Economic Liberalization and the Computer Industry: Comparing Outcomes in Brazil and Mexico

World Development Vol. 29, No. 7, pp. 1199±1214, 2001
                                                                    Ó 2001 Elsevier Science Ltd. All rights reserved
                                                                                           Printed in Great Britain                                                 0305-750X/01/$ - see front matter
                                       PII: S0305-750X(01)00038-9

Economic Liberalization and the Computer Industry:
    Comparing Outcomes in Brazil and Mexico
                      JASON DEDRICK, KENNETH L. KRAEMER
                           University of California, Irvine, USA

                                       JUAN J. PALACIOS
                                 University of Guadalajara, Mexico

                                  PAULO BASTOS TIGRE
                         Universidade Federal do Rio de Janeiro, Brazil


Ponti®ca Universidade Catolica do Rio de Janeiro and Universidade Estadual do Rio de
                                  Janeiro, Brazil
        Summary. Ð Market liberalization has been carried out by many developing countries in the hopes
        of stimulating trade, investment and technology transfer. In order to analyze the impacts of
        liberalization on a speci®c industry sector, this paper compares the experiences of Brazil and
        Mexico in liberalizing the computer industry in the 1990s. The authors conclude that liberalization
        leads to lower prices and more rapid di€usion of computer use throughout the economy, but at a
        cost to domestic computer ®rms who were harmed by foreign competition. Both countries saw an
        increase in computer production, but Mexico's production was mainly for export to the United
        States, while Brazil was producing for the domestic market. The di€erences between outcomes in
        the two countries have been determined more by environmental factors than by the nature and pace
        of liberalization. Ó 2001 Elsevier Science Ltd. All rights reserved.

        Key words Ð Latin America, Brazil, Mexico, computer, information technology, liberalization,
        outcomes of liberalization

              1. INTRODUCTION                              the vertically-integrated mainframe computer
                                                           industry structure (Grove, 1996). This devel-
   Market liberalization has been embraced by
most developing countries around the world
since the 1980s, driven partly by neoliberal               * This research has been supported by grants from the
ideology and partly by pragmatism in an                    Sloan Foundation; the Computation and Social Systems
increasingly interconnected global economy.                Program in the Computer, Intelligent Systems and
Developing countries who once feared                       Engineering (CISE) Division and the International
economic dependency now fear being left out of             Program of the Social and Behavioral Sciences (SBE)
the dynamic process of globalization.                      Division, US National Science Foundation; the Univer-
   The Information Technology (IT) industry                sity of California Institute for Mexico and the United
has become perhaps the most globalized of all              States, and the Consejo Nacional de Ciencia y Tecno-
industrial sectors, especially since the growth of         logia of Mexico (UC Mexus-CONACyT) Collaborative
the personal computer (PC) industry whose                  Grants Program. Final revision accepted: 3 February
horizontally specialized structure has replaced            2001.
1200                                 WORLD DEVELOPMENT

opment led to the growth of a global computer       role of the state in promoting national indus-
production network focused on East Asian            trial development, based on the experiences of
countries which specialized in particular           East Asian countries (Amsden, 1989;
industry segments such as PC assembly,              Anchordoguy, 1989; Wade, 1990). They have
components and peripherals (Borrus, 1997;           credited the governments of these countries
Dedrick & Kraemer, 1998; Ernst, 1994; Wong,         with providing domestic industries with selec-
1995). Motivated in part by the success of these    tive protection to compete internationally
countries, newcomers such as China, India, and      while introducing limited competition to
several others in eastern Europe and Latin          national markets. Their rationale is that
America have liberalized their computer sectors     simply opening up a country to international
in hopes of joining the global production           competition without a period of adjustment
network and gaining access to technology and        and without providing support to domestic
capital.                                            producers will result in the destruction of
   This paper analyzes the liberalization process   national industries.
in two large developing Latin American econ-           This paper addresses the following issues
omiesÐBrazil and Mexico. Both of these              raised by the debate over liberalization:
countries pursued protectionist policies in the        ÐIs promotion of a domestic computer
computer industry during the 1980s, and both           industry behind protective barriers a tenable
liberalized their markets in the early 1990s.          strategy?
While the general outlines and timing of the           ÐDoes liberalization lead to optimal results
liberalization process are similar for the two         (in terms of output, trade, employment,
countries, there are important di€erences in           technology di€usion) or are there tradeo€s
national environments, the pace of liberaliza-         between di€erent outcomes? For example,
tion, and the nature of related IT policies. As a      does liberalization lead to lower prices and
result, the outcomes and impacts of liberaliza-        faster di€usion, but harm domestic produc-
tion have been quite di€erent for the two              ers?
countries. This paper contrasts the two experi-        ÐDoes national environment matter or will
ences and assesses the respective results.             similar policies lead to similar outcomes in
                                                       di€erent contexts?
                                                       ÐCan government policy intervention lead
     2. THEORY, CONCEPTUAL                             to better results than simply liberalizing
 FRAMEWORK AND METHODOLOGY                             and allowing market forces to work?
                                                       ÐWhat are the elements of a comprehensive
   Countries around the world have been                policy approach to computer industry liber-
implementing economic liberalization programs          alization?
in a variety of forms over the past 15 years.       The analytical framework used to address these
These have ranged from deregulation and             issues is presented in Figure 1, which posits that
privatization programs in developed countries       the impacts of liberalization are in fact in¯u-
such as the United States, the United Kingdom       enced by national context, including: (a) the
and New Zealand, to outright market reforms         respective country's economic and political
such as those in China and the former Soviet        environment, its geographical location, its
bloc. Latin American countries have likewise        information infrastructure and national capa-
been undertaking various liberal economic           bilities such as human resources and technol-
reforms. The reform process was guided in           ogy, and the structure and composition of
many casesÐChile and Mexico in particularÐ          computer production and the extent of
by technocrats trained in the economics             computer use at the time of liberalization; (b)
departments of North American universities.         the nature of the liberalization process in
Their ideas on liberalization policies have thus    question, including the timing, pace and extent
been based on the theoretical underpinnings of      of liberalization, and related IT policies, such
neoclassical economics (e.g., Friedman &            as investment incentives, export promotion,
Friedman, 1980; Little, 1982), which argues that    incentives for IT use, training in IT skills and
the market is the best mechanism for both           telecommunications policies.
allocating resources and determining invest-           Key outcome variables include the impact of
ment decisions in virtually every context.          liberalization on industry structure, computer
   In contrast to neoclassical theory, another      production, trade, the domestic IT market and
school of analysts have argued for a stronger       the nature of IT and Internet use.
LIBERALIZATION AND THE COMPUTER INDUSTRY                                  1201

                                 Figure 1. Framework for comparison.

