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

Field research methodology

To discuss international location by productive activities and demand for outsourcing services of international corporate networks, this paper uses research data covering 30 large enterprises operating in Brazil, selected from among the largest international telecommunications service consumers. The sample composition is presented in Table 1.

Table 1

Sample Firms: Economic Sector and Origin of Capital

Source: field research, Prochnik (1996)

There was also observed a large concentration of highly specialised telecommunications personnel in the firms. The six largest enterprises have on average more than 50 telecommunications engineers (one very large state enterprise pushes the average up). Others have on average about five engineers each. These results are explained not only by the sophistication of the networks and size of the firms, but very much by the origin of their capital. Foreign enterprises concentrated technical know-how in their head office. The local person responsible for the network is a global executive, who reports to the head office and respects the norms established there.

This survey confirms some of the previous findings. The expectation of average annual growth in telecommunications traffic varied from 9.5% to 22.5% — Prochnik (1996). Even among this group of large enterprises, a strong heterogeneity in network composition was observed. For instance, among Brazilian Banks there were cases ranging from total international service integration to one example of incredible inoperativeness, in which communication protocols wouldn’t "communicate" with each other and, if they did, the network still would not work, as the available software in the different countries was incompatible.

Effect of Corporate Networks on the International Location of Data Processing Activity Using data from the above-mentioned survey, let us now examine the effect of telecommunications networks on the international relocation of a firm’s productive activities. For the purpose of analysis, data processing activities have been chosen. Only among the transnational corporations in the sample is international relocation possible, due to their geographically more dispersed operations.

The outsourcing of entrepreneurial functions, examined in the next section, in contrast, is important only for national enterprises, since in this respect subsidiaries of transnational firms are coordinated by their respective head offices.

The literature on transnational corporations brings out the fact that the location of productive activities depends not only on the attractiveness of the host country, but also on characteristics of the economic sector and the investing firm’s strategy. As for the latter, among other features, the centralizing of activities in a few countries favours economies of the scale, while the dispersion in a greater number of sites benefits interaction with the local market.

The effects of adopting a modern corporate telecommunications network cannot be anticipated. On the one hand, such a network facilitates the international centralization of data processing. On the other hand, because it allows greater control over subsidiaries (reducing for instance the time needed to calculate global stocks or the financial situation), networks allows head offices to grant greater autonomous action to their subsidiaries. In this case, regionally or locally differentiated operations are encouraged, leading to a more diversified geographical location of data processing activities.

Among the seven industrial transnational enterprises that answered the question, five considered Brazil as a kind of regional center, as the following excerpts from different interviews carried out by Prof. Jorge Britto indicate:

Brazil is currently responsible for the control of the group’s activities ... in Latin America, with the president of the Brazilian subsidiary also answering for the units in Argentina and Venezuela.

The strategy of the group for Latin America is based on an attempt at regionalisation, with Brazil and Mexico as the central bases.

The Brazilian subsidiary fits into the "Latin America Region", within a regionalised strategy plan which directs the organization of the firm’s activities on a planetary scale. The autonomy level of the Brazilian subsidiary in terms of defining the general orientation of its competitive strategy is, however, very high.

The same can be observed in transnational firms not included in the sample. IBM, among them, has created the concept of Panlatino Americanization, regionalising its activities by function and geographical area. "With the changes, the IBM Brazil president,..., has seen his functions extended. He is responsible not only for the country business, but also for the infrastructure segment in Latin America (logistics, purchases, distribution, factories)..." see IBM faz Reengenharia e Centraliza Decisões na America Latina — Gazeta Mercantil January 18th 1996. In the same interview, the communications and HR Vice-President declared: "For instance, it doesn’t make sense anymore for each subsidiary to have its own financial or human resource structure ... the new business profile requires increasing agility in decision-making."

The same kind of observation was made in many other interviews. Administrative activities or activity segments are being/will be transferred to Brazil, where the data processing will take place.

Among the three foreign banks and three foreign consultancy firms, four carried out data processing in the country. But it is the other two that are important (one bank and one consultancy firm), because their processing structures were much more advanced than all the other 28 interviewed firms. In these two cases, data processing was performed at a world level.

The consultancy firm uses a data bank and electronic mail system developed with Lotus Notes software. The firm, with 37,000 employees, has more than 1,000 Lotus Notes servers distributed among more than 100 subsidiaries. All tasks, in any country, are undertaken inside the network, in connection with similar tasks already completed and with specialists located in other countries. As a result, the enterprise has not only internally codified a substantial part of its know-how, but also multiplied the access possibilities to the tacit knowledge disseminated among its specialists.

