BUILDING SMEs COMPETITIVENESS :
BUSINESS DEVELOPMENT SERVICES AND
THE CASE OF INTEL INVESTMENT IN COSTA RICA
by
Jorge Monge
Foundation for the Technological
and Industrial Development, CODETI
San Jose, Costa Rica
Tel. (506) 288-0524, fax 289-9869
e-mail: jmonge@codeti.co.cr
internet: www.codeti.co.cr
2
Building SMEs Competitiveness: Business Development Services and
the Case of Intel Investment in Costa Rica
Jorge Monge1
The promotion of Small and Medium-Sized Enterprises (SMEs) competitiveness in countries economies
requires the adequate environment: policies, market functioning and services tailored to their real needs
as well as to identifying productive niches that coincide with their capacities and forge dynamic ties with
other local firms and multinational enterprises. Only in this manner can the country or region achieve or
sustain the capacity to innovate, which is a crucial element of success in the global-local market.
The first section of this paper addresses the environment, needs and services to promote industrial
upgrading. The intensity of Transnational Companies (TNC)-SME linkages and the ability of countries
and individual firms to exploit such linkages for technological upgrading depends on the interaction of:
factors such as- the existence of SMEs which are able to meet high TNC standards --or at least have the
potential to achieve such standards--; - the TNC corporate strategy --which may be more or less
conducive to local SME development-- and the existence and efficiency of a set of supporting public
policies in attracting Foreign Direct Investment (FDI), facilitating technology transfer and improving
SME competitiveness, especially trough Business Development Services (BDS) provision.
Governments and International Development Organizations recognize the importance of BDS to promote
industrial upgrading --linkages formation and technological upgrade. A practical example is provided
through the description of SUDIAC system’s methodologies which enables to deliver services tailored to
the enterprises’ needs and development stage, and at the same time -through data systematization- allows
the development of benchmarking and supports more specific sector and industrial policies, also helping
to overcome external financial constrains related to the challenge for promoting technology upgrading or
set up new technology base enterprises in a market context.
For government and donors working in this field it is fundamental the rationalization of resources and
their impact on SMEs and overall economy. In this context, a BDS Management System -designed to
operate as a decision-making tool for BDS providers and aiming to improve overall performance and
self-sustainability through services monitoring, considering efficiency as well as services quality and
impact on clients- is described.
The second section of this paper addresses some development implications of a particular experience of
local insertion into the global economy, specifically Intel´s investment in Costa Rica. The U.S. semiconductor firm´s decision to locate an assembly and test (A&T) facility in Costa Rica, marked a potential
watershed in the country’s economic development. Since the Intel plant began operation, the
composition of Costa Rican exports has been transformed, nearly a billion dollars worth of chips were
exported during Intel’s first year of operation. Moreover, numerous Global Service Providers (GSPs) that
have come to Costa Rica to supply the flagship and to provide specialized activities and services. In
addition to the upgrading opportunities that GSPs may bring to the country, growth of local software
industry suggests possibilities for inter-sectoral upgrading. This section addresses these issues, Intel´s
competitive dynamics in the rapidly changing landscape of the electronic sector; the specific role played
by Costa Rican activities in the globally-dispersed activities of the industry and the role of multinational
1 Jorge
Monge is President of CODETI Foundation, jmonge@codeti.co.cr, usual disclaimers apply.
SMEs Competitiveness: BDS Development and
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and domestic firms engaged in the chain, highlighting obstacles and opportunities for upgrading.
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I. SMEs’ environment, needs and services
The process for improving SMEs’ competitiveness requires reaching the in-house capacity to master the
technological package -used by them in their environment- and how they link inside the productive
chain2. In this sense, according to the management level of the technological package, SMEs could be
divided in three development stages (see Figure 1). The Unified Industrial Diagnosis System for the
Improvement of Competitiveness (SUDIAC)3 supports SMEs accordingly to their needs and
development stages. Whereas the SMEs’ more general needs/SUDIAC’ services (RFC, Holistic
Diagnosis-CIP) are concentrated in Level I; the specific needs of greater focus and depth are associated –
in Level II - with SUDIAC’s in-depth level tools. Finally, in Level III, services of greater technological
contents, or those that require specialized support for innovation, are established in a case-by-case basis depending on the specific needs - with a systemic approach.
SUDIAC
GRAL.
INDIV.
RESEARCH &
DEVELOPMENT
ACTIVITIES FOR CH.C.
OR TO BUILD CH.C.
CLUSTER
SERVICES FOR
COMPETITIVENESS
INDIV.
SECT.
SECT.
RFC
I (
HOLISTIC
)
(
IN-DEPTH
TOOLS
)
SPECIF./CHAIN
POLICIES I
POLICIES II
BM
+
SN2
INNOVATION
SERVICES
HORIZONTAL
•GRAL IND. APPROACH
•GRAL BENCHMARKING
•PERFORMANCE/TOOL
BM
+
SN1
II
(
CHAIN
$ $+M
HOUSEKEEPING
INDUSTRIAL
UPGRADING
POLICIES
)
III
SYSTEMIC
APPROACH
• INTL. BDS PROGS LINKS
• SECTORIAL ENTERPRISES ORG.
• GROUP SERVICES
• IN DEPTH TOOLS
I.C.S.
.
POLICIES III
BM
+
SN3
• SPECIAL SERVICE
• TECH. TRANSFER
• INTL. INVESTMENT
• LOCAL-INTL INVESTMENT
MECHANISM
COMPETITIVE
INTELLIGENCE
I.C.S = INNOVATION CLUSTERS SERVICES
CH.C. = CHAIN COMPETITIVENESS
$ = INVESTMENT
$ + M = INVESTMENT + MARKET
TECHNOLOGIES
FORECASTING
SELECTION
AND INVESTMENT
BM = BENCHMARKING
SN = SPECIFIC NEEDS LEVEL
PRIVATE SECTORGOV. POLICIES
CODETI
Figure 1
In this sense, it has become more important from the point of view of SMEs’ competitiveness as to how
these SMEs establish backward and forward linkages through chain and how services can be developed
to increase their competitiveness and the quality of these linkages; so that these SMEs can upgrade
towards a more value-added position or better performance inside the productive chain. Thus, it becomes
crucial to perform accurate SMEs´ diagnosis in order to assess their needs as well as to improve their
strategies for a better market performance through a specific Competitiveness Improvement Plan.
To promote Industrial Upgrading in companies with greater performance level -such as II or III- it is
necessary to provide services that include research and development activities for building productive
2
Monge, Ref. 49
SUDIAC-CODETI, Ref. 75
SMEs Competitiveness: BDS Development and
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chains (chain competitiveness), developing at firm level in-house capacity to fully master the
technological package. Also, through greater specialized services -technology forecasting, technology
selection, technology adaptation and strategic planning and investment- industrial upgrading should be
promoted inside the productive chains where these SMEs link.
It becomes evident that the development of SMEs will need a conducive environment to promote their
industrial upgrading, under a national-regional development strategy implemented through adequate
policies. As an example of how programs can be conducive to generate that environment, Figure 2
summarizes the four modules of the Central American Industrial Modernization Program (PROMICA)
developed4 by to support the Regional Economic Integration Secretary, the Central American Bank of
Economic Integration and the private sector- and approved as a priority by the Central American
Economy Ministers.
CENTRAL AMERICAN INDUSTRIAL MODERNIZATION PROGRAM
Proposal submitted to IADB Donors Committee (Brussels, October 1997)
Developed by CODETI for the Economic Integration Ministers Council, Central American Integration Bank and Private Sector.
MODULE 1 (ORGANIZATION)
COORDINATION, POLICIES, STRATEGIES, INSTITUTIONS
MODULE 2
STUDIES/DESIGN OF INDUSTRIAL MODERNIZATION POLICIES, REGIONAL
1-AINDUSTRIAL POLICY, COMPETENCE, ENVIRONMENTAL SUSTAINABILITY,
TECHNOLOGY (POLICY INSTITUTIONAL FRAMEWORK REVIEW) , FOREIGN TRADE
INSTITUTIONAL STRENGTHENING
PUBLIC SECTOR AND SUPPORT FOR
THE POLICY IMPLEMENTATION
1-B
PUBLIC/PRIVATE
SECTOR
2-A CREATION OF
INDUSTRIAL
MODERNIZATION
FUND “IMFU“
(TRAINING FOREIGN TRADE)
MARKET FUNCTION
LINES OF CREDIT FOR:
•INDUSTRIAL MODERNIZATION
•TECHNOLOGICAL PROJECTS
•GUARANTEE FUNDS
•ENVIRONMENTAL MANAGEMENT
PROJECT
•EXPORTS INSURANCE
•EXPORTATION
•RISK CAPITAL(STOCK EXCHANGE)
INSTITUTIONAL STRENGTHENING
1-C PRIVATE SECTOR AND
COORDINATION/
PUBLIC SECTOR / PRIVATE SECTOR
INTELLIGENCE ON FOREIGN TRADE
1-D
HUMAN RESOURCES TRAINING PROGRAM
MODULE 3 PRODUCTIVITY
3-A
2-B INVESTMENT PROMOTION PROGRAM
MODULES
FEEDBACK
EXECUTIVE
COMMITTE
INFRASTRUCTURE MODERNIZATION (S+T)
FINANCE
SECTOR
MODULE 4
ENTERPRISE LINKAGES
(POLICIES FUNCTION AND REGULATORY FRAMEWORK)
•LABORATORIES (PRIMARY, SECONDARY, METROLOGY)
POLICY
4-A
•CLUSTERS DEVELOPMENT
•PROMOTE CREATION OF
INTEGRATED ENTERPRISES
•SYSTEM OF SATELLITE ENTERPRISES
•ARTICULATION OF FREE TRADE
ZONE ENTERPRISES WITH LOCAL
INDUSTRY
•UNIV-ENTERPRISE ARTICULATION
•TESTS AND TESTING
•CERTIFICATION
•ACCREDITATION
PUBLIC SECTOR
•METROLOGY
INFRASTRUCTURE S+T
3-B SUPPORT SERVICES FOR COMPETITIVENESS
•QUALITY (ISO 9000)
•ENVIRONMENT (ISO 14000)
•PRODUCTIVITY (GMP)
•FOREIGN TRADE
•FINANCING (BUSINESS PLAN)
• TECHNOLOGY TRANSFER
• TECHNICAL EDUCATION
4-B
CONTINUOS
PROGRAM FOR
HUMAN
RESOURCES
TRAINING
FOR INDUSTRY
IMPLEMENTATION
•ENTERPRISES ALLIANCES INSIDE
AND OUTSIDE THE REGION
•INTEGRATED SYSTEM OF
SUBCONTRACTING
•INDUSTRIAL INFORMATION
SYSTEM FOR THE
COMPETITIVENESS
•BUYING CENTERS
•SME’s PROMOTION-PRODUCTIVE NETWORKS
Figure 2
The first module, entitled “Coordination, policies, institutional projects”, seeks -through conducive
coordination and participation of the Government and the private sector- to establish a conducive
environment for industrial development. The second module, entitled “Market function”, aims to
4
PROMICA-CODETI, Ref. 5
SMEs Competitiveness: BDS Development and
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generate financial mechanisms that promote the needed investment and financing for industrial
development. The third module, entitled “Competitiveness”, was designed to attain adequate linkage of
the scientific and technological system with the productive sector and also the development of support
services for competitiveness. The fourth module, entitled “Enterprise Linkages”, seeks to develop
support systems for clusters strengthening, SMEs' networking and alliances, integrating enterprises
towards the achievement of global competitiveness.
