TY - JOUR
AU - Zawislak, Paulo A
AB - Abstract Recent literature has called attention to the significance of mission-oriented policies (MOPs) in setting the directions of change, market creation, and economic development. The aim of this article is to analyze and discuss the main challenges of setting MOPs in the context of developing countries. We do so by looking at the recent development of the Brazilian shipbuilding sector where an entire institutional setting was put in place to boost technological and industrial development. We investigate the policies set for the sector to create a market, stimulate the industry, and promote innovation. Results show that, while the set of policies emplaced was able to give an initial boost in the sector, coordination uncertainties and high capability-building costs precipitated the failure of the industry to catchup with international competitors. We argue that there is a fuzzy boundary between policy expectations for market creation and the actual possibilities of building an industry. 1. Introduction Innovation is widely recognized as the fundamental source for economic development and prosperity, making it a high priority for both strategic decision and policymakers. While innovation is the result of the entrepreneurial efforts of firms, firms themselves do not exist in a vacuum. They are a product of social/market relations (Polanyi and MacIver 1957; Granovetter 1985) and institutions (Coriat and Weinstein 2002), which define the rules of the game firms must play (North 1991). In this sense, governments have a direct and indirect influence on the rate of innovation and development that can be achieved. Recent literature has called attention to the historical significance of governments in setting the directions of technical change and market dynamics toboost innovation. Beyond their very important role in regulating markets and correcting market failures, governments can help create and shape new markets through targeted, innovation-ledmission-oriented policies (MOPs) (Mazzucato 2013, 2015). However, the tools used by governments for this purpose are still up for debate (Ergas 1987; Brown and Mason 2014; Foray 2018; McKelvey and Saemundsson 2018). This is especially true for developing countries, where MOPs have arguably seemed a better fit mostly because of the frequent ‘embryonic’ level of different targeted sectors and markets. In such contexts, traditional sectors can provide an earlier stage of catching-up (Abramovitz 1986), which may eventually underline the conditions for a leapfrog path in the future (Lee and Lim 2001). The double character of innovation MOP in developing countries is fraught with difficulties and fuzziness in prioritization: MOPs are meant to cope with the impreciseness of both ‘building innovation capabilities for market creation’ and the reverse, ‘market creation for building innovation capabilities’. Due to bounded rationality and, thus, incertitude behind decision-making processes (Simon 1997), it is impossible to foresee the exact upcoming shape of a market created from a certain innovative package as well as to perfectly foresee the exact scope of the required innovation capabilities. The inability to rationally convert policy innovation efforts into concrete packages of capabilities that will produce positive economic outcomes can lead to an innovation paradox where developing countries have negative returns on innovation investment (Cirera and Maloney 2017). This process also contributes to the stagnation of these nations into what is called the middle-income trap (Griffith 2011; Lee 2013). In this article, we discuss the main challenges of setting successful MOPs in the context of developing countries. We do so by looking in detail at recent developments of the Brazilian shipbuilding sector. This sector received a major boost in the previous decade with the setup of an entire institutional framework aimed at technological catchup, industrial progress, and innovation. The policy was motivated by the discoveries of giant oil fields in ultra-deep waters in the southeastern coastline of Brazil around the turn of the century. The strategy has not met its very ambitious goals. In the pursuit of becoming a global player in this market, a set of policies was put in place to mobilize a large number of actors and resources around the country. While initially creating a major boost and quite some excitement, the industry ultimately failed to catchup and really innovate. This article sheds light on both the macrolevel institutions and market-creating issues and the necessary technological and organizational capabilities at the microlevel to concretely create a sustainable market. The failure of the Brazilian endeavor is explained in terms of a lacking balance between these two levels due primarily to the inability and cost of developing the necessary managerial and technological capabilities at the microlevel quickly. High capability-building costs, far beyond those solely of the targeted sector/market, can prevent the effective implementation of such policies. We thus point out the capability gap that needs to be harnessed to increase the chances of policy success, especially in emerging economies. Finding the balance between policy intentions and the actual potential of economic agents to learn and meet the task involves uncertainties that go beyond technology per se. However, being prepared for such a ‘window of opportunity’ (Lee and Malerba 2017) by having a minimum level of technological and organizational capabilities in place is imperative, as the length of the opportunity window is typically not long enough to start from scratch. The rest of the article is organized as follows. Section 2 discusses the concept of MOPs for new market creation. Section 3 shortly explains the sources of information and process of developing the case study. Section 4 discusses the case of the Brazilian shipbuilding industry. Section 5 discusses the policy outcomes. Finally, Section 6 concludes. 2. Mission-oriented policies for market creation, innovation, and growth The role of institutions and policy in setting the direction of inventive and economic activity has long been recognized (Bush 1945; Arrow 1962; Langlois and Mowery 1996) as well as the difficulty in assessing the effectiveness and contribution of innovation policies and research investment to economic growth (Griliches 1979). Nevertheless, governments set the rules of the game for economic agents to make decisions on their course of action (North 1991) and foster innovation, technological change, and the underlying production systems within an economic structure (Lall, 1992; Edquist 1997; Malerba 2006). Institutions and the technological structure of regions coevolve to produce comparative advantage (Nelson 1995), thus potentially creating windows of opportunity for technical and economic transformation (Lee and Malerba 2017). Still, getting institutions right remains a challenge (Williamson 2009). Emerging economies are typically challenged in terms of preexisting technological capabilities, internal markets, as well as industrial and institutional conditions for innovation (Khanna and Palepu 2005). The lack of appropriate institutions in combination to the complexity of implementating industrial and innovation policies in emerging economies (Rodrik 2009) bring forward MOPs as a potentially attractive policymaking vehicle for technology upgrading and economic growth. 