Innovation and Knowledge Transfer in Mexican Technology SMEs: Spin-off Approach

Óscar Contreras and Jorge Carrillo*

Innovation and Knowledge Transfer in Mexican Technology SMEs: Spin-off Approach
Small Mexican companies created through spin-offs of multinationals are one of the most important and least known phenomena in the Mexican business world. This article aims to give an account of its importance in a simple way, base don the work carried out in the field by the El Colegio de la Frontera Norte.

Small Mexican companies created through spin-offs of multinationals are one of the most important and least known phenomena in the Mexican business world. This article aims to give an account of its importance in a simple way, base don the work carried out in the field by the El Colegio de la Frontera Norte.

Spin-offs (henceforth SO) are companies that stem from another company, but operate independently in financial and work matters, and make their own decisions. These detachments can be part of a corporate strategy to decentralize certain processes or services, and give rise to large firms, even larger in size than the company that incubated them,1 but thy are most commonly small businesses, not created by a corporate decision but rather due to high-level employees (directors, managers and engineers) leaving and starting their own business after accumulating knowledge and experience in the big company. Contreras2 analyzed cases of managers and engineers of maquilas on the border and of automotive companies that established their own companies, using the liaisons and knowledge acquired during their career as employees of multinational companies (MCs).3 Hualde4 found that local engineers hired by Ford in Hermosillo developed enough expertise to then start their own businesses. Dutrénit, Vera-Cruz and Gil found evidence of knowledge spillovers from MCs to the machining workshops in Ciudad Juarez, and documented cases of former MC employees who set up their own companies.5 Echeverri-Carroll6 found that big companies in Monterrey gave different incentives so highly-qualified employees would set up their own companies, thus acting like business incubators, providing experience and knowledge to new entrepreneurs, adding them to their supplier database.

Klepper7 found three types of reasons that led to employees leaving their jobs to setup their own company: (a) exploit innovations that they previously achieved in the company where they worked; (b) in response to the inability of employers to perceive or promote promising technological developments; and (c) to exploit human capital acquired as a sub-product of their work in technology-intensive firms. As for the features of the big companies associated to spin-off processes, Contreras, Carrillo and Alonso8 identified the origin of the capital, the age of the company, the size of the company, the export orientation, the autonomy of the Mexican operation with respect to management mobility, and management replacement policies.


APTIV, TYPICAL SPIN-OFF EXAMPLE

MULTINATIONALS AND SMALL MEXICAN SPIN-OFFS
MCs have become ubiquitous and decisive in the Mexican economy. There are around 1,700 multinational firms in the country9 that employ about five million people. They dominate highly-globalized segments, such as the automotive, aerospace, electronics, chemical and pharmaceutical industries, but also activities related to trade and services.10

MCs are indirectly generating an important number of local companies. A study on this type of firms undertaken by El Colegio de la Frontera Norte showed that 35% of MCs established in Mexico had had at least one sort of spin-off11. Furthermore, Mexican spin-offs are not exclusive to the manufacturing sector; these are also found in the service sector. It is a socially and economically important phenomenon for the country since according to the study, there were close to 3,700 new spin-offs in Mexico with over 130 thousand employments generated, and more than one third of the new companies (38.5%) became suppliers of the MCs that gave rise to them. Thus, most of these entrepreneurs ventured into new markets.12 The formation of back links in the value chain are inferred from this data.13

But if the number of companies and jobs generated represent a type of positive externality, processes of knowledge transfer and technology spillovers from MCs to SMEs are even more so. Various studies show that the presence of multinationals in Mexico favors the transfer of new productive and administrative roles to local plants, as well as various technology and knowledge spillovers in the regional economy, including the formation of local capacities and the coevolution of MCs along with their local suppliers.14


Source: Based on “Formación y escalamiento de pymes mexicanas intensivas en conocimiento,” El Colef-Conacyt, no. 1442.

 

Capacity transfer and building of MCs is not fortuitous. While global chains are hierarchical and generally commanded by multinationals, competitive pressures of the global markets in which these firms operate create pressures to transfer technical and managerial capabilities to their subsidiaries and local suppliers in order to meet two objectives: to maintain its high quality standards, and reduce production costs.15 Once the capacities are increased, the new standards become an incentive to transfer more sophisticated knowledge and processes to local suppliers.16 Local suppliers may have greater capacity to absorb knowledge disseminated by MCs if they nurture their own skills and abilities.

