Globalization and industrial restructuring in Mexico : the cases of the automobile and electronic industries /;"Cristina Casanueva Reguart, Flor Brown Grossman "

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(1)Globalization and Industrial Restructuring in Mexico; the Cases of the Automobile and Electronic Industries. 1. Cristina Casanueva Reguart ccasanue@campus.ccm.itesm.mx Flor Brown Grossman brown@Jservidor. unarn .mx. Instituto Tecnológico y de Estudios Superiores de Monterrey Campus Ciudad de México Departamento de Economía. ., },¡J .,11,. División de Negocios y Alta Dirección. •. •. lTESM -:AMP Us L. 1. CIUD~V VI~ A11-:x1ca .. •. Bl BLIO'fb.LA. Este proyecto ha sido posible gracias al interés y apoyo del Dr. Jorge Mendoza, del Dr. Carlos Mendizábal y del Dr. Francisco Medina. Las autoras agradecen la invaluable asistencia y apoyo de Osear Fuentes y Juan Antonio Laguna. La Colección de Documentos de la División ele Negocios de Alta Dirección repr~sentan un medio para difundir los avances de la labor de investigación y permitir que los autores reciban comentarios antes de su publicación definitiva. Se agradecerá que los comentarios se hagan llegar directamente a las autoras. * D.R.©2000.. 1. F.

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(3) ABSTRACT. This study explores the effects of globalization and industrial restructuring in Mexico in the automotive, and the computer and telecommunications equipment industries. Toe study analyzes the re-organization of co:mpanies' structure, the formation of supply chains and the interaction between companies in the regions of Guadalajara, for the electronics industry, and Saltillo- Ramos ArizpeMonterrey, for the au.tomotive industry. Toe study also examines the extent to which the growth of productive activities in these regions has led to the formation of clusters. These regions were identified based on their important contribution to Mexico's manufacturing activities in these industries. Toe selection of regions was based on official industrial statistics (censuses and surveys). This selection of companies was assisted by the industrial chamber directories. Information on companies was gathered through surveys and interviews with executives and other industry representatives, conducted during visits to the cornpanies. Toe visits also allowed observations regarding the implementation of organizational practices. Toe study conducted an indepth examinat:on offi~ms, 21 companies (10 in the electronics and 11 in the automotive). Information gathered. from executives and high-level personnd from the companies were complemented with interviews with government representatives, who were in charge of promoting investment, representatives of industrial chambers in the auto and clectronic equipment industries, universities, and research and developments centers, located in each one of the regions under study. Quantitative information was analyzed using factor analysis allowing to a more detailed analysis on the relative impact of the variables involved. Toe results reveal the adoption of the organization's best practices, along the lines oflean and flexible production. However, nT is not fully implemented in most of the companies studied. Nevertheless, they use approximated versions of the nT, like programming of dclivery systems that reduce the cycles from the delivery of parts, to the assembly of the final product. Toe companies' implementation of total quality systems has enabled them to obtain intemationally recognized certification. Industries, productive organization has lead to work teams, to the of use multi-skill training, al:lowing also workers participation in production responsibilities, particularly in quality control. In the two regions stu.died, supply chains have formed around final assembly companies up to the third tier, in the electronics, and second tier in the automotive. To a large degree the formation of supply chains in these regions is a result of the implementation of synchronized programming systems (llT). In the electronic:s the "contractor manufacturers" have pláyed a critica} role in facilitating the formation of chains, integrating parts from second and third tier suppliers in their production. In the automotive the relation between ::;econd. and third tier suppliers is at its initial stages. Toe final electronics assembly companies in Guadalajara have focused on attracting "proven" suppliers from abroad, and to lesser extent have encouraged the development of national suppliers in the region. Differently, in the auto parts industry, Mexican industrial groups have achieved the technical and organizational restructuring of their firms, through strate_gic alliances with technological partners, which has launched them as world class suppliers. Evidence suggests that those parts and components suppliers and OEMs production activities are not limited to the exporta.tion of final products, they also export significant amount components at different levels of the supply chain. However, unlike the opinion that these regions are "export 2.

(4) processing" or "maquiladora" regions, the study found that conditions exist for the formation of clusters. Although, is not possible to identify these regions with t:1e concept of clusters in a strict sense, there are the formation of more complex, integrated supply chains that would led to the future formation of clusters in these regions.. 3.

(5) TABLE OF CONTENTS. ABSTRACT .............................................................................................................. 2 l. Introduction ..................................................................................................................... 5. II. Economy Liberalization and Industrial Restructuring ................................................... 7 III. Industrial Restructuring and Regional Development .................................................. 8 IV. Methodology ................................................................................................................ 11 V Globalization, Industrial Restructuring and Lean Production ...................................... 12 VI. Study Hypotheses ......................................................................................................... 18 VII. Company's and Flexible Production Systems ............................................................ 20 .Clectronics Industry ............................................................................................... 20 Automotive Industry ............................................................................................... 22 VIII. Formation of Supply Chains. ........................................ ......... ...... ........................ ..... 25 Electronics Industry............................................................................................... 25 Automotive Industry .............................................................................................. 28 IX. Acquisition of Technological Capabilities and Innovation Activities ......................... 30 Electronics Industry ................................................................................................ 31 Automotive Industry ............................................................................................... 37 X. Conclusions... ... ... .... .. ......... ... .... .. ... .. .. ... .. ....... ...... ... .... ........ ....... .. ................. .. ... ..... ... ... 41 Bibliography ....................................................................................................................... 45 Appendix I. .......................................................................................................................... 4 7 Appendix II ........................................................................................................................ 57. 4.

(6) l. Introduction This study explores the effects of globalization and industrial restructuring in Mexico on the automotive and electronic equipment industries, two ofMexico's most dynamic industrial sectors in this decade. Focusing on computer and telecommunications equipment and the auto 2. parts industries. Thc analysis took place in the regions where thc electronic equipment and the automotive have experienced a more dynamic growth, relative to other regions in the country, since the liberalization of markets and the orientation of Mexico asan export economy.. In order to explore the effects of globalization on the industrial restructuring process, the study first analyzes the re-organization of companies' structure, and then the formation of the supply chain in the regions ofGuadalajara, for the electronics industry, an.d Saltillo-Ramos ArizpeMonterrey, for the automotive industry. These regions were selectcd based on their important contributions to production, as will be documented below.. The first issue examined in the study relates to the restructuring of 1:he organization of production, analyzing the extent to which companies have modifiec: their organization and 1. management practices according to lean and flexible production systems. This re-organization of production demands a complex and rigorous system of cooperation from participating companies based on the use of just-in-time systems, total quality control strategies, and the organization of productive activities around cells or work teams. The second issue examined is the formation of the supply chain and the interaction between companies in the regions, and the effect of the new production systems in the formation of these chains. Thirdly, the study briefly examines technological transfer and the acquisition of technological capabilities by the recipient companies.. 2 In 1998 the automobile industry represented 11 % of the manufacturing GNP, 20% of total exports, 22% of the manufacturing industry exports, and 18% of total manufacturing employment. For 1:he same year (1998) the electronic-industry represented 9% of the manufacturing industry GNP, 18% of manufacturing exports, and , 16% of total exports (INEGI).. 5.

