Masters of arts in development studies



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Chapter 1
Introduction


This thesis analyses inter-firm interactions both inside and outside the iron and steel (I&S) industrial district in Ciudad Guayana, Venezuela, and explores the question of to what extent those interactions change as a result of changes in ownership structure as well as other factors. It seeks to find out the nature of co-operation among firms under a given ownership form. Other factors are also taken into account to explore interaction patterns. The study builds on typology of industrial districts put forward by Markusen (1996).

    1. Background


Firms within Ciudad Guayana’s I&S industry have experienced changes in ownership structure throughout their trajectory that are linked to broader political economy context. This trajectory can be split into three distinct stages where a distinct ownership structure was prevalent: state ownership, private ownership and state ownership with workers’ self-management.

        1. State ownership


The first stage of state ownership in Ciudad Guayana’s I&S industry can be framed in the context of state-led and import-substituting approach to industrialization that was on fashion in Latin America in the early 1950s. At that time had been discovered iron ore deposits in “Cerro Bolívar” and “El Pao”, located 130 kilometres from the district. That was the outset of I&S activity in Venezuela, albeit it was primarily a private-foreign controlled and export-oriented activity. But the prevalence of state ownership in Ciudad Guayana started in 1960 with the creation of Corporación Venezolana de Guayana (CVG), a state agency with the mandate of seeding a growth-pole in a virtually unpopulated zone in the Southeast of Venezuela. Ciudad Guayana started from scratch as part of a comprehensive plan designed by a small group of specialists from Massachusetts Institute of Technology (MIT), Universidad Central de Venezuela (UCV) and CVG (Interview 10b). The plan in broader sense was to channel oil revenues to industrialization projects and “deflect migration away from ‘core’ coastal population centres like Maracaibo and Caracas” (Hite 2004: 63). In 1964 was created the steel mill SIDOR and in 1975 with the nationalization of the iron industry the two foreign-owned mining companies were transformed into “CVG Ferrominera del Orinoco” (FMO). These two large state-owned firms have shaped the landscape of I&S in Ciudad Guayana as from the mid-1970s.

        1. Private ownership


The neoliberal agenda was widely adopted in Latin America. Accordingly, it was believed that privatisation was an option to promote competitiveness in I&S industry. The rationale behind this policy was to recover investment levels, reduce fiscal deficit, promote industrial development and enhance collective welfare motivated by technological changes and public sector distress (Corporación Venezolana de Guayana 1990: 4).

In 2008 SIDOR was sold to Amazonia Group, a foreign consortium with a little participation of SIVENSA, a domestic firm. According to one respondent (Interview 11b) there were two major events prior SIDOR’s privatisation. First, in the early 1990s SIDOR started a reconversion program determining that former Siemens-Martin plant would not meet the international standards in terms quality and cost, and consequently it was shut down. As a result, the production capacity of SIDOR dropped from 4.8 tons per year to 3.6 tons per year and 4000 workers were fired. From that time onwards, SIDOR would depend on a new steel mill (Plan IV) which construction had started in 1974 and finished in 1982. It can be argued that this decision concurred with the neoliberal certainties that were on fashion at that time, namely the reduction of the state size. Second, a debt burden to finance construction of Plan IV: even though there was an increase in the productivity as well as in the operative standards due to the reconversion program, it was difficult to recover the profitability of the firm because of the debt burden (Interview 11b).

As from 1998, I&S industry experienced a decade of private-foreign ownership over SIDOR. Moreover, both private-foreign and domestic ownership was also present in the district in other sector: the briquetting sector, encompassing five medium enterprises that employ between 200 and 700 workers (Briquetera de Venezuela. 2011, Complejo Siderúrgico de Guayana. 2011, Venezolana de Prerreducidos Caroní. 2011, Orinoco Iron. 2011). Private-foreign investment constructed: i) OPCO (nowadays FMO briquetting plant) which started operation in 1989 and operated by the Japanese Kobe Steel, ii) COMSIGUA which started operation in 1998 with a majority participation of Japanese capital with the 73% of the shares (Interview 06), and iii) POSVEN (nowadays BRIQVEN) which started operation in 1999 with a majority participation of Korean POSCO.