2.1 Mission-oriented policies and industrial innovation Historical mission-oriented programs in the twentieth century are popularly traced back to the postwar developments in the USA with the Apollo program, the war on cancer, and various defense-related defense programs (Mowery 2010; Pisano and Shih 2012). Fisher et al. (2018) provide extensive coverage and interpretation of MOPs with significant innovation results across various countries stressing the need for a mix of appropriate policy instruments, social approval, accountability, and sense of urgency. Beyond the conventional economic approach of government intervention to regulate and to correct failing markets, MOPs look at creating new markets based on the active entrepreneurial role of the state in fostering economic growth through innovation-led, inclusive, and sustainable solutions (Mazzucato 2013). One of the primary ways of creating new markets for innovation is through public procurement (Edquist et al. 2015). More generally, MOPs are expected to achieve the specific goal by creating the necessary incentives to save and invest, by setting up institutions to promote education and skills, by building infrastructures to support innovation, and by shaping long-term behavior (Mazzucato and Penna, 2015). Moreover, through MOPs governments have a strategic role in providing the necessary finance for innovation (Mazzucato and Penna 2016). Beyond governmental policy, successful MOPs require the strong buy-in and engagement of the private sector. While governments can create the right conditions, ultimately management decisions will determine what happens (Pisano and Shih 2012: 20). Thus, both active government policy and investment decisions of private enterprises will determine what and where capabilities will be fostered. Differently from the so-called old missions, which are usually top–down policy decisions—such as the creation of government agencies like NASA and major initiatives relating to national defense, space exploration, and public health—‘new missions’ should encourage bottom–up stakeholders-based initiatives (Mazucatto and Penna 2015). Table 1 brings forth some differences on the characteristics of ‘old’ versus ‘new’ missions-oriented projects.It is understood that missions must be well-defined, comprise a portfolio beyond research and development (R&D) projects, involve different types of actors, and engage in joint policy decision-making (Mazzucato and Penna 2016). Ultimately, these policies are characterized by specific targets, organization, evaluation and assessment, risk, and rewards (Mazzucato 2013, 2018; Fisher et al. 2018). Table 1. Characteristics of old and new ‘mission-oriented’ projects. Elements . Old: Defense, Nuclear, and aerospace . New: Environment technologies and societal challenges . Definition criteria The mission is defined in terms of the number of technical achievements, with little regard to their economic feasibility The mission is defined in terms of economically feasible technical solutions to particular societal problems Diffusion of results Diffusion of the results of the core of participants is of minor importance or actively discourage Diffusion of results is a central goal and is actively encouraged Directionality The goals and the direction of technological development are defined in advance by small group of experts The direction of technical change is influenced by a wide range of actors, including government, private firms, and consumers groups Government degree of centralization Centralized control within a government and administration Decentralized control with a large number of agents involved Breadth of participation of actors Participation is limited to a small group of firms due to the emphasis on a small number of radical technologies Emphasis on the development of both radical and incremental innovation to permit a large number of firms to participate Complexity Self-contained projects with little need for complementary policies and scant attention paid to coherence Complementary policies vital for success and close attention paid to coherence with other goals Elements . Old: Defense, Nuclear, and aerospace . New: Environment technologies and societal challenges . Definition criteria The mission is defined in terms of the number of technical achievements, with little regard to their economic feasibility The mission is defined in terms of economically feasible technical solutions to particular societal problems Diffusion of results Diffusion of the results of the core of participants is of minor importance or actively discourage Diffusion of results is a central goal and is actively encouraged Directionality The goals and the direction of technological development are defined in advance by small group of experts The direction of technical change is influenced by a wide range of actors, including government, private firms, and consumers groups Government degree of centralization Centralized control within a government and administration Decentralized control with a large number of agents involved Breadth of participation of actors Participation is limited to a small group of firms due to the emphasis on a small number of radical technologies Emphasis on the development of both radical and incremental innovation to permit a large number of firms to participate Complexity Self-contained projects with little need for complementary policies and scant attention paid to coherence Complementary policies vital for success and close attention paid to coherence with other goals Source: Based on Soete and Arundel (1995) and Mazzucato (2018). Open in new tab Table 1. Characteristics of old and new ‘mission-oriented’ projects. Elements . Old: Defense, Nuclear, and aerospace . New: Environment technologies and societal challenges . Definition criteria The mission is defined in terms of the number of technical achievements, with little regard to their economic feasibility The mission is defined in terms of economically feasible technical solutions to particular societal problems Diffusion of results Diffusion of the results of the core of participants is of minor importance or actively discourage Diffusion of results is a central goal and is actively encouraged Directionality The goals and the direction of technological development are defined in advance by small group of experts The direction of technical change is influenced by a wide range of actors, including government, private firms, and consumers groups Government degree of centralization Centralized control within a government and administration Decentralized control with a large number of agents involved Breadth of participation of actors Participation is limited to a small group of firms due to the emphasis on a small number of radical technologies Emphasis on the development of both radical and incremental innovation to permit a large number of firms to participate Complexity Self-contained projects with little need for complementary policies and scant attention paid to coherence Complementary policies vital for success and close attention paid to coherence with other goals Elements . Old: Defense, Nuclear, and aerospace . New: Environment technologies and societal challenges . Definition criteria The mission is defined in terms of the number of technical achievements, with little regard to their economic feasibility The mission is defined in terms of economically feasible technical solutions to particular societal problems Diffusion of results Diffusion of the results of the core of participants is of minor importance or actively discourage Diffusion of results is a central goal and is actively encouraged Directionality The goals and the direction of technological development are defined in advance by small group of experts The direction of technical change is influenced by a wide range of actors, including government, private firms, and consumers groups Government degree of centralization Centralized control within a government and administration Decentralized control with a large number of agents involved Breadth of participation of actors Participation is limited to a small group of firms due to the emphasis on a small number of radical technologies Emphasis on the development of both radical and incremental innovation to permit a large number of firms to participate Complexity Self-contained projects with little need for complementary policies and scant attention paid to coherence Complementary policies vital for success and close attention paid to coherence with other goals Source: Based on Soete and Arundel (1995) and Mazzucato (2018). Open in new tab While it is reasonable to argue about an exact boundary of MOP and more typical innovation and industrial policies in cases of complex product systems, the difference may appear in terms of scale (bigger), scope (broader), target (more specific), and a mix of project characteristics. To achieve its goals, MOP is based on a four-fold set of elements (Mazzucato 2018). MOP must (1) apply an ambitious challenge translated into routes and directions, (2) nurture organizational capabilities, (3) establish new forms of assessment, and (4) offer a better sharing of rewards and ease risk-taking so that innovation-driven growth can also result in inclusive growth. 