non-university levels and this has raised the effective supply of labor to the software sector.

  24. SSI: the role of universities • picture at postgraduate education is more problematic: 29 Mastering Courses in 2002, with 2467 enrolled students and 847 dissertations defended. 11 Doctoral Courses, with 560 enrolled students and 80 PhD thesis approved. • low exposure to education abroad and a weaker science orientation compared with countries like India or China • the share of scientific articles of Brazilian residents published in indexed international scientific is quite inferior to the share of other scientific areas such as agronomy, natural sciences and physics • only two universities (PUC-RJ and UFRJ) got an grade six or seven i(the highest in the scale adopted to evaluate the post-graduate institutions) • legal difficulties in assigning patent rules for work done in universities has also had adverse consequences for incentives • weakness of systematic links between university and software companies basedo on an evaluation of cooperative links extracted from the Directory of Research Groups of CNPq to period between 2002 and 2004, • university-enterprise links related to the development of software was responsible for only 4,9% of the total links of the basis.

  25. Universities and SSI Share of scientific articles in indexed international scientific periodic 2002-2004 Links between Research Groups and Enterprises by Science & Engineering Fields (2002-2004)

  26. NSI and IT Indicators – BRICS countries Source: KAM database (world bank) e OCDE (2007)

  27. Brazilian firms with CMN and CMNI Certification situation in August 2006 Number of firms adopting CMM (selected countries- 2003) CMN Brazil (2004) = 35 firms CMNI Source: : MCT/SEPIN/DIA and Brasscom e ATKearney (2006)

  28. Software Specialization and new opportunities • segments where Brazilian firms had also consolidated a strong position – such as in the financial sector, e-business, telecommunications applicative, e-governament • segments related to complex integration outsourcing • digital games to PC, mobile phones and internet • visual applicative to petroleum industries in areas such as geosciences, engineering, environment management and operational security to attend demands of Petrobras,, particularly through 10 centers of virtual reality installed in its units. • opportunities for software in broadcasting area opened by the diffusion of digital signals associated with the advent of high definition digital TV market. • growth of free software / open source software (FS/OS): the market for FS/OS-based operating systems in Brazil is estimated to have a minimum volume of R$ 77 million, considering only the sale of Linux distributions and related services, with potential to grow 2.5 to 3 times by 2008. Growth can be encourage by the government trough the use of Linux, particularly in education • opportunities generated by impact of IT to traditional industries, such as the construction industry, retail, logistics and the agribusiness market.

  29. Conclusive remarks • software remains a very dynamic industry in Brazil with potential to amplify its economic impact and to stimulate the adoption of innovations, contributing decisively to the growth of productivity. • A policy regime which emphasized human capital formation, infrastructure building and support to new ventures still appear to help significantly the development of the industry. • Besides the amplitude of the internal market, the basis of the Industry’s strength can be associated with the flexibility and creativity of companies and technical personnel, with the sophistication and attractiveness of some of its target markets and to the capacity of generating satisfactory technical solutions for a wide range of economic activities. • confronted with the sectorial and territorial heterogeneity of the software industry and with the complexity of its technological dynamics, the policy measures might be flexible and properly adapted – in term of programs and to construct institutional arrangements - to the focus they target. • In a country like Brazil, where the socio-economic contrasts are still very dramatic, these policies might also pursue a trajectory based on the reduction of social and spatial disparities (“digital divide”). • Capacity to develop software solutions in a local base permits the accumulation of capabilities that make possible the expansion to more sophisticated markets, including international ones. • Importance of improving the knowledge about the links between learning and competence building in LIPS of software activities. • The importance of improve the knowledge about the industry through information to be collected in PINTEC 3.

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