Report No. 1153-SP

Spain: Appraisal of an Industrial Research,Development and Engineering Project

April 22, 1977

Industrial Projects Department

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

Currency: Pesetas (Ptas.)

Years

1960-66 US$1.00 = Ptas. 60

1967 US$1.00 = Ptas. 60.83

1968-71 US$1.00 = Ptas. 70

1972 US$1.00 = Ptas. 64.4737

1973 US$1.00 = Ptas. 58.0263

1974 US$1.00 = Ptas. 57.50

1975 US$1.00 = Ptas. 57.40

Since February 9, 1976

US$1.00 = Ptap. 66

Pta. 1 = US cents 1.515

Ptas. 1,000,000 = $15,150

ABBREVIATIONS USED IN THIS REPORT

ASINEL Asociacion de Investigacion Industrial ElectricaCAICYT Comision Asesora de Investigacion Cientifica y TecnicaCENIM Centro Nacional de Investigaciones MetalurgicasCETME Centro de Estudios Tecnicos de Materiales EspecialesICGE Impuesto de Compensacion de Gravamenes InterioresINE Instituto Nacional de EstadisticaINI Instituto Nacional de IndustriaINIA Instituto Nacional de Investigaciones AgronomasINTA Instituto Nacional de Tecnica AeroespacialJEN Junta de Energia NuclearP., Ptas. PesetasR&D Research and DevelopmentRD&E Research, Development and EngineeringSEAT Sociedad Espanola de Automoviles de Turismo, S.A.SEFINNOVA Sociedad Espanola de Financiacion de la InnovacionSERCOBE Servicio Tecnico Comercial de Constructores de

Bienes de Equipo.

FOR OFFICIAL USE ONLY

SPAIN

APPRAISAL OF ANINDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

Table of Contents

Page No.

SUMMARY AND CONCLUSIONS ........ . . . . . . ................................. . i - iii

I. INTRODUCTION .............. .... . . ......................... 1

II. THE ECONOMIC SETTING ..................................... 2

A. The Economic Transformation of SpainThrough the Early 1970's .......................... 2

B. Recent Economic Developments ........................ 3C. Industrial Performance ....... ..................... ........ 4

III. CHARACTERISTICS OF INDUSTRIAL RD&E IN SPAIN ANDTHE NEED FOR MODIFICATION ............ .. .................. 5

A. Industrial RD&E ...... .................. . 5B. Spain's RD&E Gap .................................... 6

IV. THE INDUSTRIAL RD&E PROJECT .. 7

A. The RD&E Unit .............................. *........ 7B. Selection of Areas for Initial Concentration

of the RD&E Work ....... ............................. 10C. Criteria for the Selection of Subprojects ...... ..... 11D. Defining the Minimum Critical Effort .............. .. 11E. Project Cost, Financing, Procurement and

Disbursement ...................................... 131. Cost Estimate ......... .................... 132. Financing Requirements .......... .......... 143. Sources of Financing ................... ... 164. Procurement ................................ 165. Disbursement ... ........................... 166. Audits .................................... 17

F. Project Justification, Economic Benefits and Risks... 17

V. AGREEMENTS ............................................... 18

This report was prepared by: F. Moore, D. Carpio, C. Weiss, Jr., andW. Wipplinger.

I This document has a restricted distribution and may be used by recipients only in the performanceof their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization.

I

ANNEXES

Table of Contents

ANNEX 2.1 ECONOMIC SETTING

A. Growth and Transformation of Spain's EconomyB. Industrial Performance and Development Pattern

in ManufacturingC. Manufactured Exports and Industrial CompetitivenessD. Changes in Competitive Conditions of IndustryE. Transfer of Technology and Spanish R&D Efforts

STATISTICAL ANNEX

ANNEX 3.1 GENERAL CHARACTERISTICS OF R&D IN SPAIN

A. The Climate in Spain for Industrial Research

and DevelopmentB. Public Sector IndustriesC. National Fund for the Development of Scientific

ResearchD. Research AssociationsE. Universities and Institutes of Higher EducationF. Government Industrial Research InstitutesG. The Research Centers of the Patronato

"Juan de la Cierva"H. Center for Nuclear Energy (JEN)I. The National Institute of Aerospace Technology (INTA)

ANNEX 3.2 DIRECT GOVERNMENT INTERVENTION IN TECHNOLOGICALDEVELOPMENT

A. IntroductionB. Evaluative Observations on Governmental MechanismsC. Some Implications for Development Agencies

ANNEX 3.3 LEGISLATION ON THE PURCHASE OF FOREIGN TECHNOLOGY

ANNEX 3.4 INDUSTRIAL RD&E PROGRAM SIZE AND COST ESTIMATE

A. IntroductionB. Determining a Minimum Critical Effort - A Micro ApproachC. Determining a Minimum Critical Effort - A Macro ApproachSTATISTICAL ANNEX

- 2 -

ANNEX 4.1 THE RESEARCH, DEVELOPMENT AND ENGINEERING UNIT

A. Structure and FunctionsB. AdministrationC. Evolution of a Project of the RD&E UnitD. Institutional Relationships

ANNEX 4.2 INSTITUTIONAL ARRANGEMENTS: POWERS, INDEPENDENCE,AND LIMITATIONS IN SPANISH ADMINISTRATIVE LAW

A. IntroductionB. General Comparison of Types of OrganizationsC. Autonomous OrganizationsD. Public ServicesE. National Enterprises

ANNEX 4.3 INDUSTRIES OF PREFERENTIAL INTEREST

A. IntroductionB. ElectronicsC. Food Industries

ANNEX 4.4 AREAS OF INITIAL PROJECT EFFORT

A. Electronics IndustryB. Mechanical Engineering IndustryC. Food Industries

ANNEX 4.5 INCENTIVES TO RESEARCH AND DEVELOPMENT PROVIDEDTO FIRMS PARTICIPATING IN "JOINT ACTION PROGRAMS"(ACCIONES CONCERTADAS)

SPAIN

APPRAISAL OF ANINDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

SUMMARY AND CONCLUSIONS

i. This report appraises a project to support research, development,and engineering (RD&E) of new products and processes in industry. Thetotal cost of the project is about US$40 million, to which the proposed Bankloan would contribute an equivalent of US$18 million. Although the projectand its cost are related to a specific time frame of five years, it is ineffect only a part of what is intended to be an ongoing process of acquiringthe technical knowledge necessary to improve economic well-being and abilityto compete.

ii. Spain reached its current level of development primarily due tovery rapid growth since the early 1960s, rather than through slow accretionsover a long period. During 1961-74 GNP in real terms expanded on average by7.3% per year, one of the highest rates achieved among developing countries,although the growth rate has declined sharply since the onset of the worldrecession, to 5% in 1974 and 1% on average in 1975-76.

iii. Much of the past growth, particularly in industry, was based onimported technology, through foreign investment and licensing. Rapid growthprobably could not have occurred in any other way, but the result is an in-sufficiency of domestic activities to strengthen indigenous RD&E of newproducts and processes. The extent of the dependence is indicated by thetechnological balance of payments. In 1974 payments by Spanish industry forlicenses, royalties, and technical assistance amounted to US$316 million,whereas the income received from transfer of Spanish technology was only US$36million. In 1975 payments for imported technology had risen to about US$500million.

iv. Compared to other countries at a similar stage of development,Spain does very little RD&E of new products. Its expenditures have amountedto about 0.3% of GNP, which is comparable to that of countries with far lowerlevels of per capita income (such as Korea, Portugal, and Turkey) and is farbelow the levels in its chief competitors, the countries in the EEC. There isa gap or shortfall in what normally would be expected of a country at Spain'slevel of per capita income and the amount that may be expected based onhistorical experience. In quantitative terms, the gap is in the order ofUS$60 million annually. The qualitative deficiencies in the programs are ofeven greater significance. The proposed project is to help correct these de-ficiencies and to provide some new institutional bases and program directions.

- ii -

v. The industrial RD&E project is the first of its kind to be under-taken by the Bank. It is intended to provide a model that can be replicated(with appropriate changes) in other countries.

vi. The project involves (a) establishment of a new organization todirect and control the RD&E activities; and (b) formulation of a program of asize that will supply a minimum critical effort that can, after a time, beself-sustaining.

vii. The new organization (called here the RD&E Unit) will initiallybe created by decree, in the Ministry of Industry as a "centralized publicservice without legal personality". This form of organization has onlyslight differences from any office of the Ministry and thus has limitationson its ability to earn or receive income outside the ordinary budget; there-fore, within two years the RD&E Unit will be reconstituted by law as anautonomous organization, which has the necessary flexibility and powers tocarry out the project effectively.

viii. The RD&E Unit will consist of a managing director, a permanentstaff of about ten professionals, a Board of Directors, and various ad hoctask forces, recruited for specific periods of time, to carry out theproject tasks. Stated briefly, the Unit, under the leadership of themanaging director, will survey the available technology and resources inSpain, will select product areas for investigation that seem the mostpromising, will organize task forces to undertake specific productinvestigation, and in general, will commission and supervise the neces-sary RD&E studies and pilot plant operations leading to commerciallyviable new products. These tasks will be done in close collaborationwith industry, and most of the actual contract work will probably bedone by industrial firms.

ix. After a review of the performance of specific industries, andby agreement with the Government, it is proposed to give preference inthe RD&E work initially to three industries: electronics, mechanicalengineering, and food industries. This selection in no way precludesacceptance of subprojects in other industries; the selection simplygives a focus to the initial efforts.

x. To be successful the industrial RD&E project must be of aminimum critical size. This concept has three aspects: first, the projectshould be able to generate enough commercially successful products to supportthe program at the same level of activity in the future; second, the number ofcommercial successes must be sufficient to have a demonstration effect andencourage industry to undertake more RD&E investments; third, the programshould fill a measurable portion of the gap in RD&E expenditures.

- iii -

xi. At the macro level, the project should fill about 10% of theestimated US$70 million gap in RD&E expenditures between a target level andan extrapolation of past trends. With the average cost of a representativesubproject estimated to be US$745,000 over a three-year period, a minimumcritical size of program of nine subprojects annually has been established,and is based on the following considerations. On average it will take threeyears to complete the RD&E phase of the work and another two years to bringa new product to full commercial exploitation. It is estimated, based onexperience in Spain and elsewhere, that the proposed program of nine sub-projects annually could have a success ratio of one-third; then the prob-ability is less than 3% that all of the nine subprojects financed each yearwould be failures. A program with nine subprojects per year would spendabout US$7 million annually, including administrative costs, and would thusrepresent about 10% of the projected gap in RD&E expenditures, most ofwhich is a deficiency in industry. These figures provide a "model" of howthe process might work and are not intended to impose conditions on the actualproject decisions with regard to size and length of the RD&E work required.

xii. Given the estimated success ratio and the period of five yearsthat is necessary for commercial maturation, one can calculate that theannual program of about US$7 million could be self-sustaining after eightyears if the successful subprojects paid royalties of about US$580,000annually for a period of four years (which is a conservative assumption).

xiii. Of the total cost of the project of about US$40 million, the Bankloan will finance US$18 million of largely imported specialized test equipmentand machinery plus foreign services. The proposed Bank loan would be made tothe Government of Spain and transferred in the form of grants to the institu-tion administering the project.

xiv. Based on the agreements with the Borrower, the project is suitablefor a Bank loan of US$18 million for 13 years including three years of grace.

I. INTRODUCTION

1.01 This is a project to support research, development, and engineeringof new products and processes in industry. This is the first time in Spainthat a deliberate program, involving systematic outside assistance, has beendevoted to the purpose of strengthening the capabilities of Spanish industryto compete successfully in the world market. The proposed Bank loan for theproject is US$18 million. The total costs amount to about US$40 million over afive-year period. But, unlike the usual project in industry, whose limits arelargely marked by the bounds of its assets, research, development, and engineer-ing (RD&E) activities cannot be delineated so precisely, nor can their benefits.Consequently, this project is viewed as providing foundations -- and a demon-stration -- for programs that should continue vigorously for many years;therefore also the costs -- and the benefits -- of the phases of work coveredin this project are but a fraction of the ultimate totals.

1.02 The economic transformation that has occurred in Spain in the lastdecade is generally known. In industry in particular growth has been veryrapid, and the range of industries has broadened, so that the fabric of indus-trial activities has become quite dense, with few major gaps. But much ofthis growth has been imported, in the form of foreign investment and licensingthat carries its own technology and is subject to its own constraints. Thisimportation of the technical basis of industrial growth supported an impressiverecord of achievement, but it also occurred at the cost of an almost completelack of domestic capability in product and process development. Spain has nowreached a level of development in industry where this lack may seriouslyimpair its ability to continue to grow and to compete in world markets,particularly the EEC. The correction of this condition is the chief economicrationale for this project. Without the assistance provided by this project,the correction would be delayed and possibly be too little and too late to beeffective in avoiding interruption in growth.

1.03 There is no "habit" of undertaking research and development inSpain; it is often regarded as an activity undertaken by academicians. Butthis attitude is changing and is perhaps best summed up in the followingquotation: "The world of ideas, in the sciences and in letters, in the artsand in technology, has today as always, a great obligation to society. Thisdeveloping society, which is looking for new solutions, now more than everneeds guidance." 1/ Thus the economic rationale for the project is backed bythe political realization of the necessity to take appropriate steps.

1.04 This project was first appraised in December, 1975 and followed up byan additional mission in 1976, and subsequent further discussions with theBorrower. The mission consisted of F. Moore (Chief), D. Carpio, C. Weiss,Jr., W. Wipplinger, and T. Bamford (Consultant). The mission was preceded byearlier missions, dating back to 1973, that prepared the foundations.

1/ First speech by King Juan Carlos I (December 6, 1975).

II. THE ECONOMIC SETTING

A. The Economic Transformation of Spain Through the Early 1970's

2.01 Spain's economy has advanced very far from the conditions thatexisted prior to the 1960s, when extensive economic controls and foreignexchange constraints put severe limitations to a fuller and more rationaluse of the country's productive potential. In the relatively short time of15 years Spain has become an industrialized economy, closely interdependentwith the rest of the world, and, in particular, the European Common Market.And in terms of her GNP per capita -- estimated at US$2,700 in 1975 -- Spainhas reached the lower stratum of the high income countries. Annex 2.1describes in more detail the country's economic setting, particularly itsindustrial performance, and the changes that have affected competitiveconditions of Spain's industry.

2.02 Facilitated by economic liberalization and growth-oriented eco-nomic policies, and supported by rapidly rising foreign exchange inflows fromtourism, workers' remittances and foreign private investors, Spain's economicgrowth record has been outstanding. During 1961-74, GNP expanded in realterms on average by 7.3% per year, one of the highest rates achieved amongdeveloping countries, and the second highest, after Japan, among OECD coun-tries. Industry, the leading sector, grew at an average rate of 9.6%.After import substitution lost its main stimulating power, industrial growthwas further sustained by exports of manufactures. Manufactured exports in1970 surpassed the volume of Spain's traditional exports of agricultural andmining products. In this context it is important to note that most of theindustrial exports found their way into highly industrialized countries,notably in the,EEC. In part this was facilitated by comparative advantagesin labor costs and a considerable supply flexibility. But a rapidly growingexternal demand for industrial goods and the lowering of trade barriersvis-a-vis the EEC also contributed. In 1970 the EEC concluded a PreferentialTrade Agreement with Spain.

2.03 As a result of the dynamic industrial development in Spain, theshare of industry in GNP at constant 1970 factor cost rose to 41% in 1974,from about 30% in 1960. Industry also became a more important employer thanagriculture, formerly the main source of employment in Spain. The servicesectors, leading in both combined value added and employment, appear tohave maintained their relative weight in the economy, accounting for about48% of GNP. But agriculture declined significantly, as its share in GNPdropped to about 10% in 1974, a ratio typically found among many developedcountries.

2.04 The sharp decline of Spain's rural labor force, from almost 5million in 1960 to 3 million in 1974, involved unprecedented migratory move-ments to urban centers and abroad and profound changes in the country's socialstructure. Urbanization accelerated dramatically, creating new needs forphysical and social infrastructure and expanded social services. Change was

-3-

further intensified by the growing number of foreign tourists visiting Spainwhich culminated in over 34 million in 1973 -- about the size of Spain'spopulation.

2.05 Spain's industrialization and changes in demand stemming from risingstandards of living have, since the early 1960s, resulted in persistently highdeficits in the country's balance of trade. These deficits averaged someUS$1.8 billion a year during 1965-70 and US$2.5 billion during 1971-73. How-ever, owing to rising earnings from tourism and workers' remittances, Spainwas in a position to keep balance of payment deficits on current accountduring the 1960s at tolerable levels and to even generate surpluses during1970-73. The favorable development of Spain's balance of payments on currentaccount, combined with substantial net inflows of medium and long-term capital,mostly from private sources, has until 1973 also led to a strong accumulationof foreign exchange reserves. At the end of 1973, total net reserves stoodat US$6.8 billion, equivalent to seven months' imports of goods and non-factor services.

B. Recent Economic Developments

2.06 Sharply increased petroleum prices and the recession in other OECDcountries have, since 1974, caused a reversal in Spanish economic conditions.First to be affected was the balance of payments. Because of much higherpayments for imports, stagnating earnings from tourism, and a decline inworkers' remittances, Spain's balance of payments on current account reversedfrom a surplus of US$558 million in 1973 to deficits of around US$3.1 billionin 1974, US$3.5 billion in 1975 and approximately US$4.0 billion in 1976.Only through a substantial increase in foreign borrowings, particularly fromsuppliers and capital markets, could a critical loss of foreign exchangereserves be avoided. Net reserves stood at US$5.5 billion by the end ofOctober, 1976, equivalent to less than four months' imports of goods andnon-factor services.

2.07 Primarily to promote exports and tourism but also to discourageless essential imports, the Spanish Government decided earlier in 1976 todevalue the peseta against the US dollar. Effective February 9, 1976, aparity of Ptas 66 per dollar was established replacing the previous parity ofPtas 58.3 per dollar which had been valid since February 1973. The exchangerate has been floating since February 9, 1976.

2.08 Spain entered the recession later than the other OECD countries.In 1974, the real growth rate of GNP was still 4.9%, down from over 8% inboth 1972 and 1973. In 1975, however, GNP growth came to a virtual stand-still as real value added in manufacturing and construction declined.Developments in 1976 suggest a continuing stagnation of growth, resultingfrom the sharp drop in fixed investment in 1975 and the currently furtherdepressed investment climate.

-4-

C. Industrial Performance

2.09 The most important contributors to growth in manufacturing since1960 have been non-traditional activities. National accounts data suggestthat basic metals, metal products and machinery, transport equipment, andchemical products contributed together about 45% to the absolute growth inmanufacturing value added during 1961-70, with their direct contributionto manufacturing growth increasing to 57% during 1971-75. The leadinggrowth sectors were transport equipment (during 1961-70) and the metaltransforming and engineering goods industries (during 1971-75). As aresult of the strong growth performance of the non-traditional activities,their share in total manufacturing value added, expressed in constant 1970factor cost, reached 52% in 1975. On the other hand, light industrieslagged behind total manufacturing growth. The food industry, for example,in the 1960s the largest individual subsector in manufacturing, currentlycontributes less to manufacturing value added than the metal transformingand engineering goods industries or the transport equipment industry. Par-ticularly lagging throughout the period under consideration have been tex-tiles, wood, cork and furniture, while apparel and footwear, after havinggrown about in line with total manufacturing value added during the 1960s,have been slackening in recent years.

2.10 The emerging new industries were mostly large-scale and capital-intensive utilizing up-to-date equipment and the most recent foreign tech-nologies available. In many cases, direct foreign participations providedimmediate access to new technological developments and the know-how neededin processing and marketing. Despite the rapid development of new large-sizeindustries, Spain's industrial structure remains, however, dominated by thesmall-scale, family-based enterprise, which in the past has been able toremain competitive because of relatively low labor costs and its capabilityto produce in small individual series and with a high product flexibility.

2.11 In the 1960s, industrial growth was induced mainly by rapidlyexpanding domestic demand. Exports of industrial goods virtually did notstart rising until 1964, but have since increased dramatically, particularlysince 1968 when slackening domestic demand and the incentives given by thepeseta devaluation of November 1967 caused many Spanish manufacturers tolook abroad for markets. In 1974, about 14% of manufacturing output wasexported as compared to 5% in 1961.

2.12 Industrial exports, which amounted to US$150 million in 1961, ex-ceeded US$4.4 billion in 1975. Their share in total commodity exports in-creased during the same period from 21% to 66%. As Spanish industry wasbecoming more diversified, a large array of new export products emerged,some of which were assuming major positions in world markets. Outstandingexamples of Spain's export surge have been ships, tires, shoes, and manynew products of the engineering and transport equipment industry. The EECbecame an increasingly important outlet, absorbing in 1974 about 42% oftotal Spanish industrial exports.

- 5 -

2.13 Many of the comparative advantages on which Spain's industrialsuccesses were based are gradually diminishing, however. For example,Spanish labor costs, including social security costs, have increased veryrapidly in recent years and will probably continue to rise faster than inother Western European countries. With labor costs now getting closer tothose in other West European countries, Spanish industry can no longerdepend for its competitiveness on cheap labor. This has implications alsoon the capability of Spanish firms to accommodate small orders with varyingspecifications.

2.14 The gradual disappearance of previously important comparativeadvantages occurs during a period of increasing integration with the EECand changed economic conditions in OECD countries. These developments haveput additional competitive pressures on Spanish enterprises and given furtherevidence of the serious weaknesses in Spain's industrial structure and inindustrial management. Concentrated efforts from industry and the Govern-ment will be required to prevent a further erosion of current competitivepositions. In view of the prospects of a much closer economic integrationwith the EEC, vigorous and selective efforts must begin now to develop tech-nologically improved processes and products in areas in which Spain can expectto be competitive.

III. CHARACTERISTICS OF INDUSTRIAL RD&E IN SPAIN AND THE NEED FOR MODIFICATION

3.01 Although expenditures on RD&E have been rising fairly rapidly inthe last few years, the total allocations are still small, are spread toothinly over too many fields, and are supporting too many institutions whichare often very small in size and lacking in significant impact on technologicalimprovements. In 1974 the expenditures on total research and developmentactivities amounted to about US$280 million, which was equivalent to 0.3% ofGNP; this is in the range typical of countries with a much lower level of percapita income and is comparable to the ratios in Korea, Portugal, and Turkey.It is substantially below countries in the EEC that have increasingly becomeits main competitors, where the range in 1970/71 was 0.9 to 2.3% of GNP and2.6% in the U.S. (Annexes 2.1 and 3.1).

A. Industrial RD&E

3.02 Industrial growth has been based primarily on the adoption offoreign technology through the acquisition of licenses, patents, and for-eign assistance services. In 1974, payments by Spanish industry for licenses,royalties, and technical assistance amounted to about US$316 million; by com-parison in the same year the income from transfer of Spanish technology wasUS$36 million. The deficit in the technology balance of trade (US$280 mil-lion) was one of the highest among OECD countries and compared unfavorably todeveloping countries such as Korea, which has developed industry very rapidly.Compared to other countries at about its stage of industrial development,Spain does very little research, development, and engineering of new products.

-6-

The dependence on importation of foreign technology has been high, and oftenat the cost of conditions imposed by the foreign seller that have limited theability of Spanish enterprises to export and to compete in foreign markets.With the expected closer ties to the EEC these competitive limitations imposeburdens that may seriously hamper growth of Spanish exports to the most im-portant markets.

3.03 There is not now any institution in Spain with responsibility forthe systematic support and exploration of industrial research and develop-ment opportunities and the engineering of new products. There are, indeed,scattered programs of support, but all this support lacks breadth of cover-age in problems and sector representation, and procedures are generally slowand cumbersome. This applies in particular to the Government support pro-vided through the Comision Asesora de Investigacion Cientifica y Tecnica(CAICYT) to manufacturers and private research associations. Of industrialRD&E spending estimated at about US$126 million in 1974, only little more thanhalf is accounted for by private enterprises. The remainder is spread overmore than two dozen public research institutions, various public enterprisesof the Instituto Nacional de Industria (INI), institutes of higher education,and 17 private research associations, all of which are operating with limitedscope and, possibly with the exception of INI enterprises, under importantoperational constraints (Annex 3.1). There are currently also no tax or otherincentives that are designed to promote research activities.

3.04 The course of technology development by importation was probablythe most logical and natural for Spain to adopt during rapid industrialgrowth, but as experience in many other countries has demonstrated it willnot suffice for the future. This is understood in the Government and inindustry, but inertia in Spanish RD&E is difficult to overcome without specialeffort, and there are some policies that may be inimical to such an effort;for example, in the interests of encouraging more efficient, larger scaleproducing units in industry, there are some limitations on the entry of firmsbelow a certain size in certain product lines. Yet successful RD&E is notclosely associated with only larger firms. Lack of venture capital, the con-servatism of the banking system, and the fragmentation of existing programsare also inhibiting factors. Thus an RD&E program must provide resources andthe institutional means that as yet do not exist in Spain for breaking throughthe inertia, and this must be accompanied by a review of those policies andprocedures that constrain such an effort now. If progressive firms and agen-cies in selected industries can be formed as an initial nucleus, the effortcan be launched with reasonable probability of success (Annexes 3.2 and 3.3).

B. Spain's RD&E Gap

3.05 To estimate the RD&E gap that can be expected in Spain during thenext five years, target expenditure levels have been established takinginto account the country's projected level of income, development and RD&Eresource availability. The concept of a target level is normative andthe values calculated in Annex 3.4 must be interpreted as guides to

- 7 -

the likely range of values and as order of magnitude indicators. The termtarget expenditure is used for simplicity and the amounts indicated do notimply precision but rather rough estimates that can be used for generalnational planning purposes.

3.06 Estimates derived from target and extrapolated (historical)values suggest the gap in RD&E expenditures to be in the order ofUS$70 million annually during the period of project implementation.The details of these calculations are shown in Annex 3.4.

3.07 The historical base for the extrapolated values is only six years(1969-74) and corresponds to a period of exceptionally rapid economic growth.Consequently, the extrapolated values for RD&E expenditures may tend to behigh. However, existing programs are largely of the basic research typewhich does not fill the technological challenge facing Spain. Thus, while theexpenditure gap is not quantitatively large, there is a far more substantialqualitative gap which the proposed program will attempt to help bridge.

3.08 The program that the project is intended to assist should fill ameaningful portion, say 10%, of the expected expenditure gap. This would meana budget of about US$7 million equivalent annually in constant 1976 US dollars.The proposed program size (as described further below) would cost on averageabout US$7 million each year, representing 10% of the expected gap and onthese grounds would thus be considered a minimum sized program. Other justi=fications for this size of program are presented later.

IV. THE INDUSTRIAL RD&E PROJECT

4.01 The project to support research, development and engineering inindustry is new and the first of its kind that has been undertaken by theBank.

4.02 The project is composed of three principal elements that togethermake up an "operational system" to support new product development. Theseelements are: (1) establishment of a new organization (hereinafter called theRD&E Unit) to direct and control the project activities; (2) selection ofareas for initial concentration of the RD&E work and criteria for the selec-tion of subprojects; and (3) build-up of a program of subprojects which willrepresent a minimum critical effort that can, after a time, become self-sustaining.

A. The RD&E Unit

4.03 The new Unit will be established initially within the Ministry ofIndustry. In general, the Unit would operate as follows. As a first stepit would survey available technology and resources of Spanish industry withthe purpose of evaluating its capacity to develop particular products and

- p

processes, based largely on Spanish technology, that would be commerciallycompetitive in future markets. It would then select industrial fields oropportunities of maximum commercial promise for further research and develop-ment work during the subsequent 3-5 years. Such opportunities are likely tobe found in supporting product lines for industries in which Spain is alreadystrong, as described further below (para. 4.13 and in Annex 4.1).

4.04 For each field thus selected, the RD&E Unit would carry out, withmaximum cooperation of industry, detailed studies of potential markets, andwould identify product lines and a marketing strategy to compete in them,using external expertise, if necessary. The Unit would review availableforeign technologies for design and production, and select those most appro-priate to be obtained under license as part of a strategy intended to lead toincreased reliance on Spanish technology. It would commission and supervise,but not itself perform, the necessary research, development, design and en-gineering activities needed to master these technologies, to adapt them toSpanish conditions, and to improve them. These activities would be carriedout for the most part in Spanish institutions (including laboratories) ofthe public or private sector, although specialized studies may be contractedabroad. In practice, most of the RD&E work would probably be carried outin industrial firms.

4.05 The RD&E Unit will carry the work only to the point of commercialexploitation of the results of its efforts but will not engage in commercialactivities in any form nor provide funds for that purpose. These will beleft to public and private enterprises. However, the Unit will, as one ofits guiding principles, at all stages of its work enlist the support ofindustry and will promote commercial production through advice and technicalassistance, including supply of drawings, specifications, information onproduction processes, markets, and such other information and assistanceas is required.

4.06 The creation of new products and processes will result in items thatare patentable and hence give rise to property rights. When the products orprocesses are produced wholly or dominantly through the funds and contracts ofthe RD&E Unit, the patent right will belong to the Unit. Licenses to usepatents will be made freely available to all domestic firms upon payment of areasonable royalty, as determined by the Unit's Managing Director and approvedby the Board of Directors. Non-patented information resulting from theprogram will be made freely available to all domestic firms. A domestic firmmeans all those licensed to operate and produce in Spain.

4.07 Ideally, the RD&E Unit should be an autonomous organization from thebeginning to give it maximum independence in its actions and also to enable itto receive income from sources other than the Government budget, for example,through the sale or licensing of technology (Annex 4.2). However, it is notpossible to obtain the necessary law from the Spanish legislative authoritiesin time for the RD&E Unit to begin operations during calendar year 1977 as is

intended. For this reason and since in any case the Unit will not be receivingoutside income for the first few years of its existence, it will be organizedinitially as a servicio publico centralizado sin personalidad juridica.However, legislation will be proposed to reconstitute the Unit as an autono-mous organization as soon as possible. Agreement has been reached on allpoints necessary for the creation and subsequent transformation of the RD&EUnit as well as its principal policies and functions as described furtherbelow. Specifically, these points include:

(a) Prior to the effective date of the loan, a decree will beissued creating a servicio publico centralizado sinpersonalidad juridica with powers to receive and administerthe project funds, and a competent Managing Director of theRD&E Unit acceptable to the Bank will have been appointed;

(b) The Unit's policies, its operating procedures, organizationalstructure and delineation of responsibilities between the Unit'smanagement and its Board of Directors have been agreed upon withthe Government;

(c) As soon as possible, and in any case not later than December 31,1979, a law will be drafted and submitted to the legislativebody to transform the Unit into an autonomous organization tofurther direct and control the project and with otherwiseequal functions and responsibilities as established under(b) above.

4.08 The RD&E Unit will consist of a Managing Director, a permanent staffof about 10 professionals, ad hoc task forces, and a Board of Directors asdescribed below. Paragraphs 4.09-4.12 set forth the intentions of theGovernment.

4.09 The Managing Director will have extensive experience in privateindustry and will be recruited for a fixed term and will be paid sufficientsalary to attract a man of outstanding qualifications comparable to thoseof the managing director of a large private industrial enterprise. He willreport initially to the Director-General for Industrial Promotion and Tech-nology of the Ministry of Industry but upon transformation of the Unit toan autonomous organization he will be responsible only to its Board of Direc-tors. He shall only be removed for substantive failure to carry out the RD&Eprogram. This provision is specifically intended to ensure the continuityof the management through possible changes in the Ministry of Industry andthe Directorate-General of Industrial Promotion and Technology which will berepresented on the Unit's Board. Within the framework of existing Spanishlaw, the Managing Director will be in charge of all operational activities,and will have authority to hire and dismiss members of the staff, to launchand terminate studies, to allocate the budget to the particular RD&E projectsto authorize contracts for outside research activities, and to approvearrangements for participation of industry. The major conditions of employ-ment and the responsibilities of the Managing Director, as outlined here, havebeen agreed upon with the Government.

- 10 -

4.10 The staff will consist of: (a) experts who will normally be onpermanent assignments with the RD&E Unit and who will be familiar with tech-nologically oriented market forecasting; the assessment and management of newproduct and process potentials and their development; the promotion of newtechnologies to industry; and (b) ad hoc task forces which will not formpart of the Unit but be independent bodies on contract in order to main-tain a flexible staffing pattern. The task forces will be formed by tem-porary recruitment of specialists from industry, universities, researchagencies, consulting firms and other appropriate sources within Spain andoutside, for terms ranging from a few months to a number of years depend-ing on the particular research or engineering project to be undertaken.Each task force will act as an arm of the RD&E Unit for carrying out func-tions of supervision, control and technical assistance in the execution ofa particular project. In many cases, a private or public enterprise willact as a prime contractor and may subcontract particular activities to otherentitites, under the supervision of the task force.

4.11 The task force will maintain close contact with industry, bothproducers and prospective purchasers of the Unit's efforts, from the begin-ning. Should industry not participate from the outset, the task forces willat appropriate later stages (e.g. as soon as a prototype product is ready)seek to find such industrial partners who are willing to share future develop-ment costs. The patterns for the initiation and conduct of RD&E work are notlimited to those described above. Private or public firms or institutions mayinitiate action by proposing specific projects to the RD&E Unit. The lattermay then create a task force as above and contract the execution of the workto the initiating entity.

4.12 The Board of Directors will be composed of not more than ten pro-minent leaders, of Spanish industry, directors of leading laboratories andconsulting firms, and representatives of the Ministry of Industry; at leasthalf will be from industry. The Director General for Industrial Promotion andTechnology in the Ministry will be its Chairman. The membership of the Boardwould change every few years, by a system of staggered terms. This systemwould ensure a continuous flow of ideas between the RD&E Unit and otherSpanish institutions concerned with industrial technology.

B. Selection of Areas for Initial Concentration of the RD&E Work

4.13 From the review of Spanish industrial performance and conditionsunder which it works, it has been concluded and agreed with the Governmentthat the electronics industry, the mechanical engineering industries, andthe food industries are among the most promising industrial subsectors inwhich to promote further technological development. Two of them have al-ready been declared by the Government to be of "preferential interest" inits program to stimulate industrial development (Annex 4.3). While it isintended to give these industries preference in the initial selection bythe RD&E Unit of subprojects for investigation, it is important to emphasizethat this choice is intended to provide merely a focus for the work in theUnit's initial stages and is not to preempt the whole of the program. Sub-projects of particular merit will no doubt be identified in other industries,and will be accommodated in the total program on a priority basis. The main

- 11 -

criterion for choice is that there should be an area for technological de-velopment of new products and processes that is reasonably close to solutionand that builds on Spain's comparative advantages in existing industries.The three industries chosen have the appropriate characteristics (Annex 4.4).

C. Criteria for the Selection of Subprojects

4.14. The criteria for the selection of subprojects has been agreed uponwith the Government. The subprojects will be of a kind that can be absorbedand improved on within existing Spanish industry. They would have to beinnovative, and subprojects that aim primarily at aesthetic improvements wouldnot qualify. They should also help to maintain or improve the internationalcompetitive position of Spanish industry. In considering a subproject, infor-mation will be prepared on the technical improvement in the product or processthat is being sought; the physical, engineering, or other limitations thathave to be overcome; the approach to and organization of the work; the qualifi-cations of the personnel to work on the subproject; the market value or otherbenefits of a successful effort; the costs of undertaking the subproject andthe estimated costs of adopting or using the innovation. Based on thisinformation, an evaluation of the proposed subproject will be made and severaltypes of criteria and tests will be applied to assess the risks and technicalfeasibility of the proposed work. The aim is to try to find subprojects wherethe probability of success is high and the commercial payoff is also high.The costs of the subproject and the investment and operating costs of usingthe innovation will be assessed and compared to the commercial payoffs in themarket. The subproject will also be assessed in terms of the capabilities ofthe personnel and the institutions that will undertake the work, and finally,the specific benefits to Spanish industry in strengthening its competitiveposition, particularly vis-a-vis European markets, will be evaluated. Theevaluation procedure will give weight to each of these points in arriving ata final judgement to either accept or reject the proposed subproject.

4.15 The following RD&E subprojects provide an illustration of thetype of work that is anticipated under the proposed project. Examples inelectronics are the development of certain types of numerical control systemsfor machine tools, a measuring and discharging device for electrostatic loadsin empty petroleum and product tankers, and thyristors and related semi-conductor products; in mechanical engineering prototypes of continuous andhigh temperature dyeing machines for textiles, high speed railway bogies, andan improved hydrodynamic wrench for use in coal mines; and in food industriesa new canning process using no liquid media, and processes aimed at utilizingthe husks of grapes for the production of proteins.

4.16 As part of the Bank's effort to help the Unit find its focus, thedefinition of the work program during the initial three years will be made inconsultation with the Bank whenever specific tasks are estimated to require inexcess of US$500,000.

D. Defining the Minimum Critical Effort

4.17 To be successful the Unit's industrial RD&E program must be of aminimum critical size. This concept has three aspects: First, the programshould be able to generate enough commercially successful subprojects so that

- 12

the royalty payments or cash returns are adequate to support the program, atleast at the same level of activity, after a reasonable period of time.Second, the number of commercially successful subprojects must be sufficient tohave a demonstration effect, thereby encouraging Spanish industry to undertakemore RD&E investments. Finally, the program should fill a measurable portionof the gap between the target or desired level of national RD&E effort and thelevel that would otherwise be attained if only historical trends and existingprograms are relied upon (para. 3.06).

4.18 The realization of these objectives depends on several factors:(a) the proportion of the RD&E gap that should be filled by the Unit's program;(b) the cost of a representative subproject (i.e., its capital and operatingcosts); (c) the success rate that is achieved (i.e. the proportion of sub-projects that become commercial successes and therefore bring revenues to theUnit through royalty or other payments); and (d) the average length of timeit takes to complete subprojects and obtain revenues on them. Once thesemain parameters are established, the total size of the program and its chiefcharacteristics are defined (Annex 3.4).

4.19 As mentioned previously (para. 3.08), it is judged that the programshould aim at filling about 10% of the expected gap of US$70 million per yearin R&D expenditures in Spain over the next few years since much less thanthis would diminish the program's demonstration effect unduly. The averagecost of a representative subproject within such a program is estimated atUS$745,000 (in constant 1976 terms) over a three-year period, which is theperiod estimated to complete the RD&E phase of the work. It is furtherestimated that an additional two years are needed to commercialize the results.This has been derived from the experience of Government-supported industrialresearch projects (CAICYT) submitted during 1974-76, the experience of INI en-terprises, and the Bank's own evaluation of the composition of expendituresin other similar research projects. It is realized that there may be fairlywide dispersion of actual subproject costs around this average. For example,the recent range in CAICYT projects was from US$50,000 to US$4,000,000.Therefore, the average figures used above are merely illustrative.

4.20 The proposed project is emphasizing work at the development andengineering end of the spectrum rather than the research end; that tendsto increase the cost of a typical subproject, since it involves more pilotplant type operations and thus requires more equipment.

Illustrative Average Subproject Cost Over Three Years(in thousands of constant 1976 US dollars)

Foreign ExchangeCost Local Cost Total %

Capital Costs 310 85 395 53Operating Costs 50 300 350 47

Total 360 385 745 100

In percent 48 52 100

- 13 -

4.21 A minimum program size of an average of nine subproject starts peryear was determined based on the following considerations. It is estimatedthat the proposed program could have an average overall success rate ofone-third, i.e. similar to that experienced by CAICYT; then the probability isless than 3% that all of the nine subprojects begun each year will be failures.Thus, nine subprojects would provide a high level of confidence that at leastone successful subproject will materialize. In practice, the probability ofsuccess is likely to be higher already at the beginning of the program. Thisis concluded from recent findings of the Ministry of Industry which indicatethe existence of a substantial range of project opportunities thus permittingchoice and the selection of those projects with the best chances for success.A program with nine subprojects per year would - after a three-year build-up- spend about US$7 million (in constant 1976 US dollars) annually includingadministrative costs and would represent about 10% of the expected gap innational RD&E expenditures. The estimated budget and financing of the programduring the initial five-year period are discussed below. It should be emphasizedthat this characterization of the program provides a "model", and the figurescited are not intended to impose conditions or constraints on actual decisions.