2.2 MOP and the fuzzy boundary of market creation While, in theory, MOPs can be set to directly change and create new markets, fostering the conditions to build local capabilities that will support firms to populate the market is unavoidable. In fact, a precondition of market creation is to build capabilities, which are often difficult to master, and costly to develop. The mismatch between the positive expected goal and what is actually feasible (based on the available capabilities at any point in time) creates a ‘fuzzy boundary’ that often leads to unsuccessful implementation of missions. Geographic considerations in terms of technological and market proximities must also be taken into account to increase the chances of success (Orlando 2004). In countries behind the technological frontier, markets must be created for the purpose of catching-up (Lee 2018). Governments can create market reserves—through mechanisms such as local content policies, tax cuts, trade barriers, and special funding (Rodrik 2009)—as stimuli for economic agents to build the necessary capabilities and fill market gaps. Market reserves reduce the comparative costs of transactions, allowing economies to internalize and make feasible formerly inexistent or economically impracticable technological interfaces. Such public incentives can actually work as ‘windows of opportunity’ in laggard countries (Lee and Malerba 2017). Latecomers use such incentives to offset cost differences associated with the lack of capabilities. However, the early ‘artificial transformation’ of marginal transaction costs is not enough. This is surely an initial boost but it is insufficient for market sustainability over time. To really take advantage of market entry incentives created by governmental intervention, latecomer economies must figure out faster ways to develop capabilities at the lowest possible cost. On top of the uncertainties involved on the return of R&D efforts (Griliches 1979), the absorptive capacities of economic agents are essential to convert R&D output existing technologies into production, sales, and growth (Aldieri et al. 2018). 2.3 Capability transitions and capability-building costs To illustrate the argument, we use an adapted version of the Multi-Level Perspective of Systems Innovation and Technological Transitions (Geels 2002) in Fig. 1. Technological transitions are defined as major technological transformations in the way societal functions such as transportation, communication, housing, and feeding are fulfilled (Geels 2002). This model intends to capture the emergence of new technologies and their interaction and amalgamation with extant sociotechnical regimes to generate change. Figure 1. Open in new tabDownload slide MOPs and capability transitions to catching-up. Figure 1. Open in new tabDownload slide MOPs and capability transitions to catching-up. Social–technical regimes expand the notion of technological regimes,1 which can be traced back to Nelson and Winter (1982). Technological regimes describe the technological environment in which firms operate in terms of opportunity conditions, appropriability conditions, cumulativeness, and characteristics of technological knowledge and knowledgebase (Malerba and Orsenigo, 1996). Technological regimes, based on decisions rules and organizational routines, lead to technological trajectories (Nelson and Winter 1982). Social–technical regimes include other elements internal and external to the firm regimes such as science, user and markets, policy, infrastructure, industrial networks, cultural and symbolical, and among others (Geels 2002; 2004). Geels (2004) defines social–technical regimes as the deep structure of systems or ‘semicoherent sets of rules’ carried out by social groups and linked together in different ways making it hard to change one without altering others. Technological transitions eventually create pressures and slowly alter the sociotechnical regimes to new states. Our focus, however, is not on the technological transition that changes or disrupts a previous regime but on country-specific ‘capability transition’ for latecomer economies to catchup. We argue that MOPs may create an institutional incentive for regime-change for catching-up, capability building, and market creation. Catching-up theory original hypothesis argues that backwardness learning provides an opportunity for fast growth from latecomer economies (Abramovitz 1986). However, this process is subjected to high uncertainty when previous capabilities are not present. That’s where the boundaries for market creation become fuzzy. While policies, as stated in the MOP literature, can define the goal and direction of change, the unavailability of ex ante capabilities generates higher capability-building costs. These costs are hard to predict even with the best estimates as they depend highly in the speed of learning of firms in a given context. For instance, accelerating learning requires R&D investments for firms to both use freely available knowledge (Nelson and Winter 1977), as well as to access a network of information (Rosenberg 1990). Adoption or imitation costs depend crucially on the technological level achieved by a firm or country. This becomes even problematic for less industrialized countries unless there is a window of opportunity to be exploited (Perez and Soete, 1988). Market creation at the macrolevel and capability building at the microlevel must be tackled simultaneously, a quite difficult task to sequence and balance. The reason is that capabilities ‘don’t travel’, they need to be built locally. The inability to master and orchestrate different and complimentary capabilities undermines the possibility of creating a market and conducting transactions economically. This is especially true in complex systems. Complexity in the knowledge and in the number of technological interfaces can generate frictions beyond transaction and production costs (Alves 2015). Some of these are technological transfer costs, referred to ‘the costs of transmitting and absorbing the relevant firm-specific knowledge’ (Teece 1977). Others are related to coordination decisions such as suppliers switching costs (Monteverde and Teece 1982). Capability-building costs are similar to what Langlois (1992) calls dynamic transactions costs, that is, the ‘costs of persuading, negotiating and coordinating with, and teaching others’ or, simply, ‘the costs of not having the capabilities when you need them’ (113). More than coordination costs, capability building costs are dynamic learning costs that must be taken into consideration by MOPs in emerging economies as they will influence the economic scope and the rate at which new industries can and will dynamically grow. 3. Methodological proceedings This study gathers some of the results of a 3-year research project funded by the Brazilian National Research Council on the dynamics of industrial organization of the shipbuilding and offshore