Services for SMEs competitiveness
The type of services needed for increasing competitiveness of SMEs should be tailored -as mentionedaccordingly to their development level and specific needs. The services could be classified in categories
going from a more generic technical support - that addresses more common needs of enterprises - up to
more specialized services seeking SMEs' technology upgrade and focusing on specific needs required by
international markets (Figure 3).
Since any service requires an assessment of the SME’s real needs, its diagnosis becomes fundamental for
defining strategies and actions for the SME's competitiveness increase in the short, medium and long
term.
Thus, departing from the demand, this assessment -knowledge of the performance level of the SME's
eight key functional areas- (Figure 4) will enable the BDS provider to decide an intervention strategy and
the best tools to supply the needed services. Also, for each service provided - besides the necessary steps
for service delivery - the follow-up process for impact quantification and evaluation should be based in
SMEs Competitiveness: BDS Development and
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clearly defined impact indicators .
The intervention complexity (Figure 5) -tool- will depend on the enterprise development stage and
Readiness for Change (RFC).
For instance the service required could be a Competitiveness
Improvement Plan (CIP), Benchamarking Performance (BM) or in other cases more specific In-Depth
analysis or Simulation Plant (SIMPLANT) up to elements of strategic-financial management and
specific projects’ cash flow for the technological package upgrade (Figure 6).
REVENUES
SIMULATE
SCENARIO
AND DECIDE
ON PROJECT
IMPROVEMENT PROJECT
SIMPLANT
BM
SUDIAC
ENVIRONMENT
QUALITY
PRODUCTION
FINANCE
TOOL
COMPLEXITY
TOOL FOR
IN-DEPTH
ANALYSIS
BM
CIP
SUDIAC
RFC
STAGE 1
(PSYCHOLOGY)
COMPANY
CULTURAL
READINESS
PERFORMANCE
PERFORMANCE
(COMPLEXITY
FOR EXELLENCE
OF OPERATION
PERFORMANCE
FOR WORLD CLASS
STAGE 2
CODETI
IMPROVE
SMEs Competitiveness:
BDS Development
and
(COOPERATION)
PERFORMANCE
Monge
the Case of Intel Investment in Costa Rica
Figure 5
CODETI
)
Jorge
8
FORECASTED CUMULATIVE CASH FLOW DIAGRAM
CUMULATIVE CASH FLOW DIAGRAM
+
WASTED
PRODUCT
FROM THE
MARKET
TIME
$
BALANCE POINT
-
ESTABLISHED
TECHNICAL
FEASIBILITY
ESTABLISHED
TECHNOLOGICAL
PRODUCTION
LAUNCH TO MARKET
APPLIED
INVESTIGATION
COST OF THE
LAUNCHED COSTS
PROTOTYPE/
TO MARKET
PILOT PLANT
INVERSION IN
MANUFACTURING PLANT
SALES
PROFITS
CODETI
Figure 6
At the firm level -which is the level where an enterprise is or is not competitive in the national and
international markets- competitiveness is the product of the in-house capacity for the adequate handling
of the technological package used, which includes everything from production-technology,
administration and market information up to the applied knowledge required to attain competitiveness in
the market -through operation complexity increase- up to world class performance.
INCREASE OF COMPETITIVENESS
(TYPE OF COMPANIES)
C
SPECIFIC (MORE
TECHNOLOGY/INNOVATION)
INTERMEDIATE
BASIC
C = f (P, Q, E, M)
COMPETITIVENESS
INCREASE TOOLS
t
C
+
+
+
+
Productivity
Env. Performance
Quality Performance
Market Performance
PROCESS MANAGEMENT
TECHNOLOGY UPGRADE
TECHNOLOGY SOURCING
C
t
S3
S2
S1
t
R + D ( LEAD)
TECHNOLOGY SERVICES
INNOVATION SERVICES
TECHNOLOGY UPGRADE
CODETI
Figure 7
SMEs Competitiveness: BDS Development and
Monge
the Case of Intel Investment in Costa Rica
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Jorge
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Therefore, the market niche, to which a SME can have access, will be a combination of price, quality and
market (delivery time) and accordingly, SMEs could be classified in three categories, as shown in Figure
7, from a basic to an increased level of competitiveness.
Performance Benchmarking -by zone, country, region, ISIC5 code, and enterprise size- can be developed
through the diagnosis results, building on the BDS provider's Database (Figure 8). This would allow,
with database growth -based on actual services delivered- to determine specific actions by industrial
classification, region or geographic area, thus supporting more specific horizontal policies.
ENTERPRISE PERFORMANCE BENCHMARKING
(ZONE, COUNTRY, REGION LEVELS, ISIC CODE, ENTERPRISES’ SIZE)
Strategic Planning
90
80
Information Systems
70,2
Production
and
Operations
70
60
86,2
50
67,8
40
30
20
Environmental
Management
10
47,4
55,2
Quality
Assurance
0
52,4
61,4
Human Resources
Enterprise
Best Practice
Average
Commercialization
84,8
Finance and Accounting
Figure 8
Enhancing SMEs’ Access to Credit and Technology Upgrade
There is ever increasing agreement on the fact that SMEs require technical as much as financial support
services. This is especially true when promoting SMEs technology upgrade, since a great number of
projects and business possibilities fail due to the unavailability of credit in the traditional financial
system.
SUDIAC’s FINANCEmeter is a financial tool developed to enhance SMEs access to credit and also
serves as bridge between technical and financial support services (Figure 9). The tool also seeks to
support SMEs which could start its technological upgrade or globalization with adequate technicalfinancial support. This tool performs an adequate quantitative evaluation of the enterprise’s financial
management -traditional credit institutions analysis- and also an enterprise’s qualitative financial
5
International Standard Industrial Classification, UN
SMEs Competitiveness: BDS Development and
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evaluation. For instance, the tool a financial-strategic management evaluation of the enterprise and
support by improving its access to credit from financial institutions through preparation for an adequate
credit application submittal.
ENHANCING SMEs’ ACCESS TO CREDIT
SUDIAC´s FINANCE TOOL
GUARANTEE FUNDS
(DEVELOPMENT BANK)
III
$
VENTURE CAPITAL
TRANSFER TECHNOLOGY
INNOVATION
INTERNATIONALIZATION
$
FINANCEMETER
II
QUALITY
ENVIRONMENT
PRODUCTIVITY
CLUSTER
SERVICES
COMPETITIVENESS
STRATEGIC
INVESTMENT
DECISION
COMPETITIVE
INTELIGENCE
SERVICES
(IN-DEPTH TOOLS)
SPECIFIC
TECHNICAL
ASSISTANCE
I
COMPETITIVENESS
IMPROVEMENT PLAN
CODETI
CIP (HOLISTIC TOOL)
Figure 9
On the other hand, there is a section for the evaluation of new enterprise projects, which supports through both qualitative and qualitative information- the decision-making investment process, based on
project programming and cash flow projection (Figure 10).