E. Project Cost, Financing, Procurement and Disbursement

4.22 The procedures for deriving cost estimates and financing needsare based on probabilistic or expected values because this project typeis new and inherently cannot be easily related to a set of specific projectactivities at this time.

1. Cost Estimate

4.23 As discussed in para. 4.21 above, the minimum critical size of theRD&E program is based on nine subproject starts per year, each costingUS$745,000 on average over a three-year period. The estimated cost for theprogram over a five-year period is discussed in detail in Annex 3.4 andsummarized below:

- 14 -

Summary Cost Estimate for Five Year Period /a

Foreign Local Foreign LocalExchange Currency Total Exchange Currency Total % ofCost /b Cost Cost Cost /b Cost Cost Cost(millions of pesetas) (millions of US dollars)

Subproject Costs(9/year)a. Capital Costs 924 251 1,175 14.0 3.8 17.8 56b. Operating Costs

(primarilyservices) 119 713 832 1.8 10.8 12.6 39Sub-Total 1,043 964 2,007 15.8 14.6 30.4 95

Administrative Costs /c - 99 99 - 1.5 1.5 5Base Cost Estimate /d 1,043 1,063 2,106 15.8 16.1 31.9 100Provision for PriceEscalation (26%) /e 264 290 554 4.0 4.4 8.4 26

1,307 1,353 2,660 19.8 20.5 40.3 126

/a At an exchange rate of Ptas. 66 = US$1.0./b Includes indirect foreign exchange requirements of US$5 million equivalent./c Estimated at US$300,000 per year./d In 1976 prices./e Assumes annual escalation rate of 8% in 1976; 7.5% in 1977-79 and 7%

in 1980-82.

4.24 The proposed RD&E program is thus estimated to require about US$40million (Ptas. 2,660 million) equivalent over the initial five-year periodincluding about US$20 million (Ptas. 1,307 million) in foreign exchange, allin current terms. The cost estimate, due to its very tentative nature doesnot show a contingency reserve separately. Nevertheless, the above estimateis considered conservative since it assumes annual funding for the ninesubprojects from the very beginning of the Unit's existence (1977/78) whilein practice a slower build-up must be expected, with the level of the ninesubprojects being reached (or surpassed) only in the third or fourth operatingyear. The cost estimate also assumes that about 56% of the base cost estimatewill he needed for capital costs mostly in the form of pilot plant and testingequipment and the remaining 44% for operating costs of the subprojects andadministrative expenditures of the Unit. The estimate contains a provision of26% for price escalation.

2. Financing Requirements

4.25 The following table shows the financing requirements or budgetarysupport needed for the above program and the time when the program may beexpected to become financially self-sustaining, assuming nine subprojectsare started each year (with a success ratio of one-third), that the royaltypayments are made only during four years (which is conservative), and at abreakeven level set at about US$0.58 million (in constant 1976 dollars) per

- 15 -

successful project. The table also shows that under the above assumptions, theprogram will be self-sustaining after eight years. If the royalty paymentsare higher or the period of payments longer, the time when self-sustainedoperation is reached will be shorter. 1/ Conversely, the time will be longerif the opposite is true or the project build-up slower than assumed in thismodel. (For details of calculations see Annex 3.4).

Estimated Annual Budgetary Support for RD&E Program /a

Project & Receipts from Annual Cumulative Annual CumulativeAdmin. Successful Budgetary Budgetary Budgetary Budgetary

Year Expenses Projects Support Support Support Support----(in millions of constant 1976 US$)--------- ----(in millions of

current US$)----

1 (1977/78) 4.9 - 4.9 4.9 5.3 5.32 6.0 - 6.0 10.9 6.9 12.23 7.0 - 7.0 17.9 8.8 21.04 7.0 - 7.0 24.9 9.4 30.45 7.0 - 7.0 31.9 10.0 40.46 7.0 1.8 5.2 37.1 8.0 48.47 7.0 3.5 3.5 40.6 5.7 54.18 7.0 5.2 1.8 42.4 3.1 57.2 lb9 7.0 7.0 - 42.4 - 57.210 7.0 7.0 - 42.4 - 57.2

/a Based on the equivalent of nine average subprojects financed each yearwith a success rate of one-third and receipts set at a break-even levelof US$0.58 million (in constant 1976 US dollars) per successful subprojectover a four-year royalty period.

/b The foreign exchange portion is about US$37 million.

1/ The average royalty rate in Spain is estimated at 4% of a product's grossrevenues annually. It is assumed that royalties are paid for four years.Under these conditions if each successful subproject pays a royalty ofUS$583,000 annually, after eight years the revenues generated in this waywould match the annual financial outflow (constant 1976 US$).

- 16 -

4.26 From the current flow of project proposals into CAICYT and dis-cussions with industry, it appears that there will be no difficulty in find-ing nine subprojects even in the early years; however, if for reasons ofadministrative constraints of the newly formed RD&E Unit one assumes thatthe build-up is gradual, starting with three subprojects the first year,then successively six, nine, twelve (for three years) before settling at asteady state of nine subprojects annually, the program changes are small.Budgetary support in current terms for the first five years would be US$37million (instead of US$40) and the program would take nine years to achieveself-sufficiency (instead of the eight mentioned in para 4.25). These cal-culations are shown in detail in Annex 3.4.

3. Sources of Financing

4.27 The initial five-year budget of the RD&E Unit of about US$40 mil-lion will be financed by a direct Government grant of the same amount in-cluding the proceeds of US$18 million from the proposed loan, which is some-what less than the estimated foreign exchange component of the project (i.e.US$ 19 million). This portion of the Bank loan will be made to the Governmentat an interest rate of 8.2% for 13 years including three years of grace. TheGovernment in turn will pass on the loan proceeds in the form of a grant. TheGovernment will bear the foreign exchange risk of repayment of the Bank loan.The Government has given assurances that: (a) it will provide the US$40million to the Unit as a grant under conditions acceptable to the Bank as wellas any additional grant money as may be needed to fully utilize the Unit'spotential during the first five years of operations; and (b) it will supportthe Unit financially as needed for a maximum of three additional years sincethis total period thus provides an adequate test of the program.

4. Procurement

4.28 The Bank funds for the project are expected to finance US$15.7million of largely imported equipment and materials and US$2.3 million offoreign exchange expenditures of foreign consultants, all under Bank guide-lines. Domestic equipment suppliers will be granted a preference margin underinternational competition for purposes of bid evaluation. Internationalcompetitive bidding will be applied, except for: (a) items and packagescosting US$100,000 or less; or (b) proprietary, limited, or long lead timeitems critical to the timely completion of the subprojects, which willbe procured through international shopping. Items procured by internationalshopping are not expected to be a substantial fraction of the total, but nospecific estimate of the amount can be made. Ownership of equipment andmaterials will be determined in the contracts between the RD&E Unit and thefirms and/or institutions undertaking the actual work.

5. Disbursement

4.29 The US$18 million Bank loan would be disbursed against 48% ofexpenditures for specialized test equipment and materials and consultant'sservices, excluding the Unit's staff salaries, office expenses and other ad-ministrative costs. Disbursements by the Bank are expected to be completed by

- 17 -

end 1982. No precise schedule for disbursements can be given since disburse-ments will be made against invoices submitted under specific sub-projects,when these sub-projects have been approved under the guidelines established inpara. 4.14 and 4.16. It is, however, anticipated that the loan will bedisbursed approximately as follows: 1977 - 5%, 1978 - 20%, 1979 - 30%, 1980 -20%, 1981 - 20% and 1982 - 5%.

6. Audits

4.30 The Unit's accounts and financial statements will be audited by theBorrower's Intervencion General de la Administracion del Estado; this isacceptable to the Bank.

F. Project Justification, Economic Benefits and Risks

4.31 It is not possible to calculate either a financial or an economicrate of return for this project. Such a procedure would be circular at best,because it would simply calculate a return based on factors, such as number ofsubprojects, success rates, etc., that themselves have been used as the basisfor establishing the total size and funding required by the project. Theeconomic benefits are non-quantifiable, but subproject selection should not bebiased against projects which yield benefits that are difficult to quantify.

4.32 The project has clearly stated objectives and includes measuresof the performance that is expected. It initiates a systematic effort todevelop new products and processes leading to early commercial exploitationwhere none has existed before. It creates an institutional organization andset of procedures for controlling and directing the work that can be perpet-uated as a part of Government policy for development. By encouraging theparticipation of the private sector, as well as the public sector, it triesto inculcate the habit of undertaking RD&E activities as a means to maintaina strong competitive position in foreign as well as domestic markets. Andby establishing a norm of self-sustaining performance, it demonstrates thefeasibility of meeting a test of its effective use of resources. For thesereasons, it is judged that the project will yield potentially abundant--indeedessential--benefits to a country at an appropriate stage in its industrialdevelopment.

4.33 In a number of the semi-industrial countries, the level and com-plexity of the industrial structure makes it logical and justifiable to under-take projects that are aimed at improving the capabilities to undertake indi-genous technological development. Spain is considered to be in an excellentposition to succeed in this type of project; consequently, this project maywell serve as a model for similar projects in other countries.

4.34 Many countries have adopted programs to develop indigenous techno-logical capability rather than relying solely on licences for imported tech-nology which, as was noted earlier, frequently contain clauses that limitthe user's ability to compete effectively in world markets. A brief study

- 18 -

was made of the programs to support indigenous RD&E in a sample of six coun-tries and some developing countries that have been successful in penetratingforeign markets (i.e. France, Sweden, United Kingdom, Canada, Korea, Brazil).All of these countries have support programs, but they frequently differ insize, scope, and emphasis of objectives; each country has adopted a "style"of its own, but there are also elements in common. The programs typicallycover financial incentives, direct government support, schemes to reducethe costs of innovation, or to reduce the risks of failure, increased re-wards for successful innovators, and programs to restructure industry andmanagement along more efficient lines. The basic elements of the proposedproject in Spain are very similar to those adopted by these other coun-tries, and the project will help establish Spanish industry on a reasonableparity with the advantages available to their competitors in the EEC andother markets. It has not been possible to quantify the exact benefits ofthese support programs, but the costs and disadvantages of relying solelyon imported technology are well known and have caused countries to seek waysto mitigate their most onerous effects (Annex 3.3).

4.35 There are risks, or more accurately, uncertainties in the project.One such uncertainty is whether the success ratio of subprojects will be ashigh as anticipated, but this would not fundamentally imperil the soundess ofthe project; it would simply delay the time when the Unit's program is self-sustaining and also raise the projected level of budgetary support for theprogram. The greater uncertainty is whether the whole program will, foreconomic and other reasons, elicit the kind of response from entrepreneursthat is necessary. This potential danger may not be wholly forestalled, butit should be reduced by providing for greater supervisory effort by Bank staff(and consultants as needed) to help launch the project, particularly duringthe early formative years.

V. AGREEMENTS

5.01 The legal documents will record the following major agreements andassurances:

(a) A decree will be issued prior to the effective date of the loancreating a servicio publico centralizado sin personalidadjuridica with powers to receive and administer the projectfunds (para. 4.07).

(b) Prior to the effective date of the loan, a competent ManagingDirector of the RD&E Unit acceptable to the Bank will be appointed(para. 4.07).

(c) The Unit's policies, its criteria for the selection and focusof the RD&E projects, its operating procedures, organizationalstructure and delineation of responsibilities between the Unit'smanagement and its Board of Directors have been agreed with theGovernment (paras. 4.03-4.16).

- 19 -

(d) The law necessary to transform the Unit into an autonomousorganization will be drafted and submitted to the legislativebody not later than December 31, 1979 (para. 4.07).

(e) As part of the Bank's effort to help the Unit find its focus,the definition of the work program during the initial threeyears will be made in consultation with the Bank wheneverspecific tasks are estimated to require in excess of US$500,000(para. 4.16).

(f) The Government will (a) provide the US$40 million required forthe initial five-year budget of the RD&E Unit as a grant underconditions acceptable to the Bank as well as any other grantmoney as may be needed to fully utilize the Unit's potentialduring the first five years of operations and (b) furthersupport the Unit financially as needed for a maximum of threeadditional years (para 4.27).

5.02 In view of the above agreements and assurances, the IndustrialResearch, Development and Engineering Project provides a suitable basis for aloan of US$18 million for a period of 13 years, including three years ofgrace, at 8.2% interest.

Industrial Projects Department

April 22, 1977

ANNEX 2.1Page 1

SPAIN

INDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

ECONOMIC SETTING

A. Growth and Transformation of Spain's Economy

1. The years between 1960 and 1974 stand out as a period of rapid eco-

nomic growth and structural change which saw Spain rising to the lower strataof the high income countries and its transformation into an essentially indus-trial nation. During 1961-74, GNP expanded in real terms on average by 7.3percent per year, one of the highest rates achieved among developing countries,and the second highest, after Japan, among OECD countries. Spain's GNP percapita, growing at an average annual rate of about 6.1 percent during thisperiod, reached $2,300 in 1974. 1/

2. Industry, the leading sector, grew at an average rate of 9.6 percentper year during 1961-74. As a result of this dynamic development, the shareof industry in GDP at constant 1970 factor cost rose to 41 percent in 1974,from approximately 30 percent in 1960. The service sectors, also reflectedin their share in GDP at constant factor cost, appear to have maintained theircombined relative weight in the economy, hovering around 48 percent. Agricul-ture, however, declined significantly in importance, as its share in GDP droppedto about 10 percent in 1974, a ratio typically found among many developed coun-tries.

3. The intensity of these structural changes involved major shifts inthe composition of Spain's labor force and the emergence of unprecedentedmigratory movements, with almost every second Spaniard changing residenceduring 1961-74. The resulting impact on the pace of urbanization and the needfor transport and social services can only be indicated here. During 1961-74,Spain's agricultural labor force declined by 1.9 million to 3.0 million in1974, and its share in total labor force dropped from 42 percent in 1960 to23 percent in 1974. While the share of the labor force engaged in industryincreased only from 30 percent to 36 percent during this period, reflectingthe largely capital-intensive nature of emerging new industries, the servicesectors became the most important source of domestic employment. In 1974,about 40 percent of Spain's labor force was engaged in service activities,compared to 27 percent in 1960. However, substantial underemployment becamea consequence of government policies aimed at avoiding open unemployment.Mainly as a result of domestic employment creation and a labor legislationinhibiting the discharge of redundant workers, open unemployment has not been

1/ Calculated according to the modified Atlas methodology.

ANNEX 2.1Page 2

a serious problem in the past. The employment situation was furthermore al-leviated by a substantial emigration of labor abroad, mainly to Western Europe,and a comparatively low participation of female labor.

4. Spain's impressive economic surge has been effectively stimulatedby the drastic change in orientation of Spanish economic policies after 1960,bringing to an end over two decades of policies of self-sufficiency that wereforced upon Spain by her political isolation in the years following the CivilWar (1936-39) and World War II. The new orientation, which was essentiallyfacilitated by the success of the 1959-60 Stabilization Program and therapid rise of earnings from tourism and remittances from emigrant workers,led to a gradual liberalization of economic policies and to the promotion ofeconomic growth, through extensive investment and production incentives, inthe framework of long-term development objectives. As the economy was opened-up to foreign goods and capital, involving a considerable transfer of newtechnologies and know-how, a strong impetus was given to increasing invest-ment and production. This process of integration with world markets has nowadvanced very far from the conditions of the past. However, with institu-tional and structural changes in Spain lagging behind this process of inte-gration, Spain is likely to face some difficult problems of adjustment inthe future, particularly in view of the expected much closer relationshipto the European Common Market. A good many of the inherent institutionaland structural weaknesses-of the Spanish economy, such as the relativelysmall public sector and the deficient tax system, the important structuraland managerial weaknesses in industry, and, what follows from the latter, theneglected efforts to strengthen industrial capabilities in product developmentand marketing, all these have been less evident and apparently less urgent toovercome as long as the Spanish economy drifted on the leeside of a fast grow-ing world economy.

5. These conditions, however, no longer exist. Since about mid-1974,Spain has been seriously affected -- as other countries -- by economic reces-sion and a deterioration of its balance of payments. Real growth of GDP atmarket prices fell from a rate of 8.4 percent in 1973 to 5 percent in 1974,and it was at barely 1 percent in 1975. In addition, the balance of paymentson current account reversed from a surplus of $557 million in 1973 to deficitsof over $3.1 billion in 1974 and almost $3.5 billion in 1975.

6. The exceedingly strong reversal of Spain's balance of payments oncurrent account, after surpluses during 1970-73, is not only a reflection ofthe substantially increased external dependence of the economy but also ofsome failures in Spain's import and export behavior of the past. The latteris discussed separately with particular reference to industrial imports andexports (paras. 38-40). For the understanding of past and current balanceof payments conditions and the need of their strengthening, some generalobservations are, however, necessary at this point.

7. Spain has, since its turn-about in economic policy orientation ofthe early 1960s, persistently experienced high balance of trade deficits.These deficits, averaging some $1.8 billion during 1965-70, $2.5 billion

ANNEX 2.1

Page 3

during 1971-73 and over $7.1 billion during 1974-75, reflect largely the verystrong growth of imports of investment goods, raw materials and semi-manufac-tures that went along with the country's industrialization and modernization.The dramatic increase of the trade deficit in 1974-75 is primarily the resultof the price increases of petroleum and industrial imports. Rising food im-ports also contributed as Spain's food balance turned to a deficit. On thewhole, imports of raw materials and semi-manufactures explain 58 percent ofthe absolute growth of commodity imports during 1962-74. Their weight intotal imports has been rising, particularly in recent years. Investmentgoods accounted for 21 percent of the absolute growth of imports during thesame period, but their incidence in Spain's import growth has -- as may beexpected -- shown a declining trend. Despite the strong overall growth ofimports, Spain has been able -- until recently -- to cover an increasingproportion of its import demand by exports. This has been largely due tothe successful expansion of industrial exports (semi-manufactures, invest-ment and consumer goods) which contributed over 60 percent to the absoluteexport growth experienced during 1962-74. Foodstuffs, the traditionalbasis of Spain's exports, accounted for only about 20 percent of Spain'sexport growth during this period.

8. Earnings from tourism and workers remittances have in the past beenthe most important offsetting items to Spain's large trade deficits. The for-eign exchange inflow from these sources has kept the balance of payments def-icit on current account during the 1960s at tolerable levels and even generatedsurpluses during 1970-73. On the average of 1965-73, net earnings from tourismalone helped offset 77 percent of the trade deficit and paid for 35 percent ofSpain's commodity import bill (f.o.b.). In 1973, when Spain was visited by34.6 million tourists, net earnings from tourism reached a volume of almost$2.9 billion. Workers' remittances have grown at a slower rate than tourismearnings, reaching $0.9 billion in 1973. However, as the major industrialcountries entered a recessionary phase in 1974, earnings from tourism andworkers remittances suffered sensible setbacks. Both sources have since1974 no longer been adequate to offset the surging trade deficit, givingrise to the re-emergence of very large deficits on current account.

9. Owing to substantial net inflows of medium and long-term capital,primarily from private sources, Spain's basic balance showed surpluses from1967 to 1973. The net inflow of private medium and long-term capital aver-aged about $640 million a year during this period, of which 74 percent wasaccounted for by direct, portfolio and real estate investments. Publicmedium and long-term capital inflows have been at moderate levels through-out the period, with amortizations exceeding disbursements during 1970-73.

10. The favorable development of Spain's balance of payments on cur-rent account, together with an overall surplus on capital account during1970-73, led to a strong accumulation of foreign exchange reserves. Atthe end of 1973, total net reserves stood at $6.8 billion, equivalent toseven months of imports of goods and non-factor services. However, thisfavorable trend could not be maintained after 1973. Although a substantialincrease in foreign borrowings, particularly from suppliers and international

ANNEX 2.1Page 4

capital markets, helped to stem the effects of the sharp deterioration of thebalance on current account, net foreign exchange reserves declined to $5.8billion by the end of November 1975. This was equivalent to less than fourmonths imports of goods and non-factor services. On February 9, 1976, theGovernment decided to devaluate the peseta against the US dollar. A parityof Ptas. 66 per dollar was established replacing the previous parity of Ptas.58.3 per dollar which had been valid since February 1973.

B. Industrial Performance and Development Pattern in Manufacturing

11. The rapid progress of industry since the early 1960s and the patternof industrial growth have been strongly influenced by special factors, includ-ing:

the pent-up needs of the Spanish economy, including industry,accumulated in more than two decades of supply constraints;

- the attraction of the Spanish market to foreign firms owingto its comparatively large size, the prevalence of low laborcosts, and the proximity to EEC countries;

- and the acceleration in the 1960s in the growth of worldtrade in industrial products.

12. It should be recalled that Spain's industry production of the early1960s compared unfavorably with other European countries, both in terms ofits diversity and in standards. At that time, a good many industrial firmswere operating with obsolete equipment. Sales of manufactured goods abroadwere small, with only 5 percent of total manufactured output being exportedin 1961. As the gradual liberalization made it possible to import capitalgoods and industrial imports more freely and domstic demand increased rapidly,this provided a strong incentive to industry to expand and renovate a largepart of its capacities and to shift production increasingly to more sophis-ticated goods. The intensity with which this process took place explainsthe very high growth rates of industry experienced in the early 1960s. Thespecific patterns of growth in industry in these earlier years, as well asits impact on industrial exports, are discussed in para. 15 below. At thispoint, it is important to bear in mind, that it was essentially the utiliza-tion of up-to-date equipment and of fairly recent technical know-how thatprovided a good deal of the initial push in industrial output and subse-quently in exports. The quite sweeping process of replacing older industrialequipment also contributed to improve the competitive position of many Spanishmanufacturers over their foreign competitors. This was mostly in additionto already existing advantages provided by lower labor costs, the virtualabsence, during most of the 1960s, of labor conflicts, and the great flexi-bility in producing to changing specifications.

13. A large part of the overhaul of capacities and the introduction ofnew technological processes was attributable to growing foreign participa-tions in Spanish enterprises, both through direct and portfolio investments.Foreign investors were mainly motivated by the opportunities of the rapidly

ANNEX 2.1Page 5

growing Spanish market. Also the creation of the EEC in 1958 and expecta-tions of future improved access to the EEC market were important factorsbehind the decision of foreign manufacturers, notably from the U.S., togain footing in Spain. While foreign participations in Spain were essentialfor the introduction of important technological, managerial and organizationalchanges on the enterprise level, they also brought about some important dis-advantages to Spanish firms, which now have become more evident as Spain'sindustry is facing significant marketing limitations with respect to itscurrent range of products.

14. Finally, industry's past record of growth may be linked to theacceleration in the growth of world trade in manufactured goods, in whichSpain was able to participate. Manufactured exports developed faster thanSpain's industrial production, and world manufacturing output. In 1974,Spanish manufacturers exported about 14 percent of their output as comparedwith 5 percent in 1961.

15. Based on national accounts data, real growth in manufacturing wasat an average annual rate of close to 10 percent during 1961-70 and at 7.1percent during 1971-75. Three periods of outstanding growth performance maybe distinguished since 1960. The first one covered the years 1961-66. Thiswas a period of rapid and "easy" growth with virtually all industrial subsectorsparticipating in these booming developments. During this relatively longcycle, which saw manufacturing value added growing at a rate of almost 12 per-cent per year in real terms, structural weaknesses remained largely hidden.The recession of 1967-68 brought an end to the 1961-66 cycle. As domesticdemand slackened during 1967 many Spanish firms entered export markets for thefirst time. The second growth cycle lasted only two years, from 1969-70, anddevelopment patterns among the various subsectors were -- contrary to thesituation during the first cycle -- much more differentiated. In particular,the metal transforming and engineering goods industries expanded much moreslowly than most other subsectors as the need for market demands to catch upto the previous rapid expansion of the production capacities arose. Aftera deceleration of industrial growth in late 1970 and the first half of 1971,which was linked to uncertainties as to the direction of the Government'smonetary and balance of payments policies, Spain's manufacturing sector passedduring 1972-73 through a third -- and for the firt time being last -- cycle ofvery strong expansion. During these two years, real growth in manufacturingexceeded an average of 13 percent per year, with the highest growth ratesexperienced in the non-traditional heavy industries. In 1974, this cycleweakened rapidly. The downturn was further accentuated by external factors,notably the dramatic rises in prices for energy and raw materials. Laterthan other industrial countries, Spain plunged in 1975 into severe recession,when manufacturing value added fell in absolute terms by 2.5 percent. Theabove description of the cyclical pattern of growth in Spanish manufacturingmay help to explain later in this report some features of the export behaviorof Spanish manufacturers in the past.

ANNEX 2.1Page 6

16. The most important contributors to growth in manufacturingsince 1960 have been non-traditional activities. National accounts datasuggest that basic metals, metal products and machinery, transport equip-ment, and chemical products contributed together about 45 percent to theabsolute growth in manufacturing value added during 1961-70, with theircontribution to growth increasing to 57 percent during the period 1971-75.The leading growth sectors were transport equipment (during 1961-70) andthe metal transforming and engineering goods industries (during 1971-75).As a result of the strong growth of the non-traditional activities, re-ferred to above, their share in total manufacturing value added, expressedin constant 1970 factor cost, reached 52 percent in 1975. On the otherhand, light industries lagged behind total manufacturing growth, which re-sulted in a decrease of their shares. The food industry, in the 1960'sstill the largest individual subsector in manufacturing, is currently con-tributing less to manufacturing value added than the metal transforming andengineering goods industries or the transport equipment industry. Parti-cularly lagging throughout the period under consideration have been tex-tiles, wood, cork and furniture, while apparel and footwear, after havinggrown about in line with total manufacturing value added during the 1960s,have been slackening in recent years.

17. Despite the rapid expansion and diversification of industry andthe profound changes in the overall economic environment of Spain, the coun-try's industrial structure continues to be characterized by the predominanceof small enterprises, mostly family-owned firms. Although there appears tobe sufficient evidence now that concentration in manufacturing has beentaking place, this process has been rather slow and mostly related to thedisappearance of small firms and growth of larger units. According to themost recent official survey of the largest industrial enterprises 1/, therewere in 1973 only 429 manufacturers in Spain which either had a turnover ofmore than Ptas. 400 million (about $6.9 million) or employed more than 1,000persons. These enterprises employed only 20 percent of the labor force en-gaged in manufacturing and their contribution to total manufacturing valueadded of that year was 37 percent. Of the same group of large enterprisesonly 336 were also exporters. These latter firms accounted for slightlymore than half of total exports of the manufacturing sector.

18. The degree of industrial concentration is also reflected in theshare of sales of the largest five firms as compared to the total volume ofsales in a given branch of activity. Official estimates for 1973 suggestthe largest degree of concentration for oil refining (89 percent) and ship-building (81 percent), followed by motor vehicles (46 percent), iron andsteel (38 percent) and the electrical engineering industry (32 percent).At the lower end were the food and textile industry (4 percent each) andthe mechanical engineering industries (12 percent).

1/ Ministerio de Industria, Las 500 grandes empresas industriales espanfolasen 1973, Madrid, 1974.

ANNEX 2.1Page 7

C. Manufactured Exports and Industrial Competitiveness

19. Exports of industrial goods have been growing rapidly since 1964,with the highest rates, however, being achieved since 1967/68, when slug-gish domestic demand and the incentives given by the peseta devaluation ofNovember 1967 motivated many Spanish manufacturers to increase sales abroad.In this latter period, outlets in other countries have frequently been es-tablished for the first time.

(a) Exports of Investment Goods

20. Spain has been particularly successful in expanding her sales ofinvestment goods, which in 1974 reached a volume of over $1.3 billion com-pared with less than $100 million in 1965. The share of investment goodsin total commodity exports rose during the same period from 10 percent to19 percent. Exports of investment goods for industry and the transport sec-tor increased most. An outstanding example has been the export of ships(including marine equipment). Ship sales abroad increased from only Ptas.1.35 billion in 1965 to Ptas. 22.56 billion ($392 million) in 1974, thusbecoming the largest single export of Spain. As a result of this strongexpansion of exports, Spain has become fourth in the world as ship builder,competing with industrialized countries like Japan, Sweden, Germany and theUnited Kingdom. Much of the past dynamism of Spanish ship-building can beattributed to the rapid growth in world demand, particularly for bulkcarriers, which Spain met by diversifying its production capacities, usingthe most recent technologies. Distinct advantages in labor costs overSpain's major competitors and flexibility in adjusting to market require-ments were essential factors behind the Spanish industry's competitiveness,but not the only ones. Also Spain's more favorable climatic conditions,as compared to other competing nations, and the virtual absence of laborunrest aided. More recently, however, the Spanish position has been af-fected by decreasing world demand of ships, and Spanish ship exports havebeen declining in real terms. With medium-term prospects of world demandfor ships expected to remain depressed -- except probably for smallercarriers -- and diminishing labor cost advantages, Spain's ship exportsare expected to grow at rather slow rates, if at all. Additional problemsfor Spanish shipbuilders may arise from likely further changes in shiptechnology, particularly with respect to the increasing equipment of shipswith electronic gear and with medium-speed diesel engines and gas turbines.In these fields, Spain's capabilities are essentially untried or non-existent, which could result in a growing dependence on foreign licensesand a further loss in competitiveness.

21. One of the fastest growing exports of investment goods are tires.The export volume increased from negligible amounts before 1967 to Ptas. 10.66billion (US$185 million) in 1974; thus becoming the third most important in-dustrial export item after ships and shoes. It exceeded in 1974 for thefirst time even Spain's car exports. The fact, that in 1974 over 80 percentof Spain's tire exports were destined to other industrial countries inEurope and to the USA suggests that Spain was able to develop some absolute

ANNEX 2.1Page 8

(rather than comparative) advantages in tire production. Attainment ofeconomies of scale and the capability to produce to specifications thatare less attractive to other industrial countries may have been importantfactors behind this success. One should expect good opportunities for tireexports, particularly also of industrial tires, to more countries, includ-ing developing countries.

22. In other investment goods exports, Spain has made advances alsoin pumping equipment and in small electrical equipment and components,mostly toward European markets. But the weight of these commodities inSpain's total exports is still comparatively small. In several of theseproduction lines Spain was able to increase its competitiveness by special-ization and the development of modified designs. Again, most products inquestion have relatively high labor contents.

23. Exports of trucks and other industrial vehicles have been quiteerratic through 1972, largely because rapidly rising domestic demand pro-vided little incentives to seek outlets abroad. Only since 1973 haveexports increased more rapidly particularly to North African and Asiancountries and in the framework of bilateral trade agreements. Despiteachievement, with one truck producer, of an almost 100 percent nationalcontent of production and the introduction of some technological improve-ments, diseconomies of scale still are an important problem to be overcome.

24. Traditional exports of the engineering goods industry, such astextile machinery and machine tools have shown little dynamism, althoughSpain has been able to stay in international markets because manufacturersproduced in small, individual series and with high product flexibility whichmost more advanced industrial countries cannot afford anymore at competitiveprices. This situation is not likely to change as long as labor cost dif-ferentials between Spain and other industrial countries exist. But anyfurther narrowing of this gap through increasing labor costs in Spain willlead to the disappearance of many small enterprises that are still operatingin this market and to the gradual loss of export opportunities in thisspecial field.

(b) Exports of Intermediate Goods

25. The export volume of semi-manufactures, excluding petroleum products,has increased from only $72 million in 1965 to $1.2 billion in 1974. Itsshare in total Spanish exports more than doubled during the same period,reaching 17 percent in 1974. Among intermediate goods, exports have par-ticularly expanded in organic and inorganic chemical products, and in ironand steel products, including special steels. Export sales in these largelystandardized products, however, have either started or become more importantonly in recent years. Organic chemical products, an essentially unknown ex-port prior to 1965, reached in 1974 an export volume of Ptas. 9.37 billion(US$163 million), while inorganic chemical products, except for the traditionalexport item mercury, reached a volume of exports of Ptas. 5.22 billion ($91million). Iron and steel products, predominantly structural steel and steel

ANNEX 2.1Page 9

plates, have entered exports markets to some larger extent only since1971/72, but sales abroad have been rather irregular, amounting in 1974to Ptas. 7.56 billion ($131 million) for iron and steel products andPtas. 3.28 billion ($57 million) for special steels. Most of the exportsales were to EEC countries.

26. Export of intermediate goods usually comprise a very smallportion of the industries' output in these products. Also, it appearsthat exports in these items are not usually an indication of Spanish com-parative advantages but are rather connected with and the result of capa-city increases. Such increases generally produce surpluses in certainproduct lines -- owing to capital indivisibilities in these technologicallymore complex industries -- which lead to an accumulation of unsold stocksunless these products are exported. Being in general less profitable tothe companies concerned than home sales, exports of intermediate goods arefrequently of temporary nature until domestic demand catches up or im-balances in the existing production facilities are corrected. Exceptionsdo, however, exist in a number of products in which Spain has comparativeadvantages due to its endowment with specific raw materials (e.g. mercury,silicates, some aromatics and, until recently, phosphates), and in productlines characterized by a high degree of specialization such as alloyed steels.

(c) Export of Consumer Goods

27. Consumer manufactures have increased their share in total exportssomewhat more slowly than other industrial exports, from 15 percent in 1965to 22 percent in 1974. In absolute terms, exports of consumer manufacturesreached a volume of $1.59 billion in 1974 against $141 million in 1965.

28. Among the great multitude of export items, shoes continue to takeby far the first place, representing the second most important item inSpain's export list, after ships. Shoe exports have risen at a spectacularrate, from less than $20 million in 1965 to $273 million (Ptas. 17.63 bil-lion) in 1972, but have shown no further growth in recent years. Exportsof Ptas. 21.10 billion ($367 million) in 1974 were less than in 1972 inreal terms. The declining trend in this important export reflects largelya gradual weakening of Spain's competitiveness due to higher labor costs,with other industrializing countries offering labor cost advantages overSpain, and gaining market shares (Brazil, Korea, Taiwan). However, thelopsided dependence of Spain on one single market, the U.S., and weak-nesses in marketing techniques (resulting from the atomization of theSpanish shoe industry) also contributed. In the past, Spanish shoe ex-ports had benefitted from abundant labor supply and relatively low laborcosts, which allowed Spanish manufacturers to offer and to maintain a highflexibility in production (styles) at competitive prices. With foreigndemand expanding rapidly, small plant sizes and inadequate marketing ex-pertise did not represent a major obstacle to exporting. This, however,has been changing in recent years, and the atomized structure of this in-dustry and its obsolescent marketing techniques now constitute the mostimportant problems for its future.

ANNEX 2.1Page 10

29. Similar problems to those of the shoe industry are now alsobeing faced in other exporting light industries (some branches of thetextile industry, leather goods, food canners). In food canning, particu-larly of vegetables and fruits, marketing problems appear now to be themost important constraint to further growth of this industry. Spain'sfood industry is facing increasing competition from a number of developingcountries with more systematic and more aggressive marketing methods. Onlya few exports, in which Spain has an exclusive or almost exclusive supplybase (artichokes, olives), remain relatively unaffected. In book exports,which have been a traditional stronghold of Spain in the past, expansionhas been slow in recent years (1974 exports amounted to Ptas. 8.52 billionor $148 million), as editing and printing activities are increasingly as-sumed by Latin American countries themselves, though frequently under Spanishtrade marks.

30. A substantial part of the export push in consumer manufactures hasin recent years originated in more capital-intensive and technologicallymore complex branches of industry. Outstanding examples are the export ofautomobiles, spare parts for automobiles, household appliances and tools.Car exports, almost exclusively smaller SEAT models, have increased veryrapidly during 1971-73, but export sales in 1974 (Ptas. 10.04 billion or$175 million) stagnated owing to the recession in Western Europe. Spainhas in recent years penetrated into lower income segments of the Europeancar market that were no longer adequately attended by the big car manufac-turers. Also, some major suppliers to the Spanish car industry were ableto develop markets for their products abroad. Products being exported in-clude mainly electrical equipment such as starters, alternators and batteriesbut also measuring instruments and similar products. Fairly recent new-comers in Spain's export list are household appliances and toys, notablyproducts of relatively high labor content. In household appliances a de-clining trend in the rate of growth of domestic demand explains in mostcases the export drive of Spanish manufacturers. Specialization on certainproducts could help exporters to maintain their markets abroad also in thelonger run.

31. The development pattern of Spanish manufactured exports has broughtmuch closer ties with the European Common Market. This has in part been sup-ported by the conclusion of a Preferential Trade Agreement with the EEC in1970 and subsequent further reductions of trade barriers vis-a-vis theCommon Market. The enlarged EEC was in 1974 the market for 47 percent oftotal Spanish exports and for 42 percent of its manufactured exports. Assupplier the EEC accounted in 1974 for 36 percent of Spain's total importsbut for 63 percent of imports of manufactured goods. The accelerated paceof integration with the EEC expected for the near future raises the importantquestion of how Spanish industry can be adapted to meet the growing compet-ition from the more highly developed industry of the Common Market.

32. In the past, emphasis had been given in Spanish economic policiesto structural improvements in the basic industries and to promotion -- throughpreferential credit and tax incentives -- of those industrial subsectors"that are in a position to export or to substitute imports under competitive

ANNEX 2.1Page 11

conditions". Direct action was aimed at restructuring individual industries(with varied success) and at changing the geographic distribution of in-dustry so as to revitalize regions lacking an industrial base and to relieveindustrial congestion in certain centers. Over time a rather complex ad hocstructure of overlapping incentives developed, the cost-effectiveness ofwhich has frequently not been clear and which is now in need of a thoroughreview.

33. Recent economic developments and prospects of Spain now call forsome major change in emphasis and, in part, different instruments of indus-trial policy support. The outstanding issues are:

(a) in the short run to revive and to substantially increaseindustrial investment and to promote the creation of addi-tional, productive employment in industry; and

(b) in the medium and long run to improve and maintain compet-itive capabilities in industry.

D. Changes in Competitive Conditions of Industry

34. The preceding chapters have described the increased dependence ofSpain's economy on the performance of the industrial sector. From the reviewof Spanish industrial exports it has become evident that the conditions underwhich Spanish manufacturers have to compete internationally have changed sub-stantially, particularly in recent years. It has also become clear thatsome of the factors that helped to establish competitive positions in the1960s are gradually dissipating thus putting increasing pressure on industrialenterprises to rationalize production, to develop new products and markets,and to reorganize marketing arrangements.

35. Labor cost advantages of Spain's industry are now less significantas a factor to competitiveness than in the past. Wage costs per worker haveincreased rapidly in recent years and social security costs have put a grow-ing burden on enterprises. Both have substantially narrowed the labor costdifferentials that existed between Spain and other Western European countries.Although labor costs in Spanish industry continue to be lower than those pre-vailing in the EEC (as does productivity), Spain can no longer depend onthis factor for its competitiveness.

36. In recent years, labor cost increases in Spain's industry havealso been in excess of productivity increases, leading to a deterioration ofthe competitive position of industry as a whole. In line with this trend,an increased competitiveness of foreign products is being observed in theSpanish market, which is affecting most industrial sectors. 1/

1/ Ministerio de Industria, Informe sobre la evoluci6n de laindustria espaaola en 1975 (unpublished draft).

