The emergence of an industry cluster: Brazil’s ‘Oil Island’

By Alec Waterworth

Ilha do Fundao is an island complex constructed in the Guanabara Bay north of downtown Rio de Janeiro in Brazil. The island’s transformation reflects broader trends of technological and industrial development and also some of the challenges seen in Brazil in recent years. For fifty years, Ilha do Fundao was home to CENPES (the primary research and development centre of Petrobras, Brazil’s massive semi-public oil and gas company), and to the Federal University of Rio de Janeiro’s (UFRJ) Institute for Graduate Studies and Research in Engineering (COPPE). Yet, large areas of this mostly artificial island had laid empty. Today, that has changed. Ilha do Fundao is now also occupied by technology centres from nine leading companies in the global oil and gas industry and is emerging as a cluster of innovation in the oil and gas sectors. I have visited the island several times over the last two years in order to interview the actors in this emerging industry cluster. As a technology manager at CENPES told me during my most recent visit, “a new world has been created”.

General Electric’s US$100m research centre on Ilha do Fundao, opened in late 2013

Ilha do Fundao’s makeover has centred around the university-owned technology park in the south of the island. Next door to this is the university’s business incubator, which has expanded from one multi-firm building to three. A thirty-minute walk from the technology park takes you to CENPES and in between this lies COPPE. COPPE and CENPES have a long history in collaborating together: Over the last fifty years, COPPE has been instrumental in establishing Petrobras as a technology leader in the exploration and production of oil and gas, and most recently, as a specialist in deep and ultra-deep water technologies. “There has always been an exchange of knowledge. […] Petrobras has never worked completely alone,” said one of my interviewees at Petrobras. “Petrobras not only used their knowledge, it shared knowledge … so the university [could] help us.”

Technological and innovation capabilities on the island are now further enhanced with the arrival of new residents on the island, including Schlumberger, Baker Hughes, Halliburton, FMC Technologies, Siemens, BG Group, General Electric and Vallourec. These firms have invested heavily in the area, establishing large and expensive R&D centres. For example, FMC’s 20,000 square metre facility cost around US$25million to build. Why there? FMC hopes to tap into the university campus, to create a collaborative environment and enable access.

Yet, despite these new R&D investments, operational challenges remain. As yet, cooperation between the new companies on the island is still weak. Several companies identified this as a source of concern. Perhaps with strong relationship already built by Petrobras, it is hard for newcomers to forge links with local academics. But there may be other reasons. These issues will be examined in an academic paper in preparation this year which addresses the motivations of foreign multinational enterprises in Brazil in locating in industry clusters, how they participate in those clusters, the extent to which the collaborative efforts of such firms are inhibited by barriers to entry, and the implications for industrial innovation in Brazil. 

Alec Waterworth is a doctoral student with the Manchester Institute of Innovation Research, Manchester Business School, The University of Manchester, UK, and a researcher with the Project on Emerging Technologies, Trajectories and Implications of Next Generation Innovation Systems Development in China and Russia (ES/J012785/1). Alec is completing his doctoral research on path dependence, path renewal, and the evolution of innovation in Brazil’s petroleum sector. For further information, contact: alec.waterworth@postgrad.mbs.ac.uk

What influences the returns to innovation policies in Rising Power economies?

By Yanchao Li, Maria Karaulova, Oliver Shackleton and Philip Shapira

In the arenas of science, technology and innovation, two of the world’s largest emerging economies – China and Russia – have placed great emphasis on seizing early opportunities to develop and exploit strategic emerging technologies. These technology and innovation policies are being implemented in the context of, and are indeed part of, the transformations of economic structures and other innovation system aspects in these two countries, including changes in institutional frameworks, governance approaches and actor roles. In our ESRC project on Emerging Technologies, Trajectories and Implications of Next Generation Innovation Systems Development in China and Russia we are building a conceptual framework to investigate the factors that influence the returns to technology and innovation policies in each of these countries.