In the aforementioned process, regional innovation systems (SRI) tend to have a decisive weight. Technological learning and innovation involve interactive processes that include actors, institutions, and social norms embedded in SRIs.17 In the creation of local capacities, both the territorial context of the learning processes and the organizational and cultural proximity of the agents play a central role, since the innovative activity and the leveraging of new technologies do not depend exclusively on individual capacities or initiatives, but rather, involves the relationships and technological trajectories of the regions and their knowledge transmission networks.18

Regional, public, private, and hybrid institutions play an important role in the industrial development of SMEs. Ruiz Durán and Carrillo found four types of arrangements for this purpose: centers of productive articulation, joint business accelerators, articulation between industries and universities, and the triple helix model.19

THE IMPORTANCE OF MEXICAN SPIN-OFFS
Companies incubated in multinationals are of great transcendence because of the potential they boast to integrate global value chains; a fact that since the 1990s has had important repercussions in emerging countries due to the learning and catching up that they can achieve and their importance in the design of public policies.20 Recent studies have shown that local SMEs are not passive and that they actively seek multinational spillovers regardless of the country they come from.21

A study with 40 knowledge-intensive Mexican suppliers associated with MCs found that this type of SME exhibits significant technological disparities.22 However, the recent study by El Colef, based on a survey of 127 Mexican technological SMEs with representativeness in four metropolitan areas of northern Mexico, found that most of the local technology companies that are MC suppliers were created through types of spin-offs; these also have the greatest innovation capabilities, compared to startup ventures. A heterogeneous balance was obtained from the construction of complex indicators (see Table 1), because over half of the sample had low digitization and low knowledge transfer. On the other hand, a significant number of Mexican SMEs are suppliers of multinational companies, more than half have a high multinational vocation, and two thirds have a high innovation rate. It is worth analyzing in greater detail these types of companies, which are one of the most important knowledge transfer vehicles from multinational companies to the national economy. It is also worth encouraging their consolidation and scaling, as they are a mechanism for the building of endogenous technological and business capabilities.


 