ENTERPRISE NEW PROJECTS´ FINANCIAL
EVALUATION
QUALITATIVE EVALUATION
ALTERNATIVES´
DEVISING AND
IDENTIFICATION
FEASIBILITY AND
SELECTION
QUANTITATIVE EVALUATION
PROJECT
DESCRIPTION AND
JUSTIFICATION
PRE-FEASIBILITY
AND SELECTION
STUDY
DEVELOPMENT
INFORMATION COMPILATION
AND PROJECT FORMULATION
MARKETING
STUDY
SALES
ESTIMATION
TECHNICAL AND
SUPPLY STUDY
INVESTMENT
COSTS
ENVIRONMENTAL
IMPACT STUDY
IMPLEMENTATION
AND OPERATION
COSTS
NPV: Net Present Value
IRR: Internal
of Return
SMEs Competitiveness:
BDS Rate
Development
and
Monge
the Case of Intel Investment in Costa Rica
CODETI
PROJECTION
FLOWS
Figure 10
INVESTMENT DECISION
MAKING´ CRITERIA
NPV, IRR,
BENEFIT/COST
PAY BACK PERIOD
IMPLEMENTATION
CODETI
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This evaluation also takes into account the required strategic time to launch the product in the market
and, therefore, adequately defines both the velocity and quantity of the required investment for business
success (Figure 11). When this business involves specific technology, special attention should be given
to the technological package development stage -readiness- due to time sensitivity for the competitive
product position in the market and how this affects the SME´s competitive position inside the productive
chain
NEW PROJECT FORECASTED CUMULATIVE
CASH FLOW DIAGRAMS
tLM1 = TIME TO LAUNCH TO MARKET
WITH INVESTMENT VELOCITY N°1
tLM2 = TIME TO LAUNCH TO MARKET
WITH INVESTMENT VELOCITY N°1
t2 = TIME TO REACH BALANCE POINT
WITH INVESTMENT VELOCITY N°2
CUMULATIVE
CASH FLOW DIAGRAM
WITH INVESTMENT VELOCITY N°2
t1 = TIME TO REACH BALANCE POINT
t1
t1t
t
t2
t1
1
T LM1
T LM2
CODETI
 t LM
Figure 11
SMEs and BDS Sustainability
Governments and international development organizations recognize the importance of BDS to promote
industrial upgrading -linkages formation and technological upgrade- as well as the rationalization of their
resources and the maximization of impact on SMEs and overall economy. Thus, the sustainability of
BDS organizations --both facilitators and service providers-- has become a crucial issue. Despite the
different conceptual schemes for approaching sustainability, to know accurately how BDS organizations
are performing financially and how they can improve their performance and impact on SMEs, implies to
have actual and quality data of their work to implement actions for improving such overall performance.
To attain sustainability, BDS providers need to improve their management, to use practical tools to get
information and a clear business plan where their goals are set according with their local environment
(market). In this sense, there is some main sustainability factors that need to be considered in order to
achieve the desired state of self sustainability (Figure 12).
SMEs Competitiveness: BDS Development and
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BDS MANAGEMENT SYSTEM
BETTER AND
NEW SERVICES
DEVELOPMENT
OF CONSULTANCY
Ar
ea
QUALITY STANDARS
INDICATORS
SKILLS/KNOWLEDGE
CUSTOMER
PERFORMANCE
& IMPACT
FOLLOW-UP
MARKETING
INCOME
IMAGE
EVALUATION
SATISFACTION
IMPLEMENTATION
FOLLOW UP SERVICES
PERFORMANCE
CORRECTIVE
ACTIONS PLAN
MONTHLY
REPORTS
MEETING
SPECIFIC NEEDS
SKILLS DEVELOPMENT
Management
Area
GOALS
MEASUREMENT
TECH. ASSISTANCE
i.e. SUDIAC
FOR NEW SERVICES
B.D.S. Tools
OPERATIVE
PLANNING
SUSTAINABILITY
Operations
PERSONNEL
DEVELOPMENT
GENERATION
PROMOTION
INCENTIVES
ACTIVITIES
PROGRAMME
FEE
DEFINITION
MARKET/SERVICES STRATEGIES AND
PROMOTION
POLICY DEFINITIONS
•BDS Management System
•Support Database
•Strategic Planning-Business Plan
•Performance and Impact Measurement Program
•Marketing Plan/Service Promotion
•Human Resources Development Program
•BDS Operative Manual
Figure
•Specific Projects
12
The BDS Management System6 operates as a decision making and daily management tool aiming to
improve -through a continuos process- overall performance and to promote BDS organizations’
sustainability, considering efficiency as well as services quality and impact on SMEs. This methodology
enables correlation of the planning stage, services delivery and monitoring (type, cost, time, impact) and
facilitates -through an evaluation stage- decision making process to establish actions and
BDS MANAGEMENT SYSTEM
Planning
BUSINESS PLAN
•Business Aproach: Mission,
Strategies & Policies
•Market Information
•Budget :Financial Resourses
•Goals: Operative Resources
Service Delivery
•Task Definition
•Target Definition
•Performance Indicators/Goals
INDICATORS
STRATEGIC MANAGEMENT
OPERATIVE MANUAL
•Accounting
•Database
•Monitoring
DEFINITION
•Services Definitions
Evaluation
INPUT
•Registration: Personnel, Entrep. and Services
•Monthly Follow Up
•Personnel: tasks, training, goals
•Services: operative and fin. efficiency
•TM Services: clients, costs, income, outreach.
•TM Sevices Performance Indicators/Goals
•Human Resources Management
•Operative Performance
•Impact
•Financial Performance/Sustainability
OUTPUT
•Services Indicators/Analysis
•TM Services Finance Indicators/Analysis
•Personnel Indicators/Analysis
•Outreach/Beneficiaries/Firms
•Market Indicators
SUPPORT DATABASE
6
BDS Management System - CODETI, Ref. 4
SMEs Competitiveness: BDS Development and
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policies.(Fig.13)
Figure 13
Industry Structure and Firm Behavior
An understanding of the firm requires an understanding of the markets and industry structure in which it
operates, since industry evolution shapes options for firm growth7. In each value chain, industry structure
conditions firm behavior in terms of growth and diversification and, more specifically, in terms of its
technological learning. In turn, firms feedback on industry structure through product specialization, level
of import dependence and the industry knowledge base. (Figure 14).
Co-evolution of Industry Structure and Firm Behavior
POLICIES
Trade, industry
& tecnology
Product specialization;
INDUSTRY
STRUCTURE
Size distribution,
Concentration,
Entry & exit barriers,
linkages
Knowledge
FIRM
BEHAVIOR
Level of import dependance
Growth & diversification,
technological learning
Figure 14
Of critical importance is the creation of a broad diversified knowledge base for technology
diversification as well as the strengthening of financial and technological capabilities of domestic SMEs
and their international linkages formation.
In this context, countries need to promote SMEs development through policies that improve their
competitiveness and act in a country national environment together with industrial, technology, trade and
FDI policy. From the perspective of building SME´s linkages with TNCs, the provision of BDS for the
development of local suppliers must be provided bearing in mind (monitoring-dynamic industry
structure) the type of suppliers linkages that are conducive to sustainable competitiveness. (Figure 15)
7
Ernst D., Ref. 20
SMEs Competitiveness: BDS Development and
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The SMEs´ regulatory and legal framework must be conducive of their industrial upgrading and develop
--through a business-government coordination process-- the needed institutional framework. Also, to
build SMEs linkages with TNCs, the involvement of these TNCs in the provider development program
(BDS) is necessary to guarantee their commitment (ownership) and to improve the business-government
coordination.
SMEs Development and TNCs Strategies
GOVERNMENT
POLICY
Industrial,
Technology
and
Trade
Policy
SMEs Competitiveness
Improvement
SMEs
DEVELOPMENT
Linkages
FDI Policy
TNCs
STRATEGIES
BDS
Figure 15
II.
Intel´s Investment in Costa Rica8
This section addresses the development implications of a particular experience of local insertion
into the global economy. The empirical focus is on contemporary Costa Rica, a Central American
republic of four million people that by some accounts is poised to achieve a major break from its
traditional profile as a natural resource-based exporter. Whereas coffee, bananas, tourism and a handful
of non-traditional exports have long accounted for most of the country’s revenues, the 1997 decision by
Intel, the pioneering U.S. semi-conductor firm, to locate an assembly and test (A&T) facility in Costa
Rica marks a potential watershed in the country’s economic development. Since the Intel plant began
8
This is an extract of a chapter in "Who Gets Ahead in the Global Economy: Industrial Upgrading, Value Chains and
Development” (Gary Gereffi, ed., forthcoming) by Dr. Eric Herhsberg, Social Science Research Council (SSRC) and Eng.
Jorge Monge, CODETI Foundation, based in field research conducted in 2000-2001.
SMEs Competitiveness: BDS Development and
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operation in 1998, the composition of Costa Rican exports has been transformed virtually overnight.
Nearly a billion dollars worth of chips were exported during Intel’s first year of operation in Costa Rica,
accounting for roughly one fifth of national exports.
Moreover, numerous Global Service Providers (GSPs) -- multinational enterprises with established ties
to Intel production elsewhere -- have come to Costa Rica to supply the flagship enterprise with
components and to provide specialized activities and services. In addition to the upgrading opportunities
that GSPs may bring to the country, growth of an incipient local software industry suggests possibilities
for inter-sectoral upgrading. Many observers interpret these striking developments as evidence of an
emergent high technology cluster that can provide the basis for a radical and promising shift in the Costa
Rican insertion in the global economy.
The viability of a high technology path to prosperity has far reaching implications for Costa Rican
society. Long the most prosperous and peaceful of the Central American republics, the agrarian
underpinnings of Costa Rica’s unique formula for stability are no longer sufficient to generate the
resources needed to meet the needs of the populace or to fund the benevolent democratic welfare state
that has evolved since the late 1940s. Tourism offers one noteworthy growth opportunity, particularly as
the country continues to upgrade into eco-tourism and other specialized niches, but that quintessentially
non-traditional export can only be part of the solution to the long-term development challenges facing
Costa Rica. Cognizant of the need to pursue new avenues for growth, both major political parties have
sought to promote manufactured exports through the creation of export processing zones (zonas francas,
or EPZs), in which foreign firms are exempted from tariffs and controls on investment and repatriation of
capital. Concentrated primarily in the outskirts of the capital city San Jose, in proximity to the
international airport, EPZs have attracted manufacturing investment in several industries.
Notwithstanding successes in attracting FDI from U.S., European and Asian firms during the 1980s and
1990s, Costa Rica's EPZs exhibit problems commonly associated with maquila production. Companies
operating in the EPZs typically import an overwhelming percentage of inputs, and after conducting
assembly operations in Costa Rica, ship finished goods abroad, with local value added being limited
almost exclusively to that which takes place within the assembly plant. Significantly, the drawbacks to
the EPZ model appear to have been true for potentially "high-end" industries such as electronics, in
which investment first began to trickle into Costa Rica two decades ago, as well as for "low end" sectors
more typically associated with maquila production, such as garments and consumer goods.
