REPORT NO: AUS17180 ORIENTAL REPUBLIC OF URUGUAY INTEGRATION INTO GLOBAL VALUE CHAINS THE DAIRY INDUSTRY AND THE ICT INDUSTRY alberto criscuolo, ifeyinwa uchenna onugha, gonzalo varela REPORT NO: AUS17180 ORIENTAL REPUBLIC OF URUGUAY INTEGRATION INTO GLOBAL VALUE CHAINS THE DAIRY INDUSTRY AND THE ICT INDUSTRY © 2014 Banco Mundial Bouchard 547 piso 29 (1106) Buenos Aires, Argentina Telefono: +54-11-4316-9700 Internet: www.worldbank.org This volume is a product of the staff of the International Bank for Recon- struction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they repre- sent. The World Bank does not guarantee the accuracy of the data included in this work. 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Diseño y armado: Manosanta Desarrollo Editorial Zelmar Michelini 1116, Montevideo, Uruguay www.manosanta.com.uy REPORT NO: AUS17180 ORIENTAL REPUBLIC OF URUGUAY INTEGRATION INTO GLOBAL VALUE CHAINS THE DAIRY INDUSTRY AND THE ICT INDUSTRY PART I ALBERTO CRISCUOLO IFEYINWA UCHENNA ONUGHA GONZALO VARELA oriental republic of uruguay 6 Integration into Global Value Chains The Dairy Industry and the ICT Industry 7 Acknowledgements This report was prepared by a World Bank Group team led by Alberto Criscuolo (Senior Private Sector Specialist, GTC04) including Ifeyinwa Onugha (Private Sector Specialist, GTCCS), Gonzalo Varela (Senior Trade Economist, GTCTC), Gianluca Santoni (Consult- ant, GTC04), Alvaro Lalanne (Consultant, GTC04) and Aarre Laakso (Consultant, GTC04). The team received helpful guidance and comments on the scope and analysis from Marialisa Motta (Practice Manager, GTC04), Jesko Hentschel (Country Director, LCC7C), Emily Sinnott (Program Leader, LCC7C), Matilde Bordon (Resident Representative, LCCUY), Frank Sader (Principal Strategy Officer, CBCCF), David Tinel (Country Manager, CLAAR), Andrew Bartley (Chief Investment Officer, CTTTT), Juan Gonzalo Flores (Senior Investment Officer, CMGA7), Thomas Bauer (Principal Industry Specialist, CMGAF), Daria Taglioni (Lead Economist, GTCTC), Jean Saint-Geours (Economist, GTCCS), and Alvaro Quijandria (Lead Private Sector Specialist, GTCLA). The World Bank Group team would like to thank counterparts in Uruguay for their collaboration and input on the report, especially at the Budget and Planning Office of the Presidency of the Republic of Uruguay, the Ministry of Economy and Finance, Min- istry of Industry and Mining, the Ministry of Agriculture, Livestock, & Fisheries, and the business associations and members of the private sector in the dairy and ICT industries. oriental republic of uruguay 8 Integration into Global Value Chains The Dairy Industry and the ICT Industry Index 1. Executive Summary..............................................................................................................11 1.1. Country Context..........................................................................................................................................11 1.2. Uruguay’s Trade Competitiveness Performance ................................................................................... 12 1.3. How is Uruguay integrated into Global Value Chains?.......................................................................... 16 1.4. Objectives and GVC Methodology............................................................................................................20 1.5. Summary of Strategic Repositioning Options and Recommendations................................................ 27 2. GVCs and Development, the GVC Strategic Policy Framework, and Economy-wide Policies for Participation................................................................... 33 2.1. Global Value Chains and Economic Development.................................................................................34 2.2. The GVC Strategic Policy Framework......................................................................................................36 2.3. Economy-wide policy reforms and insertion into GVCs........................................................................39 3. The Uruguayan Dairy Industry: Export Competitive, but Locked in Low-Value Added Strategic Segments of the Dairy Global Value Chains......................................................................................43 3.1. Evolution and History................................................................................................................................43 3.2. Recent Performance of the Dairy Industry in Uruguay.........................................................................52 3.3. Analysis of Resource Misallocations affecting the Performance of the Dairy and Food Industries in Uruguay ..............................................................................................................58 9 3.4. Global Trends shaping the Dairy industry, and Strategic Segmentation of the Dairy Global Value Chain............................................................................................................... 72 3.5. Deep Dive on the Dairy Strategic Segments Relevant for Uruguay.....................................................86 4. The Uruguayan Information Communication Technology (ICT) and ICT-Enabled Services (ICTES) Industry : from “Export Discovery” to Global Niche Player in the ICT/ICTES GVC.................................................................. 123 4.1. Evolution and Performance of the ICT/ICTES Industry in Uruguay.................................................. 124 4.2. Industry Structure, Stakeholder Map, ICT/ICTES Infrastructure, and Education............................ 130 4.3. Global Trends shaping the ICT/ICTES industry and Strategic Segmentation of the ICT/ICTES Global Value Chain..................................................................................................... 138 4.4. Comparative Analysis of the ICT/ICTES Strategic Segments.............................................................. 166 4.5. Deep Dive on the ICT/ICTES Strategic Segments relevant for Uruguay............................................ 167 5. Strategic Repositioning Options and Recommendations...............................................177 5.1. Recommendations for the Dairy Global Value Chain...........................................................................177 5.2. Recommendations for the ICT/ICTES GVC.............................................................................................191 5.3. Recommendations for Data Collection and Statistical Tools on GVCs..............................................200 6. Bibliography.......................................................................................................................203 11 1. Executive Summary Uruguay has much to gain from further integration with the global marketplace. In- creased trade allows economies of scale and increases exposure to technological and knowledge spillovers, resulting in greater productivity. Participating in global and re- gional value chains is an important launchpad for international integration. Uruguay requires a multipronged strategy that targets increased sophistication of Uruguay’s productive structure and diversification into specialized, high-value, modern services exports unconstrained by lack of economies of scale or distance. This report analyzes the dairy and Information & Communications Technology (ICT) and ICT Enabled Services (ICTES) value chains in Uruguay to identify opportunities for industry-specific upgrading and integration with global value chains (GVCs). By taking the dairy and ICT/ICTES value chains as concrete cases, the analysis piloted here illustrates how a traditional industry, locked in low value added exports, such as dairy, and a new export service industry, such as ICT/ICTES, can tackle the re- moteness and ‘smallness’ challenges of Uruguay, and pursue economic upgrading and better international integration. The analytical approach targets opportunities to both enter new international production networks and participate in higher-value-added business segments. These objectives align with the Government of Uruguay’s priority to determine how the country can integrate better with global markets through GVCs. GVCs have four key features that set them apart from traditional production and trade: (1) customization of production—with intensive contracting between parties, often subject to distinct legal systems, (2) sequential production decisions going from the buyer to the suppliers, (3) high contracting costs, and (4) global matching not only of goods and services, but also of production teams. These distinct features of GVCs have implications for the overall business environment conducive to fertile grounds for GVCs to prosper, as well as for the types of trade facilitation efforts, infrastructure, skills, and trade and investment policies that are best suited for this reality. 1.1. COUNTRY CONTEXT Over the past decade, Uruguay’s growth has been sustained, strong, and inclusive; the country has bolstered its resilience and reduced its vulnerability to external shocks. Uruguay’s economy has expanded at an annual average of 5.6 percent since 2006. The oriental republic of uruguay 12 Integration into Global Value Chains The Dairy Industry and the ICT Industry economy has recovered from the 2002 economic and financial crisis, and there has been a marked decline in growth volatility. A favorable external environment—characterized by strong foreign demand, high commodity prices, and global liquidity—has supported growth. Prudent macroeconomic policies and important policy reforms have also played key roles. The last decade bore witness to significant job creation, and unemployment has declined to historically low levels. Low corruption, good infrastructure, and sound educational and health standards are conducive to investing in Uruguay, which is now one of the top recipients of FDI in the region: amounting to 4.7 percent of GDP in 2010- 2015, at par with Costa Rica, and outperforming Paraguay or Argentina. 1.2. URUGUAY’S TRADE COMPETITIVENESS PERFORMANCE Substantial churn in Uruguay’s main export products and destinations has accompa- nied Uruguay’s economic growth over the last ten years. Although Uruguay’s merchan- dise exports remain dominated by primary and resource-based products, there has been substantial technical change and knowledge addition in some of these export products that would typically be considered ‘primary.’ One example is bovine tracea- bility from farm to consumer. Similarly, services exports have maintained their strength, driven not only by in- creases in exports of traditional services (transport, travel, distribution), but also of modern services (Figure 1)—for example, business services and ICT/ICTES—to a wide variety of markets. Indeed, Uruguay has maintained a positive trade balance over the last decade. As a share of GDP, Uruguay’s trade balance has been higher than those of several of its peers, including Argentina, Chile, and Paraguay (Figure 2). The services sector accounts for almost a third of total exports. Despite Uruguay’s significant achievements, its growth model now faces several challenges. Notably, Uruguay suffers from a significant productivity gap relative to as- pirational comparators: labor productivity is estimated to be (35 percent of that in the U.S.).1 Increasing productivity upgrading through improved managerial quality and a greater propensity to innovate in processes and products will be key to competing in international markets. Additionally, as Uruguay cannot easily use economies of scale to enhance its competitiveness due to its ‘smallness,’ it must do so by identifying high- 1 Labor productivity in Uruguay was among the highest in the region during the 2000s and has grown twice as fast since 2007 as it did during the 1990s and early 2000s. Nevertheless, Uruguay’s observed labor productivity is only about 35 percent of that of US. Human capital and TFP are the main driv- ers of this labor productivity gap (Uruguay SCD, World Bank, 2015). chapter 1 Executive Summary 13 FIGURE 1. Evolution of Uruguay’s Services Exports Composition, 2000–2013 100 % of Total Service Exports 80 60 40 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013  Communications   Financial   Personal   Travel    Computer and information  Insurance   Royalties   Other   Construction    Other business   Transport FIGURE 2. Services Trade Balance, Share of GDP, 2002–20121 Service Exports Trade Balance 10 5 0 ARG CHL CRI NZL PRY URY  2000    2007    2012 1. WBG WITS System country codes: Argentina (ARG), Chile (CHL), Costa Rica (CRI), New Zealand (NZL), Paraguay (PRY), Uruguay (URY). Source: Uruguay Trade Competitiveness Diagnostic, World Bank, 2015 er-value-added activities in sustainable segments in which it can compete and excel internationally. This makes issues related to human capital, skills, logistics, trade equally relevant to the competitiveness and international integration challenge. Uruguay remains less open to international trade in both merchandise and services than would be expected given its level of economic development (Figure 3 and Figure 4). oriental republic of uruguay 14 Integration into Global Value Chains The Dairy Industry and the ICT Industry Trade as a share of GDP in Uruguay stood at an estimated 53 percent in 2014. At the same time, trade in Panama, Chile, and Costa Rica was at 75.2, 66.5, and 58.6 percent, respectively. Uruguay’s openness in commercial services is less than expected given its level of develop- ment (Figure 4), and when compared with countries with similar income levels and higher than expected service trade openness such as Estonia, Latvia, or Trinidad and Tobago. FIGURE 3. Merchandise Trade as a Share of GDP vs. Income, 2010–2014 Merchandise Trade as % of GDP 160 MYS 120 PRY KOR 80 CRI CHL 40 PER NZL URU COL ARG BRA 6 8 10 12 Log GDP per capita (current USD) FIGURE 4. Services Trade as a Share of GDP vs. Income, 2010–2014 100 Service Trade as % of GDP 80 60 40 EST LVA TTO 20 URU NZL CHL PRY ARG 6 8 10 12 Log GDP per capita (current USD) Source: Uruguay Trade Competitiveness Diagnostic, World Bank, 2015 Note: These figures use the WBG WITS System country codes (for example MYS stands for Malaysia) at: http://wits.worldbank.org/wits/wits/witshelp/Content/Codes/Country_Codes.htm chapter 1 Executive Summary 15 Nonetheless, there is an opportunity for Uruguay to increase its own value addition in exported goods and services. The Trade Competitiveness analysis conducted by the World Bank in 2015 (World Bank, 2015) demonstrated that between 1997 and 2011 Uruguay’s gross exports of goods and services grew faster than those measured in terms of value added (Figure 5). This suggests that imported intermediates embedded in Uruguayan export products increased during that period. Still, exports measured in value added terms also expanded rapidly. Indeed, when focusing on the post-2002 crisis period and comparing FIGURE 5. Evolution of Exports of Goods & Services in Gross & Value Added, US$ billions 16 14 12 10 8 6 4 2 1997 2000 2003 2006 2009 2012   Value of Exports     Value Added of Exports FIGURE 6. Growth of Exports, Gross & Value Added, Uruguay and Comparators, CAGR, 2004–2011 18% 16% 14% 12% 10% 8% 6% 4% 2% ARG CHL NZL PRY URY   Gross Exports    VA of Exports Source: Calculations based on data from World Development Indicators (WDI) and the World Bank Trade in Value-Added Database, 2015. oriental republic of uruguay 16 Integration into Global Value Chains The Dairy Industry and the ICT Industry export performance across comparator countries, Uruguay’s exports of value added grew on par with gross exports and at a rate of 17 percent per annum. Argentina, Chile, Para- guay, and New Zealand also benefitted from food price increases. Chile also benefitted from mineral price increases. Yet, Uruguay has managed to incorporate value added into its export growth faster than Argentina, Chile, Paraguay, and New Zealand (Figure 6). However, the recent decline in commodity prices that severely decelerated export growth in Uruguay in 2015, and with it, overall GDP growth, stresses the importance of increasing value added and upgrading in the value chains in which Uruguayan produc- ers operate. Achieving these goals will require a strong institutional set up to support Uruguay’s industry at the sector-level. Previous administrations have implemented several initiatives to develop institutional support and resource that could enhance productivity and innovation in Uruguay. Because several line ministries, agencies, and organizations actively contribute to Uruguay’s participation in global value chains, as well as Uruguay’s competitiveness and the productive transformation of Uruguayan industry, the current administration has recently established the National System of Productive Transformation and Competitiveness (Sistema Nacional de Transformación Productiva y Competitividad - SNTPC) under the Presidency of Uruguay. Identifying and addressing economy-wide and industry-specific reforms that could enable the implementation of a global integration strategy remains a critical policy priority for Uruguay. Uruguay’s path toward greater integration in global (and regional) value chains will require a multipronged strategy that targets increased sophistication of Uruguay’s productive structure and diversification into specialized, high-value, mod- ern service-exports that are not constrained by lack of economies of scale or distance. Such a strategy might focus on sustained growth in value added and sophistication in upstream phases of production in resource-based agricultural chains, selectively upgrading toward downstream phases of the chain, and further diversifying the primary products export mix. It would also entail consolidating Uruguay’s position as an interna- tional provider of both traditional and modern services, by broadening the portfolio and knowledge-intensity of export services not constrained by scale or geographical proximity. The capacity of the SNTPC, the Oficina de Presupuesto y Planeamiento (OPP) under the Presidency, and the Ministry of Economy and Finance to align public intervention, policies, and investment around industry-specific development strategies will be critical in fostering a greater and better integration of Uruguay into global value chains. 1.3. HOW IS URUGUAY INTEGRATED INTO GLOBAL VALUE CHAINS? Examining indicators of overall performance of Uruguayan exporters in global mar- kets is useful as a first pass into looking at integration into GVCs. Another relevant chapter 1 Executive Summary 17 proxy is to look at how the country has performed in attracting foreign direct investment. In a world of GVCs, trade and investment are inextricably linked. How has Uruguay per- formed in joining GVCs by attracting FDI? Figure 7 shows the evolution of FDI inflows into Uruguay and comparators over the period 1997-2015. Uruguay has positioned itself as an attractive investment destination, with FDI flows soaring in the past few years. Despite a recent decline, FDI flows have shown remarkable and relatively steady growth. As a portion of GDP, FDI inflows in Uruguay have grown from an average of 0.84 percent during 1997-2000, to 5.2 percent during 2003-2008, to fall slightly to 4.7 percent in 2010-2015, at par with Costa Rica, and out- performing Paraguay or Argentina. FIGURE 7. Foreign Direct Investment Inflows 9% 8% 7% 6% 5% 4% 3% 2% 1% Argentina Chile Costa Rica New Zealand Paraguay Uruguay  1997-2000   2003-2008   2010-2015 Source: Authors’ calculations based on WDI and UNCTAD. Over the last years, the highest share of FDI has originated in construction, food- stuffs and electricity gas and water. While the first sector is unlikely associated with GVC integration, the second is, and reveals the presence of the largest global grain processors and traders such as ADM, Cargill, and Louis Dreyfus, to mention a few. The forestry sector has also played a key role in GVC-linked FDI, with the set-up of pulp mill factories (World Bank, 2015). Another proxy for measuring how integrated Uruguay is in GVCs is to look at how much foreign value added there is in exports (integration as a buyer, or backward integration), and how much of Uruguay’s value added is embedded in third country’s exports (integration as a seller, or forward integration). Backward integration provides access to quality inputs, which contributes to downstream competitiveness; it also has significant potential to deliver productivity spillovers through access to global frontier oriental republic of uruguay 18 Integration into Global Value Chains The Dairy Industry and the ICT Industry technologies. As such, backward integration tends to be particularly important for coun- tries as it links to a number of measures of structural transformation. Similarly, forward integration is an indicator of integration into value chains and provides opportunities to benefit from technology spillovers. An international comparison shows that Uruguay’s participation in GVCs through upstream linkages is above Paraguay’s, on par with Argentina, and substantially lower than Costa Rica or Chile (Figure 8). The import content of Uruguay’s exports measured in value added was, for the last period with available data, 2011, slightly above one- FIGURE 8. Foreign Value Added in Gross Exports 30% 25% 20% 15% 10% 5% Argentina Chile Costa Rica New Zealand Paraguay Uruguay  1996   2000   2006   2011 FIGURE 9. Domestic Value Added in Third Country Exports 40% 35% 30% 25% 20% 15% 10% 5% Argentina Chile Costa Rica New Zealand Paraguay Uruguay  1996   2000   2006   2011 Source: Authors’ calculations based on EORA chapter 1 Executive Summary 19 fifth. Interestingly, this value increased from about 15 percent in 1996. On the other hand, the share of Uruguay’s exports that ends up in foreign exports was similarly at 20 percent in 2011, up from less than 15 percent in 1996. In terms of integration as a seller, comparatively, Uruguay appears to be slightly outperformed by Chile, New Zealand, and Argentina, for most of the period considered. BOX 1: INTERNATIONAL INTEGRATION THROUGH GLOBAL VALUE CHAINS. WHY AND HOW? GVCs entail a number of features that set them apart from traditional production and trade. Antras (2015) mentions the following (1) the customization of produc- tion, (2) sequential production decisions going from the buyer to the suppliers, (3) high contracting costs, and (4) global matching not only of goods and services, but also production teams and ideas. Goods and services produced in GVCs are customized to the needs of the intended buyers. In turn, customization entails sequential production and sales decisions that go from the final buyer backward to the producers of upstream inputs. Also, as production of customized goods and services is fragmented across borders, this entails intensive contracting between parties, often subject to distinct legal systems. Because of the fragmented contracting environment, a significant share of GVC trade actually happens within firms (in the US, this share reaches 50 percent, according to Antras, 2015). Importantly, because GVCs also lead to matching production teams globally, skill and knowledge transfers happen at an unprecedented rate. Yet, there are important distributional consequences as world income shifts toward countries involved in GVCs and a ‘superstar effect’ is generated in many countries, with the risk of domestic inequalities domestically. To be sure, international fragmentation of production has been happening for decades, but generally, it only implied the assembly of foreign inputs to produce locally sold goods. Because these goods produced were not part of a global net- work, the flows of expertise and transfers of technology were less intense. More- over, with fewer opportunities to buy and sell globally, the push for productivity upgrading was less strong. From a development perspective, the fact that firms in developing countries have become full-fledged participants in international production networks pre- sents some important prospects. oriental republic of uruguay 20 Integration into Global Value Chains The Dairy Industry and the ICT Industry ◆◆ Firms are not just importing parts for assembly, but absorbing foreign technology and expertise, and with vertically integrated systems of production, they share blueprints, technicians, managerial practices and productivity-enhancing tools and techniques providing access to accelerated learning. ◆◆ Fragmentation of production together with advances in ICT create new entrepre- neurial possibilities for small and medium enterprises to access markets abroad, giving rise to a new category of micro-multinationals – small firms that develop global activities from their inception (Mettleer and Williams 2011). ◆◆ Competition is fierce, and developing countries face challenges to enter interna- tional production, to upgrade to higher value-added products, tasks and sectors, and to ensure social upgrading and cohesion as a consequence. With that, new policy trade-offs emerge. High growth and development potential are associat- ed with exposure to the increasing complexity and uncertainty associated with organizing production across locations. Opening borders and attraction of foreign direct investment is important to jump-start entry into GVCs. However, keeping them, and maximizing their benefits to the domestic economy and ensuring their sustainability require well-designed and well-targeted policies. Critical in this respect is how GVCs integrate into the economy. If GVCs are de-linked from the local context, lead firms will keep driving most decisions and governments may have limited influence and ability to lever- age these decisions for domestic economic development. The policy challenge, therefore, extends to creating and strengthening links with domestic firms and ensuring that the host country benefits from technological transfers, knowledge spillovers, and increased value addition in the country. Source: “Making GVCs Work for Development”, Taglioni and Winkler (2016). 