There are multiple points of comparison between China and Russia, including a shared legacy of centrally planned regimes and more recently economic reforms and market orientations. Three decades ago, there were many similarities between the two countries in science and innovation. National economic shares of investment in science and outputs of scientific papers were comparable. In both countries, the Academies of Sciences dominated the institutional research landscape, while universities focused mostly on teaching. Large state companies occupied most of the major economic sectors, driven by goals of production. Particularly since the 1990s, both China and Russia have sought economic transformation with greater use of market incentives, and each has developed policies to modernize and reform science and innovation. Today, there are similarities in the strategic goals of their respective innovation policies – and both countries engage in active innovation policy learning from US and European models.

Nevertheless, it is evident that present day China and Russia now diverge significantly from each other in science and innovation system performance. China has undergone a striking transformation in R&D capabilities, greatly expanding the share of its economy spent on research, rising to one of the world’s leading source of scientific publications, developing a number of globally-recognized research universities, and seeing the emergence of innovation as a source of growth among larger companies and new entrepreneurial start-ups alike. In contrast, Russia has struggled to maintain its research infrastructure, particularly since the decline of the oil-fuelled economic growth of the early 2000s and the economic consequences associated with recent geo-political tensions. Overall, by almost all innovation indicators, Russia now lags. Yet, these differences between the two countries cannot be explained only by macro-level events. We also identify the importance of institutional and micro-level factors within innovation systems themselves. Our research frames the problem of micro-macro systemic interactions in an iterative way through which actor expectations and subsequent strategies shape innovation policy implementation processes in an institutional context – which, in turn, influences the next round of an expectations cycle and bears on whether trajectories follow path dependency or open up path plasticity (see Figure).



Our research draws on interviews with a wide range of innovation actors in China and Russia including established firms, new start-up enterprises, central and regional government officials, scientists, think tanks, and managers of science parks and incubators. We have used focus groups and workshop and conference engagements alongside individual and group interviews. We also draw on secondary data, such as organisational documentation, bibliometric sources, and other available statistical data. We have focused research on emerging technologies, such as nanotechnology and synthetic biology, so as to track developments through the lens of a leading-edge, high priority new technology.

While our research is ongoing, we do have some initial findings. Evident in both countries are factors of path dependency – including deep-rooted legacies of administrative behaviour and hierarchical top-down oversight that carry over from prior phases of central state planning. At the same time, path plasticity – where actors stretch institutional boundaries and more flexibly overcome constraints – is stronger in China. For example, while one Chinese research university we visited does not officially encourage faculty to form companies notwithstanding central government guidance to allow this, faculty are informally associated with start-up-companies, at times through their graduate students. Indeed, actor perception of plasticity (as seen in China) is conducive to entrepreneurship, while actor conformance to path dependencies can stifle such activities (in Russia).

The importance of plasticity is also seen in differences in openness to internationalization and mobility of scientific and entrepreneurial talent. While maintaining strategies of “innovation with Chinese characteristics,” science and technology in China has become much more open to international knowledge exchange. An example is the prominent role of returnees in the innovation process in China, bringing with them transnational experience and active linkages with international innovation and business communities. “Over the years, the government has invested a lot in education and sending students abroad,” commented one interviewee. “These graduates and returnees are gradually showing their contribution to the society.” Russia is more circumspect when it comes to internationalization. While many Russian scientists have moved to other countries, relatively few move back – in part because of differences in the availability of resources but also because it is often hard for returnees to be re-accepted, notwithstanding government policies to encourage return migration. Instead, the Russian approach has been to promote internationalisation through established collaborations with compatriot scientists abroad – this has been a feature of many international cooperation programmes in recent years, although one consequence is that Russia captures fewer domestic innovation spillover benefits from these international linkages.

There are differences in perceptions of the roles of respective government in innovation processes. Maintaining good relationships with government officials at all levels is de rigueur in China. Government linkages often lead to special status designations, tax incentives, and support for research and facilities for high technology enterprises. This can be the case too in Russia, but we also see the increased importance of intermediaries in facilitating communication, trust building, and access to resources. However, as trust in government institutions is low, private companies tend to abstain from government initiatives and policies, even eschewing available tax breaks for science-based enterprises. Quasi-governmental brokers serve as a buffer between the aggressive state and mistrustful companies. “We prefer to work with foundations rather than with the government,” one Russian small enterprise told us. Interestingly, some of these foundations are funded by government itself. Others are privately funded, although the status of some foundations established by private donors has now become uncertain in Russia. A current case involves the Dynasty Foundation – a sponsor of research, education, scientific prizes and exchanges founded by a wealthy Russian business philanthropist – which has fallen into difficulty with the Russian government. Here, a seemingly flexible initiative designed to overcome problems in state science support has encountered the limits of government tolerance in the current Russian system.