The limited deployment of skilled labor is particularly noteworthy, since substantial public investments
in primary and secondary education have endowed Costa Rica with a workforce that is far better
educated than that of neighboring countries, and that indeed is among the most developed in Latin
America. While zonas francas boosted exports and created some employment for relatively low-skilled
workers and a handful of managers, their overall contribution to the local economy prior to Intel’s arrival
on the scene has been disappointing. Yet the most optimistic accounts hold that the investments
undertaken by Intel and by the GSPs that accompanied it to Costa Rica will have qualitatively superior
effects on the country's prospects. In the popular press and in the discourse of politicians, arrival of chip
manufacturing has been understood to imply the dawn of an era in which Costa Ricans will prosper
because of their expertise as engineers and technicians, and as highly skilled workers reaping the fruits of
comparative advantage in human capital. A country whose path to peaceful development could be
attributed to the century-long predominance of small farm-based coffee production would thus renew its
ticket to prosperity in a new era: by producing engineering and technical expertise for the global market
in semi-conductors, software and related high value-added products.
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The Challenges of Upgrading
Costa Rica's wager on the electronics industry as a springboard toward economic success can be
analyzed in terms of the challenges faced by any locality -- be it national, regional or local in scale -seeking to successfully engage processes of globalization. But to suggest that countries share an interest
in becoming linked to the global economy does not mean that all will achieve this objective, or that they
will benefit equally from doing so. It is through the complex interactions between global and local
dynamics that we come to understand the ways in which globalization offers promising opportunities for
improving economic conditions in some settings, while posing the threat of stagnation or decline in
others.
Indeed, as impressive as the scale of Intel’s activities in Costa Rica may be, this is not sufficient to
ensure development of an "agglomeration economy" in which firms clustered closely to one another
create an environment conducive to learning and innovation. Whether this and the associated dynamics
of "industrial upgrading" take hold will depend on a number of intertwined factors. These encompass
exogenous questions, such as the evolving structure and performance of the electronics industry, the role
of Costa Rican operations in Intel's global strategies, and the degree to which locally-based firms will be
considered as potential partners by Intel and its global suppliers. Endogenous factors -- matters that may
be amenable to influence of public and private institutions in Costa Rica -- are also likely to weigh
heavily on eventual outcomes. These factors include the ability of domestic enterprises to meet the
exacting standards of multi-national electronics firms and to branch out into related areas of production
and services, as well as the workplace dynamics that emerge both in the factories operated by multinationals and in domestic enterprises that develop more or less direct relationships with them.
Industrial upgrading can follow various paths, but invariably it entails increasing the complexity and
specificity of activities undertaken in the particular setting. Moving from one level of activity to another
within a single global chain constitutes one approach to upgrading. The unprecedented decentralization
of highly integrated economic activities implies that particular actors may specialize in a limited number
of functions along a given global value chain or cross-national production network9. For example, a
hierarchy of activities was identified10 in the apparel and light manufacturing sectors -- from simple
assembly at one end of the spectrum to design and engineering at the other -- through which the
successful Asian export economies moved over the decades beginning in the 1960s.
Similarly, in the computer industry, the most advanced of the East Asian NICs have developed design
capabilities previously enjoyed only by U.S. and Japanese firms and have shifted manufacturing of
relatively simple components to other countries in the region. Mathews and Cho11 describe a parallel
process in the East Asian semi-conductor industry from the late 1970s through the 1990s, a period during
which countries such as Singapore entered the sector as relatively low wage assemblers for
multinationals but progressed to a point where domestic enterprises could occupy some of the most
desirable niches in the value chain, turning over to less developed neighbors activities that rely primarily
on low cost production capabilities.
9 Borrus,
Ernst and Haggard, Ref. 3; Gereffi and Tam, Ref. 28
Gereffi and Fonda, Ref. 26
11 Mathews and Cho, Ref. 47
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Typically, such intra-sectoral upgrading entails the adoption of new technologies or enhanced production
processes, or shifting niches based on improved knowledge, either of changing patterns of demand in
highly segmented markets or of the key points at which actors can exercise control over the chain. While
we suggest below that there is evidence of some intra-sectoral upgrading in Costa Rican electronics, the
growing reliance of large firms such as Intel on GSPs, which establish operations wherever new plants
are established, signals a narrowing of space for such forms of upgrading.
An alternative approach to upgrading is to take advantage of the experience gained through participation
in a given chain to shift into other, perhaps related, sectors. In the Costa Rican case, the emerging
software industry would seem to offer an especially promising opportunity for such inter-sectoral
upgrading, which takes on particular importance given that semi-conductors are the subject of
unparalleled volatility in demand and sharp downward pressure on prices. More generally, Costa Rican
firms and workers may acquire new capabilities through exposure to the global electronics environment,
and these capabilities may be deployed in a variety of economic activities. There exists as well the
possibility that efforts by public and private institutions to facilitate upgrading of local industry in order
to engage in electronics-related activity may have important spill over effects that can enable domestic
actors to thrive in a variety of industries.
Whether intra- or inter-sectoral in nature, upgrading involves processes of organizational learning and
technological and managerial advances that result from exposure to the risky universe of global value
chains. As evident in the experience with EPZs, actors incur real risks when they enter a given chain at a
relatively low level. And in sectors as volatile as electronics, it is easy to become trapped in low valueadded niches. In this regard, a key concern of this section is whether the activities undertaken by Intel in
Costa Rica will differ substantially in nature from those which characterize production elsewhere in
zonas francas.
That is, we must determine whether the value added will be limited to assembly and testing operations,
the location of which is determined largely by cost considerations, or whether such activities may be
supplemented by engagement with other segments of the chain or by shifts into new industries. As
outlined further below, the distinction between assembly and other functions is relevant for semiconductors in much the same way as for relatively low-technology manufacturing: the portion of value
added associated with the assembly and testing stage of the semi-conductor chain is relatively low, and is
likely to narrow further over time, thus magnifying the importance of Costa Rica’s upgrading into higher
stages of the chain or establishing niches in related industries.
To address these questions, this section outlines the principal characteristics of the electronics industry,
situates Intel in the rapidly changing landscape of the sector; addresses the specific role played by Costa
Rican activities in the globally-dispersed activities of the industry and in the strategies of Intel as well as
the role of multinational and domestic firms engaged in the chain, highlighting obstacles and
opportunities for upgrading.
The Electronics Industry: Growth and Globalization
The electronics industry has been one of the fastest growing and most rapidly expanding
industries in the world, and until recently the sector was expected to continue growing at annual rates of
nearly 9%, with worldwide production of electronics equipment topping US $1 trillion by the end of
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12
2000 . Semiconductors, which are important to almost all electronic products -- including computers,
consumer electronic goods, transportation equipment, telecommunications apparatus, and industrial
machinery hardware -- account for 12.5% of the total value of electronic equipment sales13, employing an
estimated four million people worldwide in 1997.
Many countries have sought to develop an electronics industry in hopes of benefiting from soaring
demand for high technology products and establishing a new source of domestic value-added14. Growth
in electronics equipment production has been concentrated in North America, Europe and East Asia,
where the so-called Four Tigers -- Hong Kong, Taiwan, South Korea and Singapore -- have gained
access to highly profitable niches of the industry. To date, Latin America's role in the electronics industry
has been very modest, with production concentrated in Brazil and Mexico. The region accounts for only
about 3% of worldwide semiconductor production. Table 1 shows annual production levels and growth
rates of worldwide electronic systems.
Table 1
Worldwide Electronic Systems
Annual Production (US$ millions) & Annual Growth Rates
1994-1995
1994
1995
(%)
110,000
125,000
13.6
Semiconductors
157,096
170,746
8.7
Consumer Electronics
127,200
148,668
16.9
Telecommunications
208,590
236,747
13.5
Computers
77,000
86,000
11.7
Software
1995-2000
(%)
20.0
6.2
11.6
10.4
12.0
Source: S&P Industry Survey and Dataquest15
Semiconductors
Almost all-contemporary industrial products, ranging from consumer electronic goods, consumer
durables, industrial robots, to smart missiles require semiconductors, or integrated circuits, which
production requires varying levels of technical sophistication. Semiconductor devices are essential to
information and communication equipment industries and to the development of virtually all other hightech industries16. Integrated circuits production has grown dramatically over the past 40 years, from
US$100 million in the late 1950's to US$150 billion in 1995.
The industry is remarkably volatile: while global semiconductor sales decreased 8.4% in 1998, they
rebounded nicely in 1999, rising 19%, and soared during the first three months of 2000, when sales rose
12
FIAS, Ref. 21 -22, Gonzalez, Marshall J. and Marshall L, Ref. 30-31
Trade Summary, Ref. 36
14 USEPA Ref. 78, Vieto Ref. 80
15 Standard & Poor, Ref. 74
16 Sung Gul Hong, Ref. 76
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28.4% compared to the previous year. Intense competition between leading companies in the industry
and the pace of technological innovation have combined to reduce most product life cycles to 2-3 years,
compared with 7-8 years in the mid-1970s.
To remain competitive, semi-conductor companies were forced to spend about 25% of sales revenues on
R&D. These high R&D costs, as well as economies of scale in production, mean that companies must
maintain large market shares in order to survive. During the 1990s, semiconductor technology propelled
the direction of change as well as growth patterns of the worldwide electronics industry. Until the
unexpectedly sharp slowdown that began during the second half of 2000 and that has accelerated since
then, it appeared that this trend would continue during the coming years, as wireless communications
join networked personal computers, home PCs, and consumer electronics as globally pervasive
applications for these components.
Semiconductor manufacturing encompasses multiple processes, of varying levels of technical
sophistication. Outside the U.S., Japan and Europe, only Taiwan, South Korea and Singapore have been
able to develop wafer fabrication facilities, the segment of the chain for which barriers to entry are
highest. This was possible only because of the technical skill and business networks provided by
expatriate populations working for leading U.S. semiconductor companies17, and it is doubtful that this
achievement can be replicated under present circumstances, for both the scale of production and the
capital requirements for establishing wafer fabrication plants are growing at an astonishing pace18.