  This paper is based on research by the            have never succeeded beyond the domestic
authors in both Mexico and Brazil, reported in      market. Japan's PC market was isolated by the
several individual country papers (Botelho,         adoption of technology standards incompatible
Dedrick, Kraemer, & Tigre, 1999; Dedrick,           with the global standard, and its PC makers
Kraemer, & Palacios, 2001; Palacios, 2000;          have had very limited success outside Japan
Tigre & Botelho, 2001). The primary research        (West & Dedrick, 2000). By contrast, successful
included extensive secondary literature reviews,    PC-producing countries such as Taiwan,
and interviews with over 50 people in each          Singapore and Ireland have integrated them-
country, representing the computer industry,        selves into the global production networks led
IT user organizations, industry associations,       by multinational computer makers (Dedrick &
government and academia. The authors met for        Kraemer, 1998; Tallon & Kraemer, 2000).
two days in September 1999 to review and               By the early 1990s, a global production system
compare the ®ndings of the two cases and draw       was well established for computer hardware,
conclusions as presented in the present paper.      with the United States, Japan and East Asia
                                                    dominating the industry. Newcomers faced dim
                                                    prospects for breaking in unless they had a
             3. ENVIRONMENT                         unique asset, such as China's large potential
                                                    market, to attract investment by multinational
            (a) Global environment                  corporations (MNCs). But the industry has seen
                                                    a shift toward build-to-order production in the
   The global environment in¯uences the poli-       late 1990s, requiring PC assemblers and some of
cies of national governments and de®nes the         their suppliers to locate production close to the
opportunities and challenges facing policy          ®nal market. This trend has led to regional
makers and business leaders. The computer           production strategies, with major PC makers
industry is highly globalized, with common          having separate assembly plants in Asia, North
technology standards used around the world.         America and Europe in order to serve the three
This means that thousands of companies are          major markets. The result has been new
doing research, designing and manufacturing         opportunities for countries such as Ireland,
products, and developing software for a few         Scotland, Hungary and as we shall see, Mexico.
standard technology platforms, particularly the
IBM/Wintel PC. In the face of such global                      (b) Economic environment
economies of scale and technological dyna-
mism, it has proven impossible to develop a           Brazil and Mexico are the largest economies
competitive computer industry in an isolated        of Latin America, with Brazil's GNP about
national market. Examples of countries that         twice that of Mexico. The countries have similar
tried and failed to develop competitive PC          levels of GNP per capita and industrialization.
industries in protected markets include India       Brazil has managed to grow about twice as fast
and China, each of which have partially liber-      as Mexico since 1980, although it was plagued
alized their PC markets in the 1990s (Dedrick &     by high in¯ation until the mid-1990s.
Kraemer, 1993; Kraemer & Dedrick, 1995).              While Mexico became more open during
Korea protected its PC industry with a ban on       1980±96, with trade increasing from 24% to
imports during 1982±88, and its PC makers           42% of GDP, Brazil actually became more
1202                                   WORLD DEVELOPMENT

self-contained, with trade dropping from 20%        stability brought about by the end of in¯ation
to 15% of GDP (World Bank, 1999). Privati-          with the 1994 Real Plan. Even before then, the
zation of state enterprises in Brazil gained        Brazilian State had begun reducing its
impetus from 1996 and in some sectors, such as      economic role. The Brazilian Congress, domi-
telecommunications, has been completed. Both        nated by a multiparty government alliance, has
countries' mix of exports has shifted from          supported the government's strategies of liber-
primary products to manufactured goods, but         alization and privatization, although it has
much more dramatically in Mexico.                   resisted more profound changes in the critical
   Both countries endured foreign debt crises       areas of social security and public de®cit
during the 1980s, leading to severe economic        control (Tigre & Botelho, 2001).
downturns. In response to these crises and             Mexico was governed by the Institutional
resulting pressure from international lending       Revolutionary Party (PRI) from 1929 until
agencies, both countries began to open up their     2000, the longest continuing rule of any politi-
protected domestic markets. By the late 1990s,      cal party in the world. The PRI's hegemony
each had privatized state enterprises, opened       ®nally ended with the election of opposition
major industry sectors to foreign investment,       candidate Vicente Fox in 2000, but the
and lowered tari€s and other trade barriers. In     conservative Fox is not expected to backtrack
addition to beginning earlier, in Mexico, the       on the liberalization e€orts of the past 15 years.
liberalization process was swifter and broader,
while in Brazil it unfolded more gradually.
   Both countries have joined the World Trade                   (d) National capabilities
Organization and both have entered free trade
agreements in the 1990s. Mexico joined the            The potential impacts of liberalization on a
United States and Canada in NAFTA, while            country are a€ected by a set of national capa-
Brazil spearheaded the creation of the              bilities needed for production and use of
MERCOSUR (MERCOSUL in Portuguese)                   computers and information technology. Most
free trade area, which includes Argentina,          important of these are the quality of the tele-
Paraguay and Uruguay. For Brazil, MERCO-            communications infrastructure and human
SUR is signi®cant, but the three other countries    resources, and the size and competitiveness of
have a combined GNP of only US$335 billion,         the IT industry before liberalization. Telecom-
or less than half that of Brazil. On the other      munications infrastructure is vital to e€ective
hand, NAFTA gives Mexico access to the US           use of IT, especially in the era when Internet
and Canadian markets, with a combined GNP           and other network technologies are coming to
of US$8.3 trillion (World Bank, 1999). This         dominate. Human resources include everything
asymmetry, as well as its close proximity to the    from literate workers for advanced manufac-
United States, make Mexico a logical place to       turing facilities to engineers and technicians
locate high-volume manufacturing for the            needed by the IT industry, to scientists and
North American market, while production in          researchers who can conduct research and
Brazil is still mostly for the domestic or          development (R&D) and develop new tech-
MERCOSUR markets.                                   nologies.
   The economic di€erences between Brazil and         The capabilities of the existing IT industry
Mexico also help explain the di€erent approa-       can also a€ect the results of liberalization. If
ches taken to liberalization. Brazil, with its      domestic companies are already internationally
larger economy and distance from other major        competitive, they are likely to survive and even
markets, has been more inclined to protect and      thrive under liberalization. If they have
promote local industries, while Mexico has          succeeded only by taking advantage of the
been willing to open its market in return for the   protected domestic market, they are unlikely to
promise of access to the large North American       survive the onslaught of foreign competition.
market.                                             Even if existing companies do not survive,
                                                    however, there may be individuals who have
           (c) Political environment                gained experience starting and managing
                                                    companies, and these skills will still prove
  Brazilian politics have been in a period of       valuable after liberalization. They can shift to
relative stability since the early 1990s. The       di€erent industry sectors, start new companies
ongoing democratization, begun in the late          or help foreign MNCs carry out higher value-
1970s, was further consolidated by economic         added activities within the country.
LIBERALIZATION AND THE COMPUTER INDUSTRY                                     1203