(7) Casanueva and Brown I G/oba/ization and Industrial Restructuring in Me:xico. Finally, the study poses the question ofto what extent the emergence and growth of productive activities in these regions have led to the formation of clusters, in the Guadalajara metropolitan area for the electronics equipment industry, and thc Saltillo-Ramos ArizpeMonterrey region for the auto parts industries.. This research attempts to contribute to the discussion of the spatial organization that results from the integration of regions within the global economy: To what extent do these regions approach the models proposed by literature as "clusters" or "industrial districts?" Do these regions remain as "maquiladoras" or "export processing zones," or are the regions different from the proposed models?. With these objectives in mind, the study briefly describes the political framework in which the trade opening took place, leading to industrial restructuring. Then the criteria used for selecting the regions is presented, as well as the factors that led electronics companies to locate in Guadalajara, and automotive companies to locate in thc Saltillo-Ramos ArizpeMonterrey region. And then, the methodology used in the study is discussed.. In the following section, there is a theoretical discussion on industrial restructuring and the primary aspects of lean production systems -which are the basi.s for the main hypotheses guiding the empirical analysis.. The empirical analysis is divided into two sections: first, the reorganization of companies according to flexible production systems and the second, the formation of supply chains. In these two sections the analysis attempts to respond to the questions posed by this study with respect to globalization and industrial restructuring in the electronics and automotive industries.. 6.

(8) Casanueva and Brown I Globah:ation and Industrial Restructuring in Mexico. II. Economy Lib,eralization and Industrial Restructuring In the l 980s the Mexican government began the implementation of a package of policies that resulted in the export orientation of the Mexican economy andina greater degree in the integration with global flows of investment, production and trade. Sorne of these policies had a significant impact on industrial rcstructuring; they included the program ofreducing taxes on imports and the trade opening, deregulation and a broader opening to foreign investment, andan intense program of privatization. 3. The liberalization policy began in 1983 and was reinforced when Mexico joined GATT in 1986. Liberalization signified a substantial reduction in customs tariffs and the elimination of all types of qualitative barriers to trade (customs tariffs were dec:reased from 100% in 1982 to a.11. average of 11.1 % in 1993 ).. With the objective of consolidating the economic liberalization, Mexico began a program of negotiating trade agreements, the most important ofwhich have been with North America and with the European Union. The first culminated with the signing ofthe North American Free Trade Agreement (NAFTA), which became effective in 1994 and the results of which can be seen in the areas oftrade and investment. The second, with the European Union, effective from July 2000, and thus Mexico will be a trade partner with the most important economic blocs, with access to the two largest markets in the world.. In the area of foreign investment, regulations were modified to reduce restrictions, allowing levels ofup to 100% in most sectors ofthe economy. Previous to the new Law, in constrast most sectors had been closed to foreign investment, or open to only minority participation, subordinated to national investment. In addition, the procedures far authorizing foreign investment were simplified and made more expedite.. 3. Toe privatization process reduced the number of state-owned companies from a total of 744 in 1982 to 106 in 1992 (Carrillo, J., Mortimore, M., y Estrada, A.,1998).. 7.

(9) Casanueva and Brown I Globafüation and Industrial Restructuring in Mexico. Within this new political framework, investment was viewed as a factor of intemational competitiveness that would facilitate access to advanced technology, leading toan expected impact on productivity. Deregulation and liberalization of foreign investment represented a central aspect of measures for promoting intemational integration. Parallel to these changes, technological transfer was also deregulated.. The changes in Mexico' s economic policies permitted the economy to evolve from an import substitution model to a model in which exports are promoted; these changes had an impact on the formation of different pattems of competition, thus giving rise to a new industrial model.. In the case ofMexico, this model has tended to focus on certain branches ofthe manufacturing industry, specifically textiles and clothing, automotive and auto parts, and the electric and electronic industries (Carrillo, Mortimore and Estrada, 1998). This is a result of a greater specialization in productive processes and their integration into export markets, according to the logic derived from the global strategic planning of large companies and Mexico's competitive advantages.. Furthermore, the structural changes in the economy have led to the gradual emergence of a new economic geography, with the strengthening ofmanufacturtng production in regions other than the greater metropolitan area of Mexico City and nearby zones. It was in the latter region where previously, during the import substitution period, growth in manufacturing production was concentrated.. 111. Industrial Restructuring and Regional Development During the past decade, the level of computer and telecommunications equipment production in the Guadalajara region rose atan impressive rate. This was al:;o the case for the auto parts industry in the northem region of Saltillo, Ramos Arizpe and Monterrey.. 8.

(10) Casanueva and Brown / Globalizalion and lnduslrial Restructuring in Mexico. The following section analyzes the growth in the electronic equipment and automotive industries in the selected regions, the section also examines sorne of the factors that had influenced the decisions to locate companies in these regions.. Selection of regions. In 1993, the Guadalajara-Jalisco region's share ofthe national production of computers and telecommunications equipment was 31.9%, and by 1997 it had more than doubled to 71.4%.. In comparison, the share ofthe Mexico City metropolitan area (including Mexico City and the State ofMexico) in t:he production of electronics decreased from 54.9% in 1993 to 19.09% in 1997. 4. Between 1993 and 1997, the electronic equipment industry in thc Guadalaj ara-Jalisco region grew by 52.6%, and in contrast the same industry in the Mexico City metropolitan area experienced a negati ve growth (4.1 % ) with respect to national production during these years. 5. In the case of the auto parts industry, the Saltillo-Ramos Arizpe-\.1onterrey region (Coahuila and Nuevo Leon) increased its share ofnational production from 18.5%in 1993 to 23.5% in 1997. In comparison, the Mexico City metropolitan area's share of national production in auto parts decreased :from 36.3% to 34.4% in the same time span. 6. Thus the northem region experienccd an average growth rate of 13.5%, which is almost twice the average national growth rate during the same years. In contrast, the Mexico City metropolitan area experienced an average growth rate of only 5.5% in auto parts production during the same years. 7. 4. See Appendix I, Table 1: Regional Share in Mexico 's Production of Electronic Equipment and Appliances, 1993-1997. 5 See Appendix I, Table 2: Growth of Electronic Equipment and Appliances 1993-1997. 6 See Appendix 11, Table 1: Regional Share ofMexico's Production in Parts ofVehicles 1993-1997. 7 See Appendix 11: Table 2: Growth of Parts ofVehicles 1993-1997.. 9.