ANNEX 2.1Page 12

37. To compensate for the higher cost of labor and of other indus-trial inputs 1/ and to maintain and increase competitive positions inindustry, intensive efforts are required on the part of industry and theGovernment to achieve:

(a) a more rational utilization and allocation of productivefacilities, including manpower;

(b) improved scale economies through merger and other forms ofassociation and through specialization (discontinuation ofcertain present product lines); and

(c) more effecient ways of marketing, including stricter measuresof product standardization and quality control.

All this will, however, not be enough to secure competitive positions inthe longer run, unless Spanish manufacturers are also successful in con-tinuously developing and marketing new competitive products.

38. The changes that are necessary require stronger managerial cap-abilities than in the past when industry was generally more concerned withkeeping up with expanding demand. Under past conditions, adoption of for-eign technologies, mostly without any modification seemed appropriate aslong as domestic demand grew rapidly and exporting remained on the marginof interest. However, market conditions have been changing rapidly, bothin Spain and abroad, and firms that so far have relied on a fixed range ofproducts and continuous labor cost advantages, are now in a difficult posi-tion to maintain their market positions. In addition to this, enterprisesthat in the past have mainly depended on foreign licenses for their produc-tion are now frequently squeezed between unfavorable domestic market con-ditions and contractual restrictions to operate in extended markets, par-ticularly abroad.

39. There are other factors that have contributed to weaken indus-trial positions. One of these factors is the failure of many Spanishindustrialists to establish themselves firmly in foreign markets. Exportinghas frequently been a matter of taking advantage of casual opportunitiesrather than the result of systematic efforts to penetrate into markets.Marketing efforts and export planning have been grossly neglected in thepast, and exporting was frequently the result of the initiative of foreignimporters or of the parent company of the Spanish firm. As a result ofthis, a great number of Spanish industrial exports actually carry foreignbrand names.

40. The other important factor, to be mentioned here, is the oftenunqualified preference of Spanish investors and consumers for foreign pro-ducts even if these products are more expensive than their Spanish counter-

1/ Import prices, for example, rose by 50 percent in 1974.

ANNEX 2.1Page 13

parts of the same quality. This includes the public sector in Spain. Al-though Spanish legislation requires the public sector to give preferenceto Spanish suppliers, actual compliance has been and continues to be unsatis-factory.

E. Transfer of Technology and Spanish R & D Efforts

41. Spain's rapid industrial growth and transformation during thepast 15 years were essentially based on the import and indiscriminate adop-tion of the foreign technology available. In acquiring licenses, patents,and foreign assistance services, Spanish manufacturers could be sure ofutilizing tried and proven techniques that relatively easily could be trans-lated into new or improved processes and products. Indigenous efforts ofindustry to adopt foreign technologies to Spanish conditions and topromote the development and engineering of new products have been exceptions.Only in more recent years, and under increased competitive pressures, havesome industries become more concerned with technological innovation, and afew enterprises have become able to become exporters of technology. Butthis process is at only its very beginning.

42. Owing to the preference given to imported technology, Spain'stechnology payments abroad have increased steadily, accounting for abouttwo percent of the foreign exchange outflow on current account in recentyears. In 1974, total Spanish payments for licenses, royalties and technicalassistance reached a volume of $316 million. During the same year, incomefrom technology transfers abroad was $36 million. The resulting deficitin technology trade ($280 million) was not only one of the highest amongOECD countries, but it also compared unfavorably to developing countries suchas Korea.

43. Several factors may have contributed to unduly inflate Spanishtechnology payments in the past. One has been related to the common prac-tice of Spanish manufacturers to acquire a license or a product line evenwhen a similar product line was already being produced in Spain. Theother factors are mainly connected with the negotiating process for licensesand other technology transfers itself. Spanish firms have frequently beenin a disadvantaged position owing to size and their limited experience inthis type of operation.

44. Government controls over transfers of technology to Spain werevirtually non-existent until 1973. A significant change in this respectwas introduced by the Decree 2.343 of 1973. 1/ Since then, Spanish firmsare required to obtain approval of the contractual arrangements involvingtechnology transfers from the Ministry of Industry. The main objective ofthe relevant regulations is to supervise the selection and conditions oftechnology transfers with a view to reducing contract prices, removing undulyrestrictive clauses on use, and channelling part of the technical services

1/ The legal provisions on the purchase of foreign technologyare described in Annex 2.3.

ANNEX 2.1Page 14

to be contracted into the national engineering sector. Registry of the con-tracts regulating transfers of technology with the Ministry of Industry isalso a prior condition to the authorization by the Ministry of Commerce ofpayments in foreign currency resulting from such contracts.

45. In the past, Spain has spent significantly more for the import oftechnology than for all domestic research and development activities, in-cluding basic research in science and social subjects. Although Spanishexpenditures on research and development have been rising more rapidly inrecent years--also in relation to total payments for foreign technology--overall allocations to R&D are still strikingly small, spread too thinlyover far too many fields, and supporting too many institutions which areeach too small to have a significant impact on technological advancement.Total Spanish allocations to research and development in 1974 amounted toabout $280 million. This was equivalent to 0.3 percent of GNP. With thisratio Spain is placed in the range typical of countries at a lower stageof economic development. Spain's ratio compared to those of Portugal andTurkey, and it was well below the ratios of Israel (1.1), and Korea (1.6).Particularly significant is the large difference in R&D efforts betweenSpain and those countries that have increasingly become its main competi-tors. The EEC countries, for example, spent in 1974 equivalents between0.7 and 2.3 percent of their GNP on research and development, Japan 1.6percent and the United States 2.6 percent.

46. Spanish expenditure on research and development in the manufac-turing industries, including industrial research associations, have beenless than 45 percent of total R&D expenditure in recent years. For 1974,expenditure on industrial research and development amounted to an estimated$126 million. This was equivalent to only 0.5 percent of the total valueof manufacturing output and to 40 percent of industry's payments for foreigntechnology. Again, these ratios are very low compared to Spain's main compe-titors indicating excessive dependence on undigested foreign technology.Moreover, participation of the various industrial sectors in research anddevelopment activities is markedly equal, with about 90 percent of industrialR&D expenditure concentrated on the chemical and pharmaceutical industry,metal transforming industries, and transport equipment.

47. A quite similar picture was obtained from the 1973 survey ofSpain's largest industrial enterprises. For example, of the 429 largestmanufacturers surveyed only 232 reported conduct of research and developmentactivities. Their total spending on R&D amounted to 0.6 percent of theircombined value of output. The highest ratios of R&D spending were found inelectrical engineering (1.3 percent), followed by the transport equipmentsector (1.0 percent), the chemical industry -- except refining -- (0.8 per-cent), and the mechanical engineering industry (0.8 percent). In the textileand food industries the corresponding ratios were below 0.2 percent.

48. Only 23 of the large industrial enterprises covered in the 1973survey spent an equivalent of more than 2.5 percent of their sales for R&Dactivities, the majority of which were enterprises of the pharmaceuticalindustry. It would appear, however, that the comparatively larger weight

ANNEX 2.1Page 15

of research and development expenditure at pharmaceutical firms is relatedmore to product testing than to product development. Of the 232 largestSpanish manufacturers conducting research and development activities in1973, chemical and pharmaceutical firms accounted for 24 percent of totalspending R&D, electrical engineering firms and car manufacturers for about20 percent each.

49. Spanish industrial research and development activities have in thepast been essentially confined to process and product improvements and to themore or less continuous task of quality control and product standardization.These efforts have mostly been in response to current market requirements,notably customer specifications, and to legal requirements related to pro-duct safety. However, different from most other industrial countries, therehave been virtually no systematic efforts in Spain to develop new or essen-tially improved products to meet anticipated future market needs. Thisefficiency now poses a problem to the future growth and prosperity ofSpanish industry. With the changed economic conditions and rapidly growingforeign competition, both in foreign and domestic markets, many Spanish manu-facturers will in future be facing the danger of losing out to foreign com-petition unless vigorous efforts are made to seek out and develop new markets.

50. The future competitive position of Spanish industry will thus in-creasingly depend on the building of new competitive advantages through pro-duct innovations based on Spanish technology. It is evident that specificareas in which competitive advantages could be developed cannot adequatelybe defined without prior detailed studies of future market opportunities andthe Spanish industrial and technological capabilities. Scope for advance-ments in specific processes and product lines which could lead to maintainingor improving competitive positions can be perceived in any industrial sub-sector. But in a number of areas such advancements are more difficult toachieve because the industry is too dispersed and managerial and technicalcapabilities to do market studies and to design and develop new products areinadequate or simply not yet available. Also in some industries, marketingproblems impose currently greater constraints to expansion than productiontechnologies.

51. For these reasons and because of the limited resources availablefor technological development, any industrial technology strategy for Spainwill have to be highly selective. Efforts need to be concentrated on areasthat not only promise to offer attainment of greater comparative advantagesbut do already have good technical and engineering capabilities, with somerecord of creativeness, and management knowledgeable of the state of theart of developing new products and markets. These conditions are importantfor securing the best possible prospects for the research, development andengineering works to be done and for the eventual marketing of new processesand products. They cannot, of course, guarantee success, but may make suc-cess more likely than any indiscriminate drive. Concentrated efforts in afew areas may also serve as a model for subsequent work in other areas thatoffer less favorable conditions at the technical and managerial levels.

ANNEX 2.1Page 16

52. Among the Spanish industrial subsectors that currently appearbest suited to make a significant contribution to the strengthening ofSpanish industry through technological advancements are the electronicsindustry, the mechanical engineering industry, and food industries. Annex3.4 gives a brief description of the conditions in these subsectors andan outline of the scope for improved capabilities through development ofcompetitive, advanced products.

Industrial Projects DepartmentMarch 1976

SPAIN

INDUSTRIAL RD&E PROJECT

STRUCTURAL CHANGES OF SPAIN'S ECONOMY

1960-74

Share in GDP at Constant Share in GDP at Current

Share in Total Labor Force 1964 Factor Cost 1970 j 'actor Gost Factor Cost

1960 1 965 1970 1974 1960 1965 1970 1970 1974 1960 1970 1974

Agriculture 41.7 33.9 29.1 23.0 23.3 17.4 15.0 11.8 10.3 23.7 11.8 9.8

W ning 1.6 1.3 1.0 0.7 1.8 1.4 1.1 0.7 0.7 1.8 0.7 0.6

Indastr'y 29.9 33.7 36.3 36.4 31.1 36.7 39.5 38.7 41.2 33.5 38.7 40.1

Service sectors 26.8 41.1 33.6 39.9 43.8 44.5 1414.4 48.8 47.8 47.0 48.8 49.5

Source: Xinisterio de Planificacion del Desarrollo, Instituto Nacional de Estad5stica: Contabilidad Nacional de Espaiia and Encuesta de

Poblacion Activa (various years)

Industrial Projects Department

March 1976

SPAIN

INDUSTRIAL RD&E PROJECT

ORIGIN OF GDP AT FACTOR COST, 1970-75

1970 1971 1972 1973 1974 1975 1970 1971 1972 1973 1974 1 9 7 5L2

- in millions of current pesetas - - in percent of GDP -

Agriculture, $orestry,fisheries 285,054 326,844 364,903 434,151 461,170 560,783 11.8 11.8 11.3 11.1 9.8 10.2

Mining 16,655 17,504 18,975 22,732 27,051 31,650 0.? 0.7 0.6 o.6 0.6 o.6

Manufactiring 649,759 725,363 884,489 1,081,651 1,317,756 1,416,588 26.8 26.3 27.4 27.8 28.1 25.7

Energnr and water 77,329 88,939 100,004 107,054 133,734 144,194 3.2 3.2 3.1 2.7 2.8 2,6

Construction industry 212,000 226,416 263,322 337,579 432,100 477,903 8.7 8.2 8.1 8.7 9.2 8.6

Service sectors 1.183,617 1.374.754 1.599.629 1.911,59g 2Q34044 2,881 827 48.8 49.8 49.5 49.1 49.5 52.3

GDP at factor cost 2,424,414 2,759,820 3,231,322 3,594,762 4,695,065 5,512,945 100.0 100.0 100.0 100.0 100.0 100.0

- in millions of 1970 pesetas - - growth rates in percent -

Aericulture, forestry,fisheries 285,054 302,801 306,097 318,680 323,704 335,034 6.2 1.1 4.1 1.6 3.5

Mining 16,655 17,263 18,089 20,722 21,903 20,900 3.6 4.8 14.6 5.7 -4.6

Manufacturing 649,759 690,947 796,996 887,722 938,201 914,750 6.3 15.3 11.4 5.7 -2.5

Energy and rater 77,329 81,766 91,179 95,464 100,930 99,573 5.7 11.5 4.7 5.7 -1.3

Construction industry 212,000 209,644 228,976 24B,402 260,616 255,404 -1.1 9.2 8.5 4.9 -2.0

Service sectors 1.183.617 1,246,088 1.323.557 1,437,307 1,511,659 1,566 079 5.3 6.2 8.6 5.2 3.6

GDP at factor cost 2,424,414 2,548,509 2,764,894 3,008,297 3,157,013 3,191,?40 5.1 8.5 8. l.9 1.1

j Preliminary estimates

:w.urce: Cont'hilidad llacional de E-paha F'

Industrial Projects DepartmentMarch 1976

SPAIN

INDUSTRIAL RD&E PROJECT

DEVELOPMENT PATTERNS IN MANUFACTURING

1960 Shares 1970 Shares 1975 Shares

in Compound Annual Growth in Compound Annual in

Manufacturinp' Pates Manufacturing Growth Rates ,4anufacturing

Sub-Sector Value Added 1961-66 1967-70 1961-70 Value Added 1971-74 1971-75 Value Added

% P % % % % % X

/1 L /2 /2 /2 /3 /2

Food, beverages, tobacco 20.3 6.8 6.8 6.8 15.1 13.1 5.2 4.3 11.5

Textiles 12.7 5.5 2.7 4.4 7.5 8.0 4.8 3.4 6.7

Apparel and footwear 7.7 13.1 5.0 9.8 7.6 9.6 6.7 5.9 9.1

Wood, cork, furniture 6.3 8.8 5.9 7.6 5.1 5.8 7.2 5.3 5.3Paper, printing, editing 4.1 14.6 7.2 11.6 4.7 5.1 14.3 10.8 6.0

Chemicals, rubber, plastics 10.4 13.4 10.1 12.0 12.6 11.2 10.3 7.4 11.3

Glass, cement, clay 5.1 15.4 7.6 12.2 6.2 5.8 11.0 9.1 6.4

Basic metal produats 7.1 11.5 12.2 11.8 8.3 8.7 11.7 8.4 9.3

Metal transforming, machinery 14.8 14.0 4.1 9.9 14.7 17.0 12.7 9.4 18.9

Transport eouipment 8.0 19.2 10.9 15.8 13.4 11.8 13.3 8.8 12.8

Others 3.5 14.8 11.2 -3.3 h.8 3.9 0.9 -0.5 2.7

Total HanufPcturing 100.0 11.7 7.4 10.0 100.0 100.0 9.6 7.1 100O0

/1 based on constant 1964 factor cost7v based on constant 1970 factor cost

ZL preliminaryj

Source: (ontabilidad Niacional de Espaf.a and mission estimates

Industrial Projects DepartmentMarch 1976

SPAIN

INDUSTRIAL RD&E PROJECT

MANUFACTURING VALUE ADDED 1970-75

At Constant 1970 Factor Cost (in million Ptas.)

Subsector 1970 1971 1972 1973 1974i 1975Preliminary Estimate

Food, beverages, tobacco 85,029 13.1 86,462 89,918 94,636 103,977 105,017 11.5

Textiles 52,088 8.0 54,209 57,450 60,317 62,728 61,473 6.7Apparel and footwrear 62,494 9.6 69,075 79,450 80,646 81,066 83,174 9.1Wood, cork,furniture 37,458 5.8 40,607 49,416 49,407 49,504 48,514 5.3Paper, printing, editinga 33,140 5.1 42,731 48,608 53,648 56,607 55,475 6.0Chemicals 52,352 8.1 53,238 58,461 67,791 73,809 71,595 7.8

Rubber and plastics 20,134 3.1 21,915 26,717 31,108 33,374 31,705 3.5

Glass, cement, clay 37,724 5.8 38,572 45,574 54,936 57,293 58,324 6.4

3asic metal products 56,775 8.7 60,275 68,707 80,893 88,450 8L,9l2 9.3Metal transforming, machinery 110,500 17.0 117,037 145,051 168,479 178,355 173,000 18.9Transport equipment 76,974 11.8 81,859 101,301 120,456 126,970 117,066 12.8Others 25,111 3.9 24,967 26,344 25,404 26,069 24,495 2.7Total Manufacturing 649,759 100.0,. 690,947 796,997 887,721 938,202 914,750 100.0%.

Source: Contabilidpd Nacional de EspaFa and mission estimates .A

Industrial Projects DepartmentMarch 1976

SPAIN

TNDUSTRIAL RD&E PROJECT

BALANCE OF PAYMF.NTS 1960. 1965-75

(in million of US$)

1960 1965 1966 1967 1968 1960 1970 1971 1972 1973 1974 1975

Prel. Est.

1. Imports, f.o.b. 688 2,778 3,300 3,200 3,242 3,865 4,357 4.577 6,236 8,948 14,334 15070

2. Exports, f.o.b. 745 1,019 1,308 1,419 1,667 1,994 2,483 2,978 3,920 5,403 7,265 7,790

3. Trade balance 57 -1.759 -1,992 -1,781 -1.575 -1,871 -1,874 -1,599 -2,316 -3,545 -7,069 -7,280

4. Freights, transport, insurances 8 -65 _10 -60 -46 -22 -36 30 -9 -54 -72 83

5. Touri 247 1,027 1,202 1,111 1,111 1,195 1,543 1,878 2,231 2,878 2,807 3,095

6. InvestIent income -14 -31 -73 -92 -110 -166 -174 -148 -176 -86 98 - 223

7. Royalties, technical assistance -10 -75 -90 -102 -98 -124 -118 -138 -178 -233 -279

8. Other services 15 56 40 18 28 63 78 66 153 183 157 - 299)

9. Transfors 90 360 419 450 448 532 659 767 866 1,414 1,222 1,145

of which:(10.) Workere remittanceas (55) (298) (346) (320) (319) (400) (467) (548) (598) (912) (860) (..)

11. Balance on current account 393 -486 -564 -456 -242 -393 78 856 571 557 -3 136 -3:479

12. Private HM6LT capital 107 322 303 502 436 481 697 602 934 810 1,427 1,815

of which:Direct investment (36) (116) (129) (180) (143) (187) (178) (176) (219) (324) (239) (137)

Portfolio investment (11) (53) (55) (50) (34) (10) (-13) (25) (34) (113) (-56) ( 26)

Real estate investoent (O) (59) (54) (52) (91) (106) (144) (261) (395) (589) (468) (272)

Commercial credits and loansto enterprises (60) (94) (65) (220) (168) (178) (388) (140) (286) (-216) (776) (2,759)

13. Public M&LT capital 19 -14 41 33 145 24 -27 -103 -2 -45 53 613

14. Basic balance 519 -178 -220 79 339 112 748 1,355 1,503 1.322 -1,656 -1,051

15. Short-term capital anderrors and omissions/1 -60 47 33 -215 -268 -342 65 -98 -136 369 864 959

16. Change in reserves -459 131 187 136 -71 230 -813 -1,257 -1,367 -1,691 792 92

(increase -)

/L Includes revaluation adjustments

Source: Miniisterio de Comercio, Balanza de Pagos de Eapana 1974, Madrid 1975, and estimates of the Ministerio de Comercio and the Banco de Espania

Industrial Projects DepartmentMarch 1976.

SPAIN

INDUSTRIAL RD&E PROJECT

EXPORTS BY CGW4ODrrY CATEGORIES

(in million of US$)

I n d e x (1961= 100)1961 1965 1970 1971 1972 1973 1974 '965 1970 1974

A. Foodstuffs 381.8 452.4 833.6 902.0 1,060.6 1.524.7 1,704.7 118 218 446

B. Raw Materials andSemi-Manufactures 234.6 275.1 669.0 847.5 1,077.1 1.559.5 2.486.1 117 285 1.060of which:

B.1 Raw materials for agriculture 11.7 16.6 18.6 20.8 24.7 28.6 75.5B.2 Raw materials for food industry 1.3 2.6 3.9 3.4 3.2 4.9 6.1B.3 Other raw materials for industry 112.1 151.6 249.9 258.5 277.9 417.6 735.0B.4 Petroleum and Petroleum products 40.7 32.7 98.8 99.7 117.1 209.5 470.2B.5 Semi-manufactures 68.8 71.6 297.8 465.1 654.2 899.0 1,199.3

C. Investment Goods 22.9 98.3 417.1 534.5 709.4 922.6 1.328.8 429 1.821 5.803C.1 For agriculture 0.2 4.9 6.1 12.3 15.8 27.5 55.7C.2 For the transport sector 3.4 41.7 189.2 236.4 366.5 451.1 591.4C.3 For other service sectors 0.7 1.4 13.7 16.4 20.9 25.6 44.2C.4 For industry t6.8 45.5 202.3 264.3 303.0 414.6 633.6C.5 Animals for breeding 1.8 4.8 5.8 5.1 3.1 3.8 3.7

D. Consumer Goods 59.6 141.2 468.9 655.4 957.8 1.209.6 1,586.7 237 787 2,662of which:

D.1 Kotor vehicles 0.7 5.0 34.0 64.8 89.0 166.1 187.1D.2 Metal products 7.8 23.2 79.1 97.0 136.2 172.2 243.5D.3 Leather products 1.8 4.2 25.9 35.2 57.0 (69.3 (88.7D.4 Books 7.0 30.8 66.0 84.6 110.4 119.2 148.1D.5 Apparel and footwear 17.9 35.8 170.7 256.5 392.9 431.1 559.2D.6 Others 24.4 42.2 93.2 117.3 172.3 251.7 360.1 _

Total Exports, f.o.b. 698.9 967.0 2,388.6 2,939.4 3,804.9 5,216.4 7,106.3 138 342 1,017

S1

0.9

SPAIN

INDUSTRIAL RD&E PROJECT

EXPORTS BY COMMOD1TY CATEGORIES

SHARES IN THE ABSOLUTE GROWTH OF EXPORTS(in million of US$)

1962-65 1966-70 1971-74 1962-74

Total Export Growth 268.1 1007 1,421.6 100% 4,717.7 1007. 6,407.4 100%of which:

A. Foodstuffs 70.6 26.3 381.2 26.8 871.1 18.5 1,322.9 20.7

B. Raw Materials andand Semi-manufactures 40.5 15.1 393.9 27.7 1,817.1 38.5 2,251.5 35.1

B.5 Semi-manufactures 2.8 1.0 226.2 15.9 901.5 19.1 1,130.5 17.6C. Investment Goods 75.4 28.1 318.8 22.4 911.7 19.3 1,305.9 20.4

C.1 For agriculture 4.7 1.8 1.2 0.1 49.6 1.1 55.5 0.9C.2 For the transport sector 38.3 14.3 147.5 10.4 402.2 8.5 588.0 9.2C.3 For other service sectors 0.7 0.2 12.3 0.9 30.5 0.6 43.5 0.7C.4 For industry 28.7 10.7 156.8 11.0 431.5 9.1 617.0 9.6C.5 Animals for breeding 3.0 1.1 1.0 0.1 -2.1 0 1.9 0

D. Consumer Goods 81.6 30.5 327.7 23.1 1,117.8 23.7 1.527.1 23.8D.1 Motor vehicles 4.3 1.6 29.0 2.0 153.1 3.2 186.4 2.9D.2 Metal products 15.4 5.7 55.9 3.9 164.4 3.5 235.7 3.7D.3 Leather products 2.4 0.9 21.7 1.5 62.8 1.3 86.9 1.4D.4 Books 23.8 8.9 35.2 2.5 82.1 1.8 141.1 2.2D.5 Apparel and footwear 17.9 6.7 134.9 9.5 388.5 8.2 541.3 8.4D.6 Others 17.8 6.7 51.0 3.6 266.9 5.7 335.7 5.2

Industrial exportsB.5, C.l-4, D.1-6 156.8 58.5 871.7 61.3 2,933.1 62.2 3,961.6 61.8

Sources: Direccion General de Aduanas and Gabinete de Mecanizacidn de la Secretaria General T5cnica delMinisterio de Comercio.

Industrial Projects Department M

March 1976

SPAIN

INDUSTRIAL RD&E PROJECT

PRINCIPAL EXPORTS OF SPANISH INDUSTRY

(in billion of pesetas)

Customs Classification and Nos. 1966 1968 1970 1971 1972 1973 1974

Intermediate Goods 10.70 18.27 25.95 34.17 43.17 55.34 82.8928 Inorganic chemical products,

except mercury (28.05.31) 0.32 0.64 0.89 1.06 1.50 1.59 5.2229 Organic chemical products,

except items of groups 36 and 44 0.71 1.07 2.12 2.50 2.58 3.27 9.3739.01,39.02 Plastic materials 0.01 0.23 0.65 0.91 0.94 0.92 1.8441 Hides and skins,

except items of group 01 0.61 0.57 0.53 0.73 1.04 1.54 2.3343 Furs, except items of group 01 0.18 0.34 0.93 1.43 2.04 2.70 3.2644.13/a/19 Wood semi-manufactures 0.11 0.30 0.45 0.77 1.01 1.27 1.2945 Cork products, except items

of group 01 0.67 0.80 0.86 1.00 1.15 1.29 1.6748.01/a/09 Paper and paperboard 0.26 0.33 0.66 0.99 1.45 1.64 3.51

51.01 Continuous man-made fibres 0.11 0.45 0.45 0.73 0.89 1.03 1.3855.05/06 Spun cotton 0.59 1.11 1.17 1.26 1.59 1.05 2.1156.05/06 Discontinuous man-made fibres 0.11 0.21 0.30 0.57 0.94 0.95 1.8768 Processed stone and gypsum products 0.25 0.47 0.89 1.08 1.28 1.54 2.14

69.01/a/08 Ceramics 0.07 0.10 0.51 0.90 1.27 1.59 2.5573.02 Ferro-alloys 0.11 0.22 0.10 0.24 0.38 0.84 2.15

73.10 Iron and steel bars 0.03 0.36 0.42 1.94 1.88 2.40 1.5473.11 Structural iron and steel products . . 0.34 1.67 3.06 3.67 3.92

73.13 Iron and steel plates . . 0.10 0.92 0.91 3.20 2.1073.15 Alloyed steel . . 0.76 0.81 1.08 2.11 3.2873.18 Iron and steel pipes . . 0.67 1.06 1.71 2.54 2.7373.36 Stoves, ovens . . 0.43 0.57 0.83 0.90 1.30

All other intermediate goods 6.56 11.07 12.72 13.03 15.64 19.30 27.33

Investment Goods 11.96 15.93 30.26 40.35 49.13 57.57 82.6440.11 Tires 0.29 1.42 2.91 4.86 6.09 7.84 10.6684.10/11 Pumping equipment 0.08 0.16 0.45 0.52 0.64 0.95 1.81

84.22 Lifting and loading equipment 0.13 0.21 0.58 1.04 0.91 1.23 1.35

84.36/37/38 Textile machinery 1.44 3.64 1.69 2.16 2.27 2.57 3.6484.45 Machine-tools 0.64 1.13 1.88 2.38 2.54 2.50 4.03

85.01 Generators, motors and transformers 0.15 0.22 0.89 1.11 1.06 1.31 2.00

85.19 Switches and other instruments forelectrical circuits 0.19 0.25 0.92 1.14 1.25 1.58 2.17

85.21 Lamps, tubes, electronic valves,glass valves . . 0.15 0.09 0.39 1.12 1.56

85.23 Electric cables 0.09 0.26 0.59 0.85 0.54 0.89 1.87

84.06 Combustion engines 0.20 0.29 0.58 1.07 1.01 1.69 2.7884.51 Typewriters 0.16 0.51 1.18 1.49 1.21 1.29 1.43

85.13 Telephones and other tele-comnunications equipment 0.07 0.26 0.59 0.75 0.80 0.82 1.44

86 Railway equipment . . 1.14 1.82 2.05 2.47 1.15 , .

87.02,11-19 Motor vehicles (except passenger E xcars, motorbikes) 0.76 0.22 0.61 0.63 0.38 1.52 1.85

89.01 Shlips 5.51 3.76 8.69 10.39 16.10 15.64 22.56All other investment goods 2.25 3.60 7.41 10.05 11.89 14.15 22.34

SPAIN

INDUSTRIAL RD&E PROJECT

PRINCIPAL EXPORTS OF SPANISH INDUSTRY

(in billion of pesetas)

Customs Classification and Nos. 1966 1968 1970 1971 1972 1973 1974

Consumer Goods 12.29 20.91 35.73 49.93 66.54 75.23 97.92

30 Pharmaceutical products 0.26 0.31 0.55 0.78 0.80 0.97 1.43

42 Leather articles, except itemsof groups 01 and 04 0.41 0.82 1.59 2.12 3.01 3.14 3.92

44.20-28 Wood products 0.78 0.80 1.08 1.18 1.41 1.50 1.90

48(part) Paper products 0.14 0.16 0.38 0.38 0.53 0.78 1.29

49 Books 2.36 3.10 4.62 5.92 7.11 6.85 8.52

51.04, 56.07 Fabrics made from man-made fibres 0.27 0.48 0.97 1.16 1.72 2.08 3.16

60 Knitting wear 0.57 1.09 1.07 1.58 2.73 2.69 3.73

61, 62 Apparel and articles for dressmaking 0.76 1.39 2.09 2.63 3.55 4.08 5.10

64 Shoes 1.18 4.70 7.62 12.51 17.63 16.57 21.10

69.09-14 Ceramics 0.11 0.17 0.31 0.38 0.49 0.64 1.20

70.10/13/14 Glass products 0.06 0.13 0.29 0.47 0.61 0.70 1.00

71.12-16 Jewelry articles 0.14 0.23 0.44 0.63 0.87 1.10 1.57

82 Tools 0.50 0.57 1.24 1.80 2.04 2.32 3.62

83.07 Lamps and light fixtures 0.53 0.68 1.00 1.09 1.60 1.86 2.12

84.15.01/02 Refrigerators . . 0.87 1.24 1.17 1.19 1.69

85.06/10/12 Household appliances 0.04 0.06 0.21 0.29 0.55 0.75 1.09

87.02.01/09 Automobiles 0.25 0.74 1.99 4.21 4.91 9.38 10.04

87.06 Spare parts for motor vehicles 0.42 0.64 1.85 2.08 2.67 3.53 4.81

93 Weapons, except items of groups03 and 06 0.52 0.63 0.61 0.70 0.86 1.04 1.39

94 Furniture, except items of group 02 0.54 0.72 1.34 1.67 2.79 3.51 4.57

97 Toys and sporting goods, exceptitems of group 08 0.26 0.40 0.73 1.14 1.83 2.43 3.32 H >

All other consumer goods 2.19 3.09 4.88 5.97 7.66 8.12 11.35

Ho

SPAIN

INDUSTRIAL RD&E PROJECT

PRINCIPAL EXPORTS OF FOOD INDWSTRY

(in billion of pesetas)

Customs Classification and NOs. 1966 1968 197O 1971' 1972 1973 1974

15.07.01/02 Olive oil 1.78 2.08' 7.99 9.53 4.23 10.30 10.90

16.04/05 Canned seafood 0.96 1.26 2.41 2.49 3.00 3.08 3.96

20 Canned fruits and vegetables 4.19 6.94 8.27 9.68 10.99 13.62 15.20

22.09 Liquor 0.15 0.29 0.47 0.60 0.74 0.80 1.29

Source: Ministerio de Hacienda, Direccicon General de Aduanas, Informe mensual sobre el comercio exterior (annual summaries) < 3

Industrial Projects DepartmentMarch 1976

SPAIN

INDUSTRIAL RD&E PROJECT

IMPORTS BY CObYOD1rY CATEGORIES

(in million of US$)

19- 1 Index (1961-100)

1961 1965 1970 1971 1972 1973 1974 1965 1970 1974

A. Foodstuffs 223.5 573.2 709.8 835.8 1.066.0 1,597.7 2,304.0 256 318 1.031

B. Raw Materials andSemi-Manufacturee 598.6 1.457.7 2.512.5 2,585.2 3,417.5 4,690.8 8,951.9 244 420 1,495

of which:B.1 Raw materials for agriculture (34.3) (53.0) (33.3) (23.3) (27.8) (30.2) (41.9)

B.2 Rew materials for food industry (12.4) (21.2) (32.6) (25.4) (7.7) (10.5) (10.6)

B.3 Other raw materials for industry (300.0) (641.0) (1,250.1) (1,259.2) (1,718.4) (2,315.4) (3,480.0)

B.4 Petroleum and Petroleum products (167.1) (269.7) (540.8) (724.9) (877.1) (1,144.0) (3,713.8)

B.5 Semi-manufactures (84.8) (472.8) (655.7) (552.4) (786.5) (1,190.7) (1,705.6)

C. Investment Goods 233.9 818.8 1,224.6 1,211.2 1,839.8 2,645.1 3,244.7 350 524 1,387

of which:C.1 For agriculture (21.4) (42.9) (51.9) (37.7) (61.7) (90.3) (114.9)

C.2 For the transport sector (44.4) (88.8) (200.2) (137.3) (296.3) (484.7) (580.8)

C.3 For other service sectors (14.3) (75.4) (146.1) (167.6) (246.3) (365.1) (443.8)

C.4 For industry (153.8) (611.7) (826.3) (868.6) (1,235.5) (1,705.0) (2,105.2)

D. Consumer Goods 36.6 169.1 300.2 336.7 482.0 744.7 960.9 462 820 2,625

of which:

D.1 Motor vehicles (12.5) (16.0) (20.9) (21.8) (32.4) (57.0) (49.4)

D.2 Metal products (4.7) (42.5) (73.5) (90.3) (110.5) (165.5) (224.8)

D.3 Leather products (o) (2.1) (4.3) (3.8) (6.5) (11.1) (12.9)

D.4 Book (3.5) (8.5) (19.5) (21.0) (34.0) (47.6) (42.9)

D.5 Apparel and footwear (3.5) (27.7) (42.2) (45.0) (63.5) (100.5) (142.4)

D.6 Others (12.4) (72.3) (139.8) (154.8) (235.1) (363.0) (488.5)

Total Imports, c.1.f. 1,092.6 3,018.8 4,747.1 4,968.9 6,805.3 9,678.3 15,461.5 276 434 1,415

m r.CD.

SPAIN

INDUSTRIAL RD&E PROJECT

IMPORTS BY COMMODrTY CATEGORIES

SHAgES IN THE ABSOLUTE GROWTH OF IMPORTS

(in million of US$)

1962-65 1966-70 1971- 74 1962-74

Total Import Growth 1 926.2 100% 1,728.3 1007 10,714.4 1007 14,368.9 100%.of which:

A. Foodatuffs 349.7 18.1 136.6 7.9 1,594.2 14.9 2,080.5 14.5B. Raw materials and

*emi-manufacturec 859.1 44.6 1,054.8 61.0 6,439.4 60.1 8,353.3 58.1C. Investment goods 584.9 30.4 405.8 23.5 2,020.1 18.8 3,010.8 21.0D. Consumer goods 132.5 6.9 131.1 7.6 660.7 6.2 924.3 6.4

Direct imports to industry /1(B.2-3, B.5, C.4) 1,195.7 62.1 1,018.0 58.9 4,536.7 42.3 6,750.4 47.0 H

0 M/1 Not including imports of petroleum and petroleum products for industry ¢ "

Sources: Direccion General de AdUianas and Gabinete de Mecanizacio'n de la Secretarta General Te,cnica delMinisterio de Com_rcio.

