- SOFTWARE PRODUCTION AND TRADE
The production of software has attracted the attention of many governments and firms in developing countries. It is an area where there do not appear to be significant entry barriers, and where firms can be created and can develop with limited capital if they have access to well-qualified human resources. Although it is true that fixed production costs are not as high as in other activities, the development of world-standard packaged software requires considerable - and risky - investment in programme design and development. Moreover, it is not only a question of having a good product: the ability to market it is essential to the success of any venture in this field (see Correa, 1995). This explains why, despite high expectations, the software industry in developing countries has performed very modestly, notwithstanding the support given by some governments to local production and/or the export of software (Heeks, 1994).
The international market for traded software totalled approximately US$195 billion in 1993, and was estimated to rise to around US$275 billion in 1996. The distribution by country of packaged software production, consumption and trade is illustrative of developing countries' marginal role as software producers (see table 1). The "rest of the world" (including all developing countries) accounted in 1991 for only 1.2 per cent of world production and 2.3 per cent of total exports. Their consumption, however, was 7.7 per cent of world figures. Table 1 also indicates that the United States has a unique dominant position in this market, with 78.3 per cent of global production and 93.1 per cent of total exports of packaged software.
A few Latin American countries, such as Chile and Uruguay, have achieved some success in the export of software, mainly for vertical markets, undertaken by small and medium-sized firms. Chile is reported to have exported in 1995 software worth more than US$30 million, and Uruguay software worth about US$8 million. Though not significant in global terms, these figures are relevant for small firms such as predominate in this area.
Table 1. Packaged software: production, consumption and trade, 1991 (US$ billion)
|
Production (%) |
Exports (%) |
Imports (%) |
Consumption(%) |
| United States |
39.98 78.3 |
20.04 93.1 |
0.61 2.8
|
20.54 40.2 |
| Japan |
2.21 4.3
|
0.12 0.6
|
3.32 15.4
|
5.41 10.6 |
|
Rest of World |
0.62 1.2
|
0.49 2.3
|
3.81 17.7 |
3.94 7.7 |
Source: Göransson et al. 1994.
One of the major weaknesses of Latin American firms is market access. It is extremely difficult for small, unknown firms from developing countries to commercialize products in the world market, even if they are well designed and provide reliable solutions. The launching and the marketing of new products require not only skills but also sizeable resources. Retailers in industrialized countries generally work with potentially profitable products and are reluctant to accept newcomers. In addition, software producers need to provide customers with after-sales services. However, the cost of establishing and maintaining offices abroad is too high for small firms.
- THE ROLE OF PARTNERSHIPS
Given the conditions described above, partnerships with foreign firms may be a powerful tool for fostering software production by and exports from Latin American countries. A study conducted at the request of the European Commission aimed at identifying perceptions, interests and possible goals in relation to a possible European - Latin American interaction in this field. The study explored the potential for alignment of Latin American and European firms. Critical to the alignment process is an understanding of the role played by technical as well as social aspects. Technical aspects include the characteristics of the products and production processes, and in particular the opportunities offered and limits imposed regarding collaborative arrangements. Social aspects relate to the existence of a common technical language - which is facilitated by the codification of knowledge, use of standards and availability of good products documentation - and to the identification of common business objectives.
Analysis of the perceptions of Latin American software firms with regard to the possible role of European partners revealed a significant lack of knowledge about the characteristics of and opportunities offered by the European software market, industry and technology. However, at least Chile's association of software exporters (CEES) is targeting Europe as a priority area after Latin America. Europe is seen by CEES as providing far greater opportunities than the United States (CEES, 1992).
Table 2 summarizes the perceptions on possible cooperation between Latin American and European software firms. Europe's main attraction for Latin American firms is the size of its market. A number of difficulties are perceived, however. Some find relatively easy solutions (the use of English to avoid language fragmentation), while others see a need to build mutual confidence and overcome a negative perception (by Europeans) of software produced in Latin America.
Europeans see some opportunities in Latin America. Although Latin America does not have a very large software market, it is growing rapidly (particularly since liberalization policies were implemented). Factors perceived as obstacles to possible cooperation are also significant, including cultural barriers and fear of instability. Moreover, there is a considerable lack of information in both Latin America and Europe, which may constitute a formidable barrier to the development of partnerships. As mentioned below, it is in relation to this typical market failure that concerted public action may play an important role.
