Timothy Sturgeon: “The import substitution model has Latin America stuck”

He is a senior researcher at the Industrial Performance Center (IPC) of the Massachusetts Institute of Technology (MIT) in the United States; He has been an academic for two decades and his work focuses on global integration processes, digital transformation in companies and value chain development.

The economies of Argentina and Brazil are the two historically most relevant in South America. And, with their ups and downs and their own conjunctures, they have followed similar paths throughout recent history and, in particular, their industrialization processes in the 20th century. According to Timothy J. Sturgeon, a senior researcher at the Industrial Performance Center of the Massachusetts Institute of Technology (MIT), in the United States, this model has entered a crisis and this currently requires rethinking the development scheme in the region.

According to the analyst, a specialist in value chain and international integration issues, both countries have in common the “import substitution model”, based on the principle of trying to locally manufacture or produce components or products that replace those of foreign competition. . According to him, this had results in job creation, but “due to a variety of factors it has not worked very well to generate spillovers” in the value chain as a whole.

“In the region there was a long history of calling multinationals to come and settle, with the idea that, if processes were carried out here, suppliers and small companies would grow to supply that industrial process locally. But what has happened, particularly since the 1990s, is that the big companies have gone global, and so have their suppliers. So, we have leading firms that have gone global, but they told their suppliers: ‘You also have to adapt and be global like us.’ And one of the things that happened is that, instead of generating local suppliers, there are multinational suppliers as well. This undermined the import substitution strategy, due to the globalization of the entire chain,” says the analyst, who traveled to the country to speak at the Informative Bulletin meeting, an event regularly organized by the Techint Group, in dialogue with the nation.

What consequences did this process leave?

-A consequence is that employment was generated. There are a lot of people working in these companies, which are owned by big global firms. That’s a good thing, and at some point it’s a success, because creating jobs is important. And it was created in factories that are making advanced products, because these large companies have modern processes and advanced work models, and so they are a great learning environment for people. And not only in the factory, but also in management, where the staff is local and learns from these companies, which have more advanced practices. It is something positive. There were spillovers there, because opportunities opened up and companies came. But it can also create a status quo, which is difficult to change.

-In what sense?

–Because those jobs are linked to politics and that scheme. If that model is dismantled, companies could leave the country, there would be more imports and all those jobs would be lost. And it is a challenge for the countries. This import substitution approach is a model that to a certain extent has Latin America stuck. There is also the issue of the added value of innovation. The manufacturing process done locally remains, but the innovation is still in the United States, Germany or Tokyo. And that doesn’t necessarily travel. So it’s not necessarily an innovative industry, necessarily connected to what comes next. When a big change is coming, as is happening in the automotive industry and the rapid shift to electric vehicles, those new products and ideas come from the core countries. Others are always in a position to react to what happens elsewhere. This is a fairly general statement, there are many companies and startups making software or apps in many sectors, in Latin America and in Argentina in particular, but, in general, large companies or industries are depending on what happens in other places. And if things change quickly, companies can leave. Thus, we see that Ford left Brazil. He was there since 1950, but his departure was a great earthquake. And the reasons are many, but there is a lot of pressure on Ford to compete with Tesla, which has a market valuation several times higher. And in this scenario, perhaps Argentina or Brazil do not fit into their future plans.

-In Asia there was a process of industrialization with low wages, something different from Argentina or Brazil, which has wages, on average, higher. How can they compete in this scenario that you describe?

–In Asia there was a cost benefit. Many people think of emerging markets or developing countries and put them all in the same bag, but Latin America is not, strictly speaking, in an industrialization process, but in a reindustrialization, because the first stage happened a long time ago. If you look at countries like Vietnam, we are talking about thousands of people coming from the countryside to the city, sometimes every week, to work in big factories, for Samsung or for other brands. And I don’t imagine that this could be a scenario that could exist here. But when costs are low, like in Asia, it can be exported all over the world in large quantities. China had that model for 20 years and now it is going backwards; salaries are rising and they are with innovative developments. Here, that strategy was never possible because of higher salaries, which, in a sense, is a good thing, because people who have jobs are not going to accept receiving a dollar a day. The question is what to do.

