Stimulating Applied Research in Interface Institutions and Industry: a proposal of brokerage and consortium for the China/Portugal case
Vladimiro Miranda
Professor at the University of Porto, Portugal
President of the Scientific Council of INESC-Porto (Institute of Engineering in Systems and Computers, Portugal) Consultant of the Innovation Agency of Portugal for the promotion of technological partnerships with China
1. A dynamic landscape
A moment of enlightenment occurs when one realizes that the society organized under the concept of market does not have an ideal way of being organized. It is a moment of shock, too, and of rejection, for those many that nourished, in some cases for a whole life, the concept of “ideal society”.
Understanding this challenging idea represents a big step in the way one perceives the social universe.
Scientists and engineers should be well prepared to accept this odd point of view, but it happens that they are only human (if we discount the intelligent beings from Mars, observing us from far away as imagined by H.G.Wells in his immortal “War of the Worlds”).
As humans, scientists tend to forget to apply their models and methods, so successful in their areas of knowledge, to human relations and their interaction in the complex system that we call society for simplicity.
Nevertheless, in recent years some efforts have been made to understand complex systems and their behavior. The emergence of the theories of deterministic chaos and of self-organizing systems have helped larger layers of people to be receptive to ideas of dynamic systems, instead of static systems.
In many countries around the world, educated people, academics, politicians, have discussed with more or less enthusiasm the concept of “ideal society”. In many occasions these discussions derived into ideological trenches, and much suffering of humankind resulted from opposite and irreconcilable attitudes and actions dictated by opposing ideologies.
But, if one does a rational approach to the vast majority of the proposals originated by the most importantly disseminated ideologies, and how they were perceived and adopted by the less educated masses, or at least by those billions that did not have time, patience, opportunity, training, will or means of understanding their subtleties and technicalities, and if this appreciation is done without prejudice, one will easily conclude that the predominant concepts shared by those that have any idea about this, display a common set of characteristics:
• Although the society is a tremendously complex system, people tend to have an over-simplified mental representation - very schematic indeed
• This schematic representation tends to be fairly linear in its aspects of variable interaction
• The perception of an ideal society is of a static model
• Changes in society are seen as a way to converge to that ideal static model
The ability to build simplified models of the environment is one of the distinguishing characteristics of humankind that gave it an advantage edge in the struggle for survival. Our brain, however, is not well adapted to represent non- linear models - maybe because the environment where it had to excel was fairly Euclidean.
The attraction felt for a static model for the organization of society could well be also derived from a Darwinistic effect. The need for security, for controlling the rules, for no surprises, anything that would increase the chance of survival: all this could be explaining why humans feel static models so pleasant.
Either because of these reasons or because of others not considered, the fact remains that discussions about the ideal model of society played an important role in the tragedies that characterized this century.
One example of a dynamic organization of the market agents is the following.
In a growing market, companies will tend to associate with one another, under a diversity of forms, in order to gain economies of scale. In the long run, these forms of association will derive into the fusion or absorption of the weakest by the strongest. This phenomenon of the convergence to monopolies is well known - but it must be said, serving the purpose of this paper, that under a market environment this is a natural process to improve the efficiency of companies - to obtain economies of scale. We would then say that small companies have small structural costs but high operating costs, and that obtaining economies of scale is the way to gain efficiency in the market, by cutting in the operational costs with gaining size.
There comes a time, however, when companies have grown so large that it is no longer feasible to easily obtain economies of scale. When companies have stabilized in size, one cannot gain much more efficiency, because the other ways of becoming more profitable besides economies of scale will give only marginal increases.
What happens then is that companies begin gaining fat. It might look, from an external point of view, that the situation is stabilized - for instance, the electric power generation and distribution may be concentrated in a single national company or a limited number of large companies. However, once the situation stabilized, management concerns usually tend to turn to the consolidation of company structure, and then self-organized interests within the company, not foreseen or in the line of the company purpose of existence, eventually emerge.
In amused terms, one might say that a critical point is attained when secretaries start demanding (or having) secretaries…
Structural costs then grow continuously, inefficiency follows along and gains in efficiency to try to compensate this are very scarce or very marginal.