The other two private-owned briquetting mills were established in the locality by domestic capital. SIVENSA Group started up VENPRECAR in 1990 also with participation of CVG with 13% of the shares (Interview 07). The other briquetting plant was initiated as a lab with participation of both FMO and SIVENSA Group to develop a technology that could produce briquettes from iron ore fines that was the strength of FMO (Interview 15). The technology was approved and in 2000 started up Orinoco Iron (O.IRON) with SIVENSA Group as the major shareholder (Interview 08).


        1. State ownership and workers’ self-management


The process of nationalization (it is still going on) of I&S industry in Ciudad Guayana began in a context of rethinking the national economy with impacts at local level. During the last decade Venezuelan National Government has been promoted a radical change towards the so called “Socialism of 21st Century”, which industrial policy has been framed in this study under the neo-developmentalist approach since it resonates with some of its features, namely the recall of state-drive development and the importance of manufacturing-based industrialization for national and local development. Nationalization process is led by MIBAM somewhat diminishing CVG ascendancy on the district (Interview 06). OPCO was nationalized in 2007 followed by SIDOR in 2008 after a period of dispute between them and the labour unions (Interview 12). Then in 2009 were nationalized COMSIGUA, O.IRON, VENPRECAR and BRIQVEN (Interview 06, Interview 07, Interview 08, Interview 09). More recently in 2010 started the process of nationalization of SIDETUR which owned CASIMA plant in the locality. The majority of these firms are nowadays operating under the supervision of a transition committee composed of representatives of the government and the labour unions.

Nowadays, the state-owned I&S industry in Ciudad Guayana comprises de following firms which interactions are the focus of this study:



Firm

Activity

CVG Ferrominera del Orinoco, C.A. – FMO

Mining

Siderúrgica del Orinoco Alfredo Maneiro – SIDOR a/

Manufacture

FMO Planta de Briquetas, S.A. – FMO briquetting plant b/

Manufacture

Briquetera de Venezuela, S.A. - BRIQVEN c/

Manufacture

Complejo Siderúrgico de Guayana - COMSIGUA c/

Manufacture

Orinoco Iron, CA – O.IRON c/

Manufacture

Venezolana de Prerreducidos Caroní - VENPRECAR c/

Manufacture

Siderúrgica del Turbio, SA - Planta Casima - CASIMA d/

Manufacture

a/ Privatized in 1997 and nationalized in 2008.

b/ Nationalized in 2007.

c/ Nationalized in 2009.

d/ Nationalized in 2010.



Additionally, I&S industry is likely to expand since three state-owned firms are now in process of construction, albeit just one in the locality. These three firms are also included in the study sample:

Firm

Activity

E.B. Siderúrgica Nacional, C.A. – SNAC

Manufacture

E.B. Tubos sin Costuras, C.A. – TSC

Manufacture

E.B. de Rieles y Perfiles, C.A. – RYP

Manufacture

1.2 Indication of problem area


Industrial districts and their developmental features have been of the interest of many scholars. Most of the literature refers to the traditional Marshallian or Italianate district where inter-firm negotiation with co-operation is assessed within a production system characterized by a geographical and sectorial concentration of private- small and medium enterprises (SMEs). Such production systems are less likely to observe in developing countries, where the state and large firms can play an important role in promoting and sustaining industrial districts. Thus, it is worth to explore other strategies of clustering so as to identify inter-firm interaction patterns and the type of production system that is taken place. This research attempts to contribute to scholar knowledge by bringing the issue of ownership structure into the debate, albeit it is acknowledge that other factors play a role in affecting interaction patterns.

1.3 Research objectives


The aim of this research is to explore inter-firm interactions both inside and outside Ciudad Guayana I&S industry. It explores the question of to what extent those interactions change as a result of changes in ownership structure. The study additionally searches other factors influencing inter-firm interactions and builds on typology of industrial districts proposed by Markusen (1996). Within Markusen’s framework it is also explored changes in direction of local and non-local embeddedness.

1.4 Research questions


This research analyses the main question of to what extent inter-firm interactions change as a result of changes in ownership structure in Ciudad Guayana’s I&S industry?
Sub questions:


  • What are the inter-firm interactions among state-owned firms in Ciudad Guayana’s I&S industry?

