Context for Firm Strategy and Rivalry

MACROECONOMIC ENVIRONMENT

Political Stability:

Brazil became a democratic country in 1985 following a military dictatorship that lasted 21 years. In 1994, after a succession of corrupt and incompetent leaderships, Fernando Enrique Cardoso, then Minister of Finance enacted "Plano Real" which introduced the "Real" as the Brazilian National Currency and catapulted Brazil to economic and political stability. Today, as a country that has surpassed itself as an "emerging economy," Brazil is still "emerging "in some respects.

While Brazil stands as an economic powerhouse, the sad backstory reveals that it is still plagued by corruption as shown in the 2011 Corruption Perception Index indicating the degree of public sector corruption ranging between 10 (highly clean) to 0 (highly corrupt), as reported by Transparency International also known as "the global coalition for corruption."

Economic Environment:

During the global economic crises of the late 2000s, Brazil's economy experienced a pattern of fluctuation proving, if nothing else, Brazil's resilience to economic shocks. While Brazil felt the impact, it was fleeting. The government implemented strict economic policies that included temporary tax cuts, subsidies, and increases in expenditures.

Brazil's economy is set to continue at a rising momentum, the main drivers of its performance being expansion of private consumption and investments, particularly infrastructure projects owing to the FIFA World Cup in 2014 and the Summer Olympic Games in 2016. Over the next five years, a strong demand should continue providing support and the GDP should grow around 5% a year, before it eases at about 4.5 % from 2016 and onwards. This can happen but not without any challenges.

The good news for Brazil is that at least for now, there is enough foreign interest in financing its external deficits. With its large international reserves - 15% of the GDP – Brazil still stands strong as a net creditor. The bad news is that if interests change, the exchange rate would be at risk of depreciating if foreign inflows slow down.

MICROECONOMIC ENVIRONMENT

Technological and Scientific Involvement:

To foster innovation and promote collaboration among the industry, government, and academia, Brazil established a law called "The Innovation Law of 2004." This was designed to build and intensify the university and industry research relationship, share resources such as science and technology infrastructure and research laboratories, provide access to direct government grants for innovation and increase the movement of researchers within the system. In Bahia's Technological Park, some of the mechanisms that promote innovation are scholarship programs to attract a talent, shared laboratories and business incubators.

The Role of IT Clusters in Brazil:

The need for competition within the IT sector, between cities and clusters was sparked mainly by the pressures of globalization. On a local level, raising incomes and creating jobs became a priority for local officials. Hence, the local government has made efforts to foster growth and innovation by establishing techno parks and providing grants for companies located in their areas.

Funding:

From 2003 to 2008, around 1% of Brazil's GDP was invested in R&D. This is small compared to the global average of 2.2 %; however, Brazil leads the entire Latin American region in federal funding for scientific research. While Brazilians rely on the federal government for most science funding, state- funded programs actually account for over a third of public investment in science and innovation. The problem is that since 75% of the state's revenues go to a fixed budget, there is little room left to the discretion of the state government to move funds around. In other words, even when Funding is available, they are not as easily accessible to business startups due to this flaw.

Structure of Tax System:

Brazil's taxation system was founded on the 1988 Constitution which divides taxing powers as Federal government, States and Federal District and Municipalities and Federal District. Due to the fact that Brazil's tax system is too complicated, taxes change rapidly and there is no regulating body similar to the IRS to police tax evasions, Brazil's taxation policy is a potential threat to the economy and to the development of competitive clusters in Brazil. While there have been changes to the legislation, they are not changes made to the actual rate of tax, but to the process of paying taxes.

Corporate Governance:

Brazil enforced some changes in the organizational environment due to globalization and economic growth, particularly, those that relate to the capital market, mergers and acquisitions of large companies, challenges of new as well as old companies, companies with dispersed and diffused capital, and the global economic crisis. The goals of such changes were to foster a culture of transparency and disclosure that is conducive to foreign business pursuits. There are three key bodies that play a significant role in the development of corporate governance practices in Brazil: IBGC, the stock market regulator CVM and the stock exchange Bovespa.