This is a typical situation in companies belonging to the state after some time, in no matter which political system they exist.
What to do then? Some economists and politicians in the early eighties had a correct insight: if one cannot gain more efficiency in operational costs, then one must search for efficiency gains in structural costs - and this means breaking up the companies, cutting the fat, reducing a large company to again a number of smaller companies. In summary, back to small market agents, with small structural costs (having however a higher operational cost).
Large company Small company
$
Actions to improve efficiency
Figure 1 – Improving efficiency in a large company may come from reducing structural costs; improving efficiency in small companies may come from gaining economies of scale.
This line of action has not been taken only by states regarding large state companies. Big multinational have followed the same approach, as well as medium and small enterprises. The basic idea is simple: organize the company in smaller profit centers and cost centers. Each profit center will then act as a if it were a company with a large degree of autonomy - and in order to gain efficiency, it will hopefully cut in its structural costs. In this process of restructuring a sector of the economy, a large state company or a private company, eventually excessive fat is dispensed.
One thing to bear in mind is that this is not a final stage, having the companies and the economy based on small profit units or autonomous agents.
Contrary to the dogmatic beliefs of apostles of the liberal wave of the eighties and nineties, instead of being the “ideal” organization of the market economy, this will just constitute the first step for new aggregations and reconstitution of larger and larger units - because after gaining as much as possible in cutting structural costs, there will be only one mechanism available for companies to continue gaining efficiency, which is to bet on economies of scale.
And apparently, back there they are in a cycle. One is therefore lead to conclude that there is no real
“ideal” static model for the organization of a market economy, and that a cycle small-big-small-big is the dynamic representation of what one could call the
“ideal path” or “ideal trajectory” for the structure of an economy.
Following this path, however, requires smooth but active controls. This is probably not a trajectory that can be originated by a free evolving economy. Most certainly, a too free (in the sense of no controls) economy would converge to some stationary point with undesirable characteristics. In the industrialized countries, politicians had to make a concentrate effort to brake up national monopolies, and history has shown that these have not only never initiated such process by themselves, but also that severe resistance of corporate nature appeared, demonstrating precisely how strong other interests besides the original aim of the company had made their way and grown roots.
On the other hand, too tight controls, such as the ones witnessed in eastern European State-run economies, led to crystallized companies with the same structural problems as described and the same inability to self reform.
All this talk is to call the attention to the importance of active controls. Engineers know this quite well: in unstable systems, exhibiting properties of positive feedback, one needs active controls to stabilize and to force them to follow desired paths or trajectories.
Governments have the power to plan and exert this type of active controls. Their action, to be valuable and have maximum effect as desired, must be smooth - but the keyword here is active.
We conclude the following:
• there is no static ideal structure for the market agents
• keeping the market in a planned trajectory demands active controls.
2. The progress function
We have established that keeping an economic market system on a given trajectory depends on the implementation of active controls. We might add that these control actions should be incremental and smooth, in order to avoid instabilities.
However, too shy actions must also be avoided, for they exert virtually no corrective influence in the behavior of the system. The art of management (and by extension, the art of government) is to be able to elect the adequate amount of control, not too much nor too little.
This notion of a dynamic system and the need for an amount of control inputs above a given threshold may be applied to the case when a government identifies an opportunity of progress and a trajectory to be followed by the society.
We have here clearly the challenge put to developing societies, when governments wish to push through some process of modernization. We can talk about a progress function
Progress =
= External Pressure Perceived + Willingness to Innovate x Incentives
or simply
M = P + V.I
which represents the basic behavior model for economic agents.
By progress, we understand here modernization, either in processes, products, technology or management. These aspects are not independent of one another, but for the sake of clarity we identify them separately.
It is clear that in the absence of external pressure perceived, no willingness to innovate will lead to no progress, no matter how strong the incentives may be. We must therefore understand better what this factor represents.
We are now ready for the introduction of the second equation of our formal system:
Willingness to Innovate =
= Awareness of opportunities x Expectation of gain or simply
V = A.E
Both factors (awareness and expectations) contribute to from the willingness to innovate among market agents. The expectation is a rather complex factor, with cultural roots, subject to psychological influences and to the educational and cultural level of the economic agents, as well as to the observation of similar situations in foreign countries or parallel economic systems.