1 A typical example of a spin-off is Delphi—now Aptiv—that was created from US auto company General Motors (GM). This world manufacturer of passenger vehicles decided—strategically—to create an independent company, Delphi, with the aim to entrust them with the manufacturing of all car parts and their corresponding systems, reserving the car assembly central activity for GM. With time, this GM spin-off assumed a leading role in the world car part industry and diversified its client portfolio with the incorporation of more first-order assemblers.
2 Óscar Contreras, “Pequeñas empresas globales: un conglomerado automovilístico en México,” Comercio Exterior, vol. 58, issue. 9, September 2008 and Óscar Contreras, Empresas Globales, Actores Locales. Producción Flexible y Aprendizaje Industrial en las Maquiladoras, El Colegio de México, Mexico, 2000.
3 Óscar Contreras and Paula Isiordia, “Local institutions, local networks and the upgrading challenge: Mobilizing regional assets to supply the global auto industry in northern Mexico” International Journal of Automotive Technology and Management, vol, 10, no. 2, 2010.
4 Alfredo Hualde Alfaro, Aprendizaje industrial en la frontera norte de México, Ed. Plaza y Valdés, and El Colegio de la Frontera Norte, Mexico, 2001.
5 Gabriela Dutrénit, Alexandre Vera-Cruz and José Luis Gil, Estadísticas del sector maquinados industriales en Ciudad Juárez, 2001-2002. Características de mercado, tecnológicas y empresariales, Universidad Autónoma Metropolitana, Xochimilco, Mexico, 2003.
6 Elsie Echeverri-Carroll, “Flexible Linkages and Offshore Assembly Facilities in Developing Countries,” International Regional Sciences Review, vol. 17, no. 1, 1994, pp. 49-74.
7 Steven Klepper, “Spin-offs: A review and synthesis,” European Management Review, no. 6, 2009, pp. 159-171.
8 Óscar Contreras, Jorge Carrillo and Jorge Alonso, “Local Entrepreneurship within Global Value Chains: A case study in the Mexican Automotive Industry,” World Development, vol. 40, no. 5, 2002, pp. 1013-1023.
9 Multinational firms are understood as companies that operate in at least two countries and that have at least 500 jobs internationally. A multinational firm can have divisions, companies and multiple establishments in the same country. In other words, hundreds of Walmart stores, several Ford or Delphi plants, count as one firm.
10 Óscar Contreras and Jorge Carrillo, “Las empresas multinacionales como vehículo para el aprendizaje y la innovación en empresas locales, in Ciencia, tecnología e innovación para el desarrollo," Álvaro Bracamonte and Óscar Contreras, El Colegio de Sonora and Consejo Estatal de Ciencia y Tecnología, Hermosillo, 2012, pp. 325-354.
11 This study’s methodology was ad hoc. It was structured in five stages: census of multinational firms established in Mexico, data verification, pilot test, data validation, and sample expansion. The survey was applied to more than 200 multinational firms and 171 cases were valid. This latter number represents an expanded N of 922. The survey was conducted face-to-face with the human resources manager of each firm, in most cases. For more information about the methodology of this project see Jorge Carrillo, “Firmas Multinacionales en México. Un estudio sobre la estructura organizacional, la innovación y las prácticas de empleo,” Cuadernos de trabajo, El Colegio de la Frontera Norte, Tijuana, 2015, 122 p. and Redi Gomis, Jorge Carrillo and Jordy Micheli, Las Multinacionales en Datos. Empleo, recursos humanos e innovación en México, El Colegio de la Frontera Norte, Tijuana, 2018.
12 Óscar Contreras and Jorge Carrillo, “Las empresas multinacionales…” op. cit.
13 Belisario de Azevedo, “Proteccionismo 4.0: de la guerra comercial a la guerra por los datos,” Comercio Exterior, no. 19, Nueva época, July-September 2019, pp. 46-51.
14 Jorge Carrillo and Alfredo Hualde, “Maquiladoras de tercera generación. El caso de Delphi-General Motors,” Espacios, vol. 17, no. 3, Caracas, 1996, pp. 71-86; Óscar Contreras, Empresas Globales…, op. cit.; Gabriela Dutrénit, Alexandre O. Vera-Cruz, Aryenis Arias, José Luis Sampedro and Alma Urióstegui, Acumulación de capacidades tecnológicas en subsidiarias de empresas globales en México. El caso de la industria maquiladora de exportación, Miguel Angel Porrúa/UAM, Mexico, 2006; Arturo Lara, “Teoría de la empresa y sistemas complejos adaptables: el programa de investigación,” in Arturo Lara, (coord.), Co-evolución de maquiladoras, instituciones Regiones: Una nueva interpretación, uam-adiat-Miguel Ángel Porrúa, Mexico, 2007.
15 Gary Gereffi, “International trade and industrial upgrading in the apparel commodity chain,” Journal of International Economics, vol. 48, no. 1, June, 1999, pp. 37-70, and Dieter Ernst and Linsu Kim, op. cit.
16 Óscar Contreras, “El eslabón perdido: pequeñas empresas tecnológicas en las cadenas de valor del TLCAN,” in Marta Tawil Kuri, et al. (coords.), Integración en América del Norte (1994-2016). Reflexiones desde el PIERAN. Mexico: El Colegio de México, 2017. Gabriela Dutrénit, Alexandre O. Vera-Cruz and José Luis Gil, Estadísticas del sector maquinados industriales en Ciudad Juárez, 2001-2002. Características de mercado, tecnológicas y empresariales, UAM-Xochimilco, Mexico, 2003, 33 p.
17 Richard N. Nelson, “Recent evolutionary theorizing about economic change,” Journal of Economic Literature, vol. xxxiii, March, 1993, pp. 49-90, and BengtÅke Lundvall, “Introduction,” in Bengt-Ake Lundvall (Ed.), National Systems of Innovation: Towards a Theory on Innovation and Interactive Learning, Pinter Publishers, London, 1992, 342 p.
18 Óscar Contreras and Jorge Carrillo, “Los enfoques analíticos y las políticas de innovación en el Norte de México,” in Jorge Carrillo and Oscar Contreras (coords.), Experiencias estatales y transfronterizas de innovación en México. Mexico, El Colef and Comecso, 2015.
19 Clemente Ruiz Durán and Jorge Carrillo, “MNCs Strategies and their linkages with SMEs,” en Adelle Blacket y Christian Lévesque, Social Regionalism in the Global Economy, Routledge, New York/London, 2010, pp. 48-64.
20 Conferencia de las Naciones Unidas sobre Comercio y Desarrollo, “TNC-SME Linkages for Development, Issues-experiences-best practices. Proceedings of the special round table on TNCs, SMEs and Development,” unctad x, Bangkok, February, 2000, 113 p.; Jörg Meyer-Stamer, “Estrategias de desarrollo local y regional: clusters, política de localización y competitividad sistémica,” Mercado de Valores, septiembre de 2000, pp. 18-31; Tilman Altenburg, et al., Desarrollo y fomento de la subcontratación industrial en México. Instituto Alemán de Desarrollo, Berlin, 1998, and Lee Keun and Franco Malerba “Economic Catchup by Latecomers as an Evolutionary Process” in Richard Nelson, et al., Modern evolutionary economics. An overview, Cambridge University Press, Cambridge, 2018, pp. 172-207.
21 Chen Hua, “The Effect of FDI Spillover and Efficiency of Independent Technological Innovation: the Perspective of Industrial Characteristics of High-tech Industries,” Collected essay on Finance and Economics, University of China, Beijing, 2011.
22 Jordy Micheli, Jorge Carrillo and Saúl de los Santos, MNEs impacts on Local Development: The Case of Knowledge-Intensive Services in Mexico, talk given at the 29th SASE Annual Meeting, Lyon, France, June 29th to July 1st, 2017.

 *The first author is Academic General Secretary of El Colegio de la Frontera Norte. The second author is research professor at the Social Studies Department of the same institution.