sector in Brazil. This research project investigated the institutional and technological conditions necessary to allow the industry to emerge based on a detailed mapping of both policies and their translation into a chain of production and technological interfaces of the Brazilian shipbuilding and offshore sector (Alves 2015). We conducted an in-depth literature review of the recent history of shipbuilding in Brazil and of the MOP framework which allowed the reemergence of the industry. This review covered papers, publications, as well as industry reports from the Institute for Applied Economic Research, PETROBRAS, the National Shipbuilding and Offshore Association, the National Organization for the Oil Industry (ONIP) as well as specific norms and laws passed forth regarding local content policies, special finance regimes, and fiscal benefits. Secondary data were used to update earlier statistics on shipbuilding production based on Clarkson research data. These reviews allowed the collection of facts about the institutional setup that help the industry to re-emerge and temporarily grow (Figure 2). The 3-year research project also involved a series of onsite exploratory interviews with different institutional and company actors directly related to the shipbuilding industry in Brazil such as government, unions and industry associations, Petrobras, university researchers, shipyards, and suppliers which can be found in Alves (2015). The visitations of shipyards and interviews allowed a deeper understanding of the main technological and coordination challenges for overcoming operational inefficiencies across interfaces and the catching-up progress on capabilities during the implementation of the examined MOPs. At total, there were three interviews with the main client Petrobras and fifteen interviews in a major shipyard (Fig. 3). In the next section, we present our results and analysis. 4. Case: mission-oriented policy for innovation in the Brazilian shipbuilding and offshore industry The Brazilian shipbuilding industry has a long history reaching back to the sixteenth century in connection to small vessels and marine arsenals. Private investment, however, practically started in 1846 in Niteroi (Rio de Janeiro) when entrepreneur Barão de Mauá transformed a little foundry in the region into the biggest shipyard of the country at the time. It took 100 years more for the first substantial policy boost of the sector to arrive in the 1950s during the presidency of Jucelino Kubitsheck and its ‘Plano de Metas’ which intended to accelerate progress and economic growth of ‘50 years in 5’. During this period, the Merchant Marine Fund (FMM) was created alongside the National Development Bank. This fund aimed at promoting the renewal and increase of the national commercial marine fleet,the reduction of both ship imports and charter costs of foreign ships, and the stimulation of ship exports (Foster 2013). Over the next 20 years, foreign direct investment took place through the setting of major shipyards in Rio de Janeiro. Ishibras from Japan and Verolme from the Netherlands established operations in Rio de Janeiro alongside the national shipyards Caneco, Mauá, and Emaq. Another shipyard, Só, was implanted in Porto Alegre during the same time period. By 1975, Brazil had reached the second position in shipbuilding orders worldwide, only behind Japan. A major bust in the cycle followed as a result of deep economic problems in the next couple of decades. Tight monetary policy, however, resulting in much less generous subsidies to the industry, and the large local content requirement offered to foreign customers, in turn, resulted in a significant erosion of the Brazilian shipbuilding industry by the early 1990s (Cho and Porter 1986). Disinvestment led to delays on deliveries, cost overruns, and technological downgrade. The Brazilian fiscal crisis and the inability to compete either in quality or in costs put the industry in peril. The sector would reemerge in the 2000s as Brazil was able to balance its fiscal deficit and manage inflation. A major role in this reemergence was played by the new offshore oil discoveries. The prospects of oil found in the ‘pre-salt’ layer—the big offshore area along the seacoast of Rio and São Paulo—and the concomitant needs for sophisticated oil platforms and oil transport provided the impetus for rebooting shipbuilding in the country. The estimated 15 billions barrels of oil equivalent, which potentially placed Brazil among the top ten oil producers in the world, was the green light for new market creation. This is the part of the story we concentrate upon hereinafter. 4.1 Defining routes and direction: mission-oriented policy and institutional framework for market creation As the deepest oil fields discovered up until now, the Pre-Salt Oil deposits required significant technological advancement to push back the frontier into ultra-deep-sea waters. Following a variety of complex strategies for access, adaptation, and creation of new technologies (Furtado and Gomes de Freitas, 2000), the Brazilian state-owned oil company Petrobras has been at the forefront of deep-water oil exploration and production. From 410 ft in 1977, the company reached depths of >8000 ft in 2010 (Petrobras, 2009). Subsea technologies require the work of specialized professionals in different domains of engineering, geology, and geophysics. The importance and complexity of these challenges had created a lot of enthusiasm at the time beingcompared by specialists as the Brazilian ‘space-race’ in analogy to the American-Union of Soviet Socialist Republics (USSR) space race during the 1960s. Technological development and the ‘race’ for exploration and production, in turn, created high demand for different types of vessels to sustain operations. The relative costs and long waitlist of orders at the time created the incentives for the country to find local solutions by building ships and oil rigs in Brazil. To catchup quickly, the Brazilian shipbuilding, and offshore industrial reemergence required a broad set of public policy interventions across many fronts, culminating into a full-fledged MOP. 4.1.1 Routes: institutions, government programs, and industry targeting In 2002, Petrobras announced it was going to buy two offshore oilrigs (P-51 and P-52) from overseas companies as part of its Program for Offshore and Support Vessel Fleet Renovation initiated in 2000. The announcement generated a strong counterreaction from labor unions arguing against the external purchase of these two platforms. The unions demanded that the platforms would be constructed domestically, generating jobs to local labor. President Luiz Inácio Lula da Silva, allegedly sensitized by those demands, changed the course of decision and promoted the idea of domestic production of the platforms. This triggered a series of legislative acts and policy changes summarized in Fig. 4 and Table 2. A new public bid was called later that year, requiring the two platforms to be built in Brazil (Foster 2013). A legislative Act2 created the National Program for Mobilizing the Oil and Gas Industry aiming at maximizing the participation of national suppliers of goods and services to the Oil and Gas industry. This organization was supposed to map the national capabilities and provide training in several related fields of shipbuilding to the oil industry. Furthermore, in 2007, the Brazilian government instituted the Program for Growth Acceleration and placed the shipbuilding industry as one of the key national strategic sectors to generate wealth and create jobs. In the same year, the National Oil Regulatory Agency created a resolution3 for minimum local content requirements. In 2010, Petrobras announced the biggest capitalization in history, amounting to 120 billion dollars borrowed to fund the exploration, development, and production of the Pre-Salt fields. The purchasing power of the company was directed to national shipyards to stimulate the national industry to develop a supplier base to meet the demands for renewal of their fleet of platforms, tankers, and support boats. In 2011, Petrobras alongside other major construction companies created Sete Brasil SA, a company responsible for the drilling operations of the Pre-Salt fields. The company placed several orders of drillships to various shipyards. 