It becomes also obvious that if there is a negative expectation of gain, the willingness to innovate cannot be positive.
The awareness of opportunities may be described by Awareness of opportunities =
= Incentives
Social Impedance to Information Flow or simply
A I
= Z
The announcement of incentives wakes up in market agents the awareness of opportunities. However, the transmission of the information needed to create the generalized awareness depends enormously on how easy is the flow of information in a society. The difficulty in passing information through the social strata and across the market agents to one another may be characterized by a factor of social impedance: the higher it is, the less easily information flows. This has two effects
1. It generates a highly uneven distribution of information, with a few controlling most of it while a majority does not receive or perceive it;
2. The propagation time is increased, meaning that localized beneficial effects or important pieces of information will take a long time to spread to the rest of the market and its agents.
Combining all these equations, we obtain the expression of the fundamental principle of Progress
( )
Progress
Incentives Expectation of gain Social Imp
=
+ ×
External Pressure Perceived +
edance to Information
2
or simply
M P I E
= + 2Z
This expression holds a number of interesting lessons.
First of all, it highlights the importance of a good system of incentives. Because incentives are squared, their effects in the induction of modernization of industry and other market agents is extremely powerful.
Secondly, it shows that incentives is not the only variable that a government can play, in order to induce a movement towards innovation and modernization.
The most difficult variables to deal with are the perception of External Pressure and the Expectation of Gain.
It is very difficult to play with expectations. In most occasions, one can only manipulate expectations in the most indirect way, and the influence of global factors, either external or internal, is determinant.
It is also difficult to manipulate the perception of external pressure, except in a very wide context. For instance, governments may impose restrictions to the access to the internal market of foreign agents, creating a protected environment. The result is usually a stagnation in innovation or a slow down in its rate, because of the lack of competition with external agents and the lack of pressure to improve.
This happened, for instance and to give just an example, with the extreme protection granted in the eighties in Brazil to the computer and software industry in the country, virtually banning, through regulations and customs policies, the penetration of foreign products. The short term result was the flourishing of national manufacturers - but soon they were just proposing out of date technologies, and the long term result was that Brazil lagged behind in technology in spite of the existence of a promising sector earlier on.
The difficulties offered by the social and cultural environment to the flow of information is the other factor to take in account. The expression above illustrates that one cannot expect to have high rates of modernization if the impedance to information flow remains high.
This Fundamental Principle of Progress clarifies, therefore, how should a government plan its intervention in a market system to increase the rate of modernization or Progress. The relevant decisions are listed in decreasing order of impact and possibility of control:
1. Establish a good scheme of incentives 2. Reduce the Impedance to information
flow
3. Pay attention to the expectations of gain (act when they seem positive or when they can be influenced to become positive)
What is a good scheme of incentives is sometimes hard to define. But loosely speaking, it should be clearly directed, have well defined targets, have a clear system of measurement of effects and be correlated with the expectations of gain of the economic agents (even if its purpose is to stimulate new types of activities).
The importance of incentives is so great that many governments neglect the other variable in which they can have determining influence: the impedance to information flow.
We will approach precisely how to influence this factor in the coming section.
3. A more efficient action model
From the expression
M P I E
= + 2Z
one sees that the innovation process is commanded by 4 variables, but governments can only act easily on two of them. They cannot easily influence external pressure nor the expectation of gain;
therefore, they must concentrate attentions on creating incentives and on reducing impedance.
Because incentives have such a great influence (remember that they appear squared in the above model), governments and governmental agencies pay immediate attention to creating incentive schemes. In many cases, this is all they do.
In many of these cases, however, these schemes are not as effective as promised to be, and there is a distinct feeling that economic agents are not fully profiting from them or using them efficiently. When this happens, one of two reasons are behind it:
• either the incentive program was ill designed, or
• someone forgot to act on reducing Impedance.
This section is devoted to the second aspect.
3.1. The Counter Attitude
The most traditional attitude of governmental agencies in charge of incentive schemes is the one we will call “the Counter Attitude”: officers wait patiently behind a counter that some economic agent
approaches to submit a proposal and benefit from some incentive.