Aside from the demand for highly skilled personnel, it would cost around US $2 billion to build an 8inch wafer fabrication plant using 0.5 micron technologies and today this is switching to 12 inches wafer
and 0.25 to 0.18 microns etching lines (forty percent less energy and water consumption per chip than 8
inches process). (see Figure 16). No Latin American country is likely to combine access to the necessary
pool of investment capital with a sufficiently large stock of trained technicians capable of implementing
such an advanced manufacturing process. Even Malaysia, with a long history of semiconductor assembly
and testing, lacks the technical talent needed to implement a wafer fabrication facility.
Figure 16
17
Ernst, Ref. 17
Leachman R. and Leachman C., Ref. 43
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Several Asian countries have developed assembly and test facilities similar to those established by Intel
in Costa Rica. These operations require the least qualified personnel and lowest paid workers in the
value-chain of the semiconductor industry. A typical worker in a semiconductor assembly and test
facility is paid close to US$1 an hour in Malaysia. That worker would earn slightly less in the
Philippines, and about half as much in China. As companies diversify away from Malaysia, which until
recently has been the primary location for semiconductor assembly and testing, a large number of
assembly and test facilities are now being developed in China, Indonesia and the Philippines.
Costa Rica’s Electronics Industry and the arrival of Intel
Before Intel’s arrival in 1998, Costa Rica experienced three clearly defined waves of foreign
investment in electronic components. During the 1970s five foreign companies established facilities in
the country, including Motorola, Trimpot (an affiliate of Bourns Inc.) and Square D; during the late
1980s and very early 1990s six more companies established facilities, including Espion (an affiliate of
C&K Components) and Reliability. The third wave of electronic FDI dates from 1994 to 1996, with the
establishment of nine firms, among them Protek and DSC Communications (which closed local
operations in 1999 due to merger and acquisitions strategy). Most firms in the sector were established
through foreign investment, especially from the United States, with one third of the companies exporting
directly to the US, in most instances exclusively to their parent companies19.
In November of 1996, Intel Corporation announced plans to construct a semiconductor assembly and test
plant -called A6/T6- in Costa Rica with an investment of $300-$500 million, to produce and test nearly
20-30% of its Pentium II chips. The announcement was the country’s main economic news that year and
echoed throughout the region considering this was the first Intel plant in Latin America and competition
to attract the investment had been intense. The structure of Costa Rican exports changed drastically since
the arrival of Intel, situating electronics products in first place ahead of all earlier traditional and nontraditional exports. In 1998, the first year of Intel production, "Componentes Intel de Costa Rica"
exported $985.31 million, representing 18% of national exports, with modular circuits and
microstructures - Intel products - as the main exports20.
Numerous factors attracted Intel to invest in Costa Rica rather than elsewhere in Latin America. The
country’s positive international image --it had enjoyed half a century of liberal democracy and a stable
record of economic growth as well as had achieved some of the best indicators of social well being in the
developing world. The country had also launched various initiatives to attract foreign investments: FDI
was encouraged by legislation that places no limitations on foreign property ownership nor for
conducting business; by a constitution that gives equal rights and obligations to foreigners and nationals
and by laws that place no restrictions on repatriation or transfer of capital. Intellectual Property Laws in
accordance with World Trade Organization (WTO) guidelines are in place as well as are agreements
with several countries for investment promotion and protection.
Costa Rica has also instituted a Free Trade Regime (FTR) with attractive incentives for foreign
19 FIAS,
20
Ref. 21-22
El Financiero, Ref. 13 (1999)
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investment. For instance, there is a 100% exemption on import duties for raw materials, components and
equipment, on export taxes, excise taxes and profit repatriation taxes as well as on income taxes for 8
years with a 50% exemption for the following 4 years. Moreover, there are no restrictions for capital or
profit repatriation and companies can sell to exporters within Costa Rica and 25% to the local market21.
Realizing that some textile manufacturers have moved to other Central American countries in part
because of the country’s higher wages and benefits compared to its neighbors, the Costa Rican
government has encouraged companies to move to Costa Rica by promoting among other factors the
nation's more mature, sophisticated and technologically advanced labor pool. Several high-technology
companies, including Intel, have responded positively – investing in Costa Rica to capitalize on such
advantages.
Intel's selection of Costa Rica
Intel’s initial list of possible locations for the planned new facility included around 10 countries
worldwide, among the Latin American options were Brazil, Chile and Mexico. As stated above, a
combination of different factors contributed to Costa Rica’s eventual selection. To be considered at all,
stable political and economic conditions (pro-business environment, as well as signs of economic
liberalization) were essential. The winning candidate needed to assure that the educational structure
(educational institutions, technical and professional quality levels), human resources (sufficient supply of
workers, non-union work environment), incentives to external investments (free trade regime,
exoneration, privileges), and fast track permit processes would respond advantageously to Intel’s
requirements. Because Intel, like other cutting-edge technology firms, relies on a dependable and welleducated labor pool, it only builds plants where it is assured access to a highly trainable supply of labor.
The previous establishment in Costa Rica of an important number of foreign electronics firms was
another positive factor for Intel’s decision22.
Besides these assets, two other factors explain why Costa Rica was attractive to Intel: negotiation tactics
and specific concessions23. During the selection process, several major concerns emerged. The first was
simply Costa Rica’s small size and limited resources. Initial projections indicated that the planned plant
might require up to 30% of Costa Rica power capability though it turns out that actual usage has
represented about 5%24 of Costa Rican capacity25. Cargo facilities also worried Intel, since the entire
plant’s production would need to be exported on-time and at frequent intervals by air. While the
physical infrastructure of Costa Rica’s airport at San Jose was more than adequate, the frequency of
flights and airport efficiency was not. These inconveniences were thoroughly discussed by Intel
representatives in the negotiation process obtaining assurance from Costa Rican government authorities
of adequate and timely solutions. Another issue concerned applicable environmental regulation: Intel is
subject to local --Costa Rican-- wastewater discharge standards and the corresponding mandatory
monitoring and reporting practices, as well as to the more recent hazardous industrial waste management
regulations26.
21
Cinde, Ref. 7
Gonzalez, Marshall J. and Marshall L., Ref. 30-31
23 Spar, Ref. 73
24 Data sources differ in a range from 2% to 8%
25 Ingenieria y Arquitectura, Ref. 37, La Republica, Ref. 41 (1996)
22
26
Spar, Ref. 73; Vieto Ref. 80
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The efforts of local institutions to accommodate the magnitude of the project and the requirements of the
Corporation required exceptional and explicit measures which had never before taken place in Costa
Rica. The active participation of the nation's President and a team of senior government officials was a
clear signal of their interest in Intel’s investment. In fact, among the negotiating tactics and actions of
Costa Rican authorities -during the decision making process- bargains struck and problems got fixed
through unified response, extensive personal involvement from the top and speed of response to Intel
requirements. With regards to specific concessions, Costa Rican authorities successfully addressed three
main problems preventing closing the deal, including guarantees of physical infrastructure, educational
infrastructure, and favorable financial terms for the proposed investment.
The Costa Rican labor force is relatively well educated, skilled and easily trained, largely due to longterm government investment in public education. The country enjoys a literacy rate of 94 percent and
many workers seek and absorb additional specialized training. The National Vocational Training
Institute (INA) and private-sector groups provide technical and vocational training. Costa Rica’s ample
pool of professionals, educated at both Costa Rican and foreign universities, is among the largest and
most diversified in Latin America27. The Costa Rican Labor Code of 1943 governs labor-management
relations, including wages, working hours and conditions as well as employment termination and
provides for the resolution of labor disputes in labor courts. The National Wage Council, composed of
government, labor, and private-sector representatives, establishes minimum wage rates for the private
sector semi-annually. According to the Labor Ministry, about 15 percent of Costa Rica's work force
belong to unions, a figure that has remained relatively constant. While the vast majority of union
members are in the public sector, many private sector workers, are affiliated with so-called Solidarity
Associations. Under such associations, employers provide access to credit unions and savings plans in
return for agreements to avoid strikes and other types of confrontations. Overall, more Costa Rican
workers belong to Solidarity Associations than to unions. The fact of Costa Rican labor force offering
the required skill conditions and general labor environment that corresponded to Intel’s preferences was
a key element to the company’s decision to invest in Costa Rica.
About Intel
Since paving the way for the PC revolution by marketing the world’s first microprocessor in
1971, Integrated Electronics (Intel) has spearheaded a computer revolution that has changed the world.
Ninety percent of personal computers in use today are based on Intel-architecture microprocessors. In
addition to the popular Pentium® processor, Intel manufactures networking and communications
products as well as semiconductor products used in automobile engines, home appliances, and laser
printers. Intel has become the world's largest supplier of microprocessors with 60-75% of the global
market and near 85% of PCs has an Intel processor "Intel Inside"28. Intel’s total income rose from US
$16.2 billion in 1995 to $26.3 billion in 1998. These figures reveal the Corporation to be one of the most
profitable companies in the world: Intel had net revenues in 1997 of over $25 billion and paid over $3.7
billion in income taxes29. The company employed in late 2001 approximately 80,000 people in 45
countries around the world.
Intel's distinctive position in the semiconductor industry has led the company to pioneer an equally
27
USITC, Ref. 79
28
Mendez, Ref. 48; Ortiz, Ref. 56
Nasbic Success Histories Ref. 55
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distinctive strategy for operations and investment. Essentially, the strategy is driven by cutting-edge
technology and blistering speed. Every nine months or so, Intel builds a new plant. Nearly all of these
plant are built to meet future -rather than existing- demand30. For instance, due to the explosion of Ecommerce (projected at $1 billion in 2002) and multimedia applications, Intel oriented its products since Pentium III - to Internet-based applications31.