4.1.2 Directions: local content requirements, finance, fiscal incentives, and training The demand for oilrigs, tankers, and support vessels came from companies already involved in the offshore oil exploration and production activities. Petrobras was placed at the center of this endeavor. The National Oil Agency created the local content resolution in 2007. This resolution required that every concessionaire, producing oil in the Brazilian offshore fields, should acquire a minimum of 70 per cent of goods and services from national suppliers. The ONIP should certify suppliers to participate. Such local content policy aimed at creating a local market reserve for national suppliers, thus providing incentives to gradually build capabilities and gain productive capacity. The existing oil and offshore industry along side with the local content resolution established the basis for Brazilian legislation to define three exploration regimes: production sharing, concession, and transfer of rights regime.4 The production sharing agreement stated that all oil from the pre-salt fields is the property of the state. The state-owned oil company is guaranteed to participate in the exploration even though it may not be the main operating firm in the field. The operating firm to be contracted in a public bid is the responsible party for exploring and extracting the oil, paying for all operational expenses, in exchange for a part of the value from the oil fields. The operating firm absorbs all costs and risks from exploring the specific field and does not have any right of restitution or compensation in case the oil field is not tradable. In the concession regime, the oil extracted is property of the operating firm during the time frame stipulated in the contract in exchange for financial compensation to the state. This compensation comes in the form of taxes and royalties. Finally, the transfer of rights agreement stated that the government might give to Petrobras the rights over the activities of exploration and production in certain areas of the pre-salt fields with up to five billion barrels and Natural Gas at the company’s own expenses and risk. It is a way to compensate for the company’s capitalization effort to promote the supporting industry. Local content requirements alongside incentives such as tax exemption and financial support provided the stepping-stone to promote supply. By linking oil-producing firms to national shipyards and the engineering, procurement, and construction (EPC) firms through modes of contracts, a national market for shipping vessels and parts was structured to foster capability building all along the national supply chain. Complementary national training programs involving universities and technical schools aimed at mapping the national suppliers and at providing the necessary training in different fields. The established set of laws, resolutions, and incentives intended to reduce the comparative cost disadvantages of extant Brazilian suppliers vis-a-vis foreign competition, and to stimulate the entry of new national players into the supply chain. Credit facilitation also allowed firms to obtain lower rates on loans to invest in activities related to the shipbuilding industry. Table 2 presents the resolutions to stimulate capability building and finance for innovation. Table 2. Institutional incentives to stimulate the supply side. Incentives . Description . Legislation . Local content Local content requirements for vessels used in the activities of exploration and production of oil and gas in the Brazilian offshore oil fields ANP resolutions 36 a 39/2007 Fiscal Exemption of tax, Tax over Industrialized Products (IPI) for industrial production on parts and materials for the construction of ships in domestic shipyards. Zeroing of Social Integration Program, Civil Servant Property Formation Program (PIS/PASEP) and Contribution to the Financing of Social Security (COFINS) taxes on equipment for the marine industry Act 6.704/2008 and Law 11.774/2008 Finance Facilitating financing conditions to the sector through the Navigate Brazil Program, which introduced changes in access to credit for ship owners and yards, increasing the participation of the FMM from 85% to 90% in the operations of the shipbuilding industry and increase in the maximum loan term from 15 to 20 years Reedition Provisory Act 1.969/67 Establishment of differential interest rates and participation in financing with FMM resources for those contracts that ensure local content rates of over 60% or 65% Resolution CMN 3.828/2009 Creation of the Shipbuilding Guarantee Fund with the purpose to ensure risk credit to financing operations for construction and production of vessels and the risk of performance of Brazilian shipyards Law 11.786/2008 Training The institution of the Program for Mobilization of the National Oil and Natural Gas – PROMINP, which aims to enhance the participation of national goods and services industry, competitive and sustainable manner, the implementation of oil, and gas projects in Brazil and abroad Act Nº 4.925/ 2003. Incentives . Description . Legislation . Local content Local content requirements for vessels used in the activities of exploration and production of oil and gas in the Brazilian offshore oil fields ANP resolutions 36 a 39/2007 Fiscal Exemption of tax, Tax over Industrialized Products (IPI) for industrial production on parts and materials for the construction of ships in domestic shipyards. Zeroing of Social Integration Program, Civil Servant Property Formation Program (PIS/PASEP) and Contribution to the Financing of Social Security (COFINS) taxes on equipment for the marine industry Act 6.704/2008 and Law 11.774/2008 Finance Facilitating financing conditions to the sector through the Navigate Brazil Program, which introduced changes in access to credit for ship owners and yards, increasing the participation of the FMM from 85% to 90% in the operations of the shipbuilding industry and increase in the maximum loan term from 15 to 20 years Reedition Provisory Act 1.969/67 Establishment of differential interest rates and participation in financing with FMM resources for those contracts that ensure local content rates of over 60% or 65% Resolution CMN 3.828/2009 Creation of the Shipbuilding Guarantee Fund with the purpose to ensure risk credit to financing operations for construction and production of vessels and the risk of performance of Brazilian shipyards Law 11.786/2008 Training The institution of the Program for Mobilization of the National Oil and Natural Gas – PROMINP, which aims to enhance the participation of national goods and services industry, competitive and sustainable manner, the implementation of oil, and gas projects in Brazil and abroad Act Nº 4.925/ 2003. Source: Alves (2015). PROMINP: National Program for Mobilizing the Oil & Gas Industry.5 Open in new tab Table 2. Institutional incentives to stimulate the supply side. Incentives . Description . Legislation . Local content Local content requirements for vessels used in the activities of exploration and production of oil and gas in the Brazilian offshore oil fields ANP resolutions 36 a 39/2007 Fiscal Exemption of tax, Tax over Industrialized Products (IPI) for industrial production on parts and materials for the construction of ships in domestic shipyards. Zeroing of Social Integration Program, Civil Servant Property Formation Program (PIS/PASEP) and Contribution to the Financing of Social Security (COFINS) taxes