  • How can be conceptualised and mapped out Ciudad Guayana’s I&S industry?

  • How does ownership structure influence inter-firm interactions in Ciudad Guayana’s I&S industry?

  • How do other factors influence inter-firm interactions in Ciudad Guayana’s I&S industry?

1.5 Methodology


This thesis adopts primarily a qualitative approach to explore the research questions. Accordingly, the research strongly relies on inductive analysis based on semi-structured interviews undertaken in the locality. As stated by Markusen (1994: 478):

Evidence to test these newer theories has come increasingly from qualitative data, especially from interviews of firms and other industrial and regional actors such as trade associations, business service providers, labour unions, and economic development officials…This makes sense because a key focus in recent theory is the degree to which firms are “embedded” in local economies, through relationships with competitors, customers, suppliers, regional business organizations, and public sector forums.

Accordingly, a fieldwork was carried out in Ciudad Guayana, Venezuela, where I&S industrial district is located. It was targeted managers of the firms, government officials from Ministry of Basic Industries and Mining (MIBAM), the municipality of Caroní (local government) and CVG as well as representatives of workers among firms. In order to substantiate findings, both qualitative and quantitative data is examined from primary and secondary sources.

        1. Primary Data


For data collection semi-structured interviews were conducted to gather data of the firms and in-depths interviews were implemented for other actors. It was considered to apply a questionnaire to collect standardized data. The firms identified above represented the whole stated-owned complex. Accordingly, the questionnaire was sent attached to them, but the sampling was too short that it was considered not representative to report them. This quantitative endeavour was dropped out of the analysis, albeit respondents’ comments on questionnaire were used as fruitful source of relevant data. All the interviews occurred in interviewees’ place of work from 28th July 2010 to 25th August 2010. Primary data collected was mainly qualitative although quantitative data was also gathered. In data processing, most of the qualitative data was used in its original state and coded where necessary using Atlas.ti 6.2.

The selection of key respondents was made purposively and snowballing technique was used to locate fruitful respondents. The main strategy was sending a letter to the head of the organisation asking for key resource persons at planning, procurement or personnel area. The respondents were selected by the organisation based on their knowledge and/or position in the organization. Due to time and financial limitations, a total of 16 interviews were conducted in the field that comprised 22 key respondents: 14 from I&S firms, most of them strategic planners and personnel managers. Additionally, it was selected 1 informant from MIBAM, 2 from the municipality, 1 from CVG and 4 from the workers representatives. Interviews were conducted in Spanish and needed to be transcribed and translated from Spanish to English.


        1. Secondary Data


To substantiate the study a set of quantitative data was gathered from available information provided by Banco Central de Venezuela (BCV) and CVG. Additionally, a set of data was used from desk review of different materials that could be found on internet (books, journals, articles, newspapers) as well as any published and unpublished materials related to the topic.

1.6 Scope and limitations


As for the scope of this study, the focus was on I&S industry in Ciudad Guayana, Venezuela, hence, its findings may not be generalised to either resource-based state-owned industrial district. Therefore, further research is needed on this regard.

There could be some selection biased since it was targeted the managers of the firms and they might not be always the most appropriate respondents. Also the researcher made use of his working relationships with some officials from these organizations as an entry point. However, it was always up to the organization the selection of key informants. As mentioned before, it is acknowledged that due to lack of time and financial resources the sample size was small especially to apply a questionnaire, which limited the researcher to obtain different points of views to confirm the responses. To overcome this limitation there was discussion on the questionnaire and the secondary data was gathered from desk review.


1.7 Structure of the paper


This paper has been organised into six chapters. Chapter one presents the background of the case study, indication of the problem area, objectives, research questions and the methodology. Chapter two shows the relevant concepts as well as the analytical framework to address the research questions. Chapter three explores inter-firm interactions among state-owned firms. Chapter four explores the role of state, the role of large firms and local and non-local embeddedness as to conceptualize and map out the district. Chapter five builds on the main research questions; the analysis aims to find out whether ownership and other factors influence inter-firm interactions. Chapter six presents the conclusions of the study.