Intellectual Property Rights:

Brazil belongs to the following principal international Intellectual Property Rights organizations and agreements:

1. BERNE CONVENTION (1992) - Protection of Literary and artistic works
2. PARIS CONVENTION (1884) - Protection of Industrial Property
3. PATENT COOPERATION TREATY (1978) - Protection of Patent Rights
4. WORLD TRADE ORGANIZATION/TRADE ASPECTS OF INTELLECTUAL PROPERTY RIGHTS (1995) - Protection of Intellectual Property Rights

Current Problems:

1. Backlog in the processing of applications which are currently taking six to seven years to be resolved
2. Intellectual Property remains exposed to IP violations without registration
3. Intellectual Property Rights are being viewed as a foreign monopoly against the interests of the Brazilian people
4. International crime when committed across land borders complicates enforcement of IP rights
5. The massiveness of Brazil's population, the scale of its economy, its geography and political divisions make it difficult for authorities to effectively manage the implementation of IP rights

Labor Market Policies Affecting Workforce Development Incentives:

While Brazilians will probably disagree, it appears Brazil's archaic labor laws and bureaucratic processes seem to have resulted in income disparities. If productivity is the goal, such laws must be liberalized as they are deterrents to attracting more foreign investments and transfer of technology. While indeed these laws protect those disadvantaged economically (e.g. informal workers) and promote social inclusion and equality, they also exacerbate the effects of unemployment, discourage private and public investment, and weaken overall growth and productivity.

Local Demand:

Studies have shown that the strongest conductor of local competitiveness in the local marketplace is innovation. Companies are more likely to compete successfully in the global market when they are already competing within their own industries locally. Studies also show that as clusters mature, the focus of importance shifts from price-led competition - in the case of developing countries - to value-added competition through innovation and adaptation, in the case of developed countries; from local growth investments towards high growth industries and activities of greater value such as technology, manufacturing, mining, etc. According to a report prepared by the team led by Ming Zhang, Lead Urban Economist in Latin America, the need for this type of competition does not contradict cooperation between clusters or between companies because "competition and cooperation can operate on different planes. " According to Zhang, this can be demonstrated by "creating a common brand or identity" (e.g. Cariri Footwear, Napa Valley Wine, San Diego Leather and Sporting Goods, etc.) but there needs to be some kind of "competition based on quality."

Government Ownership:

A government owned state or country is such when the government controls all commercial activities of said state or country. The government acts as the stockholder. Corporations owned by the government are known as government-owned corporations (GOCS). In some areas, corporations can be fully or partially owned by the government. For Brazil, government ownership has helped to control expenses in the country. Either the government has partial or complete ownership over many businesses, helping to stimulate the economy. In this way, the government is also able to observe many businesses as well as help these businesses when problems arise. The government and business owner both work together to create the best business possible. The government plays a large part in Brazilian corporations. Most decisions go through the government. Even with the government displaying extensive presence, Brazilians still believe in having a little freedom. There is a middle ground between government ownership and complete freedom but overall, the government in Brazil will always have partial ownership over many corporations in the country.

Influence of Corruption:

Brazil is a leading world investment destination due to its enormous market. The government dually advocates state participation in the economy and respect for the contractual rights of investors (Brazil Country Profile). President Rouseff has adopted a zero-tolerance approach to corruption within the government cabinet as demonstrated by the resignation of six ministers, since inauguration, all under corruption allegations (The Christian Science monitor). In October 2011, the comprehensive Freedom of Information Law was passed, this forces public authorities to publish information on spending and forcing them to respond to citizen requests for information" (Brazil Country Profile). Studies demonstrate that corruption and bribery are a threat to doing business in Brazil even though they are role models for establishing anti-corruption framework for developing countries (Brazil Country Profile). They lack effective enforcement of these laws. Furthermore, the tax system in Brazil is also prone to bribery by tax collectors (Brazil Country Profile).