    Table 1. Comparative telecommunications indicators,      managers of IT companies in both countries
                          1998a                              con®rm the high quality of engineering skills
                Main lines         Cellular mobile           for the hardware industry, and a good supply
                 Per 1,000       Subscribers per 1000        of software skills as well. These skills are
                inhabitants          inhabitants             available at a much lower cost than in indus-
Mexico              104                   35                 trialized countries, an additional attraction for
Brazil              121                   47                 IT companies.
Korea               432                  302
Taiwan              524                  216
Malaysia            202                  101
                                                                              (g) IT industry
    Source: ITU (2000).                                         Prior to liberalization, Brazil had a larger
                                                             and more technologically advanced IT indus-
   The ability of a country to participate in a              try, which produced a wide range of systems,
global, post-liberalization environment and                  peripherals and even some components (Tigre,
realize the potential bene®ts of that participa-             1992). But, the industry produced mostly for
tion depends to a great extent on whether it has             the protected local market and had not honed
or can develop all of these capabilities.                    itself against foreign competition. Mexico's IT
                                                             industry, by contrast, was dominated by
                                                             foreign MNCs even during the protectionist
        (e) Telecommunications infrastructure                1980s. Locally-owned companies had initially
                                                             tried to develop their own PC designs and
   The telecommunications infrastructures of                 brands, but once the restrictions on component
Brazil and Mexico are quite similar in terms of              imports were loosened, they shifted to simple
wired and wireless penetration. As Table 1                   assembly of PCs based on foreign designs and
shows, however, both countries lag signi®cantly              components (Borja, 1992).
behind Asian countries such as Malaysia, Korea                  These di€erences help to explain Brazil's more
and Taiwan in terms of main lines and cellular               active local entrepreneurs after liberalization.
phone subscribers per 1,000 people. Both Latin               Both countries do have well-educated entrepre-
American countries have seen improvements,                   neurs who have entered the IT industry, but
thanks to privatization and deregulation of the              there is more activity in Brazil. This could be due
telecommunications sector in recent years, and               to the larger role of foreign multinationals in the
further improvement is likely.                               Mexican market, o€ering more job opportuni-
                                                             ties and also more competition to potential
                 (f) Human resources                         entrepreneurs. In addition, the larger Brazilian
                                                             market o€ers more opportunities for startups to
  The general level of education in Mexico and               target niche markets at home, and Brazil's
Brazil is about average for their income levels.             government has more actively supported local
In terms of IT skills, both countries have high-             entrepreneurs through export assistance and
quality personnel and quite large numbers of                 incubator programs. But the fact that Brazil had
professionals, as Table 2 shows. Interviews with             a domestically-owned computer industry before

                                        Table 2. Human resource indicators
Country                                                   Mexico     Brazil     Korea      Taiwan     Malaysia
Population (millions)a                                     96.5       159        44.9        21         20.1
Adult literacy (%)a                                         90         83         98         na          84
Mean years of educationb                                    4.7       3.9         8.8       NA          N/A
Secondary enrolment ratio (%)a                              58         45        101        NA           57
Masters and Ph.Ds in science and engineering               5916       N/A        7070       4011        N/A
awarded, 1990c
R&D scientists and technicians per 1,000 peoplea             0.3      0.2          2.9      N/A          0.2
Number of software professionalsd                         321,482   549,840     340,168    140,070     53,389
  UNDP (1998).
  UNDP (1993).
  Dedrick and Kraemer (1998). For Mexico, CONACyT (1995).
  Jones (1998).
1204                                  WORLD DEVELOPMENT

