.rnrif>. NAVAL POSTGRADUATE SCHOOL Monterey, California THESIS THE BRAZILIAN AEROSPACE INDUSTRY: A CASE STUDY OF THE TECHNOLOGICAL IMPACT OF OFFSET AGREEMENTS IN A RECIPIENT INDUSTRY by Julio Eduardo da Silva Menezes December, 1989 Thesis Advisor: Edward J. Laurance Approved for public release; distribution is unlimited. T248083 Unclassified SEt'^P'TY CLASSlF'CATOrM O- ^H'S PAGE Form Approved REPORT DOCUMENTATION PAGE 0MB No 07040188 la REDQRT SECURITY C.ASSi^C A'lQN D RESTRlCTi\/E MARKINGS Unclassified 2a SECURITY CLASSiFlCATiOM AUTHORITY 3 Distribution 'AVAiLABiL'TY of repor'' Approved for public release; 2b DECLASSIFICATIOM ' DOWNGPADiMG SCHEDULE Distribution is unl im4.^«:.ri C performing ORGANIZATION REPORT NUMBER(S) 5 MONITORING ORGANIZATION REPORT NUMBER(S/ 6a NAME OF PERFORMING ORGANIZATION 6b OFFICE SYMBOL 7a NAME OF MONITORING ORGANIZATION Naval Postgraduate (If applicable) 54 Naval Postgraduate School 6c ADDRESS [City. State, and ZIP Code) 7b ADDRESS (Ory, State, and Z/P Code) Monterey, CA 93943-5000 Monterey, CA 93943-5000 3a NAME OF FUNDING SPONSORING 8b OFFICE SYMBOL 9 PROCUREMENT INSTRUMENT IDENTIFICATION NUMBER ORGANIZATION (If applicable) 8c ADDRESS (C/ty, State, and //P Codej 10 SOURCE OF FUNDING NUMBERS PPQGRAM PROJECT TASK- WORK UNIT ELEMENT NO NO NO ACCESSION NO 1 1 TITLE (Include Security Classification) IHE BRAZILIAN AEROSPACE INDUSTRY: A CASE STUDY OF THE TECHNOLOGICAL IMPACT OF OFFSET AGREEMENTS IN A RECTPTFNT miTNTPV '2 PERSONAL AU'HOR.S) Menezes, Julio, Eduardo da Silva 13a TYPE Qc REPORT 3b TiN-E COVERED DATE O^ REPORT (Yea/-, Month, Day) '•5 PAGE COUN-' Master's Thesis FROM TO December 1989 349 e supp.EMEN'APYNOTATON ^he views expressed in this thesis are those of the Depa?imiR? §? Bgfe^il^§?^fi^^U?^?igi#^rRSM?Y °^ Position of the COSA-' coD-:s 18 SUBJECT TERMS (Continue on reverse if necessary and identify by block number) FlE.D GROUP SUB-GROUP Arms trade. Offset, Technology Transfer, Brazilian Aerospace Industry '9 AbS'RAC" {Continue on reverse if necessary and identify by block number) This thesis examines the role of the technology in determining the technological independence, national security enhancement, and economic benefits which occur as a result of military offset agreements in recipien : countries. The study defines trade offsets and interprets the Brazilian government's offset and technology trasnfer policies. Using cases from the Brazilian aerospace industry, the researcher performed an analysis of four types of offsets (countertrade, technology transfer , licensed production, and "coproduction) to test the hypothesis that technology is the driving factor in the design of offset requirements for recipient countries. The thesis concludes with some recommendations to improve the Brazilian gover- nment's offset policy and decision-making process. 21 20 Distribution AVA:LA3.Li' t- of ABSTRACT ABSTRACT SECUR'"'Y C.ASS.