The Costa Rica Plant in the context of Intel Activities
Plant products
Intel has two types of plants, there are fabrication plants or fab for producing the heart of
processors, and there are assembly and test plants known as ATP, which are relatively less expensive and
more labor-intensive compared with fabs. The first Costa Rican plant (CR1) was launched in 1997 and
began by assembling and testing Pentium II processors as well as Pentium Pro, Pentium MMX, Celeron,
and SEC cartridges, which integrated microprocessor and memory. The Pentium II is a 300 MHz
microprocessor capable of uses such as voice recognition and video. Pentium Pro was the result of
research focused on manufacturing more powerful and less expensive microprocessors, obtaining a
significant improvement on system function, especially in 32 bits programs as Windows 95 and NT. The
Pentium II processor is more powerful than the Pentium Pro (200 MHz), launched in 1995, and less so
than the Pentium III processor (500 MHz), which was launched in 1999 and which is capable of more
powerful functions such as game-playing on the web. Intel’s manufacturing in Costa Rica was upgraded
in a new plant (CR3) which began operations in January 1999 to assemble and test Pentium III
processors, as well as OLGA, one of its main components32. Plans for assemble and test Pentium IV
processor are in process.
Intel initial insertion in Costa Rica
According to government official records from CINDE (Coalición de Iniciativas para el
Desarrollo) -government institution to attract FDI- there are more than 30 firms in electronics and related
industries with manufacturing operations in Costa Rica. These companies are primarily foreign firms
established under free trade regime (FTR) with a broad range of activities inside the electronic sector. In
principle, the presence of several leading firms suggests a positive environment for enabling domestic
firms to build backward and forward linkages in different sector chains33.
As mentioned briefly, larger companies established prior to Intel’s arrival include C&K Components
(formerly Espion), a manufacturer of miniature switches; Bourns Inc. (formerly Trimpot) which provides
PC board assembly and testing at its Costa Rica location; Panduit, a supplier of wire and cable
accessories; Protek Electronics, a provider of digital metering equipment and Tico Pride Electronics
(TPE), an electronic contract manufacturing services firm which started operations in 1994 with a sales
and marketing office in Orange, CA., its activities including printed circuitry assembly (Surface Mount
Technology SMT and Through Hole) and assembly (wiring and harnesses) of electro-motors for
30
Spar, Ref. 73
La Nacion Digital, Ref. 40 (2000)
32 Corcoran, Ref. 10; La Nacion, Ref. 40 (1997-8)
33 Doner and Hershberg, Ref. 12
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aviation.. Several of these companies underwent recently a rapid expansion, for instances TPE grew
200% in facilities and 400% in labor force.34.
As also mentioned briefly, Intel’s operation in Costa Rica consists of an A6/T6 plant which comprises
basically an assembly and test process with the main processor components imported from other Intel
plants (fab) located worldwide and from other high technology providers. On-site specialized services –
delivered by its foreign equipment providers- are required for the operation of Intel’s Costa Rican plant
as well as are basic services and supplies provided by local firms.
Foreign high technology companies arrived along with Intel in order to provide accessories as well as
specialized services. Initially, Intel's plant was expected to bring to Costa Rica an additional US$500
million worth of associated investment by approximately 40 firms to engage in support and supply
activities35, however the scale of investment has not reached the expected level. Among the electronic
companies attracted by Intel are Photocircuits (circuit boards), Pycon (test boards), AETEC (circuit
boards) 36, Anixter (data communications, cable and wires), Tiros (curing sytems), Entex (systems
management), HP-Agilent (instrumentation), Alphasem (Die attach and sort systems), RVSI
(automation), Schlumberger (testing), which established operations in 1998 and early 1999.
As stated by S.H. Wong, Vice-president and Managing Director of Intel Penang- Intel suppliers need to
meet several critical capabilities, which first and foremost means technical competencies, manufacturing
capabilities and the ability to respond to multiple and sudden changes. The latter issue reflects the nature
of Intel's business where market dynamics change quickly, which also require suppliers to be responsive
to that change in the same rhythm in which Intel operates, i.e. 24 hours a day and 7 days a week. In
addition suppliers need to be able to meet Intel's stringent environment, health and safety (EHS)
requirements. Since Intel has become a global player with manufacturing sites in various locations
worldwide, SME suppliers have to be able to support this global network. Last but not least, Intel
suppliers need to be competitive from a total cost perspective.
Dimensions of the chain
The input-output structure along the semiconductor chain
Although physics and electronics engineering are the underlying technologies of
semiconductors, the manufacture of semiconductors also requires skills in chemistry, chemical
engineering, and metallurgy. In the manufacture of semiconductors there are four stages: design, wafer
production & wafer fabrication, assembly & test, and sales37.

The design and development of new semiconductors requires highly skilled technical and
engineering personnel as well as significant investment in capital equipment, such as sophisticated
computers and software. The circuit is designed and tested (through simulation) and printed out in
large sheets. These are then decomposed into layers (up to twelve or more), each being transferred
to a mask. The integrated circuit (IC) is constructed sequentially as each circuit layer is laid down in
silicon38.
34
FR, Ref. 23
FIAS, Ref. 21-22
36 Ward, Ref. 81
37 FIAS, Ref. 21-22; Spar, Ref. 73; USITIC, Ref. 79; Vieto, Ref. 80
38 Mathews and Cho, Ref. 47
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
Wafer production consists of silicon ingot creation, slicing and grinding and polishing. Germanium,
gallium arsenide, and indium phosphide are substrates used in the production of semiconductors.
Silicon is preferred since it´s relatively inexpensive, it can operate at relatively high temperatures
and it has an insulating, oxide protective property.

Wafer fabrication consists of oxidation layering, photoresist coating, stepper exposure, development
and bake, acid etch, doping, "repeat step", dielectric deposition & metallization and passivation.
Fabricating semiconductors is a complex process that is highly automated and capital intensive.
Fabrication requires a large investment in plant and equipment as well as skilled production workers.
Semiconductor manufacturers usually purchase their substrate materials such as wafers from
chemical producers, companies such as Waka Chemicals, Monsanto, Sumitomo and MEMC.

Assembly and tests consist in backside preparation, probe test, die cut, wire bonding, encapsulation
and burn-in. Compared with fabrication, assembly and testing of semiconductors is usually more
labor-intensive, and is often conducted in developing countries with low-cost labor.
The assembly process in Intel-CR1 consists in placing the processor and other components -such as
cache memory and RAM memory- in a wafer (purified polycrystalline silicon) using a welding
process. The Intel-CR1 production line consists of 25 machines along 180 meters39. During the test
operation, a robot places 30 semiconductor chips (boards) into a test machine controlled by a
technical worker who uses a computer and his analytic knowledge to re-program the test if needed40.
In fact, the inputs needed for Intel CR operations -phase I- are classified by sector in electronics and
non-electronics components, chemicals (solid, liquid and gaseous), packaging material, energy &
water and others. Machinery, equipment, technological knowledge, know-how, services,
maintenance, different labor skill levels, among others are required. The main outputs are solid
waste, hazardous solid, semi-solid and liquid waste, wastewater discharges, air emissions and
finished products (as well as employment generation, service consumption and other intangible
outputs).

Customization and sales consists in design, services, support and sales. The technology of
semiconductor manufacturing lends itself to varying degrees of customization, from totally
standardized devices such as DRAMs to totally customer-specific integrated circuits (CSICs). The
variation in customization is achieved technically by customizing one or more layers of the masks;
by using "cells" in circuits; by using metal interconnected between layers of circuits, between blocks
of transistors organized in rows and columns (gates), hence a "gate array"; through programming by
users41.
The value added of the chain
Wafer production process represents 2% of value added in the semiconductor chain; wafer
fabrication represents 26%, assembly and test 10%, and customization, sales and profit 62%. Assembly
39
La Nacion, Ref. 40 (1998)
y Arquitectura, Ref. 38
41 Mathews and Cho, Ref. 47
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42
and test facilities do not allow the best use of available educated workers in Costa Rica . According to
FIAS, the assembly and test operations of Costa Rican plant represent about 10% of total sales value of
chips and the value added is provided by the least qualified personnel and lowest paid workers in the
semiconductors’ value chain..
The local value added for Intel´s for the first two years of operation in Costa Rica was between 18 and
20%, including labor, services, electricity, among others. It should be noted that for an assembly and test
facility such as A6/T6, wage costs are the most important variable cost, typically accounting for 25-30
percent of total operating costs43. Some other data for Intel CR indicate an imports-exports ratio of 69%
as a rough estimation for value-added, pointing to the fact that imports include machinery and that the
firm manages its accounts outside Costa Rica, thus limiting its relevance for the national economy44.
Productive chain at Intel Costa Rican Location
High technology products and services Providers
Field research was carried out in an effort to sketch the role played by firms in the high
technology based activities required to support Intel's operations in the assembly and testing segments of
the semi-conductor chain. Table 2 summarizes some main providers inside that segment of the chain and
identified related activity.
Table 2
Intel-CR High Technology products and services providers
Company
Aetec Intl.
Agilent - HP
AK Precision
Alphasem
Anixter
DEK Printing Machines Ltd
EMC Technology, INC
Entex
Fema
LKT
Mecsoft
OPM Microprecision
Panduit Corporation
Photocircuits
Pycon
Reliability
Robotic Vision Systems Inc
Activity
Circuit board production, Media Cleaning process (trays)
Instrumentation, measurement and semiconductor equipment.
Material injection, trays for pick and place equipment (molds)
Fully automatic Die Attach and Die Sort Systems
Data communications products and electrical wire and cable
Precision screen printing systems and pre-placement solutions
Electronic components for satellite telecommunications
(microwave)
E-business consulting and management of LAN/WAN/Desktop
Fixtures for pick and place equipment and magazine walls
Automatic loading systems-boats transfer-from/to magazines carts.