on equipment for the marine industry Act 6.704/2008 and Law 11.774/2008 Finance Facilitating financing conditions to the sector through the Navigate Brazil Program, which introduced changes in access to credit for ship owners and yards, increasing the participation of the FMM from 85% to 90% in the operations of the shipbuilding industry and increase in the maximum loan term from 15 to 20 years Reedition Provisory Act 1.969/67 Establishment of differential interest rates and participation in financing with FMM resources for those contracts that ensure local content rates of over 60% or 65% Resolution CMN 3.828/2009 Creation of the Shipbuilding Guarantee Fund with the purpose to ensure risk credit to financing operations for construction and production of vessels and the risk of performance of Brazilian shipyards Law 11.786/2008 Training The institution of the Program for Mobilization of the National Oil and Natural Gas – PROMINP, which aims to enhance the participation of national goods and services industry, competitive and sustainable manner, the implementation of oil, and gas projects in Brazil and abroad Act Nº 4.925/ 2003. Incentives . Description . Legislation . Local content Local content requirements for vessels used in the activities of exploration and production of oil and gas in the Brazilian offshore oil fields ANP resolutions 36 a 39/2007 Fiscal Exemption of tax, Tax over Industrialized Products (IPI) for industrial production on parts and materials for the construction of ships in domestic shipyards. Zeroing of Social Integration Program, Civil Servant Property Formation Program (PIS/PASEP) and Contribution to the Financing of Social Security (COFINS) taxes on equipment for the marine industry Act 6.704/2008 and Law 11.774/2008 Finance Facilitating financing conditions to the sector through the Navigate Brazil Program, which introduced changes in access to credit for ship owners and yards, increasing the participation of the FMM from 85% to 90% in the operations of the shipbuilding industry and increase in the maximum loan term from 15 to 20 years Reedition Provisory Act 1.969/67 Establishment of differential interest rates and participation in financing with FMM resources for those contracts that ensure local content rates of over 60% or 65% Resolution CMN 3.828/2009 Creation of the Shipbuilding Guarantee Fund with the purpose to ensure risk credit to financing operations for construction and production of vessels and the risk of performance of Brazilian shipyards Law 11.786/2008 Training The institution of the Program for Mobilization of the National Oil and Natural Gas – PROMINP, which aims to enhance the participation of national goods and services industry, competitive and sustainable manner, the implementation of oil, and gas projects in Brazil and abroad Act Nº 4.925/ 2003. Source: Alves (2015). PROMINP: National Program for Mobilizing the Oil & Gas Industry.5 Open in new tab In summary, a major legislative, fiscal, financial, and training effort was put in place to stimulate economic agents (firms and individuals) to enter the industry which, in turn, led to a massive mobilization all over the country. 4.2 Organization and coordination of the industry With the institutional conditions set for the creation of a market and the establishment of an industry, Petrobras was used as the main engine for building it. Three main roles were set for Petrobras: securing demand, orchestrating suppliers, and managing cross-sectoral investment. 4.2.1 Securing demand: orders and investments Petrobras was responsible for the operational activities in oil production and for the acquisition of platforms and support vessels. The company used its subsidiary Transpetro for the transportation and storage activities of the oil products, which demanded a large crude-carrier fleet of oil tankers and Liquefied Natural Gas (LNG) carriers. A third company (SeteBrasil) was created in 2011 specializing in the exploration and drilling activities. SeteBrasil is responsible for placing the orders for the drillships. Table 3 presents the number and values of order books as they were by 2012. Table 3. Order books and investment by type of vessels (2012). Vessels type by program . Number . Investment . Average cost/vessel . Investor . Support vessels PROREFAM 1, 2, and 3 223 R$ 16.7 billion R$ 75 million PETROBRAS Platforms Floating Productions, Storage and Offloading v(FPSO’s) 22 R$ 53.9 billion R$ 2.45 billion PETROBRAS Large crude carriers PROMEF 1 and 2 49 R$ 6.8 billion R$ 139 million TRANSPETRO Drill ships 29 R$ 54 billion R$ 1.8 billion SETE BRASIL Total R$ 131.4 billion Vessels type by program . Number . Investment . Average cost/vessel . Investor . Support vessels PROREFAM 1, 2, and 3 223 R$ 16.7 billion R$ 75 million PETROBRAS Platforms Floating Productions, Storage and Offloading v(FPSO’s) 22 R$ 53.9 billion R$ 2.45 billion PETROBRAS Large crude carriers PROMEF 1 and 2 49 R$ 6.8 billion R$ 139 million TRANSPETRO Drill ships 29 R$ 54 billion R$ 1.8 billion SETE BRASIL Total R$ 131.4 billion Source: (Neto and Alvares, 2014) . Data from reports of contracted orders. Open in new tab Table 3. Order books and investment by type of vessels (2012). Vessels type by program . Number . Investment . Average cost/vessel . Investor . Support vessels PROREFAM 1, 2, and 3 223 R$ 16.7 billion R$ 75 million PETROBRAS Platforms Floating Productions, Storage and Offloading v(FPSO’s) 22 R$ 53.9 billion R$ 2.45 billion PETROBRAS Large crude carriers PROMEF 1 and 2 49 R$ 6.8 billion R$ 139 million TRANSPETRO Drill ships 29 R$ 54 billion R$ 1.8 billion SETE BRASIL Total R$ 131.4 billion Vessels type by program . Number . Investment . Average cost/vessel . Investor . Support vessels PROREFAM 1, 2, and 3 223 R$ 16.7 billion R$ 75 million PETROBRAS Platforms Floating Productions, Storage and Offloading v(FPSO’s) 22 R$ 53.9 billion R$ 2.45 billion PETROBRAS Large crude carriers PROMEF 1 and 2 49 R$ 6.8 billion R$ 139 million TRANSPETRO Drill ships 29 R$ 54 billion R$ 1.8 billion SETE BRASIL Total R$ 131.4 billion Source: (Neto and Alvares, 2014) . Data from reports of contracted orders. Open in new tab As the state-owned company, Petrobras was the main buyer of the production vessels ordered to Brazilian shipyards and participated in all process steps of shipbuilding—engineering, procurement, construction, and commissioning—to a different extent. Overall, the company had to provide the general technical description to the shipyards or to the operating firms, reflecting the desired characteristics of each platform or vessel to be built. The technical description was elaborated at the company’s Research Center. Ultimately, the core objective of the examined MOP was to lay the foundations for innovation across the industry. This required the building of innovation capabilities all along the value chain, from the main contractor (Petrobras) to the “last” supplier. Moreover, Petrobras and other operators are obliged by the National Petroleum Agency to invest 1 per cent of operational revenues in other research providers within the country. 