Brains at work

In economics, accounting for technological inputs can be eminently unscientific. The stylized mathematics of Total Factor Productivity (TFP) considers the functions of labor, capital and technology.

Economists tend to lump non-quantifiable factors into the ‘technology’ part of the equation: R&D, innovation strategy, creativity, patent registration, managerial know-how. Politicians then bandy the word around to trumpet their modernity. But in the world of international economics, where push comes to shove, technology hovers behind all indicators in the national accounts.

For a small country like Portugal (pop. 10.4 million), the objective is to implement it at all levels.

Part of the formula will consist in cleaning up unresolved structural problems in the economy. Number one will continue to be bud- get deficit reduction to free up financial resources for R&D.

The government has so far brought the excess down from 6% to 3.9%, which represents a new kickoff stage for hitching technology in top industries like petrochemicals, paper, tourism or renewable energy. Creating synergies around high-tech parks produces knowledge net- works that eventually lead to business models. The next step is training the workforce from grade school to state labs. So far, policymakers see their role as enablers, aligning the best conditions at science parks, educational centers and markets for venture capital.

There is no doubt that this is a market-led initiative. “First we support investment in transnational goods. Second, we strengthen the innovative process. Third, we foster technology transfer. Fourth, we focus on educating the workforce. And fifth, we develop the small regional companies,” says Horta.

The former OECD ambassador is conscious of the need to mobilize society and for him it is not so much a matter of political will as much as time lags. In the short-run, AICEP’s goal is to turn the country’s SMEs into international players. Horta says that about 90% of Portuguese companies are technically SMEs and he thinks 2,500 of them are already mature for globalization. Everything else points to a plain truth: Portugal is changing its habits.

“This is a very small country, a bit like Ireland. You must think in micro terms and economic size"

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  For example, when we have investors coming in we deal with them on a very personal basis, a tailor-made approach that is not possible elsewhere. With five successful reforms and 20 business success stories, you can turn Portugal around,” says Manuel Pinho, the Minister of Economy and Innovation. For US firms, Lisbon can serve as the new gateway to Europe and Africa, as well as a triangulating entry point for the 190-million strong Brazilian market. Pinho wants to create the image of a country with a zest for innovation.

  “We have money for technology investments and export infrastructure. Globalization creates a lot of opportunities”

  says Pinho, who has a particular interest in wind energy and biodiesel plants. Portugal was shown to have a 10-20% competitiveness gap vis-à-vis its trade partners in the EU. One of the conclusions was that export growth had deteriorated in the 1990s because of low corporate investment in technology. Entry into the EU meant a fall in the country’s risk premium, which triggered a consumption boom that lasted until 2000. The sharp appreciation of the euro since 2002 has contributed to a widening of the current account deficit. The most distorting element, however, has been the jump in relative labor costs: it is the ultimate culprit in the loss of market share Traditionally a producer of low-to-medium tech goods, Portugal has lost its competitive ground to regions with undervalued currencies, like China or some countries in Eastern and Central Europe.

  “For many years, our competitiveness was related to low costs. In a globalized economy, this has changed drastically. If we want to stay competitive, we need to develop capabilities and sources of competitiveness that go beyond the old paradigm,” says Fernando Teixeira dos Santos, Minister of Finance. The domestic economy is already showing upbeat signs. Last year, exports began to increase sharply and for the first time there was a marked shift away from low-tech production to higher market niches. Real GDP, according to an IMF forecast, will rise to 1.8%, up from 1.3% last year. Inflation will continue its downward trend to 2.2%. VAT revenue is up and there has been a freeze on the automatic progression of salaries.
  This is also the first time economic actors have aligned their interests in R&D. The new owners of capital speak perfect English and boast a global mindset. Foreigners are struck by the move away from traditionalist behavior.

  

  “I’m impressed by the way this government approaches the challenge. It’s a huge gambit for a country to swing around from practices entrenched over decades”

  says Charles Buchanan Jr., the administrator of the Luso-Ameri- can Foundation (FLAD). A former private-sector specialist with the US State Department, Buchanan thinks sealing official cooperation agreements with the likes of MIT, Carnegie Mellon and the University of Texas will bring technology closer to civil society. “It encourages people to think on their own, about what can be done at research centers here. In places like Minho and Aveiro huge efforts are being made to connect R&D with local business,” says Buchanan.