Let’s examine two examples of the Counter Attitude:
a) a program to promote technological modernization in industry;
b) a program to stimulate the emergence of new technology based companies.
At last, someone
interested… Come in…
No!!!…
Figure 2 – The Counter Attitude is passive and does not by itself promote trust between University and Industry
3.1.1. Promoting technological modernization
A typical program to promote technological modernization in industry will try to promote some form of association of companies with competence centers or research and development institutes of University level. In order to achieve this, some form of incentive must be offered, otherwise the traditional gap of mistrust of industry towards academics will prevent any increase in the level of relations. Typical incentives may be under the form of subsidies to the part contracted to academic institutions, or tax exemptions for the same.
The Counter Attitude will be characterized by announcing deadlines for the submission of proposals, waiting for these to appear, then evaluating their merits and selecting a few to be subsidized.
What may go wrong?
1. Companies not used to work with Universities will still feel uncomfortable or suspicious of starting such a relation
2. The value of incentives will not be seen as covering the risks of having academic institutions as a partner in a project involving impacts in the company structure or production 3. For a long time there will be virtually no response
or just a faint response to the program. Money will be granted to inferior quality proposals.
4. At the end of the program, motivated by the final deadline, maybe a rush of proposals will appear.
Pressed by the need of spending the budget, again money will be allocated to a number of less good proposals.
5. The general effects on modernization will be inferior to anticipated.
3.1.2. Creating new companies
From time to time, governments try to favor the appearance of new companies or the emergence of young entrepreneurs. Therefore, they devise a scheme of incentives for new companies with some technological basis in their core business.
A typical program will be the establishment of some form of business incubation scheme, with the possibility of injecting some capital in the newly formed company, benefiting from some reduction in interest when compared to plain bank loans.
The Counter Attitude will be characterized by announcing the program, establishing deadlines for the submission of proposals, waiting for them to appear, then evaluating their merits and selecting a few to be supported.
What may go wrong?
1. New young potential entrepreneurs will be unaware of opportunities
2. New young entrepreneurs will not see the reduction in loan interests as enough to compensate the risk in a new adventure full of uncertainties
3. Institutions holding some kind of technology or management know how will not easily find young interpreters of a business oriented attitude 4. The program will mostly receive medium or poor
proposals for the constitution of small companies in traditional areas of business with low technology incorporation
5. The general effect of creating a tissue of new technology based companies will be inferior to anticipated.
3.2. The BALL model
Understanding that Impedance is an important control variable allows us to propose a model of action, complementary to incentive schemes, and in replacement of the traditional Counter Attitude. It is the Broker Agent Liaison Lattice model, or simply the BALL model.
Under the BALL model paradigm, a network of
agents will actively promote the incentive programs launched by governments. These agents will act as
“honest brokers” and will seek to:
1. make apparent good opportunities to apply the incentive program
2. identify potential partners and initiate dialogue among them
3. establish trust among the potential partners of projects
4. increase the awareness of the full extent and consequences of the incentive schemes
5. support the partners in organizing their proposals
6. follow on the approved projects and act as a facilitator for project development and solver of eventual problems among partners
7. promote new projects as a consequence of the success of earlier ones
8. promote spin-offs of projects
The adequate profile for such a Broker agent is one of a highly experienced expert, with solid reputation in academic terms and publicly recognized achievements, with a wide technical and scientific culture and a deep understanding of business and productive processes, with good and strategic personal acquaintances in political, industrial and university middles, able to be accepted as dialogue partner both by companies, academic institutions and government agencies.
A network of such Broker agents, sharing information and acting as a lubricating element, will form the necessary lattice to cover a number of territories, of areas of interest and technical specialties.
Together, they will form a BALL for a given purpose, defined at government level.
The fundamental difference from the Counter attitude is the pro-active nature of the BALL concept.