Overall, the innovation actors in these countries now have different expectations, as well as differences in access to resources and capabilities. In some cases, similar weaknesses are evident in both countries, for example in encouraging innovation-based collaborations between large and small firms. Yet, while combinations of flexibilities and rigidities are present in the institutional and governance frameworks of both China and Russia, the greater opportunities for path plasticity now available in China have helped significantly to improve its innovation performance outcomes.

Further work is continuing in our project through to September 2016 both to elaborate the conceptual framework and to develop evidence and insights from our field work and other analyses.

All authors are associated with the Manchester Institute of Innovation Research, Manchester Business School, The University of Manchester, UK, and the Project on Emerging Technologies, Trajectories and Implications of Next Generation Innovation Systems Development in China and Russia (ES/J012785/1). Yanchao Li is a Research Fellow, Maria Karaulova and Oliver Shackleton are doctoral students, and Philip Shapira is Professor of Innovation, Management and Policy. For further information, contact: yanchao.li@mbs.ac.uk

Corporate governance in China: Podcast interview with Boya Wang

At a workshop on Law and Finance in Rising Powers, held at the Centre for Business Research, University of Cambridge, Boya Wang, Research Fellow at the Centre for Business Research, presented his research on corporate governance in China. In this podcast interview, he summarizes his findings on corporate governance and institutional factors of firm valuation during the financial crisis of cross provincial data of Chinese companies.

Wang said: “I have done some field work trips in China interviewing business people and that is where my business research hypothesis developed from. There is a divergence between the central and local government, their roles, and their incentives in corporate governance practices. The western media generally hold a monolithic view of the Chinese state as a unified entity, but actually it is not. Marketization and political reform have led to a divergence of interests across the local bureaucracies.

“The financial crisis provides the ideal test ground to test my hypothesis. During the financial crisis Chinese business was suffering from one of the worst economic situations and in this case the appropriation incentives will be strong. I think that this will expose many existing and neglected weaknesses in the corporate governance system.

“The political reforms and crack- down on corruption that is happening now are a reflection of what is happening in the economic sector and where we can see the rise of large non-state firms such as Alibaba and Tencent. These private businesses constitute a new constituency. For the Chinese party state, this will counter balance the conservative or entrenched interests and their power. I don’t think China will morph into the political situation that we find now in Russia.”

Listen to the full interview with Boya Wang

More podcasts from the workshop on Law and Finance in Rising Powers,
Centre for Business Research, University of Cambridge, December 9th 2014

Changing Labour Regulations and Labour Standards in China: interview with Khalid Nadvi

At a workshop on Law and Finance in Rising Powers, held at the Centre for Business Research, University of Cambridge, Khalid Nadvi, Reader in International Development University of Manchester, and the research programme co-ordinator for the ESRCs Rising Powers and Inter-dependent futures programme, presented his work on labour standards in China. This podcast interview gives an overview.

Nadvi said: “Our paper has been looking at how our changing labour regulations are impacting on labour standards in China. The paper that we presented is an introduction to a special issue of the International Labour Review which is on this theme coming out in December 2014.

What we are trying to look at is how does the rise in the labour regulation that we have seen in China in recent years impact on questions around labour standards working around labour conditions and labour rights.

I think things are changing and what we are beginning to see in those changes is that increasingly there is an improvement in real wages. There has been a lot of labour activism and in fact grass roots activism with wild cat strikes and so on, and one of the consequences of that is that there has been a rise in real wages in much of the region along the coastal belt and pearl-river delta and the province of Guangdong. But the nature of the labour regime in China and the working conditions in China is varied and so if you move further inland to inner provinces you might still see very poor conditions and very harsh working environments.