(11) Casanueva and Brown I Globa/iwtion and Industrial Restructuring in Mexico. These statistics clearly show the emergence ofthe new economic: geography, with manufacturing production increasing in certain regions, specifically in the metropolitan area of Guadalajara in the case of the electronics equipment industry, and in the northem region of Sal tillo, Ramos Arizpe and Monterrey for the automotive industry.. Factors in the location of electronics companies in the Guadalajara region. On the main factors influencing companies to establish themselves in each of the regions, the results to date, show that in the case of the electronics industry, is the workforce is the factor that has had the most influence in decision-making on where to locate companies. It was the cost of labor and to a lesser degree their skill level that had encouraged firms to establish themselves in the region.. Another relevant factor in terms of location is the companies' interest in complying with the local content requirements ofthe North American Free Trade Agreement (NAFTA). This factor tums to be critica! since they import a significant number of components from Asia. NAFTA creates incentives for the Asian-owned companies to establish themselves in Guadalajara in order to comply with the rules of origin, and then supply products to their clients in the region {generaliy terminal assembly companies). 8. In the view of sorne of company directors interviewed, the decision to locate their plants in the Guadalajara region is to a large extent based on its proximity to one of the world's largest markets. They agree on the fact that Guadalajara is endowedwith a satisfactory transportation infrastructure. In this context, it is found an announced strategy of creating a center of manufacturing and design in this region, because of the cost advantages offered by its. 8. Results ofthe factor analysis suggest that manpower costs explain 54.7% ofthe total variance, followed by training (which explains 17.2% ofthe total variance), and then NAFTA's local content requirements (which explain 11.4% of the total variance). Together these three factors explain 83.3% ofthe total variance (See Appendix I, Table 3: Location Factors, Electronic Companies).. 10.

(12) Casanueva and Brown / Globa/iz,1tion and Industrial Restructuring in Mexico. proximity to the United States. This strategy has the objective of successfully confronting the competition that companies from the Asian Pacific region present for US companies. 9. Factors in the 10<:ation of automotive companies in the Saltillo - Ramos Arizpe Monterrey region. In the case of auto parts companies, the most relevant factor is the presence of final assembly companies or Original Equipment Manufacturers (OEMs). This finding reveals the importance of the location of suppliers near OEMs, with the objective of gradually consolidating a synchronized system of production and ajust-in-time system, as will be analyzed later. The second most important factor for its influence on the location of auto parts companies in this region is the quality of the workforce, as determined by skill levd. And, the third most important factor consists of labor costs. 10 This latter will be discussed in the context of the education level of the workfcrce.. IV. Methodology According to the obj ectives of study, it was necessary to identify the regio ns to be examined for each of the two industries -auto parts and electronic equipment- based on the regions' relative performance during the last decade. Once the regions were selected, it was conducted an in-depth examination of a total of 21 companies, specifically l O in the electronic equipment industry in the Guadalajara region, and 11 in the auto parts indus·try in the Saltillo-Ramos Arizpe-Monterrey region. Dueto the exploratory nature ofthe study, the two groups of companies are not representative samples of the type of firms in the two industries analyzed.. 9. 11. In the words of a company director in the computer and periphery equipment sector: "Our competition is not in the United States, because we are complementary (manufacturing) economies. The competition is with the Asían Pacific region, considered the traditional center of the electronics industry, and including countries such as Taiwan, Malaysia, Singapore and Hong Kong. These countries have the founclations for design and manufacture." (López, 1999). 10 Toe presence of final assembly companies or OEMs explains 45.4% of the total variance. The quality of the workforce, as determined by skill, explains 19.7% of the total variance. And labor costs explain 17.3% of the total variance (see Appendix 11, Table 3: Location Factors Automotive Comprnies).. 11.

(13) Casanueva and Brown / G/oba/izarion and Industrial Reslructuring in Mexico. The selection of regions was based on secondary sources, such as Industrial Census Reports (1988 and 1994) and Annual Industrial Surveys (1993-1997), supplemented by information available from industrial chambers. The two regions were selected on the basis of their gross production value growth, and their share in the production value in relation to other regions in the country.. Surveys and interviews with executives and other industry representatives, were conducted during in-person visits, provided information on the companies. The visits also allowed for observations regarding the implementation of organizational practices. Interviews with company executives and high-level personnel were complemented with interviews with government representatives in charge of promoting investment, representatives of industrial chambers in the auto and electronic equipment industries. Quantitative information supplied by the surveys, was examined through factor analysis and the results gathered were complemented the qualitative information collected unstructured through interviews.. The next section presents a theoretical discussion ofthe most relevant aspects of lean and flexible production systems. This discussion is followed by an empirical analysis on the organizational practices adopted by the firms, and on the formation of supply chains. This leads to the analysis on the effects of industrial restructuring in the Guadalajara region for the electronic equipment industry and the Saltillo- Ramos Arizpe region for the automotive industry.. V. Globalization, Industrial Restructuring and Lean Production The objective of the lean production system is to achieve flexibility, understood as the ability to adapt to changes in the demand for products within a competitive environment, while reducing costs and increasing product diversity, and the ability to adjust production volumes to fluctuations in demand. 11. See Appendix I, Table 4: Companies in the Electronic Equipment Industry Guadalajara-Jalisco Region and Appendix 11, Table 4: Companies in the Auto Parts Industry, Saltillo-Ramos Arizpe Monterrey Region.. 12.

(14) Casanueva and Brown / Globali.cation and Industrial Restructuring in Me:xico. The lean production system incorporates changes in product and process design, incorporates new technologies, and generates a tendency to subcontract production services from other companies. In organizational restructuring, lean production implies three major transformations: the reorganization of production based on a strict system of inventory control, known as the just-in-time system; total quality control; and the development of new relationships with suppliers. These interrelated changes are held to create a new production system, based on principies which contrast to fordist mass-production (Humphrey, 1995).. Organizational restructuring of production Traditionally, mass production has been organized in assembly h.nes and requires large inventaries, stock reserves, temporary workers, and extra space for its operation. In contrast, the lean production system is dedicated to eliminate these excesses through inventory control practices and the "kanban," just-in-time (IlT), total quality, and c:ontinuing improvement or "kaizen" systems.. The "kanban" is a system of intemal control over the company's production, and is also implemented by suppliers that only produce components as they are needed, thus eliminating unnecessary inventory (Karthik A. Rao, 1999). The just-in-time or JIT system refers to a complex manner of organizing buyer-seller relations between cornpanies. In the JIT system, parts suppliers must provide parts within the required time limit and with zero defects. For these reasons, JIT is considered to be the center of production reorganization in various regions (Schoenberger, 1987; Rubenstein, 1992; Kenney andFl01ida, 1993; Reid, Solocha, and Uallachain, 1995; Uallachain a.nd Reid, 1997).. The "kaizen" or continuing improvement system is based on the principie that it is always possible to improve any process within production. The "kaizen" concept requires a structure of disciplined workers working in what are referred to as "cells" or work teams in which among other things, facilitates the establishment of total quality systems. Therefore,. 13.

(15) Casanueva and Brown I Globah:ation and Industrial Restructuring in Mexico. continuing improvement signifies the constant rationalization of production for quality control (Klein, 1989).. Mass production has been traditionally characterized by the highly-specialized assets and economies of scale maintained by OEMs. For this reason, OEMs establish short-term contracts with suppliers, based on costs and not quality. In contrast, lean production systems, tend to generate profound changes in the relations between final assembly companies and their suppliers. The most important transformation consists of the systems for delivering parts with zero defects, based on JIT. These modifications have had a fundamental impact on the spatial configuration of regions, because ofthe need for final assembly and supply companies to be nearby, making it necessary for them to be located in the same region.. With regard to labor organization, mass production requires workers to be specialized in a single activity and work to be organized rigidly in assembly line~:. In lean production systems, on the other hand, personnel training is designed so workers acquire various skills that can be applied in a variety of tasks. This is what is known as worker flexibility, or multi-task systems. With this focus in labor organization, there is no longer a need for worker reserves, or dependence on temporary workers, in order to confront absenteeism or production changes resulting from the dynamics of product demand.. In terms of organization, there is a tendency to eliminate departments specialized in inspection and maintenance tasks. Instead, it is the workers who participate in these tasks, sharing responsibility for quality control and the operation and control of the manufacturing process. In this context there are mechanisms for receiving suggestions and proposals from workers on how to improve the process. The successful implementation of this form of production requires an ongoing, intensive efforts in the area oftraining. (Andersen Consulting, 1994; Jordi Michelli, 1994).. 14.

