TEXA S B U S I N E S S  R E V I EW Bureau of Business Research • IC2 Institute • The of Texas at Austin FEBRUARY 2008

Monterrey, in the Mexican state of Nuevo of 2007 in with knowledge-based León, long has been known for its large industrial small firms, faculty and administrators from The enterprises and heavy industry. Today, however, local (Monterrey Tech, UANL, and the city is transitioning to a more knowledge-based Universidad de Monterrey), local government Growth of economy marked by tech startups and innovation. officials, and representatives from CANIETI This article, based on interviews and data collected (the National Chamber of the Electronics in Monterrey by IC2 Institute researchers, looks at Industry). Knowledge- the roots of the changes underway in Monterrey and identifies some of the keys to the city’s Small Firm Creation in Monterrey in the Transition Based transformation. Period: 1982-2000 Starting in December 1982, with Mexican Small Firms onterrey’s industrial growth started President Miguel de la Madrid’s administration, Maround the end of nineteenth century, gradually abandoned the import in Monterrey, when large companies in the textile (e.g., La substitution model adopted in 1940 and began Mexico Fama, El Porvenir, La Leona), brewing (e.g., to liberalize the economy. Trade liberalization Cervecería Cuauhtémoc), glass (e.g., Vidriera accelerated in 1985 when Mexico became a Monterrey-VITRO), and cement (Cementos member of the General Agreement on Tariffs by Hidalgo) sectors were created in the city. While and Trade (GATT), and again in 1995, when Elsie the growth of the large (and in many instances Mexico joined the North American Free Trade family-owned) companies in Monterrey is well Agreement (NAFTA). This Agreement lowered Echeverri-Carroll documented, there is scarce information on the tariffs, opened up the country to foreign capital, 2 Bureau of Business Research, IC Institute growth of small technology-based companies and reduced the role of state-owned enterprises. A The University of Texas at Austin in the city.1 more open economy increased pressure for firms Today, there is an important cluster of across Mexico to become more efficient, reduce technology-based small firms in Monterrey, costs, increase quality, and implement product mainly in the information technology (IT) and process innovations. The “Regiomontanos” sector. This cluster emerged as the result of (as people from Monterrey are called in Spanish), “business incubation” services provided by the known for their entrepreneurial spirit, were at large, family-owned firms in the city during the the vanguard of these changes. transition period from protectionism to free According to our interviews, many large trade (1982-2000). More recently, the processes firms in Monterrey adopted several strategies Inside: of creation and growth of small technology to respond to increasing competition from Monterrey International firms have been accelerated as a result of specific foreign manufacturers during the transition City of Knowledge: policies implemented by federal and state period from the import substitution model governments and high tech business incubators to free trade. One strategy was to concentrate The Vision developed within the largest local universities, their activities in “core competencies” (vertical by Jaime Parada...... 2 in particular, Monterrey Tech and Universidad disintegration), creating an opportunity for Autonoma de Nuevo León (UANL). Evidence of some skilled workers to create their own small these twin processes, elaborated below, emerged startup companies.2 The large firms not only from interviews conducted during the summer served as business incubators, (cont'd on p. 3) welve years have passed since the launch of It is not manufacturing, it is “mindfacturing.” The Tthe North American Free Trade Agreement It is not fundamentally a real estate project, but (NAFTA). NAFTA raised expectations for it is very important to have technology parks accelerated economic growth in Mexico, but where researchers and private companies can Monterrey the general feeling in our country is that the collaborate. It is not a single university campus anticipated sustainable development has not but broad connections among many universities, International occurred at the rate we had hoped. each with a wide range of talent. Finally, the Manufacturing plants hiring cheap labor MICK is not a short-term project but a new way City of (“maquiladoras”) in proximity to the world’s of life. It is not “made in Mexico,” but “created largest economy raised the quality of life for in Mexico.” The state government’s long-term Mexicans near the border in the mid-1990s, vision is to increase Nuevo León’s per capita Knowledge: but some of the gains were short lived. Other GDP by growing and attracting knowledge nations, with considerably cheaper labor costs, industries and activities and to promote an The Vision eroded Mexico’s relative advantage in some innovation culture throughout the state. low-cost manufacturing sectors and took away There are six basic strategies for the by market share. It quickly became apparent that program: Mexico needed a parallel vision or model with 1. To redesign the curricula of the education Jaime Parada which to build stable, long-term economic system growth. CEO and President, 2. To attract new research centers and Monterrey International To address this situation, the Governor of investment in technology-based companies City of Knowledge Nuevo León, México, initiated the Monterrey to Monterrey International City of Knowledge Program 3. To promote innovation in existing (MICK) in November 2004. The program’s companies strategic goal is to build a knowledge-based 4. To promote entrepreneurship and new economy for the region based on innovation, company formation using the talent and creativity of the region’s more than four million citizens. Other regions, 5. To increase urban infrastructure notably in Korea, Spain, and Ireland, have improvements undertaken similar aggressive programs with 6. To promote a culture of innovation and startling success. There is a clear relationship technology between economic growth and the investment For example, in education, the state has made in research and development and redesigned the academic agenda of high school innovation (R&D+i). South Korea, for example, and college institutions to emphasize five invested an average of about 0.4 percent of its strategic technology areas (Biotechnology, Health GDP annually into R&D in the 1970s and Sciences, Nanotechnology, Mechatronics, and had a GDP per capita of $500 (USD). Thirty- Information Technology). In coordination five years later, after committing to growing its with the State Ministry of Education, it has knowledge economy, South Korea today invests launched an initiative called “Innovec” to teach 2.8 percent of its GDP in R&D, and its per basic sciences in real-world situations at the capita GDP is almost $20,000 (USD). elementary school level, simultaneously fostering an interest in sciences and innovation. The Monterrey International City of Knowledge To attract new research centers and innovative Program technology companies, the state has begun Understanding that there are several possible constructing the Research and Innovation definitions of what a “Knowledge City” could Technology Park (PIIT), close to Monterrey in be, the government of the state of Nuevo León the town of Apodaca. The main purpose of the visualizes the MICK as a grand alliance among PIIT is to integrate innovation, research, and universities, companies, and government in a development through the linkage of universities, “triple helix” whose main purpose is to generate companies, and R&D centers. The first phase economic growth via innovation. The MICK of the PIIT consists of nine centers. Three of represents not just constant improvement but them are from universities: Monterrey Tech, disruptive change that imposes a new standard the State University of Nuevo León, and the for which everyone in the community strives. . Two more are centers