We need to do more analysis of ways in which national, regional and local levels of government engage with this agenda. Looking at labour regulations and the law that has been passed is not going to be enough we need to see how they get implemented and what our evidence is pointing to is that the nature of that implementation varies at the local level. There are reasons why those variations take place.

When you look at the BRICS,  Brazil is the most interesting it is a fascinating story of the ways in which regulation around law, around finance, around labour standards, have really moved ahead. Brazil is interesting and is almost an outlier. China falls somewhere in the middle and Russia is at the other extreme, where we don’t see very strong legal institutions beginning to take effect and so therefore we see all sorts of issues around corruption.”

Listen to the full interview with Khalid Nadvi

More podcasts from the workshop on Law and Finance in Rising Powers,
Centre for Business Research, University of Cambridge, December 9th 2014

Law and finance in Russia: interview with Rilka Dragneva-Lewers, Larry King, and Sveta Borodina

At a workshop on Law and Finance in Rising Powers, held at the Centre for Business Research, University of Cambridge, Rilka Dragneva-Lewers (University of Birmingham), Larry King (University of Cambridge), and Sveta Borodina (University of Cambridge) presented their work on law and finance in Russia. In this podcast interview, they summarize their findings.

Rilka Dragneva-Lewers presented on the EUs influence on Company Law Reform in the Eastern Neighbourhood: 
“My main area of interest is the Ukraine, which stands out amongst the rest of the eastern European states in that it was probably the last country to reform its law on the books and it is of course in a state of very serious turmoil at the moment.

“The main approach of the EU has been to insist on legal approximation so it has pursued both integration and stimulating economic development through reform of the laws. But as we have seen this is definitely not enough and this external pressure has not been a critical factor, for legal change. Businesses manage to protect their property rights through various extra-legal ways through access to political power for example and protection.

“The difficultly with large businesses in Ukraine is that there are often run by holding companies and they are owned by oligarchs. This has meant that there has been a very strong business effort to keep transparency low and maintain the privacy of dealings. Transparency remains a critical issue in business dealings.

“At the EU level the economics is quite complex. The EU despite having had a very strong response to Russia’s policy in Ukraine with sanctions still suffers from a lot of disagreement with its member states because Russia’s approach of subsequently imposing its own sanctions against the EU has been divisive.”

Larry King, Professor of Sociology and Political Economy University of Cambridge spoke about 'The Governance Grenade, the Effect of Mass privatisation on Corporate Governance in Russia':
“There are many different ways to privatise and we looked whether how you privatise makes a big difference, for example how do you allow state owned enterprises to compete with other private firms? How do you allow domestic owners to emerge which then go on to privatise firms and which will probably have much better outcomes? This happened in Poland and much of Central and Eastern Europe, and here there is a big role for foreign investors. However, when you try to privatise everything at once, without waiting for domestic owners to emerge, or without inviting in competitive auctions involving foreigners, you have to embark on artificial privatisation.

“Rather than that being a corrupt process in itself, my argument was that it created corruption. It led to firm failure. Creating owners who had no capital, who had no expertise, who had no connections, and who couldn’t monitor firm insiders, created a perfect storm for firms to fail. Once they started to fail it created a fiscal crisis for the state as nobody was paying taxes.

“This led to a situation where firms were retreating from the market as state bureaucrats, who were already demoralised from the transition and were not being paid, were now ripe for corruption. What emerged in many of these countries, Russia or Ukraine, is a system of social property relations that were based on client type ties between political officers and captured businessmen who were what we call Oligarchs.

“Clearly these systems needed to change but Russia for example could have done what Poland did and it could have protected its domestic market and allowed competition to drive enterprise restructuring and reforms of the state but they tried to do everything at once and that led to disaster.

“In summary, you can’t really describe these countries as in transition from socialism to a market society, what you have is a new type of market society developing, one in which the relative separation of the political and the economic spheres is different. There is much less separation and to be in big business you also have to be in a political community in these countries.”

Sveta Borodina outlines her findings on law and finance in Russia:
“In Russia people tend to do business with their friends and acquaintances and there is also the concept of reputation so people know each other. They rely on law to formalise what they have agreed informally previously. Trust used to be the way of making deals but nowadays lawyers are getting involved at earlier stages and they look at the letter of the law before the signatures are put on the paper.