(16) Casanueva and Brown I Globalization and Industrial Restructuring in Mexico. Subcontracting of production services The recent tendency of final assembly companies subcontracting production has been a determining factor in the new model of productive organization (Sturgeon, 1998a, 1998b). One ofthe most important factors contributing to the emergence ofthis tendency is market volatility. Subcontracting manufacturing services facilitates_the possibility of increasing or decreasing the supply of finished products with little prior notice,, and thus final assembly companies can easily adjust to fluctuations in the market without having to underutilize their facilities or absorb the high costs ofmaintaining an inventory of products. In addition, through their role as companies that purchase parts and components, therc are new possibilities for connections in the supply chain.. Companies offering subcontracted production services have efficiencies, due to their economies of scale, that allows costs reduction. Manufacturing subcontractors thus acquire a new role in the industry, incorporating tasks such as the design o:f subassemblies or "modules", the coordination and logistics for acquiring parts, and. the inspection and quality control of parts. Exclusively final assembly companies previously carried out these tasks.. In recent years, a tendency among rnanufacturing subcontractors has been to install rnanufacturing and design centers in different locations around the world. The two factors that appear to have an influence on the decisions regarding location are first, the possibility of being near final assembly cornpanies or OEMs, and second, the relative costs of personnel, including both workers and specialized staff who work in the area of design.. Formation of supply chains The new spatial configuration ofparts supplying based on llT af:ects the way in which suppliers and final assembly companies are distributed, in what are referred to as flexible complexes or nT complexes (Ramírez, 1997). This spatial configuration also affects the formation of chains in which suppliers tend to locate within a limited geographical area in the sarne region, where final assernbly cornpanies and other suppliers frorn the various levels in the chain of production are located. 15.

(17) Casanueva and Brown / G/obalization and Industrial Restructuring in Mexico. In the first level of the chain, it is found companies that supply directly to final assembly companies, and producers of modules and complete systems. Their capacity in research and development within their specific area of expertise allows them to take on the tasks of assembling, logistics and coordination necessary for working together with second and third tier suppliers. It also means they can deliver systems to the place where the assembling will take place, in the quantity required, with consistent punctuality and reliability, and without defects (Chappel, 1994; Klier, 1994).. These international suppliers establish subsidiaries in the countries where final assembly companies are located, including developing countJ:ies, and transfer the learning process to any place in the world (D'Cruz, J. and Rugman, A., 1993; Humprey, Mukeherje, Zilbovicius and Arbix, 1997; Stevens, T., 1995; Sturgeon, T., Florida, R., 1997).. In addition, decisions regarding where to locate final assembly companies are based on cost. factors, but one of thc important considerations within these cost factors is the proximity between these companies and the mi:ijor markets.. Globalization of lnnovative Activities. In the past, it was acknowledged in the literature that transnational corporations located their centers for innovation, research and development in their main oflices, generally in the more developed countries. Designs for new products and processes were developed in these centers, and then sent on to the subsidiaries located in other regions around the world. Only minar changes were sometimes made in the designs at the sites of the fo~eign companies, for the purpose of adapting them to the characteristics of the regional mcrkets where the products would be sold (Vernon, 1966, 1977; Porter, 1986).. Recently, the literature on technological innovation and development has reported a process of decentralization and internationalization of technology innovation activities. This new trend is. 16.

(18) Casanueva and Brown I Globalizalion and Industrial Restructuring in Mexico. based on an increase in foreign investment in the subsidiaries owned by the major transnational corporations, as well as on the increasing globalization of economic activity, and the increasingly accel.erated rhythm of technological changes. The globalization of competition is associated with the need to generate new producís and improve those already existing on the basis of differentiation, with the objective of elevating competitiveness in global markets (Ronstadt, 1977; Cantwell, 1989; Mowery and Teece, 1992, 1993; Howells, 1990; Westney, 1990, 1992).. According to the literature, it is found a more global distribution of innovative activities in technologically intensive industries, such as those based on microelectronics and new materials. 12 These industries appear to need innovations generated independently and from a variety of sources. Globalization and the intensification of knowledge for developing new products have been the primary motors for innovative activity in the various centers of development around the world.. The literature provides with a number of factors that explain the globalization of corporate activities in innovation, including cost, market and technological factors. Arnong the market factors are: access to markets (size, proximity), adaptation to local or regional needs, ongoing monitoring of tendencies in innovation, and technology monitoring in other geographic areas, especially regions where competing companies are located (Pearce, 1991; Dorrenbacher and Wortman, 1991; Grandstrand et al, 1992; Florida and Kenney, 1994; Reddy and Sigurdson, 1994). 13. Cost factors include ai:cess to human resources, in terms of abilitics and talent, at relatively lower costs than those ofpersonnel at the company's headquarters. Other factors have to do. 12. In addition to microelectronics and its applications in equiprnent rnanufacturing, the biotechnology, pharmaceutical and rnaterials industries are also identified as knowledge-intensive industries. These industries have nurnerous applications in the irnprovernent and differentiation ofproducts in the more well-developed industries. We can see, for exarnple, the application ofrnicroelectronics and new rnaterials in the automotive industry. 13 Pearce, 1991; Dorrenbacher and Wortrnan, 1991; and Grandstrand et al, 1992 cited by Prasada and Sigurdson, 1994.. 17.

(19) Casanueva and Brown I Globalizazion and Industrial Restructuring in Mexico. with access to scientific and technological resources in the different countries where innovation centers are located. Lastly, in sorne regions, there rnay be factors that are not precisely technological, but rather associated with the national policy on science and technology.. In addition to the factors just rnentioned, it has seen in recent years that because of the intemational division oflabor among countries and the spreading oftechnology, the technological capacity in sorne developing countries has increased significantly. Building technological capabilities refer to the whole range of skills needed to operate industry, and includes "technology mastery", "rninor innovation". Technology mastery refers to building up the skills and capabilities neecied to operate a technology efficienty. Major innovation refers to any activíty leading to the introduction of new products and processes (Lall, 1990).. These. countries are able to undertake highly cornplex technological activities that represent sources of innovation and continuing irnprovernent of products (Lall, 1990; Casanueva, 1998).. The following section presents the hypotheses that have developeé. frorn the previous theoretical discussion.. VI. Hypotheses Hypothesis I. Companies in the electronics and automotive industries that are located in the regions under study have begun a process of reorgartizing production, managernent and labor organization, according to the schemes of lean and flexible production.. Hypothesis 11. The region has witnessed the formation of supply chains and links with final assernbly companies located in the same region. lmportant relations have also been developed with intemational production chains.. 18.