Chapter 2
Conceptual and Analytical Framework

2.1 Introduction


This chapter introduces the conceptual and analytical framework. It addresses concepts of industrial districts and clusters, draws on typology of districts, discusses nature of inter-firm interactions, the role of the state and firms in shaping industrial district configuration, defines the concepts of local and non-local embeddedness and finally shows the analytical framework used to address the research questions.

2.2 Industrial districts and clusters


Industrial districts and clusters have been of interest of scholars for the last three decades. The concept of clusters focuses on the advantages that accrue to firms and the area in which they operate due to sectorial and geographical concentration of firms, while industrial district additionally implies the existence of co-operation (Schmitz 1995: 536). Piore and Sabel (1984) made an important contribution to the study of industrial districts by identifying “networks of technologically sophisticated, highly flexible manufacturing firms in central and northwestern Italy” (1984: 17) as an alternative to Fordist mass-production. Porter (1990, 1998) gave clusters prominence as a source of competitive advantage. Pyke and Sengenberger (1992) clarified that an industrial district is not merely a concentration of firms within the same sector and locality, but they characterised by “strong networks of (mainly) small firms which, through specialization and subcontracting, divide among themselves the labour required for the manufacture of particular goods” (1992: 4) that bring about collective efficiency. Schmitz and Nadvi (1999) identified an “incidental and deliberate effects into the concept of collective efficiency defined as the competitive advantage derived from external economies and joint action” (1999: 1504). The former is termed passive collective efficiency and include external economies such as a pool of skilled workers, access to suppliers of specialized inputs and new knowledge spillovers. The latter is called active collective efficiency meaning a “conscious pursuit of joint action”.

However, the production system this paper is intended to analyse differs substantially from the above features of industrial districts. Markusen contribution to the debate of industrial district expanded to a large extent the scope of the analysis. This thesis adopts the definition of industrial districts given by Markusen as:



A sizable and spatially delimited area of trade-oriented economic activity which has a distinctive economic specialization, be it resource-related, manufacturing, or services (Markusen 1996: 296)

      1. 2.2.1 Typology of industrial districts


Markusen’s definition of industrial district broadens the typology of production systems that may bring about both passive and active collective efficiencies. This is especially important for developing countries. As some scholars have discussed (Hilhorst 1998, Altenburg and Meyer-Stamer 1999), it is less likely to find such a sophisticated system of production in developing countries. For example, Altenburg and Meyer-Stamer elaborated about typology of clusters in Latin American countries. They distinguished three types of cluster: i) survival cluster of micro and small-scale enterprises, ii) more advanced and differentiated mass production clusters, and iii) cluster of transnational corporations; albeit they did not consider resource-based clusters, such as the metallurgical industry in Ciudad Guayana (Altenburg and Meyer-Stamer 1999: 1695). In this paper is taken the typology of industrial districts put forward by Markusen which contributed to industrial district analysis by characterizing other form of ‘sticky places in slippery space’. According to her, there are four basic types of industrial district: Marshallian and Italianate district, hub-and-spoke district, satellite platform and state-anchored district.

  • Marshallian and Italianate district is “a region where the business structure is comprised of small, locally owned firms that make investment and production decisions locally. Scale economies are relatively low, forestalling the rise of large firms. Within the district, substantial trade is transacted between buyers and sellers, often entailing long-term contracts or commitments.” (Markusen 1996: 297-9)

  • Hub-and-Spoke Industrial District is “another quite different type of industrial district is present in regions where a number of key firms and/or facilities act as anchors or hubs to the regional economy, with suppliers and related activities spread out around them like spokes of a wheel”. (Markusen 1996: 302)

  • Satellite Platform is “a congregation of branch facilities of externally based multiplant firms. Often these are assembled at a distance from major conurbations by national governments or entrepreneurial provincial governments as a way of stimulating regional development in outlying areas and simultaneously lowering the cost of business for competitively squeezed firms bristling under relatively high urban wages, rents, and taxation”. (Markusen 1996: 304)

  • State-anchored Districts “where a public or nonprofit entity, be it a military base, a defence plant, a weapons lab, a university, a prison complex, or a concentration of government offices, is a key anchor tenant in the district. Here, the local business structure is dominated by the presence of such facilities, whose locational calculus and economic relationships are determined in the political realm, rather than by private-sector firms”1. (Markusen 1996: 306)

The contention is that Ciudad Guayana’s I&S industry resonates with state-anchored district category, which features are being analysed in chapter 4.