^iCATiON n ,^', CLASSIFIED J'ml:V'TED SAT/E AS °p" DD"C USERS Unclassified a \A'yiE 0=^ p;"-ONS'B.E ".D'V'D',:Ai ;2b '^i..tP^O\i (Include Area Code) :2c OfF:CE S^MBO. Edward J. Laurance (408) 646-2831 56 Lk - Qc DD Form 1473, JUN 86 Previous editions are obsolete SEC^R'Tv CLASS CAT;ON Tm S PAGE S/N 0102-LF-014-6d03 "nclassif ied Approved for public release; distribution is unlimited. The Brazilian Aerospace Industry: a Case Study of the Technological Impact of Offset Agreements in a Recipient Country by Julio Eduardo da Silva Menezes Lieutenant, Brazilian Air Force Submitted in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE IN MANAGEMENT from the NAVAL POSTGRADUATE SCHOOL pecember 1989 11 ABSTRACT This thesis examines the role of technology in determining the technological independence, national security enhancement, and economic benefits which occur as a result of military offset agreements in recipient countries. The study defines trade offsets and interprets the Brazilian government's offset and technology transfer policies. Using cases from the Brazilian aerospace industry, the researcher performed an analysis of four types of offsets (countertrade, technology transfer, licensed production, and coproduction) to test the hypothesis that technology is the driving factor in the design of offset requirements for recipient countries. The thesis concludes with some recommendations to improve the Brazilian government's offset policy and decision-making process. Ill . TABLE OF CONTENTS INTRODUCTION 1 A. BACKGROUND 2 B. PURPOSE OF THESIS 3 C. SCOPE OF THESIS 4 D. LIMITATIONS AND ASSUMPTIONS 5 E. METHODOLOGY 7 1 General Methodological Theory 7 2. Why Case Study Methodology? 8 3. Research Design 9 4. Definition of the Variables 9 a. Independent Variables 10 (1) Technological Factors 10 (2) Economic Factors 11 (3) Socio-Political Factors 12 (4) Military Factors 12 b. Dependent Variables - Offset Outcome 13 5. Case Studies 14 a. Countertrade 18 b. Technology Transfer 18 IV n-j-Di T.Vn fl'D'9' c. Licensed Production 18 d. Coproduction 20 6. Hypotheses 20 7. Data Collection 21 8. Generalization 23 F. LITERATURE REVIEW 23 G. ORGANIZATION OF STUDY 25 OFFSET AND TECHNOLOGY TRANSFER CONCEPTS 26 A. OFFSET TRADE CONCEPT 26 1. Definitions, Terms, and Structures 27 a. Definitions 27 b. Terms 29 c. Structure 30 2. Background 31 3. Offset Participant Motives 35 a. Offset Supplier Motives 35 b. Offset Recipient Motives 37 (1) Offset Factors 38 (2) Offset Outcome 49 c. Institutional Opinions 52 B. TECHNOLOGY TRANSFER CONCEPT 53 1 . Technology and Technology Transfer Concepts 53 . a. Technology Concept 54 b. Technology Transfer Concept 55 2. Technology and Trade 57 3. The Application of Military Technology in Commercial Business 60 GOVERNMENT OFFSET POLICIES 63 A. SUPPLIER COUNTRY OFFSET POLICY 63 1. The U.S Government Offset Policy 64 B. RECIPIENT COUNTRY OFFSET POLICY 67 1 British Offset Policy 67 2. Australian Government Offset Program 68 3. Indonesia Countertrade Experience 70 4. Effectiveness 71 C. BRAZILIAN GOVERNMENT OFFSET POLICY 71 1 Trade policy 72 a. Offset Status 73 b. Export Incentives 75 c. BEFIEX Program 78 d. Subsidies, Countervailing Duties and GATT Agreement 79 e. Trade Barriers 80 2. Technology Transfer Policy 82 a. Development of Technological Infrastructure 82 VI . b. Regulation of technology imports 83 c. Development of Technological Capabilities 85 (1) Direct Financial Assistance 85 (2) Direct Technical Assistance 85 (3) Scientific and Technological Information 86 (4) Direct Research and Development Programs 86 3. Brazilian Aeronautics Ministry Offset Policy 87 a. Aeronautics Ministry Offset Program 88 IV - THE BRAZILIAN AEROSPACE INDUSTRY 93 A. INTRODUCTION 93 B. THE AIRCRAFT INDUSTRY 97 1 Historic events 97 2. The Aircraft Companies 100 a. Empresa Brasileira de Aeronautica (EMBRAER) 100 (1) EMBRAER's development 100 (2) Government and industry relationship 101 (3) Market strategies 106 (4) Technology Strategy 110 b. Helicopteros do Brasil S.A. (HELIBRAS) 113 c. Companhia Eletromecanica Celma (CELMA) 115 C. SPACE AND MISSILE INDUSTRIES 117 1 . The Space program 119 VII . 