  As President of COTEC, a non- profit business association that pro- motes innovation strategies, Artur Santos Silva believes that a more level playing field will prevent the crowding out of ideas in a country used to top-down approval. Also, Chairman of leading bank BPI, he cannot help but think that taking decisions directly to the boardroom is a matter of common sense.
  
  “Our challenge is to make room for this new generation of entrepreneurs flaunting a different mentality, a generation that is innovating in all areas and investing in the education of its workers,” he says.
  
  One of the ratings for innovation is based on the percentage of workers that have undergone training in a single year. The numbers for Portugal have not yet reached their optimal level.

  “Our challenge is to make room for this new generation of entrepreneurs flaunting a different mentality, a generation that is innovating in all areas and investing in the education of its workers.” Artur Santos Silva, President of COTEC

  “Without investment, there is no innovation. If you study our economy, you’ll notice the missing factor is the contribution of investment to GNP,” says Santos Silva. But the numbers are already showing an improvement, with projections for investment revised upward to 10%, according to the Ministry of the Economy.
  
  This is an impact of the government-led Technology Plan (TP), an attempt to change the ways Portuguese companies rationalize investment. Widely seen as a market enabler, the TP has drawn out 112 directives to spread the mantra of R&D.
  The goal of the TP is to bring investment in technology up to 1% of GDP. From electronic billing to paperless hospitals, it entails a thorough streamlining of the public administration. Officials warn it is not a bunch of hype, either; the TP includes measures to evaluate its own progress.

  “We’re innovating in order to change our competitive model. It’s not just a political agenda, but more of a directive for private enterprise and universities.” Carlos Zorrinho, National Coordinator of the Technology Plan.

  This, after all, is the can-do country of the 55-minute company. Portugal made headlines in Europe last year for its Empresana Hora scheme, whereby companies could register in that period of time after bypassing the usual red tape. According to Minister of Finance Teixeira dos Santos, both the UN and the European Commission found it to be one of the most innovative business initiatives of the year. It was also a clear indicator that the Portuguese administration was betting on modernization. “There is an effort to modernize the administration and alleviate its burden of bureaucracy. This, together with the improvement in infrastructure and IT, is critical,” says Teixeira dos Santos.

  “First of all, we’re innovating in order to change our competitive model. It’s not just a political agenda, but more of a directive for private enterprise and universities,”

  says Professor Carlos Zorrinho, the nation- al coordinator of the TP. One of the how-to challenges consists of finding a strategic fit with foreign universities. These days, they not only sell knowledge: their role is also to help the community create wealth. Portugal already has cutting edge R&D at universities like the IST polytechnic in Oeiras outside of Lisbon. “We have strong examples of excellence, but they are not really structural. We need to disseminate those examples through the educational system. The Portuguese are very creative, but they need to be more rigorous,” says Zorrinho.

  In a twist, the state bureaucracy is beginning to set an example about ways to improve the business framework. The TP is an opportunity for Portugal’s administration to see itself as a competitive weapon, rather than a constraint. With new data architecture, it has eliminated more than 300 procedures. Although there is a real consensus in Portugal, oddly enough it is in the private sector where divisions are still patent. Some SMEs are modern, vibrant and adapt- able. They do not bat an eye when asked to work with university professors. The problem is the other kind of enterprise, the more stolidly traditional one based on a surviving monopoly.

  “I think the TP is very good. But the most important thing is people. It is all very well to follow the example of Finland, but let’s not forget that the Nordic countries invest a great deal in education”

  says Mario Costa, the General Director of Select Vedior, a multinational human resources group. Costa would like to see more concrete measures. If the ultimate goal is economic success, then the government should be prepared to train both the young and old in the new context that lies ahead. Costa is referring to a change in the operating system, the only lasting formula to do away with Portugal’s comfortable conservatism. “The younger Portuguese businesspeople are going abroad, but when they return sometimes, they stop thinking because the bureaucracy thinks small. If you want the TP to work, you need to change that,” says Costa.

  The Portuguese thinking machine needs guidance. At Select Vedior, Costa works with 14 different divisions. One of them, New Boston Select, consists of 6-month internships for college students at IT projects. It works like a trainee program in which the government provides fellowship money and the individual companies put their share. For Costa, it is important that young people under- stand that life is not a gravy train. It is about acquiring skills and being productive. Costa speaks of his 360 employees in Portugal as a learning franchise. “I provide a lot of training and never expect anything from the government. The incentives are always very clear,” he says.