      1. 2.2.2 Inter-firm co-operation


The source of competitiveness in industrial districts depends highly on inter-firm co-operation:

According to the industrial district model, there is intense competition between firms producing the same things and co-operation between firms producing similar but non-competing goods or between firms engaged in different staged of production (Schmitz 1992: 95)

It is acknowledged that there are several forms of co-operation. Literature on industrial districts tends to identify the more frequent forms of co-operation. For example, Kristensen surveyed some instances of co-operation in Italian industrial district:

Co-operation is manifest in the collective organisation of services, the strength and political influence of the small business trade associations, the collaboration between units in a production chain over questions of design and technology, and the general atmosphere of openness that encourage the spread of ideas and innovation so crucial to the district’s success (Kristensen 1992: 124).

The question is: would a group of state-owned firms co-operate to take advantage of sectorial and geographical concentration? As it is implied in Markusen’s typology of districts, the answer could be affirmative, but what form of co-operation? As mentioned above, co-operation can take many forms. For the purpose of this study, interactions will be analysed within Markusen’s framework of state-anchored district (1996: 299).

Additionally, to draw on the nature of interactions, this thesis adopts the framework of ‘resource-exchange analysis’ which “builds on but goes beyond Weber's formulations, exploring macro and micro relationships by considering normative, instrumental, and coercive elements of politics” (Uphoff 1989: 296). This framework accepts Weberian notion that authority is a special kind of power (in Uphoff 1989: 300) and that the state claims “legitimate use of physical force in the enforcement of its order” (in Uphoff 1989: 302):

The authority of the state exists to the extent and to the degree that its leaders and their agents successfully uphold the claims they make upon their subjects for compliance - regardless of the basis upon which that success rests (Uphoff 1989: 302).

As stated by Boulding “power in any social system invariably involves some combination of self-interested, coerced, and altruistic relationships” (in Uphoff 1989: 305). Accordingly, for the purpose of this paper, it is made the distinction between negotiated, coerced and voluntary co-operation: i) negotiated, when co-operation is combined with more degree of self-interest, ii) coerced, when co-operation is combined with more degree of “legitimate force” as in the Weberian notion, and iii) voluntary, when co-operation is combined with more degree of altruism.

It can be argued that qualitative feature of industrial district that differentiate from mere geographical and sectorial concentration of firms, is the emergence of voluntary co-operation among firms.

      1. 2.2.3 Role of the state


The role of the state at national and local level has not been ignored in industrial district analysis (Pyke and Sengenberger 1992, Schmitz 1992, Benton 1992, Parrilli 2009, Sabel 1992), albeit the state is seen more as enabler rather than a producer. For developing countries and transition economies state-owned enterprises are existing phenomenon: “the state may be a major shaper of industrial geography, especially in developing countries” (Markusen and Park 1993: 157).

This thesis adopts a broaden approach of role of state, as put forward by Markusen:

As rule maker, as producer and consumer of goods and services, and as underwriter of innovation, with consequences for the distribution and anchoring of employment within and across regions (Markusen 1996: 295)

      1. 2.2.4 Firm size


The bulk of scholars’ attention is given to production systems of SMEs (Schmitz 1995, Schmitz and Nadvi 1999, Parrilli 2009, Brusco 1992). The contention, as stated by Pyke and Sengenberger (1992: 7), is that most of employment is generated by SMEs and that “small firms are more flexible, more efficient, and more capable of adapting to market requirements than large, cumbersome, bureaucratised enterprises”. Thus, it is often neglected the role of large firms as Markusen stated:

The study of industrial districts and networks within them has generally been confined to smaller firm in particular industries; their links to larger firms and to other firms and institutions outside the region have been ignored (Markusen 1996: 309).