1.4. OBJECTIVES AND GVC METHODOLOGY Overall, opportunities for better international integration and insertion into global value chains vary by industry. The opportunities also depend on a wide array of other factors, including global demand trends, sourcing and localization, the strategies of multinational corporations, specific competitive dynamics within each phase and strategic segment of the chain, and the type and rate of innovation within the industry. Some of the factors at least partially under a country’s control are alignment of resource endowments and chapter 1 Executive Summary 21 provision of complementary public goods with the required cost structures and min- imum efficient scale to compete in a specific phase nationally, regionally, or globally. Uruguay is no exception, and the objective of this report is to share and pilot (in the dairy and ICT industries) with the Government of Uruguay a common methodology utilized by the Finance, Competitiveness, and Innovation Global Practice of the World Bank to identify opportunities to better support industry and sector-specific upgrading, integration and participation in global value chains (see Box 2). The dairy and ICT/ICTES industries have been identified, in consultation with the Government of Uruguay, as two illustrative cases of how a traditional industry, locked in low value added exports, such as dairy, and a new export service industry, such as ICT/ ICTES, can tackle the remoteness and ‘smallness’ challenges of Uruguay, and pursue economic upgrading and better international integration. The selection of these two industries is illustrative only and does not reflect any prioritization of dairy and ICT/ ICTES over any other industry in Uruguay by the World Bank Group. Nevertheless, the industries account for 9 percent of merchandise exports, and dairy posted an annual growth rate of 4.1 percent from 2004 to 2010, while software exports alone accounts for 1.5 percent of GDP with a 17 percent value added annual growth rate from 2004 to 2011. The global value chain (GVC) analytical approach, piloted for dairy and ICT/ICTES in this report, aims at identifying strategic options for Uruguayan industries to retain a greater share of value added from the global industries they participate in and identify opportunities to both enter new international production networks and participate in higher-value-added business segments. This objective aligns with the Government of Uruguay’s priority to understand how Uruguay can integrate better with global markets through GVCs, and to consolidate the analytical tools available to the OPP to strengthen the policymaking process of the Sistema Nacional de Transformación Productiva y Compet- itividad. The ultimate development goal is an increase in growth and job creation due to a stronger insertion, and better repositioning, of Uruguay into global value addition networks. BOX 2. A SNAPSHOT OF THE GVC ANALYTICAL METHODOLOGY Acknowledging the great potential for development that GVCs entail, the World Bank Group has established a Global Solutions Group with a specific mandate to improve the development outcomes of programs and projects incorporating Global Value Chains (GVCs). The Finance, Competitiveness, and Innovation Global Practice (FCI) of the WGB provides evidence-based policy options to formulate and implement context-specific GVC strategies, and it has developed an integrat- oriental republic of uruguay 22 Integration into Global Value Chains The Dairy Industry and the ICT Industry ed quantitative and qualitative GVCs modular analytical methodology that has informed the preparation of this report. To guide policymakers in achieving development through integration into GVCs, an initial quantitative assessment of a country’s position in GVCs is usually conducted by assessing performance across a wide range of indicators and con- cepts to measure 1) GVC participation measures by country and sector (including trade in value added), 2) network analysis of international trade, and 3) firm-level measures of direct links in GVCs. With the caveat that no single measure or concept can be used to determine success or failure in GVC integration, the WBG’s GVC quantitative assessments combine different perspectives: a) gross trade vs. value added trade perspectives, b) buyer’s vs. seller’s perspectives, c) development perspective (economic, social and environmental upgrading), and d) policy perspective. This entails different levels of analysis, with different data sources and meth- odologies: i) macro (traditional econometrics, network analysis of trade/invest- ment relationships), ii) meso (traditional econometrics, network analysis of I-O tables), iii) micro (firm-level analysis, segmentation by business models). While a detailed explanation of the quantitative techniques utilized in this report is provided in Annexes A, B, and C of Part II, Figure A below provides an overview of the analytical approaches based on the complexity of the measure utilized and of the complexity of the data required. FIGURE A. Different Methodologies to Capture GVC Integration Strategic Low accuracy (1) to high accuracy (5) Processing Firm-level segmentation Complexity of the measure trade data analysis Case Trade in studies value- added Vertical specialization Direct import content of production Parts & components Complexity of the data required Low complexity (1) to high complexity (5) Source: Modified from Amador and Cabral (2014) chapter 1 Executive Summary 23 Once quantitative analysis tools have provided the overall framework and accurate measures (depending on data availability and quality) of the degree and type of GVCs participation of a specific country and/or industry, then more qual- itative and in-depth industry and strategic segmentation analyses allow moving beyond trade data which usually quantifies ‘how much value’ is created by each country participating in a GVC, toward ‘how the value’ is created and ‘where in the chain’ to help policymakers promote shared value and prosperity. The methodology used for the strategic analysis has been developed by the Finance, Competitiveness, and Innovation Global Practice of the WBG. It is based on the concepts developed by Professor Michael E. Porter1, and implemented by the European Foundation for Cluster Excellence (in association with the European Commission and IESE Business School), in Europe and Latin America in the last 15 years. In particular the methodology uses the following steps: a. Identification of existing and emerging business segments (and associated value chains) that exist globally in the sectors of study 1. Background and contextual industry research is conducted to identify industry dynamics and trends related to global supply (historical reason for success in certain countries/regions, ways in which markets are responding to changes in demand), evolution in demand (geography and product/service), industry cost structure and margins, recent evolution in value chain structure (e.g. localization, specialization and integration amongst firms). 2. The industry is grouped into strategic segments that reflect not only the mix of products and services that are offered, but also the users and markets that are served. As can be seen in Figure B, the Matrix of Strategic Segmentation contains all the strategic segments of an industry. The strategic segmentation provides a global overview of the different businesses that exist in a particular sector, and is not country specific. 1 Porter’s seminal books include “Competitive Strategy” (1980), “Competitive Advantage” (1985), “The Competitive Advantage of Nations” (1990) and “On Competition” (1998). The Five Forces, the Value Chain, and the Diamond. oriental republic of uruguay 24 Integration into Global Value Chains The Dairy Industry and the ICT Industry FIGURE B. Matrix of Strategic Segmentation users/markets ? ? ? Strategic Strategic Strategic ? products/services Segment 1 Segment 2 Segment 3 Strategic Strategic Strategic ? Segment 4 Segment 5 Segment 6 Strategic Strategic Strategic ? Segment 7 Segment 8 Segment 9 Each strategic segment is a function of both the product and/or service and the user or market group that this product/service serves. b. Industry Attractiveness assessment Porter’s ‘Five Forces’analytical tool is used to assess industry attractiveness by determining the profitability of the industry and identifying the actors within the industry with the most bargaining power (thereby determining which actors appropriate the bulk of the available profits). Additionally, the analysis includes some assessment of the evolution (historical and future) of this attractiveness. FIGURE C. Strategic Segment Attractiveness Barries of Entry Profitability: how interesting is this industry Who is capturing the Suppliers Demand margin Substitutes The strategic segments are distinct from one another because the Porter’s Five Forces are different (Figure C); therefore the value chain of each segment is also different. As such within a sector, each strategic segment will have its own value chain (see Figure D). chapter 1 Executive Summary 25 FIGURE D. Strategic Segments and their Value Chains Strategic Value chain 1 segment 1 SECTOR Strategic Value chain 2 segment 2 Strategic Value chain n segment n c. Ideal Value Chain ‘mapping’ The competitive dynamics within each strategic segment of any industry require a specific “ideal” value chain configuration for firms and networks of firms to successfully compete and operate in that segment. The ideal value chain config- uration is determined according to (see Figure E): 3. the optimal distribution of activities between the local, regional, and global levels of the value chain in terms of minimum efficient scale of operation and production runs, 4. the type (knowledge intensive, capital intensive, labor intensive, natural resources and energy intensive) and level of intensity (low-medium-high) of each value chain activity, and 5. the typology of value chain linkages (just-in-time – made-to-order – on-stock) by time (24-48 hours – weeks – months) and information exchange (high or low information exchange) that are required to compete effectively in a specific strategic segment. oriental republic of uruguay 26 Integration into Global Value Chains The Dairy Industry and the ICT Industry FIGURE E. Value Chain Activities and Linkages Typologies Value Chain Activities and Linkages Typologies • Value Chain Activities by resource intensity and EOS (batch size) Knowledge Intensive VC Activities Low (X staff) - Medium (X-Y) - High (>Y) KNL KNL KNL Capital Intensive VC Activities Low (Y) CAP CAP CAP Labor Intensive VC Activities Low (Y) LAB LAB LAB Natural Resources and Energy Intensive VC Activities NRE NRE NRE Low (Y) • Value Chain Linkages by time and information intensity Just in Time linkage (24-48 hours) Low information exchange – High Information exchange Made to order linkage (weeks) Low information exchange – High Information exchange On stock linkage (month) Low information exchange – High Information exchange d. Current Positioning In this step, those segments in which a specific country or industry is currently participating are identified. The specific industry’s performance in those segments is assessed (vis-à-vis regional as well as global competitors) and the ‘ideal value chain’ for those segments is compared to the country context. Specific policy, chapter 1 Executive Summary 27 investments and/or institutional interventions that might be required in order for the specific industry to better compete in those segments and appropriate more value are identified. e. Benchmarking and Feasible Strategic Repositioning Options More attractive, higher-value added segments that could allow the industry to ap- propriate more value are highlighted in this step. The ‘ideal value chain’ for those segments will be compared to the country context which will itself be compared to leading countries in the highlighted segment(s) to assess the industry/coun- try’s potential capacity to compete. Specific policy, investments, or institutional interventions that would be required in order for the specific industry and/or country to ‘leap’ to those segments are detailed. Source: “Making GVCs Work for Development,” Taglioni and Winkler (2016), and “Industry Specific Global Value Chains Project,” WBG (2015). 1.5. SUMMARY OF STRATEGIC REPOSITIONING OPTIONS AND RECOMMENDATIONS Gains from participation in GVCs are neither instantaneous nor automatic, and they call for enabling or mediating policies. Section 2 shows that economy-wide policies can influence Uruguay’s value added gains from increased participation into GVCs in terms of backward and forward integration. For example, behind the border trade barriers have a crucial impact, and, for Uruguay, improving port, road, and rail infrastructure remains a policy priority to increase the gains from integration into GVCs. Logistics plays a stronger role in Uruguay. Openness to foreign investments positively affects value added gains and Uruguay’s ability to participate into GVCs. Similarly, the quality of institutions in Uruguay plays a crucial role in economic development through GVC participation, espe- cially for building backward linkages, whereas political stability drives forward linkages. Human capital upgrading and labor markets that facilitate reallocation of workers into high productivity activities are crucial to build the skills needed by Uruguay to increase the share of value added domestically, foster forward integration of domestic firms into GVCs as net sellers to foreign countries, and facilitate growth of high productivity firms. Section 3 shows that Uruguay has promising opportunities in two strategic seg- ments in the dairy industry. One is the “Tradeable, Stockable, Global (TSG)” seg- oriental republic of uruguay 28 Integration into Global Value Chains The Dairy Industry and the ICT Industry ment, which provides dairy products that can be internationally traded due to their inherent ‘non-perishability.’ Such commodities include whole milk powder, cheddar, lactose, butter milk powder, and rennet casein. Uruguay’s performance is optimal across most local, national, and regional activities of this value chain but does not stretch far from its borders. The second dairy segment in which Uruguay has a good opportunity for upgrading is the “Perishable Premium Local – PPL” segment, which provides locally produced perishable products for which local consumers will pay a premium. Artisanal cheese is an intrinsic part of the history and culture of Uruguay. Uruguay’s performance in the artisanal cheese segment is suboptimal in some important parts of the value chain. However, Uruguay’s stagnant domestic demand suggests strategic reposition- ing based on pursuing a collective upgrading and formalization strategy by groups of artisanal cheese producers. Section 4 illustrates that Uruguay also has two ICT/ICTES strategic segments with promise for upgrading. The most viable in the short term is providing highly complex, customized ICT products and services by small dynamic firms with a highly specialized workforce (the “Boutique” segment). Firms in this segment follow nimble and adaptive business models. Products and services might include mobile application develop- ment, gaming software design, digital animation, visual effects, or highly specialized knowledge process outsourcing. Over the longer term, Uruguay could reposition into a second strategic segment that includes large, global ICT firms that support large-scale innovation and high-vol- ume introduction of new products and services (the “Powerhouse” segment). Firm entry in this segment may at times require relatively small initial investment and human capital, but sustainable growth requires high capital costs and investment in product development, marketing, branding, distribution, and customer service. Prod- ucts tend to be highly specialized and customized to the needs of specific industries. Whilst sustained success in the “Powerhouse” strategic segment requires a vast, highly skilled workforce a number of strategic options may be open to Uruguay to overcome its ‘smallness’ challenges in terms of a small pool of skilled workforce and factors shortages. Addressing these challenges could enable Uruguay’s participation into the “Powerhouse” strategic segment. Section 5.1 identifies a strategically repositioning for Uruguay within the TSG segment, with a focus toward the international organic dairy powder market to fetch the almost fivefold price premium it provides. Investing directly in the downstream phases of the dairy GVC to gain a foothold in end markets and focusing on product differentiation in the organic dairy milk powder niche market would help Uruguay strategically reposition itself in this segment. This would require Uruguay to (1) har- monize national legislation and regulations with international standards, (2) audit chapter 1 Executive Summary 29 organic dairy farm practices, (3) introduce organic accreditation and certification schemes, and (4) establish temporary non-distortive organic farmer support schemes. Section 5.1 also identifies a strategic repositioning option for the PPL segment, through a collective upgrading and formalization strategy for artisanal cheese pro- ducers in the regions of Colonia and San Jose. This would require strengthening the milk collection, distribution, and retail phases of the value chain and creating a collective product quality and food safety control mechanism. Significant efficiency gains and firm-level upgrading can be achieved by: (1) developing voluntary yet enforceable product standards for artisanal cheeses; (2) strengthening food safe- ty, sanitary, and phytosanitary controls; (3) enabling investment in a distribution network; and (4) investing in developing a nationally recognizable brand for Uru- guayan artisanal cheese. For the ICT/ICTES GVC, Section 5.2 identifies the strategic repositioning option for the “Boutique” segment of increasing Uruguay’s foothold in export markets by: (1) refocusing ICT/ICTES export promotion programs on dynamic start-ups and mid-sized firms with reasonable prospects of successful internationalization; (2) reducing double taxation and barriers to trade for ICT/ICTES exporters; and (3) engaging pre-emptively in tailored STEM education policies and programs. In the longer term, Section 5.2 proposes that Uruguay establish the enabling con- ditions for strategically repositioning its ICT/ICTES industry into the “Powerhouse” segment, comprising large global software firms. This would require (1) increasing the skilled workforce through a coordinated package of policy changes on immigration, secondary and tertiary education, on-the-job specialization, continuous training, and aftercare for ICT/ICTES FDI. It would also require (2) consolidating Uruguay’s regional leadership in ICT/ICTES infrastructure by adopting a pro-competitive policy and enabling entry to private investment, (3) increasing access to catalytic financing and early stage investing to foster ICT/ICTES entrepreneurship, and (4) leveraging algorithmization to overcome the lack of a large pool of ICT/ICTES talent. Finally, Section 5.3 stresses that high-quality data is crucial for evidence-based policymaking. Two improvements could make the data available in Uruguay better suited for the analysis of participation in international production networks: (1) matching firm-level survey data from the National Economic Activities Survey with customs transactions data and (2) collecting information on firms’ linkages. Table 1 provides an overview of the strategic repositioning options identified for each of the strategic segments prioritized in the dairy and ICT/ICTES industries (presented in Section 5). It summarizes the mix of policy and private sector initiatives enabling each strategic repositioning options, by using the relevant public policy and market failures as filters to identify the rationale for intervention. It also identifies the main stakeholder/s potentially in the lead for implementation. oriental republic of uruguay 30 Integration into Global Value Chains The Dairy Industry and the ICT Industry TABLE 1. Summary of Recommendations Priority Strategic Recommendations on Lead Segments Strategic Repositioning Mix of Policy and Private Sector Initiatives Rationale Stakeholder/s Identified for Dairy Options for each Enabling each Strategic Repositioning Option for Intervention for and ICT/ICTES in Prioritised Strategic Implementation Uruguay Segment Dairy GVC In the long term, directly Increase access to