Openness to Trade and Foreign Investment:

Brazilian law provides the same guarantees and protection measures to foreign and domestic investors. "The petroleum, telecommunications, mining, power generation, and internal transportation sectors were opened up to foreign investment in 1995" (Encyclopedia of Nations). Currently, "foreign participation is restricted in activities such as rural property, health, telecommunications, the mass media, as well as maritime and air transport" (WTO - report on Trade Policy). Foreign investment comes primarily from the U.S. and the European Union (Encyclopedia of Nations). The Federal Brazilian Government strives to continue and improve the business and regulatory environment to attract foreign investment and give itself international competitiveness. In addition, "The Federal Government's actions are aimed at fostering investment in infrastructure and technology-intensive sectors" (World Trade Organization). "However, no specific incentives are offered to foreign investors by the Federal Government" (World Trade Organization). Whenever the Brazilian government feels the economy is "deindustrializing," it implements taxation on imports that do not meet local content requirements as a protection measure. This was the case for the automobile industry in Brazil who felt threatened by the Chinese automobile industry and were taxed a 30-percent-point tax as a protection measure (The Economist).

Antitrust Policy:

Changes have been made along with the changes in Brazil's economy and public policies (e.g. trade liberalization, deregulation, and privatization). These changes have acted as catalysts for the reformation of competition laws and policies in Brazil. Despite these changes, however, Brazilian competition laws have remained weak. During the 1990s, Brazil opened up its economy and privatized companies to stimulate competition. Yet after many years, the top four companies in almost all sectors still control the biggest market share which had grown even bigger over time. CADE, the competition authority, is paralyzed by rules which keep it from enforcing laws over companies in a timely manner. If CADE deems a company monopolistic or anti-competitive, it deselects it (i.e. undo mergers) but by that time, it is too late. Companies are already in court to challenge the rulings.

Licensing Rules:

According to the Doing Business 2012 index, Brazil ranks 126th overall in ease of doing business among 183 countries in terms of starting a business, dealing with construction permits, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.

RECOMMENDATIONS:

In a study conducted by Cruz and de Mello in 2006 examining the obstacles to innovation for Brazilian firms from 1998-2003, it was found that the main obstacles to innovation are costs, economic risk, scarcity of financing, shortage of skilled labor, lack of information, and difficulty to adopt standards. Based on the results of this study and information gathered from the company visits in Bahia and Rio de Janeiro, it appears that Brazil's challenges are well summarized by the study.

High taxes make it costly to start a business, impacting foreign and local investments. When tax rates are high, even when investors are willing to absorb investment risks, they are discouraged by the high cost of doing business. While there have been changes to the legislation, they are not changes made to the actual rate of tax, but more to the process of paying taxes.

Brazil's archaic laws and bureaucratic processes have resulted in income disparities, difficulty in implementing laws including labor laws, intellectual property rights, antitrust policies and licensing rules. If productivity is the goal, such laws must be liberalized as they are deterrents to attracting more foreign investments and transfer of technology.

To improve cluster competitiveness, the most obvious set of actions that Brazil needs to prioritize is to reduce the cost of doing business and simplify regulations to make it easier to start a business, pay taxes, hire workers, acquire land and exit from business. Cluster efforts in Bahia and Rio de Janeiro should also include the following:

1. Understand local market through market research and cluster branding
2. Make funding more accessible for applicable R&D activities
3. Motivate more universities to participate in applicable R&D activities
4. Design training programs to have industrial relevance and meet local cluster needs
5. Understand and anticipate local skill needs
6. Invest in the training and education of highly skilled labor

Factor Input Conditions

POSITIVE CONDITIONS

Physical Infrastructure:

The Parque Tecnologico Da Bahia is strategically located on an initial 581,000 sq. meters of Atlantic Forest land along one of the most important roads in Salvador providing for easy access and placing it close to strategic partners such as research facilities and universities. Another 519,000 sq. meters of land has already been tagged for expansion, with 148,000 sq. meters of the initial stage pegged as public area, and 433,000 sq. meters as private area. Additionally, 150,000 sq. meters of land has been set aside to preserve the Atlantic Forest providing nature trails, an adventure park, and an environmental education center. The strategic geographic location of the technological park also places it close to government offices, a proposed new mass transit system, and the Camacari Industrial complex. This complex houses many prospective partners including Petrobras, Braskem, DOW and DuPont. Furthermore, the park is just 7 miles from financial center of Salvador and 4 miles from Salvador International Airport.

