The
Growth of
Knowledge-
Based
Small Firms
in Monterrey,
Mexico
By Elsie Echevarri-Carroll | February 2008
Bureau of Business Research, IC2 Institute
The University of Texas at Austin
Monterrey, in the Mexican state of Nuevo
León, long has been known for its large industrial
enterprises and heavy industry. Today, however,
the city is transitioning to a more knowledge-based
economy marked by tech startups and innovation.
This article, based on interviews and data collected
in Monterrey by IC2 Institute researchers, looks at
the roots of the changes underway in Monterrey
and identifies some of the keys to the city’s
transformation.
Monterrey’s industrial growth started
around the end of nineteenth century,
when large companies in the textile (e.g., La
Fama, El Porvenir, La Leona), brewing (e.g.,
Cervecería Cuauhtémoc), glass (e.g., Vidriera
Monterrey-VITRO), and cement (Cementos
Hidalgo) sectors were created in the city. While
the growth of the large (and in many instances
family-owned) companies in Monterrey is well
documented, there is scarce information on the
growth of small technology-based companies
in the city.1
Today, there is an important cluster of
technology-based small firms in Monterrey,
mainly in the information technology (IT)
sector. This cluster emerged as the result of
"business incubation" services provided by the
large, family-owned firms in the city during the
transition period from protectionism to free
trade (1982-2000). More recently, the processes
of creation and growth of small technology firms
has been accelerated as a result of specific policies
implemented by federal and state governments
and high tech business incubators developed
within the largest local universities, in particular,
Monterrey Tech and Universidad Autonoma
de Nuevo León (UANL). Evidence of these
twin processes, elaborated below, emerged
from interviews conducted during the summer
of 2007 in Monterrey with knowledge-based
small firms, faculty and administrators from
local universities (Monterrey Tech, UANL, and
Universidad de Monterrey), local government
officials, and representatives from CANIETI
(the National Chamber of the Electronics
Industry).
Small Firm Creation in Monterrey in the Transition
Period: 1982-2000
Starting in December 1982, with Mexican
President Miguel de la Madrid's administration,
Mexico gradually abandoned the import
substitution model adopted in 1940 and began
to liberalize the economy. Trade liberalization
accelerated in 1985 when Mexico became a
member of the General Agreement on Tariffs
and Trade (GATT), and again in 1995, when
Mexico joined the North American Free Trade
Agreement (NAFTA). This Agreement lowered
tariffs, opened up the country to foreign capital,
and reduced the role of state-owned enterprises. A
more open economy increased pressure for firms
across Mexico to become more efficient, reduce
costs, increase quality, and implement product
and process innovations. The "Regiomontanos"
(as people from Monterrey are called in Spanish),
known for their entrepreneurial spirit, were at
the vanguard of these changes.
…...today in Monterrey,
there is a new "business
philosophy" whereby
large companies have
multiple suppliers for
different parts of their
production systems,
and their relationships
with suppliers are
mainly short-term, only
for the duration of a
specific project.
According to our interviews, many large
firms in Monterrey adopted several strategies
to respond to increasing competition from
foreign manufacturers during the transition
period from the import substitution model
to free trade. One strategy was to concentrate
their activities in "core competencies" (vertical
disintegration), creating an opportunity for
some skilled workers to create their own small
startup companies.2 The large firms not only
served as business incubators,providing experience and knowledge to the new
entrepreneurs, but in many instances they were
the new firms' only customers. The relationships
between the large companies and the new
startups were informal. Trust (built on previous
familiarity with the large firm's managers) was
the basis of this relationship. Figure 1 illustrates
this process of technology firm creation, where
individuals acquired technical and business skills
at large local firms before creating many of the
small innovative firms in Monterrey.
A manager at IEBSA, an electronics firm
founded in 1981, mentioned in our interview
that twenty years ago his firm was the only
IT supplier for one particular large company.
The long-term relationship with its customer
allowed IEBSA to have deep knowledge of its
client's production system and to make solid
recommendations about new technologies.