liberalization meant that many professionals        global production network for high-volume PC
gained experience in ®nancing, launching and        production (Dedrick & Kraemer, 1998).
managing their own companies, a set of skills          These two developments led to a shift in
developed by fewer Mexicans.                        strategy in 1985 when IBM asked permission to
                                                    produce PCs in Guadalajara, but balked at the
                                                    joint venture requirement in the Computing
       4. LIBERALIZATION OF THE                     Program. The Mexican government was
            COMPUTER SECTOR                         opposed to granting an exemption since other
                                                    foreign ®rms had already formed joint ventures
         (a) Pre-liberalization policies            with Mexican partners. But keeping IBM out of
                                                    Mexico's PC market would isolate the country at
   During the 1980s, both Brazil and Mexico         a time that it hoped to become more integrated
employed protectionist policies in order to         into the emerging industry (Dedrick et al., 2001).
promote their respective computer industries.          Ultimately, IBM and the Mexican govern-
The policies di€ered in scope, with Brazil's        ment came to an agreement that gave IBM the
``market reserve'' policy causing more conster-     right to retain full ownership of its new plant in
nation among trading partners, especially the       return for concessions on R&D and develop-
United States. Brazil's policies placed a heavier   ment of local suppliers. Most important, IBM
emphasis on local ownership, while Mexico           agreed to export a large share of the plant's
initially favored joint ventures and ultimately     output, helping Mexico reduce its trade de®cit
allowed full foreign ownership. Both countries      in PCs from $200 million in 1985 to $78 million
accepted the de facto presence of IBM in the        in 1987 (Borja, 1992). After the IBM decision,
mainframe computer market, and targeted the         the government shifted its emphasis from
emerging minicomputer and microcomputer             industry protection to encouraging IT use and
(PC) markets for development.                       eventually to liberalization.
   In 1981, the Mexican government formulated          Brazil's computer industry policies in the
the so-called Program to Promote the Manu-          1970s and 1980s followed a ``greenhouse''
facture of Electronic Computing Systems,            strategy of protecting domestic producers to
Their Central Processing Units and Their            allow them to grow and innovate. The goal was
Peripheral Equipment, more commonly refer-          to limit linkages between local and foreign
red to as the Computing Program. The key            ®rms, so that local companies could develop
goals of the plan were to generate local            capabilities for autonomous innovation with-
production of microcomputers, peripherals and       out depending on foreign technology (Evans,
components, to promote exports, and to              1992). This policy, dubbed the market reserve,
achieve greater autonomy in computer tech-          focused on the lower end of the marketЮrst
nologies (Borja, 1992).                             minicomputers, and then microcomputers as
   As part of the program, access to the            well. Foreign competitors were kept out of
domestic computer market was limited to             those segments of the Brazilian market through
companies that would produce according to the       restrictions on imports and foreign investment.
Program's provisions, and foreign ownership         Local companies were prevented from acquir-
was limited to 49% in the production of PCs         ing foreign technology without government
and peripherals. Foreign companies were             permission.
required to invest between 3% and 6% of gross          This policy gave local ®rms the space to grow
sales in R&D, and include a minimum                 and develop capabilities, and by the end of the
proportion of Mexican-made parts and                1980s, Brazil had a set of diversi®ed IT
components in their systems. Preferential           companies with signi®cant presence in the local
treatment was given in government procure-          market. The output of local computer hard-
ment to companies registered in the program.        ware producers grew from less than $200
   Almost as soon as the policy was put in place,   million in 1979 to more than $4 billion in 1990,
the environment began to change. First, the debt    and some local ®rms produced impressive
crisis of 1982 shifted the government's emphasis    results in R&D (Evans, 1992). But, the industry
from industrial policy to ®nancial policy, with     was largely isolated from the dynamism of the
the balance of payments becoming the critical       global PC industry, and Brazilian computer
concern. Second, the introduction of the IBM-       companies were not competitive outside the
PC led to standardization of the PC industry on     protected domestic market. Moreover, many
the IBM architecture and the creation of a          local ®rms made no e€ort to innovate and
LIBERALIZATION AND THE COMPUTER INDUSTRY                                   1205

chose instead to pirate or surreptitiously license   cies for the computer sector more in line with
foreign technology while taking advantage of         those of the United States and Canada and
the market reserve.                                  thus, minimized the changes needed when
  The market reserve policy also raised the cost     NAFTA was implemented. The continuing
of computers to users, although, as Tigre (1992)     reticence to adopt any computer industry
points out, the price gap between Brazil and the     policies or incentives is in¯uenced by concerns
United States dropped signi®cantly in the late       that such policies would be seen in the United
1980s, so that Brazilian prices were more in line    States as attempts to pull jobs across the border
with prices in Europe and Latin America. Still,      to Mexico.
there was a delay in introduction of new tech-
nologies that ranged from one to several years.
                                                               (c) Nature of liberalization
        (b) Forces driving liberalization
                                                        Liberalization of Mexico's computer sector
                                                     took place in a sweeping one-time move when
   Brazil began to reduce the heavy role of the
                                                     the Computing Program was abandoned in
state in its economy in the early 1990s, in the
                                                     1990. The only remaining barrier to the Mexi-
wake of a decade of economic stagnation. In
                                                     can market was a 20% tari€ on hardware,
the computer industry, the market reserve was
                                                     which fell to 12% by 1994, and was phased out
abandoned in 1992 and replaced by a more
                                                     by 1998 within NAFTA. In 1999, the Mexican
market-oriented policy. The shift was driven in
                                                     government established the Sectoral Promotion
part by fears that Brazil was being left behind
                                                     Program for producers and nontrading
technologically in computers and IT. In addi-
                                                     companies in the electric±electronics sector to
tion, pressure for change was brought to bear
                                                     import components and machinery from
by the US government, which threatened Brazil
                                                     outside the NAFTA region at lower taxes
with Super 301 trade sanctions for its market
                                                     (Palacios, 2000).
reserve policy. There was also concern over
                                                        Brazil likewise removed most barriers to its
high levels of smuggling and gray market
                                                     computer market in 1992, but left in place a
activity (Tigre & Botelho, 2001).
                                                     complex mix of tari€s and national and local
   While these factors pushed Brazil toward
                                                     taxes, which could total over 30% of the cost of a
liberalization, the government did not want to
                                                     computer. By maintaining these taxes, Brazil
lose the capabilities developed by domestic
                                                     could o€er exemptions as a means of promoting
companies under the market reserve. More-
                                                     domestic production. The goal was to allow
over, it wanted foreign companies to do more
                                                     foreign companies into the market with the
than simply import products to serve the
                                                     latest technologies and lower prices, but to give
Brazilian market, especially, given the country's
                                                     them an incentive to locate production in Brazil.
balance of payments problems. As a result, the
new policies adopted in 1992 included incen-
tives for companies to produce in Brazil, and                   (d) IT promotion policies
ensuing programs provided support for local
companies entering the industry.                       There have been signi®cant di€erences in the
   Mexico's decision to liberalize the computer      degree to which the two countries have
sector was driven as well by the pressures of        promoted IT production and use after liberal-
globalization in the industry, but it was            ization. Brazil has replaced industry protection
supported by a stronger ideological commit-          with an active policy of industry promotion,
ment on the part of Mexico's leaders. Presidents     while Mexico has taken a laissez faire
Miguel de la Madrid (1982±88) and Carlos             approach.
Salinas (1988±94) were technocrats with a              Brazil's post-liberalization IT policies were
neoliberal bent. Salinas opened the computer         de®ned in 1991 by Law 8248/91, aimed at
industry to trade and foreign investment in 1990     establishing alternative mechanisms to preserve
without apparent reservations as to the fate of      local manufacturing and R&D activities in the
the small local computer industry. Since then,       computer sector. The approach taken was to
the prevailing belief, in the words of one federal   o€er exemptions to various taxes if companies
government ocial, is that ``the best policy is to   would commit to certain levels of local
have no policy'' (Dedrick et al., 2001).             production, local content and R&D. There
   Mexico's unilateral market opening in 1990        were no barriers to imports or foreign invest-
actually brought its trade and investment poli-      ment; however, computer makers that simply
1206                                   WORLD DEVELOPMENT