invest in downstream Develop a medium term internationalization international markets Private Sector phases of the dairy value and outward investment strategy and reduce “upstream- chain in end markets. ness” Harmonize sector-specific legislation and regulations with international standards on pasture management, seed certification, food safety, maximum residues fertilizers, pesticides, Public good provision Policy Focus on livestock feed regulation, livestock health care the Tradable practices, and traceability. Imperfect information, Stockable Global In the short term, public good provision Public Sector Audit organic dairy farms in Uruguay to assess (TSG) Segment reposition the TSG value implementation gaps and investment needs Reduce information Public-Private chain in Uruguay toward for temporary support schemes for conversion asymmetries the organic dairy powder to organic. Public-Private international market. Non-full appropri- Public Sector Introduce organic accreditation and certifica- ability of returns tion for service providers and farms to facilitate (externalities), deep compliance with international standards. uncertainty.1 Consider temporary non-distortive organic farmer support schemes to provide incentives for converting to, or maintaining, organic status. Develop voluntary yet enforceable product standards for cheeses to obtain artisanal certification for cheeses to obtain artisanal Information asym- geographical certification of origin, with Consolidate Uruguay’s metries, negative compliance monitored and sanctioned by local position in the Perisha- externalities, coordi- industry associations or cooperatives. ble Premium Local (PPL) nation failures Industry pro- segment, and prepare Strengthen food safety, sanitary, and phytosan- ducers groups Public good, negative Focus on the the groundwork both itary control mechanisms, both by consoli- with Public externalities Perishable Pre- in terms of regulation, dating public veterinary and sanitary service Sector mium Local (PPL) product standards, and provision, and by supporting the introduction Monopoly power and Public Sector Segment investment, for entry of good agricultural practices and food safety market dominance into enter the Perishable management practices by retailers on local Private Sector Global Premium (PGP) markets Enable investment in a collective distribution Public-Private strategic segment in the network, with cold chain as necessary. Public good, positive medium term. externalities, coordina- Invest in developing a nationally recognizable tion failures brand for Uruguayan artisanal cheese to reap the benefits from the regulatory changes and investments proposed above. ICT/ICTES GVC 1. Firms’ under-investment due to: incomplete information and uncertainty of market discovery, positive externalities, coordination failures. chapter 1 Executive Summary 31 Priority Strategic Recommendations on Lead Segments Strategic Repositioning Mix of Policy and Private Sector Initiatives Rationale Stakeholder/s Identified for Dairy Options for each Enabling each Strategic Repositioning Option for Intervention for and ICT/ICTES in Prioritised Strategic Implementation Uruguay Segment Externalities, Recalibrate the focus of export promotion Consolidate Uruguay’s coordination failures. programs for ICT/ICTES from micro and software industry po- (mismatch between small enterprises to dynamic start-ups, and sition in the “Boutique” support programs and mid-sized firms with reasonable prospects of strategic segment by target population due successful internationalization increasing its foothold to imperfect market Public Sector in main export markets, Reduce barriers to trade for Uruguayan ICT/ information) Focus on the ICT/ Public Sector namely the U.S. and ICTES exporters through a clear strategy ICTES “Boutique” Public good, Reduce Latin America, in terms of integration into the global marketplace, Public Sector, Segment entry barriers and of direct marketing including negotiating market access on a bilat- and joint Public- transaction costs on channels, B2B client eral basis and double taxation agreements. Private international markets management services, Engage in tailored STEM education policies for exporters and geographical and programs to address the projected skills co-location and co-pro- Public good and provi- shortage (see specific recommendations for the duction. sion of merit goods in Powerhouse segment). incomplete markets Public good and provi- Increase the critical mass of skilled workforce sion of merit goods in through a coordinated package of policy incomplete markets changes on attracting returnees and foreign talent, secondary and tertiary education, on- Public good. Increase the-job specialization and continuous training, access to STEM educa- and aftercare for ICT/ICTES FDI. tion to enlarge the ICT/ ICTES skills pool Promote diversity in STEM education and increase the participation of women and lower Reduce information asymmetries and Public Sector, income Uruguayans. transaction costs and joint Pub- Enable proactive global recruitment policies lic-Private by firms to attract and retain returnees and Reduce mismatch between labor demand Public Sector foreign talent. Create the enabling and supply in ICT/ICT- Public Sector Enhance skills policies and curricula, jointly conditions for a strategic ES through continuous Focus on the with the ICT/ICTES industry, for continuous Public Sector, repositioning of the ICT/ learning ICT/ICTES learning and on-the-job specialized-skills Industry, and ICTES industry to the training programs. Reduce information Academia Powerhouse “Powerhouse” strategic asymmetries by Segment Focus on tailored FDI aftercare policies to Public Sector segment in the medium foreign investors and to long term. facilitate the relocation of knowledge-intensive foster knowledge Public Sector function by MNCs as a mechanism to increase spillovers Public Sector the pool of ICT/ICTES skills in Uruguay. Imperfect competition ICT/ICTES indus- Consolidate Uruguay’s regional leadership in ICT/ICTES infrastructure by adopting a Financing gap and try and Public pro-competitive policy and enabling entry to underinvestment Sector private investment. due to intangibility, technological and Increase access to catalytic financing and market uncertainty of early-stage investing to foster the ICT/ICTES ICT/ICTES entrepreneurship ecosystem. Address scalability Leverage algorithmization trends to overcome challenge through the shortage of a large pool of ICT/ICTES technological talent. advances Recommendations Match firm-level survey data from the National Economic Activities Survey with customs transactions data. on data and Collect systematic information on the nature of firms’ linkages. statistical tools 33 2. GVCs and Development, the GVC Strategic Policy Framework, and Economy-wide Policies for Participation2 The concept of Global Value Chains (GVCs) is defined as value addition processes associated with a given product that go from upstream R&D to downstream marketing and customer services. These value addition processes are fragmented across national borders, with processes and standards typically governed by a lead firm. Despite usually being called “GVCs,” these are typically regional rather than truly global, and they are complex networks rather than linear chains. Uruguay’s development prospects inevitably depend upon its ability to leverage international markets. Consequently, GVCs have become crucial for the growth of the country. They are a key platform for integration into the marketplace, increasing opportunities for value added and productivity gains, as well as increasing the challeng- es associated with participation into them, transforming trade, leading to changes in trade- development links, trade competitiveness links, and trade-governance options. Section 2 explores how GVCs can affect the development outcome of a specific country, and it illustrates the main channels through which integration into global pro- duction networks may affect economic growth. It provides a strategic policy framework to devise the relevant policies to enter, expand participation, and ensure sustainability of GVCs. Finally, Section 2 provides an overview of the relevant economy-wide policies that influence entry into and participation in GVCs. Using cross-country empirical analysis, it highlights non-causal conditional correlations between specific policy variables and GVC-associated gains, which are then further investigated through business strategy analyses in the rest of the report. 2 The complete quantitative analysis of how economy-wide policies influence Uruguay’s participa- tion into GVCs is provided in Annex A. oriental republic of uruguay 34 Integration into Global Value Chains The Dairy Industry and the ICT Industry 2.1. GLOBAL VALUE CHAINS AND ECONOMIC DEVELOPMENT GVCs are a key platform for integration into the marketplace, increasing opportunities for value added and productivity gains, as well as increasing the challenges associated with participating in them. GVCs are—in effect—factories crossing borders. As a result, intra-factory-flows of goods, know-how, investment, training, ideas, and people are now international commerce. This increases the scope for knowledge spillovers associated with integration. GVCs also denationalize comparative advantage, with implications for the options available to all nations. In the past, a country would need to build the whole value chain for an industry domestically in order to become competitive in that industry internationally. In the new GVC world, middle income or new high income countries can join GVCs to become competitive. They can subsequently industrialize by densifying their participation. Firms or countries that do not participate in GVCs struggle to compete. However, gains from participation in GVCs are neither instantaneous nor auto- matic. Enabling or mediating policies may be needed. To realize the full gains from integration into global production networks, policymakers need to adapt public policies to the increased interconnectedness across countries and sectors. Taglioni & Winkler (2016) provide the strategic policy framework and the strategies to maximize gains from participation in GVCs in (i) entering GVCs, (ii) expanding and strengthening GVC participation, and (iii) turning GVC participation into sustainable growth. The new GVC reality requires fresh policy thinking. Countries that want to take advantage of GVCs need to ensure that their overall business environments are fertile for GVCs to prosper. This requires acknowledging that GVCs have four key features that set them apart from traditional production and trade: (1) customization of production—with intensive contracting between parties, often subject to distinct legal systems, (2) sequential production decisions going from the buyer to the suppliers, (3) high contracting costs, and (4) global matching not only of goods and services, but also of production teams.3 These distinct features of GVCs have implications for the types of trade facilitation efforts, infrastructure, skills, and trade and investment policies that are best suited for this reality. Enhancing competitiveness and thereby raising living standards and achieving sustainable growth are at the top of the policy agenda in many countries. The concept of competiveness, however, is still debated.4 For microeconomists, competitiveness is usually associated with firm productivity, a well-established concept that is relatively easy to quantify empirically, both at the firm and sectoral level. On the other hand, for 3 See Antras (2015). 4 Fontagné and Santoni (2015) survey the related literature and tentatively clarify the concept of competiveness, within a policy perspective. chapter 2 GVCs and Development, the GVC Strategic Policy Framework... 35 macroeconomists, the concept can be captured through the evolution of relative prices or current account balances (the underlying idea being that equilibrium factor prices are lower in competitive economies). Even if the two approaches relate to different economic motivations, it is crucial to understand that macro- and microeconomic determinants of competitiveness are linked.5 Recent literature on firm heterogeneity illustrates how aggregate performance relates to firm-level factors like organization and technological capacity as well as to the environment in which firms operate. See, for example, Melitz and Ottaviano (2008), Ottaviano et al. (2009), and Corcos et al. (2012). To stay in the market, firms need to reach a performance cut-off, that is, a minimum level of productivity. The value of the cut-off is market specific and depends on demand conditions, remoteness, and the quality of the business environment or the country’s ability to generate low-cost (high productivity) firms. The ability of firms to compete successfully depends on public institutions, the educational system, and the overall macroeconomic stability of the country. These macro factors alone, however, are not sufficient if firms themselves are not productive (e.g., if firms do not produce valuable goods or do not employ inputs efficiently) Participation in global production networks may help firms improve their pro- ductivity and thereby raise production, value added and jobs. GVC integration has two main channels: backward and forward. Backward integration refers to integrating with GVCs as a buyer of foreign value added. Forward integration refers to integrating with GVCs as a seller of domestic value added. Not all firms in every country have been able to internalize those externalities, however, as recent empirical evidence shows (Kummritz 2015). Consequently, national policies play an important role in successful economic upgrading within GVCs. How do GVCs affect a country’s development outcomes? Taglioni and Winkler (2016) provide a comprehensive assessment of the role GVCs play in economic devel- opment. It includes a detailed analysis of how public policy may strengthen ties between firms involved into global production networks and the domestic economy to maximize the likelihood of positive externalities through diffusion of knowledge, technology and expertise from foreign investors. Figure 10 illustrates the main channels through which integration into global pro- duction networks may affect economic growth. Through backward linkages, lead firms (both foreign and domestic) may generate an increase in demand for domestic inputs as well as help local suppliers overcome financial or technological constraints. Inte- 5 Sala-i-Martin and Artadi (2004) developed the World Economic Forum’s “Global Competitiveness Index” (GCI) framework based on this observation. oriental republic of uruguay 36 Integration into Global Value Chains The Dairy Industry and the ICT Industry gration into international production networks may generate pro-competitive effects beneficial for both participant and non-participant businesses, leading to an increase in the average productivity of the economy. Finally, other effects associated with GVC participation take place through changes in labor market dynamics. For example, lead firms may provide training directly, and increased demand for skilled workers may raise the expected returns of human capital investments. It is important that the market supply the skills in demand to prevent bottlenecks. FIGURE 10. GVC Transmission Channels Technology spillovers Diffussion Demonstration effect effect Availability Market & quality Backward / restructuring effect forward links Pro-competition Demand effect effect Assistance effect Demonstration effect Amplification of pro-competition Domestic impact of Demand effect Minimum scale GVC participation Labor markets effect Training effect achievements Sustainability Labor turnover effect effect Source: Taglioni and Winkler (2016) 2.2. THE GVC STRATEGIC POLICY FRAMEWORK Country involvement in complex international production networks creates opportu- nities. It may allow countries to overcome their traditional comparative advantages, moving to higher value added activities and benefiting from knowledge spillovers, improving overall productivity and growth potential (Cattaneo, et al. 2013). However, participation in GVCs may also expose countries to risks, in particular those related to chapter 2 GVCs and Development, the GVC Strategic Policy Framework... 37 imported crisis through trade (Escaith, Lindenberg and Miroudot 2010) or the transmis- sion of natural shocks - as for the earthquake that hit Japan in 2011 and whose effects spread over other Asian countries (Fujita 2013). To fully internalize the potential gains from integration into global production net- works, authorities need to adapt public policies to the increased interconnectedness across countries and sectors. Cattaneo, et al. (2013), for example, identify four main paradigm changes in public policies due to international fragmentation of production: 1. Strategic framework: from country to firm-relevant intervention. Imports are inter- preted as a means for firms to access efficient inputs. The need to look at both inward and outward flows (either for trade or FDIs) in an integrated framework. 2. Economic framework: identify country most competitive supply of tasks; recognize the role of services (financial, R&D, logistics) to product high value added manufactures. 3. Relevant economic assets: from stock to flows; firms are both competitors and sources of inputs for each other, and GVCs may act as a valuable channel of transmission for knowledge, capital and services. 4. Relevant barriers: requires international cooperation and public-private discussion to identify winners and losers from trade policy and behind the border measures. The changes in international trade relations induced by the increasing interna- tional fragmentation of production also require a review of specific barriers and an ad hoc framework for designing public policies for competitiveness. Taglioni and Winkler (2016) provide a full assessment of the different policy options that may help economic upgrading and densification by improving the quality and quantity of labor skills, technological capabilities and redressing market failures to ensure more inclusive growth. Figure 11 reports the strategic policy framework and the strategies to maximize gains from participation in GVCs. During this process, it is neces- sary to identify the most binding constraints on integration at the firm level and design regulatory interventions and capacity building that allow economic actors to address specific objectives to increase the share of value added from domestic productive factors. At the country level, those objectives change with the degree of integration in inter- national production chains: entering GVCs, expanding participation, or turning partic- ipation into sustainable growth. On one hand, a country that is not yet integrated into global production chains must identify on which tasks it should focus and which types of governance options are suitable to attract the “right” foreign investors and facilitate domestic firms’ entry into GVCs. On the other hand, a country that is already integrated into global production chains must carefully evaluate the sources of potential risks to its survival in the market as well as the transmission channels through which external shocks may propagate to the domestic economy. oriental republic of uruguay 38 Integration into Global Value Chains The Dairy Industry and the ICT Industry FIGURE 11. Strategic Policy Framework Foucus area Objetctives Strategic questions Policy options Which tasks? Creating world-class GVC links - Which form of GVC - Jump-starting GVC entry participation? through EPZs and other Attracting foreign competitive spaces - How can tasks be investors and - Attracting the «right» foreign identified? Entering GVCs facilitating investors - Which risk? domestic firms’ - Helping domestic firms find Which form of governance? entry into GVCs the «right» trade partner and - Which form of governance between lead firms and technology abroad suppliers? - Improving connectivity to - Buyer – or producer – international markets driven value chains? - Which power relations in GVCs? Creating a world-class climate for foreign tangible and intangible assets - Ensuring cost competitiveness - Improving drivers of investment and protecting foreign assets - Iproving domestic value chains and quality of infrastructure and services Promoting Strengthening GVC-local Which transmission economy links on the buyer’s economic channels? and seller’s sides upgrading and Which type of economic densification upgrading? Which type of densification? Which foreign firm and Strengthening absorptive Expanding and country characteristics capacity strengthening GVC influence spillovers? - Maximizing the absorption participation potential of local actors to benefit from GVC spillovers - Fostering innovation and Strengthening Which domestic firm building capacity domestic firms’ characteristics help - Complying with process and absorptive internalize spillovers? product standards capacity - Bundling tasks Which relationship between economic and social upgrading? Creating a world-class Promoting social Which type of social workforce upgrading and upgrading? - Developing skills cohesion Is downgrading a -Promoting social upgrading Turning GVC possibility? -Engineering equitable participation Which links between social distribution of opportunities and into sustainable upgrading and cohesion? outcomes development Promoting enviromental What benefits from Implementing climate-smart sustainability environmental regulation? policies and infrastructure Source: Taglioni and Winkler (2016) chapter 2 GVCs and Development, the GVC Strategic Policy Framework... 39 Finally, because GVC integration is closely related to FDI, countries that have the objective of turning integration into a source of sustainable growth must evaluate to what extent FDI generates positive externalities for the domestic economy (and whether local economic actors have the capability to internalize them). They must also ensure strategic skills improvements in the local labor force, an equitable distribution of eco- nomic opportunities, and environmental sustainability. 2.3. ECONOMY-WIDE POLICY REFORMS AND INSERTION INTO GVCS6 Gains from participation into GVCs are neither instantaneous nor automatic. Ena- bling or mediating policies may be needed. What are the set of policies that can help Uruguay gain more from participation into GVCs in terms of increased domestic value added? There are at least two streams of literature that have emphasized the role of national policies for welfare gains. A first set of studies has looked at the role of country characteristics for economic growth and for escaping the middle-income trap (for recent contributions, see, e.g., Eichengreen, Park, and Shin 2013; Pritchet and Summers 2014; Bulman, Eden, and Nguyen 2014; for a literature review, see Raiser 2014). Another stand of literature has examined the role of policies for the productivity spillovers from trade and from FDI (see for example, Coe, Helpman and Hoffmaister, 2008; Javorcik, 2004; or, for a literature review, see, e.g., Farole and Winkler, 2014). Broadly speaking, and based on both theoretical and empirical evidence, there are five groups of mediating factors that are bound to mediate the effects of integration into GVCs and gains associated with increased value added. These are: 1. Factors that affect how easily can goods, services or ideas cross international bor- ders. The unbundling of stages of production across borders creates new forms of cross-border policy spillovers a time-inconsistency problems. This, in turn, creates demand for deeper forms of integration that include traditional market access, but also harmonization of certain national policies to help GVCs operate more smoothly, including reductions of restriction services trade, cross-border capital movements, or restrictions to foreign investment, among others. In sum, liberal and deep trade policies become particularly important in a world of GVCs (see, for example Osnago, Rocha and Ruta, 2016). 