(20) Casanueva and Brown I G/obalizmion and Industrial Restrocturing in Mexico. Hypothesis III In the two regions studied, supply chains up to the second tier and third tier, have formed around final assembly companies. To a large degree the formation of supply chains in these regions is a result ofthe implementation of synchronized programming systems (JIT).. Subcontracted production services and the primary agents involved ---contractor manufacturers- have played a critica} role in the formation of ch".ins, facilitating the integration of parts and components from second and third tier suppliers in the assembly of the final product.. Parts supplying by producers at the various levels in the chain is not limited to supply what the region final assembly companies demand. The companies manufacturing parts and components, at differe:nt levels in the chain do export an important part of their production.. There are efforts underway to further develop national suppliers for the industry. The success of these efforts has depended on the capacity for restructuring production for competiti veness on the part of Mexican business groups.. Hypothesis IV Companies are not passive receivers oftechnology from the outside. Rather, they are immersed in an ongoing process of ma.king improvements that provide feedback for the design of new products and processes. To a greater or lesser degree, companies are engaged in innovative activity.. Hypothesis V The development of local suppliers is generating links between companies within the same region, and this has led to greater integration with the regional economy. Now that there is greater integration between final assembly companies and their suppliers, there is a change from a scheme we could call "export processing zones" (Gereffi, 1997) or "maquiladora" type zones, to a scheme of productive organization similar to "industrial districts" or "clusters.". 19.

(21) Casanueva and Brown I Globalization and Industrial Restructuring in Mexico. This has led to production systems that are more stable, with greater added value, and with an important spillover effect on the region's economy.. In the following section presents the results observed in the restrncturing of production in the electronics and automotive companies in the regions studied.. VII. Company's Restructuring and Flexible Production Systems The objective of this section is to document the way in which companies in the regions studied have reorganized production in accordance with flexible and lean production schemes.. Electrou!cs lndustry. Synchronized delivery system (JIT) Among the various companies in the computer and telecomrnunica.tions industry located in the Guadalajara region, th,e implementation of a synchronized delivery system (JIT) is not fully applied. This is true in both, the coordination with suppliers and in terms of the delivery of products to clients. Nevertheless, in most of the companies studied,. are implementing approximated versions of the JIT system, consisting on programmi:1g systems that seek to reduce the cycles that begin with the delivery of parts and componmts and end with the assembly of the final product. Most companies reported that it is difficult to implement rigorous systems for synchronizing deliveries, due to logistics and transportation problems resulting from the fact that sorne of the suppliers are located in distant countries generally in Asia. 14. The difficulties in implementing ITT in the electronics industry in Guadalajara is largely due to the geography of the industry which maintains zones of technical specialization in component and module production in various parts ofthe world. A certain level of production 14 According to the factor analysis, deliveries programming explains 45.7% and "kanban" explains 30% that is attributable to companies, of the total variance of the factors being studied in relation to the organization of. 20.

(22) Casanueva and Brown / G/obalization and Industrial Restructuring in Mexico. excellence has been achieved in sorne countries and regions, particularly in Asia, where there are original contributions in technical and design improvements, resulting in a "geographic division oflabor". It is found, therefore, a variety ofpattems of specialization and partssupplying among these regions.. However, in recent years it has seen major first tier suppliers and nanufacturing subcontractors establish themselves in the region, attracted primarily by the presence of final assembly companies and by labor cost (as discussed later, seven of the world's largest companies in manufacturing subcontracting are in the Guadalajara region).. \\!hile, JIT has not been fully implemented, as mentioned earlier, there are systems of extended programming that have facilitated coordination between suppliers of parts and subassemblies, on the one hand, and the final assembly companies, on the other. The result is more rigorous quality control and greater efficiency in production, with reduced "downtime" and waste rates. These efforts by companies have led to greater discipline in terms of costs, making it possible to increase competitiveness within the industry. 15. Total quality systems All the companies surveyed (final assembly companies, parts suppliers and manufacturing subcontractors) have implemented total quality processes, with the c:orresponding documentation, and have received certification of quality in accordance with intemational standards.. Flexible organization o/personnel The processes of continuing improvement (kaizen) and preventative maintenance are not generalized practices in the industry. Workers do not directly assumc responsibility for. 15. Quality control explains 50% of the variance in the different irnpacts studied; greater efficiency in production that reduces "downtime" explains 23%; and reduction in the waste rate explains 14% ofthe total variance sample (see Appendix I, Table: 6 Impact of the Synchronized Delivery Systems).. 21.

(23) Casanueva and Brown / Globalizat!on and Industrial Restrucluring in Mexico. "kaizen" nor for preventative maintenance, however they participate more actively in taking responsibility for quality control. 16. Worker teams has been adopted by nearly all the companies, illustrating the efforts to modify labor organization according to lean production schemes. In half of the companies, direct participation by workers in taking responsibility for production control and rotation of tasks among personnel can be observed. 17. Subcontracting Only the large final assembly equipment companies use subcontracting production services. Manufacturing subcontractors such do not, in tum, subcontract other production services, but they do subcontract other services such as personnel hiring through human resource companies, as well as maintenance, transportation, cafeteria, security, among others, thus concentrating their efforts in their fundamental activity of assembling large volumes of products. In sum, cases of subcontracting are found, but in terms of production services, only to a significant degree within final assembly companies or OEMs. It is worth mentioning that subcontracting of other types of services has a positive spillover effect for other companies in the Guadalajara region.. Automotive lndustry Synchronized delivery system (JIT) A process of moving toward establishing JIT has begun in the Saltillo-Ramos ArizpeMonterrey region. Especially noteworthy are the introduction of the "kanban" system or on-. 16. There is an active participation in the activities related to total quality control in six (out of ten) of the electronics firms that were analyzed (see Appendix I, Table 7: Workers Responsibilities in Quality Control). 17. These three factors explain 90% of the factors considered in the area of labor organization (see Appendix I, Table 8: Flexible Organization of Work). 22.

(24) Casanueva and Brown I Globalizarion and Industrial Restructuring in Mexico. line programming, and the use ofthe IlT system for deliveries to final assembly companies. This is not the case, however, in the receiving of inputs for suppliers. 18 The fact that the nT system has no} been completely implemented in the region can be explained, by the insufficient number of suppliers established in the region, and by the continued importing of components by final assembly companies. The data suggests that the establishment of auto parts suppliers is still in process, and that final assembly companies continue to import a significant portion of their components.. Although the use of the IlT system is not fully implemented the location of first tier suppliers and the system of deliveries, is beginning to modify the spatial configuration of the region, ,-. since suppliers are increasingly establishing themselves near the final assembly companies in the region.. Quality systems stand out among the impacts observed from the dissemination ofnew production systems in the region. The use of these systems has extended to suppliers at different levels in the production chain. Next in importance, in terms of impacts analyzed, is production efficiency, with less "downtime" and lower waste rates, as well as a reduction in inventories. This suggests that sorne significant aspects of the lean production system have spread to a significant part of production in the region. 19. Total quality systems. Mexico's parts of vehicle companies have adapted their systems according to total quality and programming of deliveries. Mexico's supply companies -primarily the first tier suppliershave applied the ISO9000 and QS quality standards and guarantee systems in their labor. 18. Toe "kanban" system explains 67% of the variance in the factors of extended production, and nT delivery to clients explains 25% (see Appendix II, Table 5: Synchronized Delivery Systems, HT). 19 Quality systems explain 36% ofthe total variance in impacts analyzed; reduction in "downtime" explains 22%; and reductions in inventories explains 19% (see Appendix II, Table 6: Impact of the Synchronized Delivery Systems).. 23.

