1. Telecommunications innovation system: development, impacts of the structural changes and perspectives Marina Szapiro Associate Researcher of RedeSist, Economics Institute, Federal University of Rio de Janeiro, Brazil II International Workshop of the BRICS Project April 26, 2007

2. To present the development of the Brazilian telecommunications innovation system To discuss the main features of the telecommunications restructuring process and its impacts on the innovation system To discuss the future perspectives of the telecommunications innovation system in the context of the new organization of the telecommunications industry. Structure and objectives

3. Brazilian telecom innovation system: main policy measures Political context: military government and II National Development Plan (PND) Creation of Embratel (1965), Telebrás (1972) and CPqD (1976). Specific policy measures to foster the local industrial and technological development Governmental procurement power –to promote homogenization both technical and of equipment specifications –to enhance the development of domestic technology and national telecoms equipment companies as well Funding of the system based on the National Telecommunications Fund (FNT) - a tariff of 30% on all telecommunications services

4. Brazilian telecom innovation system (From the 1980s to mid 1990s) Source: Szapiro, 1999

5. Brazilian telecom innovation system: main achievements Establishment of a network of local suppliers (120 local firms responsible for 17% of the market in 1982) Gradual involvement of multinational subsidiaries in the process of innovation and technological capability development Local development of key technologies for the telecom system expansion (optical fibre, Trópico digital switching systems, induction-loop phone card) Reduction in the investment costs of building the Brazilian telecom network Development and qualification of Human Resources

6. Challenges faced by the telecom innovation system in the beginning of the 90s Funding problems (low tariffs and international restrictions) Scarcity of telephone lines Speed up of technological changes in the telecommunications sector, diffusion of microelectronics and convergence between telecom and informatics

7. The Context and Impacts of Telecommunications Restructuring Process Trade liberalization of the beginning of 90s, Liberalisation process (1995) and Telebrás’ fragmentation and privatisation (1998) –Increase in the participation of multinational subsidiaries on the telecom equipment industry –Increase in investments: growth of the number of fixed and mobile lines –Entrance of new multinational operators: internationalization of the supply of services in Brazil

8. Reorganization of the Telebrás system - 1998 Region III Telesp 5.074 million fixed lines 75% digitalisation 24,000 employees 36% of GDP 22% of population US$ 4,967 million Region III Telesp 5.074 million fixed lines 75% digitalisation 24,000 employees 36% of GDP 22% of population US$ 4,967 million Region I Tele Norte Leste 5.642 million fixed lines 73% digitalisation 37,000 employees 39% of GDP 54% of population US$ 2,949 million Region I Tele Norte Leste 5.642 million fixed lines 73% digitalisation 37,000 employees 39% of GDP 54% of population US$ 2,949 million Region II Tele Centro Sul 3.694 million fixed lines 69% digitalisation 19,000 employees 25% of GDP 24% of population US$ 1,778 million Region II Tele Centro Sul 3.694 million fixed lines 69% digitalisation 19,000 employees 25% of GDP 24% of population US$ 1,778 million Source: author’s elaboration

9. Main Results of the Telecommunications Restructuring Process on the segment of services Rapid increase in the number of fixed and mobile services until 2001 – universalization goals From 2001 on: stagnation of the number of fixed lines –International and general trend; and –Migration of fixed line subscribers to pre-paid mobile services (80% of the total number of mobile lines) Few telecom operators supplying telecom services in different segments – low competition on fixed services, oligopoly in the mobile segment, and competition on the long distance services –Telefonica/Vivo –Telmex/América Móvil (Embratel/Claro) –Brasil Telecom –Oi/Telemar –TIM Main focus of Telefonica, Telemar/Oi and Brasil Telecom: still fixed and broadband services Integration of fixed and mobile services Triple play (voice, data and video)

10. Evolution of fix and mobile phones 1994- 2006 Source: www.teleco.com.br

11. General data about the Brazilian telecommunications market (in million of units) Source: www.teleco.com.br

12. Gross Revenue of the main telecom operators in Brazil Source: www.teleco.com.br

13. –Disarticulation of the innovation system Privatisation of CPqD, uncertainty and change of role in the system Increase in technology imports Decrease of the use of national technology –Entrance of new equipment suppliers –Increase in imports of telecom equipment and acquisition of dynamic nationally owned firms by MNCs subsidiaries Impacts of Telecommunications Restructuring Process on the innovation system

14. Impacts on the innovation system- Denationalization of the equipment industry Source: Oliva, 2002 and Szapiro, 2005

15. Impacts on the innovation system - Increase in telecommunications imports of components, parts, pieces and final products Source: Szapiro, 2005

16. Innovation in the equipment industry (Pintec) Reduction of the number of innovative firms from 167 in 2000 to 136 em 2003 (although the number of firms in the segment has increased in the period) Reduction of the innovation rate from 2000 to 2003: 56% to 44% Investment reduction in innovative activities from 2000 to 2003: 4,97% to 4,25% Investment reduction in internal R&D activities from 2000 to 2003: 1,75% to 1,30%

17. Main results of telecom restructuring strategies from the point of view of the innovation system –Privatization: Maximization of the entrance of foreign capital –Entrance of multinational telecom operators and denationalization of the equipment industry –Uncertainty/change of role of the R&D telecom laboratory –Weakening and disarticulation of Brazilian telecom IS

18. Organization of the “old” telecommunications Industry Monopoly in the supply of services and oligopoly in the equipment industry –Vertical integration in the USA; –“national championship” policy in the developing countries; –Developing countries that created a domestic telecom equipment industry (Brazil) High level of interference of the government in the telecommunications strategic decisions Concentration of the R&D activities in the services operators laboratories

19. Oligopoly in the services supply Concentration of the R&D activities in the big telecom equipment industry Some new “entrants operators” entering the telecom market with low R&D efforts International incumbents maintaining sigficative R&D investment Importance of the role of the state on the strategic decisions of the sector (for developing and developed countries) Growing internationalization of the services market in developing countries (especially in Latin America) Organization of the “new” telecommunications Industry

20. Perspectives of the telecom innovation system Funttel (Telecommunications Technological Development Fund): problems of continuity Fust (Universalization of Telecommunications Services Fund): problems of operation Definition of the Digital TV pattern Universalization of broadband access: “window of opportunity” for the development of WiMax technology?

21. Perspectives of the telecom innovation system - Definition of the Digital TV pattern Creation of a Brazilian Digital Television System based on the Japanese pattern –Development of a research program involving CPqD (as the coordinator) and research institutes and universities –Funding: Finep with the resources of Funttel –Opportunities of development of softwares, middlewares, set-up-boxes, audiovisual content

22. Governmental initiatives to promote the universalization of broadband internet access to schools and hospitals in many parts of Brazil Use of this opportunity to foster the local development of technological and industrial capabilities Procurement power as a strong policy instrument Window of opportunity for the development of fix WiMax technology and production of Radio Base Stations and Customer Premises Equipment (CPEs) Perspectives of the telecom innovation system – Universalization of broadband internet access