Timothy Sturgeon: “You have to see what Argentina is good at, focus, look outside and see that something small can have a big market; that is specialization”PATRICIO PIDAL/AFV

–And what is done?

There is no great answer for that. What we see in this region, which I analyzed more particularly in the case of Brazil, is to develop the domestic innovation system, promote projects, take money and invest in innovation and development, have institutions that allow collaboration between universities, companies and institutes of innovation. There’s a lot of that going on and it’s excellent. It takes a lot of time. These programs are good, but a warning sign is that they become an objective in themselves, with an emphasis on showing all the projects, all the initiatives that we did, all the inputs that we generated, but there is not as much attention on the outputs, on the spillovers that are generated, in the development of suppliers. A project, a product, was invented, but what happened? Occurred? It sold? Was it exported? There is little following in general and I saw it a lot in Brazil. I remember the case of a product that was created in the country, but ended up being manufactured in Italy and sold all over the world. It was an industrial product, which needed a large service network. They looked inward at how to move forward with this project in the country, but what came later did not stay in Brazil. Innovation has to be considered with spillovers, and parts of the production chain must be kept in the country, because the processes are globally integrated. Another issue is what is there a specialization in; that is another problem of import substitution.

-Why?

–Because you cannot have all the parts made in the country. It doesn’t make you very specialist. There is never the scale of production in a market. If you think about specialization, perhaps you have to see what Argentina is good at, focus on that, look outside and see that perhaps something small can have a large market, which is the global market.

–What about the education and training of workers in this context?

–If it is going to be oriented towards global insertion, people have to have that approach as well. There is a fear of brain drain, and also a fear for companies that are born in Argentina and buy other small companies in the United States, Germany or China, and become global. The thought, as also happens with people, is that we lost them, why didn’t we do that in Argentina? But what we see is that when people or companies go abroad, what happens locally also grows. Because they come back and they have connections, they understand finance or technology in ways that they wouldn’t if they had just stayed in the home market. It is a wrong fear. There are a lot of Argentines who go to study abroad, many come back, but even if they don’t come back, they have families, friends and a network. Value chains, networks and transactions is the set that must be seen as the new value; It’s not just making things in a factory or counting projects.

Timothy Sturgeon: "Import substitution is a problem because you can't have all the parts [de una producción] made in the country;  It doesn't make you very specialist.  There is never the scale of production in a market#
Timothy Sturgeon: “Import substitution is a problem because you can’t have all the parts [de una producción] made in the country; It doesn’t make you very specialist. There is never the scale of production in a market#PATRICIO PIDAL/AFV

–What is your vision of technological progress and employment?

-Technology stirs everything. It destroys jobs, it creates others, and the final tally is hard to measure. But what has been seen is that the unemployment and employment rates do not change much due to this factor in the long term. What I can say, especially with digital platforms or tools, is that the speed of change can be really high. If the change is slow, it may be assimilable, but if there are rapid changes, it can be very disruptive. That has to do with the type of technology application. In matters of mass consumption, such as electronic commerce or transport, there is demand and the services can be quickly replicated. But in a factory, with industry 4.0, the internet of things, analytics, artificial intelligence or the cloud inside the plants, change is happening, but at a really slow pace, because the processes or products are different, the factories are not the same and the change does not scale. This idea that robots are going to take over our industrial jobs is not true, it’s not what you see in research. But from the consumer side, things do change. Everything is being affected in the taxi or e-commerce sector. In the United States, one might wonder why there are still stores. Amazon brings stuff to my house three times a day (laughs), and people buy groceries online. There is also a lot of reaction. In India, there was a push back from Amazon and an Indian platform was developed. That does not stop being something disruptive too.

-How do you see Argentina?

–One of its strengths is its human capital, its people. There are very good education, highly educated people who can make a good contribution. The way in which the economies developed is an issue because, in general, they do not think about innovation, about creating new companies or products. The way in which industrialization took place generated a closed system, for the domestic market, protected and, then, why innovate? The focus is important, to think more outward, connected to the global, looking at the world. But that inward thinking is a legacy of import substitution, and implies that people do not have an eye toward the world. And changing it takes time.

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