In the foreign bank, in an interview with this author, the following was said:

"many processes are operated at a world level. The data processing in the whole international commerce area, for instance, ‘runs’ in Singapore with back-up in Hong Kong. A letter of credit generated in one of WallMart’s three offices in Brazil and authorized by the head office in the USA, for instance, ‘runs’ in Hong-Kong. In this way, the bank sees the client as a whole and the client can also easily see himself.

According to the same interviewee, the data processing of current bank transactions in Brazil has been transferred to Florida (USA). As a consequence, Brazilian system analysts and the mainframe computers were moved to the new unit. Currently, the bank operates only with workstations in Brazil, which perform less important tasks.

Outsourcing of International corporate telecom networks and the competitiveness of enterprises.

The literature on the outsourcing of telecommunications activities falls between two opposite poles. On one side, some authors, like McFarlan and Nolan (1995) see the process as an extremely complex activity which affects considerably the firms day to day activities. They coherently agree on the need to form long term partnerships and joint work schemes between clients and service providers.

On the other side, authors like Lacity et al (1995) emphasize a recent trend towards the simplification and commoditization of the outsourcing, as well as the possibility of segmenting data transfer activities and, consequently, partial processes of outsourcing. It follows that the clients have to segment the activities to be outsourced, look for different suppliers for each segment and encourage competition among them. As the services become more and more commodities, the search for the lowest price, in this interpretation, should be given priority in relation to the cooperative work.

Partial or total outsourcing of international corporate telecommunications networks is a growing trend among transnational firms and, to meet this development, one can notice the formation of a world oligopoly of service providers, in which the main current participants are the Global One (France Telecom, Deutsche Telecom, SPRINT etc.), Concert (British Telecom, MCI etc.) and World Partners (ATT etc.) consortiums. Other international firms, like IBM and SITA, also supply the same services. Many small firms supply outsourcing services for corporate networks in more restricted geographical areas.

Three quarters of interviewed firms expressed a potential interest in partial or total outsourcing of their telecommunications services. In almost all of them, the comparison between the price of the services and internal costs was the main analysis criterion. The research data thus lends greater support to Lacity et al (1995).

In any outsourcing process, the technical expertise of the clients declines in favour of a greater use of the know-how of firms offering outsourcing services. When the interest in developing a partnership with the supplier is low and the service price is the main contracting criterion, the technical capability that remains in the client firm tends to be even smaller.

In this sense, the net effect on national technical capability may rest in the supply structure. As this is largely composed of foreign firms, important activities such as, for instance, network planning, software production etc., may migrate overseas.

It should be noticed, however, that some of the more efficient firms have been more reluctant about outsourcing their networks and, in other cases, showed a preference for partial outsourcing, in this case encompassing activities less intensive in know-how, such as computer maintenance and equipment rental. The decrease in the country’s technical capability may also be less if the network outsourcing service progressively becomes a standard service, opening up space for national enterprises, starting their activities from more restricted geographical niches.

Conclusions

The article begins by discussing the effects of IT dissemination on productivity growth. It was seen that the result is a positive one and tends to be increasingly more important. IT dissemination, however, is quite asymmetric, it being pertinent, therefore, to propose the adoption of information and technology dissemination policies.

A discussion then follows on the international location of productive activities with internal data processing activities being the case analysed. In foreign industrial firms there is a migratory trend of data processing activities from other Latin American countries to Brazil. Although favourable to Brazil, this is also not a very interesting prospect from the broader economic development viewpoint.

The available data also indicates that there are also cases of corporate data processing services being relocated from Brazil to more developed countries. The sample is too small to reach final conclusions. It should be noted, however, that there is no mention of contrary examples.

Finally, the paper discusses the demand for international corporate telecommunications networks. A strong propensity to outsourcing is clearly discerned. The question raises one of the most serious problems for IT dissemination in Brazil, the weakness of the supply structure. Supply is not only relatively small considering the country’s needs, implying an significant volume of imports, but there are also other problems which need to be addressed.

In particular, the high participation of foreign capital should be discussed more, as relatively more attention has been given to its advantages than its disadvantages. Among the latter, for instance, one may point to the location of planning and R&D activities, where the best jobs are and where the most dynamic effects on the economy have their origin.

Bibliography

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Lacity, M.C., Willcocks, L.P. & Feeny, D.F., IT Outsourcing: Maximize Flexibility and Control, Harvard Business Review, May/June de 1995.

McFarlan, F.W. & Nolan, R.L., How to Manage an IT Outsourcing Alliance, Sloan Management Review, Winter 1995.

Prochnik, V., Spurious Flexibility: Technical Modernization with Social Inequalities in the Brazilian Footwear Industry - Discussion Paper 222, OIT/ONU, Genebra, 1991.

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