INFORMATION TECHNOLOGY IN DEVELOPING COUNTRIES

A Newsletter of IFIP Working Group 9.4
and
Commonwealth Network for Information Technology

Volume 8, No3, January 1998
Editor: Subhash Bhatnagar

January 1998

The Brazilian Software Industry and Electronic Software Distribution

Pierre Polzin

Institute of Economics, Federal University of Rio de Janeiro

Brazil

pierrep@sapo.pt

Introduction

The main objective of this article is to analyze the Brazilian software industry and relate it to the electronic distribution of software via the Internet.

First, an analysis of the Brazilian software sector will be made. Then, some measures will be proposed for the government to stimulate the Brazilian software sector. In the end, the Internet and the changes related to the advent of the Internet - particularly the implications of the Internet to the software sector will be considered.

Software in Brazil

In terms of numbers, the Brazilian software market represents approximately 1% of the international software market, but it grew 42% (average annual growth) between 1993 and 1995 And in the last three years, the Brazilian software sector together with the hardware (computer and peripherals) sector grew at an average rate of 25%. As more computers push the demand for more software, together with the fact that the sale of personal computers in Brazil is expected to grow at 30%, suggests that, although the Brazilian software industry is relatively small today, it is expected to be prosperous in the future.

Some steps have been taken by the Brazilian government - federal, state and municipal - in order to guarantee the transformation of this positive expectation into reality. The government’s strategy for the Brazilian software industry from the middle of the 70`s until the end of the 80`s was basically to control software imports, promote the local software industry and promote the production and trade of packaged software. However, this strategy achieved limited results - the policy instruments adopted were not strong enough to cope with the complexities involved in fostering the sector (Gaio 1992). Particularly in the 80`s there were no effective stimuli for the development of the software sector (Pondé 1993).

At last, in the 90`s a remarkable step was taken: the SOFTEX (National Program of Software Export) 2000 program was initiated in 1993 and is still in progress. Intending to stimulate the entry of Brazilian firms in the international software market, the main aim of this program was to increase the Brazilian market share through an increase in software exports. Coordinated by the CNPq (National Council of Scientific and Technological Development), with the participation of representations of the Brazilian software firms, and funded by the government - and by the United Nations Program for Development -, the program invests in private software development projects. The SOFTEX 2000 Program has become a fundamental tool for the integration of the Brazilian software industry, intensifying the cooperation between firms, government and academic institutions and the relationships between the Brazilian firms - and also between Brazilian firms and firms abroad. The contact with other countries is facilitated, making it easy to form strategic alliances between firms, provide access to distribution channels, facilitate learning of specific forms of marketing and encourage the participation of Brazilian firms in well-known trade fairs, like COMDEX.

Other Important Measures

Together with the SOFTEX 2000 Program, other measures should be taken by the government to strengthen the Brazilian software sector. The software sector is becoming a strategic sector, in the sense that numbers indicate that it is growing unprecedentedly all over the world. Future employment generation will depend on it, and it will represent a growing share of any country’s National Product. The Brazilian government should attend to three basic problems:

1. Education

2. Funding, and

3. Intellectual property

Education

The educational system of the country should be the main point in a policy directed at the development of the software sector. Education and consequently the formation of human resources are the basic requirements for a competitive software industry. Software engineering courses in universities should be intensified in order to graduate qualified workers and prepare them to enter the job market.

The government could also implement a procurement policy directed to the educational sector. The government could buy more computers for schools, universities and other public academic institutions with the condition that the software applications to be used in the computers received by these institutions will have to be produced by Brazilian software enterprises. This policy would guarantee an increase in the Brazilian software production. This policy would also stimulate a different kind of user-producer interaction. The users - universities, schools, research institutes, etc. - would help the producers - software firms - to detect failures, imperfections or other technical problems in their products more rapidly than normal users would, because these two groups can understand each other easily as they share common technical skills. The user-producer interactions are, according to Gaio (1992), of particular relevance for the development and evolution of software. They function like a feedback mechanism, helping the firms to know if their products are being produced with quality.

Intellectual Property

Intellectual property is an important point to be discussed. Piracy - the use and commercialization of illegal copies of software applications - is difficult to control, given the characteristics of software, which is an intangible good (the physical part is the least important part). Although the software firms try to find technical solutions to protect their products against piracy, the illegal copies are easy to make, which is reflected in the high rates of piracy all over the world - particularly in Brazil.