The positive effects expected from the action of a BALL are:
1. Increase in the rate of good opportunities and projects identified
2. Increase in the robustness and balance of the project consortia formed
3. Increase in the quality of the projects submitted 4. Increase in the trust established among
industrial and academic partners
5. Increase in the rate of submission of proposals to incentive programmes
6. Increase in the efficiency of the use of incentives and in the rate of success of the incentive programmes
Governments must be conscious that when some kind of active agent systems is tried to be established, the most common error is to contract for the function of broker agents young or inexperienced persons. These will never be seen as credible
“honest brokers” by the market, lacking social authority to propose ideas and join partners in projects. Credibility and authority are the two main characteristics that must be associated with the broker agents.
This means that these agents must be well paid. The operation of a BALL model must be conceived with a purpose and a budget. And because of the very nature of the activity of these broker agents, as extremely qualified experts, maybe the most interesting way of rewarding their efforts is to establish a base load payment plus a success fee indexed to the number of actions or projects promoted.
Therefore, the BALL will become a network of highly qualified and motivated consultants, instead of state officers with a tendency to be passive or adopt a Counter Attitude.
Figure 3 – The BALL model is based on an active network of Broker Agents that join together partners for profiting of opportunities
4. Macau as the center of a BALL
4.1 The concepts
It is now time to talk about Macau, in the special context of South China and with ancient ambitions to remain as an alternative highway between China and Europe.
The need (or urge) to modernize public administration and industry has been recognized.
Macau is a small territory with open economy - it is therefore subject to a tremendous external pressure.
Should this be enough to promote modernization?
According to our model, some change should be induced, even in the absence of incentives. Clearly, in the past years some change was observed. The questions are: what kind of change? How fast?
The kind of change is something external to the illustrative model proposed. Certainly, not all kinds of change are indifferent to the political power. The decay in Macau of the toy industry is an observable change. What about the textile and garment industry? Is it changing in a desired direction, moving up in the value-added scale? Gaining productivity?
Staying in Macau?
One of the components of the modernization vector is innovation. Innovations requires attitude and know how. Macau has a young yet good University. How are the relations between industry and university in Macau, or between university and public administration, in terms of cooperating for innovation? Do we face a cooperative environment, or three separate worlds, living side by side but with barely no interaction?
No technological sustainable change is possible without the emergence of a fabric or a network of companies dedicated to selling and maintaining the new technologies and promoting the adoption of new products. Therefore, about Macau, one may ask: is modernization a self sustained process, or inducing more dependency on external agents? Is there a new set of companies devoted to the support of more advanced technologies emerging?
Our thesis is that the isolated action of external pressure is not enough to apply in Macau a positive vector of change that sends Macau in a desired controlled trajectory.
One must therefore act in the control variables available: incentives and impedance.
And the type of action devised will determine the rate of change induced. Our thesis is completed by the notion that Macau especially requires an active attitude instead of the traditional Counter Attitude.
In fact, the analysis in the history in Macau of the relations between industry and University, in the context of an innovation process, will teach us the following:
• There is no past history of cooperation between university and industry; one must take in account that the University of Macau is very young - but there are other Universities in he neighborhood, such as in Hong Kong, and nevertheless there is no significant history of direct partnership
• There is a climate of generalized mistrust from the Industry towards Academics and the University; in part, this may be due to the point stated above, and in part it may have cultural
roots.
• The Administration can’t present a history of cooperation with the University in technological issues, either.
These factors must be taken in account in order to understand that they contribute in a great measure to generate a high impedance value in Macau.
Therefore, any policy towards innovation must be considered as a vector with two components:
applying incentives and reducing impedance. And a coherent plan must define an active attitude.
We would propose a plan composed of three basic measures:
1. Incentives to the association of industry and university partners in joint projects.
2. Incentives to the creation of new technology based companies.
3. Establishment or support of a network of active Agents with the mission of promoting partnerships and the efficient use of incentives.
4.2. Joint University-Industry Projects (JUIP) This measure would be twofold:
1. A line to support small and short term innovation projects of partnership between the local industry and the local University (Confidence Building line).
2. A line to support large and long term projects involving specifically partners from China, Macau and third countries (Technology Transfer line).
4.3. New technology based companies (NTBC) This measure would be twofold:
1. Incentives for young entrepreneurs to propose and create new companies with products or services with new technology incorporation.
2. Incentives for spin-offs originating new companies either from JUIPs or directly from the Resarch and Development Academic activities The measure would be supported by an active Business Incubation process.