6 The complete quantitative analysis of how economy-wide policies influence Uruguay’s participa- tion into GVCs is provided in Appendix A. oriental republic of uruguay 40 Integration into Global Value Chains The Dairy Industry and the ICT Industry 2. Factors that affect transport and logistics costs. Good logistics performance is crucial because key components of GVC production are time sensitive, and reliable connectivity al- lows firms to connect factories across borders more efficiently (Taglioni and Winkler, 2016). 3. Factors that affect how input and output markets operate. Much of the gains arising from GVC participation, imply reallocation of resources into products, or tasks in which firms in a given country have a comparative advantage. For these gains to materialize, the reallocations need to happen at relatively low costs, implying that both input and output markets function efficiently. This implies, for example, that firms can access financing at competitive rates, and that they can hire workers in times of expansions, and hire them in times of contractions also at reasonable costs. 4. Factors that affect the skills or innovative capacity of the labor force. A skilled work- force is recognized as an important determinant of countries’ success in GVCs because it allows producing at the high standards of productivity, efficiency, sophistication and timeliness required to serve global markets (Oliveira Martins et al, 2007). 5. Factors that affect the institutional quality under which firms operate. Cross border production linkages creates new policy externalities that require deeper forms of in- tegration, harmonizing, for example, schemes of intellectual property protection, or, more generally, convergence of institutional quality between lead firms’ countries, and connected firms’ countries (Antras and Staiger (2008), Park and Lippoldt, 2005). Economy-wide policies can influence Uruguay’s value added gains from increased participation into GVCs in terms of backward and forward integration7. While the fol- lowing results that emerge from a cross-country empirical analysis are not causal in nature, they provide information on conditional correlations between specific policy variables and GVC-associated gains that warrant further investigation in the following sections of this report. We focus the analysis on the policies that would enable Uruguay to enter and strengthen participation into GVCs. In particular, we examine how economy-wide policies on infrastructure, connectivity, investment and trade, investment climate and quality of institutions, financial development, labor market regulation, education, and innovation contribute to Uruguay’s economic upgrading and participation in GVCs. We turn now to the empirical analysis of the role of specific mediating policies for internal- izing spillovers from participation in GVCs for Uruguay and comparators. The empirical strategy—described in Appendix A—closely follows Kummritz et al. (2016) and aims to identify the role of selected public policies for economic development through GVC participation, from a macroeconomic perspective. 7 Backward integration refers to integrating with GVCs as a buyer of foreign value added. Forward integration refers to integrating with GVCs as a seller of domestic value added. chapter 2 GVCs and Development, the GVC Strategic Policy Framework... 41 Behind the border trade barriers have a crucial impact on potential value added gains from GVC participation. Looking at Uruguay and a relatively more homogenous group of countries reveals a much stronger role for port, road and rail infrastructure for both gains through backward and forward participation. This suggests that behind the border trade barriers (e.g., an inefficient transport sector) have important roles in shaping gains from integration into GVCs. For example, the results suggest that improving road infrastructure by 10 percent is associated with increased value added by 2.3 percent. Back of the envelope calculations suggest that for Uruguay (score 1.43, in logs) moving from the actual level of road infrastructure to the one of France (best performer with an average score of 1.89) would translate, other things being equal (e.g., for a given level of backward GVC integration) to a value added gain of around 10 percent (in average for all sectors of the economy). Openness to foreign investments positively affects value added gains through both forward and backward participation. Logistics plays a stronger role in Uruguay and comparator countries. Better management of cross-border operations and customs admin- istration play a crucial role in ensuring a stronger integration of Uruguay in GVCs through backward linkages, with a 3.5 percent increase in value added associated with a 10 percent improvement of customs, and through forward linkages, with a 3.45 percent increase in value added. Among the full sample of countries, openness to foreign investments seems to be the main driver for participation. Logistics has a small effect on backward linkages only. Institutional quality plays a crucial role in economic development through GVC participation, especially for building backward linkages, whereas political stability in the home country drives forward linkages. For Uruguay’s backward GVC integration, well-enforced property rights are the main drivers for successfully adding more value do- mestically, suggesting that protecting assets is a primary concern for international investors. Political stability remains central in location decisions of FDI and multinational companies considering investing in Uruguay. For forward linkages, by contrast, all key dimensions of the Uruguayan investment climate in terms of property rights, political stability, the degree of corruption, and financial development are statistically significant determinants of value added gains through participation. Human capital upgrading and the availability of a large enough pool of talented employees are crucial to build the skills to increase the share of value added domes- tically and foster forward integration of domestic firms into GVCs as net sellers to foreign countries. The direction of policy over time in Uruguay has been to increase social security provision for employees. This combined with balancing the need on the side of employers for a flexible workforce will be important for the development of GVCs and forward linkages in the economy. 43 3. The Uruguayan Dairy Industry: Export Competitive, but Locked in Low-Value Added Strategic Segments of the Dairy Global Value Chains8 3.1. EVOLUTION AND HISTORY The dairy industry generates nearly 9 percent of Uruguay’s exports of goods and 70 percent of its production flows to international markets, mainly Venezuela, Brazil, China and Argentina. Uruguay’s commercial dairy industry began in the late 1930s following a sharp increase in the number of dairy farms and amount of land dedicated to dairy farming. With the creation of the Cooperativa Nacional de Productores de Leche (Conaprole), a dairy cooperative, farmers could take advantage of favorable factor con- ditions. In the 1970s and 1980s, productivity improved greatly, primarily through tech- nology adoption and better use and increased availability of food. Productivity growth continued through the late 1990s and early 2000s using quality fodder reserves (silos), strategic land use (such that fodder production could be increased without expensive irrigation), and increased concentrates. (Uruguay XXI 2012). In 2014, Uruguayan dairy farms achieved an average productivity of 3,500 liters per hectare per year (INALE 2015) and total annual production of approximately 2.3 million liters (0.3 percent of the world’s production) (IFCN 2015). Figure 12 shows yearly total milk production for Uruguay from 1975 to 2012. 8 The complete analysis of the dairy industry in Uruguay and of the strategic repositioning options in the dairy GVC is provided in 3.4.2. oriental republic of uruguay 44 Integration into Global Value Chains The Dairy Industry and the ICT Industry FIGURE 12. Total Milk Production in Uruguay, millions of liters 2400 2201 2200 2000 1770 Millions of liters 1800 1600 1424 1400 1200 962 1000 723 800 600 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Uruguay XXI (2012) FIGURE 1 3. Map of Major Stakeholders in Uruguay’s Dairy Industry INDIRECT Other Public Agencies Research and Education UTE, URSEA, DINAMA, MIEM, MTSS INIA, Instituto Nacional de Colonización, Universidad Tecnológica del Uruguay DIRECT Processor Associations Producer Associations and IGs Cámara de la Industria Cámara Uruguaya de Productores de Leche, Asociación Nacional Láctea del Uruguay de Productores de Leche, Grupo del 29, Asociación Uruguaya de Pymes Lácteas, Sociedad de Productores de Leche de Florida, Public Agencies Sociedad de Fomento Rural de la Industria Lechera de Salto, INALE, MGAP Intergremial de Productores de Leche, Agremiación de Tamberos de Canelones, Asociación de Productores Lecheros de San José, Sociedad de Fomento Rural La Casilla, Sociedad de Productores Consumers de Leche de Rodríguez, Sociedad de Productores de Leche de San Ramón, Asociación del Queso Artesanal. Inputs Vendors PROLESA, Agroventas, others Workers Unions and IGs Federación de Trabajadores de la Industria Láctea Union de Empleados y Obreros de CONAPROLE Fertilizer Producers Other Associations CORE ISUSA, Grupo Maccio, Cámara Uruguaya de Semillas Nidera, Bunge, ASP Instituto Nacional de Semillas CONAPROLE Cámara Uruguaya de Servicios Medium and Small Processors Retailers Agropecuarios Larger and Medium-sized Producers Formal and informal (ferias) Processor Employees Small Producers Transport SPs Seed Development Artisanal Producers TRALE, others Agroterra, Fodere, Barraca Erro Source: Author’s Elaboration (IG = Industry Groups, SPs = Service Providers) chapter 3 The Uruguayan Dairy Industry... 45 The following sections describe the main characteristics of the industry, including the most important firms and the relations among main stakeholders. Figure 13 maps the major stakeholders in Uruguay’s dairy industry. 3.1.1. Dairy Processing There are approximately 40 dairy processors in Uruguay. Three of the largest proces- sors—Conaprole, CALCAR and CLALDY—are cooperatives owned by the producers that supply milk to them for processing. Conaprole is by far the largest (Box 3). Foreign ownership and vertical integration into dairy farming by FDI processors is an emerging trend in this phase of the value chain in Uruguay. While the presence of a dominant processor might have led to a downward pressure on farm-gate milk prices, the fact that Conaprole is a cooperative means it is highly motivated to prioritize the needs of its member producers (84 percent of all deliverers in Uruguay). Not only do Conaprole’s own members benefit from relatively high farm-gate prices, Conaprole’s milk prices are a reference for the rest of the sector. Although some larger foreign processors have tried to attract milk producers by paying higher prices than Conaprole, smaller firms with longer histories in the country (and who cannot afford to pay higher prices) try to leverage long-standing relationships with producers, stability and trust in order to retain suppliers. Conaprole has also helped sustain high wages for workers and technicians in dairy processors across Uruguay. Elected representatives negotiate wages annually, and the wages are then mandatory for all registered processors. Conaprole, which has a strong negotiating position and can absorb the cost of higher wages, has pushed the industry to pay higher wages. BOX 3. CONAPROLE MARKET AND PRODUCTION DOMINANCE In 2015, Conaprole… …processed 72 percent of all Uruguay’s processed milk …received milk from 84 percent of producers that supply processors with milk1 2 …achieved a market share of 79 percent of local fresh milk sales …exported 75 percent of all Uruguay’s dairy products 1. Total does not include processors that process milk themselves. 2. Author’s calculations based on interviews with Conaprole and INALE Sources: INALE (2015), Euromonitor (2014), and Dirección Nacional de Aduanas del Uruguay (2016). oriental republic of uruguay 46 Integration into Global Value Chains The Dairy Industry and the ICT Industry Between 1936 and 1984, Conaprole had a monopoly on the supply of fresh milk to Montevideo while smaller firms were limited to supplying their own local regions. Although the supply of other dairy products (e.g., cheese and yoghurt) is more diverse (Table 2 and Table 3), there are still high barriers to entry for smaller firms in the fluid milk market in Montevideo. As an example, Supermercado Disco, the biggest retailer in Uruguay, has exclusive agreements with Conaprole for fresh milk (D. Lalanne 2016). TABLE 2. Percent Share of Yoghurt and Sour Cream Sales in Uruguay, 2011–2015 2011 2012 2013 2014 2015 Cooperativa Nacional de Productores de Leche 58.7 58.3 59.7 59.8 66.0 Fort-Masis SA** 15.2 15.2 14.9 13.4 14.4 CLALDY SA 6.7 6.6 6.6 6.8 7.1 Ecolat Uruguay SA 10.9 10.3 10.0 10.6 2.2 Yakult Uruguay SA** 0.6 0.7 0.7 0.7 0.7 Others 7.8 8.9 8.1 8.7 9.7 Total 100.0 100.0 100.0 100.0 100.0 **international ownership, produced abroad (Argentina) Source: Euromonitor International (2015) TABLE 3. Percent Share of Cheese Sales in Uruguay, 2011–2015 2011 2012 2013 2014 2015 Cooperativa Nacional de Productores de Leche 15.1 15.7 15.7 16.0 16.1 Naturalia Srl 12.1 11.8 11.8 11.9 12.0 Noliman SA 10.4 11.1 11.0 10.9 10.8 Quesería Helvetica SA* 9.1 10.8 10.9 10.5 10.6 Selgar SA 9.4 10.2 10.4 10.2 10.5 Granja Brasetti SRL 9.7 10.0 9.3 9.2 9.2 Lactosan Uruguay SA* 6.1 6.2 6.0 5.8 5.8 Dicasold SA** 1.0 1.1 1.9 2.1 2.2 chapter 3 The Uruguayan Dairy Industry... 47 2011 2012 2013 2014 2015 Supermercados Disco SA 2.5 2.2 2.0 1.8 1.8 Fort-Masis SA** 0.9 0.6 0.7 1.2 1.3 Mondelez Uruguay SA ** 1.0 1.1 Henderson & Cía SA (Tienda Inglesa) 0.9 0.8 0.8 0.8 0.8 Devoto Hnos SA 0.8 0.7 0.7 0.7 0.6 Mimatec SA*** 0.2 0.2 0.2 0.1 0.0 Kraft Foods Uruguay SA* 0.5 1.0 0.9 Others 21.3 17.7 17.8 17.9 17.2 Total 100.0 100.0 100.0 100.0 100.0 * international ownership ** international ownership, produced abroad (Argentina) *** importer only Source: European Commission (2015) Associations and Interest Groups The managers of Uruguay’s dairy processors belong to an industry association called the Cámara de la Industria Láctea del Uruguay. The Asociación Uruguaya de Pymes Lácteas (AUPYL) was created in 2014, with the aim of representing the small processors. Employees and processing technicians are part of a trade union called the Federación de Trabajadores de la Industria Láctea. Conaprole’s employees also have their own worker’s association, the Unión de Empleados y Obreros de Conaprole. Conaprole’s influence is significant in both organizations. The percentage of members who work for Conaprole is far greater in the trade union than in the industry association, where all processors have an equal number of representatives. Before the revitalization of labor unions in 2005, the labor affiliation and influence of other dairy processors in the trade union was low. The centralized wage negotiation has typically led to tensions between the association and Conaprole. There have also been frictions at times over firings or sanctioning of co-workers (El Observador 2015). These frictions have at times affected exports as well as domestic activity. 3.1.2. Dairy Farm Production Production in agriculture and related sectors contributed 8 percent of Uruguay’s GDP and 30 percent of Uruguayan exports in 2014, employing 16 percent of the economically active population. The total production area is 16.4 million hectares. The main activities are cattle and wool production (12.8 million hectares), forestry (1.8 million hectares), oriental republic of uruguay 48 Integration into Global Value Chains The Dairy Industry and the ICT Industry agricultural production (1.5 million hectares) and dairy production (817,000 hectares). According to the latest Agriculture, Cattle and Fisheries Ministry figures, there are nearly 45,000 establishments in the agro industry. The dairy industry specifically generates nearly 9 percent of Uruguay’s exports of goods and 70 percent of its production flows to international markets, mainly Venezuela, Brazil, China and Argentina. The number of registered dairy farms fell from 5,000 in 2000 to 4,000 in 2015 (DIEA MGAP 2000). The decrease is mainly due to ongoing concentration of capital and com- peting options for land use (INALE 2015). Lack of intergenerational relay may also con- tribute to the reduction in the number of dairy farms. The average age of producers is relatively high, and young people that would otherwise take over from older relatives have difficulty accessing land due to lack of effective markets and financial instruments. Competing activities, such as agriculture or forestry, have different business structures and are amenable to a broader variety of land property schemes (Mondelli and Gorga 2015). Milk farming was the principal activity of the Department of San Jose and the second highest activity (in terms of land-use) in Colonia, Florida and Canelones (DIEA MGAP 2011) (Figure 14). The Department of Florida is the highest producer of milk in Uruguay, followed by San Jose and Colonia. Despite their proximity, the method of production is different in Florida as compared to San Jose and Colonia. In Florida, farms are relatively large, with 35 percent higher productivity than the national average (source: 2011 Agro Census). 95 percent of Florida’s dairy farms supply directly to processors. Conversely, in San Jose and Colonia, only 65 percent of producers supply processors with their milk. The rest are almost all artisanal producers of cheese and other dairy products. Across the country, 11 percent of Uruguayan farmers produce less than 300 liters per day. 50 percent of farmers produce between 300 and 1,400 liters, while 20 percent produce over 1,400 a day (over 50 percent of Uruguay’s milk). Foreign ownership and vertical integration into dairy farming by FDI processors is an emerging trend in this phase of the value chain in Uruguay. Two major producers have vertically integrated some processing activities. Estancias del Lago, located in Durazno (which is not a traditional dairy production region), started production in 2016. It is the biggest dairy farm in Uruguay with 37,000 hectares. Estancia has announced plans to build a herd of 13,000 cows to support the production and export of 20,000 tons of powdered milk annually. Another dairy producer with vertically integrated processing is Talar, located near Punta del Este. Talar has a relatively large dairy farm (by Uruguayan standards) with over 2,000 cows. Both farms manufacture their own grain. Associations and Interest Groups The Cámara Uruguaya de Productores de Leche (CUPL) represents the interests of the biggest dairy farmers while the Asociación Nacional de Productores de Leche (ANPL) represents about 1,500 producers. Conaprole and ANPL maintain a very close relation- chapter 3 The Uruguayan Dairy Industry... 49 FIGURE 14. Land Area Devoted to Milk Production and Location of Main Dairy Processors Smaller Processors (PILI, COLEME, CLALDY, INLACSA)     CONAPROLE 0% del rubro    0,1 - 1    1,01 - 25    25,01 - 50    50,01 - 75    75.01 - 100 Source: Adapted from DIEA MGAP 2011 Census oriental republic of uruguay 50 Integration into Global Value Chains The Dairy Industry and the ICT Industry ship. Not only does ANPL have formal control of the board, it also exerts considerable influence over Conaprole’s board composition because candidates nominated by ANPL traditionally receive the most votes. A smaller group of big producers, known as “El Grupo de los 29” plays a major role in the strategic decisions of the firm. Several other local associations and interest groups have varying levels of informal influence on ANPL. The most powerful are the Sociedad de Productores de Leche de Florida and the Sociedad de Fomento Rural de la Industria Lechera de Salto. Nationally, in addition to the ANPL, the Intergremial de Productores de Leche (IPL) represents the interests of small producers. Artisanal Production Artisan producers supply 50 percent of all cheese consumed in Uruguay (Cirisola and Gago 2012). The Asociación del Queso Artesanal represents more than 300 of these producers. The association promotes quality and sanitation in artisan production, col- laborative development strategies, and new marketing and distribution channels. The lack of controls and the prevalence of informal production, channels of distribution, and retailing of the products hurt the potential for growing the industry. Unsophisticated local demand, with consumer preferences for unpackaged hard cheese and the consequent lack of brand positioning make it difficult to develop the industry. 3.1.3. Public Institutions for the Dairy Industry and Public—Private Sector Relations The public sector has played a direct role in the dairy sector in Uruguay. After founding Conaprole by government decree in 1936, the government granted Conaprole a mo- nopoly on the supply of fresh milk to Montevideo from 1936 to 1984. While other fixed milk price policies have since been abandoned, the government still sets the price of pasteurized fresh milk, the most widely consumed dairy product in Uruguay. Conaprole, by its size and dominance, has always enjoyed an open communication channel with the government. However, there now exist several public support institutions, mechanisms and vehicles for public-private dialogue and collaboration (Box 4). Dairy Inputs Supply In sourcing inputs, suppliers to Conaprole operate in a different environment from oth- er producers. Conaprole created PROLESA in 1994 to buy inputs (including grains and concentrates, fertilizers, seeds, agrichemicals, veterinary services, nutrition products, and building materials) in aggregate and sell them to member producers at competitive rates. The significant bargaining power that PROLESA derives from its size allows it to buy at much lower prices than individual producers. The firm employs 120 workers across 22 sales points. chapter 3 The Uruguayan Dairy Industry... 