The public infrastructure of the technological park was completed in December 2010 and the TechnoCenter, which is the eight floor 24,500 sq. meter centerpiece of the park, was finished in April 2012. The TechnoCenter will house the central administration for the park, research centers, and an incubator. Since the park is in its initial stages, some companies that have purchased lots will be temporarily located in the TechnoCenter while their facilities are under construction. The facility also includes underground parking, a library, an auditorium, commercial space, a coffee shop, and a restaurant. Additionally, the TechnoCenter will also be home to laboratories, training facilities, and exhibition space.

The TechnoCenter building is modern and was built to provide natural cross ventilation and was designed to draw this natural air flow up through the building, using the naturally mild climate and sea breezes to cool the building. Additionally, the building provides clear exterior and interior views as all of the walls facing the outside and inside hallways are glass. All of the floors inside the units incorporate a raised flooring system, which allows for easy configuration of office space and wiring of modern data and electrical networks. Additionally, the TechnoCenter network infrastructure is integrated into the 10Gbps RNP National Research Network allowing for high speed data communications with research institutions and universities.

Taking into considerations all of the different physical aspects of the Salvador Technological Park, one can assess that the Bahia Government and its partners have done a superb job of acquiring and implementing a superb physical infrastructure. The strategic central location of the Technology Park, the planned facilities with their mix of public and private use, and the incorporation of the natural environment and the Bahian climate into the infrastructure all make this a desirable facility for prospective members. Moreover, with the conclusion of the most recent public call for applications, four impressive names have already been added to the roster of members at the Technology Park: IBM Brasil, Portugal Telecom, Sabia Experience Technologies, and INDRA Brasil. Finally, multiple Federal universities and private universities have already signed agreements to become members of the park.

Information Flow and Infrastructure:

As a result of the early stage of development at the Salvador Technological Park, actual data on information flow is only based on theory. The administrative arm of the park had yet to be established, but officials stated that one of the main duties of the parks' administration was to help promote information exchange and cooperation between members. The administration of the park can provide a means of facilitating communication between the government, companies, research institutions, and universities. For instance, the Government and companies can share market knowledge or can collaborate with universities on public initiatives; Businesses can share knowledge and technology with each other allowing for increasingly efficient innovation; and universities and research institutions can form mutually beneficial relationship s with businesses at the park to spark innovation, to enhance educational opportunities, and to train future employees on site.

Infrastructure within the park is another subject that is just theoretical at the moment. Members of the technology park should be able to use the benefits that come from relationships built within the cluster to be able to enhance infrastructure of all kinds. Members of the park should be able to use formal and informal relationships within the cluster to enhance their own physical and financial infrastructure by combining demand for products, services, and materials to benefit from economies of scale when purchasing. Additionally, these relationships can enhance companies support services infrastructure by allowing multiple institutions to share in the cost of contracting financial, professional, and legal services.

Legal - Tax Incentives and Land Donations:

As a result of the extremely complicated, convoluted, and costly local, state, and federal tax systems, tax incentives will play a huge role in the success of the Technological Park. Tax incentives are a must because relocation, construction, and the associated taxes, combined with standard business taxation, are expensive in Brazil. So, to entice businesses, startups, and educational institutions to become members of the Technological Park, city and state governments are offering multiple tax incentives for organizations that choose to become members and in some cases they may even donate land for a member's site. These incentives include:

1. City Tax Incentives
1. ITIV – Property Transfer tax - Full exemption
2. IPTU - Property Tax - Full Exemption
3. ISS - Building Maintenance and Services Tax - Reduced to 2%
4. ISS - Construction Tax - Reduced to 2%
2. State Tax Incentives
1. ICMS - 90% reduction from 27% to 4% for Telecommunications Services
2. ICMS - Deferral of import taxes on equipment acquisition
3. PROPARQ – Helps organizations attract and retain qualified professionals
4. INOVATEC - State Program of Incentives for Innovation for asset acquisitions and infrastructure setup
5. Land Donation – The state may donate land