The rationale behind the protection of intellectual property is the protection of the stimulus to create. A firm creates new products - innovates - in order to gain benefits associated with the commercial exploration of these products. However, with illegal copies made by other firms or users, the benefits become divided and shortened. The result can be that the returns obtained by the firm that creates do not cover the investments made in the creation process. This would obviously eliminate any stimuli for further creation.

In Brazil, the fight against piracy is becoming stronger. There is a so-called Software Law, implemented in 1987, that established the protection of intellectual property. Since then, piracy is being reduced slowly. The Brazilian Association of Software Enterprises (ABES), trying to reduce software piracy with law suits against pirates, succeeded in decreasing the piracy in 1996 by 7%, which is a major achievement, considering the difficulties associated with the control over use and commercialization of illegal copies.

Funding

Funding is another problem. There are not enough funding opportunities for software firms in Brazil. There is lack of capital, particularly venture capital. In the US, in the Silicon Valley, US$ 5.5 billion were invested by risk capital investors in new ideas in the last four years. In Brazil, all the money that FINEP (Fund Institution for Studies and Projects) - a public enterprise from the Ministry of Science and Technology, that is the main public institution with the function of funding the technological development of Brazilian firms - has invested in technology during the last 30 years does not exceed US$ 1 billion. It is not a small amount, but it could be more, considering the importance of funding, particularly funding of research and development projects, for creation and innovation.

The Brazilian financial institutions in general are still not prepared to fund high risk projects offering low interest rates, because there are practically zero guarantees to be offered by the taker in return. Also, entrepreneurs of small or new firms, that need to be funded, generally do not have the administrative capabilities required to negotiate funds with financial institutions and "sell" credibility to them.

One positive expectation about the future of capital opportunities for software firms is the low inflation rates achieved during the last years in Brazil. According to Garcia and Chamas (1997), the macroeconomic stability stimulates the investment in high risk projects that offer potential high returns.

The Internet

International Data Corporation (IDC) estimated in August 1997 that there were 42.3 million people connected to the Internet - the Web that interconnects simultaneously millions of computers around the world through telecommunication networks. Some say the correct number is 50 million, others say 55 million, but the exact number really does not matter. The fact is that this number is growing quickly every day.

As the Internet adopters increase in number, the electronic commerce - commercial transactions made through the Internet - becomes more popular. According to analysts from UNCTAD, the value of commerce through the web is going to be between US$ 30 and 60 billion until the year 2000 and between US$ 200 and 250 billion until 2005. Last year, the transactions through the Internet summed between US$ 2 and 3 billion.

The Brazilian numbers are small, if compared with the above numbers. The number of Brazilians connected to the Internet is approximately 2 million. Even with this small number of users, it can be said that the prospects for electronic commerce in Brazil are optimistic. According to a research done in August this year, although only 19% bought through the Web (which is a share less than the 25% of the users worldwide estimated by IDC), 62% showed interest in buying in the future. Another good sign for future sales is the percentage of users that have a credit card: 72% (52% have an international credit card).

The Internet and Software

Software, in general, has a very small physical part (diskettes, CD-Roms, etc). It is the content that matters. One advantage of software is: the costs of production (and development) are relatively low. As these costs are low, the biggest part of the total costs is formed by marketing and publicity expenses and distribution costs. And here is where the Internet matches perfectly with the software sale process.

Internet reduces the expenses of packaging to zero, since the physical part is eliminated through an electronic software sale. It also allows marketing and publicity to be made through the Web, which is cheaper, and permits the software to be distributed through the Web, which is also cheaper. There are two main facts contributing to these cheaper opportunities for marketing and publicity and distribution:

• Accessing the Internet is becoming easier, and

• The prices of information transmission are declining

What is behind these two facts? The investments in telecommunication infra-structure and the consequent improvements of the telecommunication networks - like enlargement of bandwidths to quicken the transmission of data, and the growing number of Internet service providers and the improvement of their equipments. These are two of the most important points making the Internet access easier, and supporting and stimulating the growth of the number of Internet users, which in turn makes the prices of accessing the Internet and transmitting information fall. With more users there is a demand for more service providers that have to compete against each other charging lower and lower prices for Internet use.