imported products for sale had to forego the          Investment Board, the foreign investment oce
bene®ts provided under the law.                       of the Ministry of Commerce and Industrial
   The policy consisted of four types of incen-       Promotion (SECOFI), and two development
tives. First, ®scal bene®ts consisted of a waiver     banksÐBanco Nacional de Comercio Exterior
on the industrialized goods tax resulting in a        (Bancomext)        and    Nacional      Financiera
reduction of 15% in the ®nal cost of production.      (NAFIN). In addition, the national electronics,
Second, a discount of 50% on income tax for           telecommunications and informatics industry
R&D expenditures was available to all indus-          chamber (CANIETI) has implemented a strat-
trial sectors. Third, in order to provide support     egy to develop a local supply base for the
for new capital investment, a discount of 1% of       computer and electronics industries. There is,
the income tax payable by companies investing         however, little coordination of e€orts, limited
in IT ®rms was available until 1997. Fourth,          funding and no overarching strategy aimed at
government procurement policy favored the             developing long-term capabilities (Dedrick et
acquisition of IT goods developed and produced        al., 2001).
in Brazil, as long as they had similar prices to         To summarize, both Mexico and Brazil
imported equipment. By 1997, 248 ®rms had             pursued protectionist policies in the computer
taken advantage of the program, including most        sector in the 1980s, but under internal and
major domestic and foreign computer makers.           external pressure, both liberalized in the early
A program to promote the software industry,           1990s. Mexico opened up more quickly and
called Softex, was introduced in 1993. The            completely, taking a hands-o€ approach to trade
program includes the formation of regional            and investment in the IT sector. Brazil main-
centers and incubators to stimulate cooperation       tained a set of tari€s and taxes, for which it could
among small software ®rms, the installation of        o€er exemptions as a tool to promote local
marketing oces in foreign markets to support         production and R&D. Both countries imple-
Brazilian ®rms' export e€orts, and provision of       mented policies to promote the IT industry, but
incentives for training IT professionals within       Brazil's were more extensive and better funded.
®rms (Tigre & Botelho, 2001).                         In both cases, policies were mostly developed ad
   While laissez faire has been the trend in          hoc, with no guiding long-term goals or coordi-
Mexico, there have been some scattered                nation mechanisms to link production, use and
attempts at industry promotion in the 1990s.          creation of national capabilities.
When Ernesto Zedillo became president in
December 1994, he called for the development
and exploitation of information technology as a           5. IMPACTS OF LIBERALIZATION
national goal. This goal was given form in the
Plan for the Development of Informatics                  Given these di€erences in policy, one might
(PDI), which targets: (i) promotion of IT use;        expect large di€erences in impacts. Yet in some
(ii) human resource development; (iii) research       respects, the impacts of liberalization have been
and development; (iv) development of a local          similar in the two countries: consumers have
IT industry to exploit niche opportunities; (v)       bene®ted from lower prices and greater choice in
improvement of the telecommunications infra-          computer products; IT use has expanded
structure; and (vi) creation of the necessary         throughout the economy; and many local
legal framework to support IT (e.g., intellectual     computer makers have been driven out of busi-
property rights).                                     ness by foreign competition. There have been
   Despite its broad objectives, the PDI has had      signi®cant di€erences as well, partly due to
little impact, for two reasons. First, there are no   di€erences in the liberalization process, but
funds set aside to pay for new projects, so           more importantly due to di€erences in environ-
funding must come from the relevant govern-           ment such as location, domestic market size,
ment agencies' already tight budgets. Second,         existing national capabilities, and also to IT
there is little coordination among the institu-       policies. To analyze these impacts, we look at the
tions involved, and no pilot agency to ensure         following: domestic computer market, computer
that policies are designed to complement each         production, trade, IT use, and employment.
   The government also is encouraging devel-                        (a) Computer market
opment of a local supplier base to support the
multinationals producing in Mexico. The                 The impacts of liberalization on the compu-
organizations involved are the Mexican                ter market in Mexico and Brazil were di€erent
LIBERALIZATION AND THE COMPUTER INDUSTRY                                           1207

in the short-run, as Mexico saw somewhat                surpassed its pre-crisis level and continued to
faster growth in computer sales after the liber-        grow solidly in 1998 and 1999.
alization of 1990, while Brazil's market at ®rst           In retrospect, there is evidence that liberal-
stayed rather ¯at after its 1991 liberalization         ization accelerated the rate of IT spending in
(Figure 2). Later, however, Brazil's market             each country, although not as dramatically as
began to take o€, mainly due to the successful          might have been expected. This could be due to
e€ort to control in¯ation through the Real Plan         the fact that both countries had actually taken
in 1994. Once prices were stabilized, businesses        steps to push prices downward on domestically-
could make more realistic long-term investment          produced computers even before liberalization
decisions and began to invest heavily in infor-         by allowing imports of many components at
mation technology. It was only then that the            lower tari€ rates. Thus, IT spending was
impacts of liberalization were fully felt. The          already growing in the late 1980s.
market declined in 1999 due to a ®nancial
crunch and devaluation that were triggered by                       (b) Computer production
the Asian ®nancial crisis.
   In Mexico, the rapid expansion of IT                   Computer production in Brazil ®rst dropped
spending was interrupted by the peso crisis and         in response to liberalization, which brought in
deep recession of 1995. Growth resumed,                 imported computer hardware to compete with
however, in 1996 and by 1997, the market had            local production (Figure 3). After a one-time

         Figure 2. IT markets for Brazil and Mexico 1985±99. Source: IDC, data provided to authors.

     Figure 3. Computer hardware production in Brazil and Mexico, 1989±99. Source: Reed (various years).
1208                                      WORLD DEVELOPMENT