Institutions for Collaboration:

As far as the education is concerned, Bahia has some strong educational and research institutions, and this number continues to grow every day. This growth stems from the Brazilian governments increased focus on promoting education in science and technology. Already the technological park has multiple agreements for universities to become members of the technological park. For example, the Federal University of Bahia has plans for a 250 sq. meter site at the park funded by the Government and Senai Cimatec has plans to enter the park, but is waiting for their application to be approved. Additionally, other universities plan to have a presence within research facilities at the Technological Park in conjunction with their corporate partners, but will not build their own physical infrastructure. Furthermore, because these institutions and the park are all part of the same high speed network, providing for real-time communication and data exchange of research and information. A few of the universities that will have a presence at the park include:

1. UNEB – Universidade do Estado da Bahia
2. UESB – Universidade Estadual do Sudoeste da Bahia
3. UFRB – Universidade Federal do Reconcavo da Bahia
4. IFBA – Institute Federal de Educaco, Cinencia e Tecnologia da Bahia
5. UFBA – Universidade Federal da Bahia

Governmental institutions also provide an important arena for collaboration with the Technological Park. Without collaboration between different organizations within city, state, and federal governments, the park could not have been built, and organizations would not be attracted to the opportunity. Government institutions such as Brazil IT and Softex are promoting IT, and cluster formation in Brazil. Additionally, without the help of state and local governments, many of the incentives that are attracting company to the park would not be available.

Collaboration is not just limited top government institutions and universities. Non-profit institutions such as Sebrae are providing the much needed training, capital, and resources for new IT companies to be successful in Brazil and within the technological park. Furthermore, it will be important to the Technological Park to reach out to and collaborate with as many relevant associations, trade groups, and research initiatives as possible to keep the flow of information high and to spur innovation and competition.

Administrative Infrastructure:

When we visited the technological park the administrative infrastructure was not in place yet, but they talked briefly about their plans and the type of management team that they hoped to employ. The park hopes to employ a spherical management model with the Executive management in the middle and the government, academic, and private organizations all link together on the outside. The Executive management will be responsible for coordinating all aspects of park management. This includes, administrative tasks and the financial and legal aspects of running the park, but more importantly they will be responsible for promoting collaboration, information flow, and cooperation. Although, organizations will not be required to share information, resources, and to collaborate with other organizations, to not do so would be foolish. One of the greatest advantages of operating within a cluster such as this is to take advantage of, and benefit from, economies of scale.

Natural Resources, Human, and Capital Resources

Brazil is rich in natural resources, including many of the raw materials that are used to manufacture items for the IT industry. If managed correctly and allocated in a responsible way this will provide competitive advantage for Brazilian companies against their competitors and for the Technological Park. Additionally, where human resources are concerned, Brazil has been pumping money into and drastically promoting education in science and technology, so there should be an influx of new talent in the years to come. Furthermore, Federal, State, and local governments continue to offer incentives to qualified employees to recruit them from different areas of the country and from abroad. Finally, with the Technological Park in its infancy, it has all of the capital resources it could ask for at the moment, but time will show whether it is a success.

NEGATIVE CONDITIONS

Tax System, Government Regulation, and Human Resources::

The entire tax structure in Brazil is convoluted, expansive, and places a heavy financial burden on both individual citizens and organizations. Businesses and organizations had 56 different taxes to pay at the time we visited Brazil, but this system is constantly evolving which makes it costly to stay current on changes. At the moment the corporate tax rate is around 34% and the individual tax rate is between 7.5 and 27.5%. Additionally, employers must pay an 80% payroll tax, so for every $100 they pay to an employee; they must pay $80 in payroll taxes. This is why Brazil ranks 150th out of 183 countries in ease of paying taxes. (doingbusiness.org)

Government regulation is Brazil is also convoluted and restrictive which is why Brazil ranks 126th out of 183 world economies in ease doing business. (doingbusiness.org) Government organizations regulate where and when new businesses can open, which means that a perspective business must submit its business plan to the government and they will say which area of the city they can be located in, if at all. Furthermore, the number of hoops that these businesses must jump through and the amount of time it takes to do so is ridiculous.