Texas Business Review 2 February 2008 from the National Science and Technology established 15 more R&D centers as well as Council (CONACYT): the Engineering and three high technology business incubators. Industrial Development Center (CIDESI) Local manufacturing firms in Monterrey have and the Advanced Materials Research Center launched at least three product design centers (CIMAV). Also committed to locating in the as well. PIIT are the Research and Advanced Studies The state understands that the Monterrey Center (CINVESTAV), the Monterrey IT International City of Knowledge program is a Cluster (a group of 42 small and medium- long-term strategy that will take years to develop, sized software enterprises), the Mexican RFID but the rewards—a diversified economy with company IDZ, and the State of Nuevo León’s a strong base of homegrown technology firms Institute of Water. thriving on innovative ideas—are very much The attraction of research centers and the worth the risks. creation of new companies in Monterrey is not limited to the PIIT but has spread to other Webpage address: local and regional institutions over the past Monterrey International City of Knowledge Program: 18 months. Local universities recently have http://www.mtycic.com.mx/html_eng/index.html

The Growth of Knowledge-Based Small Firms in Monterrey, Mexico (cont'd from p. 1) ...today in Monterrey, providing experience and knowledge to the new allowed IEBSA to have deep knowledge of its entrepreneurs, but in many instances they were client’s production system and to make solid there is a new “business the new firms’ only customers. The relationships recommendations about new technologies. philosophy” whereby between the large companies and the new The manager noted that today in Monterrey, large companies have startups were informal. Trust (built on previous there is a new “business philosophy” whereby multiple suppliers for familiarity with the large firm’s managers) was large companies have multiple suppliers for the basis of this relationship. Figure 1 illustrates different parts of their production systems, and different parts of their this process of technology firm creation, where their relationships with suppliers are mainly production systems, individuals acquired technical and business skills short-term, only for the duration of a specific and their relationships at large local firms before creating many of the project. Whether the small company is the with suppliers are small innovative firms in Monterrey. low-cost supplier is the key criterion in winning contracts with large firms now, not long-term mainly short-term, only A manager at IEBSA, an electronics firm founded in 1981, mentioned in our interview relationships between managers. for the duration of a that twenty years ago his firm was the only Not all large firms in Monterrey were successful specific project. IT supplier for one particular large company. in overcoming the challenges posed by the The long-term relationship with its customer economic transition; some of them were forced

Figure 1 Monterrey's Technology Business Creation Model: 1982 - 2000

Technology-based Startups

LARGE COMPANIES • CEMEX • DINAMICA • VITRO • Cervecería Cuauhtémoc

Source: Bureau of Business Research, IC2 Institute, The University of Texas at Austin

