PUERTO RICAN INFORMATION TECHNOLOGY FIRMS RADIOGRAPHY: EMPIRICAL EVIDENCE. Abstract

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1 PUERTO RICAN INFORMATION TECHNOLOGY FIRMS RADIOGRAPHY: EMPIRICAL EVIDENCE Rosarito Sánchez- Morcilio, University of Puerto Rico Río Piedras Campus Justin Paul, University of Puerto Rico Río Piedras Campus Abstract The Global Competitiveness Report Index ranked Puerto Rico as 30 th among 148 countries around the world. The information technology sector of the economy is among the fastest growing industry in the world (Paul & Gupta, 2013). It is important to observe the characteristics of information technology firms founded in Puerto Rico due to its great economical potential for the Caribbean region. In addition, the more information the academia has about those firms, the better educational partnerships can be created. Since few data about the information technology firms from Puerto Rico was found, a search for the characteristics of those firms was embarked. This study is radiography of the Puerto Rican Information Technology firms. The objective of this study is to find out the characteristics that describe the Puerto Rican Information Technology firms. This is a quantitative study conducted in A 25 items online questionnaire was administered to 55 information technology firms. According to the Puerto Rico Information Technology Cluster (2013), it has 70 members, which are Puerto Rican information technology firms. The data analysis was done with a 95% confidence level and 5 as confidence interval. All 55 participating firms were founded in Puerto Rico from 1968 to The average year of foundation is 2000 with a standard deviation of 9 years. Most firm main area of service is pharmaceutical, biotechnology, project management, cloud computing services, hardware installation and maintenance, enterprise systems, and information technology auditing. Most firms (35%) have from 26 to 100 customers. More than half percent of firms (55%) have from one to 10 employees. Eighty- four percent of firms serve the private sector. More than half firms (55%) report to have its total annual revenues from fifty thousand US dollars but less than or equal to one million US dollars. Almost half firms (45%) report its total annual revenues to be more than one million US dollars. Even though more than half firms (55%) have operations only in Puerto Rico, the null hypothesis is rejected because there are closed to half firms (45%) operating not only in Puerto Rico, but also in United States, the Caribbean, and other countries from continents like Central America, South America, and Europe. Most firms,

2 which serve the Caribbean, operate in Dominican Republic, a close to Puerto Rico country. Puerto Rican Information Technology firms while having a low number of employees serve close to a hundred customers in the areas of pharmaceutical, biotechnology, project management, cloud computing, and other related information technology areas. Most firms serve the private sector of the economy. Close to half of firms give services in United States, the Caribbean, and other countries. More studies can be performed to determine whether the Puerto Rican Information Technology firms comply with the Uppsala internationalization process (Johanson & Vahlne, 2009) or with the born- global firm theory (Knight & Cavusgil, 2004). Furthermore, studies about Information Technology firms from Puerto Rico are recommended so academia can improve serving those firms sustain innovation. Keywords Information technology firms, information technology sector, Caribbean region PUERTO RICAN INFORMATION TECHNOLOGY FIRMS RADIOGRAPHY: EMPIRICAL EVIDENCE Introduction The global competitiveness refers to the extent to which an organization is able to create defensible position over its competitors in the global business primary due to the development of technological advances among other factors (Jadesalug, 2011). The Global Competitiveness Report Index ranked Puerto Rico as 30 th among 148 countries around the world (Schwab & Sala- i- Martín, 2013). This index is a respected assessment of national competitiveness according to the results of a survey administered to approximately 13,000 executives. Executives are knowledgeable informant of the corporate measures, which can determine the global competitiveness in an organization (Jadesalug, 2011). Firms collaboration and outsourcing is advisable, both domestic and internationally to achieve globalization (Jadesalug, 2011). From all sectors of the economy, the information technology (IT) is the fastest growing (Paul & Gupta, 2013). Furthermore, IT has the main characteristics, which are internationalization and innovation processes, require for globalization (Melnikas, 2011). Software and IT commodities produced by IT firms are mostly knowledge- intensive because those supplies can be replicated at a low marginal cost (López, Kundu, & Ciravegna, 2009). Knowledge- intensive businesses become global easier like it is