Industrial Projects DepartmentMarch 1976

ANNEX 2.1Table 9

SPAIN

INDUSTRIAL RD&E PROJECT

DIRECTION OF TRADE - EXPORTS BY MARKET

(in billion of pesatas)

SITC 1966 1970 1971 1972 1973 1974

0,1,4 Food, beverages, tobacco 32.76 58.66 63.40 68.47 88.84 98.02EEC 14.21 27.56 29.97 38.83 52.78 57.88EFTA 9.38 13.87 14.37 7.02 9.07 8.11USA 3.04 5.64 6.73 8.84 8.80 9.78LDC's 2.72 6.87 6.58 7.15 10.90 11.87(in America) (1.40) (3.07) (2.59) (2.95) (3.72) (3.67)Others 3.41 4.72 5.75 6.63 7.29 10.38

2 Raw materials 4.02 6.55 7.04 7.18 8.77 13.49EEC 1.98 3.37 3.54 4.40 5.20 8.03EFTA 0.71 1.38 1.51 0.54 0.60 0.86USA 0.40 0.60 0.60 0.71 0.88 1.13LDC's 0.40 0.77 0.92 1.01 1.21 2.09(in America) (0.21) (0.30) (0.31) (0.33) (0.64) (0.92)Others 0.53 0.43 0.47 0.52 0.88 1.38

3 Petroleum, petroleum products 3.36 9.17 8.80 8.87 14.09 27.61EEC 1.76 3.16 4.14 5.03 9.48 15.52EFTA 0.49 2.60 1.93 0.82 0.51 1.18USA 0.11 1.29 1.14 1.36 2.68 2.23LDC's 0.37 0.63 0.58 0.58 0.38 6.60(in America) (0) (0.20) (0) (0) (0) (0.68)Others 0.63 1.49 1.01 1.08 1.04 2.08

5 Chemical products 4.64 8.77 9.91 11.02 13.87 30.85EEC 1.26 2.68 2.92 4.14 5.83 13.35EFTA 1.09 2.01 2.63 1.90 1.99 3.70USA 0.57 0.67 0.80 0.80 0.99 2.07LDC's 0.84 1.95 2.49 3.15 3.46 9.04(in America) (0.38) (0.81) (1.03) (1.27) (1.44) (4.46)Others 0.88 1.46 1.07 1.03 1.60 2.69

6 Primary manufactured goods 10.40 28.76 41.37 52.45 65.71 87.69EEC 3.52 10.77 14.96 24.23 31.09 . 36.62EFTA 1.53 4.01 5.99 3.55 4.58 6.77USA 1.46 3.54 6.00 5.86 7.73 10.28LDC's 2.53 7.23 10.31 12.39 15.26 22.19(in America) (0.95) (2.98) (3.6)) (4.'5) (4.16) (5.64)Others 1.36 3.21 4.11 6.42 7.05 11.83

7 Machinery and transport equipment 12.32 32.60 43.51 53.14 65.32 91.05EEC 1.03 8.89 14.39 21.51 24.79 38.82EFTA 1.10 4.00 6.05 4.45 5.51 8.91USA 0.80 2.23 2.71 3.40 3.75 4.24LDC's 8.99 14.80 17.62 20.69 27.51 33.41(in America) (7.77) (10.36) (12.42) (9.16) (10.59) (11.97)Others 0.40 2.68 2.74 3.09 3.76 5.67

8,9 Other manufactured goods andvarious items, n.i.e. 7.71 22.58 31.63 44.11 46.09 59.24EEC 1.40 3.89 6.45 12.73 15.56 23.27EFTA 0.71 2.12 2.83 2.16 2.75 3.83USA 2.43 9.60 13.54 19.04 17.05 18.13LDC's 2.73 5.41 6.76 8.08 8.10 10.11(in America) (2.34) (4.25) (5.37) (6.31) (6.18) (7.18)Others 0.44 1.56 2.05 2.10 2.63 3.90

0-9 Total Exports 75.21 167.09 205.66 245.25 302.69 407.97EEC 25.16 60.32 76.37 110.87 144.73 193.49EFTA 15.01 29.99 35.31 20.44 25.01 33.36USA 8.81 23.57 31.52 40.01 41.88 47.86LDC's 18.58 37.66 45.26 53.05 66.82 95.31(in America) (13.05) (21.97) (25.35) (24.17) (26.73) (34.52)Others 7.65 15.55 17.20 20.88 24.25 37.95

Source: Ministerio de Hacienda, Direcci6n General de Aduanas, Informe mensual sobre el comercio exterior (annual summaries)

Industrial Projects DepartmentMarch 1976

ANNEX 2.1SPAIN Table 10

INDUSTRIAL RDflE PROJECT

DIRECTION OF TRADE - IMPORTS BY MARXETS OF ORIGIN

(in billion of pesetas)

SITC 1966 1970 1971 1972 1973 1974

0,1,4 Food, beverages, tobacco 36.72 40.65 47.97 56.79 86.67 108.48EEC 5.27 5.42 7.28 11.35 14.26 20.44EFTA 3.66 2.83 4.50 2.47 4.34 3.23USA 10.75 4.73 5.51 9.02 19.89 28.23LDC's 15.43 25.75 27.84 27.44 41.61 50.25(in America) (12.94) (21.46) (22.88) (21.29) (32.96) (40.23)Others 1.61 1.92 2.84 6.51 6.57 6.33

2 Raw materials 33.54 56.71 60.32 75.50 84.91 136.11EEC 4.58 6.44 6.37 14.04 16.30 23.83EFTA 4.49 7.33 8.90 6.69 6.40 11.84USA 7.43 17.47 17.42 18.08 21.27 36.97LDC's 11.79 18.08 20.89 27.41 29.11 4j.75(in America) (2.97) (5.48) (5.70) (8.63) (6.83) (14.63)Others 5.25 7.39 6.74 9.28 11.83 17.72

3 Petroleum, petroleum products 20.68 43.92 56.82 62.89 72.81 224.86EEC 1.53 2.20 2.71 3.69 3.64 9.91EFTA 0.29 0.40 0.46 0.16 0.15 0.17USA 1.41 5.27 4.87 4.11 3.39 7.16LDC's 17.06 35.46 47.29 52.71 63.09 201.71(in America) (2.68) (2.17) (2.20) (1.99) (2.14) (6.10)Others 0.39 0.59 1.49 2.22 2.54 5.91

5 Chemical products 18.77 34.99 36.81 47.81 60.60 89.58EEC 11.20 19.10 19.71 30.38 41.59 62.00EFTA 3.66 6.11 6.93 3.96 'p.56 5.98USA 2.68 6.43 6.28 8.00 8.91 13.36LDC's 0.64 1.67 2.05 2.42 2.56 3.88(in America) (0.27) (0.61) (1.03) (1.22) (1.01) (1.76)Others 0.59 1.68 1.84 3.05 2.98 4.36

6 Primary manufactured goods 35.45 53.09 41.82 52.28 69.96 100.84EEC 19.53 21.56 21.12 34.49 44.61 59.75EFTA 7.76 10.66 10.43 5.92 8.20 12.44USA 2.19 5.71 2.97 3.31 4.24 8.39I'mC's 2.48 4.67 2.75 3.42 5.62 9.35(in America) (1.09) (1.86) (1.33) (1.25) (2.44) (2.70)Others 3.49 10.49 4.55 5.14 7.29 10.91

7 Machinery and Transport equipment 60.26 85.52 84.61 115.97 153.11 185.38EEC 34.49 45.77 49.07 75.94 100.76 119.15EFTA 13.67 16.00 17.22 9.77 13.86 16.03USA 10.86 21.25 14.85 24.18 29.65 38.81LDC's 0.16 0.21 0.30 0.60 0.83 1.42(in America) (0.04) (0.09) (0.18) (0.16) (0.24) (0.48)Others 1.08 2.29 3.17 5.48 8.01 9.97

8,9 Other manufactured goods andvarious items, n.i.e. 10.02 17.42 19.57 26.62 34.53 43.43EEC 4.11 6.85 7.84. 15.14 19.81 24.47EFTA 3.69 4.50 6.45 4.40 5.42 6.88USA 1.21 1.88 2.10 2.64 3.19 4.44LDC's 0.39 0.64 0.86 1.20 1.96 2.56(in America) (0.16) (0.18) (0.19) (0.35) (0.46) (0.47)Others 0.62 3.55 2.32 3.24 4.15 5.08

0-9 Total Imports 215.44 332.30 347.92 437.86 562.60 888.68EEC 80.71 107.34 114.10 185.03 240.97 319.55EFTA 37.22 47.83 54.89 33.37 42.93 56.57USA 36.53 62.74 54.00 69.34 90.54 137.36LDC's 47.95 86.48 101.98 115.20 144.78 314.92(in America) (20.15) (31.85) (31.51) (34.89) (46.08) (66.37)Others 13.03 27.91 22.95 34.92 43.38 60.28

Source: Ministerio de Hacienda, Direccion General de Aduanas, Informe mensual sobre el comercio exterior (annual sammaries)

Industrial Projects DepartmentMarch 1976

SPAIN

INDUSTRIAL RD&E PROJECT

BALANCE OF TECHNOLOGICAL PAYMENTS

(in millions of US$)

RECEIPTS PAYMENTS BATANICERoyalties, Know-how Royalties, Know-how Roy'lties, Know-hov-Licenses (Tech.Asst) Total Licenses (Tech.Asst) Total Licenses (Tech.Asst) Total

1960 9.35 2.05 11.140 19.13 2.20 21.33 -9-78 -0.15 -9.93

1961 2.91 0.47 3.38 21.75 4.58 26.33 -18.84 -4.11 -22.95

1962 5.07 0.04 5.11 23.39 5.08 28.47 -18.32 -5.04 -23.36

1963 11.11 0.12 11.23 31.32 11.28 42.60 -20.21 -11.16 -31-37

1964 6.08 0.54 6.62 34.16 21.99 56.15 -28.08 -21.45 -49.53

1965 4.51 0.71 5.22 44.71 35.17 79.88 -40.20 -34.46 -74.66

1966 3.53 3.09 6.62 52.68 44.26 96.94 -49.15 -41.17 -90.32

1967 3.31 4.60 7.91 61.00 48.94 109.94 -57.69 -44.314 -102.03

1968 3.60 7.80 11.40 58.75 50.39 109.14 -55.15 -42.59 -97.74

1969 3.07 6.11 9.18 76.38 56.60 132.98 -73.31 -50.49 -123.80

1970 3.65 12.34 15.99 81.61 52.16 133.77 -77.96 -39.82 -117.78

1971 4.05 12.80 16.85 86.56 68.37 154.93 -82.51 -55.57 -138.08

1972 4.26 16.41 20.67 112.25 86.40 198.65 -107.99 -69.99 -177-98

1973 5.60 23.31 28.91 152.57 109.39 261.96 -146.97 -86.08 -233.05

1974 7.44 28.75 36.19 182.55 133.11 315.66 -175.11 -104.36 -279.47

Source: M1.inisterio de Comercio, Balanza de Pagos de Espafia 1974, Madrid 1975I..

Industrial Projects DepartmentMarch 1976

SPAIN

INIWJSTRIAL RD&E PROJECT

TRENDS IN SPAIN'S DEPENDENCE ON FOREIGN TECHNOLOGY

Total Paymentsfor Foreign In % Of Manufacturing In % of TotalTechnology GDP In % of Indus- In % of Imports Payments on

(Ptas.million) Old Series New Series rial vxports/i to IndLatryUL Oarrent Account

1961 1,580 * * 17.6 4.8 2.1

1965 4,793 1.46 * 26.1 14.6 2.4

1970 9,364 1.67 1.*44 11.4 4.8 2.4

1971 10,845 1.76 1.50 9.4 5.7 2.6

1972 12,808 1.74 1.45 8.6 5.3 2.5

1973 15,201 1.40 8.7 5.0 2.2

1974 18,151 . 1.38 7.7 4.3 1.8

Lt Excluding petroleum prodacts

Sources: Contabilidad Nacional de Espafla and Hanisterio de Comercio

Industrial Projects DepartmentMarch 1976

A2 iEX ..Table 13a

INIJSTRIAL RD&E PROJECT

SPAIN'S EXENDITURE ON R&D

A. Total R L D Excenditure (Current and Capital Expenditure)

Million Million In Percent of-Current Ptas.of Index GNP at CurrentPtas. 1970 (1970=100) Market Prices

1967 3,838 4,386 74 0.211969 4,951 5,223 88 0.221970 5,946 5,946 100 0.231971 8,540 7,918 133 0.291972 10,343 8,862 149 0.301973 13,146 10,101 170 0.311974 16,178 10,922 184 0.32

3. R & D Expenditure by Sector of Performance (million pesetas)

Govern-nent Higher

Research Educa- Er.ter-Total % Centers % tion % prises/1 %

1967 3,838 (100.0) 2,027 (52.8) 111 (2.9) 1,700 (44.3)1969 4,951 (100.0) 2,616 (52.8) 168 (3.4) 2,167 (43.3)1970 5,946 (100.0) 3,085 (51.9) 205 (3.4) 2,656 (44.7)1971 8,540 (100.0) 3,749 (43.9) 854 (10.0) 3,937 (46.1)1972 10,343 (100.0) 4,642 (44.9) 739 (7.1) 4,962 (L.BCo)1973 13,146 (100.0) 5,800 (44.1) 1,000 (7.6) 6,346 (48.3)1974 16,178 (100.0) 6,850 (42-3) 1,150 (7-1) 8,178 (50.6)

C. Intra- and Extranural Expenditure on R & D (million pesetas)

Intra- Extra-mural muralExpen- Dxen-

Total diture % diture

1967 3,838 (100.0) 3,516 (91.6) 322 (8.4)1969 4,951 (100.0) 4,621 (93.3) 330 (6.7)1970 5,946 (100.0) 5,548 (93.3) 398 (6-7)1971 8,540 (100.0) 8,068 (94.5) 472 (5.5)1972 10,343 (100.0) 9,816 (94.9) 528 (5.1)1973 13,146 (100.0) 12,500 (95-1) 646 (4-9)1974 16,178 (100.0) 15,400 (95.2) 778 (4.8)

/1 Including research associations

ANNEX 2.1Table 1 3b

SPAIN

INDUSTRIAL RD&E PROJECT

SPAIN 'S EXPELDITURE ON R.D

D. Intramural ExDenditure on R & D by Subject Area (million pesetas)

Engineering Agricultureand and

Total of which in: Technology Livestock Others

1967 3,516 1 ,325 209 1,9821969 4,621 2,910 220 1,4911970 5,548 3,455 272 1,8211971 8,068 4,814 483 2,7711972 9,816 5,631 782 3,4031973 12,500 7,040 920 4,5401974 15,200 8,700 1,200 5,500

Sources: Instituto 11acional de Estadistica,Estadistica sobre los actividades en investigaci6ncientifica y desarrollo tecnolo6gico (various .years);Consejo Superior de Investigaciones Cientificas,Patronato "Juan de la Cierva"; and mission estimates.

Industrial Projects DepartmentMarch 1976

SPAIN

INDUSTRIAL RD&E PROJECT

INDUSTRIAL R,D EXPENDITtTRES (RTRA AND EXTRAMIRAL EXPENnTTURES3

(in million pesetas)

of which: of which:

1967 1969 1970 1971 1972 INI 2/ 1973 INI 1974

Total Manufacturing 1,561 100% 1.913 100% 2.372 100% 3,516 100% 4,395 100% (1.523) 5625 1007 (1.300) 7260 100%

of which:

Food Industry 48 3.1 57 3.0 90 3.8 48 1.3 59 1.3 (19) 40 0.7 (8) 60 0.8

Textile Industry 1/ 18 1.1 17 0.9 18 0.8 45 1.3 57 1.1 - 40 0.7 - 50 0.7

Chemical Industry 490 31.4 647 33.8 856 36.1 1,291 36.7 1,595 36.3 (195) 2,010 35.7 (163) 2,650 36.5

Basic Metal Industry 81 5.2 200 10.5 214 9.0 217 6.2 264 6.0 (207) 280 5.0 (121) 350 4.8

Metal Transformation 762 48.8 ) (122) (71)

913 47.7 1,087 45.8 1,817 51.7 2,299 52.3 3,145 55.9 4,000 55.1

Transport Equipment 93 6.0 ) (980) (846)

Other Industries 69 4.4 79 4.1 107 4.5 98 2.8 131 3.0 - 110 2.0 - 150 2.1

I/ Including apparel and shoes.2/ Excluding Centro de Estudios Tecnicos de Materiales Especiales - CETHE.

Sources: Consejo Superior de Investigaciones Cientfficas, Patronato "Juan de la Cierva", Inatituto Nacional de Industria (INI),

Memoria 1972, 1973, Instituto Nacional de Estadfstica, Eatadistica sobre las actividades en investigacion cientffica y desarrollo

tecnol(;gico (various years), and mission estimates.

Industrial Projects DepartmentMarch 1976

SPAIN

INDUSTRIAL RD&E PROJECT

PUBLIC INVESTMENTS IN R&D

DURING THE III PLAN (1972-75)

(in million of pesetas)

1972 1973 1974 1975 1972-75 7.I. Technological Development 2 3 3275.131531 3 421.7 12,202.5 82.9

1.1 Major Projects 317.7 340.0 360.0 380.5 1,397.8 9.5

of which:JEN Nuclear Reactor 228.2 200.0 180.0 164.8 773.0Oceanographic Plan 89.1 140.0 180.0 215.7 624,8

1.2 Defense Research 158.0 525.1 613.2 710.8 2,007.1 13.6of which:Participation in European Space Program 122.0 290.0 355.0 433.0 1,200.0STOL aircraft - 100.0 100.0 101.8 301.8Other Defense Research 36.0 135.1 158.2 176.0 505.3

1.3 Agricultural Research 376.7 443.0 465.0 482.9 1,767.6 12.01.4 Industrial Research 948.0 1,o9/.0 1,Jo.2 1,305.6 4X800.8 32.6

of which:Joint Research Plan Projects 112.3 410.0 525.0 634.9 1,682.2

"Mercure Project" of the Air Ministry 475.6 383.6 - - 859.2Junta de Energia Nuclear (JEN) 81.6 70.0 65.0 60.0 276.6

INTA 100.0 20.0 20.0 20.0 160.0

Other Projects 178.5 513.4 540.2 590.7 1,822.8

1.5 Environmental Protection 50.5 98.0 118.0 137.3 403.8 2.81.6 Research in Public Works 74.9 84.0 93.5 103.0 355.4 2.41.7 Training of Research Personnel 401.4 329.0 259.5 180.1 1,170.0 8.0

1.8 Other Areas 25.8 59.0 93.7 121.5 300.0 2.0

II. Basic and University Sponsored Research 735.2 391.2 433.3 472.0 2,031 7 13.8

III. Research Equipment 76.0 110.2 135.1 164.5 485.8 3.3

TOTAL I, II, III 3,163.8 3,776.5 3,721.5 4,058.2 14,720.0 100.0

SOURCE: III Plan de Desarrollo Econ.omico y Social,Investigacio'n Cientffica y Desarrollo Tecnologico, and Ministerio de Industria

Industrial Projects Department

March 1976

{X

I-.

AULEX 2.1Table 16

SPAI1i

INDUSTRIAL RD&E PROJECT

PROPOSED PUBLIC INVESTMENTS IN RESEARCHiihD1D2EVELOPMN IT (ICL. BA3I(: IN- ATIOL )DURl,G THE IV DEVELOPMNT PLAN (1976 - 79)

02 Sector/Prograin Amount in million pesetas

iesearch and Development

01 Gener ..l ictivities 2,095 8.709 Energy 1,775 7 403 Environment 289 1,204 Natural siescurces 2,?h8 9.305 Human aresources 549 2 306 Napterials and Technologies 1 ,9940 8.007 Research Infrastructure 5,649 230408 Defense 3,565 1)4.809 Health 443 1o81C Territory and Oceans 605 20511 Space 4, 988 20,6

Subtotl-al 24,146 10000

Fasic Information

12 Geographic Information 1 ,50013 Statistics 2 ,20014 Data Processing 434

Total 28,280

Fir.anc ing:

-budget 26,280External Sources 2,000

Source: TV Plan I acional de Desarrollo 1976-79 ( 1. draft, Ikovemter 1975)

Irdustrinl ProJects DepnrtmentM-rch 1976

SPAIN

INDUSTRIAL R06E PROJECr

TOTAL EXPENDITURES IN R6D IN SELECTED COUNTRIES

MAJOR INDICATORS

Gross National Expend. in R & D Per Capita No. of ScLen- Total M/bpowor Total N Dpower papsodit-re iC Cu-r-t Eapeodit-0e in R & DPopulation GNP per Expeanditure in a. percentge of Eapenditure ti.te & Rngin- in R & D per R & D (in 7) by S11tor of by Type of Activity

Countrv Year Mid-ytea Capita R & D CNP - Hnrket Prices In R & D Pers in R & D 10,000 pop. Perfornc - (in 7.)(in thousands) (US) (USS *ill.) - (ratio) per 10,000 pop (ratio) B..ineoa Cov't. H.Edic. P.N.P. 0o1ic Applied Daweloprent

3,Spain 1970 33,645 1,020 77.9 - 0.2 2.3 2 5 42.7 54.0 3.3 - 19.3 35.9 44.9

Acotria 1970 7,390 2,010 77.6 0.6 10 4 13 62.0 7.6 29.8 0.5 - - -

.elgi,a 1971 9,710 2,960 363.7 1.2 38 7 25 56.7 13.1 29.7 0.5 32.7 41.7 25.6C.nada 1971 21,600 4,140 1,145.4 1.2 47 10 24 37.6 35.2 27.3 - 21.4 38.1 40.6Denmark 1970 4,921 3,190 143.2 0.9 29 8 22 47.7 24.6 22.7 5.0 22.0 27.0 51.0

Vinl-nd 1971 4.680 2,550 90.9 0.8 20 9 19 59.9 19.3 18.7 2.1 20.1 33.4 46.5France 1971 51,250 3.360 2,920.4 1.8 57 11 39 56.0 28.1 14.8 1.1 19.0 32.0 49.0Germany, F.R. of 1971 61,290 3,210 4,499.1 2.1 73 14 46 67.4 10.4 19.1 3.1 30.7 - -

Greece 1971 8,975 1,250 17.9 0.2 2 1 3 25.9 56.9 15.0 2.2 23.1 45.4 31.5Iceland 1971 206 2,480 2.7 0.5 14 6 11 1.1 78.9 18.6 1.3 20.5 39.5 40.0

Irel-nd 1971 2,970 1,510 32.8 0.7 11 6 14 40.8 44.7 13.8 0.7 10.0 40.5 49.4Italy 1971 54,078 1,860 929.0 0.9 17 5 13 60.8 21.7 17.5 - 22.1 39.9 37.9Japan 1971 104.660 2,130 4,041.0 1.6 39 19 41 66.5 13.5 18.6 1.4 37.3 19.1 43.6

Notherlands 1971 13.190 2,620 783.8 2.0 59 a 41 60.3 17.6 20.4 1.7 > 44.6 C 55.4Norvay 1970 3.879 2,860 111.6 1.1 29 9 23 49.8 20.3 29.4 0.5 23.2 31.2 45.6PortuRal 1971 9,716 730 23.9 0.3 3 2 7 27.6 49.8 18.8 3.8 - -Sveden 1971 8,110 4,240 538.3 1.6 66 12 39 64.7 12.8 23.0 0.1 16.7 19.8 63.5S,itaerlsad 1971 6,320 3.640 473.8 1.9 75 22 - 80.4 6.3 13.3 _- - -United Kingdom 1970 55,730 2,270 2,596.5 2.3 47 _ _ 64.5 24.3 8.4 2.8 7.5 23.1 60.8USA 1971 207,050 5.160 27,527.6 2.6 133 26 - 66.5 15.9 13.8 3.9 14.7 22.5 62.8Hexato 1971 52,422 700 82.7 0.2 1.6 - - - - - - - - -Veneaueln 1970 10,399 980 21.7 0.2 2.1I.rael 1970 2,910 1,960 69.7 1.1 24T.rkey 1968 33,550 310 41.5 0.3 1.2 - - - - - - - - -

Note.: 1/ The exchoge rates need to conv,rt eaediture data in 1970 end 1971 vare obtained from the Rcononic and Statietico Departsent of OECD end they repreocnt annual averages based oar trimstril avera..ge..

A list of the rete u"ad appears In the aien sourcs given belos,

2/ Th. four sector. are a) Business Enterprise (Business), b) General Geveremant (Gov't.), c) Higher Education (H. Educ.), and d) Private Non-Profit Institutes (P.N.P.) as defined by OECD.T/ The OECD e.hapge rate uced for Spain wes US5 1 - 69.76 Pea.tas

Surce: OCD, Survey of the Resources Devoted to I & D by OECD Member Count.1o., 1971 (DAS/SPR 74.46)- Last three colun (current expenditures by type) a. wll PC R 6 D dat on the lst four countries (Hexico, Venasula-, Israel and Turkey) fri UNESCO Btati.tiacl Yearbook, 1973, Table 7.2

Population nd GNP per Capita figures fro the 1972 sd 1973 World Bank Atlas.

$#.L . A y eoMIy dinned -o.&d.I I,__TEAf9 -n-olod Or di-reo,v ofr .4..

Industrial Projects Depaetrent fed. eru.rr,on, wilboel eey ,po ih: pe.,"c .. _March 1976

, - ,,,i wJ ,^ A., CaNily dir¢ood W_nh lb.-- .,r skN iO. kocabohe brA 06:, : ci8fiz

rr..:i..1 ai nrrr, iew. h01roor,rra ifserrnd .. Sytkdli ,or ,.c ..wJi

kr.oi.k.t.e hirncled ,,ol.d. Iho r,rlr.obeo.jrr ol roeo, 0i .l , errrnirrls. .Ik .r . . r. .. vs o,r Or neIr.,.

derrp zlnrprrorrhs nl .4 rrr,. .n. ;rI. ,,,o

SPAIN

INDUSTRIAL RD&E PROJECT

SELECTED COUNTRIES' EXPENDITURES TN R&D BY SECTOR

Composition of Total R&D Expenditures By Industry, 1970-71(Percentages)

F.R. OF

Sectors USA UK GERMANY FRANCE ITALY JAAN KOREA CANADA GREECE IRELAND PORTUGAL SPAIN

Manufacturing 96.3 93.9 96.0 91.4 89.0 92.0 82.6 81.4 49.5 78.6 56.1 88.8Machinery 9.7 10.7 9.1 8.3 3.5 10.7 2.1 7.8 0.9 2.8 1.6 6.5

Transport Equipment 8.3 7.3 14.8 8.5 25.3 11.1 3.1 2.9 0.4 4.0 2.3 12.1Electrical Machinery 24.2 23.4 28.1 24.6 22.7 26.9 1.5 26.9 9.7 8.8 4.9 20.8

Chemicals(incl.Pharmaceut.) 10.1 12.2 28.2 13.5 24.2 21.9 34.6 11.1 15.3 10.2 19.2 28.7

Petrol Products 3.4 1.8 0.5 3.7 0.8 1.1 1.4 4.0 1.5 - - 4.4

Air Craft, Missiles 29.0 25.1 7.0 23.0 - - - 8.0 - - - 2.4

Basic Metals 1.5 2.7 4.6 2.3 3.9 7.0 3.0 1.6 2.3 - 2.0 1.4

Metal Products 1.0 1.2 0.4 0.9 - 1.2 - 1.3 3.4 4.5 7.2 3.9

Foods 1.1 3.0 0.4 1.3 0.9 3.4 14.9 2.8 5.4 21.1 7.3 3.9

Miscellaneous 8.0 6.5 2.9 5.3 7.7 8.7 22.0 15.0 10.6 27.1 11.6 4.7

Non-manufacturing (incl.Agriculture & Mining) 3.7 6.1 4.0 8.6 11.0 8.0 17.4 18.6 50.5 21.4 43.9 11.2

TOTAL INDUSTRY 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: KOREA - Handbook of Science and Technology, 1973.

- For Canada, Greece, Ireland, Portugal and Spain data was derived from the Survey of the Resources Devoted to R & D. DSTI/SPR/75.5,published by OECD, and regrouped.(this data was only for the Business Enterprise Sector)

Industrial Projects Department R

March 1976 m.

ANNEX 2.1

SPhlTV Table 19

INDUSTRIAL RDcE PROJECT

EXPENDITURES AhD PERSONiNEL

IN R&D IN THE BUSIXESS ENTERPRISE SECTOR, 1971

Total Total Full-timeIntramural Full-time Scientists &Expenditures Personnel Engineersin R&D working on working on

R&D (units) MAD (units)

Agriculture 0.5 37 9Mining 60 Electrical machinery 5.9 7 7Electronic equipment & parts 15.0 619 194

Sub-total 20.8 1,066 268Chemicals 13.3 696 207Pharmaceuticals 15.4 859 339Petroleum Refining 4.4 315 45

Sub-total 33.0 1,870 591Aircrafts - sub-total 2.4 159 34Motor Vehicles 5.6 323 34Ships 5.9 500 29Other transport o.6 17 7

Sub-total 12.2 840 69Ferrous metals 1.4 60 18Non-ferrous metals 0.9 23 5Fabricated metal products 1.5 88 17

Sub-total 3.9 171 40Instruments o.6 23 2Machinery 5.9 309 56

Sub-total 6.5 332 58Foods, Beverages & tobacco 3.7 105 47Textiles, footwear & leather 0.7 69 8Rubber & plastic products 1.2 63 15

Sub-total 5.6 238 69Stone, clay & glass 3.1 142 30Paper & Printing 1.2 32 11.4ood, cork & furniture 0.0 3Other manufacturing 0.1 5 1

Sub-total 4.4 182 41TOTAL MA14UFACTURING 88.8 4.858 1Utilities 0.2Construction 1.8 137 35Transport & storage 5.3 307 82Communications 0.9 96 25Commercial & engin. services 1.5 45 25Other o.4 22 11TCTAL SERVICES 10.2 614 183TOTAL INDUSTRY 100.0 5,570. 1,370

Source: OECD, Survey of the Resources Devoted to R & D by OECD Member Countries, 1971DSTI/SPR/75.5

Industria& Pro,iects DepartmentMarch 1976

ANNEX 3.1Page 1

SPAIN

INDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

GENERAL CHARACTERISTICS OF R&D IN SPAIN

1. Compared to other countries at about its stage of industrial develop-ment, Spain does very little industrial research, development and engineering(RD&E). Its industry is for the most part based on technology imported intactfrom abroad, with little effort of digestion or adaptation.

2. According to official statistics, Spanish allocations for all researchand development in 1972, the last year for which detailed statistics are avail-able, totalled $160 million, or 0.3% of GNP. (See Annex 2.1 for estimates for1974). Research and development spending at the enterprise level was $77 mil-lion, or 43% of the net foreign exchange costs of foreign licenses and patents.These figures are in the range typical of ocuntries at a much lower stage ofeconomic development. While they are merely indicators and should not be usedas the basis for definitive judgments, they do appear to indicate that Spainis excessively dependent on undigested foreign technology.

3. Of the national expenditure on industrial R&D in 1972, 56% was spentby private industry, 35% by public sector industry (INI), and 3% in variousgovernment laboratories (including defense).

4. Public sector enterprises spent Ptas. 1,523 million on research in1972. The R&D budget of the major civilian public sector industries, those ofthe National Institute of Industry (INI), are shown in Table 1. It is highby Spanish but not by international standards, and constituted about one-thirdof the total R&D expenditures of Spain's public sector. Expenditures areconcentrated in automobiles (27%), and aircraft and transport (25%), with ironand steel metallurgy (14%), refining and petrochemicals (12%), and shipbuilding(12%) receiving lesser but still substantial amounts.

5. In September 1973, a Bank mission made a brief review of industrialresearch at the enterprise level in Spain and visited two dozen Spanish-held,small and medium-sized firms known for their innovative activity, chiefly inthe electronics and machinery sectors. They found among these entrepreneursa high degree of awareness of the importance of international competitivenessand of the contributions of technological innovations thereto.

6. To a varying degree, the firms had already been forced to strivefor essential product improvements and new products, often developing aremarkable capability for quick adjustments to changing market conditions.Most of the electronics firms and many of the equipment producers employelectronics and mechanical engineers of international quality. These en-gineers had made it possible, in many cases, to initiate new product lines,

ANNEX 3.1Page 2

frequently on the basis of prototypes copied from foreign samples. Subsequentmodifications of the product were often highly innovative. However, nearlyall these adjustments seem to have been in response to existing market op-portunities rather than to fill future market possibilities. The conceptof a technical innovator/entrepreneur who identifies a "hole in the market",invents a device to exploit it, and builds a company or a division of a largerenterprise around this technological idea, does not appear to exist in Spain.

7. These very innovative and able engineers constitute a substantialtechnological potential which is not being exploited by Spanish firms, becauseof conservatism and risk-aversion, both in the government and in the privatesector, even in industries with a reputation for innovation. In the words ofone mission member, "some of the Spanish product development engineers aregenerally not allowed to do anything that is really new or imaginative."

8. There are many manifestations to this conservatism. Spanish entre-preneurs and government officials in many cases are not aware of the highquality of their own engineers, do not have faith that Spanish brands can becompetitive, and prefer to rely on "name brands" from foreign countries.Spanish entrepreneurs often are very reluctant to take any risks, take highincomes for themselves at the expense of reinvestment in the firm, and do notinvolve their employees in the financial structure (and hence the motivationalstructure) of the company.

9. The production engineers, for their part, suffer from a fear offailure and risk, and a possibly realistic conviction that any innovativeideas they may have will not be accepted. An engineer with an idea rarelyif ever has had the opportunity to form his own company to try to exploit it.Until very recently it would have been virtually impossible for such a manto obtain Bank credit. Equally important, Spanish design engineers oftenlack both management and production skills--as illustrated by a number offirms whose products were excellently conceived and designed but which weresuffering badly from poor general and production management.

10. Still, there exist Spanish firms both in the public and private sec-tors, which are exporting novel products based on their own technology and arealso exporting the technology itself in the form of licenses. In the mecha-nical machinery field, for example, the mission visited a manufacturer ofcircular knitting machines with a relatively large export business. The suc-cess of its products is due, to a large extent, to the availability of cleverlydesigned mechanisms within their mechanical equipment and to the finding byits founder of a "hole in the market" some 25 years ago in circular knittingmachinery. The continued success of the firm depends on its ability to manu-facture and its mechanical expertise and to further develop its know-how ininternational marketing. The mission also visited a shipyard of an INI (publicsector) firm which is exporting products and technology based on a toroidalsteering gear for ships, a major design innovation which substantially reducesthe number of parts needed. In the electronics field, a number of firms dis-played not only first class design and up-to-date technology but also excellentproduction management. Spanish skill at mechanism design was especiallynoteworthy.

ANNEX 3.1Page 3

11. The major finding of these visits was that the existing acLivitiesof research and development institutions in Spain were not well suited toconceive the kind of research and development needed to maintain competitive-ness in existing product lines and to develop new products which would fillimportant future markets. The investigation concluded that a new technolo-gical strategy was needed, with a time horizon extending to 10-15 years.

a. The Climate in Spain for Industrial Research and Development

12. There are a number of broad barriers to innovation: (a) fragmenta-tion of research work and the lack of financial and administrative indepen-dence in most existing research institutions; (b) lack of readily availabletechnological, management, and marketing assistance; (c) poor communicationamong professional groups and among firms in potentially complementary areas,in part because of the difficulty of forming professional and business organi-zations outside of established patterns; (d) lack of venture capital andexpansion capital, and the practice of the banking system of providing creditonly strictly against collateral; (e) limitations of entry of firms below acertain size into certain sectors in which innovation by smaller firms is afrequent pattern 1/; (f) high tariffs on imports of components and of laboratoryand testing equipment (even if there is no relevant domestic production toprotect).

13. In many industries, such as electronics, small firms started "ona shoestring" by innovators have often grown to great importance in other coun-tries. In Spain, such an innovator must start with his own capital; he cannotas a rule obtain a loan based on his future business prospects, or even onthe guarantee of future orders. (According to government regulation, anelectronics firms, for example, must start with Ptas. 250 million in initialcapital, a large sum). When he expands, he must often adjust his course ofaction to satisfy the banks which supply him with capital and which mightinfluence the management of his firms and prevent it from undertaking promisingand innovating but risky investments. Potential purchasers of his productswill often instinctively turn to "name brand" foreign producers rather thantrust Spanish capabilities, of which they are likely to be unaware.

1/ While these limitations to entry are reasonable from the point of viewof the persistent fragmentation of many industries into too many produc-tion lines, they put, on the other hand, a serious constraint on researchwork that typically emerges from small enterprises and workshops in cer-tain other fields, as is the case with innovations in the field of elec-tronics. In still other fields, it may be possible to encourage innova-tion in small-scale industry by means of research associations and otherforms of support.

ANNEX 3.1Page 4

14. In some cases, there are industrial problems which, although theyappear to be technological or financial, are in fact due to management. Forexample, there seems in many cases, to be a lack of attention to questions ofjob design, safety, plant layout, and materials and inventory handling andcontrol, especially in small and medium firms and in large job-shop producers.Since most of the firms visited were at the time limited simply by inabilityto produce enough to fill orders, process improvements (as opposed to productdevelopment) would have produced a rapid tangible return. Conditions havechanged since then, but attention to production management would still be

useful.

15. The trend of interest among students at graduate business programsappears to be toward seeking employment in larger firms and multinationalfirms, and away from smaller and family firms. The schools find a readyinterest in the marketing and financial aspects of management, as opposed tothe operating, production and technical aspects. There seems to be a parti-cular gap in the development of skills, services, and personnel for middleand smaller firms, and for dealing with problems of increased productivityand efficiency.

16. Finally, many Spanish entrepreneurs, particularly in certain small-scale industries, are innovative by instinct, but are handicapped by theirsmall size and lack of personnel and facilities. Their engineers are pro-duction engineers, not researchers or designers. They lack the personneland the expertise to undertake market studies. Their communications withother firms and institutions are limited. As a consequence, such entrepre-neurs may lose their present market shares over time, both domestically andabroad, with undesirable effects on employment and regional development.

17. It is necessary to remove existing institutional barriers to inno-vation and to stimulate domestic investment of venture capital, both in theinnovative process itself (that is, research and development activities), andin the commercial application of the fruits of innovation. For example, theconditions required for establishment of new firms should be carefullyreviewed so as to achieve a proper balance between the need to prevent ex-cessive sectoral fragmentation and the danger of constraints on innovation.A review is needed of tariff schedules applicable to components and testingequipment which, although not manufactured in Spain, are needed for themanufacture and testing of Spanish machines and electronic equipment. Thesetariffs cannot protect Spanish industry, but can inhibit it from improvingthe quality of its products and from developing new ones. There are otherconstraints in the rules concerning professional organizations and the fiscaltreatment and administration of Government-owned industrial laboratories.

18. There is a further need to stimulate investment of venture capitalthrough incentives to encourage investment of domestic capital in riskyventures that may offer long-term advantages to Spanish technology. The

ANNEX 3.1Page 5

report of the Bank Industrial Mission (Growth and Change in Spanish Industry,November 16, 1973, Volume I, pp. 219-221) had made a number of suggestions forrelaxation of control and interventions in the financial and capital markets.The adoption of these suggestions would help free these markets and make themmore responsive to competitive rewards and costs. The French venture capitalinstitution Sofinnova (Societe pour la Financiation de l'Innovation) has servedas an interesting model and partner for the establishment of a similar Spanishinstitution.

19. Finally, programs of management education in Spanish universities andpolytechnics should be reviewed and opportunities sought in these and otherinstitutions to create educational programs which will teach management skillsof particular interest to small and medium firms.

B. Public Sector Industries

20. Enterprises of the INI Group appear to be at the forefront of manyfields of Spanish industrial research, with numerous cases of essential productimprovements and of new product developments, notably in transport equipment,machinery, and weapons. The wide range of INI activities, INI's designationto pioneer into new industrial ventures, and INI's comparatively great freedomto carry on its programs, combined to create relatively beneficial conditionsfor the allocation of research funds and the practical application of researchand development works. Even so, INI is not a research-oriented institution byinternational standards.

Table 1

R&D Expenditures in INI Manufacturing Enterprises, 1972 1/

Total R&DNo. of Spending R&D Spending

Sector Enterprises (Ptas. M.) in % of Sales

Automobiles 3 416 0.85Aircraft and transport 2 385 1.35Iron and Steel 3 207 0.50Refining and petrochemicals 5 190 0.40Shipbuilding 4 179 0.45Mechanical Engineering 7 121Food 3 19 0.60Chemicals 2 6 0.15

29 1,523

1/ Excluding Centro de Estudios Tecnicos de Materiales Especiales - CETME.

ANNEX 3.1Page 6

C. National Fund for the Development of Scientific Research

21. The chief instrument of Government support to research and develop-ment in industry at the enterprise level is the Advisory Commission on Scienti-fic and Technological Research (CAICYT) of the office of the Presidency. Ini-tially established (in 1958) to advise the Government on science and techno-logy policy, CAICYT has since 1965 actively promoted research and developmentactivities through the allocation of funds of the National Fund for the Deve-lopment of Scientific Research to public sector research centers, industrialresearch associations, and since 1968 also directly to enterprises.

22. The support of research and development projects of enterprises,carried out in the framework of joint plans between Government and enterprise,has actually become the main activity of CAICYT in recent years. Since theinitiation of this scheme in 1968, CAICYT has approved a total of 209 indivi-dual projects, costing on average Ptas. 23.4 million each. Of the totalresearch and development projects approved, about 75 percent were defined asindustrial projects. Together with the industry contribution, these projectsconstitute about 10% of all Spanish industrial research and development forthe period.

23. Joint research plans have the objective of supporting specificresearch program of an enterprise (or group of enterprises) with a view todeveloping new processes and products. The enterprise (or group of enter-prises) has to submit to CAICYT a detailed project proposal, including esti-mates of the cost and time needed to conduct the relevant research and deve-lopment work, and an assessment of the project's expected economic benefitsand risks of failure. After approval of the project proposal, the Government,through CAICYT, concludes a contract with the enterprise (or group of enter-prises), specifying the financial support of the Government and the Govern-ment's rights with respect to supervision, repayment, and, in some cases,transfer for the eventually accruing patent rights. It should be mentionedthat the scheme of the joint research plans does not attempt to activelypromote specific new industries nor does it concentrate in high priorityfields.

24. The financial participation of the Government in a "joint researchplan" is in the form of an interest-free loan, covering up to 50 percent oftotal project costs. The beneficiary of the loan, on the other hand, has todeposit the full amount of its financing share in the project with a bankprior to the execution of the "joint research plan". The Government loan isrepayable in case of commercial success of the new product or process. Therepayment schedule is different in each individual contract, but, in general,is related to the subsequent sales volume of the new product or to theearnings derived from the concession of licenses. The loan may not berepayable in case of failure to develop commercially viable new products.

ANNEX 3.1Page 7

25. The enterprise is responsible for the execution of the specifiedresearch program. It is free to conduct related works at its own facilitiesor to sub-contract parts of the research and development work to other enter-prises and research institutions. The enterprise (or group of enterprises)participating in a "joint research program" has, in general, full propertyrights over the newly developed technologies. Exceptions have been estab-lished, however, for technologies that are significant for national defensepurposes. Contracts of "joint research programs" may in certain cases alsocontain a clause requiring a previous authorization from the Government ifa license is to be sold abroad.