Texas Business Review 3 February 2008 to close operations. Often cited in our interviews compete with international (not just local) firms was the case of Dinámica, a subsidiary of the to supply the large local companies. Moreover, Alfa Group (a holding company). Employees in certain cases, large and small IT firms compete of Dinámica, for instance, left to create Softteck in the same local market. Such is the case of and Expertec, two of Monterrey’s most successful Neoris, which started as an IT department IT companies. Softteck, founded in 1982, within CEMEX but is now an independent The local universities today has 6,000 employees and competes with company partially owned by CEMEX and one also promote Tata, Infosys, and Wipro, the three top Indian of the largest IT services providers in Latin knowledge-based providers of software services. Blanca Treviño, America. Although its main line of business economic development Softteck’s CEO, describes Dinámica during our is outside Monterrey, Neoris competes with interview in the following way: “Dinámica was smaller IT firms in Monterrey for a share of through their high-tech such a marvelous school for some of today’s more the local market. business incubators. successful local entrepreneurs and managers.” In addition to faculty research and teaching, We interviewed several The close relationships among different groups local universities in Monterrey have adopted companies at the high- in the community and their positive effects on a third mission: to promote knowledge-based tech business incubators the growth of the city earned Monterrey the title economic development. UANL, for instance, “Best Place to do Business in Latin America” of the Monterrey Tech opened the Center for Business Incubation and by Fortune magazine in 1992. Some of the Technology Transfer (CIETT) in 2001 and and the UANL. Most successful outcomes of these relationships are well the High-Tech Business Incubator in 2005 to incubated companies known. The Instituto Tecnológico de Estudios commercialize its faculty’s R&D. G.A. Musik are developing new Superiores de Monterrey (Monterrey Tech) analyzed the link in Mexico between public was begun by a group of local entrepreneurs in R&D and the private sector. Mexico has a products and new 1943 to supply high-quality engineers for their public scientific research system that is large in business models that firms. Other outcomes, such as the creation of terms of basic research produced and resources help them penetrate the technology-based startups in Monterrey that spent. He pointed out that in an index created resulted from the linkages between large and U.S. market. by RAND Corporation to rank countries on small firms, are often overlooked by business Science and Technology capability, Mexico ranks magazine’s rankings. number 50 among 150 countries.3 Despite its relative strength by world standards, research Small Firm Creation in Monterrey in an Open in Mexico is public and supply driven, and Economy: 2000 to present scientists rarely establish any relationship with Mexico is now one of the most open of the industry. This model has resulted in research medium-sized economies in the world. The that, although publishable, rarely addresses any movement of goods, services, and capital is clear short- or long-term need of society or firms. practically free. As shown in Figure 2 (p. 6), in the Overall, the interests of innovating firms are not new economy, the catalysts for entrepreneurial well matched with the specialties of its research activity are more diversified than during the centers.4 In line with previous analyses, we transition period. In particular, we identified found that the commercialization of university three sources of new business creation: traditional R&D as a source of creation of new businesses large companies, university-owned high-tech in Monterrey is still in its infancy. business incubators, and R&D centers at the The local universities also promote knowledge- local universities and CONACYT (The National based economic development through their Council for Science and Technology). high-tech business incubators. We interviewed As competition from foreign companies several companies at the high-tech business increased, large firms decided aggressively to incubators of the Monterrey Tech and the UANL. penetrate the U.S. market, not only through Most incubated companies are developing new exports, but also through investments in branch products and new business models that help firms in the United States. They also broadened them penetrate the U.S. market. Moreover, their relationships with suppliers around the the common goal of reaching a large pool of world. As a result, although large, family-owned international customers is creating incentives firms continue to be important customers for for alliances among small local firms. This is small technology companies in Monterrey, in the a step up from a traditional business culture context of globalization, these small firms must where small firms compete (rather than develop