3 the case of the IT firms. Knowledge- intensive firms are based upon value creation, rather than labor or capital (Kärreman, 2010). IT involves investment on intellectual resources. An IT firm is classified as knowledge- intensive only if it has advanced technology capabilities and a well- educated workforce (Vasilchenko & Morrish, 2011). A close relationship between IT and the academia is advised to stimulate wisdom. Puerto Rico, as a United States commonwealth, has a very close relationship with the IT companies in the mainland and very often collaborates and partner with such firms. However, formal literature regarding this topic is scarce based on a search at Bloomberg, NetAdvanced, the Puerto Rico Commerce and Exports Company, Caribbean Business Book of Lists (2011), Economic Census, the Puerto Rico Statistic Institute, and the Government Development Bank for Puerto Rico. The search was done by the sector s NAICS (North America Industry Classification Systems), which is (Computer Systems Design Services). It important to have a Puerto Rico IT sector knowledge- based system, also know as detailed statistics, as it would allow determining its reality and its potential to the economic growth of Puerto Rico and its surroundings. In addition, the more information the academia has about those firms, the better educational partnerships can be created to positively transform the Puerto Rico IT sector. This article presents the radiography of the Puerto Rican Information Technology (PR IT) sector. The purpose of the study is to find out the characteristics that describe the Puerto Rican Information Technology firms. The researchers question is if PR IT firms are internationalizing. Literature Review When discussing the internationalization of IT firms, it is important to differentiate between born- global firms and the internationalization patterns. The born- global firm, according to the Knight, Madsen, & Servais (2004) definition, is a firm that is less than 20 years old that internationalize on average within three years of founding and generates at least 25% of total sales from abroad. On the other hand, the Uppsala theory, according to Johanson & Vahlne (2009), is a dimension of the internationalization pattern, which indicate the firm go through stages from the domestic market to internationalization. The firm would gradually enter into other markets, than its primary as it overcomes the psychic distance. The authors assume developing knowledge, which is experience in its current activities or operations, is fundamental to a firm s internationalization. That experience is gained progressively, in stages. A firm gains familiarity about foreign markets regarding environment, laws, rules, languages, and the like gradually. Also, the authors establish learning to develop business networks or partnerships is important in the internationalization process.

4 The knowledge- intensive firm, according to Kärreman (2010), is a firm, which its competitive advantage is creating value by applying superior knowledge and judgment. The author cites the Starbuck work published in 1992 that describes the knowledge- intensive firm. Knowledge refers to expertise, not the flow of information. The expertise is the firm s resource or collective property. Management consultancies and software development firm are examples of expertise. The author explains the whole firm possesses knowledge; it does not reside in individual people. The knowledge- firm standardizes successful problem solving and reuses it in other contexts. Although there are some risks relating to internationalization, the knowledge- intensive firms tend to export their business The psychic distance, as Johanson & Vahlne (2009) define, is the market remoteness the firm exports. It is the effect of the liability of foreignness. The lack of knowledge about the language, laws, and rules of a foreign country increases the psychic distance, which influence in the decision of conducting business and relationships in that location. The authors explain companies start to internationalize in neighboring markets and subsequently move further away in terms of the psychic distance. To overcome the psychic distance, companies establish themselves in foreign markets using low- commitment modes, such as a middleman, and eventually subsidiaries. Short psychic distance, according to the authors, facilitates the establishment and development of relationships, which are necessary but not enough to identify and explode opportunities. The importance of IT sector internationalization studies can be seen through 3 studies that have been performed since López, Kundu, & Ciravegna (2009) conduct a study which includes 40 Costa Rican software firms from 150 listed software companies. The authors claim the sample is adequate according to the number of companies operating at the time their study was conducted. They interview each of the companies in their sample to find out the firm size, the firm age, and the export experience. The firm size is obtained by dividing total sales by the number of employees. The firm age is the firm s foundation year minus the current study year. The export experience is the number of years the firm had been exporting. Their findings show that Costa Rican firms took an average of 4 years from it s founding to start exporting and that firms do not export on a regular basis. The authors establish Costa Rican firms are born- locals meaning that firms were not born with an export orientation, and that less than 40% of their customers are foreign. To Costa Rican companies, the close psychic distance is the Latin American markets. They claim that this study is one of the few studies conducted about the internationalization and the born- global phenomenon in small developing countries. Their recommendations are to give incentives to knowledge- intensive industries, such as software firms, to increase its exporting capabilities. They also advocate conducting an in- depth analysis of the modes and determinants of internationalization. Finally, they argue that the term born- global is not adequate to explain the internationalization process of high- technology firms based in small developing countries.