26. Applications for joint research plans have in general lagged behindthe willingness of CAICYT to fund projects. Informal conversations withprivate industry indicate that CAICYT is perceived as well-intentioned butslow and cumbersome in its operations and not always persuasive in the ra-tioonale for its decisions. In addition to the problems described above,CAICYT considers applications only once a year, forcing industry into an un-natural timetable, and does not announce its awards until almost a year later,a delay that some members of private industry regard as unduly long. Theseprocedural problems were cited by a number of industries as reasons for theirnot applying to CAICYT for funds. Those industries that had entered intojoint research plan acknowledge the difficulties, but indicated that they hadlearned to live with them--in some cases by starting the project with theirown funds and using CAICYT funds retroactively. CAICTYT procedures might beimproved by providing for more frequent panels and by involving more techno-logists from private industry and from outside Spain in the review process.The experience of the CAICTYT is the only precedent in Spain for directgovernment encouragement to industrial research at the enterprise level inthe private sector.

D. Research Associations

27. Four percent of the resources of CAICYT are devoted to support ofresearch associations, of which there were 17 in 1972. The associations arenon-profit organizations created by enterprises and other institutions of agiven sector to carry out cooperative research and to act as sectoral docu-mentation and training centers. Research associations are one of the fewviable mechanisms for providing external management and technological help toindustries which are broken up into many individual firms, each of whichwould by itself be too small to mount a research, development and engineeringeffort. The Research Association for the Machine Tool Industry, for example,has laboratory facilities at the Barcelona Polytechnic University, and helpswith trouble-shooting, economic surveys, quality control, and other forms ofassistance. It does not do innovative or proprietary research.

ANNEX 3.1Page 8

Table 1

Industrial Research Associations

Associations Number of Partici- Percent of Firms Percent of Capital(year of Establ.) pating Firms of the Sectors Representing

1. Leathers and con-nected indus-tries (1962) 26 15 80

2. Apparel (1962) 385 -- __3. Fruit and vege-

table canning(1963) 286 40 90-95

4. Lucerne (1963)5. Wood and cork

(1963) 517 1.3 __6. Insurers'

(1963) 91 9.7 907. Shipbuilding

(1963) 23 -- __8. Cotton Tex-

tiles (1963) 565 58 709. Paper (1963) 238 20 8510. Metallurgy,

Navarra (1964) 118 57 7611. Labor produc-

tivity (1955) -- -- -

12. Power, ASINEL(1955) 113 85 90

13. Sugar beets(1966) -- -- --

14. Metallurgy,Northwest(1967) 52 15-20 --

15. Machine tools(1968) 92 25 25

16. Printingindustry(1968) 66 -- --

17. Transport(1970) 14 -- __

Source: Presidencia del Gobierno, Comision Asesora de InvestigacionCientifica y Tecnica, Asociaciones de Investigacion, Memoria1972, Madrid 1973.

ANNEX 3.1Page 9

28. As things now stand, the overall impact of the research associationson Spanish industrial technology is very small. Total expenditures of the In-dustrial Research Associations in 1972 were only Ptas. 42 million ($0.65 mil -lion). The research staff comprised 116 persons. In many cases, associationscould be making a larger contribution to the industries they serve if they hadmore staff and equipment. There are specific needs for more effective univer-sity based research associations in apparel and shoe-making.

E. Universities and Institutes of Higher Education

29. Research at universities and other institutes of higher education isstill very limited in its scope and volume. In 1972, the share of universityresearch in total Spanish spending on R&D was only 7 percent. Universitylaboratories dedicate about two-thirds of their activities to basic research,predominantly to natural science and medicine, and are to date by and largeinsignificant to industry. Client-centered applied research at universitiesand polytechnics does make a useful contribution in a number of fields, butis still very limited in its scope. There are a number of industries, suchas machine tools and shoe-making, that would indeed benefit from the estab-lishment of specialized university-based research institutes; a more thoroughsurvey might reveal several more which would be useful. As in many aspectsof government-supported research in Spain, it is often much easier to getfunds for buildings and equipment than for personnel and running expenses.

30. The Barcelona Polytechnic is exceptional, in that its research cen-ters have succeeded in establishing collaboration with industry by acceptingcontracts to solve specific problems of industrial technology. Covering arelatively wide range of fields, they market their services like an enter-prise - an outstanding exception on the Spanish scene. Despite their briefhistory (the Barcelona Polytechnic was established in 1971), the center'sachievements are promising and should lead to a substantial increase oftheir contributions to industry over time. Achievements include the devel-opment of new product prototypes based on advanced technology. Still, asthings now stand, the Polytechnic can handle only a few projects a year,and has little overall impact on Spanish industrial technology.

F. Government Industrial Research Institutes

31. Government-funded industrial research institutes make only a smallcontribution to Spanish industrial technology, despite the fact that someare run by dedicated, well-trained researchers who are strongly motivatedto be of service to industry. The most important of the government-ownedlaboratories doing industrial research are the Patronato "Juan de la Cierva"of the Ministry of Education and Science, the Junta de Energia Nuclear (JEN)of the Ministry of Industry, and the National Institute of Aerospace Tech-nology (INTA) of the Air Ministry. (The last two are not primarily industriallaboratories, but provide services to industry in such specialized fields asanalytical chemistry and aerodynamics, respectively.) Together they accountfor only 3% of the total industrial R&D in Spain.

ANNEX 3.1Page 10

32. There is no doubt that the Patronato "Juan de la Cierva", wouldbenefit from increased budget, reorientation, redefinition of juridical frame-work, and revision of administrative procedures. However, it should be stressedthat the essential problem of Spanish industrial technology goes beyond the ques-tion of the administrative nature of the Patronato and the size of its budget.The fundamental need is for an industrial strategy to which the Patronato, ap-propriately organized and supported, and the other publically funded institu-tions could make their contributions. Brief descriptions of these institutesfollow.

G. The Research Centers of the Patronato "Juan de la Cierva"

33. The Patronato "Juan de la Cierva" is an autonomous organizationresponsible to the Higher Council on Scientific Research, which in turnreports to the Ministry of Education and Science. It administers 22 institutesconcerned with research activities in a wide range of matters, includingfood technology, fats and oils, construction materials, metallurgy, organicchemistry and pharmacology. Sixteen of the institutes are in the Madrid area.The Patronato group had an annual budget of Ptas. 975 million ($15 million) in1972, and .t employed a staff of over 1,600.

34. The Patronato maintains contact with industry through advisorycouncils in which industry is represented and which approve individualresearch projects. However, the administration of the Patronato is not ag-gressively market-oriented; indeed, it is not permitted by its legal struc-ture to actively market its services. Private contracts amounted to onlyabout Ptas. 45 million in 1972.

35. Most of the research laboratories of the Patronato are well equippedand technically up-to-date. Some of them even have gained some internationalreputation, such as the Instituto Eduardo Torroja de la Construccion y delCemento, and the Valencia-based Instituto de Agroquimica y Tecnologia deAlimentos. The efficiency of the Patronato laboratories, however, suffersto a considerable degree from inflexible administrative regulations, likethe Ley de Administracion y Contabilidad del Estado of 1911 (revised), whichwere intended to be applied to other public bodies than to a research organiza-tion of the public sector. A change of the legal framework governing theactivities of the Patronato will be necessary to achieve a greater degree ofindependence and market orientation in the Patronato.

36. There is considerable room for organizational improvement in thePatronato. Many institutes are too small for efficient and economic researchactivities. For example, the majority of the institutes employ less than 100people, and some even employ fewer than 50. In these cases, size becomesa critical constraint in advancing research work to the subsequent stages ofproduct development. For lack of central laboratory services in the Patronato,each institute tries to become self-sufficient in equipment and auxiliaryfacilities, involving the danger of duplication and under-utilization ofinstallations and specialized staff.

ANNEX 3.1Page 11

37. In general, the Patronato would benefit from the combination of anincreased orientation towards the market for its services and its researchresults, and a redefinition of its juridical framework to provide freedom todisburse earnings from contract research and increase control over its ownfinances. These two steps would best be taken together, as the increased free-dom would be justified by the increased market orientation.

H. Center for Nuclear Energy (JEN)

38. JEN is. the largest and probably the best equipped research center inSpain carrying out some industrial research. In 1972, JEN's budget was in theorder of Ptas. 1,400 million (about $22 million). Its full-time staff exceeds2,300, of which about 1,400 are employed in Madrid. The activities of JENcenter on research and on engineering of nuclear reactors, the production andsale of radioisotopes, and the application of radioisotopes in medicine, in-dustry, and agriculture (irradiation of potatoes and other food). JEN has todate constructed three experimental fast breeders, of which one was 100 per-cent made in Spain. One reactor each was destined for Venezuela and Chile.JEN also disposes of all technologies for the production of uranium, exceptfor uranium enrichment.

39. JEN has been extending its fields of activity to cover additionalareas of interest to industry. Its diversification program includes researchactivities in the fields of water desalination, pollution control, electronics,metallurgy and ceramics. A substantial part of these activities is or can becarried out in existing JEN facilities and with the presently available equip-ment. In view of the high quality of staff and equipment employed at JEN, therather comfortable budgetary situation of JEN and JEN's well-established com-munications with universities and polytechnics, the Bank mission was of theimpression that any further expansion of research activities, particularly tothe benefit of industry, would be desirable and promising.

I. The National Institute of Aerospace Technology (INTA)

40. INTA is a research institute dependent on the Air Ministry (Minis-terio del Aire). Its 1972 budget amounted to Ptas. 449 million (about $7 mil-lion). In 1972 INTA employed a research staff of about 1,000 people. Prima-rily engaged in research related to flight and space techniques, INTA alsocarries out general research work of potential interest to Spanish industry.These supplementary activities include metallurgy and pollution control. Moreimportant to date, however, are INTA's services to other research organizationsand industry, offering the use of its test and electronic data processingequipment.

Industrial Projects DepartmentMarch 1976

ANNEX 3.2Page 1

SPAIN

INDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

DIRECT GOVERNMENT INTERVENTION IN TECHNOLOGICAL DEVELOPMENT 1/

A. INTRODUCTION

1. Governments use a variety of rationales for direct interventionin technological development. The specific policy instruments used vary innumber, scope, emphasis and severity of application, although they are allpart of the industrial policy framework. Differences in economic structure,stage of industrial development, perceived comparative advantages, politicaland economic philosophy, and even the more elusive conceptions of technolog-ical prowess and international prestige dictate the approach taken by coun-tries to stimulate technological development. Central planning of economicand social development, total or indicative as the case may be, fuels thetemptation for governments to intervene in the national and internationalmarkets for technology. Governments tend to view technological developmentas the main means to achieve the major national goals. Innovation, which wedefine as a process by which new ideas, products and processes are broughtto the marketplace, has emerged as a concept to occupy the center stage inindustrial policy discussions. It is the purpose of this paper to reviewand when possible evaluate the effect of direct governmental mechanisms andinstruments in stimulating technological innovation. This paper presentsone possible framework for analysis and chooses for illustrative purposessix countries: France, U.K., Sweden, Brazil, Canada and Korea. It concludeswith general observations which may have practical significance to interna-tional development agencies.

Categorization of Direct Government Efforts

2. Given the multiplicity of government objectives and the variety ofgovernment instruments which could influence technological change in industry,a cross-country comparison of the various measures is complex. It is equallycomplex to separate the broad indirect economic, fiscal and social policiesof nations from specific measures used to stimulate sectors, industries orfirms. The relative effects of the patent system or antitrust policy aremanifold and touch so many areas that comparison of all the effects is notpossible. We assume that what is of fundamental interest is the effect thatthe multitude of measures have on the behavior of individual firms or indus-tries since it is there that innovation generally occurs, i.e., where technol-ogy is actually brought into first commercial use or application. This papertherefore concentrates its attention on those direct instruments through whichpublic funds are expended to influence technological change in private enter-prises. Where necessary, the importance of nonspecific measures which improvethe economic and social environment for technical change are discussed.

1/ This paper was prepared by the Center for Policy Alternatives (CPA) ofM.I.T. at the request of the Bank. It is based on case studies madepreviously by the Center. This annex presents a shortened version.

ANNEX 3.2Page 2

3. Based on a survey of industrial policies of several countries andespecially of policies for the promotion of technological innovation, improv-ing the efficiency of industrial management, and policies for specific smallbusiness and depressed regions, we have constructed a typology consisting ofa dozen ways in which governments may influence the behavior of firms or anindustry vis-a-vis innovation. Each one of these ways is called a mechanismand each mechanism is composed of a variety of government instruments. Aparticular instrument may appear under more than one mechanism. For example,government procurement practices may be both a way of creating market demandto stimulate innovation and a way of encouraging the formation of new firmsor entry of firms into a new market.

4. We claim no unique quality for this typology. We are merely attempt-ing to provide a pragmatic, functional classification system to encompass thevarious mechanisms used by governments. This generalized typology appears tobe reasonably exhaustive, but occasionally one might find it difficult to en-ter a particular instrument within the confines of the typology presented orone might also find that a single instrument might belong under several mech-anisms. The direct mechanisms fall into three major categories:

Mechanisms Affecting "The Innovation Process" Itself

1. Stimulating innovation by working through market forces.

2. Reducing the cost of firms of undertaking innovativeactivities.

3. Reducing the probability of technical or commercial failure.

4. Increasing the rewards to the firm for successful innovation.

5. Encouraging innovation via market invasion

a. by new firms;

b. by old firms invading new markets.

6. Structuring the industrial sector.

7. Influencing the organization and management of individualfirms.

Mechanisms Affecting Resources

8. Influencing the availability, utilization and mobility ofmanagerial and technical manpower.

9. Assisting institutions (universities, research institutes,private consulting firms, industries and governments) withregard to the generation and utilization of technical knowl-edge.

ANNEX 3.2Page 3

10. Increasing the transmission and transfer of technicalknowledge between institutions.

Mechanisms Ameliorating the Consequences of Technological Change

11. Ameliorating the adverse consequences of technology withrespect to the environment and natural resources.

12. Influencing labor's receptivity to technological changeand internalizing the human costs associated with innovativeactivity.

5. In comparing effectiveness of mechanisms in several national con-texts, one must be guarded. A program developing new industry might be under-taken by one country in order to solve a regional unemployment problem and bedeemed successful for that purpose by the government, while not providing thecountry's consumers with products they could not buy abroad. On the otherhand, the measures of success utilized by a firm or industry are somewhatnarrower and are usually expressed in the term "commercially successful."Obviously, it is much more difficult to compare the "successes" of even iden-

tical programs in the various countries if the national goals and measuresare different. Interview data collected from the firms, on the other hand,may allow an easier comparison since government intent is not very relevant.Both comparisons are useful if governments wish to implement programs result-ing in commercial success within national constraints.

The Sample of Countries Chosen

6. The number of countries whose policies are reviewed in this paperis admittedly small. However, the paper has drawn heavily on information andperceptions from a variety of sources and in particular from CPA's study ofthe policies of five countries of Europe and its present research projects insome developing countries.

7. The sample of countries in this paper does occupy a spectrum ofgovernmental concern in science and technology matters, with France exhibit-ing concerted government action over a long-term compared to Canada, whichlike the United States has followed a kind of pluralistic policy with respectto innovation in industry placing much reliance on general economic policiesto create a climate for technical development. In between is Brazil wherein recent years the government has itself become a prominent actor in theindustrial sector in addition to providing a host of incentives for techno-logical development in the private non-governmental sector. In Great Britain,although science and technology have figured prominently in political partyplatforms, governmental incentives for innovation have a history of discon-tinuity and diffusiveness. Korea's spectacular growth ad recent history oftechnological development offers some instructive lessons to developing coun-tries. Industrial policies of a welfare state as in Sweden emphasize theamelioration of the adverse consequences of technical change, while maintain-ing an openness to domestic and international competition in technology.

ANNEX 3.2Page 4

8. These capsule characterizations, of course, do not do justice tocurrent preoccupations in the more developed countries of the sample regard-ing the real effectiveness of existing government-instruments to stimulateinnovation. There is concern that the array of assistance and incentiveprograms have been conceived not from the point of view of technologicalinnovation, but rather to perpetuate or resuscitate industries in economictrouble or to overcome regional disparities. In some of these countries,the totality of these programs is often considered too supportive and mayin fact smother innovation. It is felt that while individual programs maybe models of excellence in concept and application, collectively they failto achieve their destiny due to the pluralistic approaches by several levelsof government. Some of these concerns are reflected in the next section ofthe paper.

B. EVALUATIVE OBSERVATIONS ON GOVERNMENTAL MECHANISMS

9. In this section some critical observations are offered regardingthe effectiveness of the several government instruments and some evaluativecriteria that emerge from the analysis of the mechanisms are stated. In theinterest of brevity, cross-national comparisons are held to a few observationssuggesting to the interested reader that he examine the more detailed listingof the mechanisms in the appendices to the paper and the cross-country compar-ison matrix in that section. 1/ Detailed descriptions of the general economicclimate and performance of each country in recent years and the structure ofgovernment policymaking apparatus in each country is beyond the scope of thispaper.

10. Among the twelve mechanisms discussed in what follows, particularattention is directed to mechanisms that work through market forces (I),reduce the cost of firms undertaking innovative activity (II) and mechanismsVIII, IX and X which deal respectively with manpower, generation, and trans-fer of knowledge. Several of the more important of the direct instrumentsused by governments fall under these mechanisms. Development financingagencies which work through national governments are likely to find theseinstruments particularly useful in 'leveraging' their funds and amplifyingthe contributions that the countries themselves are frequently willing tomake to increase the innovative capacity of domestic firms.

Working through Market Forces

11. The influence of "market pull" on technological development hasbeen recognized in economic literature going back as far as Schumpeter (1928).Embodied in this idea is that new products and processs will emerge if pro-fitable markets for them exist or can be created.

1/ Not included in this annex. Available on request.

ANNEX 3.2Page 5

12. The principal vehicles governments use to provide market incen-tives are (1) government procurement practices, (2) products and processstandards, and (3) commercial policy and international trade. These arefrequently used by governments as complements to other mechanisms such asreducing cost. Financial support may be given to a technology that thegovernment will subsequently purchase.

13. In France, firms which develop new products and processes withassistance from the Concerted Action Program or Aid to Development are givenpreferential treatment in government procurement. The French have perhapsthe most highly developed activities deliberately related to the use of mar-ket forces for stimulating innovation. The Plan Calcul and the Plan Construc-tion use elaborate purchase schemes to encourage development of new products.The U.K. has made extensive use of process and product standards to promoteinnovative activity. Brazil is just now concerned with such standards, buthas begun to use export incentives and trade accords to introduce Brazilianproducts into the international markets. Korea has recognized the need forsimilar incentives. In both Korea and Brazil, the use of government procure-ment programs specifically to stimulate innovation is quite rare althoughexport-driven strategies in these countries are exerting tremendous pressurefor product quality improvement. Similarly in Canada no special effort ismade to use government procurement as a stimulus to innovation. Standardsare, however, set for major purchase items, especially military ones and thiscombined with a federal policy to buy more of its R & D is aimed at improvingthe innovative capability of Canadian industry.

Reducing the Cost to Firms of Undertaking Innovation Activity

14. The most common tool to which a government resorts to encouragefirms to undertake innovation is financial incentives: loans, grants, taxcredits, deductions, loan guarantees or other devices which effectively lowerthe cost to the firm undertaking innovative activity. Categorical programsfor aiding development of new technology by firms may address different phasesof the innovation process. In France, the Concerted Action Program fundsapplied research, the Aid to Development funds preproduction and the Letterof Agreement helps offset the costs of initial inventory and production. InBrazil, CNPq and FAPESP provide funds for research and development at univer-sity and government laboratories and FINEP and FUNTEC provide funds for feasi-bility studies leading to commercialization.

15. Governments justify such direct assistance to firms, (1) to stimu-late moribund firms, (2) to share risks which are too large for individualfirms to handle, (3) to stimulate innovations destined for eventual govern-ment consumption, (4) to promote innovations where there are substantialexternal benefits to be gained by the public at large and (5) to support thedevelopment of critical industries whose success is seen as vital to eitherfuture economic growth or the maintenance of national prestige.

ANNEX 3.2Page 6

16. In most of the countries included in this paper, one notices atendency for the older well-established firms, who already have a substantialR & D commitment to receive additional assistance from the government. Thisassertion is supported by the results of a five European country study con-ducted at the Center. It is also possible that the government bureaucracyconcered with dispensing aid is much more sensitive to public security andwants to make sure that it has a large number of "sure-bets" in the portfolioof projects supported by it.

17. When the major purpose of government aid is risk-sharing, one ofthe several criteria for evaluation is whether the project finally undertakenby the firm might have been undertaken even without government aid. A secondcriteria would be to ask if the project indeed represented a substantial riskbeyond the capability of the firm to absorb. In France, for example, a major-ity of Aid to Development went to the largest firms in the country for proj-ects as small as $100,000. Many of the projects could have been undertakenwithout government support, so it seems.

18. Another problem of project appraisal is that a large firm might havea partially ordered list of projects. If it can seek out and receive aid forprojects high on the list, this frees up internal funds to be used to supportother projects lower on the list. Thus government aid might be inducing firmsto support projects it might otherwise leave aside, but these projects may notbe the same ones for which it received government funds. As the DGRST does inFrance, it is thus important to examine the entire portfolio of the firm todetermine what kinds of projects it may be supporting by displacement. Onecannot generalize on the appropriate level of aid in the development of aparticular project without undertaking a detailed analysis of the total costof development and the scrutiny of market potentials for the project and pro-cesses to be developed by the project.

19. When the primary objective of direct assistance is to insure theproduction of a technology ultimately destined for government use, simpletechnical success of the project is an adequate measure of the effectivenessof the program since the market by definition is assured.

20. When externalities play a significant role in the decision to sub-sidize innovation, cost-benefit analysis similar to those used in risk-sharingtype of assistance can be used, although the estimates of social costs andbenefits is fraught with many methodological problems. The "key technology"objective is the most difficult to evaluate because of the many intangiblevalues included in it. In many developing countries the key technologyargument is frequently used by governments to intervene in the market placefor technology, to nationalize foreign firms and to limit the scope of opera-tions of MNCs. Often lacking is the skill and experience at the level of thefirm in the evaluation of the commercial and technical risks in developingnew products and processes for national and especially international marketsR & D is performed in government laboratories with very weak links to usersof the technology.

ANNEX 3.2Page 7

21. Among the countries reviewed, the French have been quite innovativein the use of fiscal incentives. In recent years the Brazilians have trieda variety of fiscal incentives to stimulate technological development. TheFrench have devoted very large sums to risk-sharing programs, with firms re-ceiving such support from one or more government financing mechanisms. Theuse of government programs to direct capital to specific industries is alsoquite pronounced in Great Britain. All the countries discussed in this paperhave supported the creation of specialized institutions for directing supportto industrial R & D and to small firms leading to the patenting of new prod-ucts or the creation of new enterprises: NRDC (Great Britain); ANVAR (France);FINEP and FUNTEC (Brazil); STU (Sweden); IRDIA, PAIT and IDB (Canada); KIST(Korea).

22. In a series of interviews conducted by the CPA researchers inEurope, programs which operated to reduce the cost of innovation to the firmwere reported more often than any other instrument.

23. It should also be noted that because of its concessionary naturegovernment aid is the first form of assistance sought by firms in many ofthe developed economies. In the developing countries there might be lack ofknowledge on the part of industry of government incentives available (thereis evidence in Brazil to suggest this) and also a certain hesitancy in notwanting to reveal the first priorities and "open the books" of the enterpriseto government authorities. There are cases in recent British technologicaldevelopment history (as in other countries) where firms have withdrawnrequests for governmental assistance because of the red tape involved inreceiving and accounting for government funds. In Canada, a series of recentevaluations seem to have concluded that the present system of incentivesmay be overgenerous and is not achieving the intended impact on innovation.The cancellation of the Industrial Research and Development Incentive Act(IRDIA) has recently been announced by the Canadian government.

Reducing the Probability of Technical or Commercial Failure

24. The riskiness of a particular technological development is the sumtotal of a number of variables: time, money, competition among many others.Many government programs including especially those discussed previously in-fluence the success or failure of a particular project. Success depends verymuch on the resourcefulness of the firm itself and government programs mayonly have a marginal effect.

25. Technical risks can be reduced by government programs if they canprovide up-to-date timely technical information. Accurate market informationcan help reduce the risk of commercial failure. If in addition governmentguarantees a market fo the product, the entrepreneur is well protected. Theavailability of prompt technical assistance through universities, productivitycenters, consulting firms, cooperative research organizations and governmenttrade bureaus is important.

ANNEX 3.2Page 8

26. Market information is provided in France through the National Eco-nomic Plan and COFACE (Export Insurance Co.) trade associations among otheragencies. In Brazil and Korea formal market information systems are stillvery weak, although the Brazilian industry federations are beginning to stepin to provide information to their members.

27. In the target countries competition is viewed somewhat ambivalently.In the developed countries of this group competition is thought to be neces-sary to improve productivity, prevent monopoly pricing, and eliminate dupli-cate expenditures on R & D and innovation. A certain degree of competitionin a sector seems to be positively correlated with innovation. In bothBritain and France are to be found examples of government aid-providingagencies encouraging firms to pool their resources to exploit certain inno-vative product or process ideas. Examples of domestic firms being encouragedby governments to join forces against foreign competition are, however, morefrequent. Import quotas, tariffs, manipulation of technical standards, andother restriction of competitive entry by foreign firms such as 'Buy National'policies are common in most of the countries whose policies are being reviewedhere, except perhaps Sweden.

Increasing Rewards to Firms that Successfully Innovate

28. Unless a firm perceives a gain from innovative activity, it is un-likely to assume the risks and costs which accompany innovation. Governmentshave responded to this situation by enacting programs that ensure sufficientreturns on innovations that are successful. Policy instruments that fall intothis category are:

1. Patent laws;

2. Policies that govern licensing of both patentable andunpatentable knowledge;

3. Restrictive trade regulations; and

4. Certain preferential tax practices.

Issues relevant to this mechanism are:

1. A firm in a competitive market faces the possibility that otherfirms may reap the rewards flowing from its innovation at little or no costto the other firms. Given such external economies, firms may actually findit disadvantageous to innovate. Typically this issue is raised when a gov-ernment considers policy positions towards patents and patents licensing.Governmental action in this situation may turn out to be "overgenerous" ifa large number of patents are placed in the hands of a few firms.

2. A second disincentive to innovative activity perceived by firms is"overtaxation" of the end income yielded from the innovation, be this incomein the form of patents, stock or profits. Such overtaxation may destroy therisk/reward ratio.

ANNEX 3.2Page 9

29. Capital gains taxation at favorable rates for certain gains isone method of compensating risk-taking enterprises or individuals. Anothermethod is to allow losses to be written off against profits in future years.For a small company, preferential tax rates could be established to encourageinvestment in risky projects.

30. Firms attach varying importance to patents and licenses. It wouldappear that industry differences are more significant than national patentpolicies. Chemical and textile industries seem to attach more importance topatents, their own and their competitors than say metal working industries.Whereas Great Britain, France, Canada and Sweden have sophisticated patentsystems and licensing mechanisms, Brazil and Korea are in earlier stages ofdeveloping systems and capabilities to monitor and profit by internationalpatent and licensing activities. Present policies in these countries can becharacterized as defensive of national interests and firms and not designedto enable firmst to creatively exploit the opportunities presented by thepatent system.

Encouraging Innovation via Market Penetration

31. Government policy, in addition to operating on the variables whichenter into market decisions (cost, risk, reward) can also stimulate new orold firms to invade a new market for the first time or change the entireindustrial sector to enable firms to take advantage of new or old markets.In this mechanism we are concerned with policies that foster the creation ofhealthy venture capital market. Other supporting mechanisms could includeincorporation laws, compulsory subcontracting in government procurement andcertain tax policies.

32. With the exception of U.K., where equity financing has long playedan important role, the market for venture capital in all the countries in-cluded in this paper is marginal. Brazil, through its development banks andthrough FINEP, has begun to provide venture capital for national firms. InCanada CDC and IDB provide venture capital. The absence of an effective over-the-counter market in all the countries included in this paper is a majorbarrier to provide equity investment, as it limits the ability of the capital-ist to realize his paper gains.

33. In addition to providing venture capital, the provision of manage-ment services is equally important, but governments are usually unable toprovide this service effectively.

(a) It must be mentioned that market penetration is basicallya destabilizing phenomenon. It might displace jobs, firmsor entire industries.

ANNEX 3.2Page 10

(b) Because the domestic markets of the countries reviewed here(except Brazil) are relatively small, there is a tendencyto view certain firms as "national champions." This makesit difficult to encourage market invasion domestically andeven if a government wants to it often goes counter toother national objectives.

Structuring the Industrial Sector

34. Governments in the countries reviewed here have engaged in substan-tial efforts to restructure particular industries. Brazil's attempts in theshow and furniture industries, France's Vth Plan restructuring operations insteel, petroleum, electronics, chemicals and textiles, the British programsto restructure textiles, roller bearings, shipyards, and automobile industriesand Canadian government entry into the aircraft industry come to mind in thisconnection.

35. Usually industrial restructuring policies take the form of consoli-dations and agglomeration. Forcing closure of small firms, encouraging coop-erative research and marketing activities, providing massive support to sec-tors exposed to international competition or rapidly changing technology, aresome of the modes in which governments operate. Again there is scant evidenceto support or disprove the influence of mergers on innovation. The countrymost notable for its management of its industrial structure is Japan. Swedenhas followed a policy of benign neglect and Canada has traditionally been re-luctant to intervene in restructuring industry, although it has recently en-tered directly into the aircraft industry. Restructuring is often based onconsiderations of economy of scale and capital requirements rather than con-siderations of so-called "critical mass for R & D." In Brazil, restructuringhas taken the extreme form of substantial government ownership of productiveactivities in many sectors. This mechanism cannot be effective without othermechanisms which promote capital and labor mobility.

Influencing the Organization and Management of Individual Firms with Respectto Innovation

36. There have been several studies to seek a relationship between theorganization of a firm and its success in innovation. A strong correlationseems to exist between successful innovation and the extent the innovativefirm truly understands user needs. The importance of the firm being open toinformation from outside and the special role of the 'entrepreneur' are alsopointed out in these studies. But in spite of all this, few governmentprograms consider how their policies can successfully influence innovation bymanipulating organizational variables.

37. U.S. defense establishments require contractors to adopt projectmanagement methods. France's Aid to Development Program also requires sys-tematic project analysis with its market implications and further demandsthe naming of a single individual as a contact point in the firm. Some

ANNEX 3.2Page 11

Brazilian agencies also require information on management systems and fea-sibility studies prior to grants or loans and provide financial supportfor such studies (FINEP). There are some examples in the British computerindustry where the organization of firms underwent drastic changes as aresult of governmental aid.

38. Informal evidence suggests that direct governmental assistance hasmajor implications for the management of firms. But few governments haveconsciously used this mechanism to influence profound changes in organizationof the firms assisted. An exception seems to be Korea where the governmentappears to exert a strong pressure on family-owned enterprises to open to thepublic.

Influencing the Availability, Utilization and Mobility of Managerialand Technical Manpower

39. Many manpower programs are uncritically regarded as parts of thesystem of education. But in most of the countries reviewed here governmentsintervene heavily in the manpower supply system. The concern with high-levelmanpower (engineers, managers, scientists, technicians and skilled workers)is acute in most of the countries of the sample. This is an area in whichthe social objectives (employment creation, lessening the effect of technicalchanges on workers, promoting mobility, regional development) and technologicalobjectives (increasing output, generation of new products and processes,improving quality, etc.) intersect and strongly influence government actions.

40. Sweden and Great Britain seem to have the largest packages of man-power assistance programs. Brazil's SENAI programs are some of the oldestprograms in the Latin American region to encourage industry to bear much ofthe cost of training of skilled manpower. Korea also encourages its bigindustries to start training programs within industry. On the other hand, inspite of the massive support given to universities most countries experiencedifficulty in relating the work of universities to industrial needs. GreatBritain's 'sandwich' programs are well-known and other countries are experi-menting with variations of this approach to bridge the distance between uni-versity training and research and industrial needs.

The Creation and Dissemination of Knowledge

41. All countries included in this paper have over the past 25 yearsincreased the financial support extended to the various institutions thatgenerate scientific and technical knowledge. Such generators are the uni-versities, private or publicly owned research laboratories, government re-search labs and industrial laboratories.

42. A dynamic interaction among activities and among R & D projectsin different technical fields should exist in an ideal system for the produc-tion of knowledge and its diffusion. But, in many of the countries reviewedhere the extent of interaction depends on (a) research priorities of each

ANNEX 3.2Page 12

component, (b) government R & D funding levels, (c) bureaucratic constraintson interaction, and (d) physical distance. Changing grant and contractpolicies set up perturbations in the system. Another factor may also be thechanging supply and demand for critical high-level manpower for which thecomponents of the above system might compete. In a number of studies theimportance of technological "gate-keepers," the bearers and transferers ofinformation, have been shown to be important, but such gate-keepers are lack-ing in many national situations.

43. The correlation between R & D productivity, presumably a measureused for support of R & D by some governments, comes out small or negative.In the case of Japan, which has the highest productivity in manufacturing,R & D is the lowest of most developed countries.GNP

44. The balance of payments on patents and licenses has been suggestedas a better yardstick and even here the ranking of countries according tobalance of payments for technology and R & D investment do not also correlate.It is possible that R & D may lead to inventions, but the lack or slow rateof transfer of knowledge within the country may account for the absence ofa subsequent correlation between balance of payments and productivity. The"rate of exchange" or "transfer" between the components of the dynamic equi-librium model described above may be the missing factor.

45. Some survey data indicate that 'transfer' may be more importantthan the mere generation of knowledge. Firms in France and U.K. encountertechnology transfer as a frequent government strategy. Brazil and Korea bothhave some explicit incentives for technology transfer both within the countryand from outside. Brazil has now converted some of its state level researchinstitutions into public corporations to release them from bureaucratic con-straints under which they were operating. Great Britain is encouraging gov-ernment research institutions to undertake contract research for industry.Interfacial institutes or centers between universities and industries maybe necessary to encourage active tranfer of knowledge between them.

C. SOME IMPLICATIONS FOR DEVELOPMENT AGENCIES

46. While development agencies have been investing heavily in largeinfrastructure and industrial development projects for quite some time,support to specific industrial R & D projects with a view to the commer-cialization of the products and processes is recent and limited to a fewcountries. It is true that in the early years of development assistance,when assistance to small and medium scale industries was in vogue, multi-lateral and bilateral assistance agencies experimented with a variety ofmodes for stimulating small and medium scale industries to improve produc-tivity, standardize products and seek wider markets. Small scale industrydevelopment projects in India, the 'Induk' program in Indonesia, the 'Asimov'

ANNEX 3.2Page 13

projects in the Northeast of Brazil bear witness to these early efforts. Therecent emphasis on 'appropriate,' 'low-cost,' 'intermediate' technologiesrepresents a nostalgic return to the early efforts with the added emphasis onemployment generation, distributive effects of industrialization and ameliora-tion of the adverse consequences of technical change including a pronouncedconcern for conservation of resources and energy.

47. While development thinking has traversed a full circle, developingcountries have moved at varying rates to build the basic scientific and tech-nological infrastructure needed for development. In several countries suchas Brazil, Korea, Singapore, Israel, Philippines, India, Turkey, Mexico theinfrastructure includes universities, industrial and government laboratories,engineering companies, science foundations and some high-technology industriesnow exist. Some of these countries are now beginning to export technologiesdeveloped in national laboratories and industries. In this class of countries,the big task of developing policies and programs is to encourage and sustainthe still incipient capacity for innovation by national firms. Of course,there are many other countries in Africa, Asia and the Middle East where theinstallation of the infrastructure is barely begun and the critical humanresources needed, including the entrepreneurial element, are still lacking.Developed country models are often ill-adapted for use in such national situa-tions, especially those which take for granted the existence of a strongentrepreneurial class willing and able to take advantage of incentives forinnovation provided by an open market for technology and those provided bythe government.

48. While external participation in providing venture capital forinnovation has a catalytic effect, the long-term expectation is that thenations so assisted would develop their own mechanisms and instruments forproviding capital to risk-oriented enterprises. U.K.'s National Researchand Development Corporation, Brazil's FINEP and Canada's CDC and IDB pro-vide some models of organizations for emulation in other countries wherein the absence of an aggressive banking system or an effective over-the-counter market the government becomes the sole source of venture capitaland the broker between the innovative firm or the inventor and the marketfor the new product or invention. The risk-taking small company in mostdeveloping countries finds it most difficult to finance its innovationactivities. New types of institutional mechanisms are needed to provideventure capital to such enterprises and development agencies may have aspecial role in helping governments in catalyzing their development.

49. In the developed and in some developing countries the sheer num-ber of incentives available to industry may produce counterproductive ef-fects. The complexity of management of the diverse programs and the costsof their administration reduce their effectiveness. The small scale indus-try entrepreneur might lack the information and the sophistication to profitby them, while the larger enterprise may be reaping disproportionate bene-fits. A Canadian science administrator has said: "The uncertainties offunding, the complexities of administration, the changes and renewals of

ANNEX 3.2Page 14

government policy, the dependencies that are created by the mere existenceof incentive programs need to be balanced against the advantages that theseprograms purportedly bring. If the government of Canada does indeed con-sult industry - as it should - as it creates new programs to encourageinnovation in Canada, we will all need to be thinking about whether wewant to plunge back into the alphabet soup of government support." Agen-cies that purport to promote innovation in national industries especiallythe small firms, must acquire the capability to "package" the variety ofincentives available to more purposefully direct them to selected firms.

Industrial Projects DepartmentSeptember 1976

ANNEX 3.3Page 1

SPAIN

INDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

LEGISLATION ON THE PURCHASE OF FOREIGN TECHNOLOGY

1. With the general objective of ensuring that imported foreign tech-nology is compatible with Spanish economic requirements and that the condi-tions under which it is purchased do not unduly compromise and restrict theoperations of the receiving party, the Spanish Government introduced legis-lation in 1973 requiring prior approval of contracts for the purchase of for-eign technology. Relevant provisions have been laid out in Decree 2343 ofSeptember 21, 1973 and in the Order of December 5, 1973, issued by the Min-istry of Industry.

2. According to these provisions, any Spanish firm intending toacquire a license for the manufacture of a product or to obtain foreigntechnology of other types that require contractual agreement with theconveying party, must submit the proposed contract for approval to theDirector-General of Industrial Promotion and Technology of the Ministryof Industry. The Spanish firm must also complete a questionnaire settingforth details of its existing business, its relationship to the foreignfirm, a description of the technology being transferred and how it willbe used, and other information.

3. The Spanish firm must specifically supply the following data:

(a) Total capital of the firm;

(b) Names of the most important Spanish shareholdersand the percent of shares held;

(c) The same information as (2) on foreign share-holders, including their nationality;

(d) The locality of plants of the company;

(e) The principal products and services byestablishment, and the value of annualproduction;

(f) The value of goods exported and importedin the previous two years, by type ofgoods;

ANNEX 3.3Page 2

(g) The number of employees broken down bymanagers, administrators, technicians andlaborers;

(h) Current contracts in force for the acqui-sition of technology, including the name ofthe conveying firm, the data of initiation,and description of the technology;

(i) Contracts for transfer of technology fromthe Spanish firm, including analogous infor-mation as in (h);

(j) A description of the firm's own research anddevelopment activities during the previousthree years, including the budget allocated(total value and as percent of sales) and thenumber of technicians assigned;

(k) A description of the role that the Spanishfirm intends to play in technological devel-opment, especially in the light of the pro-posed agreement and the plans to adapt orimprove on the technology to be imported.