4.2.2 Orchestrating the value chain: managing local content and suppliers As an operator, Petrobras was responsible for managing the overall contractual interfaces. A major operation like this requires staff to be placed in different shipyards to make sure contracts are being respected in terms of technical requirements and delivery schedule. The minimum local content requirements for different vessels—varying from 45 per cent up to 70 per cent of local sourcing—depended on the technological complexity, availability, and time to master the necessary technologies by local suppliers. Petrobras managed these requirements closely. The company had mapped all potential suppliers in Brazil for every single piece of technology, equipment, ship parts, and materials detailed the engineering projects, providing it with a pretty good understanding of the gaps in the national industry. The company had also documented in several books the different pieces of required technologies, which described the technology and informed what could be built in Brazil and what had to be outsourced due to lacking technoeconomic conditions. Figure 5 presents the overall organization of the industry. In summary, backed by a set of major institutional setup and finance prospects, a whole shipbuilding value chain (left side of Fig. 5) was able to emerge in Brazil under the strong coordination by Petrobras to manage project and contractual complexities. Figure 2. Open in new tabDownload slide List of organizations and interviews conducted. Figure 2. Open in new tabDownload slide List of organizations and interviews conducted. Figure 3. Open in new tabDownload slide Chronology of policies targeting the Brazilian shipbuilding industry. Figure 3. Open in new tabDownload slide Chronology of policies targeting the Brazilian shipbuilding industry. Figure 4. Open in new tabDownload slide The structure of the shipbuilding and offshore industry. Figure 4. Open in new tabDownload slide The structure of the shipbuilding and offshore industry. Figure 5. Open in new tabDownload slide Research and data sources. Figure 5. Open in new tabDownload slide Research and data sources. 4.3 Cross-sectoral, cross-regional investment, and capability building The prospects and ambitious construction plans of Petrobras attracted the interest of various states in the federation to benefit from the construction of shipyards. While there was already shipyard infrastructure available from earlier phases of development of the Brazilian shipbuilding, a series of new shipyard projects were announced across different states positioning for parts of the production chain. These new shipyards came to be called ‘virtual shipyards’ once they were based on projects and were going through the process of obtaining licenses to begin construction and finely operate. Figure 6 maps the location of these yards, planned production capacity, expected job creation, and technological partners. Figure 6. Open in new tabDownload slide Distribution of Brazilian main shipyards. Figure 6. Open in new tabDownload slide Distribution of Brazilian main shipyards. The initial requirement for the shipyard operator was either to be an experienced firm or to show proof of an international partnership with an experienced company in the industry. With little previous experience in the shipbuilding sector national companies willing to participate in the public bids needed to show proof of their EPC capabilities based on their record in complex projects and also commit to establish technological partnerships with recognized shipbuilding firms to engage in technology transfer. Technology partners arrived from Japan, South Korea, China, and Singapore carrying specialized know-how. Since shipbuilding in Brazil had retreated extensively by the late 1980s, new shipbuilding companies were being built from scratch combining local capabilities on industrial construction or building construction—that is, not specialized shipbuilders. The reemergence of the sector could be observed as several shipyards started to be built along the Brazilian coastline. Employment in shipyards was expected to reach 100,000 employees. While shipyard infrastructure started to be built with the most modern equipment, the technological capabilities to operate these yards were recognized as one of the key elements for the sector to reemerge successfully. Partnerships for technology transfer had the aim to reduce knowledge gaps. Nonetheless, not all intended partnerships were effectively contractually settled. 5. Policy outcomes Since it began in 2005, MOP in shipbuilding triggered a set of changes in the industrial landscape of Brazil such as infrastructure, value chain, R&D, capital, and labor. This MOP mobilized several resources and generated many jobs in the sector. When it reached its peak, shipbuilding became the second-largest job creating industry in the country losing only to the automobile. From nearly vanishing in the 1980s to the fast rise in the 2000s, the industry’s employment peaked in 2014 reaching 82,000 jobs (Fig. 7). Figure 7. Open in new tabDownload slide Labor and production evolution. Figure 7. Open in new tabDownload slide Labor and production evolution. Productivity, however, did not grow nearly as fast. Relatively low output and high costs of construction stunned the industry and rendered it unable to catchup with international competition. Lack of competitiveness and corruption scandals that culminated in major investigations—with Petrobras at the core—led to a strong dive. By 2016, the industry was accounting only for 46,000 employees. With very few exceptions, public bids for shipbuilding in Brazil were won by a handful of national firms. These tended to be civil engineering firms specialized in complex infrastructure projects such as roads, bridges, damns, and industrial complexes (e.g. refineries and petrochemicals). They were the only ones with capabilities to mobilize large contingents of resources such as labor and materials. Infrastructure projects, however, have a quite different technology base from those of shipbuilding. Grave bottlenecks included insufficient engineering teams, systems and tools, lack of a nearby supplier base (Pires et al. 2007), delays, and frequent rework. Figure 8 shows some of the most cited reasons preventing capability building process mentioned by interviewees in the shipyard. Figure 8. Open in new tabDownload slide What prevents building capabilities. Figure 8. Open in new tabDownload slide What prevents building capabilities. Frequent project changes, inability to set and follow standards, high overhead, external pressures from clients for dealines, lacking engineering skills, as well as institutional slow pace to deal with licensing and permits created several obstacles for capabilities to be built. Given the levels of local capabilities, the window of opportunity proved to be not long enough. While MOPs may create high expectations for market creation and capability building, two aspects make the path from the current state to the new state of market creation fuzzy. First, the length of the window of opportunity is hard to predict as competitive conditions change. The Brazilian MOP to building local capabilities in shipbuilding surfed the window of opportunity of high demand coming from Petrobras and the lack of capacity of international shipyards to deliver orders on the required time. However, after the 2008 crisis, internal demand for cargo ships drop dramatically releasing shipyards production’s capacity worldwide. This, some-how, shortened the length of window of opportunity for Brazil. Second, the speed of learning and the relative costs to transition from a set of available capabilities to new and more advanced one are also highly uncertain. The internal dynamics of orchestrating various interfaces and the need to acquire technological and organizational capabilities have prohibited the shipyards to achieve full production capacity. Project complexity combined with lacking managerial capabilities resulted in production capacity to face severe difficulties in meeting market demand. While many shipyards have been equipped with the state-of-the-art facilities and assets to operate, the ability to master the necessary routines involves a high level of knowledge and skills as well as organizational capabilities. Ten years after policies were set, the cost of producing ships in the country still exceeded the costs of importing them from abroad. The lack of knowledge in the specific industry required a larger number of technological interfaces with other firms. The higher the number of interfaces, the harder it became to orchestrate the necessary capabilities, control