4.4. The BALL
The two measures above (JUIPs and NTBCs) would be supported by a group of Active Broker Agents, with the following missions:
1. Actively identifying opportunities and seeking partners to submit JUIPs.
2. Actively identifying opportunities and seeking partners and entrepreneurs to create NTBCs.
3. Actively promoting exchange of information and developing actions to create an atmosphere of trust and positive expectations.
These Agents must form a cooperative network.
Ideally, they will not be all located in Macau, but will extend their action to China and to Europe - establishing the Macau Broker Agent Liaison Lattice, the BALL, centered in Macau and with dendrites extended in the world, in selected regions where reasons of policy dictate priorities.
5. CONCLUSIONS
The following conclusions are extracted:
1. Macau is in a vulnerable position under external pressure
2. A process of modernization is felt as needed 3. Modernization in industry is achieved through
innovation and technology transfer
4. Governments can influence the rate of modernization acting on the side of incentives and on reducing social impedance
5. Macau history is characterized by a past of lack of incentives and of high impedance
6. A set of incentive tools has been proposed in general terms
7. The need for building up a network of Broker Agents that accelerates the process of University/Enterprise partnership forming was underlined
8. The importance of having this BALL covering international cooperation and technological transfer is highlighted.
The final comment still relates to the importance of applying the BALL concept to Macau. In fact, the historical role of Macau has always been of a connection point among civilizations, driven by very pragmatic motivations.
The only way Macau will be able to retain a relative importance is to keep being able to offer connection services between China and the rest of the world, and be seen as adding value to such connections.
One way of adding value is to build the concept and pass the image of Macau as the “big facilitator” in technological and innovation projects and processes.
Partners in China and Europe (and other places) will then tend to continue to use Macau as a platform to establish joint business.
Being an intermediate partner will allow Macau and its companies and University to profit and progress, also. To obtain these results, a strong alliance
between the Administration, the industry and the University and research institutions must be forged.
But in order to achieve this, an active standing is required. Implementing a BALL concept may be the tool to successfully achieve these objectives.
ANNEX
China, Portugal and Macau in Information Technologies, Telecommunications, Electronicas, Automation and Power
INESC-Porto is organised around 5 Research Units and 2 technologic transfer centres, one mostly dedicated to serve the dense tissue of Sall and Medium Enterprises (the Centre for Automation and SME's) and the other more oriented to serve large companies or systems, Local Authorities or Health sectors (the Centre for Information and Communication Systems) .
The 5 Research Units are:
• The Telecommunications and Multimedia Unit
• The Software and Computer Graphics Unit
• The Power Systems Unit
• The Optoelectronics and Electronic Systems Unit
• The Manufacturing Systems Engineering Unit.
INESC staff is presently 237 people, distributed as follows:
• Researchers also University Professors 106
• Full time INESC-Porto Researchers 4
• Technical staff 16
• Administrative staff 29
• Graduate students 52 and still, 43 undergraduate students working in various projects.
INESC-Porto is presently involved in approximately 80 R&D projects, 10 of which supported by various EU programmes (ESPRIT, ACTS, Telematics, etc.), 22 financed by Portuguese Agencies, normally with national or international companies. The total value of projects in various activities is about US $1.25 million in European Programmes, slightly less (US
$1.1 million) in National projects, and almost US $3 million in contracts with industrial or service companies and utilities.
INESC-Porto would like to correspond to the political positive signs emitted by the Governments of Portugal, China and Macau and establish strong cooperation relations with Universities, research institutes and companies in China.
INESC-Porto would welcome active Broker Agents that would help in identifying opportunities, partners and means for such purpose.
INESC-Porto feels that Macau has a unique chance of becoming the headquarters of a BALL, for R&D in the areas of its activity, because there is a research Institute (INESC-Macau), linked to the University, with partners from Portugal and China, and because the announced policy of the Government of Macau has been favorable in the past to place Macau as a center of contact and dialogue.
INESC-Porto hopes that the Government of Macau will help supporting a BALL centered in Macau for promoting this China-Portugal scientific and technological cooperation.
INESC-Porto invites potential partners, government agencies and companies to examine
http://www.inescn.pt/
for further details on its activity.