Texas Business Review 4 February 2008 alliances) to supply products and services to a Austin) place emphasis on the entrepreneurship relatively small pool of large local firms. rate—the percentage of the population of The Secretary of Economy created the TechBA non-business owners that start a business each 5 program to promote business accelerators in month. Although the economic development other countries (e.g., the United States, Spain, of high-tech regions is associated with the and Canada) that help Mexican companies continuous growth of large firms, what interests “TechBA has been an penetrate the global market. We interviewed policymakers is the high rate of technology- important program that based business creation in these cities. We some of the TechBA companies located in Austin, provides office space, Texas. These small companies are finding that the contend here that there is an important cluster of process of marketing their products in the U.S. new knowledge-based firms in Monterrey. The credibility, coaching, is challenging but very rewarding. Eduspark, a roots of this cluster can be found in the organic and contacts in the Monterrey firm in the TechBA program, creates entrepreneurship process incubated by the United States.” educational software. In the words of its CEO, family-owned firms as the economy transitioned “TechBA has been an important program that from protectionism to free trade and, more provides office space, credibility, coaching, and recently, the aggressive policies of the state of contacts in the United States.” Nuevo León and the federal government to promote knowledge-based entrepreneurship. The TechBA program is just one of many other government-supported initiatives to accelerate innovation in the country. Both the References federal government and the state of Nuevo 1. See, for instance, Eduardo Flores Clair (2000). León have recently introduced new policies Del Acero a la Diversión, Monterrey Industrial 1890- to promote innovations at small firms. The 2000. Ciudad Victoria Tamaulipas, Universidad de federal government, through the Secretary Monterrey-CONACYT. of Economy, created the Mixed Funds to 2. Vertical disintegration is the separation of a finance innovation projects at small firms. firm’s vertically related businesses into independent Another important initiative from the same firms. Large firms concentrate their activities on so- called “core competency” areas in which they hold Secretary is PROSOFT, which promotes the a competitive advantage or have valuable, difficult- software industry in Mexico. Many of the small to-replicate expertise. In all other areas outside core companies that we interviewed noted that these competencies, large firms rely on suppliers. two programs have benefited their innovation 3. G.A. Musik (2004). “Trade and Innovation activities. Performance of Mexico after NAFTA.” Center The State of Nuevo León has invested for Policy Research on Science and Technology (CRPROST). Simon Fraser University. Burnaby, significant resources in the expansion of a B.C., Canada. Working Paper 2004-0. http://www. high-tech entrepreneurial base, including the sfu.ca/cprost/publications.htm Monterrey International Knowledge City 4. Leonel Corona, Jerome Doutriaux, Sarfraz A Program (see article on p. 2), the creation of Mian (2006). Building Knowledge Regions in North the Institute of Innovation and Technology America. Northampton, MA: Edward Elgar. Transfer (I2T2), and the launch of the Research 5. Robert Fairlie (2007). "Entrepreneurship and Innovation Technology Park in Monterrey in Silicon Valley During the Boom and Bust." (PIIT). While space limitations prevent a longer Washington, DC: Small Business Administration, description and analysis of these initiatives, it Office of Advocacy. http://www.sba.gov/advo/ is clear that these programs seek to create a research/rs296tot.pdf accessed January 15, 2008. future in which economic growth is the result of innovation, supported by an alliance among local residents, businesses, academic institutions, and the government. The author would like to thank Bruce Kellison for his valuable help during the interview processs, Conclusions and to thank the I2T2 for assistance in arranging Regions with large concentrations of high-tech the interviews; thanks are also extended to Grace industries (such as San Francisco, San Jose, and Ruiz for her research assistance. 

Texas Business Review 5 February 2008 Texas Business Review is published six times a year (February, April, June, August, October, and The University of Texas at Austin NONPROFIT ORG. December) by the Bureau of Business Research, BUREAU OF BUSINESS RESEARCH U.S. Postage IC2 Institute, The University of Texas at Austin. IC2 Institute P A I D Subscriptions are available free upon request. Views Austin, Texas expressed in this newsletter are those of the authors 1 University Station A0300 Permit No. 391 and do not necessarily reflect the position of the Austin, Texas 78712 Bureau of Business Research. Research and service activities of the Bureau of Business Research focus on strategies to make Texas industries more nationally and globally competitive. The Bureau is policy oriented and dedicated to public service. Offices are located at 2815 San Gabriel, Austin, Texas 78705.

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Figure 2 Announcement Monterrey's New Business Model for Startup Creation For all current and back issues of Texas Business Review, visit and bookmark the website of the Technology-based Bureau of Business Research Tech Business Startups R&D (www.ic2.utexas.edu/bbr). Incubators / Centers Featuring TBR issues and articles Accelerators Neoris • ITESM dating back to 1997, the site • ITESM • UANL also contains an abundance of • UANL • CONACYT valuable information, articles, • TechBA Spinoffs and data to help your business stay competitive. Much of the LARGE COMPANIES information is available free of • CEMEX charge as a service to the State of • VITRO Texas.  • Cervecería Cuauhtémoc

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Texas Business Review 6 February 2008