Table 2. Current Latin American and European perceptions
| Latin America |
European (preliminary) |
| Europe is very important - the second largest market. Chile is even giving strategic priority to Europe over the United States. |
There might be some interesting opportunities in the Latin American market. |
| It is not easy to do business in Europe because of fragmentation and linguistic diversity, but the use of English facilitates interaction. |
It is difficult to do business in Latin America because of its economic and political instability and different languages. |
| There is a lack of detailed operational knowledge about the European software market, industry, and research and development (R & D). |
There is a lack of detailed operational knowledge about the Latin American software market, industry and technology. |
| Europeans have a poor perception of Latin American software capabilities, which is sometimes manifested in a "superior" attitude. |
Latin America is not associated with good software capabilities (e.g. products and skills). |
| There is a long lead time for fostering relationships. |
Dissemination of the results of R & D programmes in Latin America is a desirable possibility. |
| European are less open than the United States with information. |
|
Source: Molina and Correa, 1993.
- BUILDING UP PARTNERSHIPS IN THE SOFTWARE AREA
Interviews with Latin American and European software enterprises suggest the kind of "give-and-take" that may occur if partnerships are established. Table 3 presents a general picture that makes no distinction on the basis of the type of partnership that may be established.
As indicated in table 3, local software firms can offer commercial opportunities based on knowledge of domestic markets, as well as production opportunities. With regard to the latter, the main strength of Latin American firms may lie in their qualified human resources and the low salaries they earn as compared with Europe. Latin American software firms will have much to gain if they can have access to new, competitive products, or become providers of programming or other services under subcontracting agreements.
Table 3. Give-and-take for Latin America
| Give to Europe |
Take from Europe |
| Knowledge of local Latin American markets |
Knowledge of local European markets |
| Entry point for Latin American markets and government tendering opportunities |
Entry point for European markets |
| Some competitive products |
Competitive products |
| Skilled labour force with lower costs |
Leading-edge knowledge of European software R & D |
| Opportunity for dissemination of European R & D results |
Possible subcontracting (and ideally partnership) in R & D projects |
Source: Molina and Correa, 1993.
Possible forms of cooperation agreements are listed in table 4. They include simple forms of licensing or distribution agreements, whereby the recipient is generally authorized to reproduce and/or sell copies of a computer programme. In some cases, this implies the communication of the source code in order to allow the supply of maintenance services (generally a profitable after-sales activity); in other cases, the licensor retains the source code in order to ensure full control over its trade secrets, and provides the licensee/distributor with the information needed to solve a customer's problems. Most Latin American companies seek relations with European firms which could lead to product distribution or some form of joint venturing.
Table 4. Possible mechanisms for European-Latin American interaction
Licensing of products; distribution arrangements, including service and maintenance
Joint ventures based on:
- complementarity between available products and expertise
- extension of products to other environments and platforms
- extension of products to different geographical markets
Joint ventures responding to Latin American governments' call for tenders
Offshore programming contracts
European R & D programmes:
- some form of Latin American participation in projects
- dissemination of results in Latin America
Source: Molina and Correa, 1993.
Joint ventures can also be an important means of cooperation. In this field, however, Latin American firms operate with very limited capital investment, and are not likely to be in a position to contribute significantly to new ventures. Joint ventures can be organized to respond to specific demands, such as government contracts (as in the case of some large projects in Chile). In such instances, the risk is lower and financing may be available from international sources.
Partnerships can also take the form of offshore programming or other subcontracting. Latin American software firms have not sought to establish this type of arrangement (or if they have, have not been very successful so far). In general, international subcontracting has not been as common in Latin America as in Asia.
Other forms of cooperation may involve R & D cooperation with European firms or R & D institutes, or participation in European R & D programmes. An example is a Chilean company working on artificial intelligence, which has conducted joint research projects with Electricité de France, and has also been selected as a partner in South America by the well-known French Institut national de recherche en informatique et automatique (INRIA). Latin American firms have participated - exceptionally - in European biotechnology programmes (at least one Argentine firm is participating in a Eureka project), but no such participation has yet been reported in the software area.
- THE INSTITUTIONAL FRAMEWORK
As described above, the alignment process in the software field may lead to the development of a variety of partnerships. There is a potential for business collaboration, which could be fostered if the informational market failure mentioned above and the problems related to financing were addressed.
Public organizations may facilitate the development of opportunities, for instance by increasing possible partners' direct contacts and knowledge and by providing financing for pre-investment and investment stages. The European Community Investment Partners (ECIP) scheme illustrates a possible framework for public support of this type of collaboration in Latin America. It should be complemented by actions at the national level that, for instance, facilitate firms' participation in international fairs, promote subcontracting and exports of programming services.
CEES. 1992. Plan estratégico CEES. Santiago de Chile: CEES. Mimeographed.
Correa, C. M. 1995. "Strategies for software exports from developing countries". World Development, Vol. 24, No. 1.
Göransson, B., Brundenius, C. and Edquist, C. 1994. Trends in the global software industry. Paper prepared for UNIDO. Mimeographed.