The manager noted that today in Monterrey,
there is a new "business philosophy" whereby
large companies have multiple suppliers for
different parts of their production systems, and
their relationships with suppliers are mainly
short-term, only for the duration of a specific
project. Whether the small company is the
low-cost supplier is the key criterion in winning
contracts with large firms now, not long-term
relationships between managers.
Not all large firms in Monterrey were successful
in overcoming the challenges posed by the
economic transition; some of them were forced
to close operations. Often cited in our interviews
was the case of Dinámica, a subsidiary of the
Alfa Group (a holding company). Employees
of Dinámica, for instance, left to create Softteck
and Expertec, two of Monterrey's most successful
IT companies. Softteck, founded in 1982,
today has 6,000 employees and competes with
Tata, Infosys, and Wipro, the three top Indian
providers of software services. Blanca Treviño,
Softteck's CEO, describes Dinámica during our
interview in the following way: "Dinámica was
such a marvelous school for some of today's more
successful local entrepreneurs and managers."
The close relationships among different groups
in the community and their positive effects on
the growth of the city earned Monterrey the title
"Best Place to do Business in Latin America"
by Fortune magazine in 1992. Some of the
successful outcomes of these relationships are well
known. The Instituto Tecnológico de Estudios
Superiores de Monterrey (Monterrey Tech)
was begun by a group of local entrepreneurs in
1943 to supply high-quality engineers for their
firms. Other outcomes, such as the creation of
technology-based startups in Monterrey that
resulted from the linkages between large and
small firms, are often overlooked by business
magazine's rankings.
Small Firm Creation in Monterrey in an Open
Economy: 2000 to present
Mexico is now one of the most open of the
medium-sized economies in the world. The
movement of goods, services, and capital is
practically free. As shown in Figure 2, in the
new economy, the catalysts for entrepreneurial
activity are more diversified than during the
transition period. In particular, we identified
three sources of new business creation: traditional
large companies, university-owned high-tech
business incubators, and R&D centers at the
local universities and CONACYT (The National
Council for Science and Technology).
As competition from foreign companies
increased, large firms decided aggressively to
penetrate the U.S. market, not only through
exports, but also through investments in branch
firms in the United States. They also broadened
their relationships with suppliers around the
world. As a result, although large, family-owned
firms continue to be important customers for
small technology companies in Monterrey, in the
context of globalization, these small firms must
compete with international (not just local) firms
to supply the large local companies. Moreover,
in certain cases, large and small IT firms compete
in the same local market. Such is the case of
Neoris, which started as an IT department
within CEMEX but is now an independent
company partially owned by CEMEX and one of
the largest information technology (IT) services
providers in Latin America. Although its main
line of business is outside Monterrey, Neoris
competes with smaller IT firms in Monterrey
for a share of the local market.
In addition to faculty research and teaching,
local universities in Monterrey have adopted
a third mission: to promote knowledge-based
economic development. UANL, for instance,
opened the Center for Business Incubation and
Technology Transfer (CIETT) in 2001 and
the High-Tech Business Incubator in 2005 to
commercialize its faculty's R&D. G.A. Musik
analyzed the link in Mexico between public
R&D and the private sector. Mexico has a public
scientific research system that is large in terms of
basic research produced and resources spent. He
pointed out that in an index created by RAND
Corporation to rank countries on Science and
Technology capability, Mexico ranks number
50 among 150 countries.3 Despite its relative
strength by world standards, research in Mexico
is public and supply driven, and scientists rarely
establish any relationship with industry. This
model has resulted in research that, although
publishable, rarely addresses any clear short- or
long-term need of society or firms. Overall,
the interests of innovating firms are not well
matched with the specialties of its research
centers.4 In line with previous analyses, we
found that the commercialization of university
R&D as a source of creation of new businesses
in Monterrey is still in its infancy.
The local universities
also promote
knowledge-based
economic development
through their high-tech
business incubators.
We interviewed several
companies at the hightech
business incubators
of the Monterrey Tech
and the UANL. Most
incubated companies
are developing new
products and new
business models that
help them penetrate the
U.S. market.
The local universities also promote knowledgebased
economic development through their
high-tech business incubators. We interviewed
several companies at the high-tech business
incubators of the Monterrey Tech and the UANL.