2. BRASILSAT Program 121 3. The Missile Industry 125 a. AVIBRAS AEROSPACIAL S.A 126 b. ORBITA SISTEMAS AEROSPACIAIS S.A 127 4. Technological Barriers 129 V - BRAZILIAN AEROSPACE OFFSET CASES 132 A. COUNTERTRADE 133 1 . MD-1 1 Aircraft Case 133 B. TECHNOLOGY TRANSFER 150 1. The BRASILSAT Program Case 150 C. LICENSED PRODUCTION 179 1. The Piper General Aviation Case 179 2. The Aerospatiale Military Helicopters Case 203 D. COPRODUCTION 225 1. The CBA-123 PARANA Commuter Plane Case . 225 2. The AMX Fighter Aircraft Case 253 VI - CASE STUDIES ANALYSIS 281 A. GENERAL ANALYSIS 281 1 Hypotheses and General Analysis 282 2. Countertrade 285 3. Technology Transfer 288 VIII . 4. Licensed Production 290 5. Coproduction 293 6. Summary of the Hypotheses Results 296 B. GENERALIZATIONS 297 1 What are the determinants of offset requirements? 297 2. What is the relationship of different offset factors? 298 3. What is the link between offsets and technology transfer? . 299 4. What are effective policies for developing countries? 300 VII - CONCLUSION 302 A. SUMMARY OF FINDINGS 303 B. RECOMMENDATIONS TO IMPROVE THE BRAZILIAN OFFSET POLICY 304 1 The National Policy Recommendations 305 2. Sectoral Policy Recommendations 306 a. Civilian Offsets Guidelines 306 b. Military Offset Guidelines 308 C. RECOMMENDATIONS FOR FURTHER RESEARCH 309 IX ACKNOWLEDGMENTS This thesis began as a discussion with Rachel Schmidt at The Rand Corporation. Without Rachel's advice, and encouragement, it could not have started. I am very grateful to Professor Edward Laurance for his patience in teaching me research methodology as a way of life and the importance of "myth bursting". I shall never forget such valuable lessons. Extensive thanks to the second-reader. Professor Boger, who patiently waded through this enormous material. Thanks to Professor Tollefson who kindly shared with me a huge amount of material about Brazil. The list would be long if I had to cite all the persons who directly gave precious contribution and information. Embraer, the Aeronautics Ministry (especially the IFI/CTA), McDonnell Douglas, Helibras, and other companies had a special participation. A very special thanks goes to my wife, Solange, whose patience, hard work, and strong support made the Master's dream a reality. Thanks also to my little daughter, Caroline, who was wonderful in understanding my limitations of time and attention. Without their kisses and love I would not be able to go so far. Finally, this thesis is dedicated to the professional people in Brazilian government and industry who struggle daily to do their jobs, while balancing the benefits of technological innovation against the economic problems that a developing country has to confront. The search for a viable but streamlined national policy certainly is their dream. I. INTRODUCTION The hypothesis of this thesis is that technology is the main factor that motivates developing countries to require offset agreements for improving indigenous arms industries. Offsets are those arrangements made whereby recipient countries require compensation as a condition of purchase of military related exports, with the intention of creating benefits for the buyer.