51 BOX 4. OVERVIEW OF PUBLIC INSTITUTIONS ON THE DAIRY INDUSTRY ◆◆ In 2008, the Uruguayan government strengthened institutional support for the dairy sector with the creation of Instituto Nacional de la Leche (INALE). INALE was created in to increase the quality of milk production in Uruguay and to strengthen the industry’s commercial domestic and export potential. INALE also facilitates cooperation and collaboration among industry stakeholders to increase value added activity in Uruguay. INALE’s board comprises government representatives, proces- sors, producers and artisanal producers. Its main goals are to advise the government on dairy issues, promote public-private dialogue, coordinate and development the value chain, generate public information about the sector, and participate in all trade, financial or other policy discussions that pertain to the dairy sector. ◆◆ The Fondo de Financiamiento de la Actividad Lechera (FFAL) is a mechanism through which producers can get some financial support. The scheme affords lines of credit to producers through the state-owned Banco República. ◆◆ The Instituto Nacional de Investigaciones Agrícolas (INIA) has five regional centers around the country. One, La Estanzuela in Colonia, is devoted to agriculture, bovine cattle and dairy farming. INIA has a close relationship with producers in the region. Among their activities is the research and promotion of good practices, the diffusion of technology and the preservation of environment. ◆◆ The Instituto de Colonización supports new land-access for small producers and owns several breeding farms. Collective farms send heifers to the institute, where an association of dairy farmers manages them. More than 600 producers use 15 breeding farms. Most dairy regulation is related to hygiene and phytosanitary standards. Dairy farms and dairy processors are obligated to register. In addition, producers must obtain an annual Certificate Sanitary of Dairy Farms and Cheese Production from the General Division of Livestock Services in the Ministry of Agriculture, Livestock and Fishing. In recent years, concern has been growing around the quality of the fresh water in the Metropolitan Area of Montevideo and in Maldonado. The National Authority of Environment (DINAMA), is particularly preoccupied by pollution of the basin of the Santa Lucia River, the main source of fresh water in Montevideo. Dairy farmers and other producers have been blamed for the pollution and con- tamination. As a result, DINAMA has announced that some additional regulation will be introduced to try and curb the trend. oriental republic of uruguay 52 Integration into Global Value Chains The Dairy Industry and the ICT Industry PROLESA does not directly import most of the products that it sells but sources them in the domestic market. Producers who send milk to other processors often receive less support. Feed Concentrates. Recent technical advances have led to sustained productivity growth. One of the main changes has been the increased use of concentrates in feed. INALE (2015) estimates that concentrates are a third of total cost. However, there are no domestic producers of concentrates. Instead, they are principally provided by TALCOL, SUPRA, TIMAC AGRO, and PGG WRIGHTON PAS. Most are medium-sized enterprises based in the Latin America. Fertilizers. Uruguay’s domestic fertilizer production has grown rapidly in recent years and is dominated by large, traditional firms. Both ISUSA and Grupo Maccio import raw inputs before mixing fertilizers in Uruguay. ISUSA also exports fertilizer to Bolivia. Foreign suppliers include Nidera, Bunge, and ASP (Agrium). Seeds. Domestic seed development has grown in recent years. Suppliers include foreign companies (such as Monsanto, Syngenta, Agar Cross, Nidera, LDC, and Wrightson Pas) and national firms (Agroterra, Fodere, and Barraca Erro). The Cámara Uruguaya de Semillas is an industry association for all Uruguayan seed producers and importers. The Instituto Nacional de Semillas (INASE) is an entity similar to INALE that regulates the market of seeds. Equipment. Machinery contributes 9 percent to the total cost of milk production. Larger providers of sowing, fertilization, and harvest equipment are typically members of the Cámara Uruguaya de Servicios Agropecuarios (CUSA), an industry association created to represent the interests of machinery services providers. Milk Collection Effective and efficient collection and transport of milk from farms to processors is a critical part of the dairy value chain. Conaprole has an exclusive relationship with TRALE, a holding company of 33 milk transporters. Other processors may use other transporters, but it is a part of the value chain that is typically outsourced (although in some cases Conaprole transports its own milk). 3.2. RECENT PERFORMANCE OF THE DAIRY INDUSTRY IN URUGUAY The Uruguayan food sector increased the share of value added in total output. In 2006, value added accounted for less than one in every 5 dollars produced. This increased to about one in every 4 dollars produced in 2010. During the same period, the sector reduced its international exposure on the output side, and increased it on the input side. Foreign sales accounted for 64 percent of total sales in 2006 but 54 percent in 2010. The share of imported raw materials in total output, by contrast, more than doubled—from 4 percent in 2006 to 9 percent in 2010 (Figure 15). chapter 3 The Uruguayan Dairy Industry... 53 FIGURE 15. Food Sector Performance, 2006–2010 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 VA/Output Net operating Foreign Sales Net operating Raw materials / Share of imported Capital Stock / surplus / output Total Sales surplus / Intermed raw materials Total costs capital stock Consump FIGURE 16. Dairy Sector Performance, 2006–2010 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 VA/Output Net operating Foreign Sales Net operating Rew materials / Share of imported Capital Stock / surplus / output Total Sales surplus / Intermed. raw materials Total costs capital stock Consump. Referencias:  2006   2010 Source: Authors’ calculations using National Economic Activities Surveys from 2006 and 2010. The dairy sector reflects the trends in the food sector. Value added increased from 18 percent of output to 21 percent of output. While international exposure declined on the output front, it increased on the input front. In 2006, foreign sales accounted for 55 percent of total sales, decreasing to 46 percent in 2010. Instead, the share of imported raw materials in total output increased mildly, from 3 to 4 percent over the same period (Figure 16). oriental republic of uruguay 54 Integration into Global Value Chains The Dairy Industry and the ICT Industry The Uruguayan dairy industry is cost-competitive on international markets. The overall cost of producing milk in Uruguay is low (Figure 17). Moreover, Uruguay’s selling price for whole milk powder is very competitive relative to other regional and major global powder sellers, with only the EU narrowly beating Uruguay on price (Table 4). Uruguay’s milk production increased by 4.1 percent from 2004 to 2010 while major developed market production centers of Australia and the EU are negative and the U.S. and New Zealand slightly below average world growth rate (Figure 18). China (not shown in the chart) was the only country with more growth at 17 percent. This growth in Uruguay is due to its solid international position from a cost of production point of view as well as size of the regional market for powdered milk. FIGURE 17. Cost of Producing Milk in Uruguay and Comparators, US$/100 kg 70 60 50 40 30 20 10 US California US Wisconsin India China New Zealand Australia Netherlands Poland Germany France Brazil Ukraine Uruguay Source: IFC 2015. TABLE 4. Selling Cost of Whole Milk Powder, Uruguay and Comparators, US$/MT, 2011 Economy Cost Economy Cost European Union – 27 3,426 United States 3,955 Uruguay 3,500 New Zealand 4,084 Argentina 3,725 Australia 4,156 Brazil 3,802 China 5,440 Mexico 3,901 Source: IFC 2015 chapter 3 The Uruguayan Dairy Industry... 55 FIGURE 18. Milk Production Growth Rates, Uruguay and Comparators, 2004–2010 4,12% 4,02% 4% 3,29% 3,16% Annual acumulative growth 2,04% 2,02% Average world growth rate = 2,1% 2% 0,97% 0,66% 0% -0,57% -2% -0,93% -2,79% -4% -6% -8% -7,69% Uruguay Brazil Argentina India USA N. Zealand Mexico Canada Rusia Ukraine Australia EU Source: IFC 2013 TABLE 5. Resource Intensity (per US$1,000 of Value Added) for the Food and Dairy Sector, 2011, US Energy intensity 2007 Labor intensity Capital intensity Industry fuel and NAICS hours worked gross surplus electricity cost U.S. Annual Manufacturing Survey (2011) 311 Food manufacturing 8.2 792.1 41.9 3115 Dairy product manufacturing 6.1 784.0 40.4 Dairy product (except frozen) 31151 5.7 790.4 41.2 manufacturing Ice cream and frozen dessert 31152 9.0 726.3 33.5 manufacturing 311513 Cheese manufacturing 8.6 729.8 54.4 Dry, condensed, and evaporated 311514 3.0 876.4 34.8 dairy product Ice cream and frozen dessert 311520 9.0 726.3 33.5 manufacturing 31151N Fluid milk and butter manufacturing 5.4 783.3 36.1 Source: Authors’ calculations based on U.S. Annual Manufacturing Survey (2011). oriental republic of uruguay 56 Integration into Global Value Chains The Dairy Industry and the ICT Industry However, Uruguayan dairy production is far more labor and energy intensive than that of the U.S. (Table 5 and Table 6). Uruguay needs five times more labor to produce US$1,000 of value added, pays two to three times more for energy than the US, and is 40 percent less capital intensive. The dairy industry in Uruguay shows on average a 25 percent lower return on capital than the US. However, despite higher resource intensity and lower returns on capital, Uruguayan dairy has posted a production growth rate of 4.1 percent from 2004 to 2010, second to China with a 17 percent growth rate. Also, the quality of Uruguayan dairy products has been improving since 2000, with fluid milk, milk powder, and butter moving from the bottom quarter to the middle of the global distribution of prices by 2014. TABLE 6. Resource Intensity (per US$1,000 of Value Added) for the Food and Dairy Sector, 2010, Uruguay Energy intensity 2007 Labor intensity Capital intensity Industry fuel and ISIC4rev hours worked gross surplus electricity cost Uruguay Annual Manufacturing Survey (2010) 10 Food manufacturing 45.7 555.4 141.3 Dairy product 105 29.8 467.0 102.8 manufacturing Source: Authors’ calculations using National Economic Activities Surveys year 2010. Note that differences in energy costs may reflect differences in electricity intensity, in costs or in both. 3.2.1. Quality in International Markets The quality of Uruguayan dairy products has been increasing since 2000. Two com- plementary indicators, the weighted average of the income of Uruguay’s dairy importing countries and the relative unit values that Uruguayan exporters fetch in international markets, suggest that export quality in dairy has been increasing for Uruguay’s most important dairy products (Figure 19 and Figure 20). In fluid milk (fat content between 1 and 6 percent), for example, Uruguay moved from selling to countries in the bottom quintile of the income distribution to selling to those in the second quintile. (Income over the period is held constant, implying this shift in the distribution is related to pen- etrating higher income countries.) This was matched with higher unit values received for its products, relative to those received by competitors, moving from the bottom quartile of the price distribution to the middle. A similar process occurred for milk in powder (both for fat content below 15 percent, and for that without sugar) and for butter. chapter 3 The Uruguayan Dairy Industry... 57 FIGURE 19. Weighted Average of Income of Importers of Dairy Products—Uruguay’s Position on the Ladder URY Milk (1%Resource N.B. Box size indicates scale of activity and significance to value chain structure (qualitative judgement). Source: Author’s own elaboration oriental republic of uruguay 164 Integration into Global Value Chains The Dairy Industry and the ICT Industry FIGURE 71. Porter’s Five Forces Analysis—”Boutique” Segment Threat of New Entrants INCREASING Bargaining Bargaining Competitive Rivalry Power of Suppliers Power of Buyers STABLE INCREASING STABLE Threat of Substitute Products STABLE Source: Author’s analysis Threat of New Entrants – Increasing Barriers to entry are relatively high and derive from the high skills and specialization required to participate. In some cases, access to the industry-specific technology, equip- ment, and certification (e.g., specialist laboratory equipment or clean rooms for bioen- gineering) is also a key barrier to entry. Bargaining Power of Suppliers – Increasing Similar to the “Powerhouse” strategic segment, the workforce in the “Boutique” stra- tegic segment is highly specialized and varied. The high degree of specialization of the workforce makes them the single most important critical success factor and enables them to retain a good share of value added. Bargaining Power of Buyers – Stable Similarly to the case of the “Powerhouse” strategic segment, the specialized nature of the products and services provided gives firms in this segment a marginally stronger bargaining power than in other segment. However, consumers and business customers will still be able to dictate agreement terms. Competitive Rivalry – Stable Competitive rivalry within the segment is not based on price but on the ability to deliver top quality customized products and services to the specific industry niches to which firms cater. chapter 4 The Uruguayan Information Communication Technology (ICT)... 165 FIGURE 72. Minimum Requirement to Compete / Ideal Value Chain in Boutique Segment LOCAL Product/ Administrative Highly skilled Service functions (e.g. Marketing, workforce – development, recruitment, advertising, core operations adaptation legal) brand (specialised) R&D Capacity positioning KNL KNL capacity KNL LAB KNL LAB CAP LAB CAP CAP NATIONAL Demand Physical Demand Demand - Public infrastructure B2C B2B Institutions KNL KNL KNL KNL CAP Telecoms provider IP / Legal Maturity KNL Training Specialist training KNL KNL KNL GLOBAL B2B Demand Distribution / B2C Demand (multi- retail platform sectorial) KNL KNL KNL ‘on demand’ Linkage (weeks) ‘on stock’ Linkage (months) Low Information exchange High Information exchange KEY: KNL = Knowledge intensive activity; LAB = Labor intensive activity; CAP = Capital intensive activity; N-RES = Natural Resource N.B. Box size indicates scale of activity and significance to value chain structure (qualitative judgement). Source: Author’s own elaboration Threat of Substitute Products - Stable Algorithmizaton and automation of non-routine ‘intelligent’ tasks poses a threat also in this segment, but it is less relevant than for other ICT segments given the high sophis- tication of the products and services provided. oriental republic of uruguay 166 Integration into Global Value Chains The Dairy Industry and the ICT Industry Ideal Value Chain Structure for Boutique Segment The Boutique strategic segment has an optimal value chain structure (Figure 72) similar to that of the “Powerhouse” strategic segment. Lower scale of operation and smaller minimum efficient investment requirements are the main distinguishing factors between the two ideal GVCs, with the “Boutique” strategic segment often serv- ing as the launchpad for successful start-ups to enter the “Powerhouse” segment. The emphasis on supporting activities on incubation, seed financing and entrepreneurship is greatly reduced because firms focus on specialized customer niches rather than on mass-markets, reducing the risks associated with large volumes. National consumer demand is also less relevant, with a focus on business to business clients. 4.4. COMPARATIVE ANALYSIS OF THE ICT/ICTES STRATEGIC SEGMENTS The dynamism of the ICT/ICTES industry can be explained also in terms of the continu- ous and rapid evolution of the five forces in each of the four strategic segments identified. The differences depicted in Figure 73 appear to be minor, but the corresponding structure of the value chain is very different as illustrated above. A comparative overview of all the four strategic segments analyzed suggests that the “Powerhouse” and ‘Boutique” strategic segments might be the most ‘attractive’ as profitability is high (compared with the “Abundant Skills” segment and the “Low-Cost” segment) and more value is retained by the firms themselves (as opposed to buyers and suppliers). The five forces analysis seem to support the view that the “Powerhouse” strategic segment is more profitable than the “Boutique” strategic segment, as margins are high and they are obtained on a global scale in large mass markets. On the contrary, the “Low-Cost” strategic segment FIGURE 73. Comparative Analysis of Porter’s Five Forces for the Four ICT/ICTES Strategic Segments 1. Low-Cost 2. Abundant Skills 3. Powerhouse 4. Boutique 1 1 1 1 2 3 4 2 3 4 2 3 4 2 3 4 5 5 5 5 Source: Author’s Elaboration chapter 4 The Uruguayan Information Communication Technology (ICT)... 167 FIGURE 74. Upgrading Trajectories across the Four ICT/ICTES Strategic Segments LOW COST ABUNDANT SKILLS BOUTIQUE POWERHOUSE Source: Author’s depiction and Analysis results as the most unattractive segment given that profitability is the lowest of all four segments and margins are captured to a larger extent by buyers and clients. Finally, the “Abundant Skills” strategic segment presents low margins, while on the positive side firms in the segment retain most of the margins created in the segment. The value chain structures described in Figure 66, Figure 68, Figure 70, and Figure 72 can shed some light on the degree to which participation in one strategic segment might lead to participation in higher value added strategic segments. Figure 74 illustrates this ‘natural’ development path. Firms participating in the “Low-cost” strategic segment may naturally transition to the (higher value-added) “Abundant Skills” strategic segment through upskilling and technological investment. Similarly, the “Boutique” segment value chain is a microcosm of the “Powerhouse” strategic segment using fewer resources and focusing on specialist clients rather than mass solutions. Transitioning from the “Bou- tique” segment to the “Powerhouse” strategic segment would usually require focus on workforce expansion, training and catalytic funding (see Section 5.2). However, significant intervention would be needed to shift firms and clusters successfully participating in the “Abundant Skills” strategic segment to the “Powerhouse” strategic segment. 4.5. DEEP DIVE ON THE ICT/ICTES STRATEGIC SEGMENTS RELEVANT FOR URUGUAY This section presents the results of a summary benchmarking analysis of the existing value chains in Uruguay vis-à-vis the ideal GVC structures necessary to compete in each of the four ICT/ICTES strategic segments: “Low-Cost,” “Abundant Skills,” “Powerhouse,” and “Boutique” (Figure 75). oriental republic of uruguay 168 Integration into Global Value Chains The Dairy Industry and the ICT Industry FIGURE 75. Uruguay’s participation in ICT/ICES Strategic Segments 1. Low-Cost 2. Abundant Skills 3. Powerhouse 4. Boutique 1 1 1 1 2 3 4 2 3 4 2 3 4 2 3 4 5 5 5 5 Source: Author’s Elaboration Figure 77, Figure 78, Figure 79, and Figure 80 compare the minimum requirements to compete in each segment with Uruguay’s specific context (including factor conditions, demand conditions, firm structure, demand conditions and institutional context). Ac- tivities are identified as being optimally represented in Uruguay (highlighted in green), sub-optimally represented (highlighted in yellow) or not present in the country (highlighted in white). Figure 77 and Figure 78 illustrate that Uruguay meets almost all minimum re- quirements to compete globally in the “Low-Cost” strategic segment and in the “Abundant Skills” strategic segment. At the same time, the benchmarking analysis shows that in the Boutique segment (Figure 79) and especially in the “Powerhouse” strategic segment (Fig- ure 80), some of the value chain activities are sub-optimal or arguably not present when compared to the ideal value chain needed to compete in these segments. Two value chain activities and inputs are crucial for all four strategic segments of the ICT/ICTES industry, and they are a skilled workforce supported by higher education institutions and ICT infrastructure. The benchmarking analysis shows that Uruguay has strong higher education institutions and training programs that have the capacity to pre- pare skilled workers and satisfy ICT/ICTES development for the “Low-Cost” , “Abundant Skills” and the “Boutique” strategic segments. In the “Abundant Skills,” strategic segment, the activity has been identified as ‘optimal’ in recognition of the quality of education. However, the relatively small size of the skilled workforce remains an issue. With an average of only 4,200 graduates a year in business segments related to ICT/ICTES (Uruguay XXI 2015), the quantity of graduates is unlikely to be able to support competi- tiveness in the “Abundant Skills” strategic segment. Furthermore, the relative high cost of labor compounds the challenges generated by the small size of the skilled workforce in Uruguay. Relatively high wages can be attributed to several factors. The overall increase in wages has coincided with a decrease in unemployment (Figure 76). The associated chapter 4 The Uruguayan Information Communication Technology (ICT)... 