drop in 1992, production began to grow as                   A similar, but smaller electronics hub is
MNCs took advantage of Brazil's industry                 found in the state of Campi~ nas, Brazil, near
promotion policies by producing in Brazil for            Sao Paulo. Campi~  nas is home to computer
the local market.                                        manufacturers such as Compaq and IBM, as
  In Mexico, liberalization initially had little         well as a growing number of contract manu-
impact on production. But, when the NAFTA                facturers. These companies use Brazil as a
agreements were signed in 1992, production               production base for both the domestic market
began to grow steeply as new companies moved             and the MERCOSUR free trade area (Botelho
into Mexico and existing foreign producers               et al., 1999).
increased production there in anticipation of
NAFTA. The combination of low labor costs,                                     (c) Trade
NAFTA membership, and close proximity to
the large US market made Mexico an attractive               The di€erences between Brazil and Mexico in
location for assembly of PCs and components              the post-liberalization era are most vivid in the
such as printed circuit boards. By 1999, Mexico          area of foreign trade (Figure 4). Brazil has seen
had actually equaled Brazil's total output for           a steady increase in imports after opening its
computer hardware, after trailing by a 4:1               market, but exports have languished and a
margin in 1991.                                          signi®cant trade gap has opened. Mexico initi-
  Production in Mexico has continued to                  ally saw imports rise quickly, leading to a trade
expand, recently with the in¯ux of contract              de®cit in computers, but after the peso deval-
manufacturers (CMs) into the western state of            uation of December 1994, that de®cit has
Jalisco. Some of the world's largest CMs have            turned into a surplus. The shift was due to a
come to Guadalajara and its metropolitan                 decline in imports, while exports continued to
region. These include SCI, Solectron, NatSteel,          grow as they had ever since NAFTA was signed
Flextronics, Jabil Circuit and Dovatron, which           in 1992. In 1997±98, export growth accelerated
joined brand name vendors IBM, Hewlett-                  even further as production by the newly arrived
Packard, NEC and Lucent, who were already                contract manufacturers came on line.
operating in the area. IBM also has continued               The di€erence between the two countries is
to increase its production of PCs, disk drive            that while both have seen substantial growth in
components, and software in its large Guad-              computer production, in Brazil it was mostly
alajara facility, which employs around 10,000            for the domestic market, while in Mexico it was
people. This concentration of electronics                mostly for export. The reasons have to do with
production has led Guadalajara to be dubbed,             trends in the computer industry, geography and
the Mexican Silicon Valley, although a more              NAFTA, more than with liberalization of the
accurate comparison would be with manufac-               computer sector per se.
turing clusters such as Singapore or Penang,                In recent years, the PC industry has become
Malaysia (Palacios, 1995; Dedrick et al., 2001).         extremely time sensitive, thanks to the rapid

       Figure 4. Trade in computer hardware for Brazil and Mexico, 1989±99. Source: Reed (various years).
LIBERALIZATION AND THE COMPUTER INDUSTRY                                        1209

depreciation of products and the build-to-order              as Brazilian-owned ®rms have sustained a
production model pioneered by Dell Computer                  larger share of their local market than have
(Curry & Kenney, 1999; Kraemer, Dedrick, &                   their Mexican counterparts. Table 3 shows that
Yamashiro, 2000). This has pushed PC makers                  six Brazilian-branded PC companies controlled
to locate production close to the market. For                25.6% of the market in 1997, while three
the US market, this often means producing in                 Mexican-owned ®rms controlled only 12.2% of
North America, and for labor-intensive activi-               the market in 1998. Moreover, ``white box''
ties such as assembly of circuit boards, cables,             clones made by local assemblers accounted for
connectors and monitors, Mexico is an ideal                  over half of Brazil's market, compared to 21%
location due to low wages and proximity to the               in Mexico. The situation in Brazil may change
United States. NAFTA's provisions helped                     in the future as PC heavyweights such as Dell
further by creating greater con®dence among                  and Gateway enter the market, but for the ®rst
foreign multinationals that Mexico's market                  decade of liberalization, Brazilian companies
liberalization was ®rmly rooted. The result has              were better able to survive in the competitive
been a shift of contract manufacturing in                    PC market.
particular from Asia to Mexico (Goad, 1999).                    Beyond the PC industry, most Brazilian-
   While most of Mexico's production is                      owned hardware makers who had been
exported, most of Brazil's production is for the             producing minicomputers and peripherals
local market. The other MERCOSUL markets                     either disappeared after liberalization, moved
are so small that they provide limited export                into other markets such as services and distri-
opportunities. Compaq is now using Brazil to                 bution or were bought out by foreign ®rms
supply all of South America, but the whole                   entering the Brazilian market. In the compo-
continental computer market, including Brazil,               nents market, Brazil has lost much of its
is less than one-tenth the size of the US market.            production capacity as companies such as
Brazil cannot easily export to the United States             Itautec have abandoned the components busi-
because its industry centers are too far from the            ness and scaled back R&D in the face of
United States to ship time-sensitive products by             international competition. Brazilian ®rms have,
truck or sea. Once air shipment is required,                 however, been able to sustain a larger role in
Brazil has no advantage over Mexico and large                niche segments of the IT industry, especially in
Asian producers such as Taiwan, Malaysia,                    banking automation, where Brazil had been an
China and Singapore in serving the US market.                early adopter as banks responded to the
                                                             demands of a high-in¯ation environment (Tigre
                 (d) Industry structure                      & Botelho, 2001).
                                                                Few Mexican-owned ®rms have entered the
   Since liberalization, both countries' IT                  components market, although a small Guad-
industries have become increasingly dominated                alajara ®rm, Compuworld has become a
by foreign (mainly US) ®rms. There is a                      supplier of disk drive components to IBM.
signi®cant di€erence between the two countries,              Otherwise, computer makers and contract

                                  Table 3. PC market share for Brazil and Mexicoa
                            Brazil, 1997                                            Mexico, 1998
Company                                Market share (in %)             Company             Market share (in %)
Compaq (US)                                   10.4               Compaq (US)                       20.0
Itautec (Brazil)                               6.8               Acer (Taiwan)                     11.3
IBM Brasil (US)                                5.6               IBM (US)                          12.8
UIS (Brazil)                                   4.9               HP (US)                           10.2
Tropcom (Brazil)                               4.7               Alaska (Mexico)                    8.9
Byte On (Brazil)                               3.4               Dell (US)                          3.8
Hewlett-Packard (US)                           3.1               Lanix (Mexico)                     2.9
Microtec (Brazil)                              2.9               Toshiba (Japan)                    2.9
Fivestar (Brazil)                              2.9               Apple (US)                         2.3
Acer (Taiwan)                                  2.5               Printaform (Mexico)                0.4
                                                                 Other int'l brands                 2.8
Others (mostly white boxes)                   52.8               White boxes                       21.3
    Source: Brazil, IDC cited in Crespo (1998). Mexico, IDC provided to authors.
1210                                         WORLD DEVELOPMENT

manufacturers mostly import components                       such systems or have worked with foreign and
under either the maquiladora or PITEX                        domestic IT companies to develop their own
(Program of Temporal Importation for Export)                 capabilities.
regimes that allow for duty free import as long                 After a slow start, the Internet has caught on
as the ®nal products are exported (within up to              in both countries in recent years. One reason
60 days).                                                    has been the availability of lower cost PCs to
  On the other hand, local Mexican ®rms have                 access the Internet. Another has been the
been more successful in custom programming                   liberalization of telecommunications in each
and information services, led by Softek, based               country, leading to lower prices and improve-
in Monterrey, which had over 2,000 employees                 ments in infrastructure. The growth in number
and over US$50 million in sales in 1997. Some                of Internet users has supported an increase in
of the leaders in this segment have been taken               Spanish and Portuguese language content,
over by US giants such as IBM (which bought                  which has in turn drawn more users.
software developer TecnoSys) and GE Capital
(which bought 80% of system integrator EDM).                                (f) Summary and analysis