  As in any formula, an increase in TFP in Portugal will be a com- bination of factors. So far, the TP has mobilized energy. And for a knowledge-based economy, that kind of cohesion goes a long way.

Highly conductive science

Portugal’s state laboratories are coming out of the cold. By regrouping into science consortiums, there is a new conductivity of ideas.

In a magnetics laboratory, cold is sometimes your best ally. Increasing the heat can lead to losses in field strength. As the temperature rises, the slope curves upward until magnetism drives to zero. Modulating ambient temperature is therefore critical. This is precisely what Portuguese policymakers have attempted to do with the net- work of state research labs—identify the ideal conditions for ground- breaking research.

To generate synergies with institutions like the French-based Commissariat à l’Energie Atomique (CEA), the radiation labs in Portugal are being placed under a consortium known as Physics- N, where management will no longer be subject to public administration laws. The added flexibility will make state labs more competitive and let them work like de facto private entities.

Julio Montalvão e Silva knows the ins and outs of low tempera- ture and high magnetic fields. As president of the Instituto Tecnológico e Nuclear (ITN), he has found new ways to sponsor research into nuclear fuel cycles and the safe handling of radioiso- topes. ITN boasts Portugal’s best facilities for radiation science. The campus, outside of Lisbon, is the only domestic institution with a Helium liquefier able to reduce temperatures from 0.3 to 400 Kelvin, creating intense magnetic fields. There are 100 undergraduate students currently training at ITN, as well as a host of PhD students. ITN also leases out equipment to smaller research groups.

“We’re the only Portuguese institute with both theoretical and practical knowledge in all areas of radiation”

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  “We have a lot to give, but also a lot to learn. This should be a strategic objective for all research institutions.” Money is short, but ITN allocates it all to research projects, facilities and equipment. That is the case with the newly acquired Squid magnetometer, which was expensive and is used 24/7. Scientists have also come up with practical applications. Medical instruments can be sterilized with gamma rays at ITN. “Radiation can even be used on cork to bottle wine. By radiating the cork, you kill the fungus that some times leaves an aftertaste,” says Mon- talvão e Silva. The medium-term goal at ITN is to get more trainees involved in research projects. Labs in Portugal have traditionally hired scientists on short-term contracts. It was the only way to stay in business. Montalvão e Silva, however, is now concerned with critical mass. ITN has developed its own spatial defractometer, known as a ‘hotbird’, for example. But he young researcher who designed it was killed in a tragic accident. Now, only a few post-doctoral students are able to work with the machine. “I’m worried about losing staff to other countries, where wages and working conditions are better,” he says. That could change with the increase in this year’s budget for the Ministry of Science. It is a perfect time window to reverse trends and recruit new staff, especially a younger generation with new ideas.

  Synergies with other institutions will make state labs more competitive and let them work like de facto private entities.

  For Adérito Serrão, President of the Instituto de Meteorologia (IM), the preferred formula is to change research institutions from the inside out. Absorbing a different mindset can be just as important as acquiring new machines. At the IM, Serrão is following up a partnership with the Massachusetts Institute of Technology (MIT) with a series of tangible projects. “One thing is to absorb technology that can be transferred from MIT and the other is to place people there who can absorb the mentality. It’s very important because the MIT, together with the US government, chose Portugal. I think all our staff sees the new consortiums in a very positive light,” says Serrão.

  The IM, now part of the Risco Consortium, is a leader in meteorology, with 162 weather stations and 3 observation centers. It receives images from a g-stationary satellite, as well as from EPS and MetOp. Serrão’s institution has joined all the different research centers that have arisen in Europe, such as EUMETNET and EUMETSAT. Meanwhile, IM has invested in a new computer platform to process forecast models more efficiently. With the spike in natural disasters related to global warming, the workload at the IM has a direct impact on people’s lives.

  Serrão is hoping to push policymakers in emerging markets like China, as well as in industrialized nations like the US, to do more to control gas emissions. The rise in global temperatures is going to hit Portugal especially hard. In the meantime, the IM has become part of an early warning system for heat waves and acid rain. “Recently, we issued a yellow warning and then an orange one. We’re in a position to issue this type of warning for the population and to give advice to disaster prevention organizations. We have video conferences with them providing that week’s forecast so that resources are mobilized before a disaster occurs,” says Serrão.

  

  It will take time—and perhaps a lower temperature—but thanks to the TP, Portuguese research institutions are more globally competitive than they have ever been. “Portugal is no longer the country associated with an old man on a donkey. It is becoming a country of high technology. I think we can put meteorology at the center of research and as a science that serves as a gateway to improve other fields,” says Serrão.

