Paulina Ramirez Birmingham Business School

1. In what way do national systems of innovation matter for learning, upgrading and innovation processes in services GVCs? A review of the empirical evidence. Paulina Ramirez Birmingham Business School 'Offshore services in Global Value Chains: New drivers of structural change in Latin America and the Caribbean?', ECLAC, Santiago, Chile; 18-19 October 2012

2. GVCs, in-house learning routines and NSIs: literatures that do not talk to each other • GVC perspective a number of advantages over traditional IB • GVC focuses on MNCs but also indigenous-owned firms whose activities and competences are shaped by participation in GVCs. • Focuses value and location of FDI but also nature of the activity. Allows a more detailed study of the knowledge and skills required by subsidiary or partner firms. • Studies of upgrading in GVC find that upgrading does take place in GVCs. However, not automatic depends on governance of GVC, type of knowledge but also existing competence of firms. Firms that upgrade most are those that already have in-house capabilities. • Doesn’t say how upgrading takes place. Doesn’t analyse firms.

3. Studies of firms • Learning is difficult and requires conscious investment • However firm do learn from routine activities. Passive Learning • For more complex learning firms need systematic in-house routines for learning and knowledge acquisition (e.g Technical departments, R&D)

4. National systems of innovation • Learning is a social activity. Occurs through interactions inside the firm and between the firm and social environment it is embedded in (customers, suppliers, finance system, training systems, universities). • Therefore, national institutions influence and shape how and what learning takes place. Gives rise to different types of learning and upgrading. • National business and innovation systems differ between countries. Notion of ‘best practice’ not meaningful. • Varieties of Capitalism: Business systems are not product of logic (are not technocratic problems) but are the product of political and social choice. They are often contested (e.g. national skills systems, ownership of IP). Different countries make different choices.

6. Inside firm GVC ? NSI/VOC

7. Review of Empirical literature Looked at GVC literature: • Very little on role of national institutions on learning and upgrading in GVCs though studies argue that link needs to be made. • How GVCs affected learning in different types of firms (e.g. MNC/indigenous) Looked at literature of NSI and VoC. Very little on: • How national institutions support learning in GVCs, • Whether firms in GVCs learn and upgrade differently from firms not in GVC. • Whether firms in GVCs make different demand on NSI

8. Empirical studies identify to five institutions/factors • Institutions related to human capital; • The national science and technology research system; • Industrial structure; • National demand; • Intellectual property protection. Most empirical studies on business services are India, Ireland, E. European • Main difference: India has MNCs but also significant indigenous industry. Ireland and E. Europe strong MNCs very weak indigenous firms.

9. Institutions related to human capital: Education, training and skills • Offshoring of business services started before ICT. A number of countries (e.g. Ireland, Barbados) developed business services industry based on advantages of location, English-speaking workforce, cultural proximity to main market, openness to FDI. • Convergence between ICT and business services made technical skills more important. India and Ireland early development in IT related industries and have diversified into ICT-enabled business services from there.

10. Education and skills development system • India entered business services from strong IT services position. Skilled workforce (at low cost) singled out in all studies on success of this industry • Government initiatives in IT education started early (1970s and 1980s): introduction of graduate and postgraduate programmes in computer sciences. Proficiency in computer programming made mandatory for undergraduates of IT colleges and for science postgraduates of all major universities. • Government-sponsored initiatives resulted in both public and private training initiatives to develop software skills amongst the workforce. Led to establishment of private training colleges and training in workplaces. • India's engineering colleges emphasised in all studies. They are linked to the agglomeration of software MNCs around the pools of skilled labour (e.g. Bangalore). • With time, significant in-house training programmes by big Indian firms (e.g. TCS, Wipro and Infosys. Often bigger than some university programmes

11. However, some questions with this system. • References to inefficient use of human capital with highly qualified engineers working in tasks that underutilize their knowledge and skills. • Explanation given: Indian software firms (above all those servicing the US rather than the local Indian market) prefer to recruit university trained engineers even for non-technical tasks rather than diploma holders from private training institutes to convince US clients that they have a qualified workforce. Skills used as a signalling device • Evidence of a polarised skills system with a very large pool of unskilled workers, significant numbers of graduates who are underutilising their skills and a weak middle. • No doubt that there has been significant upgrading in Indian based GVCs- both MNC subsidiaries and indigenous firms- but argument about inefficient use of skills important because leads to tight labour market and skills shortage in other sectors

12. Ireland and E. Europe • Business services dominated by MNC with Indigenously-owned firms very weakly connected, if at all, to GVCs. • Presence of business services MNC subsidiaries made specific demands on national educational provision which not in existence in countries. Key point was willingness of governments to respond to these demands. • E. Europe: introduction of secondary-level training for future call-centre employee; the organisation of university-led training courses in ‘services-science’. • MNCs interested in language skills. University graduates being recruited because they have language skills. Other skills not being used (Hardy 2011) • Questions about underutilized skills.