4. A main part of the questionnaire requires a detailed descriptionof the technology that is to be transferred and the economic and financialbenefits that are expected to accrue both to the firm itself and to theeconomy as a whole. The information that must be presented includes thefollowing items:

(a) A detailed description of the technologyusing the technical terms in common use inthe industry;

(b) The processes and products of the Spanishfirm benefitting from this technology;

(c) The patents that will be affected by thetechnology (either Spanish or in force inSpain);

(d) The names of other countries in which thesepatents are registered;

(e) Trademarks affected by the agreement;

(f) An estimate of the volume of output thatwill be obtained with this technology andthe markets to which it will be shipped;

ANNEX 3.3Page 3

(g) The raw materials, components, and equip-ment that the new technology requires andtheir sources of supply.

5. The questionnaire finally contains a checklist of conditions thatthe Government regards as unfavorable. If such clauses are included in theproposed contract, the parties are required to state the special circum-stances that are alleged to justify their inclusion. In subsequent nego-tiations, the Government representatives then try to soften or to removethese clauses from the agreement. In brief, these prohibited clauses in-clude the following types of provisions:

(a) To prohibit or limit the use of technologiesof the Spanish firm itself; to prohibit orlimit the utilization of non-patented infor-mation once the patent has expired, or tolimit or annul the research, innovation ortechnical development activities of theSpanish firm;

(b) To require the transfer of patents, improve-ments or innovations achieved in the Spanishfirm as a result of using the technology cov-ered in the agreement;

(c) To establish the transfer in the form of blocscontaining unnecessary elements of little valueto the Spanish side;

(d) To establish a transfer of technology that iswholly or partially obsolete, insufficientlycompetitive, etc., with the effect that incom-patible norms or qualities are created;

(e) To prohibit or limit excessively the areas ofmarketing, to require the purchase of raw mate-rials and components from the foreign firm orothers that the latter may stipulate;

(f) To limit the freedom of the Spanish firm indeciding on appropriate levels, models, pricesand times of production;

(g) To provide favorable terms for the foreign firmin sales in the Spanish market;

(h) To bind the Spanish firm to act in ways contraryto the interests of the Spanish economy;

ANNEX 3.3Page 4

(i) To establish the right of the foreign firmto intervene, control, or affect the manage-

ment of the Spanish firm or its plans forexpansion or diversification;

(j) To impose payments much greater than isnormal in the market;

(k) To establish payments proportional to thelevel of output without deducting the costof imported goods used, or without excludinglines of production not affected by the tech-nology;

(1) To impose payments based on levels above thoseactually achieved when the firm in majority-foreign owned or when the foreign firm fur-nishes materials in excess of 30 percent ofproduction cost;

(m) To establish differential prices for materialsand other supplies delivered by the foreignfirm;

(n) To impose an inadequate period of time inthe contract or to establish an automaticextension of it in a way to require paymentsafter patents have expired; and

(o) To impose interpretations of the contract inforeign languages different from the ones ofthe contract to be signed.

6. The complete list of information that is requird by the Govern-ment, including the checklist of clauses that are considered undesirable,is more than sufficient to provide control over the transfer of technology.Some of the information required is clearly excessive and difficult to pre-pare. This may lead to the provision of inaccurate and otherwise super-ficial or wrong statements, or may act as a deterrent to using foreigntechnology. Moreover, some of the criteria are so vague (e.g. points hand j of para. 5) that their usefulness in the evaluation of the tech-nology transfer is questionable.

7. It is, nevertheless, of importance for the present project thatthere are now mechanisms in Spain that may be useful in protecting and nur-turing domestic efforts to expand domestic capabilities in developing and

ANNEX 3.3Page 5

marketing new products. Importantly, these instruments can be used to en-sure that transfers of technology from abroad are complementary to and sup-portive of domestic R&D efforts.

Industrial Projects DepartmentMarch 1976

ANNEX 3.4Page 1

SPAIN

INDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

INDUSTRIAL RD&E PROGRAM SIZE AND COST ESTIMATE

A. Introduction

1. This annex attempts to determine the minimum critical RD&E programsize (e.g. number of RD&E projects to be supported annually) and the corres-ponding cost estimate or budget over the initial five to eight years of oper-ation after which period the program should be financially self-sustaining.Section B describes a micro approach towards determining the program sizeand cost, and Section C discusses a macro approach towards determining theprogram cost or budget. The two methods, however, are complementary ratherthan alternative approaches. They not only validate each other, but can belinked together to form a system through which the impact of the micro ele-ments and the program on the national RD&E effort can be traced. This link-age also provides a means by which some of the non-quantifiable or judgementfactors in one approach are made more explicit.

2. The concept of a minimum critical RD&E program size has threeaspects: Firstly, the program should be able to generate enough commer-cially successful projects so that the royalty payments or cash returnswould be adequate to financially support the program, at least at the samelevel of activity, in the future. Financial self-sufficiency in this con-text is used in a budgetary or cashflow breakeven sense and need not in-clude or imply any surplus or profit. Secondly, the number of commerciallysuccessful projects must be sufficient to have a demonstration effect therebyencouraging Spanish industry to undertake more RD&E investments. Finally,the program should fill a measurable portion of the gap between the targetor desired level of national RD&E effort and the level that would otherwisebe attained if only historical trends and existing programs are relied upon.

B. Determining a Minimum Critical Effort - A Micro Approach

3. In this section, the annual budget for the proposed RD&E Unitwill be estimated on the basis of the average cost of recent R&D projectsin Spain. The average R&D project cost structure, in terms of the proportionof the project expenditures going for personnel, operating costs and capitalexpenses will also be developed. This would be followed by an evaluation ofthe minimum number of RD&E projects that ought to be initiated annually bythe proposed program,-and then an estimation of the initial funding require-ment for the program.

4. The range of cost for industrial RD&E projects is very wide. Datafrom CAICYT 1/ for example (Table 1), show that the RD&E projects approved

1/ CAICYT - Comision Asesora de Investigacion Cientifica y Tecnica.

ANNEX 3.4Page 2

for financial assisLance during 1974-76 had project costs ranging from US$50,000to US$4,000,000. The average project cost estimate for projects approvedduring 1975 and 1976 is about US$640,000 in current terms. Discussions withrepresentativec of CAICYT and the Ministry of Industry provided a consensusthat for the RD&E Unit an average project cost of US$745,000 (in constant 1976dollars) would be appropriate. This average cost of US$745,000 per projectappears reasonable for the proposed program considering that the program willemphasize product and process development types of projects which would needtesting and pilot plant equipment. This average project cost will be used asa basis for determining the budget for proposed RD&E program.

5. The cost structure of RD&E projects also varies widely, with capitalcosts 1/ accounting for anywhere from 20% to 60% of the total project cost.While no data are available on a project by project basis, the annual R&Dexpenditure data, either for INI 2/ (Table 2) or for the manufacturing sector(Table 3), which covers several on-going as well as newly initiated projectsduring a particular year, could be separated into operating expenses (per-sonnel plus others) and capital costs. Under two reasonable assumptions,the resulting proportion of capital cost to total project cost can be usedas a guide to developing an average cost structure for the projects to befinanced under this program. The first assumption is to take the averageproject duration as constant. The second assumption is to take a steady-state situation wherein the number of new projects started is about thesame as the number of projects completed during a year. For example, shouldan average duration of three years be assumed for the projects covered bythe 1971 and 1972 annual R&D expenditure data for the manufacturing sector(Table 3), then there will be two on-going projects for each new projectinitiated during the year. This would then indicate that the annual R&Dexpenditure data would include three times the average annual operatingexpenses for the corresponding capital cost expenditure. The 1971 and 1972data in Table 3 show capital costs account for 20% of the annual expendi-ture with operating expenses representing the other 80%. Given the pre-ceding assumptions, the typical R&D project would then have the same coststructure--about 20% of the project cost would be for capital expenditureand 80% would be for operating expenses, the latter spread over a three-yearperiod.

6. For the proposed program, the cost structure will contain a largerproportion of capital cost than either the INI experience or the nationalaverage for the manufacturing industries during 1971 and 1972, since theRD&E Unit will emphasize pilot plant type of development activities. Theassumed average cost structure for the projects is shown in the followingtable, indicating an average of 53% of the project cost being spent forcapital and 47% for operating expenses. The average employment is fivepersons per project for three years. This cost structure was derived froma few examples of industrial RD&E projects from CAICYT which showed capital

1/ Capital costs include equipment, erection and fixtures for the testing orpilot plant. Operating costs cover personnel, consumable materials andother costs related to the actual testing operations.

2/ INI - Instituto Nacional de Industria.

ANNEX 3.4Page 3

costs accounting for at least one-half of the project cost. Personnel costswere estimated on the basis of both the INI salary range for R&D personneland information from the sample of projects from CAICYT. The program isthus more capital intensive than the national or the INI experience. A morecapital intensive R&D program is necessary since most of the current R&Dprojects generally involve only minor product improvements or quality controlrelated activities which are labor intensive. The gap in R&D activity is inthe pilot plant type of research.

7. During the four-year period, 1968-1971, CAICYT received an annualaverage of 40 applications for financial support of industrial type R&Dprojects of which an average of 13 were approved. By 1974 and 1975, thenumber of applications (industrial R&D projects) have increased threefoldto about 126 annually and the number of projects granted financial supportalso increased to an average of 32 each year. The industrial type of R&Dprojects being supported by CAICYT require from two to five years to complete,with three years as the average. Experience up to 1972 show that about one-third of the projects were judged as commercially successful with the balancejudged as only technically successful or completely unsuccessful or stillawaiting qualification. Commercial success implies that a viable venturewould follow or did follow the R&D activity. It is possible that the successrate for projects initiated after 1972 would be slightly higher than one-third, given the experience gained in evaluating applications. Experiencein the United States indicates that among industrial RD&E projects sponsoredby formally organized R&D institutions (e.g. laboratories), about 10 to 20%of the projects can be expected to be exceptional commercial successes andanother 20 to 30% can be expected to be acceptable commercial successes.

8. For the proposed program, it will be assumed that an average ofone-third of the RD&E projects will be commercially successful. The actualsuccess rate will of course depend on the effectiveness of the screeningprocess which depends heavily on judgemental factors. The success ratecould be more or less but one-third would be a reasonable estimate for theinitial years of the program assuming that relatively experienced staff willbe utilized to evaluate the applications. Also, an average duration of threeyears for the RD&E projects is assumed. Finally, an additional two years forcommercialization or investments in commercial facilities is assumed forsuccessful RD&E projects before benefits or revenues are realized.

8. To fulfill its demonstration role, the program should generate atleast one commercially successful project each year and gradually improve itsscreening capability so that its success rate will increase beyond one-third.To insure that at least one project is successful each year (or out of theprojects financed in one year), the RD&E Unit should set the number ofprojects such that the probability that all projects are unsuccessful isless than say 1% to 3%. Given a success rate of one-third, financing 9annually would lead to a 2.6% chance that no single project is successful.with 12 projects each year, there is only a 0.8% chance of having no success-

ANNEX 3.4Page 4

ful project in any year. 1/ But to be eventually financially self-supporting,however, the program must generate an average of perhaps three to five success-ful projects each year, depending on the success rate, the royalty rate, andthe potential revenues generated by successful projects. Finally, to fill ameaningful portion, say from 5% to 15%, of the national R&D expenditure gap,the program should have an annual budget of about US$4 to 10 million (inconstant 1976 US dollars). With all these considerations in mind, it isestimated that the RD&E Unit should initiate from 9 to 12 projects annuallywith the expectation of three or four commercially successful projects amongevery 9 or 12 that is undertaken respectively.

9. The budgetary support for the program, that is, financial supportfrom the Government, will be estimated for two cases: Case I - twelve pro-jects are financed annually; and Case II - nine projects are funded eachyear. Table 7 shows the disbursement schedule per project over the three-year average implementation period. The Table also shows for Case II, theprogram disbursement schedule in both foreign exchange costs and local resourcecosts over an eight-year period (1977-1984). To calculate the budgetarysupport from the Government, the administrative costs of the RD&E Unit must bedetermined and added to the costs of the projects. On the basis of about foursenior personnel (at $100,000 annually in constant 1976 US dollars), eightother personnel ($120,000 annually) and provisions for operating costs andcontingencies ($80,000 annually), an annual administrative budget of US$300,000would be required, all in local currency costs. Table 6 shows the Governmentbudgetary support for the program covering both project and administrativecosts for either Case I or Case II under two royalty payment assumptions.First, royalty payments on each successful project is set at a breakeven levelof about US$0.58 million annually over four years and second, the royaltypayments are set at twice the breakeven level or US$1.16 million annually (inconstant 1976 US dollars). The budgetary support required for either Case Ior Case II under the alternative royalty payment assumptions are summarized inthe following Table.

10. Because of the assumption that the average project duration isthree years and that an additional two years are needed for commercial devel-opment, the program is not expected to be financially self-supporting untilafter six to eight years, depending on the level of royalty payments receivedfrom successful projects. In the most conservative case where royalty pay-ments are just enough for a cash breakeven operation, the program can beexpected to require Government budgetary support for eight years. For Case I,the total support over the eight-year period will be about US$75 millionequivalent (in current US dollars) of which about US$44 million will be in

1/ Mathematicglly, the number of projects each year, N is chosen suchthat (1-P) is less than say 0.03 or 3% where P is the probability ofsuccess.

ANNEX 3.4Page" 5

RD&CE Program - Govermment Budgetary SuIpport(In Millions of Current US Dollars)lf-

A. Royalty Payments at Breakeven Level:

CASE I CASE IIForeign Domestic Foreign DomesticExchange Resource Total Exchange Resource Total

Year Cost Cost Cost Cost Cost Cost

1 (1977/78) 4.2 2.7 6.9 3.2 2.1 5.32 4.8 4.3 9.1 3.6 3.3 6.93 5.4 6.2 11.6 4.1 4.6 8.74 5.8 6.6 12.4 4.3 5.1 9.45 (1981/82) 6.2 7.0 13.2 4.6 5.4 10.0

Five-Year Total 26.4 26.8 53.2 19.8 20.5 40.3

6 (1982/83) 6.6 4.0 10.6 5.0 3.0 8.07 7.1 0.5 7.6 5.3 0.4 5.78 (1984/85) 4.0 - 4.0 3.1 3.1

Total Support 44.1 31.3 75.4 33.2 23.9 57.1Say: 44 31 75 33 24 57

B. Royalty Payments at Twice the Breakeven Level

1 (1977/78) 4.2 2.7 6.9 3.2 2.1 5.32 4.8 4.3 9.1 3.6 3.3 6.93 5.4 6.2 ll.6 4.1 4.6 8.74 5.8 6.6 12.4 4.3 5.1 9.45 (1981/82) 6.2 7.0 13.2 4.6 5.4 10.

Five-Year Total 26.4 26.8 53.2 19.8 20.5 40.3

6 (1982/33) 6.6 0.5 7.1 5.0 0.4 5.47 - - - _ _8 (1981185) _ -

Total Support 33.0 27.3 60.3 24.8 20.9 45.7Say: 33 27 60 25 21 46

1/ The majm-' assumptions are as follows:- (a) the success rate for projectsio one-third; (b) the RD3E duration is three years plus two additionalyears Thr commercialization; (c) royalty payments are for four years withthe breakeven level at US$0.58 million (in constant 1976 US dollars) an-nually per successful project; (d) a uniform number of projects are fin-anced each year (for Case I-12 projects and for Case II-9 projects; andUS dollar annual inflation rates of 8% during 1976, 7.5% during 1977-79,and 7% during 1980-85.

ANNEX 3.4Page 6

foreign exchange. For Case II, the requirement will be less, at US$57million over eight years including US$33 million in foreign exchange. 1/

11. However, should the royalty payments be set at twice the break-even level, then the program will be financially self-supporting after sixyears. The total budgetary support from the Government for Case I willthen be US$60 million equivalent and for Case II, US$46 million in currentterms respectively. 2/ Table 8 shows the budgetary support for Case III.Compared to Case II the effect of a slower build-up of projects, starting atthree then increasing to 12 and finally stabilizing at nine projects per year,is to reduce the budgetary support over the initial five year period by aboutUS$3 million, from US$40 to US$37 million (in current terms). However, CaseIII will require one more year to become self-sufficient compared to Case II.

12. The typical industrial royalty rate in Spain is 3 to 5% of the grossrevenues for a period of four to five years. Assuming a royalty rate of 4% overfour years for the successful projects, the royalty payment level of US$0.58million annually per project (the breakeven amount) would imply an averageannual gross revenue level of about US$14 million for each successful projector about 7 times the cost of the three projects needed to generate one success-ful project. A royalty payment of US$1.16 million annually (twice the break-even amount), would imply an average yearly gross revenue level of US$29million per successful project or about 13 times the cost of three projects.The revenue may originate from one or more commercial ventures depending onthe number of companies or groups who commercialize the results of a parti-cular project. This range of gross revenue levels, from about 7 to 13 timesthe statistical expected cost of the RD&E project, is in line with the ratioof 10 generally used as a rule of thumb in the industry. 3/ Thus, it isreasonable for the RD&E Unit to expect royalty payments of about 1.5 times

1/ In terms of constant 1976 US dollars, the total support for Case I isUS$56 million and for Case II, US$42 million over eight years.

2/ In constant 1976 dollars, the total support would be US$47 millionfor Case I and US$35 million for Case II spread over six years.

3/ This is actually a rough definition of a commercially successful R&Dproject. The ratio is related to the payback period concept. Usingthe payback period concept as a measure of commercial feasibility, aviable R&D project can be defined as one that would generate royaltypayments (or its equivalent) such that over say 2 to 3 years, it willpay back the statistical expected cost of the effort (i.e. - theaverage project cost divided by the probability of success). Thereciprocal of the product of the payback period and the royalty rateis the ratio indicated above. The arithmetic relationship is:

1 = G = 10Tr C/P

Where: T = payback period (2.5 years) C = average cost per R&D projectr = royalty rate (0.04) P = probability of successG = annual gross revenue from

successful project

ANNEX 3.4Page 7

the breakeven level. This would indicate a budget range of US$45 million (CaseII) to US$60 million (Case I) spread over six or seven years.

13. Given that the Government budgetary program would preferably beexpressed over or close to the four-year (1976-1979) period covered by theFourth National Development Plan, and that a six or seven-year budget may beextraordinarily long by bureaucratic standards, it is suggested that afive-year (1977-1981) budget be initially established for the RD&D Unit.The funding requirement during the first five-year period is independent ofthe royalty payment assumption and depends only on the number of projects tobe financed each year (9 to 12). The minimum program size should be about9 projects per year (Case II), and would require a budget of US$40 millionover five years, including about US$20 million in foreign exchange. The needfor a supplementary budget to cover the sixth year and possibly the seventhyear as well, albeit at a much reduced level, must be recognized and plannedfor. The budget for Case II over a five-year period is shown below:

In Millions of Pesetas-/ In Millions of US DollarsForeign Local Foreign LocalExchange Currency Total Exchange Currency TotalCost Cost Cost Cost Cost Cost

1. Project Costs (9 per year)Capital Costs 924 251 1,175 14.0 3.8 17.8Operating Costs 119 713 832 1.8 10.8 12.6

Sub-Total 1,043 964 2,007 15.8 14.6 30.4

2. Administrative Costs - 99 99 - 1.5 1.5

Base Cost Estimate /3 1,043 1,063 2,106 15.8 16.1 31.9

3. Provision for PriceEscalation (26%) 264 290 554 4.0 4.4 8.4

Total Cost 1,307 1,353 2,660 19.8 20.5 40.3

/1 See the footnote in the Table of para. 10 for assumptions.

/2 An exchange rate of Pta 66 = US$1.00 is used.

/3 In 1976 prices or constant 1976 US dollars.

ANNEX 3.4Page 8

C. Determining a Minimum Critical Effort - A Macro Approach

14. As used in this report, the concept of a target or desirable levelof national R&D expenditure has a normative meaning. It assumes both capacityto efficiently utilize funds for R&D (e.g., availability of projects and R&Dpersonnel) as well as ability to effectively transform the results of the R&Dactivities into economic benefits - such as competitive advantage or expansionof output and markets. Generally, it would be difficult to quantitativelyjustify the level of national R&D expenditure on the basis of an analyticalevaluation of the capacity to implement projects and ability to convert theresults into economic benefits. Such justification can be achieved only inbroad qualitative terms based on general observations about the economic con-ditions, the competitive environment, the availability of scientific personneland similar factors. A normative concept of what should be the level ofnational R&D expenditure is important for planning purposes. While estimatesof target R&D levels will vary depending on the person or group analyzing theproblem, and the technique used, the concept itself is useful and the factthat no single estimate can be derived, but rather a range of values does notreduce the utility of the concept or those of the different estimates. Theabsence of a clear-cut quantitative procedure for determining target R&Dexpenditure levels simply forces the analyst to use the results of availabletechniques as guidelines that would indicate the order of magnitude ratherthan the absolute value of the R&D expenditure.

15. In the remainder of this annex, the concept of a target R&D expen-diture level will be used. While a specific number will be mentioned, theamount should be interpreted more as a guide and gauge of the order of mag-nitude rather than an absolute recommended value. In addition the twotechniques that will be used to determine the target levels will involve theuse of averages or a trend line (e.g. regression equation). However, thisdoes not imply that the average or the value indicated by the trend line isthe appropriate target R&D expenditure level for a particular country. Theremay be valid reasons for a specific country to spend much more or much lessthan the average that the regression equation would imply. Spain, for example,up to now, has spent less for R&D than what a cross-section analysis of coun-tries with GNP per capita of US$1,000 or more would indicate. Historically,this can be justified because of the lower labor cost in Spain and similarfactors which provided Spanish goods the necessary competitive advantageover foreign made products. But as Spanish wage rates increase and catchup with the rates of other European countries, and as protection of domesticindustries decrease with Spain's integration into the European economic com-munity, competitive advantage will have to depend more on technology. Forthis reason it is valid to expect that Spain's future R&D expenditure levelshould be around the average of what the developed or advanced developingcountries are spending corresponding to their level of GNP per capita. Theanalysis in Sub-Section C-1 assumes that the average or value indicated bythe regression equation will be appropriate for Spain.

ANNEX 3.4Page 9

16. In this section a rough estimate of the budget for the proposedRD&E program will be derived on the basis of the projected gap between atarget or desirable national level of R&D expenditure and the level thatwould be attained if existing trends are simply extrapolated into the future.For the proposed RD&E program to be a meaningful national program, it mustcontribute significantly towards closing the gap. Sub-Section C-1 describestwo alternative approaches towards establishing a target R&D expenditurelevel. The two approaches yield different target levels which are used todefine a range of acceptable values and the arithmetic average is then usedas the target level of R&D expenditure.

17. In Sub-Section C-2, two methods are used to extrapolate past R&Dexpenditure trends into the future. Again, the average of the two resultsis taken as the level that is likely to be attained if no major new R&Deffort is undertaken and only existing programs and trends are considered.Finally in Sub-Section C-3, the R&D expenditure gap between the target leveland the extrapolated level is proposed to be partially filled by the proposedprogram and alternative program budgets are considered. These alternativebudgets are then reconciled or compared with the one developed under themicro-approach.

1. Target Levels for R&D Expenditures

18. The first method (Method I) for establishing target levels of R&Dexpenditures for Spain will be based on the assumption that the R&D expendi-ture per economically active person (per unit of labor in the economy) isdependent on the general economic wealth of the country as measured by theper capita GNP. Countries with higher GNP per capita can not only save morefor investments in capital, but can obviously spend more for R&D as well,which to a significant degree, leads to new capital investments. Furthermore,these countries have the purchasing power to absorb the output of R&D andnew capital investments, thus making such investments commercially viable.

19. To establish a target level for R&D expenditures, a cross-sectionanalysis of 19 countries with per capita GNP in excess of US$1,000 during1971 (based on the latest OECD publication) is undertaken in Table 9. Thefunctional form used for the relationship between GNP per capita and the R&Dexpenditure per economically active person is the constant elasticity model.This model states that for a given change in GNP per capita, say 1%, thereis a corresponding constant change in R&D expenditure per active person, sayb% for example where b is larger than zero. The constant elasticity model isgiven by:

R = a Gb Where R = R&D expenditure per active person.

G = GNP per capita.

b = A constant. This is the elasticityof R&D expenditure.

a = another constant.

ANNEX 3.4Page 10

The elasticity can be shown by taking the derivative and then dividing bythe original equation which yields:

dR = b dGR G

Thus, a change of say 1% in GNP per capita (dG = 0.01) will result in a changeof b% in R (dR = 0.01 times b). G

20. The value of the elasticity has some significance. For values ofb greater than zero but less than one, proportionately less is spent on R&Dper active person the higher the per capita GNP. That is, if GNP per capitaincreased by 1%, R&D expenditure per active person increases by less than 1%.Similarly if the elasticity is greater than one, 1/ then R&D expenditure peractive person changes at a faster rate than the change in per capita GNP.And in this case, when the labor participation rate (i.e. proportion of thepopulation that is economically active) is not changing, then R&D expendi-tures as a proportion of GNP will increase the higher the per capita GNP level.Data on R&D expenditures indicates that the higher the per capita GNP level,the larger the proportion of GNP spent on R&D. This indicates that an elas-ticity greater than one should be expected.

21. The least squares estimates for the constants a and b in the modelare shown in Table 9. 2/ The values are:

b = 2.174a = 0.00000252

1/ The case when b = I simply means that R = aG implying that R&D expendi-tures per active person is a fixed proportion of per capita GNP, what-ever the GNP per capita level.

2/ The logarithmic form of the model is:

log R = log a + b log G and has the statistical linear form (forcorrelation analysis) of:

Y = A + B Xx

Should Y and X be assumed to be bivariate normal random variables, thenthe correlation coefficient r (in this case r = 0.84) can be tested forsignificance. The test in Table 9 indicates the correlation to be verystrong and significant at the 0.002 level of confidence (that is, thereis a less than 0.2% chance that the true value of r is zero).

ANNEX 3.4Page 11

These constants, being derived for 1971 data, are applied in terms ofconstant 1971 US dollars and the R&D expenditures derived from the corre-lation model must be converted to constant 1976 US dollars which is usedthroughout this annex as the base monetary measure. For countries with GNPper capita (during 1971) in excess of US$1,000, the regression equationbetween GNP per capita and R&D expenditure per active person indicate that fora 1% increase in GNP per capita there is an expected or average increase of2.17% in R&D expenditure per active person.

22. Another method (Method II) of establishing a target level of R&Dexpenditures is to select several countries whose 1971 level of GNP percapita will be approximated by Spain's projected per capita GNP in 1980(all expressed in constant 1976 US dollars) and then use the average propor-tion of GNP spent on R&D expenditures by these countries as the target levelfor Spain by 1980. The approach is based on the assumption that economicgrowth follows certain patterns and that R&D expenditures, expressed as apercentage of GNP, is one of such patterns. Thus, the combined or averageexperience of advanced developing or developed countries can be used as aguide to establish norms or likely patterns to be followed, on the average,by developing countries as they progress along the development path. Spain'sprojected 1980 GNP per capita is about US$3,230 in constant 1976 US dollarswhich would correspond to a GNP per capita of about US$1,820 in constant 1971US dollars (Table 9). Eight countries with 1971 GNP per capita rangingfrom US$1,400 to US$2,600 (in 1971 constant US dollars) are shown below.However, the last three: Japan, The Netherlands and the United Kingdom,have been excluded in calculating the average percentage of GNP spent onR&D that will be used as a norm for Spain. The industrial experience, highlevel of technology and unusually high percentage of GNP devoted to R&Dexpenditures in these countries are not likely to be followed by Spain andhence cannot be used as a guide for that country.

1971 1971 GNP per Capita /R&D Expenditure In Constant In Constant

Country as % of GNP 1971 US Dollars 1976 US Dollars

1. Austria 0.6 /2 2,010 /2 3,8102. Finland 0.8 2,550 4,5203. Iceland 0.5 2,480 4,4004. Ireland 0.7 1.510 2,6805. Italy 0.9 1,860 3,300

Average (1 to 5) 0.7 2,082 3,742

6. Japan 1.6 2,130 3,7807. Netherlands 2.0 2,020 3,5808. United Kingdom 2.3 /2 2,270 /2 4,030

Average (1 to 8) 1.2 2,104 3,762

/1 Rounded to the nearest $10 except for the average.7T Data is for 1970 (in 1970 US dollars instead of 1971).

ANNEX 3.4Page 12

23. By 1980, Spain's R&D expenditures ought to be about 0.7% of itsGNP. A higher proportion would be required if Spain wishes to follow moreclosely the type of industrial development experienced by Japan or theUnited Kingdom. The value of 0.7% of GNP will be used as the norm thatSpain might attempt to achieve by 1980. Since R&D expenditures accountedfor 0.33% of GNP during 1974, the target for 1980 could be achieved if thepercentage of GNP spent for R&D grows at an annual rate of about 13.4%from 1975 up to 1980. This annual growth rate is used to establish thelevels of R&D expenditures under Method II. The results of the two methodsand the average of the two results are shown below:

Spain - Target Levels for R&D Expenditures(In Millions of Constant 1976 US Dollars)

Method I Method II AverageAs % of As % of As % of

Year GNP Amount GNP Amount GNP Amount

Actual1974 0.33 344.6 0.33 344.6 0.33 344.6

Target1975 0.57 604.5 0.37 394.7 0.47 499.61976 0.57 616.8 0.42 454.6 0.49 535.71977 0.58 650.2 0.48 535.3 0.53 592.81978 0.60 701.2 0.55 637.8 0.58 669.51979 0.63 770.7 0.62 754.8 0.63 762.81980 0.66 847.4 0.70 894.8 0.68 871.1

24. The two methods indicate rather close results for 1979 and 1980but show that during 1975-1978 Spain cannot be expected to match the targetsset by Method I on the basis of existing trends and programs. Some majorintervention by the Government to increase R&D expenditure is needed during1976-1978 because Spain at present is very much below the norm (in terms ofR&D expenditures) that Method I implies for the group of countries with GNPper capita in excess of US$1,000 (in constant 1971 US dollars equivalentto US$1,800 in constant 1976 US dollars). This aspect is discussed morefully in paras 28 and 29.

2. Extrapolation of Past R&D Expenditure Trends into the Future

25. Two methods are used to extrapolate existing R&D expendituretrends into the future. The first method (Method I, Table 10) assumesthat the proportion of GNP spent on R&D will continue to grow during 1975-1980 at the same average rate experienced during 1969-1974. In 1969 R&Dexpenditure was about 0.22% of GNP; by 1974 the proportion had increased

ANNEX 3.4Page 13

to 0.33% of GNP. The least squares estimate 1/ of the constant (or average)growth rate during 1969-1974 is 9% annually. That is, R&D expenditures ona trend line basis for the period 1969-1974 increased at least nine percen-tage points higher than the annual growth rate of GNP. For example, if GNPincreased by 1%, R&D expenditures increased by 10% and if GNP increased by10%, R&D expenditures increased by almost 20%.

26. The second method is also based on a constant growth rate modelbut in this case, the assumption is that the value (in real terms) of R&Dexpenditures will grow during 1975-1980 at the same average annual growthrate (or trend line) experienced during 1969-1974. That is, R&D expendituresare assumed to have a momentum of their own, and will grow at a rate inde-pendent of the general GNP performance or growth rate. This second approach(Method II, Table 11), yields an annual growth rate in real terms of 16%annually for R&D expenditures during 1969-1974.

1/ The constant growth rate model has the form:

=P (l + r) where

T = Year index or time period (1, 2, ....N)

P = The initial value at T = 00

r(100)% = The constant annual growth rate

PT= The value at year T

The least squares estimates for P and r are obtained indirectly throughthe linear logarithmic regression equation: log PT = log P + T log (l+r)which is of the form Y = A + B X.X

The constant growth rate model is a superior method of estimating theaverage (or trend line) annual growth rate during a given period comparedto the usual approach of taking the initial and final values and calcu-lating the annual growth rate that would lead from the initial to thefinal value (in this case 8.5%, close to the 9% result of the constantgrowth rate model). This usual approach is very sensitive to the endpoints chosen and could easily give very different results when other endpoints are used. In addition, it ignores all information contained inthe intervening years.

ANNEX 3.4Page 14

27. The results of the two methods, and the average of the two resultsare summarized below:

Spain - Extrapolated R&D Expenditures(In Millions of Constant 1976 US Dollars)

Method I Method II AverageAs % of As % of As % of

Year GNP Amount GNP Amount GNP Amount

Actual1974 0.33 344.6 0.33 344.6 0.33 344.6

Extrapolated1975 0.37 394.7 0.39 416.6 0.38 405.61976 0.41 443.8 0.45 483.2 0.43 463.51977 0.45 501.8 0.50 560.7 0.48 531.21978 0.48 556.0 0.56 650.3 0.52 603.41979 0.53 645.4 0.62 754.3 0.57 699.81980 0.58 741.4 0.68 874.8 0.63 808.1

28. The difference in the results of Method I and Method II is largelydue to the reduced GNP growth rate expected for 1975 and 1976 as a conse-quence of the recession afflicting Europe and the slow recovery projectedover the following two years (1976-1977). During 1975 Spain's GNP is esti-mated to have grown by only 1.1% in real terms and the expectation for 1976 isa modest growth rate of about 1.5% and then gradually increasing to an annualgrowth rate of 5% by 1979. The low growth rates for GNP during 1975 and1976 depress the value of the extrapolated R&D expenditure under Method I.Of the two methods, the second is clearly optimistic since it is unlikelythat the lower GNP growth rates will have no decelerating effect on thegrowth trend of R&D expenditures. The results of Method II can then betaken as an upper limit on the likely values of R&D expenditures duringthe remainder of the 1970's on the basis of existing trends. Both methodsindicate that by 1980, R&D expenditures will range from about 0.58% to 0.68%of GNP. This is a significant improvement over the 0.33% actually achievedduring 1974, but would still fall short of the target or desired levelsdeveloped in Sub-Section C-1. The average of Method I and Method II, whileprobably still on the high side, will be taken as the extrapolated levelof R&D expenditures during 1976-1980.

3. The R&D Expenditure Gap and the Role for the Proposed Program

29. The R&D expenditure levels for Spain derived in Sub-Section C-1and the extrapolated values determined in Sub-Section C-2 are shown belowfor comparison.

ANNEX 3.4Page 15

Spain - R&D Expenditures

(In Millions of Constant 1976 US Dollars)

Target Values Extrapolated ValuesAverage Target Average Ext.

Method Method As % of Method Method As % ofYear I II GNP Amount I II GNP Amount

Actual1973 344.6 344.6 0.33 344.6 344.6 344.6 0.33 344.6

Target orExtrapolated1975 604.5 394.7 0.47 499.6 394.7 416.6 0.38 405.61976 616.8 454.6 0.49 535.7 443.8 483.2 0.43 463.51977 650.2 535.3 0.53 592.8 501.8 560.7 0.48 531.21978 701.2 637.8 0.58 669.5 556.6 650.3 0.52 603.41979 770.7 754.8 0.63 762.8 645.4 754.3 0.57 699.81980 847.4 894.8 0.68 871.1 741.4 874.8 0.63 808.1

30. The first method of setting target R&D expenditure levels indi-cate a much higher value during 1975-1979 compared to the second method.This is because the latter is concerned only with reaching a target ofUS$895 million by 1980 (or 0.7% of GNP) and ignores the fact that Spainspent proportionately much less during 1974 than is indicated by the cross-section analysis of several countries. The first method, however, does takethis fact into account and shows that Spain by now (1975 and 1976) shouldnormally, for its level of income, devote close to 0.6% of GNP for R&Dexpenditures.

31. As mentioned in para.26, it is probably too optimistic to expectR&D expenditures to grow at an annual rate of 16% during 1975-1980. Butshould this be achieved Spain would be at the norm by 1980 suggested bythe cross-section analysis (about 0.7% of GNP spent on R&D). Based on theaverage target and extrapolated values, however, there will be an R&D expen-diture gap during 1975 to 1980. The average gap is about US$70 millionannually during this period although the annual value declines to aboutUS$63 million by 1980. These are shown below:

Spain - R&D Expenditure Gap /1(In Millions of Constant 1976 US Dollars)

Year Gap Year Gap

1975 94.0 1978 66.11976 72.2 1979 63.01977 61.6 1980 63.0

Average gap 1975-1980 = $70.0 million/year

/1 Gap between average target and extrapolated values.

ANNEX 3.4Page 16

32. The historical base for the extrapolated values is only six years(1969-74) and correspond to a period of exceptionally rapid economic growth.Consequently, the extrapolated values may tend to be on the high side, in-dicating an expenditure gap in 1980, for example, of just about 8% of thetarget value. Nonetheless, the existing R&D programs are mostly of thebasic research type or the quality control type of industrial R&D whichdoes not correspond to the type of technological challenge facing Spainat the moment. The proposed program is designed to channel resourcestowards the type of industrial RD&E needed by Spain to be technologicallycompetitive. Thus, even though the R&D expenditure gap may not be quanti-tatively large in percentage terms, there is a far more substantial andserious qualitative gap which the proposed program will attempt to bridge.

33. The proposed program should be intended to fill a meaningful por-tion of the gap, especially the larger gap during the next two to threeyears. The trend of R&D expenditures indicate that perhaps an initial largeprogram in the range of $10 to $20 million annually during 1976-1979, followedby a gradual scaling down to about US$5 to $10 million annually starting 1979might be a good strategy. However, it is doubtful if the industrial sectorcan usefully absorb such sudden large infusion of R&D funds in so short atime. The R&D program must also consider the availability of potential R&Dprojects and the capacity of industry to absorb R&D funds. On this basis, aprogram of at least constant magnitude (in real terms) may be preferable,although consideration must also be given to the alternative of having aprogram with an increasing budget starting in 1977 and then gradually decliningafter 1980. However, if the program is to fill about 10% of the projectedgap, its budget must be about US$7 million annually during 1977-1980. Thiswould be satisfied by the annual budget of about US$7 million under Case I (9projects per year) and would be slightly exceeded by the US$9 million annuallyunder Case II (12 projects per year) in constant 1976 US dollars (Table6).

34. It appears therefore that 9 to 12 projects per year would be areasonable level of activity for the program and will require about US$7to $9 million annually in constant 1976 US dollars.

Industrial Projects DepartmentApril 19, 1977

SPAIN

ITDUSTRIAL RDXE PROJir,T

CAICYT1/ - NUMBER OF R&D

PROJEC'i'S FINANCED AND AVERAGE PROJECT COST

Wumber of R N ilumber of R&D Cost Estinate&/Applications Projects Approved In Millions of Current Pesetas

Year Induistrial Others Total Indus-trial Others Total Average Cost per Largest Smallest__________ Projects Project Approved Cost Cost

1968 4o 35 75 15 8 23 16 120 31969 51 20 71 19 6 25 12 5o 11970 36 12 1[d 8 1 9 23 71 71971 35 13 48 10 2 12 16 53 51972 32 86 118 30 9 39 30 229 31973 17 28 45 12 2 1h 20 55 41974 128 15 143 31 15 h6 23 241 31975 12h. 8 132 33 7 4o 38 227 3

s 7 - NA 15 1 NA A.i 7 A 2 NT

1/ UAlUYL' - Comision Asesora de Investigacion Cientifica Y Technica.2./ Cost estimate at the time of application for financial support.

Industrial Projects Department

April 18, 1977.

SPAIN

INDUSTRIAL RD&E PROJECT

INIJI- SECTORAL R&D EXPENDITURES FOR 1973

In Millions of Current Pesetas Persons EmployedTotal R&D Expenditures Personnel as Total Persons with l with Univ.