Software and design involved in trays for pick and place equipment
Microprecision products for pick and place equipment (molds)
Cable tying and accessories, electronic components, labeling
Circuit boards
Electronic boards calibration, test during burn-in systems
DC to DC converters and Burn-In and Test equipment
Automated inspection, packages, machine-vision-based scrutiny
42
FIAS, Ref. 21-22; Ingenieria y Arquitectura, Ref. 38; Spar, Ref. 73; USITC, Ref. 79
La Nacion Ref. 40 (1999); La Republica, Ref. 41 (1999), Mendez, Ref. 48; Spar, Ref. 73
44 La Republica , Ref. 41 (1999); La Nación, Ref. 40 (1999)
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Sawtek
Schlumberger
Sykes
Tiros Thermal Solutions
Radio & Intermediate frequency, filters for digital wireless phones
Systems and services for testing semiconductors devices
Call Center / Support services
Design and manufacture automated curing system,vertical cure
ovens
Providers not related to High Technology
In addition to the high technology firms, other local companies (Table 3) are also Intel´s Costa
Rican plant providers. According to data45, 76 percent of Intel' local purchases represented services in
1999
Table 3
Intel-CR products and services providers not related with High Technology
Company
Electroplast
Corbel
Econopak
PRAXAIR de Costa Rica
Capris
Universal
Wackenhut
InHealth
CORMAR -AEI- Danzas
Metro Servicios
Metrologia Consultores
ICE
Vargas Mejia y Asociados
AyA
Activity
Plastic products
Boxes, corrugated boxes
Wood boxes
Nitrogen
Hardware store, industrial equipment and machinery
Office supplies
Security services for facilities
Food
Transportation/custom service
Occupational safety and health products
Equipment calibration
Electric power
Security Services
Water
Intel-Costa Rica chain
Intel is the main leader -flagship- of the micro-processors network, controlling critical resources
and capabilities along the productive chain, limiting the participation and opportunities of other
participants, and coordinating activities through its international linkages. Intel facilities around the
world act as a "virtual factory".
As is typical of flagships46, Intel locates different activities of the production chain wherever they can be
carried out most effectively, wherever they improve access to resources and capabilities and wherever
such activities are needed to facilitate the penetration of important growth markets. Figure 17 shows
A6/T6 segment of chain in Costa Rica.
45
La República, Ref. 41 (1999)
46
Ernst, Ref. 16
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A6/T6 Chain at Costa Rican Location
Components
and Software
Design
Services
Components
(Intel Plants)
Assembly
(Local-Prov.)
Supplies
(Local
Provider)
Components
(HT-FZR)
Specialized
Supplies
(HT-FZR)
Componets
(Foreign certified
provider)
•Water, Power
•Education, training
•Information
•General maintenance
•General services (food
legal, etc)
Services
(Local
Provider)
Test
Specialized
Services
(HT-FZR)
•Compoments, Supplies
•Electronic accesories
•Chemical products
•Equipment maintenance
•Test boards maintenance
•Calibration, Media cleaning
Supplies
(Local
Provider)
Finished Products
Figure 17
Specialized
Services
(HT-FZR)
Specialized
Services
(USA)
•Packaging Material
•Products technical
•Transportation,
•support services
•Customs, air-cargo
• (call center)
•Waste handling
•Hazardous waste treatment
•HT-FZR: High-Tech
and final disposition
•Free Zone Regime
As previously mentioned, the establishment of Intel at its Costa Rican location motivated the arrival of
international firms to support Intel's production through different services or products. All of these firms
were already part of Intel providers' chain and had previous contracts with Intel at other plants as well as
long standing relationships developed over many years. Some of these firms were established through
Intel’s strategy of fostering outsourcing to accomplish manufacturing needs, mainly cost reduction and
speed to market. Most of these firms focus on delivering services in Costa Rica to Intel, however some
of these externally oriented firms are expanding their Costa Rican activities to meet the needs of clients
abroad.
For the purpose of Intel-CR chain study, firms’ activities were classified --according to the products or
services required by Intel’s production chain--as follows: high-technology components, equipment
support services, high-technology services, support services, supplies, packaging products, logistics
services, other production and product support services (see figure 18).
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Clusters in Intel Plant A6/T6
Out of Costa Rican location
Components
and Software
Design
Latin American
Engineering
Services
(LAES) Division
Components form
Intel Plan “Fabs”
•Intel Oregon
•Intel California
•Intel New Mexico
•Certified Intel
Providers worldwide
Chemicals, Electronic and
non-electronic components
Since August 2000
Photocurcuits
(until june 1999)
Metro Servicios
•ANIXTER (Implement.)
High Tech Components
Assembly
and Test
(A6/T6)
Supplies
•Corbel
•Econopak
AETEC
Pycon
•Tiros
RI/RICR
LTK
•Agilent/HP
Packaging Products
High-Tech Services
Logistics Services
Products Support
Services
Equipment Component
Services
•CORMAR//Danzas-AEI
SYKES
 = Free Zone regimen
•ENTEX
•Merologia Consultores
Support Services
Figure 18
-FEMA
-AKPresic
-OPM
-MECSOFT
•Power
•Water
Other Services
Intel's productive chain activities and the variable status of providers along the chain is summarized in
Table 4, which helps to integrate the analysis in four variables 39 to explain how specialization affects
market structure and upgrading potential.
Table 4
Specialization-Upgrading Matrix
Applied to Intel Production Chain at Costa Rica location
Firm Activity
High Tech Components
From other Intel' plants
Printed circuit boards
Equipment Component and Services
Cure semiconductors
Chamber to test processors
IBT and AXI
Pick and place
High Tech Services
Handling media cleaning
Repair of boards/testing processors
Product Support
Product Support
Support Services
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Explanatory Variables
Product
Process
specialization specialization
Dependent Variables
Market
Upgrading
structure
Potential
High
High
High
Low
High
Low
High
Low
High
High
High
High
High
High
High
High
High
High
High
High
Medium
Medium
Medium
Medium
High
High
High
High
High
High
Medium
High
High
High
High
High
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Hardware and software tech support
Equipment calibration services
Supplies
Clean room/electrostatics control
Data communication products
(distrib.)
Packaging products
Corrugated boxes
Wood boxes, wooden pallet
Logistics Services
Freight transportation/logistic
Low
Low
High
High
Low
Low
Low
Low
Low
Low
High
High
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
Low
High
Low
Low
High Tech Components, Equipment Components and Services, High Tech Services and Product Support
activities, which have high product and process specialization, present highly complexity market
structures. Thus, the potential for upgrading is higher, but so too are the entry barriers and linkages are
low along the chain. Instead, Support Services, Supplies, Packaging products and Logistics Services
activities with low product specialization and a relatively high process flexibility specialization (reflected
in the speed of response) present a low complex market structure and low potential for upgrading. (see
also Annex 1).
For instance, in the High Technology Components, a US firm which arrived as Intel´s provider and
whose contract ended in 1999 decided to continue operations in Costa Rica, based in personnel good
performance and results, and upgraded its activity by shifting to a higher end of the chain. Instead of
quality inspection at the end of the process, the new local activity was tooling, where printed circuit
boards are designed using CAD software. This change meant, at the time of contract ending, to reduce its
work force from 300 to 10 workers and at the same time the upgrade of personnel profiles and
requirements, from an essentially maquila activity to one more technologically sophisticated with design
skills required. From the inception of these new activities the firm grew quickly to 250 employees in
2001.
In the Equipment Component and Services, even though high technological entry barriers for
competitors, local companies are becoming providers for Intel. For instance, a case of vertical linkage
involves a company which recently became Intel´s provider, whose upgrading process -through a
Business Development Service (BDS) provider using SUDIAC tools (see section I) for selling products
to Motorola- had been successful. The linkage -which was supported also by the national program for
development of local providers for multinationals- involve products which will be tested in three
different facilities in USA and Asia, bringing the opportunity for the local firm to become a Global
Service Provider.
Another case in this segment involves horizontal linkages among local SMEs to supply a product
fulfilling Intel´s requirements, involving material injection, precision machining and software design
capabilities. These firms had already started their alliance to supply another TNC --Abbot-- and one of
them had been also part of the SUDIAC/BDS application program mentioned above.
In the High Technology Services, international firms through contracting and training national personnel
are broaden the local knowledge base. The firms have grown five times since arrival providing
externally-oriented services to other clients located outside Costa Rica and maintain their initial business
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size with Intel. At the same time, linkages have been established with local firms in metal precision,
clean room, statics and occupational health & safety as well as in metrology services and equipment
maintenance an repair.
From a local perspective, Logistic Services presented a high entry barrier for potential competitors due to
Intel' preference for global providers, which are able to deliver services with worldwide coverage. In
order to be considered by Intel as provider for these services, a local customs broker and air freight
forwarder firm -with a regional position in the market- established alliances with another local firm and a
worldwide provider. The local firm -alliance- became Intel´s provider to manage high speed inventory,
deliver sales orders to Intel customers and supporting distribution-related services.
The local Product Support Services is a differentiated one, based on ICT development where a close
interaction with the customer is needed and its barriers to entry for competitors are high since it is a postsell service with significant value generation. The potential for upgrading is high on the basis of
substantial possibilities to deepen local base knowledge and forward linkages. Intel´s provider was
already established in Costa Rica and has continued its expansion further providing services to other
TNCs, building-up on skills of Costa Rican labor force.
TNC strategy and Industrial Upgrading of National SMEs
The global strategy of Intel was based until recently on setting the pace and standard of
microprocessors, basically establishing the market standard and generating demand based on a growing
number of transistors and processing speed. However, this pace started to be overwhelming even for the
fast cable modems. Thus, more software and bandwidth was needed. In addition, the connectivity
demand of Internet use is starting to affect global trends. Recently it has been seen that while the pace of
semiconductor market growth is slowing, software-services are starting to be a trend and -in general- it is
foreseen that the telecommunications market -ICT convergence- is the one that is going to set the
growing pace of the so called new economy. The communications-chips share of total chips sales in
1994 was 21 percent, while PC chips accounted for 25 percent of total sales 47. By 2003,
communications chips will account for over 25 percent of total sales, while PC-chips will fall below that
percentage.