Wiring the paradigm shift

ICT penetration is behind many of the changes in Portuguese society. But how deeply wired is the country’s educational system?

Portugal has undergone its own paradigm shift in values and beliefs. “The transformation of this country runs deep. You will find people who are ready for new initiatives and open to scientific partnerships,” says Professor Luis Magalhães, the President of the Agência para a Sociedade do Conhecimento (UMIC). Institutions like the UMIC and the Fundação para a Computação Científica Nacional (FCCN) are providing much of the wiring for Portugal’s technological revolution.

“ICT is more than an instrument for economic development. It actually changes the way society operates on many different levels. We look at our role as being the social absorption of high tech in all sectors of life”

says Magalhães. The UMIC engages stakeholders in society to further the cause of ICT. “In 2005, we achieved full broadband connection for the educational system from grades 1 through 12,” says Magalhães. At 95% of universities and polytechnics, UMIC and the FCCN installed wireless access, thus creating a nationwide Virtual Campus. It is one of the highest rates of connectivity in the world.

A backbone of fiber optic wire now also links all research departments at Portuguese universities. “We received a lot of attention from companies like Cisco Systems and Microsoft in the US,” says Magalhães.

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  The .pt domain name spread quickly in the 1990s thanks in part to the efforts of the FCCN. Originally founded to promote high performance computing, it was enlisted by the Ministry of Science, Technology and Higher Education in 1997 to ease the shift into an information society. Its man- date was to improve access to the Internet in the educational system. “The Internet in those days was not as advanced as it is today and the telecommunications market was not liberalized. Now we have an extremely advanced network,” says Professor Pedro Veiga, the Chairman of the Board at FCCN.
  
  Networking is the main activity of the FCCN. As you read, it operates a fiber optic network humming at a rate of 10 gigabytes per second. Veiga also refers to B-ON, a scientific digital library imple- mented jointly by the FCCN and UMIC. After signing subscription contracts with the publishers of scientific journals, univer- sity students will have access to 16,500 publications.

  The database is accessible through an Internet portal and offers an advanced platform for Portuguese scien- tists. “It represents a big step forward in the quality of scientific work carried out at research institutions,” says Veiga. From behind his desk, Veiga points to a double-screened video conferencing unit. The FCCN has installed larger versions at several Portuguese universities to improve results at academic meetings.
  
  “Video con- ferencing is very important in higher edu- cation. You can broadcast a seminar, have meetings—which I do often from my office—and network with colleagues in dif- ferent countries,” says Veiga, who will be rolling out a voice-operated Internet Pro- tocol for universities in 2007. “We have an additional advantage, which is that there is a lot of content in Por- tuguese coming mainly from Brazil. We’re trying to create a momentum here and I think we will surpass German and French content by 2008,” adds Veiga.

Spinning off Portuguese IT

Software is often the byproduct of knowledge networks scattered all over the world. Through IT, Portuguese developers are finding niches in economies of scale.

In the software industry many tools aspiring to become applications fall by the wayside if they lack a marketability plan.
A process that integrates research with business is the most intelligent way for Portugal to implement the government’s Technology Plan. “Then there is promotion and the qualification of entrepreneurs, as well as licensing and incorporation,” says José Encarnação, a founding member of INI GraphicsNet.

The medieval town of Guimarães is often referred to as the cradle of Portugal. Today, the town’s Computer Graphics Center (CCG), linked to Minho University, is busy developing applications for the footwear industry and mobile handsets.

The joint venture with INI GraphicsNet, based in Darmstadt (Germany), means it is part of a global knowledge network with R&D labs in 15 countries. So far, INI GraphicsNet has spun off a number of digital media companies including CyberMD, of Providence, Rhode Island.

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  Since 1999, the network of software developers and patent specialists links the R&D team in Guimarães with others in Barcelona and Singapore. Encarnação, who shuttles in from Germany, is proud that the CCG is exporting Portuguese know- how to the rest of the world. As traditional industries slowly die out, Portugal’s IT edge will need to sharpen. Critical Software began with just three people and $2,000 in startup capital. Today, 70% of his business is outside Portugal and the company’s culture is thoroughly international. The company woked with NASA to develop jet propulsion software.

  Part of its credibility stems from a stunning record in industry certification. “We always look to apply for the most difficult certification. By doing that, we overcome the negative perception about Portugal as a non-technological country,” says the VP of Business Development, João Carreira.