Industrial Sector Expenditure for Personnel % of Total Employed University Degrees Degrees

Steel & Metallurgy 211.6 18.4 9% 49 14 28%Mining 419.3 353.8 84 1010 183 18Refining & Petrochemicals 155.1 78.1 50 261 32 12Chemicals 7.6 1.2 16 3 2 67Electricity & Gas 7.6 2.4 31 4 2 50Shipbuilding 152.7 93.5 61 216 50 23Mechanical Industries 55.4 35.7 64 276 77 28Motor Vehicles 524.2 290.9 55 796 66 8Aircraft & Airtransport 162.2 76.4 47 211 34 16Transport 7.1 3.0 42 5 3 60Information Systems 1.8 1.4 78 3 2 67Food 8.o 5.2 65 13 7 54Engineering & Projects 13.8 9.6 70 26 15 58

Total 1,726.4 969.6 56 2883 487 17

Average annual personnel cost ................................... 336,316 Pta (US$5,849)/person employed.

Average total R&D annual expenditure ....... ........ ....... 598,821 Pta (US$10,414)/person employed.

1/ INI - Instituto Nacional de Industria FA

Industrial Projects DepartmentFebruary 2, 1976

ANNEX 3.4Table 3

ND)USTRIA4 RDcE PROJECT

RD&E Unit - Average Cost Structure of Projects

Average_Project Cost - Thousands of Constant 1976 US$Foreign DomesticExchange Resource TotalCost Cost Cost Percentage

Operating Expenses

a. Scientific Personnel 15 135 150 202/

b. Other Personnel 0 1N10 110 1

Sub-Total: Personnel 15 245 260 35

c. Other Operating Expenses 35 55 90 12

Total Operating Expenses 50 300 350 47

Capital Costs

a. Equipment 290 30 320 43

b. Erection 15 30 45 6

c. Land, Buildings and Others 5 25 30 4

Total Capital Cost 310 o5 395 53

Total Project Cost 360 385 745 100

Tn Percent 8% 52% ltX%

Capital Cost/Person Employed 62 17 79

Total Project Cost/Man-yearemployed 24 26 50

1/ Two persons at US$25,o00 each anmually for three years.

2/ Three persons at US$12,000 each annually for three years.

Tndustrial Projects DepartmentApril 18, 1977.

SPAIN,0TIE5 3.4

INDUSTRIAL RD&E PROJECT Table h

PRIVATE SECTOR R&D EXPENDITURES 1971 AND 1972

In Millions of Current Pesetas1971 1972

Total Private Sector Manufacturing Total Private Sector ManufacturingIndustries Sector Industries Sector

Amount % Amount % Amount % Amount %

A. Extramural Expenditures 424.7 11 417.9 12 463.9 9 453.5 10B. Intramural Expenditures 3512.3 89 3098.1 88 4498.4 91 3941.5 90

Total (A+B) Expenditures 3937.0 100 3516.0 100 4962.3 100 4395.0 100

C. Private Sector (A+B) as % of TotalNational R&D Expenditures - 46 - 41 - 48 - 42

D. Details of Intramural (B) Expenditures1. Current Expenses

a. Scientific Personnel 990.7 28 828.6 26 1244.9 28 1056.0 27b. Other Personnel 1226.6 35 1071.3 35 1570.4 35 1391.2 35

Sub-Total O?ersonnel) 2217.3 63 1899.9 61 2815.3 63 2447.2 62c. Other Current Expenses 671.0 19 610.6 20 929.2 20 804.4 20

Total Current Expenses 2888.3 82 2510.5 81 3744.5 83 3251.6 82

2. Capital Expensesa. Equipment 384.9 11 360.5 12 528.9 12 475.2 12b. Erection & Other Services 130.6 4 125.8 4 111.7 2 107.1 3c. Land, Buildings and Others 108.5 3 101.3 3 113.3 3 107.6 3

Total Capital Expenses 624.0 18 587.6 19 753.9 17 689.9 18

Total Intramural Expenses 3512.3 100 3098.1 100 4498.4 100 3941.5 100

E. Number Employed: Full-Time Equivalenta. Scientific Personnel 1958 26 1755 26 1747 24 1637 24b. Other Personnel 5551 74 5035 74 5663 76 5123 76

Total Full-Time Equivalent 7509 100 6790 100 7460 100 6760 100c. Intramural (B) Expenditures per

Full-Time Equivalent 0.47 100 0.47 100 0.60 100 0.58 100d. Current Expenditures per

Full-Time Equivalent 0.39 82 0.38 81 0.50 83 0.48 82e. Capital Expenditures per

Pull-Time Equivalent 0.08 18 0.09 19 0.10 17 0.10 18

Industrial Projects DepartmentFebruary 4, 1976

SPAIN ANNEX 3.4Table 5

INDUSTRIAL RD&E PROJiCT

R&D EXPENDITURE/EMPLOYMENT RATI0-/

YEAR1973 1974

1. Private (Industrial) Sector

a. Total R&D Expenditure in Millions ofcurrent Pesetas 6,3h6.0 8,178.0

b. Total Employed in R&D 2,121 2,363

Ave. Expenditure per Person Employed:i. In Millions of Current Peseta 2.99 3.46ii. In Thousands of Current US Dollars 52.0 60.0

2. Public Sector & Universities

a. Iotal R&D Expenditure in Millions ofcurrent Pesetas 6,800.0 8,000.0

b. Total Employed in R&D 5,820 6,430

Ave. Expenditure per Person Employed:i. In Millions of Current Pesetas 1.17 1.24ii. In Thousands of Current US Dollars 20.3 21.6

3. Total Private & Public

a. Total R&D Expenditure in Millions of 13,146.0 16,178.0current Pesetas

b. Total Employed 7,941 8,793

Ave. Expenditure per Person:i. In Millions of Current Pesetas 1.66 1.8hii. In Thousands of Current US Dollars 28.9 32.0

1/ Unofficial estimates. No official R&D statistic exists for 1973 and onwards.

Industrial Projects DepartmentFebruary 2, 1976

SPAIN ~~~~~~~~~~~~~~Table 6

INDUSTRIAL RD4E PROJECT

ESTIMATED ANNUAL BUDGETARY SUPPORT

FOR THE IT5U PROGRAM - CASE I AND CAEI-1

A. Assumption I - Breakeven Operations-2

lumber of Projects Cashflow in Millions of Constant 1976 US Dollars -Budgetary Support in Millions of Current US DollarsGenerating Outflow for 3,, Inflow from Case I Case 1I

Year Payments Projects & Adm.- Successful Projects Budgetary Suoport Annual Cumulative Annual CumulativeYear Case I Case II Case I Case II Case I Case II Case I Case II Support Support Support Support

1(1977) - - 6.43 4.90 -- 6.43 4.90 6.94 6.94 5.29 5.292 - - 7.84 5.95 -- 7.84 3.95 9.09 16.03 6.90 12.193 - - 9.24 7.00 -- 9.24 7.00 11.55 27.58 8.75 20.944 - - 9.24 7.00 -- 9.24 7.00 12.38 39.96 9.38 30.325 - - 9.24 7.00 - .24 7.00 13.21 53.17 10.01 40<336(1982) 4 3 9.24 7.00 2.31 1.75 6.93 5.25 10.60 63.77 6.03 48.'367 6 6 9.24 7.00 4.62 3.30 4.62 3.50 7.58 71.35 5.74 54.108(1984) 12 9 9.24 7.00 6.93 5.25 2.31 1.75 4.04 75.39 3.05 57.169 16 12 9.24 7.00 9.24 7.00 - - . - - -

10 16 12 -9.24 - 7.00 9.24 7.00 --- -11 16 12 9.24 7.00 9.24 7.0012 16 12 9.24 7.00 9,74 '.00 ----

B. ~-ssumption II -Royalty Payments Twice -theBravnLel

1(1977) - - 6.43 4.90 - - 6.4h3 4.90 b .94 6.94 5.29 5.292 - - 7.84 5.95 - - 7.84 5.95 9.99? 16.03 6.90 12.193 - - 9.24 7.00 - - 9.24 7.00 11.55 27.58 8.75 20.944 - - 9.24 7.00 - 9.24 7.00 12.38 39.96 9.38 30.325 - - 9.24 7.00O 9.24 7.00 13.21 53.17 10.01 40.336(1982) 4 3 9.24 7.00 4.62 3.50 4.62 3.50 7.07 60.24 5.36 45.697 8 6 9.24 7.00 9.24 7.00 - - - 60.24 -45.89

8 12 9 9.24 7.00 13.86 10.54 (4.62) (.50) No t C a 1 c u I a t e d NoI Ca1cu 9 16 12 9,.24 7.00 18.48 14.00 (9. 24) (7.00) "10 16 12 9.24 7.00 18.48 14.00 (9.24) (7.00)I11 16 12 9.24 7.00 18.48 14.00 (9.24) (7.00) " 12 16 12 9.24 7.00 18.48 14.00 (9.24) (7.00)'

I/ Case I - 12 projects supported annually. Case II - 9 projects supported each year.

2/ Assumptions are: (a) completed ROAR projects take 2 additional years to be comsercialized; (b) royalty payments are for four years; and(c) at breakeven operations, royalty payments are US$0.58 million annually per successful project. The breakeven royalty payment iscalculated as follows; annual royalty payment = total annual outflow for projects and administration/total Projects generating paymentsat steady state period or year 9.

3/ Administrative costs, all in local currency, are estimated as follows (in constant 1976 US dollars) : (a) senior personnel - 4 0 $25,9000or 9100,000 annually; other personnel - B 0 $15,000 or $120,000 annually; and (c) operating costs and contingencies $80,000 annually fora total of M30,000.

Industrial Projects DepartmentApril 18, 1977.

muNE 3.4SPAIN Table 7

INDUSTRIAL RD&E PROJECT

DISB1URSE2ENT SCHEDULE & ASSUIEDINrERNATIONAL INFLATION

A. International Inflation Rate

Annual Compounded Annual CompoundedInflation Rite, % Inflation Rate, %

Year Rate, % (Mid-1975 to Year Rate, % (Mid-1976 toMid-Year Mid-Year

1975 12 - 1981 71976 8 - 1982 7 51977 7.r 8 1983 7 641978 7.5 16 1984 7 751979 7.5 25 1985 7 88

1980 7 34 1986 6 33

B. Disbursement Schedule Per Project

In Thousands of Constant 1975 US Dollars

Capital OperatingYear Costs Costs Total

1 395 116 5112 - 117 1173 - 117 117

395 350 745

C. Program Disbursement Schedule For Projects - Case II

Number of Number Disbursement in US$ Millions1/Projects Completed In Constant In Current US Dollars

Year Started & Successful 1976 US$ Annual Cumulative

1 (1977/78 9 4.60 4.97 4.972 (1978/79 9 5.65 6.55 11.523 (1979/80 9 6.70 8.38 19.90It (198(1/81 9 3 6.70 8.98 28.885 (1981/82 9 3 6.70 9.58 38.46

5-Year -

Total 45 6 30.35 38.46 -

6 (1982/83) 9 3 6*70 10.25 48.717 (1983/84) 9 3 6.70 10.99 59.708 (1984185) 6.70 11.72 71.428-YearTotal 72 15 50.45 71.42 -

D. Foreign Exchange Disbursement Schedule For Projects - Case II

In Millions of Current US DollarsForeign Exchange Cost Domestic Resource Cost

Year Annual Cumulative Arnual Cumulative

1 (1977/78) 3.17 3.17 1.80 1.802 (197E/79) 3.58 6.71 2.97 4.773 (1979/80) 4.05 10.80 4.33 9.10L (1980/81) 4.34 15.14 4.64 13.745 (1981/82) 4.63 19,77 4.95 18.696 (1982/83) 4.96 24.73 5.29 23.98

(1983/84) 5.31 30,04 5.60 29.66(198L/85) 5.67 35.71 6.05 35.71

1/ The disbursements are assumed to be at the start of the operating'r fiscal year (e.g., mid-1977 for operating year 1).

Industrial Projects DepartmentApril 18, 1977.

ANNEX 3.4

SPAIN

INDUSTRIAL RD&E PROJECT

ESTIMATED BUDGETARY SUPPORT FOR CASE III

(GRADUAL INCREASE IN NUMBER OF PROJECTS)

In Millions of Constant 1976 US Dollars In Millions of Current US DollarsNumber of Number Number Outflow for Inflow fromProjectsl/ Completed F&, Generatin2 Projects & Successful, Budgetary Support Budgetary Support

Year Started - Successful- Payments- Adm. Exp. Projects - Annual Cumulative Annual Cumulative

1 (1977/78 3 - .i.53 - 1.53 1.53 1.65 1.652 (1978/79 6 - - 3.72 - 3.72 5.25 4.32 5.973 (1979/80 9 - - 5.95 - 5.95 11.20 7.44 13.414 (1980/81 12 1 - 8.19 - 8.19 19.39 10.97 24.385 (1981/82 12 2 - 8.89 - 8.89 28.28 12.71 37.096 (1982/83 12 3 1 9.24 0.58 8.66 36.94 13.25 50.347 (1983/84 9 4 3 7.71 1.75 5.96 42.90 9.77 60.118 (1984185 9 4 6 7.36 3.5Q 3.86 46.76 6.76 66.87

8-year Total 72 14 - 52.59 5.83 437w 66.87 -

9 (1985/86) 9 4 10 7.00 5.83 1.17 47.93 2.20 69,0710 (1986/87) 9 3 13 7.00 7.58 (0.58) - (1.15) -

10-year Total 90 21 - 66.59 19.24 47.35 67.92 -

1/ The average is still 9 projects financed each year, just as in Case II.2/ See footnotes (2) and (3) of Table 6.3/ Royalty payments at US$0.58 million per successful project (the breakeven level).

Industrial Projects DepartmentApril 18, 1977

ANNEX 3.4

SPADi Table 9

DINIJSTRIAL RD&Z PROJECT

DETERMINING TARGET R&D EXPENDITURE LEVELS - METHOD I(Constant Elasticity Model Based on Cross Section Analysis)

A. Cross-section Data - 1971 (Based on OECD Publications)

Mid-Year % Economically R&D Expendi- GNP per R&D ExpenditurePopulation Active ture in Capita per Active

Country (millions) Population millions of US$ (USGj) PersonCUS $)

1,/ (G) (R)1. Austriac/ 7.39 43.8 77.6 2010 24.0

2. Belgium 9.71 40.9 363.7 2960 91.63. Canada 21.60 40.4 1145.4 4140 131.34. Denmark-1 4.92 48.3 143.2 3190 60.25. Finland 4.68 47.8 90.9 2550 40.66. France 51.25 42.0 2920.4 3360 135.77. F.R.Germany 61.29 43.8 4499.1 3210 167.68. Greece 8.98 38.3 17.9 1250 5.29. Iceland 0.21 39.8 2.7 2480 32.910. Ireland 2.97 37.6 32.8 1510 29.411. Italy 54.08 36.1 929.0 1860 47.612. Japan 104.66 49.5 4041.0 2130 78.013. Netherjinds 13.19 36.4 783.8 2020 163.214. Norway- 3.88 40.2 111.6 2860 71.615. Spain/ 34.00 37.8 122.0 1220 9.516. Sweden 8.11 48.9 583.3 4240 147.1

17. Switzerland 6.32 48.4 473.8 3640 154.918. United Kingdom-/ 55.73 46.2 2596.5 2270 100.819. USA 207.05 42.0 27527.6 5160 316.6

1/ 1970 data2/ Data from revised figures released by the National Statistics Institute-Spain.

B. Correlation Analysis Model (Constant Elasticity Model)

R = a Gb or log R = log a +b log G which has the form Y = A + BX

C. Least Squares Estimates for A and B

(1) A = -5.59468 = (0.40532 - 6.0)a = anti log (-5.59468) = 0.00000252

(2) b = 2.174

The correlation coefficient is r = 0.84. Assuming Y and X are bivariate normalrandom variables, the significance test for r is based on the statistic Z which isapproximately distributed as the unit or standard normal random variable.

Z = V ' ln (1+r)(1-P)2 (1-r) (1+P)

where P is the value of the correlation coefficient being tested under the nullhypothesis. For example, if we test whether P = 0, then

Null Hypothesis Ho : P = 0

and the null hypothesis is accepted if Z is less than where C( is theconfidence level. For this case, Z = 4.88 which is largtr than %,Ca. (3.09)hence the hypothesis that P = 0 is rejected and it can be concluded that Y andX are strongly and significantly correlated. ( C.times 100% gives the probability thatP = 0. In this case the Cd used is 0.002).

D. Target R&D Expenditures for SpainR&D Expenditures in

Active In Constant 1971 US Dollars Constant 1976 US $Year Population GNP Per R&D Expen- R&D Expen- As % of Amount

(millions) Capita diture per diture GNPActive (millions)Person

(C) (R)Actual

1974 13.52 1,646 14.25 192.7 0.33 309.5Target

1975 13.68 1,599 23.49 321.4 0.57 604.51976 13.85 1,605 23.68 327.9 0.57 6X.81977 14.01 1,636 24.67 365.7 0.58 I .2

1978 14.18 1,684 26.29 372.8 0.66 701.21979 14.35 1,749 36.56 409.7 a04 3IU7190 14.52 1,817 3I.00 450.5 0.64 gffA1981 14.70 1,888 33.71 495.5 0.69 932.0

Industrial Projects DepartmentApr3. 18, 1977

ANNEX 3.4:able 'C

INWSTRIAL RDkE PROJECT

EXTRAPOLATION OF R&D EXPENDITURE - METHOD I(Proportion of GNP Spent on R&D Grows at a lonstant Rate)

A. HISTORICAL DATA

GNP R&D GNPin Billions Expenditure Priceof Current as % of Deflators Time

Year Pesetas GNP (1975=1.00) Variable

1969 2250 0.22 0.5L 11970 2562 0.23 0.58 21971 2901 0.29 0.62 31972 3409 0.30 0.68 h1973 U129 0.32 0.75 5197h 4949 0.33 0.86 6

B. EXTRAPOLATION MODEL (Proportion of GNP Spent on R&D Grows at Constant Rate)

PT Po (1 + r)T Where : T = Number of years.PO = Base value of R&D expenditure

OR, log PT = log PO + T log (1 + r) as % of GNP.1/ r(100)% = Constant annual growth rate.

which has the form-': PT = % of GNP spent on R&D at time T.

Y = A + B X

C. LEAST SQUARES ESTIMATES FOR A AND B

(1) A = 0.3.201 - 1.0PO = antilog A - 0.205%

(2) B = 0.03787r = (antilog B) - 1.0 = 0.091 or 9.1% = Say 9%

D. EXTRAPOLATED GNP AND R&D EXPENDITURES

EXTRAPOLATION FORMULA: PT = 0.205 ( 1 . 0 9 )T

n C tat975Peta R&D Expenditures in% AnTnal GP l % of GNP RFD p7pen- MillionJ of U DollarsReal Increase Billions Spent oX) ditures in - Cons Tn C =ait

Year T in GNP of Pesetas RED Billions 1575 US$ 2 1976 uS^ 3/

1975 7 1.1% 5818 0.37 21.53 358.8 394.71976 8 1.5% 5905 O.41 21h.21 403.5 443.81977 9 3.0% 6082 0.h5 27.37 456.2 501.81978 10 h.0% 6325 0.48 30.36 506.o 556.61979 11 5.0% 6641 0-53 35.20 58S.7 645.41980 12 5.0% 6973 0.58 ho.blh 674.0 741.41981 13 5.0% 7322 0.63 1,6.13 768.8 845.7

1/ StrictlyP- eang, testatstical linear regression model is Yx = A + BX + E (\ where the El, are independentlydistributed random variables (i.e. error terra)with zero mean and unknown variance. Should theassumption be made that the Ex are normally distributed, then tests on confidence intervals forthe estimates of A, B and the variance of Ex can be done.

2/ At pta 60 = US$1.00.3/ Based on international inflation rates in Table 7 (i.e.,10% escalation between mid-1975 and mid-1576).

Industrial Projects DepartmentApril 18, 1977.

SPAIN ANNS 3i4

INDUSTRIAL RD&E PROJECT

EXTRAPOLATION OF R&D EXPENDITURE - METHOD II(Constant Expenditure Growth Rate Model)

A. HISTORICAL DATA

R&D Expenditure GNP Price R&D Expendituresin Billions of Deflators in Billions of Time

Year Current Pesetas (1975 = 1.00) Constant 1975 PeriodPesetas

(RT) (T)

1969 h.95 0.51' 9.17 11970 5.95 0.58 10.26 21971 8.o1 0.62 13.77 31972 10.31! 0.68 15.21 11973 13.15 0.75 17.53 5197)- 16.18 0.86 18.81 6

B. EXTRAPOLATION! MIODEL (Constant E-penditure Grofth Rate)

R T = Ro (1 + r)T Whlere: T Number of yearsR 2 = Base value for R&D expenditure

Or in billions of constant 1975pesetas.

log iT I log X0 + T log (1 § r) r(lO0)% Constant growth rate per year

which has the form!/ Yx - A + BX RT w RED expenditures in billionsof constant 1975 pesetas attime period T.

C. LEAST "SQU.ARM ESTIMATE FOR A AND B

(1) A = 0.90526Ro = anti log A -8

(2) B = 0.06577r = (antilogB) - 1.0 0.163 or 16.3% = Say 16%

D. EXTR.POLATMD R&D EXPE1DITURE

RMD Expenditures In Millions of USDollarsin billions of In Constant In Constan-.

Year T constant 1975 Pesetas 1975 US$2/ 1976 USq3/

1975 7 22.72 378.7 414.51976 8 26.36 139.3 433.21977 9 30.58 509.7 560.71978 10 35J.l7 591.2 650.31979 11 41.1lI 685.7 751431980 12 L7.72 795.3 87L.;,1981 13 55.35 922.5 -O, *.

V/ See footnote (1/) of Table 10.2/ At Pta 60 = TJSpl.00I/ Bused on international ietlatior, rates in Table 7 (i.e., 10% escalation between mid-1975

and 1976).

TIdustrial Projects Departmentkpril 18, 1977.

ANNEX 4.1Page 1

SPAIN

INDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

THE RESEARCH, DEVELOPMENT AND ENGINEERING UNIT

A. Structure and Functions

1. The project under appraisal consists of the establishment of a neworganization initially established within the Spanish Ministry of Industry,called here the RD&E Unit. The purpose of this organization is to promotethe development by Spanish industry of new products and processes based onSpanish technology, so as either to develop new product areas which will becompetitive within 5-15 years, or to maintain the competitiveness of exist-ing industries.

2. The Unit will accomplish this task by identifying present or fu-ture market needs which can be filled by products based on technology whichis within the capabilities of Spanish industry, and then working with indus-try and other appropriate institutions to commission and finance marketstudies, development, engineering and, if necessary, research.

3. While most of the activities will be directed towards larger in-dustries, some part of its effort will be deliberately oriented towards theneeds of smaller enterprises. There will be no minimum size criterion forindustrial participation in the programs, nor will public sector industrybe favored over the private sector.

4. In general, the Unit would operate as follows. It will surveyavailable technology and resources of Spanish industry, to estimate itscapacity to develop particular products and processes, based on Spanishtechnology, that would be competitive in future markets. It would thenselect about half a dozen industrial fields of maximum promise for furtherresearch and development work during the next 3-5 years. Such opportuni-ties are likely to be found in supporting product lines for industries inwhich Spain is already strong.

5. For each field thus selected, the organization would carry out,with maximum cooperation of industry, detailed studies of potential markets,and would identify and design product lines and a marketing strategy tocompete in them, using outside expertise, if necessary. It would reviewavailable foreign technologies for design and production, and select thosemost appropriate to be obtained under license as part of a strategy intendedto lead to increased reliance on Spanish technology. It would commissionand supervise (but not itself perform) the necessary research, development,design and engineering studies needed to master these technologies, toadapt them to Spanish conditions, and to improve them. These studies would

ANNEX 4.1Page 2

be carried out for the most part in Spanish institutions (including labora-tories) in the public or private sector, although specialized studies maybe contracted to foreign institutions. In practice, most of the work wouldprobably be carried out in industrial firms. The Unit would work withSpanish industries and government agencies that are potential markets forthe new products, to draw up procurement standards which the industry canaspire to meet. It would work out an investment strategy in cooperationwith appropriate financial institutions.

6. The Unit would also examine government policies that relate tothe development of these new industries and product lines, and would recom-mend to the government possible policy changes needed to stimulate the devel-opment of the industries selected. These policy measures, however, shouldnot be overly protectionist. Specifically, borders should not be closed tocompeting products or technologies from abroad, nor should protective tar-iffs be excessive or maintained for unduly long periods. Otherwise, itwill be very difficult to insure the competitiveness of the new Spanishtechnologies to be promoted by the program. It would, if appropriate, esti-mate the needs for technical and management personnel in the areas selected,and would cooperate with educational institutions to develop appropriate cur-ricula and training programs. It would also foster the formation of profes-sional or business organizations needed to promote communication among par-ticipants in the program.

7. The success of this project hinges on the quality of the staffof the RD&E Unit, the strength and flexibility of its organization, and thelong-term stability of its financial arrangements. There must be continuousand open discussion with industry, with the rest of the government, and withexperts in relevant fields of busines and technology. The project is inthe nature of an experiment, and its progress will be regularly evaluatedby the IMinistry of Industry and the results of this evaluation reported tothe Bank.

8. Ideally, the RD&E Unit would be an autonomous organization fromthe beginning, since this status would enable it to receive income fromsources other than the ministry budget, for example, by sales or licensingof technology. However, it is apparently not possible to obtain the neces-sary law from the Spanish Cortes in time for the RD&E Unit to begin opera-tions during calendar year 1977. For this reason, and since the Unit willnot be receiving outside income for the first few years of its existence inany case, the Unit will be organized initially as a servicio publico cen-tralizado sin personalidad juridica. It will be reconstituted as an auto-nomous organization as soon as practicable, and in any case within two yearsof its establishment. The Unit will be authorized to employ a large numberof its staff on a temporary and/or consulting basis, and to hire outsideconsultants and consulting firms (Spanish or foreign) as it sees fit. Itwould not be bound by the salary structures or other procedures and rules ofthe Spanish civil service.

ANNEX 4.1Page 3

9. The Unit is to be initially assured of financing for the first4 years of its work, corresponding to the four years of the IVth Develop-ment Plan. This should provide a sufficient running-in period to enableit to show first results. Its activities will be monitored during thisperiod, and a full evaluation made by the Ministry of Industry every twoyears. This first financing will probably come exclusively from govern-ment budgetary allocations, assisted by the initial World Bank financing.However, to ensure requisite interest in the activities of the Unit fromindustry, it will be an explicit objective to attract industrial coopera-tive funding for its projects within two years, i.e. by the time it achievesthe status of an autonomous organization. This funding should, if possible,extend not only to specific projects but also to the core work of the Unit.It should be the goal of the project that the Unit's outside income shouldincrease to the point that the government support needed should level offafter about 5 years and hopefully decline as the organization and the pro-grams achieve self-sufficiency. In other words, income from sale of patentsand royalties plus industrial cooperative funding should cover all expenses.These are ambitious goals but are worth striving for.

10. The RD&E Unit would report to the Director-General for IndustrialPromotion and Technology of the Ministry of Industry. Its structure con-sists of a Managing Director, a staff, a Board of Directors, and a numberof other committees and task forces. The staff would be subdivided into acentral support group and a number of groups for the identification of proj-ects. Full studies of prospective new product areas would be carried outby ad hoc task forces on contract.

11. The Unit would have a small head office in Madrid, but would notcreate any physical research and development facilities of its own. Theelements of the Unit as it is presently conceived are explained below. Inpractice, the organization could be varied at the discretion of the ManagingDirector. Major changes in organization, functioning, and personnel will bediscussed with the Bank.

B. Administration

12. The Managing Director will be recruited from private industry andwill be paid sufficient salary to attract a man of outstanding qualificationscomparable to those of the managing director of a firm in private industry.He will report to the Director-General for Industrial Promotion and Tech-nology of the Ministry of Industry. He shall only be removed for substan-tive failure to carry out the programs. This provision is specifically in-tended to ensure the continuity of the management through possible changesin the Ministry of Industry and the Directorate-General of Industrial Pro-motion and Technology. The Managing Director will be in charge of all opera-tional activities, and will have authority to hire and fire members of thestaff, to launch and terminate studies, to allocate the budget to projects,to authorize contracts for outside research activities, and to approve ar-rangements for participation of industry. The Managing Director will beassisted by appropriate administrative staff including a deputy and by suchoutside technical assistance as may be appropriate.

ANNEX 4.1Page 4

13. The staff will consist of:

(a) A central support staff, consisting of experts intechnologically oriented market forecasting, project

appraisal, promotion of new technologies to industry,and the management of new product and process devel-opment. This staff will normally be on permanentassignment with the RD&E Unit.

(b) Ad hoc task forces for projects, specialized in par-ticular areas -- e.g. electronics, engineering goods,etc., and consisting largely of specialists fromindustry recruited for 1-3 year periods. A typicaltask force would consist of experts in market fore-casting, produce or process technology, and manage-ment of engineering, development, and research,headed by a Group Leader who will be responsiblefor obtaining support from industry. The GroupLeader will report directly to the ManagingDirector.

(c) A Monitor will be appointed from the staff to super-vise the work of each task force on behalf of theManaging Director.

(d) A qualified accountant, satisfactory to the Bank,will review all invoices submitted for payment bythe Bank.

14. Task Forces: The task forces will be formed by drawing expertsfrom industry, universities, research organizations, consulting firms, andother appropriate sources, for terms ranging from a few months to the lifeof the task force. The task forces will not form part of the RD&E Unit butwill be independent bodies on contract, in order to maintain a flexiblestaffing pattern. The task forces will maintain close contact with indus-try, both prospective purchasers and producers, from the beginning, andwill, if possible, be partially funded by them. They will contract theactual marketing studies, design work, R&D, etc., to appropriate firms orinstitutions; the contracts will be approved by the Managing Director and,if appropriate, by collaborating industry. The task force will supervisethe work and make periodic progress reports to a monitor from the staff.As soon as a prototype is ready, if not before, the task force will seekto find partners in industry who are willing to share further developmentcosts in order to acquire the know-how after it is fully developed. Oncethe first product lines have been successfully launched, the task forcewill be dissolved.

15. The ideas for R&D work and the conduct of the work are not lim-ited to the above described steps. Private or public firms or institu-tions may initiate action by proposing specific projects to the RD&E Unit,

ANNEX 4.1Page 5

which may then create a task force involving the initiating firm or insti-tution. The latter can undertake the work, on contract, but, if so, thefirm shall not thereby get an exclusive right to the new products or pro-cesses that emerge.

16. The Board of Directors will be composed of not more than 10 pro-minent leaders of Spanish industry, leading research and design engineers,directors of leading laboratories and consulting firms, and representativesof the Ministry of Industry. At least half should be from the private sec-tor. The Director-General for Industrial Promotion and Technology in theMinistry will be its Chairman. The membership of the Board would changeevery few years, by a system of staggered terms. This system would ensurea continuous flow of ideas between the project unit and other Spanish insti-tutions concerned with industrial technology.

17. The Board of Directors will be expected to ensure continuous dia-logue and cooperation between government, industry and research centers; toseek development funds from industry; and finally to help in the introduc-tion of the results of research efforts into Spanish industry. The Boardwill also periodically review the progress of the total program. It willbe encouraged to form associations of industrialists having a general in-terest in the work in order to improve its overall relations with the pro-ductive sector.

18. The Board will also serve to insure continuity in the face of pos-sible changes in the government or in the climate of industrial policy andopinion. In particular, the Board must consent to the hiring and firingof the Managing Director, and will review all contracts calling for thetransfer of technology to industry free of royalty or other payments.

C. Evolution of a Project of the RD&E Unit

19. In order to clarify the workings of this project as we presentlyconceive them, we shall describe the evolution of a typical project. Thiswill, of course, vary enormously according to the industrial areas, thetechnical nature of the innovations studied, the typical size of theSpanish firms now in the area, the degree of interest displayed by thesefirms, and many other factors.

20. The first task of the RD&E Unit will be to identify which par-ticular areas of industrial technology might benefit from an infusion oftechnology and hence should be selected for review for consideration forthe possible establishment of an appraisal task force. The criteria usedto determine the importance of a particular industry to Spain include suchparameters as the current size of the industry in Spain; the current sizeof the industry worldwide; the rate of growth of each, past and projected;the leverage that technology induces in the industry; the rate of tech-nological change and product obsolescence; the import and export position

ANNEX 4.1Page 6

of the industry; the nature, distribution, size, and apparent aggressive-ness of firms currently in Spain; the number of firms which are subsidi-aries of foreign companies; and an assessment of their needs and a con-sideration of the extent of foreign licenses and dependence upon foreignknow-how. Sufficient evidence should be assembled to indicate that, inthe particular industry under consideration, government assistance to andcollaboration with technological development would stimulate growth. Thereaction of the industry itself should be sought, since its cooperationwill ultimately be essential to the success of the undertaking.

21. A project begins with the decision of the Managing Director toreview a particular industrial area that seems to offer attractive oppor-tunities. The review will determine whether prospects justify setting upa task force in this area and, if it concludes that they do, of formulatinga detailed program of technological and market research. Generally, theanalysis will consist of studies of potential domestic and export markets,an estimate of Spanish production, managerial and marketing capability todetermine a broad definition of products or processes suggested to exploitthe market potential, including a tentative identification of Spanish firmsthat might be interested in participating in the project, and a general de-termination of marketing, product design, research and development, andother efforts, with the estimated cost, necessary to fully develop theideas identified. Mluch of this may be contracted to outside consultants,local or foreign. The work will often fall naturally into two stages ofincreasing precision: the first stage, to arrive at an initial tentativerecommendation that a task force should indeed be formed; and the second,to work out the details of its work program.

22. The initial review is funded by an allocation from the Unit bud-get. Eventually, one may hope that this will be supplemented by a contri-bution from interested industries or industrial trade associations, althoughthis is unlikely until the program is firmly established on the Spanish in-dustrial scene. The review should seek the maximum involvement of and inputfrom the industries who produce and use the products being considered, eitherindividually or through trade associations or other arrangements, as theirsupport will be critical in subsequent stages of the project.

23. The task force has the responsibility of carrying out, jointlywith industry, the development and engineering work (and, if necessary,research), necessary to translate the various studies into prototypes andpilot plants, and to oversee their transfer to and commercialization byindustry.

24. It will often be considered desirable to build a program aroundan ongoing industry segment. Recognizing that technology alone is only oneof several key elements of a successful business venture, it will be reason-able to build technology support into an already established, ongoing busi-ness. Therefore, one of the earliest efforts in the program developmentwill be the search for an ongoing business activity into which the tech-nical program can be inserted. The task force will establish a list of

ANNEX 4.1Page 7

companies that, in their opinion and as a result of their studies, has theskills necessary to capitalize on the venture, including most importantly theenthusiasm and desire to do so. The ultimate program, thusly, should be ajoint effort between the selected companies and the task force itself.It should consist of the technical project which will be supported, includ-ing such aspects as facilities, manpower, project organization, funding,timing, phasing, review points and, to the extent possible at this earlystage, a PERT chart. The second portion of the program should be a pros-pectus by the company or the companies involved which outlines a businessplan contingent upon presumed technical success.

25. A task force work program may take a wide variety of forms, de-pending on the products and processes being developed. In some cases ofproduct development, as for example in many electronics products, the tech-nical project itself will be a fairly straight-forward, although somewhatcomplicated, affair. The objectives at each step along the way will begenerally clearcut. The end objective will be well understood and theparameters which will measure whether the project is successful or notat various stages will be clear to everyone concerned. Technology willbe within the state-of-the-art; test and performance data will be unam-biguous; and project management, while difficult, will be straight-for-ward. There will, on the other hand, be cases in which the technologicalupgrading of an existing industry is essential to the development of acertain set of new products. For example, it might turn out that thequality of Spanish electronic components must improve if certain newproduct lines are to develop in medical, aircraft, or naval electronics.In such a case, the objective of the task force could become the appli-cation of technology to improve the quality and reduce the costs of elec-tronic components; to capitalize upon inventions and innovations emergingfrom such work; and to undertake the development of logical extrapolationsof the original product line into new component areas and, possibly, intoequipment devices and systems.

26. Development, engineering and research on a given product linedoes not, of course, begin and end with the work of the task force and thecommercialization of its results. On the contrary, it is a never-ending pro-cess, and often the solution to an immediate problem exposes the existenceof two more problems. Even Xerox and Polaroid - to cite two U.S. companieswhose existence arose from dramatically new inventions and products - areof the size and strength they are today not only because of the eleganceof the initial invention, but also because of the many years of dedicated,intelligent, hard, technical work that has been constantly applied to im-prove the product, to reduce its costs, and to increase its applicabilityand appeal to a large number of people. The same will be true a fortioriof the less dramatic innovations stemming from the work of the RD&E Unit.

D. Institutional Relationships

27. The arrangements between the RD&E Unit, the task force and indus-try are a matter of some delicacy, since the terms on which the technology

ANNEX 4.1Page 8

are made available to industry will depend on the degree of industry's con-tribution to the product development work. For this reason, such arrange-ments must be approved by the Board of Directors. While it is impossibleto foresee all the forms which such arrangements might take, the followinggeneral guidelines may be expected to hold.

28. Technologies or products whose development was funded predomi-nantly or solely by the RD&E Unit are the property of the RD&E Unit andwill be made available to industry on license. If the industrial contri-bution was substantial, license fees should be correspondingly reduced.If two firms or groups of firms contributed in different degrees, theone contributing more should be given favorable treatment. If the in-dustrial contribution was predominant, or in other extraordinary circum-stances, all payments for transfer of technology may be waived at thediscretion of the Board of Directors, after consultation with the Bank.

29. The problems of measuring the extent and importance of contri-butions to the development of new projects are complex, since there areusually many factors to be considered and the extent of contribution isnot necessarily, or best, measured by the amount of funds. Similarly, therewards for such efforts, in the form of property rights (e.g. patents) andlicenses to use the new technology (either exclusively or non-exclusively)are just as complex. No set of generalized rules is sufficient, and with-out some experience, no exhaustive set can be produced. To the extent thatthe new products or processes are not patentable, the problem may be simplersince any producer can then avail himself of the opportunities, whether hecontributes or not (though he may lack essential "know-how"). If the prod-uct or process is patentable, the questions of who owns the property rightand on what terms become difficult. Existing Spanish law will supply someguidance. Additional guidance will have to be worked out later. Since themain purpose of the project is to develop new products and processes, andto disseminate them to Spanish industry, the only general rule that can bestated is that the project shall not lead to conveying exclusive rights un-reasonably to single owners without a proof of contribution at least equalto that required in the Spanish law on patent rights.

Industrial Projects DepartmentMlarch 1976

ANNEX 4.2Page 1

SPAIN

INDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

INSTITUTIONAL ARRANGEMENTS: POWERS, INDEPENDENCE, AND LIMITATIONSIN SPANISH ADMINISTRATIVE LAW

A. Introduction

1. One major purpose of the industrial part of this project is tocreate an institutional framework within which support for research, develop-ment, and engineering of new products can be systematized and perpetuated inthe interest of accelerating industrial development. Since the projectcreates responsibility for defining specific research tasks leading to newproducts and processes, and provides funds for the support of these tasks, arequirement is set up that there exist an institution that can carry out theseresponsibilities. There are a number of these responsibilities and theexercise of them requires that the institution be able to make decisions aboutthe allocation of funds, be able to establish task forces that carry out thework includingcontracting of personnel in the Government, in private industry,or with foreign partners; the tasks also require that decisions can be madequickly at times and that no long laborious processes for approval be required.Because the Government is the borrower of the funds in this project, theinstitution that will be created must also be responsive to Government controland ultimate decision. Consequently, there are a number of alternatives tobe considered between the necessity for effective operational management ofthe program and the requirements for the Government to have ultimate controlover disposition of the funds.