technology transfer costs, dynamic transaction costs, and supplier switching costs (Alves, 2015). The combination made it harder to obtain the gains from learning curves. Uncertain challenges requiring dynamic problem-solving capabilities contradicted the need for project stability to master and reach excellence in more basic ordinary routines. The lack of technical and organizational capabilities somehow ‘obliged’ different players to act opportunistically to sustain their business positions creating the path for moral hazards. The eventual results, other than technical and operational inefficiencies, were corruption scandals inolviment industry and state agents. The ‘car wash’ operation (a major corruption investigation in Brazil in the sector) became evidence of an institutional and policy ‘debacle’. The highly expected and hoped ‘passport to the future’ in terms of economic development based on a complex MOP was not accomplished. Unstable institutional framework, personalistic political moves by the government generated even more institutional instability. In retrospect, the major policy efforts focused primarily on macroeconomic and institutional conditions rather than balancing macro- and microchallenges. Looking through the prism of chronological evolution, one may perceive the relative paucity of oriented policies and programs for strong technological and organizational capability building. While markets were created through institutional–fiscal incentives and market reserves through local content policies, the complexity of mastering the capabilities for shipbuilding in the short window of opportunity perceived by the public authorities seem to have been underestimated. 6. Concluding remarks MOPs have, by and large, aimed at creating markets and at boosting innovation (Mazzucato 2013). While MOP emphasizes the role of the state in setting the direction of change in this process, a prerequisite for well-functioning markets is that producers are capable of meeting the technical and economic requirements to deliver the demanded goods. Since complex capabilities like those in our case example do not travel (nor can they be acquired quickly), they must be built through a costly and time-consuming process. Important elements for success prescribed by the MOP literature were present in the examined Brazilian shipbuilding case: a window of opportunity, ambitious technological goals, institutional incentives, significant public finance, extensive private sector investment and involvement, detailed planning, a feeling of urgency, and national pride. MOP serves as triggers for pushing the industry to change the country-specific sociotechnical regime. In analogy to the technological transitions (Geels 2002, 2004), MOP requires countries to go through a ‘capability transition’, that is, to build innovation capabilities to actually create markets. For less-advanced economies, MOPs foster ‘capability transitions’ to catchup through market creation. However, this is not a trivial process even in the presence of favorable institutional and financial conditions. We argue that the incongruity between the intent and the real possibilities of market creation (given the availability of technological and organizational capabilities at any point in time) creates a fuzzy boundary, which leads to the unsuccessful implementation of missions. This fuzzy boundary between expectations and the concrete possibility of creating a market is full of uncertainty which generates costs not previously planned. This is even more difficult when applied to complex product systems such as the shipbuilding. The Brazilian shipbuilding example teaches that MOP can and did help foster a market window of opportunity for firms to catchup and to target new markets. In the short run, markets can be created through active interventionist policy including market reserves, public procurement, and fiscal incentives. A major further requirement, however, is the correspondence between the current levels of regional and national capabilities that can be leveraged and those that are needed for competitive advantage. The difficulty in finding this balance quickly can generate high costs and undermine the possibilities of success. These costs include previously described as technology-transfer cost, supplier switching costs, and dynamic transactions costs (Langlois 1992), that is, ‘the costs of persuading, negotiating and coordinating with, and teaching others’ or, simply, ‘the costs of not having the capabilities when you need them’ (113). The use of MOPs can be extensive in developing countries for addressing the gap due to the lack of technological and institutional framework (e.g. knowledgebase, S&T system, business propensity and culture, supply chain, and regulation) and for building the foundations of viable markets. To escape being trapped in lower incomes and really take advantage of market entry incentives created by active government intervention, however, latecomer economies must figure out faster ways to learn and develop capabilities at the lowest possible cost or be smartly selective in the choice of specific packages that make technological and economic sense to them. However, it is important to mention that, MOP did change the infrastructure and capital stock landscape with shipbuilding sites in different parts of the country. However, capabilities result from the combination of technical systems, knowledge, and routines (Nelson and Winter 1982) to actually be effective. Figuring out economic arrangements and incentives for companies with the appropriate knowledge to operate them locally could be a possible path forward for the country. Lastly, it is important to mention that the discussion herein is based on a single case of a MOP ‘experiment’ in Brazil within the very institutional, social, and economic idiosyncrasies of the country. Examination of additional cases of MOP from emerging economies would be necessary for establishing the wider applicability of the results. Footnotes 1 ‘A technological regime is the rule set or grammar embedded in a complex of engineering practices, production process technologies, product characteristics, skills and procedures, ways of handling relevant artifacts and persons, and ways of defining problems—all of them embedded in institutions and infrastructures. Regimes are intermediaries between specific innovations as these are conceived, developed, and introduced, and overall sociotechnical landscapes’. (Rip and Kemp 1998: 340) 2 Decree Nº 4.925 de 19 de Dezembro de 2003. http://www.planalto.gov.br/ccivil_03/decreto/2003/d4925.htm 3 ANP Resolution Nº 36, de 13.11.2007. http://www.anp.gov.br/brasil-rounds/round9/round9/Diario_oficial/Resolucao36.pdf 4 Lei 9.478/97 (Lei do Petróleo), Lei 12.351/10 (Lei da Partilha de Produção), Lei 12.304/10 (Lei da criação da PPSA), and Lei 12.276/10 (Lei da Cessão Onerosa) 5 ANP: National Oil Agency. Acknowledgments A.C.A. and P.A.Z. acknowledge the financial support of the Brazilian National Council for Scientific and Technological Development under the grant number 486501/2012-4. A.C.A. and N.S.V acknowledge the support of the Research Foundation of the State of São Paulo for support during the writing of the article. N.S.V also acknowledges support from the Basic Research Program at the National Research University Higher School of Economics, Russian Federation, within the framework of the implementation of the Global Competitiveness Program. 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TI - Mission-Oriented Policy for Innovation and the Fuzzy Boundary of Market Creation: the Brazilian Shipbuilding Case
JF - Science and Public Policy
DO - 10.1093/scipol/scaa059
DA - 2020-12-14
UR - https://www.deepdyve.com/lp/oxford-university-press/mission-oriented-policy-for-innovation-and-the-fuzzy-boundary-of-7BUajblK03
SP - 1
EP - 1
VL - Advance Article
IS - 
DP - DeepDyve
ER -