169 FIGURE 76. Uruguay - Unemployment and Real Wages 1994–2014 2,5 2,0 1,5 1,0 0,5 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014  Unemployment    Real wages Index Base 1994 = 1 Source: INE (2015) Bafico and Michelin (2015) increase in the scarcity of human resources led naturally to an increase in the cost of the resources. The added ease with which ICT specialists can work for overseas clients (particularly as freelancers) also means that Uruguayan firms must pay a premium to retain their best employees. As a result, nearly 90% of Uruguayan ICT firms consider labor costs in the country ‘high’ or ‘very high’ (Universidad Católica del Uruguay 2015). Connectivity, communications infrastructure and a strong and reliable provision of Internet services and mobile communications are essential to all four segments. Uruguay excels in this area and it ranked 49th overall in the 2015 ICT Development Index (IDI), the highest of any country in Latin and Central America (Table 25). It also ranked 46th in the world (1st in LAC) for IDI-use, 46th (1st in LAC) for skills, 50th (1st in LAC) for ac- cess, 29th for fixed broadband (1st in LAC), although Uruguay is the only country in LAC where caps are applied on monthly subscriptions. Uruguay also has the least expensive mobile-broadband prices for several broadband services (UNITU 2015). The benchmarking analysis of the existing Uruguayan value chains against the ideal GVC for the “Low Cost” segment (Figure 77) shows that Uruguay meets all the minimum requirements to compete globally in the segment. Specifically, Uruguay has sufficient skills and quality of the workforce, ICT infrastructure, protection of intellectual property, availability of specialized training institutions, and exposure to the latest technological trends and international demand. However, the small pool of skilled workforce available and relatively high salaries, vis-à-vis global competitors with a large workforce such as oriental republic of uruguay 170 Integration into Global Value Chains The Dairy Industry and the ICT Industry TABLE 25. Regional IDI Ranking 2015 Regional IDI Rank Country IDI Global IDI Rank 1 Uruguay 6.70 49 2 Argentina 6.40 52 3 Costa Rica 6.20 57 4 Brazil 6.03 61 5 Venezuela 5.48 72 Source: UNITU (2015) India or Russia, makes the scale Uruguayan value chain suboptimal for the labor-in- tensive and volume-based competitive strategy needed to succeed in this segment. Similarly, the analysis of the Uruguayan value chains compared to the ideal GVC for the “Abundant Skills” strategic segment (Figure 78) shows that Uruguay has an adequate minimum scale for almost all activities of the value chain. The exceptions are a sizable pool of skilled workers and sophisticated domestic demand by both final consumers and public institutions. In fact, while ICT services and ICTES are typically global and do not hinge on domestic sales, a sophisticated local demand, often driven by public institutions, can usually help raise the standards of the local industry and stimulate the international competitiveness of local players, especially during the early stages of development of the domestic industry. The benchmarking analysis of the value chains related to the “Powerhouse” strategic segment (Figure 79) shows that Uruguay has suboptimal scale in the value chain activities related to size of the skilled workforce, product and service development and adaptation, marketing, and branding. At the same time, while presence of specialized research and higher education institutions on ICT/ICTES is well established, the limited availability of specialist training programs for ICT/ICTES professionals constitutes a serious constraint to the ability to sustain competition in the most innovative strategic segment of ICT/ ICTES. Similarly, an underdeveloped early stage financing institutional landscape does not seem to provide the adequate support to the entrepreneurial dynamism associated with the ideal GVC in the “Powerhouse” strategic segment. The lack of critical mass in each of these areas of specialization is the reason why the three activities have been deemed to be “sub-optimal” for the delivery of products and services in the “Powerhouse” strategic segment. This too is the reason that training has been deemed sub-optimal and specialist training ‘not present’ . The quality of training available in Uruguay is well established, but Uruguay must improve the variety and availa- chapter 4 The Uruguayan Information Communication Technology (ICT)... 171 FIGURE 7 7. Benchmarking Uruguay with the Ideal Value Chain for the “Low-Cost” Strategic Segment LOCAL Administrative Workforce core (global) operations functions (e.g. recruitment, legal) LAB KNL NATIONAL Physical Telecoms IP / Legal infrastructure Training provider Maturity KNL KNL KNL KNL CAP GLOBAL Distribution B2B Demand / retail platform KNL KNL  Optimal    Sub-Optimal    Low presence / Not present ‘on demand’ Linkage (weeks) ‘on stock’ Linkage (months) Low Information exchange High Information exchange KEY: KNL = Knowledge intensive activity; LAB = Labor intensive activity; CAP = Capital intensive activity; N-RES = Natural Resource N.B. Box size indicates scale of activity and significance to value chain structure (qualitative judgement). Source: Author’s own elaboration bility of specialist training to become competitive in the “Powerhouse” strategic segment. Additionally, investment in research, development and innovation is low in Uruguay. Uruguay spent only 0.2 percent of its GDP on research and development in 2012 (Table 26). By comparison, Brazil (with the highest R&D expenditure in LAC) spent 1.2 percent of its GDP on research and development in the same year and Israel (with the highest R&D expenditure globally in 2012) spent 4.2 percent of its GDP on R&D in 2012. Research and oriental republic of uruguay 172 Integration into Global Value Chains The Dairy Industry and the ICT Industry FIGURE 78. Benchmarking Uruguay with the Ideal Value Chain for the “Abundant Skills” Strategic Segment LOCAL Administrative Skill workforce- (global) core operations functions (e.g. recruitment, legal) KNL KNL LAB CAP NATIONAL Demand Demand - Physical Telecoms IP / Legal - Public Training B2B infrastructure provider Maturity Institutions KNL KNL KNL KNL KNL KNL CAP GLOBAL Distribution B2C B2B Demand / retail Demand platform KNL KNL KNL  Optimal    Sub-Optimal    Low presence / Not present ‘on demand’ Linkage (weeks) ‘on stock’ Linkage (months) Low Information exchange High Information exchange KEY: KNL = Knowledge intensive activity; LAB = Labor intensive activity; CAP = Capital intensive activity; N-RES = Natural ResourceN.B. Box size indicates scale of activity and significance to value chain structure (qualitative judgement). Source: Author’s own elaboration development and crucially the potential for commercialization of R&D to fuel innovation in the private sector is essential to development of the segment. Yet, as of 2014, 79% of Uruguayan ICT/ICTES firms indicated that regulation, bureaucracy and administrative concerns are disincentives to investment (Universidad Católica del Uruguay 2015). chapter 4 The Uruguayan Information Communication Technology (ICT)... 173 TABLE 26. Research and development expenditure (percent of GDP) Country 2010 2011 2012 Israel 3.96 4.10 4.25 United States 2.74 2.77 2.81 Estonia 1.58 2.34 2.16 Brazil 1.20 1.10 1.20 Argentina 0.49 0.52 0.58 Uruguay 0.40 0.42 0.23 Source: (World Bank 2016) In terms of early stage financing in support of ICT/ICTES, Uruguay shows a sub- optimal scale of activities and institutional support of the value chain. Although there have been significant gains in recent years, Uruguay does not have the advanced research facilities (private or public) necessary to compete in “Powerhouse” strategic segment. Additionally, while there are several incubation programs in Uruguay, they are relatively small in scale and are largely publicly funded. The “Powerhouse” strate- gic segment requires not only publicly funded incubation programs but also private support for idea generation and growth. A lack of high-risk financing in Urguay has also been identified as “not present” in Uruguay and remains a significant constraint to Uruguay’s growth in the segment. Furthermore, limited and low sophistication of local demand also constitutes a constraint on developing the Powerhouse segment in Uruguay. This shortcoming is not simply due to the limited volume of local demand, but also to the intensity and quality of interactions between buyers and providers of ICT/ICTES products and services. In fact, regular touchpoints and interaction between innovation drivers (firms identify- ing solutions) and market creators (users demanding solutions) is very important for innovation and entrepreneurship in the industry. Equally important is the sphere of influence of those market creators. In ICT/ICTES, network effects mean that new solu- tions can be adopted quickly. The far-reaching influence of American culture through television, movies, and social media platforms means that, by responding to the needs of their immediate market, firms in Silicon Valley can quickly find global markets for their solutions. This demand amplification will likely be less effective in Uruguay due to its smallness in the global landscape. Finally, the benchmarking analysis of the existing Uruguayan value chains against the ideal GVC for the “Boutique” segment (Figure 80) shows that the structure of the ideal value chains for both the “Boutique” and “Powerhouse” segments are similar. oriental republic of uruguay 174 Integration into Global Value Chains The Dairy Industry and the ICT Industry FIGURE 79. Benchmarking Uruguay with the Ideal Value Chain for the “Powerhouse” Strategic Segment LOCAL Product/ Marketing, Administrative Highly skilled Service advertising, functions (e.g. workforce – core development, brand recruitment, operations (multi- adaptation positioning legal) faceted) R&D Capacity capacity KNL KNL KNL KNL LAB LAB LAB CAP CAP CAP NATIONAL Advanced Specialist R&D Training training Physical Telecoms Centers infrastructure provider KNL KNL KNL KNL KNL Demand CAP Demand Demand - Public B2C B2B Institutions Seed / VC Incubation IP / Legal Innovation Collaboration / Growth KNL KNL KNL Maturity culture culture financing KNL CAP CAP KNL N-RES N-RES GLOBAL B2B Distribution B2C Demand / retail Demand (multi- platform sectorial) KNL KNL KNL  Optimal    Sub-Optimal    Low presence / Not present ‘on demand’ Linkage (weeks) ‘on stock’ Linkage (months) Low Information exchange High Information exchange KEY: KNL = Knowledge intensive activity; LAB = Labor intensive activity; CAP = Capital intensive activity; N-RES = Natural ResourceN.B. Box size indicates scale of activity and significance to value chain structure (qualitative judgement). Source: Author’s own elaboration chapter 4 The Uruguayan Information Communication Technology (ICT)... 175 FIGURE 80. Benchmarking Uruguay with the Ideal Value Chain for the “Boutique” Strategic Segment LOCAL Product/ Highly skilled Marketing, Administrative Service workforce – core advertising, functions (e.g. development, operations brand recruitment, adaptation (specialised) positioning legal) R&D Capacity capacity KNL KNL KNL KNL LAB LAB LAB CAP CAP CAP NATIONAL Physical Demand Demand Demand Telecoms infrastructure B2C B2B - Public provider IP / Legal Institutions KNL KNL KNL Maturity KNL KNL CAP KNL Specialist Training training KNL KNL GLOBAL B2B B2C Demand Distribution Demand (multi- / retail sectorial) platform KNL KNL KNL  Optimal    Sub-Optimal    Low presence / Not present ‘on demand’ Linkage (weeks) ‘on stock’ Linkage (months) Low Information exchange High Information exchange KEY: KNL = Knowledge intensive activity; LAB = Labor intensive activity; CAP = Capital intensive activity; N-RES = Natural Resource N.B. Box size indicates scale of activity and significance to value chain structure (qualitative judgement). Source: Author’s own elaboration oriental republic of uruguay 176 Integration into Global Value Chains The Dairy Industry and the ICT Industry Lower scale of operation and smaller minimum efficient investment requirements are the main distinguishing factors between the two ideal GVCs, with the “Boutique” strategic segment often serving as the launchpad for successful start-ups to enter the “Powerhouse” segment. Also in the case of the “Boutique” segment, the actual value chain in Uruguay presents suboptimal scale activities in terms of the size of the skilled workforce, product and service development, and adaptation, marketing and branding. Similarly, the absence of a sophisticated domestic demand, both private and public, and the only nascent early stage financing innovation ecosystem, remain as two important constraints to the growth of the “Boutique” segment. At the same time, the overall lower entry requirements and smaller scale of operations needed to compete successfully in the “Boutique” segment enable Uruguayan ICT/ICTES firms to hold a better positioning, and stronger potential, in this segment vis-à-vis the “Powerhouse” one. In summary, the structure of the ideal value chains for both the “Boutique” and “Powerhouse” segments are similar. Lower scale of operation and smaller minimum efficient investment requirements are the main distinguishing factors between the two ideal GVCs, with the “Boutique” strategic segment often serving as the launchpad for successful start-ups to enter the “Powerhouse” segment. Also in the case of the “Boutique” segment, the actual value chain in Uruguay presents suboptimal scale ac- tivities in terms of the size of the skilled workforce, product and service development, and adaptation, marketing and branding. Similarly, the absence of a sophisticated domestic demand, both private and public, and the only nascent early stage financing innovation ecosystem, remain as two important constraints to the growth of the “Bou- tique” segment. At the same time, the overall lower entry requirements and smaller scale of operations needed to compete successfully in the “Boutique” segment enable Uruguayan ICT/ICTES firms to hold a better positioning, and stronger potential, in this segment vis-à-vis the “Powerhouse” one. Overall, the strategic repositioning options available to the Uruguayan ICT/ICT- ES industry point to the relevance and viability of the “Boutique” strategic segment and to the long-term potential of the “Powerhouse” strategic segment. A set of policy recommendations for each repositioning option are presented in Section 5). 177 5. Strategic Repositioning Options and Recommendations Uruguay’s path towards greater integration in global (and regional) value chains will require a multipronged strategy that targets increased sophistication of Uruguay’s produc- tive structure and diversification into specialized, high-value, modern service-exports that are not constrained by lack of economies of scale or distance. Identifying and addressing economy-wide and industry-specific policies that could enable the implementation of a global integration strategy remains a critical policy priority. The recommendations of this report aim to contribute to this agenda, and include a policy mix of industry-specific policy options for the dairy and ICT/ICTES industries. We summarize them here and organize into the following categories: (1) Recommendations on the Strategic Reposi- tioning Options for the Dairy Industry in Uruguay, (2) Recommendations on the Strategic Repositioning Options for the ICT/ICTES industry in Uruguay, and (3) Recommendations on How to Improve Data Collection and Statistical Tools on GVCs in Uruguay. 5.1. RECOMMENDATIONS FOR THE DAIRY GLOBAL VALUE CHAIN 5.1.1. Recommendations for the Tradable Stockable Global Strategic Segment of the Dairy GVC The analysis of the TSG segments points to two strategic repositioning options: (1) a “downstream” option focused on repositioning Uruguay’s dairy processors to gain entry to and price premia in end markets, and (2) an “upstream” option focused on repositioning Uruguay’s dairy producers to compete in the global organic dairy market. 5.1.1.1. The downstream option: processing Uruguayan dairy for premium end markets The first strategic repositioning option focuses on direct investments in the downstream phases of the dairy value chain to gain a foothold and price premium in end markets. Dairy processors (as opposed to producers) that can achieve the necessary scale to compete in the TSG segment have the opportunity vertically integrate additional oriental republic of uruguay 178 Integration into Global Value Chains The Dairy Industry and the ICT Industry FIGURE 81. Post-production Value-Addition—Global Dairy Commodities TSG Segment Branding Wholesale Proc’g of proc’s (e.g. unbranded Retail milk powder) producst Wholesale Processing of proc’g (e.g. finished (branded) Retail milk powder) products Branding Proc’g of unbranded products Retail Processing of finished (branded) Retail products Upstream Downstream Source: Project team interviews and research Note: Image is not to scale and is representative only. downstream activities. Conaprole and Uruguay’s smaller processors typically engage in bulk processing of wholesale dairy products and less commonly, production of un-branded dairy products (Figure 81).18 As Figure 28 shows, the “upstreamness” of Uruguay’s dairy exports has increased slightly since 1998, indicating that Uruguayan dairy exporters in the TSG segment have not been able to enter the downstream phases of the value chain and retain a higher share of the value added by interacting closely with final consumers over the last 19 years. The massive investments required in marketing, branding, reconstitution plants, final processing facilities, distribution and retail in end markets make this a long-term 18 Bulk and wholesale items are sold to other secondary dairy producers to make finished dairy prod- ucts (e.g., yoghurts, reconstituted milk, ice-cream mixes) or sold to other food manufactures to produce confectionary products, beverages, baked goods, nutritional supplements and other foods that use dairy products as ingredients. There may be an opportunity for Uruguayan dairy proces- sors to appropriate more value from the value chain by producing more finished goods. chapter 5 Strategic Repositioning Options and Recommendations 179 strategy, subject to the FDI and acquisition strategies for Uruguay of global players with an existing foothold in international end markets. Box 10 illustrates how key global players in the TSG segment have established a foothold on international end markets, and what are the competitive dynamics and investment requirements needed to pursue a downstream repositioning strategy in TSG premium end markets. BOX 10. HOW HAVE GLOBAL DAIRY PLAYERS IN THE TSG STRATEGIC SEGMENT PURSUED A DOWNSTREAM REPOSITIONING STRATEGY? Product branding and diversification are highly visible in Dairy TSG strategic segments. The wide range of global brands and labels give the impression that there are many dairy processors in the market. In reality, many of these brands are owned by only a handful of large corporations. For example, the largest dairy producer in the USA, Dean Foods, owns more than 40 brands (Murray, 2015). Similarly, 80 percent of Danone’s dairy product portfolio in the Commonwealth of Independent States (CIS) in 2014 were so-called ‘local’ brands (Danone, 2014). Therefore, competitiveness in TSG segments also requires branding and marketing prowess in destination markets rather than in the country of production. However, market penetration is not the only hurdle for global dairy processor; once a local presence has been established, reaching the consumer at point of sale requires firms to be able to negotiate supply contracts with retailers. Over the last 30 years, supermarkets in both developed and developing economies around the world have acquired an increasing share of grocery markets (Emongor and Kirsten 2009) (Starmer n.d.). Consequently, the bargaining power of retailers vis-a-vis dairy processors and other suppliers is increasing. Figure 82 shows the combined share of top three grocery retailers 2008–2013 in eight emerging markets. As can be seen, the combined share of the top three grocery retailers is rising in all eight (geographically and economically disperse) cases. Given that in many cases dairy processors may have only limited access to end consumers except through supermarkets like Carrefour, Tesco, Nakumatt and Walmart, their dominant presence means that supermarkets may be increasingly able define supply terms including sources, quantity, quality, delivery schedules, packaging, returns policy, and above all, price and payment conditions (Con- sumers International 2012). As an example, supermarkets often give discounts to suppliers that can provide goods in high volume, indirectly discriminating against smaller suppliers. This is part of the reason that the dairy processing industry (in oriental republic of uruguay 180 Integration into Global Value Chains The Dairy Industry and the ICT Industry TSG segments) is characterized by extremely large multinational corporations with a wide range of diversified products not always limited to dairy. To illustrate, Nestle (Switzerland), Danone and Lactalis (France), New Zealand (Fonterra), Dairy Farmers of America (USA) and FrieslandCampina (Netherlands) dominate the industry with turnovers of US$27.8 billion, US$19.5 billion, US$19.5 bil- lion, US$18.5 billion, US$17.9 billion and US$14.8 billion respectively. However every dairy processor featured on Rabobank’s list of “Global Dairy Top 201” had a turnover of over US$5 billion in 2014 (Rabobank 2016). Indeed, more than third of USA’s top 100 dairy processors have annual revenues of more than $1 billion (Carper 2015). The global footprint of leading dairy processors is equally significant; Nestle has 447 factories in 86 countries, directly employing approximately 333,000 people (Nestle 2016). Fonterra collects 20 billion litres of milk every year from 100 coun- tries around the world relying on a workforce of 16,000 people (Fonterra 2016). This global expansion is a relatively recent phenomenon. In 1996, French processor Danone had only 5 percent of its operations in Asia Pacific, Latin America, Middle East, and Africa. In 2014, the same region represented 38 percent of its operations. Today, Danone employs 100,000 people and operates in over 140 countries around the world, 60 percent of which are outside Europe (Danone 2016). FIGURE 82. Combined share of top three grocery retailers 2008–2013 (percent company shares by global brand owner) United Arab Emirates South Africa Chile Romania 55% 55% 55% 55% 15% 15% 15% 15% 2008 2013 08 13 08 13 08 13 México Poland Thailand Colombia 55% 55% 55% 55% 15% 15% 15% 15% 08 13 08 13 08 13 08 13 Source: (Euromonitor 2014) 1 Ranked by turnover based on dairy sales in 2014 chapter 5 Strategic Repositioning Options and Recommendations 181 FIGURE 83. Market Penetration, Organic Dairy as a Percentage of Total Dairy Denmark 24.0% Sweden 12.2% UK 7.5% Belgium 7.1% US 5.9% Canada 5.8% France 4.5% Germany 4.5% Australia 4.5% Finland 2.8% Norway 2.6% Italy 2.4% Mexico 2.3% Korea 1.5% Greece Spain Brazil Portugal China Russia India 5% 10% 15% 20% 25% 30% FIGURE 84. Global Organic Dairy Market Value Projections, 2013–2018 (US$, millions) 12,000 10,000 8,000 6,000 4,000 2,000 2007 2012 2013 2014 2015 2016 2017 2018  Actual    3.7% growth    6.2% growth Source: OMSCO – Organic Milk Market Report 2015. The upstream option: targeting the global market for organic milk powder The second option is more incremental. It focuses on repositioning the existing TSG value chain in Uruguay toward the international organic dairy powder market to fetch the almost fivefold price premium that it provides. The global organic dairy market is valued at US$7.7 billion, 11 percent of the total global organic food and drink market, oriental republic of uruguay 182 Integration into Global Value Chains The Dairy Industry and the ICT Industry with a 3.7 percent CAGR from 2007 to 2013 rising to a 6.2 percent growth rate for the post global financial crisis period (OMSCo 2015). With Europe and North America representing 90 percent of the global organic dairy market, the low market penetration in emerging economies such as China, Russia, and India (Figure 83) is a medium-term growth opportunity with a 6.2 percent forecasted annual growth (Figure 84) in spite of the stagnant or dropping prices for regular milk. If the global dairy commodity market continues to grow as forecasted (US DEC 2016) (Rabobank 2016), TSG segments may be an accessible route for producers to insert themselves into GVCs. Although the dairy industry in Uruguay lacks the organic brand recognition of final dairy products on international markets to reap the full price premium associated with these products in end markets, the continued growth of the global market for organic dairy products also presents clear product differentiation opportunities in the TSG segments in which Uruguay operates. As an illustration, milk powder constitutes approximately 52 percent of Uruguayan dairy exports and traded on international markets for US$2,043 per ton in 2016. By comparison, organic milk powder fetches a price premium of US$9,863 per ton on international markets, an al- most fivefold increase in markup attributable to the ability to