Telecommunication Infra-Structure

Of course the telecommunication infra-structure varies from country to country. There is a concern in Brazil over its precarious infra-structure. The government has to make continued investments in telecommunication networks to widen the bandwidth of telephone lines and cables, improve them, and also improve the transmission via satellites in order to avoid data congestion and guarantee the competitive strength of Brazilian firms in this new form of world commerce. If a country does not keep pace with the world improvements in telecommunications, then it will face difficulties in exporting and importing through the Internet. Also, if the prices for accessing the Internet are high in a particular country, it will work as a competitive disadvantage.

Having identified the main areas of investment to be made, there remain three other problems to be tackled:

• the security in information transmission over the Web,

• the surety about the existence of the agents involved in electronic transactions,

• the taxation of electronic businesses.

Security and Surety

The security of information transmission is closely related to the confidence of Internet users in the electronic commerce via the Web. If Internet users do not rely on the transmission of valuable information, like credit card numbers, then they will not want to buy something on-line and e-commerce will not launch. How can this problem be tackled?

It is already being tackled, together with the surety problem. What is promising to be the solution is a security protocol called SET (Secure Electronic Transactions), which is beginning to be implemented this year (1997). It is becoming the hope for secure electronic transactions over the Internet. The first commercial transaction, which was just experimental, utilizing this protocol was made between Wal-Mart stores in the U.S. in June. The first sale of a Brazilian store over the Internet utilizing this protocol was made on 16th October, 1997, when the president of Visa from Argentina was in Puerto Rico. He bought a CD-ROM in a Brazilian store over the Web, with an Argentinean credit card. It was also the first transaction using SET between two countries.

SET, besides guaranteeing secure transmission of information through encryption of the data being transmitted, has two other advantages:

The use of credit card is not necessary. There are options like electronic money, electronic checks and automatic debts, and the surety of the existence of the agents is assured. SET guarantees the existence of the establishment who is announcing products on their home-pages with digital certificates, and it assures that the buyer is not a false buyer (the customer has to have a digital signature).

With SET, there is also an expectation that software sales will be legitimate, in the sense that there will be nobody selling software applications from others without paying royalties to them. In Brazil, 50 commercial establishments are already prepared to utilize SET after January 1998.

The question about how the governments can tax the electronic transactions still cannot be answered. Since the governments are spending a lot on infra-structure, they need to earn in return. The best way for them to earn is through taxation. Then why is taxation a problem?

When intangible products are transacted over the Internet - digital objects, like software, images, sounds, etc., there is no way to track the transactions down. Someone in Brazil can buy a software from a German store over the Internet, no one will know, except the store and the buyer. Similarly if the German government decides to tax the German firms that have home-pages on German servers and sell their products through the Web, the firms can avoid taxes by simply moving their home-pages to servers located in other countries, where there are no taxes.

There is still no solution to this problem. But this has a positive aspect because without taxes, the attraction of users is stronger. Knowing that there are no taxes being levied, people will be stimulated to access the Internet, helping the Web to be transformed into a mass medium. They will buy and sell over the Internet, intensifying the electronic commerce via the Web and the consequent economic growth.

Conclusion

The numbers show that the software industry is growing world-wide and that the Internet and the electronic commerce via the Internet are becoming more and more popular around the world. As software sales and electronic commerce match together in a perfect way, it is likely that the commercial software distribution will increasingly be over the Internet, until may be this will be the only way to buy and sell software applications. Brazilian software firms have to keep this in mind when directing their production efforts to other markets.

Reference

Cassiolato, J. E., "The User-producer Connection in Hi-tech: A Case Study of Banking Automation in Brazil", in Hi-Tech for Industrial Development, Schmitz, H., Cassiolato, J. (eds.), pp. 53-89 (1992).

Gaio, F., "Software Strategies for Developing Countries", in Hi-Tech for Industrial Development, Schmitz, H., Cassiolato, J. (eds.), pp. 90-123 (1992).

Pondé, J. L., "Competitividade da Indústria de Software’, Ministry of Science Technology - MCT (1993).

SOFTEX - 2000", IEI/UFRJ (1995).

Steinmueller, E. D., "The U.S. Software Industry: An Analysis and Interpretive History", University of Limburg (1995).

Tigre, P. B., "Liberalização e Capacitação Tecnológica: O Caso da Informática Pós-reserva de Mercado no Brasil’, in Ciência e Tecnologia no Brasil: Política Industrial, Mercado de Trabalho e Instituições de Apoio, vol. 2, Schwartzman, S. (coord.), pp. 179-204 (1992).