Building Institutional Capacity The Brazilian Experience

1. Building Institutional Capacity The Brazilian Experience Richard M. Locke MIT August 6, 2004

2. Road Map • Motivation of Research • Research Methods • Summary of Case Studies • Implications for Public Policy and Future Research

3. Motivation • 98% of all Brazilian firms, employing over 45% of the formal labor force (many more in informal) are small and medium-sized enterprises (SMEs). The vast majority of these firms lack the capabilities and resources to up-grade and compete in a global market. • Brazil is not alone. Majority of firms in most developing countries are small and medium-sized enterprises lacking skills, resources, etc.

4. Motivation • Many of these small and medium-sized firms in Brazil are located in agglomerations/clusters, called Arranjos Produtivos Locais (APLs) • APL defined by Brazilian government as a local economy with at least 20 establishments employing at a minimum 100 people producing the same or similar products • 230 APLs identified officially in Brazil

5. Motivation • Given their importance to Brazilian economy and employment, new PT Government has made them a priority for industrial policy • What, if anything, can be done to strengthen these economic realities in the face of growing global competition? • Based on “Building Trust” work, Locke was asked by Sebrae (SBA) and IPEA (Ministry of Planning) to work on this question.

6. Methods • Assembled a Research Team. 8 Brazilian Sloan MBAs. Met weekly since October. • Reviewed existing secondary literature on APLs in Brazil; clusters throughout the world. • Analyzed existing data sets on APLs (see links on project web site…brazil cluster study) • Based on government data of universe of Brazilian APLs, selected several (8) APLs for field research. • Selection based on importance to GDP/employment for Brazil.

7. Methods • Industry Analysis (global and national) of the industries in which APLs located • Matched-pair comparisons. Chose APLs that were similar in age, size, product markets, etc. but located in different regions and states. • Sought to control for usual suspects/explanations (culture, partisan politics, comparative advantage, skills, etc.) • Field Research in January for first 4 APLs. On-going for second 4.

8. Methods • Field Research based on structured interviews with local firms, suppliers, buyers, business associations, political leaders, government agencies and labor unions (where they existed). • Representative and Reputational sampling of local firms interviewed. Standardized interview protocol. • Interviews with state and national-level industry and government officials • 164 interviews. Local industry analysis. “Soft” network analysis.

9. Jau Over 300 formal firms 4200 formal employees Major product: women’s leather shoes Principal market: Sao Paulo/ SE Brazil Local GDP: R$ 696 million* 7 % Average Annual Growth rate between 1990-2000 (7% growth rate between 1970-2000) Campina Grande About 80 formal firms 2400 formal employees Major product: women’s leather and synthetic shoes Principal Market: North and Northeast Brazil Local GDP: R$ 549 million* 14% Average Annual Growth rate between 1990-2000 (5% growth rate between 1970-2000 Findings

10. Jau Most firms focused on commodity products. Little original design, marketing Minimal forms of cooperation among firms in terms of purchasing cartels, collaborative marketing, design services, local brand Minimal role of public and quasi-public institutions (Sebrae, Senai, etc,) Campina Grande Mix of firm strategies: commodity and premium products. Sustained, institutionalized efforts to promote design, training, purchasing cartels, collaborative sales Active role of public/quasi-public institutions (Sebrae, Senai, Industry Federations, local government Findings

11. Explaining the Differences • Cultural. Associational traditions • Education/Skills • Partisan Politics or State-level Policies • Qualitative Features of Markets/Competition • Role of local institutions/policies

12. Explaining the Differences • Associational culture in Jau/SP not in Campina Grande/NE Brazil • Educational levels favor Jau : 13.6% of people over 25 have over 11 years of schooling (vs 11.2% in Campina Grande) • Larger, more affluent market in SP, close to Jau. Greater competition for Campina Grande firms • Politics/Policies controlled for by intra-state comparisons (Franca and Patos) • Big difference in role of local Sebrae, Senai, industry federations, etc.

13. Cooperation without Trust C = I + G + M C = Cooperation I = Self Interest G = Government M = Monitoring

14. Linhares Over 150 formal firms 3000 formal employees Major product: wood/MDF bedroom furniture Principal markets: SE Brazil. Local GDP: R$ 335 million* 6% Average Annual Growth rte between 1990-2000 (7% between 1970-2000) Uba Over 4500 formal firms 4500 formal employees Major product: wood/MDF bedroom furniture Principal markets: SE Brazil Local GDP: R$ 358 million* 12% Average Annual Growth rate between 1990-2000 )10% between 1970-2000) More Findings

15. Linhares Most firms producing commodities. Little design, marketing 6 major firms (G6) dominate local industry Vast majority of smaller firms barely surviving Cooperation Among G6. Others excluded Minimal presence of Sebrae. Senai, etc. Uba Most firms producing commodities but move towards design, local brand Firms of all sizes doing well Many forms of cooperation: purchasing cartels, fair grounds, training Active Role of Sebrae, Senai, etc. More Findings

16. Explaining the Differences • Culture: Same in Linhares and Uba • Partisan Politics/State-level policies: Same. • Education/Skill: Virtually the same: 7.2 % of people over 25 have completed 11 years of schooling in Uba vs 6.1% in Linhares • Markets/Competitive situations: Same • Big Difference in Role of Institutions. Active in Uba. Absent in Linhares

17. Implications for Policy and Future Research • Active role of public and quasi-public agencies in local development is important NOT JUST for growth but quality of development. More distributive/equitable. • How do we explain variation in role of these public/quasi-public agencies?

18. Explaining Variation in Institutional Behavior • Institutional incentives (variation by state) • Political power of local industry (variation by state) • Personnel. Different agencies led/animated by people with different skills, experiences, etc. • Local Embeddedness/Networks