(25) Casanueva and Brown / G/obaliza1ion and Industrial Restructuring in Mexico. processes and manufacturing operations. 20 Parallel to these internationally recognized certifications of quality granted by independent certifying agencies, these companies have also received acknowledgments and awards that final assembly automotive companies grant to their most outstanding suppliers. This has not been an easy process and companies continue to confront difficulties in maintaining these certifications.. Flexible organization o/personnel As we also find in devieloped countries, the companies surveyed have modified labor organization and workers' responsibilities. In ten of the eleven companies surveyed, workers are those directly responsible for quality control, continuing improvement and preventative maintenance. 21. These companies have also managed to substantially modify their ways of working with flexible organization of personnel. They have created work tearns, and have incorporated workers into responsibility for production tasks, and in half of the companies, they have implemented rotation of tasks arnong workers. In most companies, workers participate in inspection and maintenance tasks. Nevertheless, companies do not have formal mechanisms for collecting suggestions or proposals from workers on how to improve the processes. 22 In sum, there is a tendency in the region toward labor organization in accordance with lean production systems and this is transforn1ing workers' tasks and responsibilities.. Subcontracting Manufacturing subcontractors are not found in this sector, as they are in the electronics industry. In this region relationships between final assembly companies and their suppliers are. 20. QS-9000 is a quality standard created by the Chrysler, Ford Motor and General Motors automotive companies that is based on the ISO-9000 certification, to which they have added requirements for their suppliers, such as continuing irnprovement in thcir processes and reduction in the variability of proce:;ses and costs. 21 See Appendix II, Table 7: Workers Responsib1lities in Quality Control 22 Toe formation of work teams explains 61 % of the total variance in elements of flexible organization of production; responsibility in production explains 24%; and rotation oftasks explains 11% (see Appendix II, Table 8: Flexible Organization of Work).. 24.

(26) Casanueva and Brown I G/obaliza1ion and Industrial Restrocturing in Mexico. based on purchase-sale contracts -in the case of first tier suppliers. In the contracts the final assembly companies not only specify prices, but also penalties for noncompliance with quality standards or late deliveries made by producers.. In addition, companies reported that second tier parts-supplying is not well developed in the region. To have access to components from second tier suppliers, companies must frequently import these products. Subcontracted services carried out by companies in the region are not in production, but are rather services in the areas of personnel, meals, security and maintenance.. The information presented before on the organization of production practices suggest that the surveyed companies' have adopted organizational practices, along the lines of lean and flexible production.. VIII. Formation of Supply Chains Electronics lndustry Exporting and Locatio,r o/ Clients The period of 1995-99 was a very dynamic one in terms of new supply companies and manufacturing subcontractors being established in the Guadalajara region. During this same period, these companies began to direct their supplying to the regional market, whereas previously all of their production was for exporting. 23 This has resulted in the formation of supply networks in the Guadalajara region that extend from final assembly to the second and third tier, of the productive chain.. 23. Between 1995 a.nd 1997, the number of computer and telecommwtications equipment companies increased from a total of39 to 61 companies, creating 28,000 new jobs a.nd increasing exporti, to a level of3.5 billion US dollars (according to statistics from the Department of Econornic Promotion in the Jalisco state govemment, 1998). Toe maquiladoras established since the rnid-1970s exported their production directly or indirectly, by supplying other maquiladoras in the northern part ofthe country.. 25.

(27) Casanueva and Brown I G/oba/izallon and Industrial Restructuring in Mexico. Among second tier suppliers are companies with a high level of technological sophistication which includes the production of mother cards, printed circuit cards, relays, electric surge protectors, cables and hamesses, these latter designed according to the client's specific technical requirements.. During the last part of the 1990s, final assembly companies worked hard to bring their suppliers to the Guadalajara region. Currently, seven of the world's largest companies in manufacturing subcontracting (SCMs) are in the region. The recent arrival of manufacturing subcontractors has served as a factor of consolidation in the region' s supply network, generating a constant flow of demand for production from second and third tier suppliers. 24. Most of these firms are subsidiaries of components supply companies and contractor manufacturers that have supplied final assembly companies in other :ountries. The final assemblers in Guadalajara have stressed attracting "proven" suppliern, and to a lesser extent the development of national suppliers in the region.. Efforts to bring intemational companies to the region have been supported by the industrial promotion policies ofthe Jalisco state govemment, also from final assembly companies and business chambers such a.s "Cadena Productiva de la Electrónica", Cadelec (Electronic Productive Chain), who have been working to facilitate the establishment of suppliers in the reg1on.. Nonetheless, final assembly companies in the region do not represent the primary demand for the supply companies. Thcse continue to export nearly 90% of their production, 25 mostly to the United States, a country where many final assembly companies are located and the largest market in the hemisphere (Angel and Egstrom, 1998).. 24. 25. SCMs such as Solectron, Dovatron, Flextronics, Jabil, SCI, and Nasteel, among others. See Appendix I, Table 9: Exports and the Location ofClient Companies.. 26.

(28) Casanueva and Brown I G/obalizmion and Industrial Restructuring in Mexico. The emergence of regional chains has not been accompanied by increased growth of national suppliers. Supplying by national companies is only beginning, and is mostly focused in the area of packing materials, labels, and printed matter (documentation) plus indirect inputs such as energy, banking services, cleaning and maintenance services, a.nd inputs of a relatively low added value.. The limited number of national suppliers may be partly explained by the financing problems faced by Mexican companies. These companies have been required to invest large sums of money in order to introduce quality control systems and synchronized programming of production -necessary to satisfy requirements for quality, volume and timely deliveries.. The formation of supply networks up to the second tier in the productive chain is an important factor that distinguishes electronics companies in the Guadalajara region from a "maquiladora" complex. Although this is a necessary factor, it is not sufficient to distinguish this conglomerate of electronics companies from one of maquiladora complex. This is especially true if we take into account that both first tier (including manufacturing subcontractors) and second tier final assembly companies import most of their inputs and components from the United States and Asia, and also export most of their production.. Second tier suppliers The major suppliers for the electronics industry in the Guadalajara region are located in the United States. This country not only represents the hemisphere's major market, but it is also the primary producer of components as well as finished equipment.. The geographic area, second to the United States in terms of supplying components is Asia. These data confirm the geographic distribution of production areas that we identified in the discussion on the industry's geography. As indicated earlier, when the sources of the needed components are located at a distance, companies have difficulties in strictly implementing the JIT system.. 27.