differentiate an otherwise commoditized product in the TSG strategic segment. Cooperatives and other collaborative production schemes mean that small-scale producers can participate even given the high economies of scale in production of commodity products (Shah 2012, Hogeland 1998). This insertion can lead to upgrading in the sophistication and quality of production. Although domestic consumer demand might coalesce around lower-quality, lower-cost products, regional and global markets demand goods that appeal to a wider range of consumers. Thus, global industries tend to emphasize quality and uniformity through use of product standards, which are often internationally harmonized and recognized (United Nations ESCAP 2015). However, as suppliers-only to milk processors, producers are extremely vulnerable to global market volatility and must compete with imported products. This strategic repositioning option focuses on upgrading the upstream phases of the value chain in primary production to differentiate the product and to obtain inter- nationally-recognized organic certification and leverage the existing domestic portion of the TSG value chain to enter a contiguous higher-value market. Entering the organic milk powder market requires upgrading processes in the upstream phases of the value chain with a focus on dairy farming and livestock practices. The average conversion time from a regular to organic dairy farm is three years. The switch to organic dairy farming is usually accompanied by a coordinated pack- age of public policies and industry-level initiatives to (1) harmonize national legislation and regulation on food safety, minimum residues fertilizers and feed regulation, animal health, and traceability with international standards (Box 11), (2) facilitate compliance chapter 5 Strategic Repositioning Options and Recommendations 183 BOX 11. USDA REGULATIONS ON ORGANIC LABELLING To be sold in the United States as “organic,” all agricultural products, including domestic and imported livestock products, must comply with National Organic Program regulations. The United States Department of Agriculture (USDA) reg- ulates the production and labelling of “organic” livestock and livestock products under the Organic Foods Production Act of 1990 and the National Organic Program (NOP), Section 7 of the Code of Federal Regulations (CFR), Part 205, which is also known as the “NOP Final Rule” (USDA, 2000). Dairy animals must be fed and managed organically for at least one year prior to the production of organic milk. Slaughter animals must be managed organically from the last third of gestation, or from the second day after hatching for poultry. Feed must be 100 percent organic. All livestock must have access to the outdoors, and ruminants must have access to pasture during the growing season. Organic livestock producers must establish preventative livestock health management practices. Medical treatment cannot be withheld from sick animals to maintain the animals’ organic status. The use of growth hormones, antibiotics, genetic engineering, and cloning is prohibited, as is the feeding of slaughter by-products. All organic livestock production and processing operations must be certified by USDA-accredited certification agencies. Detailed records of all feeds, medications, and transactions must be maintained. Organic integrity must be protected by preventing organic livestock and livestock products from contacting prohibited substances or being commingled with non-organic products Source: Reproduced from Riddle (2012) with mandatory and voluntary international product standards through the introduction of organic accreditation and certification schemes, and (3) establish organic farmer sup- port schemes (such as the EU Organic Farmer Support Schemes) to provide incentives for conversion to or maintenance of the organic status of dairy farms. Uruguay is well positioned to consolidate the policy and regulatory framework and public-private institutional infrastructure to enable the conversion to organic dairy production by building on the food safety and traceability systems that it has already in place for the livestock and meat industries. With 500 organic farms and 759,000 hectares of organic land (5.1 percent of arable land) for the meat, wine, honey, citrus, and dairy industries, Uruguay can leverage the expertise and regulatory framework oriental republic of uruguay 184 Integration into Global Value Chains The Dairy Industry and the ICT Industry and public-private institutional infrastructure, such as the National Institute for Meat for the beef industry, to support the adoption of organic production and processing practices and minimize the costs of converting to organic dairy production. Many European countries—such as Denmark, the UK, and France, which have the highest market penetration for organic dairy products (24 percent of dairy market in Den- mark)—are good models of how a package of sector-specific regulatory reforms and adoption of international product standards, along with organic sourcing polices for public procurement (France), and organic farm conversion and maintenance schemes can facilitate entry into the higher value organic dairy market. In Uruguay in particular, the implementation of this repositioning strategy would require adopting the following coordinated package of public policies and indus- try-level initiatives: 1. Harmonize national19 legislation and regulations with international standards20 on pasture management, seed certification, food safety, maximum residues fertilizers, pesticides, and livestock feed regulation, livestock health care practices, and traceability; 2. Conduct an industry level audit on organic dairy farm practices in Uruguay to assess implementation gaps and investment needs to launch or recalibrate temporary support schemes for conversion to organic; 19 The Codex Alimentarius and IFOAM guidelines are minimum standards for organic agriculture, intended to guide governments and private certification bodies in standard setting. As such, they can be considered “standards for standards.” Governments can use these texts to develop nation- al organic agriculture programs, which are often more detailed because they respond to specific country needs. Most national standards (e.g., EU countries, Japan, Argentina, India, Tunisia, USA), are specified in legally binding regulations (www.ifoam.bio). 20 The FAO/WHO Codex Alimentarius Commission (the inter-governmental body that sets stan- dards for all foods) has produced international guidelines for the production, processing, labeling and marketing of organically produced foods to guide producers and protect consumers against deception and fraud. All member states of the Codex Alimentarius Commission have agreed on these guidelines. The private sector’s equivalent to the Codex Alimentarius guidelines is the In- ternational Basic Standards for Organic Production and Processing, created by IFOAM. Codex Alimentarius and IFOAM guidelines include accepted management principles for the production of plants, livestock, bees and their products (IFOAM makes provisions also for fibers, aquaculture and non-wood forest products); for handling, storage, processing, packaging and transportation of products, and a list of substances permitted in the production and processing of organic foods. These guidelines are regularly reviewed, particularly the criteria for permitted substances and the process by which inspection is carried out and certification held (www.ifoam.bio). chapter 5 Strategic Repositioning Options and Recommendations 185 3. Introduce organic accreditation21 and certification22 schemes for service provid- ers and farms to facilitate compliance with mandatory and voluntary23 international product standards; and 4. Establish temporary non-distortive organic farmer support schemes to provide in- centives for conversion to, or maintenance of, the organic status of dairy farms, based on the results of the industry audit on organic dairy practices and implementation gaps under point (2). 5.1.2. Recommendations for the Perishable Premium Local Strategic Segment of the Dairy GVC Strategic Repositioning through a Collective Upgrading and Formalization Strategy for Artisanal Cheese Producers. The analysis of the PPL segment points toward the strategic repositioning option of pursuing a collective upgrading and formalization 21 Accreditation is a procedure by which an authoritative body evaluates and gives formal rec- ognition that a certification program is in accordance with the standards of the authoritative body. For organic agriculture, certification bodies can apply the voluntary international stan- dards and/or the national mandatory standards and be accredited by the related “authority” . The International Organic Accreditation Service (IOAS) accredits certification bodies according to IFOAM Accreditation Program criteria by delivering the “IFOAM Accredited” logo. IOAS is an independent NGO that ensures global equivalency of certification programs and attempts to harmonize standards, taking into consideration local differences. Membership in IFOAM by certifying bodies does not constitute IOAS accreditation. Governments or national accredita- tion bodies accredit certification bodies operating in their country, if their country has organic agriculture legislation. Both private and public bodies adhere to the International Organization for Standardization basic standards for accreditation of certifiers (ISO 65) in addition to their specific requirements (www.ifoam.bio). 22 Certified organic products are those which have been produced, stored, processed, handled and marketed in accordance with precise technical specifications (standards) and certified as “organic” by a certification body. Once a certification body has verified conformity with organic standards, the product can be labeled as such. This label will differ depending on the certification body, but can be taken as an assurance that the essential elements constituting an “organic” prod- uct have been met from the farm to the market. An organic label applies to the production process, ensuring that the product has been produced and processed in an ecologically sound manner. The organic label is therefore not a product quality claim (www.ifoam.bio). 23 In some countries (e.g., Germany), individual certification bodies may produce their own stan- dards, which can be more stringent than the regulation in force, usually in response to specific consumer demands. Although these are not legally enforceable, private certifiers may be more re- strictive than is required by law (www.ifoam.bio). oriental republic of uruguay 186 Integration into Global Value Chains The Dairy Industry and the ICT Industry strategy for artisanal cheese producers (Box 12) geographically clustered in the regions of Colonia and San Jose. The objectives of this strategic repositioning option would be to: ◆◆ Increase the share of value added captured by artisanal cheese producers on the domestic market in Uruguay, as artisanal cheeses are currently sold in bulk at local markets (ferias) or through small distributors under their private labels for a limited price premium. ◆◆ Consolidate sustainable formal jobs in rural areas, which risk being displaced by global integration trends. In fact, 23 percent (800) of the 3,600 registered milk producers in Uruguay are artisanal cheese producers. Another 47 percent (1700) produce less than 1400 liters of milk per day (INALE 2015) and only supply milk to processing plants. These groups would benefit from a collective upgrading initiative in the PPL as they constitute the weakest actors in the PPL value chain and might benefit from increasing their bargaining power in the chain. BOX 12. THE POTENTIAL FOR PPL: HOW WISCONSIN CREATED THE WISCONSIN CHEESE BRAND In 1994, the Wisconsin Specialty Cheese Institute was formed to promote specialty cheese in Wisconsin, a Midwestern state of 5.7million people. In the same year the Wisconsin Center for Dairy Research, the Wisconsin Milk Marketing Board and UW-Extension (an outreach arm of the University of Wisconsin that uses univer- sity resources and research to meet the specific needs and interests of Wisconsin residents and communities) established the Wisconsin Master Cheesemaker Program as an advanced education program for experienced cheesemakers. In the first ten years specialty cheese1 production more than doubled. Recognizing that there was further potential, in 2005, the Dairy Business In- novation Center was created. Its original mission was to strengthen the image of the specialty cheese industry in Wisconsin by better distinguish itself from the commodity cheese industry, emphasizing Wisconsin’s deep-rooted cheese-mak- 1 Greenberg (2005) defines Specialty Cheese as “cheese produced in limited volume, with dis- tinctive characteristics that result in high quality products, create added value and command a premium price from consumers” chapter 5 Strategic Repositioning Options and Recommendations 187 ing heritage, developing more branded cheeses and emphasize the unique artisan characteristics of Wisconsin specialty cheeses. The Dairy Business Innovation Center also offered business development assistance to farmers and cheese processors for value-added dairy product development, business planning and market development. By 2012, The Dairy Business Innovation Center had been instrumental in the construction of 43 new dairy plants, 72 expanded dairy plants, and the creation of more than 50 new cheese varieties.2 By 2013, Wisconsin’s specialty cheese production exceeded 640 million pounds (90 percent is sold beyond state borders), accounting for 22 percent of Wisconsin’s total cheese production and 46 percent of total U.S. specialty cheese production. As shown in Figure 85, Wisconsin is also the fourth largest cheese-producing region in the world.3 FIGURE 85. Wisconsin vs Top Cheese-Producing Nations (2013) 9000 8000 7000 6000 5000 4000 3000 2000 1000 USA (ex. Wisconsin) Germany France Wisconsin Italy Netherlands Poland Russia Egypt Argentina 2 Carpenter (2012) Cheese Underground, Available from : http://cheeseunderground.blog- spot.com/2012/09/the-end-of-dairy-business-innovation.html Date Accessed: 4th March 2017 3 America’s Dairyland (2015) 2015 Dairy Data. Available From: http://www.americasdairy- land.com/economicimpact/statistics/dairystatistics oriental republic of uruguay 188 Integration into Global Value Chains The Dairy Industry and the ICT Industry ◆◆ Foster business formalization among informal cheese producers through the provision of shared services to improve regulatory, tax, and product standard compliance for the micro and small entrepreneurs willing to participate in a collective upgrading program. ◆◆ Prepare the groundwork both in terms of regulation, product standards, and in- vestment, to enter the Perishable Global Premium (PGP) strategic segment in the medium term. Policy and Private Sector Initiatives enabling the Strategic Repositioning The objectives of focusing on the artisanal cheese segment are valid on grounds of improving sustaining rural livelihoods, promoting regulatory compliance and business formalization, and building the foundations for entry into international markets in the PGP segment in the medium term. Nevertheless, the growth expectations for the short term need to be mitigated in consideration of the fact that (1) the small size of the do- mestic market in Uruguay limits the growth prospects of any local strategic segment such as the PPL, and (2) the domestic dairy market shows signs of saturation. Nonetheless, significant efficiency gains and firm-level upgrading can be achieved by focusing on the following package of regulatory and policy initiatives: ◆◆ Develop voluntary yet enforceable product standards for cheeses to obtain artisanal geographical certification of origin such as “Colonia cheese” , with compliance moni- tored and sanctioned by local industry associations or cooperatives; ◆◆ Strengthen food safety, sanitary, and phytosanitary control mechanisms, both by consolidating public veterinary and sanitary service provision at the local level, and by supporting the introduction of good agricultural practices and food safety man- agement practices through capacity building and advisory services by local industry associations and cooperatives; ◆◆ Enable investment in a distribution network, with a cold chain as necessary, to be owned and operated by an industry association or cooperative of artisanal cheese producers, to increase the bargaining power and value added retained by producers vis-à-vis small retailers and supermarket chains; ◆◆ Invest in developing a nationally recognizable brand for Uruguayan artisanal cheese to reap the benefits from the regulatory changes and investments proposed under recommendations (1), (2), and (3). Using the brand and the related extension and dis- tribution services must be conditional on producers’ compliance with the food safety and product standards established under recommendations (1) and (2). The combined package of firm-level self-interest, public pressure toward regulatory compliance, and self-governance mechanisms by collective organizations can lead to a virtuous process of formalization and upgrading as with buffalo mozzarella producers in Southern Italy and fruit exporters in Northeast Brazil (Box 13). chapter 5 Strategic Repositioning Options and Recommendations 189 BOX 13. WINE, BUFFALO MOZZARELLA, AND FRUIT: FORMALIZATION AND UPGRADING THROUGH COOPERATION IN ARGENTINA, SOUTHERN ITALY AND THE NORTHEAST OF BRAZIL In a classic case, in Argentina in the 1990s two neighboring provinces took differ- ent approaches to rescuing their wine industries. One implemented one-off tax breaks that attracted a short surge in private investment that soon fell away. The other built a network of institutions with participatory governance, generated a stream of innovations for a decade, and steadily grew to take 2% percent of the global market. In the Argentinean case above, the province of Mendoza built a network of such consultative and participatory institutions, with new institutions spinning out of old ones to perform new tasks and old ones being rejuvenated or reformed. These were all connected in a dense web of cross-governance, so that by the end of the decade an industry loosely connected at the beginning had forged deep networks of learning (Figure 86). Mendoza has in common with Petrolina-Juaziero in Northeast Brazil and Campania in Southern Italy the process through which trust was built among the implementation networks of firms. Although the initial challenges facing fruit FIGURE 86. Building trust among firms through cooperation networks: Mendoza before and after Mendoza wine industry, 1989 Mendoza wine industry, 2001 oriental republic of uruguay 190 Integration into Global Value Chains The Dairy Industry and the ICT Industry exporters in Petrolina-Juazeiro and mozzarella manufacturers in Campania were different, their underlying problems were the same: failure to cooperate would undermine the competitiveness, perhaps even the viability of the local industry. As a result, the producers came together in defense of their own self-interest. And in both cases, the initiative was taken by a small group of large producers, precisely those who had most to lose should the situation not be corrected*. Yet, in both cases, these producers’ associations quickly became more encompassing and hence representative organizations. As a result of government pressure, both the Consorzio and Valexport opened its doors to all local producers involved in the same sectors. Essentially government agencies entered into an exchange with these producers’ associations. In return for the provision of a public or quasi-public good -- granting the DOC (certification of origin) to the buffalo mozzarella cheese producers in Southern Italy and providing extensive financial and technical sup- port to the fruit fly eradication program in Petrolina-Juazeiro -- the government insisted that these associations open their doors and become truly representative bodies. Finally, both cases illustrate the importance of self-governance mecha- nisms in supporting and maintaining the cooperative efforts of the local producers. Careful monitoring efforts by Valexport was essential to the success of the fruit fly eradication program. Without these efforts as well as the association’s provision of collective services to all members, pest control in the PJ region would not have been possible. Periodic testing and sanctioning of members were also essential to the ability of the Consorzio to reduce the adulterating practices among its members. Had these practices continued, the distinctiveness and hence source of competitiveness of the entire industry would have surely eroded. In short, all three elements—self-interest, government policy, and self-governance institu- tions were essential to the construction of trust among producers in Campania and Petrolina-Juazeiro. * In Campania, four large producers involved in both buffalo herding (milk production) and cheese manufacturing together founded the Consorzio to defend themselves from the dual threat of large, outside firms entering the local industry and of local firms adulterating the product. In Petrolina-Juazeiro, again four of the largest growers together established Valex- port to avoid past mistakes that led to the decimation of the local melon industry. Source: Adapted from (Criscuolo, 2012 mimeo; Jordan, 2012, Locke, 2004) chapter 5 Strategic Repositioning Options and Recommendations 191 5.2. RECOMMENDATIONS FOR THE ICT/ICTES GVC The analysis of the ICT/ICTES industry highlights the viability of the “Boutique” strategic segment and potential of the “Powerhouse” strategic segment for Uruguay. It points to two strategic consolidation and repositioning options: 5.2.1. Recommendations for the “Boutique” ICT/ ICTES Strategic Segment Uruguay’s ICT/ICTES firms are strongest in the “Boutique” strategic segment. Opportunities to strengthen the value chain do exist, particularly in generating and maintaining specialized human resources and increasing demand for services. The first recommendation is to consolidate Uruguay’s software industry position in the “Boutique” strategic segment by increasing its foothold in main export markets, namely the U.S. and Latin America, in terms of direct marketing channels, B2B client management services, and geographical co-location and co-production. To increase the demand for Uruguay’s ICT services, it is essential to Increase Uruguay’s foothold in major export markets (the U.S. and Latin America) in terms of direct marketing chan- nels, B2B client management services, and geographical co-location and co-production. In order to achieve this objective, the analysis of the “Boutique” segment points to the following areas of focus and recommendations for policymakers: 1. Recalibrate the focus of export promotion programs for ICT/ICTES from micro and small enterprises to dynamic start-ups, and mid-sized firms with reasonable prospects of successful internationalization. The initial entry into a new export market by a Uruguayan software company in the “Boutique” segment requires a minimum investment of US$ 300,000, a business development effort of one-year minimum, and a minimal annual turnover of US$ 4 million. Unfortunately, there seem to be a mismatch between these minimum entry requirements that can be met mostly by medium-sized companies and the focus of the government supported programs of export promotion which are geared towards small enterprises unable to meet the minimum market entry requirements and contribute to low rates of export survival. 