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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:
internet: www.codeti.co.cr
Building SMEs Competitiveness: Business Development Services and
the Case of Intel Investment in Costa Rica
Jorge Monge[1]
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. semi-conductor 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 and domestic firms engaged in the chain, highlighting obstacles and opportunities for upgrading.
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 chain[2]. 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.
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 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) developed[4] 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.
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 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 mentioned-accordingly 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 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).
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.
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, ISIC[5] 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.
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 technical-financial 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 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.
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).
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
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).
The BDS Management System[6] 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 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 growth[7]. 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).
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)