  “As far as private companies go, our perspective is that we are technologically prepared,” says João Paulo Sá Couto, the Managing Director of JP Sá Couto, an electronics distributor with his own brand of ‘Tsunami’ computers. Sá Couto, who is also in the business of IT security, thinks plans like the TP can have a practical impact on the daily life of consumers. “There is a relative increase of broadband as well as the number of PCs per family and school. A more functional state and society are the goals, something which is hard to achieve but possible. For sure the private enterprise leads the way in this area and results are appearing,” he says. For a while, JP Sá Couto rode the wave of Internet penetration and cared little about research.

  “Five years ago we realized we had to be more proactive. So we set up Portugal’s first systems’ builder lab, which represented a large investment”

  says General Manager Jorge Sá Couto. Ever since, the lab has sent signals that spinoffs can take place across the board. The new business attitude has earned JP Sá Couto a cooperation agreement in forensic projects with the criminal police. JP Sá Couto has partnered with Microsoft to supply media centers. The vendor is currently supplying INESC, an engineering think tank, with all its hardware solutions.

  “We see IT in its wider perspective,” says Jorge Sá Couto. Beyond economies of scale, though, Portugal’s IT sector is still looking to level the field, which will make private firms like JP Sá Couto more competitive. As in the case of INI GraphicsNet, it is the synergies across countries and R&D teams that can turn Portugal into a factory of ideas. João Paulo Sá Couto mentions a TP provision that will immediately have an impact on his company, which sold 40,000 PCs and laptops in 2005. “The government is giving rebates of 250 euros to whoever buys a computer in Portugal right now,” he says. Together with lower prices for broadband, such measures will facilitate the industry’s takeoff.

The glamour of techno-fashion

‘Jeans’ and ‘technology’ are not usually found in the same sentence. But in Portugal, it makes 100% business sense.

Portugal’s textile and apparel industry has realized it needs to switch business models. There are only two solutions: by creating brand differentiation, or via fashion and design. Technological advancement is the more obvious path, according to Helder Rosendo, the General Manager of CITEVE, a research center for the textile and clothing industry.

“If you can have both an innovative company and special design, you have an instant winner—what I call ‘techno-fashion’”

says Rosendo. Little pieces of functionality go a long way in the rarefied world of fashion. In Portugal, the garment sector has proven an ideal platform to test drive technological inputs into traditional sectors. With bottom-of-the-shelf competition from the Chinese market, R&D in synthetics is the only way for local mills to stay open.

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  As recently as 5 years ago, Rosendo describes speaking to a deaf wall when preaching R&D to garment entrepreneurs. No one paid attention because they were still thinking in terms of low-cost production. “Now the companies are coming to us and saying: ‘We need to develop something new. Can you help us?’” he says.

  Serving big brand names like Calvin Klein and Armani worked well for Filipe Vila Nova. That is how his firm, Irmãos Vila Nova, first got its start Building brand specialization was a steep learning curve, especially in the global market for jeanswear. Located in Vilanova de Famalicao, halfway between Porto and Braga, SALSA Jeans was at the epicenter of Portugal’s textile industry, concentrating 67% of domestic mills. A lot has changed since 1994, when he first started taking orders from the big brands.

  To penetrate large department stores, Vila Nova steered firmly toward quality and brand differentiation.

  SALSA eventually found the answer on the fitting side of the equation. “I think other brands did not value fitting as much, the fact that one needs to adapt to people’s bodies like SALSA did. Few women in Portugal are lacking one of our jeans in their wardrobe,” says Vila Nova. He hired a designer who went through up to 30 variations to find the ultimate jeans product. Now, the company is obsessive about its fitting controls and 100% attentive to customer satisfaction. After 10 years, the SALSA brand is firmly anchored through a network of exclusive stores.

  Following up on earlier promises, Vila Nova has also launched a punchy web site (www.salsajeans.com). At its online shop, customers can rate glamour pants, shirts and skirts—all of which rotate 360 degrees and can be virtually fitted. Vila Nova believes the changes in the industry have been fueled from the demand side. “Clients started to deal with the Internet and new technologies and so they too began to evolve. We needed to go online with the client to understand what we had to do next,” says Vila Nova.

  Portuguese fashion still has a long road ahead. From building brands it has moved into quality niches. The future, at least for the moment, is catering to the fashion victim’s every whim.