There is empirical evidence that large firm may play role in sustaining the growth and development of industrial districts (Scott 1992). Scott stated that:

Industrial districts may comprise varying combinations of both large and small establishments and that large producers are often quite instrumental in inducing and sustaining agglomeration (Scott 1992: 273).

This study explores the hypothesized role of large firms put forward by Markusen (1996: 299).

      1. 2.2.5 Local and non-local embeddedness


The notion that economic relationships are embedded is social structures can be seen in Granovetter who stated: “most behaviour is closely embedded in networks of interpersonal relations” (Granovetter 1985: 504) including economic behaviour of firms.

In this paper, the concept of local and non-local embeddedness is taken as in Markusen (1996: 296): the former refers to networks within the district and the latter refers to networks extending across national and international space. The contention is that more degree of local embeddedness leads to integration of district, whereas more degree of non-local embeddedness leads to disintegration of district.

Networks approach is taken to define integration. As stated by Birner and Ege: “network approach…offer perspectives for integrating coordination and cooperation into a unified theory of social stability” (Birner and Ege 1999: 749). Birner and Ege elaborated on the convergences and divergences of Durkheim’s argument of co-operation and Hayek’s argument of competition and evolution of coordination as basis of social cohesion. Thus, it is assumed that networks of competition and co-operation lead to integration to district, whereas disintegration is taken as the opposite direction where networks lead to differentiation from district.

2.3 Ownership structure


The literature on industrial districts tends to focus on private sector initiatives somewhat undermining the role that can play the firm’s management structure. For example, Vakhitov and Bollinger (2010) have claimed that it might be an effect of ownership structure on agglomeration economies. They analyzed data from Ukrainian firm and suggested that state-owned firms gained little from agglomeration externalities, while private-owned firms gained more and that foreign-owned firms might gain the most from agglomeration economies. Luong and Weinthal (2006) also analyzed transition economies and have suggested that might be a relationship between ownership structure and institutional capacity.

It seems that there is little research regarding the relationship between ownership and industrial districts. This thesis seeks to contribute to this debate. For this purpose is taken the types of ownership used by Vakhitov and Bollinger (2010: 2): state-owned, private-domestic-owned and private-foreign-owned. It is included a fourth category of ownership: a cooperative or non for profit organization. In this study is made the assumption that ownership structure may influence nature of interactions. The contention is that state-ownership tends to influence the nature of firm interactions in the district through the state exerting its ‘legitimate force’ to impose political interest, thus enforcing coerced co-operation. Meanwhile private-ownership tends to influence the nature of firm interactions through firms exerting negotiated co-operation. A third effect could be hypothesized when ownership structure adopts the form of cooperatives which may bring about voluntary co-operation.


2.4 Analytical framework


The researcher has surveyed different theoretical frameworks from which to approach the study case, but none of them seem to embrace the case entirely. The concepts discussed above are taken to construct an analytical framework to address the research questions. Figure 2.1 shows schematically the causality relations of the research arguments. As can be seen, this approach stresses the importance of ownership structure for industrial districts analysis. It is argued that ownership structure influences nature of co-operation: i) state-ownership is expected to bring about coerced co-operation, ii) private ownerships both domestic and foreign are deemed to produce negotiated co-operation, and iii) cooperative ownership is expected to generate voluntary co-operation. As a result, it is envisioned to observe different pattern of inter-firm interactions due to changes in ownership structure.

This argument does not imply that ownership structure alone can influence nature of co-operation. As mentioned above, co-operation may take several forms. Accordingly, other factors may play a role in shaping the nature of co-operation. Thus, the research seeks to identify such factors in the study case. Following the suggested approach, factors other than ownership structure may lead to coerced, negotiated or voluntary co-operation depending on bargaining power of stakeholders that also influence inter-firm interactions. Then, the analysis follows Markusen’s framework that takes into account the role of the state at national and local level, the firm size, inter-firm connections and local and non-local embeddedness as to determine the typology of industrial district. As a further contribution to the analysis, it is argued that local embeddedness lead district to integration whereas non-local embeddedness lead district to disintegration which shape configuration of industrial district.



Figure 2.1
Analytical Framework

Source: Author’s own elaboration based on Markusen (1996)




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