(29) Casanueva and Brown I G/obalization and Industrial Restructuring in Mexico. In sum, the factors explaining the new configuration of supply networks in the Guadalaj ara region are the result of a process of profound change, that has made it possible to evolve from an intemational "maquiladora" type assembly enclave, to a cluste::- composed of a supply network. This supply network extends from the final assembly to the second tier and third tier -that is directly or indirectly moving toward becoming part of global trade.. The factor that explains the emergence of a supplier network around the final assembly companies in Guadalajara is the implementation of lean production systems, in particular delivery programming and quality control processes. This has led ·'.o first tier suppliers (including contractor manufacturers) establishing themselves in the same region as the final assembly companies.. If the tendency for intemational suppliers to locate in the Guadalajara region continues, supply chains will become consolidated, largely as a result of efforts by final assembly companies to encourage their suppliers to establish themselves in the region where they are located. It will also be a result of the strategy on the part of final assembly companies to convert this region into a manufacturing and design center for the hemisphere's electronics industry-with the objective of confronting the competition from the Asian Pacific region, as established earlier.. Automotive Industry. Exports and Location o/ Clients The spatial configuration of parts-supplying based on the JIT syster:1 that is emerging in the Saltillo-Ramos Arizpe-Monterrey region is leading to the formation of supply chains -as in other regio ns of the world. In this region, companies directly supplying final assembly companies make up the first level ofthe chain. These companies may be subsidiaries of intemational supply companies, or companies with national capital. Of the companies surveyed, four ofthem are new plants owned by intemational suppliers that have contracts with GM and Chrysler, and were invited by these two automotive companies to establish. 28.

(30) Casanueva and Brown I Globalization and Industrial Restructuring in Mexico. plants near their installations -for the purpose of complying more efficiently with their goals for exporting automobiles.. Five other companies -with primarily national capital- are also first tier suppliers in the region. These companies were established during the import subsütution era, and have managed to maintain their position as first tier suppliers due to an intense process of production restructuring, supported by strategic alliances with intemational partners. They have been able to adapt to changing conditions because of these alliances. In this way a group of companies carne to be consolidated as first-line suppliers for the final assembly companies established in Mexico (Brown, 1999; Domínguez and Brown, 1998). It is also worth mentioning here that the supplier's network is beginning to expand to the second tieralthough this is still in the early stages.. The links in the supply chains are not limited to this region alone; ia fact, there are links with intemational suppliers located in other parts of the world. All the companies surveyed have clients in the region and in the country, with the exception of one that exports all of its production. Together, these companies directly exportan average of 43% oftheir production, primarily to the United States and to a lesser degree, to Europe and Asia. It is worth mentioning here that an even greater percentage of their production is exported indirectly through the final assembly companies that export 80% of assembled vehicles. 26. Second tier suppliers. The process of vertical clisintegration in final assembly companies affects both direct suppliers as well as suppliers at the second tier in the chain. With the objective of satisfying their clients' requirements, direct suppliers also demand more reliable, high-quality products from second tier suppliers -who are also expected to be located in the same region.. 26. See Appendix II, Table 9: Exports and Location of Clients.. 29.

(31) Casanueva and Brown I Globa/ization and Industrial Restructuring in Mexico. For this reason we can begin to see the traces of changes in the group of second tier suppliers of parts and components. Most ofthe companies surveyed (72%) have suppliers in the same region or in nearby areas, but they continue to depend on receiving parts from companies located in the United States (80%) and, for a smaller percentage (20%), from companies in Europe. 27. The requirements of first tier suppliers, including those that manufacture systems or modules, have obliged their suppliers to make modifications in their productive processes in order to satisfy their own demands for proxirnity, price and quality.. In sum, the lean production system has begun to be established in the region, and as a consequence, the terminal assembly companies have modified their demands to the first tier suppliers, and these latter, in turn, to their own suppliers. While a considerable segment of suppliers and clients are located in other parts of the world, we can speak of a tendency for an increasing number of suppliers to locate in the same region.. In other words, there is a trend in the region toward creating supply networks and also toward a future creation of a spatial configuration similar to that found in developed countries. In this spatial configuration there are first tier suppliers capable of satisfyin.g the demands of the final assembly companies, and in which there are important interrelationships among suppliers of different levels.. IX. Acquisition of Technological Capabilities and Innovat:ion Activities The purpose of this section is to examine the existence and intensity of technological innovative activities in the region's companies, looking specifically atto what degree the companies are passive receivers of technology from the outside, or whether they are immersed in an ongoing process of improving processes and/or products, thus providing feedback for the development of new products. 27. See Appendix II, Table 10: Location of Main Suppliers.. 30.

(32) Casanueva and Brown I Globa/ization and Industrial Restructuring in Mexico. In this context it is relevant to pose the following questions: To what degree the process of creating networks among the region's companies is only for acqui:ring needed parts? Are there also connections made for transferring and disseminating technologies? To what degree are these companies engaged in innovative activities? And to what extent these innovation activities are supported and reinforced by their relationships with :higher education institutions, and consulting firms and R&D centers located in the r,egion?. In the first part of this section we analyze the technological capabilities of the region's companies based on assistance received from final assembly companies. 28 Then, the innovative activities carried out by these companies are described, as well as the origin of production technology and technical assistance provided to second tier suppliers, the characteristics of extemal and intemal sources of technology, and the relationships between companies and local R&D centers.. Electronics lndustry Origin o/ Technology The original technology incorporated in manufacturing equipment as well as in product and process design comes primarily from company headquarters or the t,echnological partners of suppliers around the world. These companies also recognize technological contributions from clients, although to a lesser degree. 29. Assistance from final assembly companies for innovation. According to the evidence we found in the electronic equipment industry in Guadalajara, assistance from final assembly companies as a source of technological innovation has. 28. Technological capabilities definition is based on Sanjaya Lall's approach (Lall, : 990). See Appendix I, Table 10: Origin ofTechnology. Toe company headquarters or technological partner factor explains 58% of the variance; the client or final assembly company factor explains 18.3% of the variance; and the suppliers as sources oftechnology factor explains 10.9% (all these factors toge:her explain 87.3% ofthe variance).. 29. 31.

(33) Casanueva and Brown I Globa/ization and Industrial Restructuring in Mexico. 30. relatively little importance. This suggests that final assembly companies (or clients at the corresponding level in the supply chain) are not the primary source of technology for supply companies. There is, however, sorne assistance from final assembly companies in product development, and providing technical information. 31. Evidence on the relationship between the final assembly company and supply companies in the area of technology, suggest the intemational trend towards a greater technological independence or autonomy on the part ofproducers of components, and subassemblies. A significant proportion of the technology incorporated in components and in these so called "modules" is developed by the producers ofthese components. lmprovements in a component or subassemblies is also the result of improvements made by the supplier. These observations correspond to a tendency toward "modularization" observed as part of restructuring the industry according to the pattems of lean production (Angel and Egstrom, 1999). The fact that a producer of a component or subsystem (screen, keyboard, hard disc, etc.) makes an improvement in that component or subsystem does not mean that producers of other modules or final assembly companies must also modify their produc·(s, thus we can say that close technological coordination between final assembly companies and suppliers is not so necessary. Joint assembly and manufacture of these "subsystems" developed and manufactured independently is possible because of agreements reached and coordination established for technical interfaces between the different producers. This tendency toward "modularization" or independent production of components or modules permits significant economies of scale in the production in this industry and contributes to its competitiveness (Sturgeon, 1998).. 30. Toe qualification obtained by the indicators on this variable represents 33 .3% of the highest possible qualification (see Appendix I, Table 11: Technology Transfer Assistance for Suppliers). Furthermore, the data from the previous section confirm this finding: in the analysis on the "Origin ofTechnology", the "client or final assembly company" factor as a. source oftechnology explains only 18.3% ofthe variance. 31 Notable among the factors is the "assistance in the development ofproducts and t,~chnological information" factor, that explains 83.1 % of the variance (see Appendix I, Table 12: Technology Transfer Assistance for Suppliers, factor analysis) .. 32.