13. Ireland • From 1960s industrialisation strategy of FDI-led growth based on attracting higher-value activities. Policies to attract FDI in IT since 1970s and to establish technically qualified workforce • Key has been the responsiveness of Irish education policy to the skills requirements of MNCs. Establishment of Regional Colleges who specialised in IT and software training. During 1980s initiatives to train school leavers in the basics of IT, office procedures and business operations. • Grants given to employers for employee training. Training subsidy given to MNCs as part of incentive package to invest in Ireland (Apple, HP, Dell, Microsoft). • Ireland’s accession to the European Union key to the growth of its vocational and technical education system as expansion was financed to a large extent with the assistance of European Funds. • Upgrading, but questions raised about heavy orientation to needs of MNCs and a neglect of the requirements of indigenous firms

14. Science and technology system • National science and technology systems important for several reasons • (i) training of very high skilled workers without which limits to upgrading • Information and consultancy services; access to new technologies • (ii) source of new entrepreneurial start-ups • After a certain point in order to undertake more knowledge-intensive activities of GVC need access to very high-skilled workers with doctoral degrees as well as research expertise. This is required for ‘problem solving expertise’, thinking out of box

15. India S&T system • Government R&D efforts in software development distributed throughout a variety of public research institutions (including military research) and universities was central to the development of a critical mass of skilled workers with software expertise • This seen as essential for the upgrading activities of both MNC subsidiaries and indigenous firms • Many of these highly-skilled workers went on to become the entrepreneurs that underpinned the development of local cluster of 'home grown' firms. • Some studies however refer to the need for bigger postgraduate research and training infrastructure. This has been identified as a constraint to be able to upgrade to more complex activities • Weak industry-academic links resulting in a continuing mismatch between the skills-set of employees and research activities of academics.

16. S&T in Ireland • Due to increasing competition for FDI Ireland saw building of national research system ‘with international reputation for excellence’ as key to attracting and embedding high-value activities of MNCs. Seen as alternative to lowering wages. • Since 2000 major initiative in S&T bringing in scientists from US and EU. Evidence that some MNCs have upgraded some activities due to this policy. Partly because Ireland is subsidising large part of R&D of these MNCs in Ireland (e.g. Lucent, DELL, Microsoft). Also evidence of increase in linkages between firms with higher skill intensity and Irish research but modest. • S&T policies modelled on US NSF which seen as ‘best-practice’. Reputation for excellence seen as necessary to attract MNCs. But this research not relevant for indigenous SMEs who need support in absorbing existing technologies that ‘international excellence’. Therefore very weak linkages with indigenous firms. Few spin-out firms.

17. Industrial structure • Important for formation of new firms that then insert in GVCs, often at higher nodes. • MNC spin-outs important in India and Ireland. Though often failure of MNCs triggers spin-out activities. Exit of IBM in India and collapse of Digital in Ireland led to formation of indigenous firms • Existing national firms also important. In India many new entrants into business services are existing large firms diversifying from hardware into business services or firms that had large in-house data processing activities (WYPRO) • Spin-outs need financial support and not clear what the financial system supporting these firms are. Government venture capital support exists in both Ireland and India. It also appears that much of the financial dynamisms for services firms comes from Silicon-Valley based Indian techno-entrepreneurs that have become Angel investors for Indian based firms.

18. Role of national demand • National demand key for upgrading in early and later stages of development of indigenous firms. Most firms begin to develop skills in national markets- from there more effort needed to integrate to GVC. • Demand from private sector firms important. In India exit of IBM important for creation of indigenous firms who were called upon to service domestic market. In Ireland indigenous software firms developed as suppliers to national banks. • Public procurement also key for stimulating learning and skills in more complex projects. This can be important for established firms. In India , example given of large domestic projects (e.g. reservation system for Railways, IT for Bombay stock-exchange) that key for upgrading capabilities of indigenous firms. Argument that these projects more complex than work done for MNCs. • Brazilian banking and telecommunications industries for Brazilian software firms. In Indian pharma industry domestic market important for expertise that now used to export R&D services. • However domestic demand not replacement for drive for international markets. • Responsiveness to demand important for learning. Distance from centres of demand will limit upgrading. Where will high-valu activities be located?

19. IPR • In past developing country firms could develop knowledge and skills via reverse engineering. Argument that this allowed many firms to inset themselves in GVCs of EU and US firms as manufacturing or service providers. • Indian pharma best example. ‘Developmental patent regime’ of past meant existing Indian pharma firms could develop the chemical skills that allows them to insert themselves in EU and US led GVCs as R&D service providers. However, also meant that Pharmaceutical MNCs reluctant to invest in India for many years due to lax IPR. • In India NASSCOM (ICT Industry Association) supporting anti-piracy initiatives. • Within same country different industrial sectors may have different interests with respect to IPR

20. Conclusion • Empirical studies indicate that national education and training systems are important in shaping the national skills and knowledge profile of the workforce needed to participate in GVCs. The role of national market important for knowledge and skills at firm level at initial stages and through demand for complex projects. • NSI important for shaping the characteristics of firms that will engaged in GVCs by influencing firm formation and the balance between MNCs and indigenous firms. • Important because these two types of firms may place different requirements on NSIs needing different types of support. Sometimes these requirements will conflict between countries and different GVCs within countries (e.g. IPR, nature of S&T systems, priorities for spending). • Need more research. Links between GVCs and NSI not really understood. ,