                        (e) IT use                             In summary, liberalization has led to lower
                                                             prices and greater di€usion of computer tech-
  Falling prices and a wider array of available              nologies in both countries. It also has created a
products and services helped expand IT use                   better environment for foreign investment,
throughout both countries' economies. As of                  which has brought with it leading edge tech-
1998, Brazil was slightly ahead of Mexico in                 nology and knowledge of how to use the tech-
terms of PCs per capita, and both were well                  nology more e€ectively. On the other hand,
ahead of poorer developing countries such as                 while both countries have seen growth in
China and India. But, compared to wealthier                  computer production, the growth has been
Asian economies such as Korea and Taiwan,                    much faster in Mexico. While Brazil's industry
Brazil and Mexico still lagged with less than                produces almost exclusively for the domestic
one-third the number of PCs per 100 inhabit-                 market, Mexico has become a major export
ants (Table 4). Brazil compares favorably to                 platform for the North American market.
other developing countries in total IT spending                Returning to the conceptual framework
as a percentage of GDP, while Mexico is about                developed earlier in this paper, a comparison of
average.                                                     Brazil and Mexico shows that di€erences in the
  IT use in both countries has been spurred as               impacts of liberalization in the two countries
well by increased competition across large                   can be related back to the twin factors of
segments of the economy. As foreign banks,                   environment and policy.
retailers and manufacturers have entered
previously closed markets, they have brought in                      (g) Impact of environmental factors
advanced information systems and exposed
Brazilian and Mexican managers to those                         ÐIdeology and political dynamics. In Mexi-
technologies. Domestic companies have either                    co, powerful Presidents with a strong neolib-
looked for foreign partners to gain access to                   eral ideology have implemented more rapid,

                                              Table 4. IT use indicatorsa
Country          PCs (millions)          PCs/100        IT spending as %        Internet users/    Hosts per 1,000
                     1998            inhabitants 1998     of GDP ('98)        1,000 people, 1998    people, 2000
Brazil                 5                   3.0                 1.6                    15                  3
Mexico                 4.5                 4.7                 1.1                    14                  4
USA                  124                  45.6                 4.2                   220                193
Japan                 30                  23.8                 2.3                   132                 20
China                 11.2                 0.9                 1.0                     2                  0.05
India                  2.7                 0.3                 0.5                     1                  0.02
Malaysia               1.3                 6.2                 1.7                    36                  3
Korea                  7.2                15.7                 1.5                    66                  6
Taiwan                 3.3                15.9                 1.1                   142                 28
    Source: ITU (2000) (PCs and Internet users); IDC (IT spending); Internet Software Consortium (2000) (hosts).
LIBERALIZATION AND THE COMPUTER INDUSTRY                                1211

wide ranging liberalization programs with         ÐIndustry trends. The PC industry's trend
little e€ort to protect the domestic computer     toward increased inventory turnover and
industry from foreign competition. Brazil's       build-to-order production has favored Mex-
more pluralistic government has taken a           ico as a production location for North
more gradual approach to liberalization,          America, and has attracted production to
maintaining some protection and incentives        Brazil for South America. While Mexico
for local industry. This is also because the      clearly bene®ts more due to the size of the
computer industry in Brazil has greater           North American market, Brazil should enjoy
political in¯uence due to the involvement         increased production as the South American
of large banks, industry groups, universities     market, particularly within MERCOSUR,
and the military. By contrast, Mexico's           grows.
domestic computer companies are mostly
small independent startups with little politi-              (h) Impacts of policy
cal clout.
ÐInternational political environment. Pres-       ÐPre-liberalization policy di€erences. Bra-
sure from foreign governments has had an          zil's market reserve policies put greater
impact on liberalization and IT policy for        emphasis on promoting local ownership
both countries. Brazil faced strong US oppo-      and domestic content than Mexico's
sition to its market reserve policies and         Computing Program, so by the time of liber-
decided to liberalize at least partly in re-      alization, there were a number of vertically-
sponse to that pressure. Mexico liberalized       integrated computer ®rms in Brazil making
unilaterally in advance of negotiations to        a range of systems and components. Some
join the GATT and later to join NAFTA.            of these ®rms survived in certain segments
Mexico also has been limited in its ability       of the systems market (such as PCs), while
to o€er investment incentives that other          others shifted to software and services. By
countries commonly provide due to two fac-        contrast, Mexico failed to develop strong
tors: (i) concerns that Mexico can be seen as     locally-owned computer makers, or even
trying to lure jobs south of the border, espe-    suppliers to MNCs, during the 1980s. After
cially since NAFTA has been in e€ect; and         liberalization, foreign companies grabbed
(ii) congruence with the Salinas and Zedillo      market share in sectors that had been closed
administrations' decided advocacy of free         to them previously. On the other hand, Mex-
market ideology which required the govern-        ico's maquiladora program had helped at-
ment to follow a hands-o€ policy orienta-         tract foreign investment in electronics
tion. As a result, Mexico was passed over         assembly, helping it to develop skills and
by Intel when it decided to locate an assem-      experience that attracted computer makers
bly plant in Costa Rica instead of Guadalaj-      and contract manufacturers.
ara, given the incentives the company was         ÐDi€erences in the pace of liberalization and
o€ered by the Costa Rican government.             remaining internal barriers. The continuing
ÐSize and location. Brazil's larger domestic      presence of various taxes, slow customs
market and distance from major IT markets         processing and other costs (referred to as
have encouraged a greater focus on produc-        the ``Brazil cost'') in Brazil discouraged many
tion for the local market. It has also sup-       foreign ®rms from entering the market until
ported more local entrepreneurship in             recently. These costs also make Brazil less
market segments such as banking automa-           competitive as a producer for global markets.
tion, software and Internet services and con-     On the other hand, domestic companies have
tent. On the other hand, Brazil has run up a      been given time to adjust, often by switching
large trade de®cit in IT as its imports have      from hardware production to other industry
grown, but it has failed to grow exports. By      segments. By contrast, Mexico's liberaliza-
contrast, Mexico's proximity to the United        tion was more sudden and comprehensive,
States and membership in NAFTA have               and foreign companies quickly ¯ooded into
made it more of an export platform for multi-     the Mexican market. This competition has
nationals. It also has been easier to serve the   driven local companies out of the market
Mexican market with products from the             and possibly discouraged local entrepreneurs
United States, so local entrepreneurs have        from entering the IT industry.
had more limited opportunities and less           ÐDi€erences in complementary IT policies.
incentives to enter the PC making business.       IT policies have had an impact, but less so
1212                                 WORLD DEVELOPMENT