Finding qualified employees in Brazil, especially those with IT training and experience, is also a problem. As was discussed earlier, the government is pumping funds into promoting science and technology in schools but this gap will take time to fill. In the mean time, businesses and the Brazilian government must offer incentives to attract talent from other areas of the country or from abroad.

RECOMMENDATIONS:

Despite the potential of Brazil's technology parks and university incubators, their ultimate impact on the Brazilian economy will remain hindered until the foundational aspects that comprise them change. From the testimonials given in Brazil, and the research completed on our return to the United States, our group concluded that the following recommendations would be a good place to start making changes.

First, the federal tax codes can no longer champion convolution. Arguably the most common complaint of business owners in Brazil, nothing serves as a greater obstacle to innovation and efficiency than a complex and confusing tax system that not only frustrates Brazilian citizens, but takes large portions of their income as well. Having a simpler tax system, with lower overall tax rates (if not a flat tax rate), would provide much incentive for employees and owners to strive for economic success, not to mention the large possibility that tax evasion would decrease. If Brazil wants its businesses to thrive, including those privileged few who have a position in the technology parks and incubators, then the tax code must change.

Next, education must have more accessibility to the general public. Currently, the Brazilian public education system does a disservice to a significant portion of the population, especially the poorest segment of the economic spectrum who are the people that need it most. Education provides citizens with tools to pursue the avenues of their dreams, and without it, poorer citizens not only have no path out of poverty, but they also lack the ambition necessary to start a successful business in the future. As a prime example of how backward the education system currently is, take the federal university tuition waiver that the Brazilian federal government offers its citizens. Originally designed to aid those with lesser means, the tuition exemption is most utilized by extremely wealthy students. Why? These students are the only ones who can afford the practice exams that make them capable of passing the difficult entrance exams that grant access to these universities. Unfortunately, due to its lack luster nature, the public educational system simply doesn't provide a vast majority of poor students with the skills needed to tackle the entrance exams. What's even more tragic is the fact that public funds, generated by the entire population's taxes, prop this program up. Does this make sense for a country attempting to assert itself on a global scale?

Additionally, the scope of government services must expand. Due to its robust funding, the Brazilian federal government can provide its citizens with many services that increase their quality of life. Take Sebrae, the technology parks, and the federal university tuition waiver as examples of this claim. However, those opportunities cannot possibly be accessed on the scale necessary to stimulate the growth of a heavily small business oriented economy. How many spots in the technology park can the thousands of small businesses in Brazil take? A few. How many of the many of the millions of underprivileged can reach the pinnacle of higher education and receive a tuition exemption for getting there? A couple hundred, maybe. Can Sebrae possibly provide aid to the thousands of small businesses in Brazil that desperately need their funding and training programs? No. When considering these questions and answers, it is not difficult to picture why the government must expand the scope of their services. Not doing so will only stagnate the national economy in the long term.

Furthermore, the Government must wean itself off of interfering with the private sector and the national economy. Our research shows that the federal government of Brazil plays a heavy role in propping up its country's economy through its many social programs, governmental ministries, and its high tax revenue. All this bureaucracy, in combination with a large budget, creates an environment of stagnant innovation amongst the many businesses of Brazil and creates corruption within the ranks of the many public sector workforces. The public sector wields too much power in regards to allowing a private business to become established. Just to start a business in Brazil requires jumping through dozens of bureaucratic hoops including mass amounts of paperwork and obtaining a ministry head's approval. These roadblocks can easily become a slippery slope for a Brazilian citizen without any formal education or political connections. Why should a Brazilian small business owner try to innovate and become more successful if said owner feels that the government sets out to better itself instead of its citizens?