(34) Casanueva and Brown I Globaliza/ion and Industrial Restructuring in Mexico. Innovation activities in companies. Previous studies on the capacity for innovation on the part of companies in the electronic equipment industry in Guadalajara indicate that the subsidiaries ofthe major final assembly electronics companies (IBM, HP, Lucent, Matsushita, Motorola, arnong others) operate as enclaves, having only l.imited connections with local companies. The authors of these studies also point out that there is lirnited exchange among companies for disseminating new technologies in the local economy, and this has increased the technological gap between transnational and local companies (Dedrick, Kraemer and Palacios, 1999).. The cited study <loes not acknowledge the emergence of supply networks. Nor does it accept that final assembly cornpanies are not the primary source oftechnology for supply companies. We have established here that due to the relative technological autonomy of supply cornpanies with respect to the final assembly companies, the most irnportant source of technology are the main offices (or technological partners) ofthe component and module companies. 32 Although the networks among supply companies and between supply companies and final assembly cornpanies incorporate a very small group of national companies in the region, the impact of new technologies on the local economy cannot be denied.. The literature on the capacity for innovation on the part of electronic equiprnent subsidiaries point to their increasing participation in innovative activities, as discussed in the theoretical section in this paper. 33. The results ofthe present study are more in line with the branch of füerature that indicates a growing tendency toward the globalization of design and developrnent activities, and contends that the presence of final assembly companies and their networks of S'.1ppliers are contributing 32 This evidence found in the present study has been presented above in Section II on supply chains and in this section under the sub-heading "Origin ofTechnology". 33 Pearce, 1991; Dorrenbacher and Wortrnan, 1991; Grandstrand eta/, 1992. Cited by Reddy, P. and Sigurdson, J., 1994.. 33.

(35) Casanueva and Brown / Globalizat:on and Industrial Restrocturing in Mexico. to closing the technological gap between transnational and local final assembly companies. This takes place through numerous cases of spillover and feedback in the area oftechnology -among companies but also with universities, technical schools, and research and development centers, as will be presented below.. The electronics equipment companies surveyed in Guadalajara are engaged in innovative activities that range from small improvements to product design. In addition to this work of gradual improvement, there are also activities focused on developi:ng new products, especially in final assembly companies. 34 Activities focused on making minor changes or improving products are based on reviewing and improving production, as well as improving processes. 35. Of the final assembly companies surveyed, three of them have their own center of development located in the region. Toe centers are specialized in innovative work relate<l to a particular product or product line. These research activities are part of a "division of labor" linked to other subsidiaries in other parts of the world, as part of global strategic planning and aimed at pursuing the development of focal points of competition in each region. For example, in one final assembly company, its design center is specialized in high technology content storage systems (hard clises and modules for magnetic discs) and in developing software for operative systems. Another company has specialized in improving füe design for printers.. Also worth mentioning are the second and third tier suppliers that manufacture "custommade" products, adaptE:d to the client's specific requirements. This is made possible by a solid engineering foundation that permits them to work on design togethcr with their clients.. 34. Activities focused on minor improvernents to product design explain 57 .7% of the variance. Activities in developing new products, especially in final assernbly cornpanies in the Guadalajara region, explain 23.8%. Together these two factors represent 81.6% of the variance (see Appendix 1, Table 13: Technology Innovation Activities). 35 Activities in irnproving production explain (56.4%); in process organization, (25.3%); together explain 81.8% ofthe variance (see Appendix I, Table 14: Interna! Sources ofTechnology).. 34.

(36) Casanueva and Brown I Globalizatwn and Industrial Restructuring in Mexico. The results of the surveys confirm that, as mentioned earlier, four companies have the capacity to modify original designs -to what they describe as a significant degree- and four carry out co-design work or cooperative engineering together with their clie:1ts. 36. Relationship between companies and R&D centers in the region. It is primarily the final assembly companies that develop relationships with research centers and universities in the region. This is largely because these are the companies that carry out development activities (especially in product development, as mentioned earlier). Two second tier companies expressed their intentions to begin projects soon with these research centers and with support from their main offices. 37. One ofthe research centers is the Center ofElectronic Technology :in Semiconductors, part of the Center for Advanced Research (CINVESTA V), founded in 198 8 is a center for design and training of high-level personnel.. In the area of design, CINVESTAV has specialized in printed circuits and has been very successful in the United States, creating links with companies such as IBM, Hewlett Packard and Lucent. Nevertheless, as a design center, it has not developed customer relationships with the companies in the region. It is worth mentioning that because of its experience in design and development, it has sufficient critica} mass and is up-to-date to offer graduate programs in electronic engineering, industrial engineering and computer sciences, with state-of-the-art instruction and research. In addition to CINVESTAV, there are other institutions in the region such as the Autonomous University of Guadalajara, ant Monterrey Institute ofTechnology, Guadalajara Campus, the Western Institute ofTechnology and Higher Studies (ITESO), and the University of. 36. As you can see in Appendix I, Table 15: Origin of Technology Design, the "receive the finished design" factor explains 47.5% ofthe variance; the "joint development" factor explains 38.3% of the variance; and the "capacity to propose significant changes" factor explains 14.1 % of the variance. 37 See Appendix I, Table 16: Relationship between Companies and R&D Centers in the Region.. 35.

(37) Casanueva and Brown / Globalizatic>n and Industrial Restrncturing in Mexico. Guadalajara. These institutions have professional and graduate programs for training the engineers needed by the electronic industry.. For example, in the case of ITESO and CINVESTAV, the topics ofMaster's theses frequently address technical problems experienced in electronics companies o:f the region. It is through these theses that the problems are analyzed, solved and documentecl. The knowledge that is generated and incorporated in the theses represents initial forms ofi:echnology and knowledge transfer to industry.. A more direct form of relationships between the research and higher education institutions, and the industry, is through consulting provided to companies for the establishment of their own design centers and the training of these centers personnel (espe~ially from CINVEST A V and ITESO).. These institutions for professional training and research maintain themselves up-to-date on the technical problems and problems in assimilating technology experienced by companies, through the companies' demonstrations ofnew equipment presented to the universities. There are also professional seminars offered, as well as joint agreements establishing practica! experiences for students through temporary placements in the companies.. In summary, with regard. to processes of creating endogenous technological capabilities (Lall,. 1980) these observations suggest that there is a considerable enginee:ring capacity in the Guadalajara region for product and process design in the electronics ::ndustry. This must have influenced the decisions of final assembly companies to establish development centers in their subsidiaries in the region. These technological capacities, although still in the early stages, have been reinforced by interaction with the region's universities and research centers.. What it is know about the supply ofhuman capital for this industry is contradictory. On the one hand, it is know that the Guadalajara region is the second most important educational. 36.