“People are starting to understand that if you lead your business according to the rules you are more secure you are safer and you will have more chances of keeping your business in case there is an attack from a hostile acquirer.

“I was very pleased to find that the micro side of the business is improving and that it has improved considerably and the technocrats are moving the country in the right direction but the trouble is that the political set up is in conflict with this forward movement. “

Listen to the full interview with Rilka Dragneva-Lewers, Larry King and Sveta Borodina

More podcasts from the workshop on Law and Finance in Rising Powers,
Centre for Business Research, University of Cambridge, December 9th 2014

China-Russia cross-border trade: podcast with Caroline Humphrey and Sayana Namsaraeva

At a workshop on Law and Finance in Rising Powers, held at the Centre for Business Research, University of Cambridge, Caroline Humphrey, Emeritus Professor of Social Anthropology, University of Cambridge, and Sayana Namsaraeva, Research Associate Department of Anthropology, University of Cambridge, presented their insights into trade across the Chinese-Russian border. In a podcast interview following the presentation, they give an overview of their research findings.

Summarising her research on 'Cross-Border E-trade and is Vicissitudes', Humphrey said: 
 “My paper was called e-trade between China and Russia and it was about the objective facts of how e-trade is taking place these days. One the one hand it is greatly encouraged and the relationships between China and Russia are getting much closer and this is a lovely high tech thing that could develop but on the other, in practice it has all sorts of problems.

“The problem is the big Chinese internet firms don’t accept payment from Russian banks and cards, and also the cheapest and best sites are in the Chinese language so they need interpreters to find out what the information is on those sites. They use mediators, middle men firms that have mushroomed up in Russia, and that helps them get access to the goods but it means that it is much more expensive for them and rather slow and cumbersome.

“I think there are some perils of trading. There are perils that the goods may be incorrectly described or that they arrive in the wrong quantity, that kind of thing, but there isn’t much come-back for the Russian consumer, the legal situation is not good at all. Deliveries from China to Russia have to go through several complicated ways of crossing the border and they have to pay big customs duties.

“You can send goods back if they are absolutely wrong in relation to what you ordered but if it is a minor issue, or it doesn’t look like it did in the catalogue, you certainly couldn’t. There is a certain amount of muddle, particularly in the Russian postal service that is coping with a gigantic numbers of parcels from all over the place, and things do often seem to get lost in there. Bribery is absolutely very common indeed particularly when crossing the borders.

“At the moment it is a punt if you want to buy something online and whether and how fast that will change is very difficult to say. But it is also exciting, because with the internet you have access to this huge range of goods and almost all of it produced in China.”

Namsaraeva described her work on 'The Effect of Exchange Rate Changes Post-Ukraine on Trans-border Trade between China and Russia':
“My research is on women border traders who do regular shuttle trade between Russia and China to buy things cheap and to sell dear on the Russian side.

“I think this kind of shuttle trade is very important for the local economies both for Russia and for China but at the same time, the border economy exists in the shadow economy of both countries.

“Border traders work in the professions in the week, they may be nurses, doctors, teachers but at the weekend they go to China and become shuttle traders to resell it. This is how they survive and how they support their families.

“The younger generation can go online and do this click and delivery thing but the elder generation that is not familiar with the internet still prefer to go to the real shop and touch and feel the real thing.
“Until recently border trade was also associated with tourism from Asia because as well as buying things they also spent quite a lot of time enjoying life in China, going shopping, eating out, visiting parks and saloons, and learning more about Chinese culture.

“Now there is a growing economic disparity between Russia and China, because once the Soviet Union was a very powerful regional super power State, but recently with China’s economic growth, the power balance has changed, and Russia has moved from being an older brother to the position of the younger sister.

“Nowadays people are really in an uncertain financial situation and with the devaluation of the Ruble they can’t plan their futures and because of this 40 per cent devaluation crossing border points are half empty. People need to save money in order to survive.“

Listen to the full interview with Caroline Humphrey and Sayana Namsaraeva


More podcasts from the workshop on Law and Finance in Rising Powers,
Centre for Business Research, University of Cambridge, December 9th 2014