Finally, even with the implementation of these changes, observers of Brazil's economy should note that they need time to take full effect. Changing a society on a fundamental and national scale takes decades to happen, if at all, given all the factors that a societal shift requires to thrive. The commitment to ensuring the success of these recommended adjustments must be steadfast, otherwise they equate to naught. If the Brazilian government, its businesses, and its people feel ready to undertake that responsibility, then Brazil will ascend to global dominance in the years to come.

Demand Conditions

Brazil currently represents the third largest economy in the world and continues to grow. It is exploring new avenues of development to strengthen its economy, especially within the information technology industry. Information technology is a rapidly expanding industry in Brazil that hopes to facilitate the growth of other industries within Brazil's economy. Specifically, the creation of information technology clusters has enabled IT firms to develop a network of supply retailers with the necessary services that make day to day activities more effective and efficient.

IT clusters have surfaced as a great way for Brazilian firms to appeal to different retailers in Brazil, avoiding or minimizing the outsourcing of services from other countries. Brazil is creating clusters to not only innovate and increase R&D in companies, but also to stimulate regional development and reduce unemployment through local production and education of the work force. Additionally, clusters allow firms to specialize within their respective niche and to work together to allow retailers to receive catered services. Based on the existence of sophisticated customers, demand defines the competitive advantage of companies who participate in local clusters. The products and services will be creates added value to businesses outside the cluster through the supply chain and production factors.

The innovative clusters and parks offer benefits abroad as well as locally. Locally, there is a creation of more competition within the IT sector. The IT clusters in Brazil address that issue by utilizing each other's resources. This makes every company stronger: working together and competing with each other. This sophisticated process of the cluster system meets the demand for innovation. If there are similar companies locally, it will push creativity and the drive to do better.

The quality of local demand is currently poor. Although Brazil represents the third largest economy in the world and continues to grow, there is a need for expansion in the IT sector. Brazilians believe that this sector is underrepresented, and could be doing better with competition. By operating locally and forming clusters, the quality of this local demand will not only be met, but achieve greater quality.

Related and Supporting Industries

A cluster cannot hope to be successful unless it is bolstered by related and supporting industries. This is what can differentiate between a group of similar companies and a truly dynamic group of organizations that, through both collaboration and competition, bring each other to a higher standard. A successful cluster will have local competition, available financing and incentives, an environment for research and development, locally based suppliers, an environment that supports the industry, and industries that add to the value chain.

Brazil is not currently an IT leader, though it does have a major IT cluster in Sao Paulo, Campinas Silicon Valley, and other smaller clusters throughout the country, such as the Instituto Genesis supported by the PUC Rio University in Rio de Janeiro. The Bahian government wants to bring that success to Salvador and is currently working to develop and fill a technological park with organizations they hope will advance the tech industry in Bahia.

Cluster Based Trade Associations:

Local competition and support are important in establishing a successful cluster. Salvador is fortunate in that there are already associations which it can leverage. Assesspro Bahia is an association of technology companies that partners with the science and technology ministry to provide training and education for employees of their member companies. Forty-five companies currently participate in an MBA program that includes 90 executives. They are currently trying to involve the government and universities in their association, but so far, this is a goal for them rather than something that has manifested. There is also the sense that the companies in the association are not taking full advantage of the opportunities the association provides.

BOC is a consortium of companies that have been brought together to work with the Angolan government to advance technology there. Currently, there are eight companies involved, strategically assembled to cater to Angola's needs. Although this particular group of companies has been put together to further the agenda of another nation, it nonetheless provides an opportunity for these Salvador based companies to combine competition and collaboration to achieve a goal. It's a learning experience that can serve as a valuable model for the technological park, especially if some or all of these companies end up participating.

Financing:

Financial incentives are a key in attracting the right businesses to an IT cluster. In Salvador, there are two main funnels that the government can use to accomplish this. The corporate tax rates on businesses in Brazil are quite high, making subsidies and tax breaks a powerful tool of the government in attracting key players in the industry. Currently, the Bahian government is planning on offering tax incentives to those companies that chose to join the technological park. This is a positive step in that the government is taking to support the businesses they want to add to the technology park.