Most incubated companies are developing new
products and new business models that help
them penetrate the U.S. market. Moreover,
the common goal of reaching a large pool of
international customers is creating incentives
for alliances among small local firms. This is
a step up from a traditional business culture
where small firms compete (rather than develop
alliances) to supply products and services to a
relatively small pool of large local firms.
The Secretary of Economy created the TechBA
program to promote business accelerators in
other countries (e.g., the United States, Spain,
and Canada) that help Mexican companies
penetrate the global market. We interviewed
some of the TechBA companies located in Austin,
Texas. These small companies are finding that the
process of marketing their products in the U.S.
is challenging but very rewarding. Eduspark, a
Monterrey firm in the TechBA program, creates
educational software. In the words of its CEO,
"TechBA has been an important program that
provides office space, credibility, coaching, and
contacts in the United States."
The TechBA program is just one of many
other government-supported initiatives to
accelerate innovation in the country. Both the
federal government and the state of Nuevo
León have recently introduced new policies
to promote innovations at small firms. The
federal government, through the Secretary
of Economy, created the Mixed Funds to
finance innovation projects at small firms.
Another important initiative from the same
Secretary is PROSOFT, which promotes the
software industry in Mexico. Many of the small
companies that we interviewed noted that these
two programs have benefited their innovation
activities.
The State of Nuevo León has invested
significant resources in the expansion of a
high-tech entrepreneurial base, including the
Monterrey International Knowledge City
Program (see article on p. 2), the creation of
the Institute of Innovation and Technology
Transfer (I2T2), and the launch of the Research
and Innovation Technology Park in Monterrey
(PIIT). While space limitations prevent a longer
description and analysis of these initiatives, it
is clear that these programs seek to create a
future in which economic growth is the result
of innovation, supported by an alliance among
local residents, businesses, academic institutions,
and the government.
"TechBA has been an
important program
that
provides office space,
credibility,
coaching,
and contacts in the
United States."
Conclusions
Regions with large concentrations of high-tech
industries (such as San Francisco, San Jose, and
Austin) place emphasis on the entrepreneurship
rate-the percentage of the population of
non-business owners that start a business each
month.5 Although the economic development
of high-tech regions is associated with the
continuous growth of large firms, what interests
policymakers is the high rate of technologybased
business creation in these cities. We
contend here that there is an important cluster of
new knowledge-based firms in Monterrey. The
roots of this cluster can be found in the organic
entrepreneurship process incubated by the
family-owned firms as the economy transitioned
from protectionism to free trade and, more
recently, the aggressive policies of the state of
Nuevo León and the federal government to
promote knowledge-based entrepreneurship.
References
- See, for instance, Eduardo Flores Clair (2000).
Del Acero a la Diversión, Monterrey Industrial 1890-
2000. Ciudad Victoria Tamaulipas, Universidad de
Monterrey-CONACYT.
- Vertical disintegration is the separation of a
firm's vertically related businesses into independent
firms. Large firms concentrate their activities on socalled
"core competency" areas in which they hold
a competitive advantage or have valuable, difficultto-
replicate expertise. In all other areas outside core
competencies, large firms rely on suppliers.
- G.A. Musik (2004). "Trade and Innovation
Performance of Mexico after NAFTA." Center
for Policy Research on Science and Technology
(CRPROST). Simon Fraser University. Burnaby,
B.C., Canada. Working Paper 2004-0. http://www.
sfu.ca/cprost/publications.htm
- Leonel Corona, Jerome Doutriaux, Sarfraz A
Mian (2006). Building Knowledge Regions in North
America. Northampton, MA: Edward Elgar.
- Robert Fairlie (2007). "Entrepreneurship
in Silicon Valley During the Boom and Bust."
Washington, DC: Small Business Administration,
Office of Advocacy. http://www.sba.gov/advo/ research/rs296tot.pdf accessed January 15, 2008.
The author would like to thank Bruce Kellison
for his valuable help during the interview processs,
and to thank the I2T2 for assistance in arranging
the interviews; thanks are also extended to Grace
Ruiz for her research assistance.
Source: The University of Texas at Austin
BUREAU OF BUSINESS RESEARCH
IC2 Institute
1 University Station A0300
Austin, Texas 78712
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