The networking chips became important for future development and the market is characterized -at this
moment- by being based in an open standard which prevents any big international corporation to
“monopolize” the emerging market (through the setting up of a “common market standard”). Thus, the
struggle for the strategic position in order to have a big share of the future market will be complex and
Intel is not –yet- a major player in this fragmented market. However it has the resources and the needed
position –brand- in the bandwidth chips, which is a starting point as well as its investment and
acquisitions capacity, for instance recent trends show how they are paying their entrance to future
strategy technologies --which are becoming future building blocks of the new economy-- as it used to be
their strategy in the microprocessors market in the 1970’s.
The above has implied for Intel a need to reinvent themselves -while they grow- based in their core
microprocessor business “buying” -as mentioned- their entrance to a more dynamic-strategic segments of
47
Semiconductors Industry Association, Ref. 70
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48
the market which is reflected in the recent number of new products put in the market . The demands of
the “new economy” reshaped Intel corporate strategy, as became explicit with the arrival of the new CEO
--the creator of the “copy exactly” philosophy that boosted Intel productivity and speed to market to
maintain their leadership and high profit margins.
Under competitive pressures, Intel lowered its profit margin in the low end PC market and speeded up
the launch of its Pentium III at higher working speeds (up to 1.13-GHz) --mainly pressured by a new
product in the market (Athlon 1.2-GHz, AMD Processor). On the highest end of the computing market,
the delay of Intel´s Itanium (64 bits arquitecture) allowed rivals like Sun Microsystems and IBM to hold
on this market sector. In this sector, AMD has launched a much less ambitious effort to slightly modify
the instruction code of its chips to handle 64-bit code. Besides, Intel had cut capital spending in 1999
from $5 billion to $3.4 billion, figuring PC growth would be only 10% in 2000, instead PC growth hit
18%49, AMD grew its processor share to 17% from 14% in 2000 and it´s projected to reach 22% in late
200150. Intel´s capital expending went up to $6 billion (75% more) in 2000, opened four new factories
and increased the production of Pentium IV (up to 1.5GHz speed) by late 2001. On the other hand, Intel
is expanding into networking, cell phone and information appliance chips as prices and projected
demand fall in its core microprocessor business51.
Intel´s design is tied to a specific manufacturing process that has a life span of a couple of years. If the
chip design slipped its schedule, it was needed to shift to another manufacturing process that could make
the chip smaller and faster52. This is especially important in the delay that Intel faced in the launch of the
Itanium chip (64-bit architecture) apart from the fact that chip makers are upgrading from equipment
etching lines of unimaginably small dimensions, 0.25 microns across, to lines still smaller, 0.18 microns.
These upgrades double the number of circuit elements -such as transistors- that can be squeezed on to a
square inch of silicon. Other factors are: - the increase (at the other end of the size scale) of silicon
wafers from 8 inches across to 12 inches and - shifting from aluminum to copper (harder to work but
better electrons conductor) in these microscopic circuits53.
Recently Intel has accelerated the convergence of computing and communications to create new classes
of devices through technology integration for the wireless communication markets and it´s encouraging
software developers to consider the unique needs of emerging markets --expected to constitute
approximate 40% of the overall world PC market by 2006-- when designing products.54
Obviously the question that arise from the perspective of a small country such as Costa Rica55 is how this
TNC strategy and market dynamics will impact an environment that can increasingly be characterized as
a dual economy. Given the country’ small size and the substantial weight of Intel in its export revenues
and in its vision for the future, the metaphor that comes to mind is that of B. Perlman56 -one of Intel´s
Vice-presidents- about a “whale in a swimming pool". In such a context, questions concerning the real
48
49
Reindhart, Ref. 65
Reinhardt, Ref. 66
50
Edwards, Ref. 14
51
Semiconductors Industry Association, Ref. 70
52 Takahashi, Ref. 77
53
Semiconductors Network, Ref. 71 .
54
Otellini, Ref. 57
55 Ernst, Ref. 18
56
Spar, Ref. 73
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opportunities for industrial upgrading, and the required conditions to do so, take on special urgency.
For instance, there are some indicators that show a positive impact of Intel´s arrival in the national
economy as well as the accelaration of institutional reforms and coordinated effort by the government for
the development of local suppliers 57. From the perspective of income distribution an analysis about
Costa Rican growth shows that in 1999 while the increase of the national production was 8%, the real
gross available national income grew 0.8% showing a small impact in the national well being of the
population58.
Upgrading Opportunities
The Latin American Engineering Service Group (22 engineers from Costa Rica, 6 from Colombia, 1
from Venezuela and 1 from Brasil) is working in California as a design center using Very Long System
Integration Technology (VLSI), i.e. how to improve the speed of Pentium IV, using the profile of
electronic engineers with programming skills for microprocessor design. This could represent a niche
area such as the one in software. In fact, recently, Intel formed a software group directed to take
advantage of the country’s capacities in this sector.
On the other hand, Intel invested recently in a Costa Rican company, Artinsoft, whose flagship product is
a computer language translator that allows business to update software and systems rather than replace
them. Here is a core technology - software with artificial intelligence characteristics- that can be adapted
to Intel products, or to “work in designing a program to enable companies to migrate to Intel’s Internet
and operating systems” (i.e. transition from 32-bit architecture to 64-bit one). It should be noted that
there are more than 200 companies on which Intel has invested recently, looking at the list of these
companies and their products helps to put in perspective the investment made by the corporation in the
Costa Rican software company59.
In S.H. Wong -Vice President and Managing Director of Intel Penang- words Intel turns to “new
suppliers when they use or posses a promising technology or new capabilities which are not available at
Intel -when performance issues, such as quality, delivery or price competitiveness attract Intel’s
attention- or when Intel faces capacity constraints that could be bridged by outside suppliers.”
For instance, another example is the investment of Intel in a German software company with a leading
edge Product in Supply Chain Management that complements the corporation capacity to work as a
virtual factory. Also, the involvement of another Costa Rican software company to develop an inventory
management software based on internet applications which will be tested in four assembly and testing
facilities as a building block of the Supply Chain Management inside Intel´s virtual factory system.
Development of suppliers requires a national coordinated effort and clear policy formulation - as was
carried out by other countries like Malasia, i.e. Penang Skills Development Center (PSDC) - for instance
the recent establishment of a National Center for High Technology (CENAT) and the Costa Rican
Provee Program to facilitate local SMEs links with high technology TNCs, constitute important steps to
support such development. Also some efforts towards national coordination are being established
through the “Impulso” Program promoted directly by the President Office. This development is a
57
Larrain, Lopez-Calva and Rodriguez, Ref. 42
Gitli and Arce, Ref. 29
59 Albrink, Ref. 1; Corcoran, Ref. 10; Malik, Ref. 45; Reinhardt 66; Takahashi Ref. 77
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dynamic process that requires the concourse of critical and innovative thinking of different stakeholders
and strong developmental organizations that promote network cohesion (inter-firm linkages).
It is important to remember the dynamic evolution of the semiconductor industry and how its trends -at
least in short term- could reshape the sector and thus policy formulation dynamics. This needs to be
taken into account from an industrial upgrading perspective, especially from the country’s industrial
policy formulation perspective.
A recent study on the semiconductor industry60 shows how rapidly software, E-commerce and production
capacity-technology are changing the industrial organization due to acting economic forces. These
researchers made an enlightening analysis about Korean, Japanese, American, European and Taiwanese
strategies and how these are generating a “new industry organization”, differentiating between fabless
and integrated companies such as Intel, as well as how design software and E commerce tools for supply
chain management will impact the global industry organization, processes that could generate new
opportunities for upgrade.
These trends on competitive dynamics61 need to be considered inside the particular national insertion
strategy in global markets as well as the fact that the ability to learn determines the economic success not
only of firms and industries but also of whole regions and countries62.
The entry in global value chains is governed by rules set by private parties, these rules include standards
(quality, environmental, labor, health and safety) that are demanded to TNCs and to SMEs that establish
links with them. The process of building linkages between SMEs and TNCs requires some nurturing
actions and readiness of national enterprises. In fact, there is a need for actions --public policies and firm
strategies– that might enhance the country’s position in global production networks and strengthen the
capacity of domestic SMEs to achieve the sorts of technological and organizational learning that will be
needed to carve out dynamic niches of their own and to upgrade SMEs role in country’s economy.
For instance, the development of specific public policies and business strategies are required in order to
create the foundations of upgrading necessary to enjoy sustained prosperity with emphasis on reducing
constraints through state policy and public investment and/or through associative actions among nation
stakeholders. In this context, National Innovation Systems (NIS) must be built-up to promote innovation
in domestic SMEs and to invest in human resources skills development
Also, industrial policies that interact with firms’ strategies and industry structure are required to build the
necessary technological capabilities to achieve and perform a dynamic sustainable competitiveness in
global markets. as well as to develop specific strategies and policies to reduce the "threats" -- related to
the impact of international trade regulations and associated legal framework-- and maximize
opportunities through the upgrade of national competitiveness factors.
Besides, the promotion of new institutions design and Business Development Services (BDS) support is
needed to increase national SMEs links in global value chains and specific attention should be addressed
to increase the knowledge required, especially the tacit knowledge at enterprises and national institutions
as well as to develop market and technology intelligence services to guide national SMEs to more value
60
Leechman R. and Leechman, C., Ref. 43
Ernst., Ref. 15; Lundvall and Ernst, Ref. 44
62 Lundvall and Ernst, Ref . 44
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added niches in global value chains.
Finally, a sound labor environment is another important factor for upgrading through the development of
innovative labor market policies that provide equitable distribution of rents between firms and workers
and a sound framework for sustainable industrial upgrading strategies as well as through the
improvement of skills and labor conditions of national workforce under international competitive
markets.
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