  than environmental factors. Brazil's various     perhaps inevitable process for both Brazil
  tax incentives have helped increase local        and Mexico, given the globalizing trends in
  production by foreign MNCs selling to Bra-       the computer industry in the early 1990s.
  zil and MERCOSUR, and have begun to at-          Prior to liberalization, IT users in Brazil
  tract contract manufacturers. Perhaps more       and Mexico were paying relatively high
  important have been programs to promote          prices for computers, and local computer
  the software industry and develop Internet       makers were not competitive outside their
  infrastructure. These e€orts go beyond           protected domestic market. India's similar
  promotion of commodity hardware produc-          e€orts to develop a domestic computer
  tion and move Brazil toward the most dy-         industry behind protective barriers was even
  namic segments of the IT industry. Mexico,       less successful, and Korea's ban on PC im-
  by contrast, has done little to provide          ports in the 1980s isolated it from global
  government support to promote the devel-         markets (Dedrick & Kraemer, 1998). For
  opment of software and Internet services,        Brazil and Mexico, the question was no
  sectors with a large potential market of         longer whether to liberalize, but rather when
  Spanish speakers in Latin America and the        and how to do so.
  United States. It also has failed to o€er        ÐLiberalization has had mixed results in
  incentives to compete with other countries       both countries. It has been bene®cial in
  for foreign investment. Industry executives      terms of reducing the cost of computers
  have stated in interviews with the authors       and expanding di€usion of IT throughout
  that Mexico could attract much more invest-      the economy. Both countries also have seen
  ment in components production if it o€ered       growth in production and have attracted
  incentives comparable to those of Asian          investment from leading multinational com-
  and European countries.                          puter makers. On the other hand, there have
  ÐDevelopment of capabilities. Both coun-         been tradeo€s, particularly, the demise of
  tries have made important gains in quality       domestic ®rms in the face of foreign compe-
  of telecommunications infrastructure as a re-    tition, and in Brazil's case, an expanding
  sult of privatization, deregulation and intro-   trade de®cit in computers. So while liberal-
  ducing competition into the sector. Brazil       ization has lived up to many of the promises
  has done more to help entrepreneurs gain         of its advocates, it also has led to painful
  the knowledge and resources they need            dislocations as feared by skeptics.
  through programs such as Softex. Mexico          ÐNational environments do make a di€er-
  has done little to develop such resources to     ence. Brazil and Mexico took somewhat
  support local entrepreneurs. It has, however,    di€erent approaches to liberalization, and
  done a good job of meeting the human re-         these variations did a€ect outcomes, but ulti-
  source needs of the growing IT industry in       mately it was di€erences in size and geo-
  places such as Guadalajara, mainly through       graphic location that had a bigger impact.
  the e€orts of local government and educa-        Mexico's proximity and close economic ties
  tional institutions.                             to the United States were enhanced by liber-
                                                   alization, and resulted in its becoming an ex-
                                                   port platform for the US market. Brazil's
6. CONCLUSIONS AND IMPLICATIONS                    larger domestic market and its distance from
                                                   major world markets led to the creation of an
  While a comparison of two countries is not       industry oriented to serving local and regio-
sucient to draw broad conclusions, the cases      nal demand, with little export production.
of Mexico and Brazil do provide insights into      ÐGovernment can play a positive role be-
the ®ve questions raised earlier in this paper.    yond simply liberalizing and taking a
Based on those questions, we draw the follow-      hands-o€ approach to the industry. Policies
ing conclusions:                                   that promote IT production and use can suc-
   ÐThe idea of promoting a domestic compu-        ceed if they take into account both global
   ter industry behind protective barriers was     market forces and national environment. It
   not tenable in an industry marked by rapid      is possible to learn from the experiences of
   technological change and dominated by           others, but those lessons must be applied
   multinational companies who set and con-        with a clear understanding of local market
   trol global technology standards. We would      conditions, national capabilities and chang-
   argue that liberalization was a necessary and   ing global forces. What worked for Mexico
LIBERALIZATION AND THE COMPUTER INDUSTRY                                              1213

   will not necessarily work for other countries               national capabilities such as human re-
   located far from major markets, and what                    sources, high-quality and low-cost telecom-
   worked for Brazil will not work for countries               munications      networks   and     Internet
   with very small domestic markets.                           connections, as well as ®nancial systems
   ÐA comprehensive policy approach to the                     capable of supporting local entrepreneurs
   computer sector needs to go beyond the de-                  (see Dedrick & Kraemer, 1998; Tallon &
   bate over whether to liberalize, as that pro-               Kraemer, 2000). By doing so, a country
   cess is already far advanced in most                        can take advantage of opportunities in the
   developing countries. Liberalization is now                 global market while developing national
   seen as a ®rst step to ensure that countries                applications of information technology.
   have access to international markets, tech-                 These countries also show the value of
   nology and foreign capital. Beyond that,                    having a coordinated policy approach that
   the issue is how to realize the potential bene-             explicitly links computer production, use,
   ®ts from increased competition at home and                  and the creation of capabilities, supported
   from participation in global markets and                    by a clear understanding of global market
   global production networks. What has been                   and technology factors. Such a coordinated
   made clear by the mixed experiences of Bra-                 approach can help a country adjust to
   zil and Mexico, and the success of countries                the dislocations caused by liberalization,
   such as Taiwan, Singapore and Ireland, is                   and to take advantage of the opportunities
   that countries need to focus on developing                  created.


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