Another, more direct, incentive is financing. Sebrae is an entity, also supported by the government, which targets small businesses and gives them the financing they need to get started. Startups being a very critical part of the IT industry, having this type of organization offering financial support in the form of business loans will go a long way to supporting the formation of companies that could be on the cutting edge of new technologies and innovative ideas.

Research & Development:

The main strength that Salvador has in advancing their R&D is the strong ties between the universities and the private companies. At UFBA, the university has been making a strong expansion in their computer science program since 2009. They have made efforts to bring in visiting and foreign professors as well as working with corporations who sponsor abroad programs for the students to participate in. These kinds of partnerships bring in outside knowledge that can be a strong supplement to Brazil's homegrown IT industry. UFBA also partners with private companies to do product research. For example, the university worked with Petrobras, the leading oil producer in Brazil, to integrate their isolated IT systems and additional helped train their employees. The government has also stepped in to play an additional supporting role, giving tax breaks to companies that fund universities for the self-serving purpose of doing research and development. Actions like this not only provide financing to both the school and the company, but also benefit the R&D prowess of both.

Senai, another post-secondary educational institution in Salvador, is a leading example of how training students at all levels of the industry can lead to boundless research and development opportunities. Combining what Americans would traditionally think of as a trade school with formal university training all the way through PhD conferral, Senai maintains very close relationships with companies looking to leverage the talent pool Senai has in order to develop prototypes and continue technological research. The school maintains multiple locations throughout Brazil, with each differing in focus in order to accommodate the region of their location. All the projects worked on at Senai are prompted by the industry and overtures from private companies regarding their needs. The schools are also funded by the government: all employers in Brazil must allocate 1% of their entire payroll tax to Senai. This is a very clear statement that the government sees Senai's mission as very connected with the success of private companies in Brazil.

Locally Based Suppliers:

An important part of building a successful cluster is having suppliers in place that enable the sector to look locally for the parts needed as opposed to having to import supplies, which in turn drives up costs. Brazil has a very strong manufacturing industry, it accounts for 20% of Brazil's GDP representing a very important part of its economy, including the production of computer chips. As it pertains to hardware, this could be a very strong supporting role for the IT park. It is clear, from the impressive assembly line and factory that is within the Senai school itself, that Bahia has the education resources to develop and support advanced manufacturing and is indicative of the resources that Salvador will have to leverage.

CHALLENGES AHEAD:

Integrating Science and Culture:

Brazil is not a culture that promotes science very intensely. In order to build their IT industry, the government, schools and private industry must all create incentives to generate interest and get students involved in the sciences. To this end, the government is currently doing just that at UFBA. By offering to pay one year's salary of a student to work in the IT industry at a company, the government is providing the financing of an additional employee, the private company is exposing a student to the IT industry and the opportunities that are there, making a school with top students a resource for the company to hopefully retain talent that they have trained on the government. Opportunities like this can help grow more talent within Brazil and should be explored further in order to create a more successful IT cluster.

The Value Chain:

In order to make their cluster more successful, Salvador will not only have to excel at technology, but also have the mechanisms in place to sell their technology. This involves sales and marketing, a skill that will have to be developed in Salvador if they hope to add value to the cluster.

Support from Outside the Cluster:

Because the cluster is still in its infancy, and technology is not a top field in Salvador or Brazil, Bahians will have to be more open to the idea of outside resources. As it is, both the university and private industry set seem open to student exchanges, but most companies also seem to have their minds set on home-grown technology. While there is certainly national pride to be had from domestic innovation, it is a somewhat antiquated notion in our increasingly globalized world generally and specifically in the information technology sector that at its core enables the sharing of knowledge across the world with minimal effort. In order to achieve advanced success in this arena, Brazilians will have to sacrifice part of their nationalistic tendencies for the sake of innovation that is competitive not only in Brazil, but globally. Brazil has important related industries in place to support a successful IT cluster. If they address the challenges ahead, they should have no trouble nurturing an industry.