2. Reduce barriers to trade for Uruguayan ICT/ICTES exporters through a clear strategy of integration into the global marketplace, including negotiating market access on a bilateral basis as well as double taxation agreements. Firms in the “Boutique” segment of the ICT/ICTES industry in Uruguay have shown a significant export dynamism in spite of lack of bilateral or multilateral free trade agreements for the service sector. However, this situation is beginning to erode the cost competitiveness of Uruguayan software services exporters as they are subject to differential tax rates (for example oriental republic of uruguay 192 Integration into Global Value Chains The Dairy Industry and the ICT Industry 10% in Paraguay, or 25% in Peru). The retreat of Uruguay from the multilateral trade agreement of the Trade Agreement in Services (TISA) constitutes a setback in the process of enhancing the export competitiveness of Uruguayan service exporters. 3. Engage pre-emptively on tailored STEM education policies and programs to ad- dress the projected skills shortage for the ICT/ICTES industry in Uruguay expected to constraint the growth of the Boutique segment. Human capital is the key asset to the sustainability of a knowledge intensive ICT/ICTES industry, and Uruguay has performed well over the past decades in supplying a sizable pool of skilled workers that have constituted the entrepreneurial backbone of the Boutique segment. However, the strong demand growth for skilled workers by the software and global business services industries (estimated at 500 technical graduates per year by CUTI) has already outpaced the supply of technical graduates (300 per year) by the Uruguayan educational system. A well-concerted secondary and tertiary education policy to address the projected skill shortage will be vital for the sustainability of the whole industry, including the transition to the “Powerhouse” strategic segment (see below). 5.2.2. Recommendations for the “Powerhouse” ICT/ICTES Strategic Segment The second one is a medium to long-term strategy, and focuses on establishing the enabling conditions for a strategic repositioning of the ICT/ICTES industry to the “Powerhouse” strategic segment. Scale and rapid business model scalability, sound intellectual property rights legal framework and protection, state-of-the-art ICT infra- structure, access to a sizable and diverse technological talent pool, and availability of catalytic financing for knowledge intensive entrepreneurship represent the key ena- bling factors for the emergence of significant market players capable of competing in the “Powerhouse” segment. While the ‘smallness’ of Uruguay remains an overarching constraining factor, the following policy recommendations can contribute to overcome the challenges associated with being a small country with a small domestic market and possibly enter on equal terms the global powerhouse strategic segment: A. ICT/ICTES Skills: Increase the critical mass of skilled workforce through a co- ordinated package of policy changes on attracting returnees and foreign talent, secondary and tertiary education, on-the-job specialization and continuous training, and aftercare for ICT/ICTES FDI. Access to a wide pool of ICT/ICTES talent and a skilled workforce is the single most critical factor for a knowledge intensive industry such as ICT/ICTES, especially to consolidate a competitive position in the Boutique segment and enter the Powerhouse strategic segment. Uruguay has done very well in cultivating a highly skilled talent pool over the past decades, however, chapter 5 Strategic Repositioning Options and Recommendations 193 as it approaches the natural limits to further growth of the critical mass of ICT/ ICTES talent due to the smallness of the country, the following policies might help overcome this challenge: 1. Promote increased diversity in STEM education and improve the rate of participa- tion of women and lower income Uruguayans. Only 30 percent of the workforce in ICT in Uruguay are women, which tend to fill administrative and support positions in 80 percent of the cases (CUTI, 2015) (does not include ICTES). There is similar inequality across different socio-economic classes—while 70.3 percent of students from top income brackets complete secondary education, only 7.6 percent of students from lower income brackets achieve the same (UNICEF 2013). This leads to low uni- versity enrollment and graduation rates. A more proactive diversity policy in STEM education would help increase graduation rates and mobilize significant untapped talent pools for ICT/ICTES. 2. Enable proactive global recruitment policies to attract and retain returnees and foreign talent in ICT/ICTES (Figure 87). Any changes to STEM education policies will bear fruit in the medium to the long term. The Government of Uruguay could therefore consider partnering with the ICT/ICTES industry to enable proactive global recruitment policies by firms to build the human resources to grow the sector quickly. FIGURE 87. Percentage of Employed Population in the U.S. and Silicon Valley with a BA or Higher that is Foreign-Born 70% Silicon Valley 70% United States 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% Science All Industries Science All Industries & Engineering & Engineering  2007   2011 Source: U.S. Census Bureau, American Community Survey PUMS (Collaborative Economics 2016) (Wang 2014) oriental republic of uruguay 194 Integration into Global Value Chains The Dairy Industry and the ICT Industry Uruguay ranks 109th on the WEF indicator on the availability of scientists and engineers, 98th on the capacity to attract talent, and 70th on the capacity to retain talent (WEF, 2016); 3. Enhance skills policies and curricula, jointly with the ICT/ICTES industry, for continuous learning and on-the-job specialized-skills training programs. Con- tinuous learning and high-specialization are two critical success factors for firms and their employees both in the Boutique and Powerhouse strategic segments, as competition is based on the ability to rapidly master the knowledge and capabilities to operate in the emerging programming platforms, which will shape the competitive landscape for the following 3 to 7 years. This requires continuous and significant investment in the workforce as it takes between one and two years of training for an already experiences system engineer to switch to an emerging software platform. The design and co-funding of demand-driven, flexible, and on-the-job learning curricula between the public sector and industry associations is an effective policy option to be considered. Box 14 illustrates how the State of Michigan in the U.S. BOX 14. ICT/ICTES SKILLS POLICIES. A PUBLIC-PRIVATE MULTIPRONGED STRATEGY IN MICHIGAN AND BRAZIL An instructive case is “Shifting Code,” a mentoring program started in Southeast Michigan in 2012 to address the shortage of qualified IT professionals for the local market. The program seeks to develop the pipeline of IT talent in the region by asking IT firms to collectively decide upon specific skills that they would like to see developed in the local workforce. These wishes are then imparted upon local community colleges, which create customized programs aimed at meeting employer needs. Shifting Code costs students a nominal fee of $100. The true cost of this program is absorbed by the community colleges and the state of Michigan; it costs the state $1,700 per student and the community college $1,300 in technology, services and teachers. The companies provide mentorship, instruction, internships and potential hiring opportunities. Thus, employers outsource some of their training and reserve the right to hire or not to hire graduates. Programs such as this could ensure greater alignment between curricula and employer needs. A second potential solution is to fund internal training programs. Companies usually complain that poaching reduces their willingness to invest in new hires. As a means of offsetting the cost and risk of running these programs, governments can subsidize training of new hires for up to six months. Through these programs, each chapter 5 Strategic Repositioning Options and Recommendations 195 registered ICT/ICTES firm would have an annual quota of funded traineeships, giving firms a greater incentive to invest in workforce training Finally, many emerging markets have successfully developed programs that send their top students overseas for tertiary studies, with the caveat that they return once they are finished. Brazil’s “Science Without Borders” set out to grant 100,000 fellowships to undergraduates, graduate students and postdoctoral fellows for up to three years. The purpose of the program has been to send Brazilian students abroad to study STEM in leading institutions around the world. The private sector is involved with this program as well, as 25% of the funding comes from companies in Brazil. 85,000 students have already been put through the program and the last batch of 15,000 students has been selected. Students must return to Brazil upon completion of their studies. Source: Adapted from (Sturgeon and Zylberberg, 2015) and many emerging economies, such as Brazil, have adopted a multipronged joint public-private strategy to tackle this issue. 4. Focus on tailored FDI aftercare policies to facilitate the relocation of knowledge-in- tensive function by MNCs as a mechanism to increase the pool of ICT/ICTES skills in Uruguay. Uruguay has been able to ride the wave of global business services offshoring, attract key players in the industry such as TATA Consulting, IBM, Globant, Mercado Libre and others for a total FDI investment of US$ 156 million. While a good share of these FDI investments have moved to Uruguay to service the “Low-cost” and “Abun- dant Skills” strategic segments of the ICT/ICTES industry, the business linkages and knowledge transfer flows forged over the time have contributed to create a domestic BOX 15. BECOMING AN ICT/ICTES “POWERHOUSE”: THE CASE OF IRELAND Ireland, a country of 4.5million people, is the second largest exporter of computer and IT services in the world. ICTES Exports (BoP) have risen from US$31 billion in 2005 to US$88 billion in 2015 (183 percent growth). OECD countries grew from oriental republic of uruguay 196 Integration into Global Value Chains The Dairy Industry and the ICT Industry US$509 billion to US$1,073 in the same period (111 percent growth). Dublin plays host to Google (employing over 2,500 staff ) as well as Facebook, Amazon, Yahoo, Twitter, Hubspot, Dropbox, and LinkedIn. Global software applications and digital services stalwarts such as Intel, HP, IBM, and Microsoft are also well established. Dublin has also been able to attract smaller and more nimble gaming firms such as Big Fish, EA, Havok, DemonWare, PopCap, Zynga, Riot Games, and Jolt . Although there has been some concentration of activity and growth in Dublin, other smaller cities and regions of Ireland have also benefitted. As an example, in 2015, Uber set up a Centre of Excellence in Limerick (a city of 95,000 people) which is also home to Thomson Reuters, QAD, Intel, Arista, Dell, and several other tech companies. In the west of the country Galway has over 190 tech companies, including multinationals such as Avaya, IBM, Oracle, EA, Cisco, SAP and Apple (who is investing US$850 million in a new data center). As is indicative of the Pow- erhouse segment, Ireland has also been able to foster its own indigenous industry and companies like Ex Ordo and Altocloud make a significant contribution to the Galway ICT ecosystem . The growth of ICT/ICTES in Ireland is largely due to sustained FDI-attraction and export promotion policies. Even in 2005, of the 17 EU countries plus the U.S. and Norway for which OECD provides data, Ireland, at just over 20 percent re- corded the highest share of services-sector employment in foreign-owned firms . Barry (2013) attributes Ireland’s ability to attract FDI during this period to EU membership, Western European governance standards; strong English-speaking workforce; a low corporation tax rate; the efforts of the Industrial Development Agency, and an educational system that complemented and worked in partnership with Ireland’s FDI-oriented development strategy. The Industrial Development Agency (IDA) whose role is to attract foreign industry together with Enterprise Ireland (EI) a sister agency tasked with export promotion has had a particular impact on the growth of the ICT/ICTES sector in Ireland. Initially using “traditional” FDI attraction strategies (for example identifying large companies in target sectors and persuading them to locate in Ireland), the agencies shifted its focus towards ‘capability’ support in areas such as human resource development, R&D, marketing and market develop- ment as EU restrictions on state aids to industry tightened . Barry (2013) also notes that the IDAs bureaucratic and administrative capacity to inform policy directly has increased their influence and ability to translate market changes into effective real FDI. chapter 5 Strategic Repositioning Options and Recommendations 197 ICT/ICTES entrepreneurial pool and could be leveraged to facilitate the relocation of knowledge-intensive functions through a tailored FDI aftercare policy. Box 15 illustrates how Ireland successfully implemented a similar strategy. B. Consolidate Uruguay’s regional leadership in ICT infrastructure by adopting a pro-competitive policy and enabling entry to private investment. Uruguay is an ICT/ICTES leader in the region according to a variety of measures. The number of households with computers has grown rapidly since 2004 and today surpasses that of peers such as Mexico, Brazil, Argentina, Chile and Colombia and is on a par with Italy. Similarly in terms of mobile telephony, the number of telephones per 100 persons surpasses that in regional peers (with the exception of Argentina which has a similar figure) as well as a number of OECD countries such as the US, Spain and Germany. Uruguay also leads regional peers in the index of ICT/ICTES develop- ment. Data services stand out globally for their high speed and low price. However, Uruguay is one of the very few Latin American countries where the local fixed-line market is neither privatized nor liberalized. ANTEL, the state-owned incumbent, has a monopoly in the provision of local telephony and fixed broadband services. Other segments of the telecom market have been opened to competition, includ- ing international long-distance telephony, mobile telephony, and fixed-wireless broadband. Uruguay is also one of the few countries in the world where broadband access via cable modem does not exist (Table 27). This is in line with Uruguay’s position that allows SOEs already holding a legal mo- nopoly in at least one market to extend its dominance to other related markets. For instance, ANTEL has extended its legal monopoly over fixed lines with a de facto TABLE 27. Degree of government participation in ICT infrastructure Market National, state or provincial Gov’t share Number of share of governments hold equity in the companies Yes No the largest stakes in the largest firm in largest firm operating in company in the sector in the sector the market the sector Telecom Fixed-line network X 100% 1 100% Fixed-line services X 100% 1 100% Mobile services X 100% 3 50% Internet services X 100% 3 Over 90% Source: World Bank, 2015. oriental republic of uruguay 198 Integration into Global Value Chains The Dairy Industry and the ICT Industry monopoly over optic fiber network for data transmission while private operators have neither received licenses to use their own network nor access to ANTEL’s network (World Bank, 2015). Progressively allowing entry to private investment into ICT infrastructure would enable to sustain the significant and continuous investments that are needed to sustain entry and leadership in the Powerhouse strategic segment. C. Increase access to catalytic financing and early-stage investing to foster the ICT/ ICTES entrepreneurship ecosystem. Limited access to finance for knowledge in- tensive start-ups is a common constraint for the ICT/ICTES industry across several countries due to the intrinsically intangible nature of the industry. Uruguay is no exception and in a recent survey of the ICT/ICTES industry in Uruguay conducted by the Instituto de Competitividad – UCU (2015), lack of access to finance ranked as the top 3rd constraint to the competitiveness of the industry, after the cost and availability of skilled workers. In spite of significant progress made over the last decade in early stage financing, Uruguay still lags behind in terms of venture capital availability as it ranks 71th in the relative WEF indicator for 2016 (Figure 88). A public expenditure review and rationalization of the programs supporting in- novation and entrepreneurship under the newly established Sistema Nacional de Transformacion Productiva y Competitividad would contribute to keeping the policy focus on bridging this critical financing gap both for the Boutique and Powerhouse strategic segments of the ICT/ICTES industry. FIGURE 88. Uruguay Ranked 71th in terms of Venture Capital Availability in 2016 according to the World Economic Forum United states 20 Chile 40 Peru 60 Uruguay 80 100 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: WEF, 2016 chapter 5 Strategic Repositioning Options and Recommendations 199 D. Leverage Algorithmization trends to overcome the shortage of a large pool of ICT/ICTES talent. By developing global specialization in algorithmization, mech- anization and robotization of tasks, Uruguay’s ICT/ICTES industry could not only develop competitive advantage in a niche that is growing in significance, but also actively contribute to reducing the reliance of the global industry on human capital (i.e. changing the value structure in such a way as to displace established market leaders, networks and alliances). This kind of ‘disruption’ is not unprecedented and does not always emerge from established “Powerhouse” strongholds, and Box 16 illustrates the case of the ‘Voice over IP’ (VoIP) in Estonia. BOX 16. E-ESTONIA. HOW VOICE OVER IP (VOIP) ENABLED ESTONIA TO BECOME A NICHE ICT/ICTES GLOBAL PLAYER Since the inception of Estonia’s Information Policy in 1994, the small country of 1.3million people has continued to drive its digital strategy forward by using an e-Government as a platform for development and advancement. With the highest digitization index in the EU1, Estonia provides (access to) a large proportion of its services online including Education, Financial Services, Healthcare, Public Safety, Policing and Utilities. In particular, Estonia’s launch of its ID-card system, Mobile ID and i-Voting systems have increased the demand for cyber-fraud protection in the region and have so doing spurred high growth in this particular industry. As a result, Estonia now enjoys particular comparative advantage in cyber security centers (and management), security software development, defense software and systems integration, mobile security and wireless security. This is reflected in the fact that NATO’s and Skype’s security teams are located in Estonia. Much of this growth can be attributed to Estonia’s ICT/ICTES labor pool: Estonia has a proportionally high level of young workers, which has allowed more niche-oriented specialisms, such as gaming, to emerge. Estonia also has a higher than average degree/post graduate education level, which will bode well for future co-operative ventures, perhaps encompassing Engineering and strong foreign language abilities. Estonia’s most notable export has been Skype. Developed in Tallinn, the na- tion’s capital, Skype Technologies’ Skype platform has commoditized the cost of 1 EU eGovernment Report 2016, Available from: https://ec.europa.eu/digital-single-market/ en/news/eu-egovernment-report-2016-shows-online-public-services-improved-unevenly oriental republic of uruguay 200 Integration into Global Value Chains The Dairy Industry and the ICT Industry international calls to near zero and in so doing virtually eliminated this previous- ly lucrative revenue stream for telecommunications companies (the Technical Advisory Council estimates that only 6 percent of Americans will use the PSTN by 2018 (Technology Advisory Council 2011). Before ‘Voice over IP’(VoIP), com- munication was largely possible through Public Switched Telephone Networks (“landlines”) whose value chain structure of the industry relied heavily on main- tenance of physical infrastructure (particularly the switches themselves which place huge demands on heating, ventilation and air conditioning and consume a huge amount of power). With the increasing popularity of VoIP services, the value chain of many/most strategic segments in the telecommunications industry has completely changed over the last ten years. A complete switch to all IP networks will mean significant changes in maintenance, power consumption, and real estate on which have has previously hinged the value structure of the strategic segments in the industry. In the meantime, Tallinn has capitalized on its early work in the field having more than 50 companies (e-Estonia 2016) specializing in the area of mobile solutions and telecommunications alone and is well positioned to support the expansion of IP networks globally. Firms in Uruguay’s ICT/ICTES sector may have an opportunity to similarly hone a niche that will at the same time disrupt the value chain structure itself toward a more accessible actuality. 5.3. RECOMMENDATIONS FOR DATA COLLECTION AND STATISTICAL TOOLS ON GVCS High-quality data is crucial for evidence-based policymaking. While data available in Uruguay is of high quality, two improvements could make it better suited for the analysis of participation in international production networks. These are: 1. Matching firm-level survey data from the National Economic Activities Survey, com- piled by the Instituto Nacional de Estadísticas, with customs transactions data (from customs registries). Matching these datasets through a common identifier (for example, the unique registration number of the firm) would allow to, when looking at customs transactions, isolate firms that export and import and produce from firms that are only chapter 5 Strategic Repositioning Options and Recommendations 201 international traders, aggregating production from small and medium firms. It would also allow for a more detailed analysis of drivers of a firm’s position into a given value chain in terms of its upstreamness, or of quality upgrading. For example, richer data may help understand how financial constraints affect the ability of a firm to access imported inputs. Similarly, they could shed light on how capital intensity and productivity affect the likelihood to expand the range of production stages performed by a given firm. 2. Collecting information on the nature of firms’ linkages. 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