2. Spanish administrative law provides for several kinds of insti-tutional organizations, ranging from those that are very closely related tothe Government itself or to specific ministries within the Government, toorganizations that have a great deal of autonomy and flexibility in makingdecisions, in exercising specific powers granted to the organization, inacquiring, owning and disposing of real property or property rights andin acquiring income and spending the funds for operational or investmentpurposes.

3. The basic law setting out the rights, duties and limitations onthese organizations is the Law on the Juridical Regimen of Autonomous StateEntities (26 December, 1958). This law has been codified in the volumeEntidades Estatales Autonomas (Official Bulletin of the State, July 1966).The summaries and comparisons among alternative organizations presentedbelow have been derived largely from that volume. The purpose is to makecomparisons among alternatives that may make a difference in the ability toconduct the affairs of this project effectively. Consequently, emphasis isgiven to (a) the independence of the institution, particularly in makingdecisions concerning the conduct of the ordinary business which has been

ANNEX 4.2Page 2

assigned to it; (b) the powers to acquire, own, and dispose of property,including the ability to contract for resources of all kinds; and (c) the mainlimitations on the organizations with particular reference to the difficultiesof changing from one form of organization to another. No attempt is made toinclude every legal qualification or nuance in the material presented below.

B. General Comparison of Types of Organizations

4. In the law referred to above, there are three main types of admini-strative organizations: (1) autonomous organizations; (2) centralized publicservices without legal personality; and (3) national enterprises. These threetypes of organizations are distinct from each other in various respects.Autonomous organizations are supposed to be those which have, in actual fact,the following characteristics: (a) they have a legal personality independentof the State; (b) they have autonomy in conducting the affairs assigned tothem; (c) the funds available for undertaking the specific objectives aretotally or partially outside of the Government budget. They are a creation ofpublic law rather than private law and must abide by the general administrativelaws established by the Government. The regulation of the autonomous organi-zations is supposed to be sufficiently flexible to take account of thevariation in circumstances, and the legal interpretation given to the law isthat these organizations will act in the public interest but must have somefreedom and powers to carry out their tasks efficiently. Consequently, theymay be given tax exemptions or freedom with respect to disposition of patentsor other similar types of property.

5. The centralized public services without legal personality (hereaftercalled "public services") do not, as the name specifically says, have separatelegal personality distinct from the State. They may enjoy certain functionaland financial autonomy, usually derived from the fact that they undertakespecific services related to the disposition of funds provided by the State oradminister such funds covering special topics. Their budgets are deriveddirectly from subventions or subsidies supplied through the State budget.They are simply specialized facilities of ministries with limited rights andpowers.

6. National enterprises are regarded as organizations subject toprivate law rather than public law, created to undertake directly activitiesin industry, commerce, transportation, or similar activities whose functionsare largely a matter of economics. They are created and are subject to thesame kind of laws as are private corporations, and they compete in the marketplace on the same basis.

7. This general characterization already identifies some of the powersand responsibilities among the three main types of administrative units. Someof the major differences are described in detail below.

ANNEX 4.2Page 3

C. Autonomous Organizat>ins

8. The administrative laws covering these organizations are mostextensive with respect to the autonomous organizations (e.g. INIA, Port ofHuelva, etc.) since these are regarded as the prototype, with the othersrepresenting divergences in one direction or the other in independence anddegree of power. Autonomous organizations can only be created by law and notby decree. Thus they must go through the parliamentary processes and must beapproved by the Cortes. The fundamental law creating each organization isunique, and it must spell out in detail the functions that the organizationwill perform and the powers that it has to do so. The law also designateswhich ministry in the Government the autonomous organization is responsible toin the first instance. Ultimately of course control adheres in the Governmentitself but frequently the specific minister can act with or without approvalof the Council of Ministers. The fundamental law also must specify thegeneral basis of their organization including designation of the president,directors, counsellors, etc. In fact the president and directors will be namedby a separate decree when their rank is at least that of a "director-general"in the Government. In other cases their designation will be made by theminister to which they are responsible. The fundamental law must also specifyeconomic resources that will be assigned to the organizations for carryingout objectives that have been specified. The law makes it clear that increating the autonomous organizations the fundamental law creating it mustspecify completely and exactly the functions and objectives and the resourcesthat will be at the command of the organization. If the fundamental lawhas been drafted imperfectly or if it is desired to expand the scope of theorganization or to provide additional resources to the organizations, a newlaw is again required. Explanations and modifications in functions or infunds can not be administrative determinations as represented in a decree.

9. Although basic changes in the charter of the organizations require aseparate law, special provisions are given to the circumstances of thoseorganizations that are involved in economic or commercial activities similarto those of the market place. Commercial and industrial prices, tariffs orother similar charges can be modified by agreement of the Council of Ministerswith a report to the Minister of Finance and the National Economic Council.In actual fact the law makes provision that approval of such changes maybe delegated to the minister involved. The law also describes the source offinance available to the autonomous organization. These consist essentiallyof funds or other resources specifically provided in the law creating theorganizations, but also includes income from the use of goods during thecourse of operations, income that may be received from other authorizedsources (e.g. including licensing and patents, or subventions received fromthe State or from other organizations). The list of sources of finance is anextensive one and there is no major source that might arise during the courseof this project that, so far as can be seen, is excluded.

10. The autonomous organization has its own budget which it prepareswithin the general budgetary law to the State. It must segregate expenses

ANNEX 4.2Page 4

according to those that are administrative expenses, those in conduct of itsprimary activities and those specifically earmarked for investment. Thebudgets of the organizations are submitted through the Ministry of which theyare attached to the Ministry of Finance for information and for later evalua-tion in accordance with the norms established in the law creating the organi-zations. The budget may contain sources of income and matching expendituresfrom the various sources enumerated above, some of which may be direct Govern-ment allocations while others are derived independently from the activities ofthe organization. Consequently, the Ministry of Finance retains some respon-sibilities for evaluating the objectives of the autonomous organizations.

11. Autonomous organizations may be dissolved in any of several ways:by a law ordering dissolution, by completion of the task or objectives setforth in the fundamental law creating the organization, or by the completionof the period of time specified in the fundamental law. The period of timemay be limited or may be extended until a set of objectives has been achievedwhich, in actual fact, could mean the perpetuation of the organization for anindefinite time period.

D. Public Services

12. As has been mentioned earlier, these types of units are closelyrelated to the normal organizations that exist within a Ministry and they donot have separate legal personality. In Spain they are mainly used to coverorganizations established to dispose of special funds or to administer specificprograms. Public service administrative units may be created by decree and donot require a separate law themselves; it only requires the approval of theCouncil of Ministers and not of the Cortes to create this type of unit.These units are not subject to the same rules with respect to the objectivesbecause the chief of the organization must propose to the ministry to which heis responsible the budget for the particular year. That minister reviews thebudget and upon approving it incorporates it in the total budget submitted forthe ministry. Public service administrative units can, however, make contractssimilar to those of autonomous organizations including contracts for theemployment of personnel outside the civil service system and at rates differentfrom those paid normal employees of a ministry. Special regulations alsoapply to their accountability directly to the Ministry of Finance and to thetypes of accounts that these units must prepare. In general a public serviceadministrative unit is a direct extension of the powers of a minister tocover the tasks that can be specially described or require the management offunds that have been specifically provided by law. Their chief differencesfrom autonomous organizations is that they acquire their funds from the Statebudget through the ministry, they cannot own or dispose of property except inaccordance with the general rules of these affairs covering Government owner-ship of property and they are more limited in the powers to conduct dailyaffairs without ministerial approval.

E. National Enterprises

13. National enterprises are created and regulated according to privatelaw covering commerce, civil affairs, and labor relations, and for that

ANNEX 4.2Page 5

reason are expected to function in the same way as private corporations exceptthat such enterprises may receive fiscal exemptions, may be subject to specialregulations concerning the scope of their activities, are subject to auditingand other controls as dictated by the Government, etc. They must be constitu-ted exactly as "anonymous companies" and generally the participation in theirownership by the State must be a majority unless the law expressly authorizesa lesser participation. The largest group of national enterprises in industryin Spain are those under the control of the Instituto Nacional de Industria(INI) and a number of interpretations of the law with respect to INI and itscorporations have been made; for example the majority of participation of INIin an enterprise automatically determines the "national interest" and governsthe rules with respect to fiscal exemptions from taxes. It is unnecessary atthis point to describe the many legal interpretations concerning nationalenterprises. It is sufficient to understand that national enterprises,even though created by the State, operate in much the same way as privatecompanies and have the same kinds of powers and responsibilities. They aremore removed from State control in normal day-to-day activities than areautonomous organizations or public service units, primarily because they arecreated to engage in industrial and commercial affairs, whereas the other twomay be created for other purposes. However, some autonomous organizationsmay be engaged in industrial and commercial activities to only a lesser degreethan a national enterprise. If the primary purpose is the production and saleof goods and services in the market, the enterprise would be organized as anational enterprise and not as an autonomous organization.

Industrial Projects DepartmentMarch 1976

ANNEX 4.3Page 1

SPAIN

INDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

INDUSTRIES OF PREFERENTIAL INTEREST

A. Introduction

1. As part of its program to stimulate industrial development, theGovernment has designated certain industries as being of "preferential in-terest". Such a designation may be given to anindustry because of the stronglinkages that exist between it and other industries to the extent that it hasserious effects on the performance of those industries, because of the poten-tial effects upon employment and the development of labor skills, or for anyother reason that can be established to demonstrate its importance to indus-trial development as a whole. Two of the industries that are chosen forpreference for allocation of funds under this project have been designated asones of preferential interest: electronics and the food industries.

2. When this designation is given to an industry, the firms in theindustry are eligible for special benefits, including tax and other fiscalexceptions and incentives, credit at preferential terms, accelerated deprecia-tion, utilization of the powers of eminent domain in order to acquire land fornew installations and/or preferential access to locations in industrialestates or development poles. Not every one of these benefits is automati-cally accorded the firms, but usually most of them are so included. Otherspecial benefits may also be permitted from time to time. In order to beeligible to receive the above benefits, however, the firms must meet certainconditions or must agree to pursue certain programs for modernization of theirplants, for expansion of existing facilities to a more efficient scale, andthey may be required to devote funds to research and development, to mergewith other firms to form larger units, or to undertake specified investmentprograms. In individual cases other kinds of requirements may be placed uponthe firms and must be fulfilled before they are eligible to receive thespecial benefits. In most cases the Minister of Industry has power to makedetermination of whether the firms are in compliance with the required provi-sions or to negotiate with the firms for special plans and programs. Heusually also has the authority to waive the application of some of the provi-sions providing there are special conditions to justify this.

3. The basic legislation creating the status of preferential interestand modifying the fiscal incentives and exemptions is contained in Law 152,December 2, 1963; Decree 2853, September 8, 1964, which creates the status ofpreferential interest; and Decree 2285, July 27, 1964 which modifies the taxlaw and extends fiscal incentives in special cases. This basic legislation isthen modified by individual decrees that are established for each of the indus-tries that are to be given this status. These may be followed by individual

ANNEX 4.3Page 2

orders of the Ministry of Industry that spell out the details required forcarrying out the decrees. As is indicated below, firms that have complied andare eligible for the special benefits are potentially in a better position toexpand, to improve their performance (including export performance) or toundertake research and development programs that will create new products orimprove old ones. However, some of the provisions usually required of thefirms (particularly those requiring them to be of certain minimum size or toundertake specific investment programs) are not necessarily the ones that willhelp to single out firms that have the best proposals for research and develop-ment, as defined in this project. These provisions may in effect eliminatefrom consideration some of the small firms that may have some of the bestideas and are in a position to make use of funds in this project. Consequen-tly, while the status of preferential interest can serve to help channel fundsto firms that are in a good position to exploit commercial opportunitiesbecause of new facilities, resources, and investment programs, it is notproposed to limit the allocation of funds in this project solely to thosefirms that have achieved this designation. Nevertheless, it is important toreview the types of special benefits that exist for firms that have achievedthis designation and also to summarize the types of requirements that theymust meet before they are eligible for the special benefits.

B. Electronics

4. Decree 2593, July 20, 1974 designates the electronics industryas being of preferential interest. The decree cites the fact that in theprincipal industrial countries these industries have had spectacular growthand that in particular the data processing field (including manufacture ofcomputers) has spread to all other industries and affects their productionscheduling, their research, and their management. The decree points out thatthe electronics industry in Spain is seriously underdeveloped, lacks programsfor developing its own technology, and frequently uses foreign technologythat is inappropriate and unproductive. The Third Development Plan establi-shed preferences for certain industries including those involved in advancedtechnologies, which includes electronics, and the law of that plan establishedthe fact that in the event that the development of these industries wasinsufficient, incentives or direct Government intervention might be adopted.For all of these reasons cited by the decree, the electronics industry isdeclared one of preferential interest.

5. The decree defines the types of the activities that are to beincluded within the definition of the electronics industry. The definition isvery broad and includes: radio and television development and production;telecommunications equipment; monitoring and control equipment; instrumentsfor nuclear plants; scientific measuring apparatus; equipment in the field ofmedicine; special equipment for defense; and components and services forelectronics systems.

6. In order to qualify for the special benefits the firms in the indus-try must meet a number of specific requirements. Among the most important arethe following:

ANNEX 4.3Page 3

(1) They must have a minimum size of 200 employees and Ptas. 100million in fixed assets in electronics but these requirementsare reduced by half for companies that have a majority ofSpanish capital.

(2) They must agree to undertake investments to expand capabilitiesin the amount of P 100 million in fixed assets as a minimum.For new enterprises the minimum investment after the date ofthis decree must be P 250 million.

(3) The firms must agree to devote 2% of the value of the annualsales to applied research.

(4) Those enterprises with a majority of foreign capital must ex-port 1/3 of their production as a minimum.

(5) In the special case of new firms in the field of data processingand computers, the ownership of capital by Spaniards must reacha minimum of 40% within five years and the volume of productionin that same period must be P 1000 million at a minimum.

(6) New enterprises in the data processing field must also have aminimum social capital of P 400 million. There are specialrequirements on investment programs, etc. in certain circum-stances.

7. If the firms can meet the above requirements and have programsapproved by the Minister of Industry they are then entitled to special benefitswhich include the following:

(1) A reduction up to 95% in various taxes including the taxes onimports of capital equipment, other customs duties, etc. Thesetax exemptions are for five years but may be extended to ten.

(2) They can depreciate the installations and equipment in a periodof five years.

(3) They will have special access to industrial estates, developmentpoles, etc. as covered in existing legislation.

(4) They will receive preferential terms in the processing of researchand development projects.

(5) The Government will use powers of eminent domain to acquire landfor their installations.

8. These are quite significant financial incentives and ones whichwould give a firm quite extensive benefits and reduce the risks of the invest-ment.

ANNEX 4.3Page 4

9. The Ministry of Industry can determine when the firms have met theconditions and hence are eligible for the special benefits.

10. It should be pointed out that the provisions for the minimum size offixed assets and/or minimum investment programs are a reflection of theconcern of the Government that the firms in Spain tend too be to small in sizeto be efficient or to compete in world markets. While this may be true in anumber of industries in which economies of scale are significant, it has notbeen demonstrated in other countries that larger size firms necessarily havethe best research ideas or are the most innovative. Economies of scaleapply to production alone. They do not necessarily apply for the conduct ofresearch and development for the creating of new processes and products. Forthese reasons the funds under this project, while they will be available tofirms meeting the requirements of this decree, will not be limited to them.It should be said, however, that firms of some minimum size may be in a betterposition to exploit new products commercially since they have adequate resour-ces in order to carry out such programs. Extremely small firms may be at adisadvantage in the commercial exploitation of a new product, but, new typesof financial intermediaries are being developed in Spain (such as SEFINNOVA)that will be in a position to invest in new small firms and take greater risksthan is normally the case with the commercial banks.

C. Food Industries

11. Decree 3288, November 14, 1974 declared the food industries to be ofpreferential interest. The decree was followed by two orders of the Ministerof Industry in June and July of 1975 laying out programs for the merger orconcentration of firms into larger units and establishing minimum conditionsof size and the capacity of enterprises. The decree notes that these indus-tries are basic to an improvement in the level of living in the country, havestrong links to the agricultural sector, are potentially large exporters ofproducts, are a means for improving regional distribution of industries, andare major employers of labor. For all of these reasons the food industriesare declared to be of preferential interest.

12. Unlike the decree on electronics, no great emphasis is given to therapidity of technological change and the need for major research and develop-ment programs but this decree points to the need for improving the efficiencyof production, including export of food products, and improvement in thequality of products. The food industries are defined very broadly to includethe canning and freezing of fruit, vegetables, fish and meat; preparation ofprecooked and packaged foods; production of protein enriched foods; flour, andbakeries; condiments and extracts; wines and liquors; vegetable oils and milkproducts.

13. Major emphasis is given to increasing the size of individual enter-prises to meet a minimum that is regarded as of an efficient scale. Thedecree and the ministerial orders go so far as to prescribe very specificsizes for individual enterprises. For example, new enterprises in vegetable

ANNEX 4.3Page 5

canning must have a minimum processing capacity of 10,000 tons per year.Fruit juices 20,000 tons per year. Bottling plants 5,000 litres per day. Thefirms must have sufficient capital of their own to cover 1/3 of the realinvestment necessary. The special benefits that enterprises may be eligiblefor are the same ones that are listed for the electronics industry includingtax exemption up to 95%, access to power of eminent domain, acelerated depre-ciation, but in addition they will have special access to official creditthrough the Instituto de Credito Oficial.

14. The main needs in the food industries are for applied research anddevelopment primarily aimed at improving the quality of existing products,solving specific technical problems associated with their processing, improv-ing packaging and presentation of the products, etc. There are some problemsrelated to the creation of new products (at least new to Spain) but these areprobably of less importance than those previously mentioned. Consequently, inall probability the success ratio of funds devoted to research, development,and engineering in the food industries is apt to be higher than it is, forexample, in the electronics field where the technology is changing much morerapidly and the problems themselves are more complex and heterogenous. Effortsunder the current project need not be devoted to such problems as increasingthe scale, stimulating mergers, or similar activities. The technical problemsmost often encountered can be rather well defined (e.g. controlling reactionof citric acid in mixed fruit juices unique to Spain) and therefore should berelatively easy to attack directly. Nevertheless, it is important to note thatallocation of funds under the current project for applied research developmentand engineering will undoubtedly have some side effects that should lead tosome improvement in the structural characteristics of the industry sinceresults of this applied work will very likely require larger production runsin order to standardize quality and achieve competitive positions. In thissense the current project strongly supports the other objectives that theGovernment has for improving the competitive position of the industry. As inthe case in electronics, funds under this project will not be allocated solelyto firms that qualify for preferential interest under the current decreebecause the specifications of minimum sizes for investment or levels of outputare not necessarily closely correlated with the generation of innovative ideasfor improving quality or creating new variations of products. Firms of asmaller size than that required to qualify for preferential interest maygenerate as many such ideas or more, than the larger scale firms. They may,however, be less capable of carrying out commercial exploitation of theproducts than the larger firms who have access to the resources. The twotypes of objectives thus involve some trade-off but it will be possibleto accommodate both small and larger scale firms within those eligible topropose projects withinthe framework of this current program for strengtheningR&D capabilities in industry.

Industrial Projects DepartmentM1arch 1976

ANNEX 4.4Page 1

SPAIN

INDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

AREAS OF INITIAL PROJECT EFFORT

1. From the review of Spanish industrial performance and conditions(Annex 2.1) it has been concluded that the electronics industry, the mechanicalengineering industry, and food industries are among those industrial subsectorsfrom which a significant contribution to the strengthening of Spanish industrythrough technological advancements can reasonably be expected. In thisAnnex, an attempt has been made to briefly describe the particular conditionsin these subsectors and to give an outline of the scope for improved capabili-ties through development of competitive products. Also a general descriptionwill be given of how the process of a concentrated research, development andengineering effort might work in each of the subsectors mentioned above.

2. Some observations are necessary at this point, however. First, theselection of the areas above for an initial project effort is necessarilytentative at this stage, since only detailed studies of future markets and ofthe available managerial and technical capabilities can establish any betterfounded criteria of selection. From this follows (a) that a good deal of thedescription below of what might happen in these subsectors in terms of productdevelopment and improved competitiveness is conjectural and used for illustra-tion purposes only; and (b) that these are most likely also other fields ofpromising technological advancement that will be identified in due course.Second, it should further be recalled that technological progress and thedevelopment of new products and markets represent only one of various conditionsfor increasing productivity and competitiveness of Spanish industry. Otherkey factors, which may vary considerably among and within individual subsectors,are the achievement of improved economies of scale, improvement in plantlayouts and job description, in material and inventory handling, and impor-tantly, more efficient ways of marketing.

A. Electronics Industry

3. Spain's electronics industry has developed in the wake of a rapidlyexpanding domestic market. It was in particular the rapidly growing demandfor telecommunications equipment and television sets that permitted theindustry to grow at annual rates of well over 15 percent during the past fiveyears. Total value of production exceeded $1.0 billion in 1975, and employmentreached some 90,000 in the same year.

4. About 90 percent of total output is for the domestic market. ButSpanish production is not adequate to meet total domestic demand, of whichsome 40 percent continues to be covered by imports. The small but rapidlyrising volume of exports comprises components.

ANNEX 4.4Page 2

5. The industry's output consists predominantly of electronic equipment(1974: 68 percent), mainly equipment for the telecommunications sector;the shares of consumer electronics (18 percent) and components (14 percent)are comparatively small. The Spanish production facilities of electronicequipment are virtually all controlled by large international groups, andproduction is under their name brand. Only a few small Spanish firms have sofar attempted to operate in the general telecommunications area in competitionwith large foreign dominated enterprises. Their market shares are very small.This contrasts with very large market shares held by a few internationalfirms. For example, Standard Electrica, an ITT subsidiary, contributesover 60 percent of total production. The same firm employs over 20,000equivalent to almost half the total employment in this subsector.

6. In the equipment subsector, growth in output of telecommunicationsequipment is anticipated to decelerate significantly as domestic demandbecomes more saturated. A stronger expansion of production is, however,expected in data processing equipment and in electromedical equipment. Bothproduct groups are also expected to contribute increasingly to exports.

.

7. The production of consumer electronics is currently the leastdynamic area of the electronics industry. Focusing mainly on black and whitetelevision sets (1974: 76 percent of total output), its future depends verymuch on the eventual introduction of color television in Spain. The firmsoperating on this branch of electronics industry are mostly majority foreign-owned or otherwise fully dependent on foreign licenses and technical assis-tance.

8. The only subsector which has been successfully penetrated by Spanishmanufacturers is the components subsector. This subsector has also grown morerapidly than other branches of the electronics industry. A major supplier tothe Spanish consumer electronics industry, the components subsector has inrecent years firmly established itself in foreign markets. Exports, notably ofresistors, capacitors, and potentiometers, have become an increasingly impor-tant factor behind the expansion of output. In 1974, about half of the totalproduction of components was exported.

9. The largest entirely Spanish-owned electronics company (Piher)operates in the components field. Founded originally to make resistors, Pihernow manufactures also potentiometers, capacitors and semiconductors. Abouthalf of its output is being exported. In Spain, Piher employs about 3,200.Its volume of sales was about $37 million in 1974. Piher's competitiveness ininternational markets is reflected not only in the growing volume of exportsbut also in the establishment of manufacturing plants abroad. Piher has,since 1973, a plant in the U.S. and is currently setting up another one nearLondon, England. The company also recently won a contract for the delivery ofa turn-key plant for components to Algeria.

10. There is a number of other smaller components manufacturers whichalso have successfully begun competing in international markets. As in the

ANNEX 4.4Page 3

case of Piher, these firms have been able to produce technologically moreadvanced products on the basis of older foreign designs. In many fields theyhave in this way developed a considerable technological know-how and productioncapability. It can be anticipated that Spanish electronics firms will increas-ingly be able to move from components manufacture into the production ofconsumer electronics and electronic equipment.

11. On the basis of the already existing capabilities of the electronicsindustry it would appear that Spain has good opportunities to achieve strongcompetitive positions - through product development - mainly in the followingareas: (a) components (particularly capacitors, resistors, semi-conductors andintegrated circuits); (b) electronic control and measuring equipment; (c)electromedical equipment (particularly in the field of pacemakers 1/) and (d)delay lines. 2/

12. Realization of these opportunities will require a substantialincrease in investment of the electronics industry and concentrated efforts inthe design, engineering and marketing of continuously improved product lines.In 1974, the electronics industry was declared a "sector of preferentialinterest" (Decree 2593/1974). W±th this measure, the Spanish Governmentintended to stimulate additional investments in existing firms and the creationof new enterprises in this field. The incentives offered through Decree2593/1974, however, are less than what has been offered to other industriesof preferential interest (see Annex 3.3) and appear inadequate to stimulatenecessary new investments. Apparently under the impression of the significantforeign participation in this industry as a whole, the Decree does not providefor access to public credit, thus obliging eligible enterprises to rely onself-financing and private credit. An exception has been made for firmslocated in the so-called "development poles" and "development zones" and,what is probably more significant, for enterprises with INI participation.The Decree also maintains the condition of a minimum fixed investment of Ptas.100 million for the expansion of existing industries and of Ptas. 250 millionfor the creation of new industries.

13. The allocations for research and development in the electronicsindustry are up to now entirely inadequate to establish and to maintain strongcompetitive positions over extended periods. This applies in particular tothose product lines that currently appear to be most promising for Spanishmanufacturers. Available data suggest that Standard Electrica is currently

1/ In this area, the Ministry of Industry believes there is a good chance forSpain to develop a worldwide market leadership.

2/ A device capable of retarding a pulse of energy between input and output,based on the properties of materials, or circuit parameters or mechanicaldevices. Examples of delay lines are material media such as mercury (spec.Spain), in which sonic patters may be propagated in time, lumped constantelectrical lines, coaxial cables, transmission lines and recirculatingmagnetic drum loops.

ANNEX 4.4Page 4

the only major enterprise in the electronics sector that spends more than 2.5percent of its volume of sales on R&D (1973: about $10 million). It should benoted that the research and development expenditure of Standard Electricafocuses on telecommunication systems, including satellite techniques, i.e. onareas of lesser interest to Spanish electronics manufacturers.

14. The comparatively small share of qualified technicians and engineersemployed in the Spanish components subsector (1973: 9 percent of all labor inthis industry group) is probably more indicative of the so far limited capacityof Spanish electronics manufacturers to conduct research and product develop-ment on a broader scale. Nevertheless, wherever Spanish electronics manufac-turers have expanded into new product lines in recent years they have demon-strated good technical capabilities and in many cases technical ingenuity.Still, moving into areas of new technological application has been on a rathernarrow base, mainly because of prevailing individualistic management practicesand the infant character of this industry. Also the fact that Spanish compan-ies had in general to make their way up in competition with large internationalfirms and with little government support, has made them rather reluctant totake any particular development risks.

15. There are indications that recent successes of individual firms inproduct development and the changing economic conditions have now also intro-duced significant changes in Spanish managerial attitudes. These changes leadone to expect that Spanish electronics manufacturers are now more prepared totake greater advantage of opportunities for technical and entrepreneurialactivities than in the past and to drive towards establishing competitivepositions also for future markets by mobilizing the technical and innovativeskills available to them. Clearly, they essentially lack the expertise toidentify future opportunities and to embark on systematic research, developmentand engineering efforts. Also existing plant sizes, problems of under-capitali-zation and lacking communication with other related companies, other industriesand institutional research, may represent major obstacles to carry out suchprograms. The proposed project is designed to help overcome these constraintsand to act as a catalyst and supporting mechanism in selecting, developing andadvancing product lines in which positions of leadership can be establishedand maintained.

16. Summing up, it can be said that despite persistence of importantindustrial deficiencies and of important disincentives to entry and expansion1/ the electronics industry is probably the most promising area for concentra-ted research and development efforts. This can be said not only in the lightof the already existing capabilities and opportunities in the industry itself,but also with respect to the significant impact that any technologically moreadvanced and more competitive products could have on the capabilities of otherSpanish industries.

1/ Non-availability or scarcity of official credit and venture capital, lackof readily available technological, management and marketing assistance,and high tariffs on imports of industrial inputs and testing equipment.

ANNEX 4.4Page 5

B. Mechanical Engineering Industry

17. Spain's mechanical engineering industry, defined as the manufactureof products listed in Chapter 84 of the Spanish Customs Nomenclature 1/, issomewhat smaller in size than the electronics industry. In 1975, the indus-try's total value of output was in the order of $0.8 - 0.9 billion. Totalemployment was estimated at about 150,000.

18. The rapid industrialization of Spain and a continuous need forreplacing older industrial equipment by newer and more sophisticated ones hasgiven strong impulses to the growth of the mechanical engineering industry.In real terms, the industry expanded at over 16 percent per year during1965-70 and at about 15 percent during 1971-75. At the same time, the industrymoved gradually into the manufacture of heavier and technologically moreadvanced products. Building mostly on imported technologies, but succeedingin the further development of many such original designs and processes,Spain's engineering industry is now in a position to supply, for example, over85 percent of the total equipment of an oil refinery, and 80-90 percent to thehot rolling facilities and 60-80 percent to the cold rolling facilitiesof steelworks. It also can supply over 80 percent of the equipment for blastfurnaces and 80-85 percent of the equipment needed for the manufacture ofcomplex fertilizers.

19. In exports, which now account for 25-30 percent of the industry'soutput, Spain's manufacturers have maintained their competitive positions inmachine-tools and textile machinery, and they have become regular exporters ofpumps, compressors, engines, and of many other types of light engineeringgoods. Also some exports of heavy equipment have emerged in recent years,including shipments abroad of rolling mills, straighteners for steel profiles(the largest ever built in Europe), and of heavy lifting equipment. But theseexports are less important and, in general, also less regular than sales oflight mechanical equipment, in many of which Spain has a fairly long tradition.

20. In traditional exports, such as textile machinery and machine-tools,comparative advantages have been maintained to a large extent by the industry'scapability to accommodate small orders and frequently changing specifications,which in turn was facilitated by the large number of small manufacturerssharing these markets. In addition, however, and this applies in particularto manufacturers of textile machinery, firms have successfully kept abreastwith technological developments. In the field of textile machinery, manymanufacturers have been able to develop new product lines, and they are now

1/ This heterogeneous group includes, among others, mining and earthmovingequipment, boilers, compressors, pumps, combustion engines, textilemachinery, equipment for the iron and steel industry, the petrochemicaland chemical industries as well as machine-tools and agricultural machi-nery.

ANNEX 4.4Page 6

advancing in equipping their products with electronic controls. One exampleof an indigenous Spanish development is the circular knitting machine of aBadalona-based firm (Jumberca, S.A.). This firm is now the largest Spanishmanufacturer of textile machinery.l/

21. In other industrial product lines such as pumps, compressors,engines and roller bearings, product developments are less evident, partlybecause of the heterogeneity of products, and production appears in general todepend more heavily on foreign technology. But also in these fields there area number of indigenous Spanish developments which have reduced the country'sdependence on foreign technology. Examples are in the production of multistagecompressors, diesel engines, certain special equipment for petrochemical andchemical industries, and in various types of mining equipment.

22. On the whole, however, technological advancements in the mechanicalengineering sector have been quite uneven. Advancements have been particularlysmall in subsectors with an excessive fragmentation of production and lack ofspecialization, such as in machine-tools and other metal working machinery, inagricultural machinery, and in equipment for the construction industry. Inmany cases, prevailing small plant sizes have been prohibitive to undertakingany new engineering and development efforts as demand shifted to heavierunits. Such shift to heavier units affected in particular Spanish boilermakers and resulted in a restructuring of the entire industry, with largeforeign dominated firms assuming leading positions in the Spanish market.While these developments have opened for Spain chances of participating insubcontracting for major international manufacturers, they have also virtuallybarred Spain from developing her own export-oriented technologies in thisfield.

23. Allocations of the mechanical equipment industry to research anddevelopment are low as compared to the overall size of the industry and itsexport intensity. This is largely due to the existence of a great number ofvery small enterprises. Even the largest enterprises of this sector (thosecovered in the industrial survey mentioned in para. 17 of Annex 2.1) spentin 1973 altogether only 0.8% of their volume of sales on R&D. If it is alsotaken into account that about half of these allocations were concentrated onthe three largest enterprises surveyed 2/, then it becomes even more evidenthow deficient the current capabilities in research, development and engineeringof new products in this sector are.

1/ In 1973; this firm employed about 560 persons and its turnover was over$20 million.

2/ Babcock and Wilcox, Construcciones Aeronauticas (not a mechanicalengineering firm as defined in this chapter) and Hispano Olivetti (threeout of 52 enterprises surveyed).

ANNEX 4.4Page 7

24. Because of the prevailing structural deficiencies and the resultingconstraints to innovations, the sector is likely to face some serious adjust-ment problems in the future, particularly in view of the probably much closereconomic relationship of Spain to the EEC. Already in 1974, more than 70percent of total Spanish imports of equipment goods was of EEC origin, andabout 70 percent of these imports was mechanical equipment as defined inChapter 84 of the Spanish Customs Nomenclature. Although mergers and otherforms of associations may improve the competitiveness of a number of firms,many of the smaller mechanical engineering firms -- still operating due tolabor cost advantages and tariff protection -- are bound to disappear asintegration with the EEC advances.

25. Yet, there are many specialized Spanish firms in this sector whichhave assumed and maintained strong competitive positions, both domesticallyand abroad, owing to good innovative capabilities and marketing skills.

26. Through further specialization and concentrated research and develop-ment efforts, these firms should be able to improve their competitive positionsalso in extended markets. Prospects seem promising for industries in whichSpain has already a long and well reputed tradition (e.g. textile machinery)but also for more recent product lines such as specific equipment for thepetrochemical and chemical industries, the transport equipment industry (e.g.transmission, clutches) and probably heavy loading and lifting equipmentfor ports, ships and workshops. It is clear that future product developmentsin the mechanical engineering industry are also closely related to innovativeapplications of product developments of other industries. For example,electronic controls or protective coatings may also open ways to new productsand markets in the mechanical engineering industry.

C. Food Industries

27. A $2.8 billion business in terms of its estimated 1974 volume ofsales, food production (including beverages and tobacco manufactures) hasgrown at an annual rate of about 5.6 percent during the past ten years orsignificantly more slowly than any other industrial activity in Spain. In1974, total employment in this industry exceeded 500,000.

28. In spite of a domestic market of over 35 million people, productionis still heavily concentrated on small, mostly family-owned enterprises,producing for very limited markets and using sales techniques that have barelyundergone any changes in the past two decades. As a result, product standardi-zation and comparability are generally low. The abovementioned 1973 Survey onthe 500 largest Spanish firms indicated only about 80 establishments in thefood industry with either an annual volume of sales of more than Ptas. 400million ($6.9 million) or more than 1,000 employed persons. Their combinedshare in total sales of the industry was 23 percent, in employment it was 15percent. Based on the same survey "large" firms held major shares in theproduction of sugar (88 percent of total production), in fish canning (51percent), dairy products (49 percent) and in beverages (36 percent), the latter

ANNEX 4.4Page 8

being attributable mainly to breweries. In all other subsectors of thefood industry, the relevant participation of "large" firms was below 10percent. Only one firm, the Swiss-held Nestle, reported annual sales of overPtas. 10 billion.

29. Rising income levels, growing urbanization and tourism have involvedsome significant changes in consumption patterns in Spain with demand shiftingincreasingly towards meat and milk products, canned fruits and vegetables,prepared meals, soft drinks and beer. This shift gave rise to considerableforeign investments in the industries concerned and to an increasing dependenceon foreign technology.

30. Export of industrial food products, amounting to about 15-20 percentof the food industry's output, are almost entirely composed of traditionalitems, such as fruit and vegetable conserves, fruit pulp, canned fish products,olive oil and alcoholic beverages. Product developments in these areas havebeen rare exceptions. Only more recently have some new products emerged,mainly in response to specifications made by major foreign food chains.Examples are marinated vegetables, canned specialty meals and most recentlyalso precooked deep frozen specialty and seafood preparations. Their overallimportance is small.

31. Research and development work in food technology has been closelyrelated to quality control and improvement. Some work has also been done tosolve specific problems that arose in the processing and canning of fruitjuices and in rice processing for precooked food preparations. Qualitycontrol and trouble-shooting work are likely to remain the major areas ofactivity in food technology, although it is conceivable that indigenousresearch efforts in the field of proteins and protein enrichment may eventuallylead to new Spanish products. In this context, work to obtain new animal feedproducts may be promising.

32. On the whole, however, technological change in Spanish food produc-tion is less crucial to maintaining competitive positions than improving theefficiency of production through concentration or merger of firms and improvingstandardization and marketing. To promote production of an efficient scale,the industry was declared in 1974 (Decree 3288) to be of preferential interest.In this context the Government established minimum plant sizes for individualproductions and it laid out programs for mergers and concentration of firmsinto larger units. Conditions of eligibility and the incentives offered byGovernment are described in Annex 3.3.

Industrial Projects Department-llarch 1976

ANNEX 4.5Page 1

SPAIN

INDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT

INCENTIVES TO RESEARCH AND DEVELOPMENT PROVIDED TO FIRMSPARTICIPATING IN "JOINT ACTION PROGRAMS" (ACCIONES CONCERTADAS)

1. Joint Action Programs were initiated by Spain's First DevelopmentPlan (1964-67) as an instrument for restructuring Spanish industries. Adoptedfrom the French regime of "quasi contracts" between the Government and indivi-dual enterprises of a specific industry, Joint Action Programs aim at achievingobjectives such as expansion of production, raising productivity, reorganizationof the sector through mergers, common services and larqer scale productionunits, plant modernization, and improvement of product quality. Participatingfirms obtain a series of special credit, tax, tariff and other benefits inreturn for voluntary acceptance of certain contractual obligations such asreaching a specific plant scale, volume of output, etc., usually for a periodvarying from four to eight years.

2. Since the introduction of this policy instrument, Joint ActionPrograms have been established for the following manufacturing industries:iron and steel, leather, vegetable canning, pulp and paper, shipbuilding,shoes and leather goods, and flour milling.

3. Out of these programs, only the Joint Action Program for the ship-building industry (Order of July 26, 1967) has made special reference to theobjective of research and development,offering certain incentives to thoseparticipating enterprises that voluntarily increase their allocations for R&D"up to 0.25 percent of the actual value of their annual production". Theincentives include a reduction of up to 95 percent of the import duties andthe I.C.G.I. border tax 1/ on equipment and instruments, provided Spanishproducts of comparable quality are not available.

4. In the Order of October 21, 1971, specific rules have been laid outthat apply to research and development works for the shipbuilding industry.According to these rules, "concerted" enterprises, research centers and otherpublic or private entities intending to conduct any research and developmentactivities related to shipbuilding have to apply with the industry's researchassociation (Asociacion de Investigacion de la Construccion Naval), submittingproject justification and cost estimates, among others. After clearance bythe authorities in charge of the Joint Action Program (autoridad de concierto)usually the Ministry of Industry, the Asociacion enters into a specificresearch contract with the entity planning to conduct the research and develop-ment work. For research and development work to be undertaken by the Asocia-cion itself the same rules of approval apply.

1/ Impuesto de Compensacion de Gravamenes Interiores

ANNEX 4.5Page 2

5. The financing of research and development projects in the shipbuild-ing sector is shared by all "concerted" enterprises according to a percentagesystem determined by the Government (autoridad de concierto). The latter alsodetermines the required annual quotas for R&D expenditure based on the annualvalue of production of each participating firm.

Industrial Projects DepartmentMarch 1976