5 Vasilchenko & Morrish (2011) conduct a qualitative study in which the authors interview the founder/entrepreneur responsible person for the decisions related to international involvement of the firm. They analyze four New Zeland companies and their findings indicate that most New Zeland IT firms operate domestically. Their study focus on how business contact and social networks encourage the New Zeland IT firms internationalization and presents interesting suggestions such as an unplanned encounter can lead to the exploration of internationalization opportunities. Moreover, the role of social networks often allows to the subsequent establishment of business relationships that can facilitate internationalization. Paul, Gupta (2013) conduct a study that includes 19 Indian IT firms, which contributes significantly to the total revenue generated by Indian IT sector as a whole. The study presents how the IT sector had played a major role in the country s economy during the last two decades. Their findings reveal that firm age, which is the firm s foundation year minus the current year of the study, has no relationship with internationalization. Besides, their study shows that Indian IT firms do not qualify as born- global since it took those more time to become global. The authors follow the Knight, Madsen, & Servais (2004) born- global definition and conclude that internationalization can be considered an in which knowledge and learning are critical to succeed in the international markets. The younger the firm is, the higher its possibility of expansion to the international markets. But, the average IT firm in India took 12 years to internationalize. They also establish that firms tend to go through stages of resource accumulation engaging in different markets after gaining some experience. In short, their study is useful for describing the process of internationalization adopted by Indian IT firm, which are knowledge- oriented industries. The Paul, Gupta (2013) and López, Kundu, & Ciravegna (2009) studies are closely related to the study describe in this article. The Vasilchenko & Morrish (2011) study focus on how firms become international, which is not the main purpose of this study. The objective of this is to find out the characteristics that describe the Puerto Rican Information Technology firms. The null hypothesis is: Puerto Rican Information Technology firms operate only in Puerto Rico. The alternate hypothesis is: Puerto Rican Information Technology firms do not operate only in Puerto Rico. Methodology The quantitative study, conducted in 2013, was based on a 25 items online questionnaire, which was sent to members of the Puerto Rico Information Technology Cluster (2013), which has 70 members. 55 firms answered the questionnaire, which based on a 95% confidence level and 5% confidence interval (Sample Size Calculator, 2013) constitutes an acceptable sample of the population. The questionnaire was directed to the firm s executives and requested data such as number of customers, number of employees, revenues, and geographical areas served by the company. Executives, according to Jadesadalug (2011), are key informants when measuring global competitiveness. The questionnaire also asks the firm s main area of service, the primary sector of service, the main customer

6 segment (government or private), the name of the place the firm was founded, the year the firm was founded, the year the firm started serving in United States, and the year the firm started servicing other countries. Data analysis was done using simple frequencies to describe the answers provided by the executive of the PR IT firms. Findings All 55 participating firms were founded in Puerto Rico between 1968 and The average year of foundation is 2000, with a standard deviation of 9 years. Most firm s main area of service is pharmaceutical, biotechnology, project management, cloud computing services, hardware installation and maintenance, enterprise systems, and information technology auditing. A few number of participants inform its main area of service to be business intelligence, business analytics, e- business, e- commerce (including mobile commerce), e- government, electronic payment systems, geographical systems, health information systems, information logistics and supply chain, education and training, knowledge management, networking (software and hardware), security assistance, social media and social networks, software development and maintenance, and web development and maintenance. Based on the answers provided by the firms, some of them services some specific markets, such as professional services (13%), manufacturing (13%), health care (13%), government (11%), banking (11%), education (9%), retailing (2%), insurance (2%) and accounting (2%), while others served different sectors (24%). In terms of the market served by the companies, most of them (84%) serve the private sector, followed by the central government (13%) and municipalities (4%). In terms of the firm s number of clients, 35% have from 26 to 100 customers, 24% have from 11 to 25 customers; 22% have more than 100 customers and 20% have less than or equal to 10 customers. In short, more than half (57%) of the firms have 26 customers or more. The majority of the firms (55%) have a very small workforce (1 to 10 employees), followed by with a 16% with 26 to 50 employees; 15% with 11 to 25 employees; 7% with 501 or more employees; 4% with 76 to 100 employees; 2% with 251 to 500 employees and 2% with 51 to 75 employees. In short, most firms (55%) have from 1 to 10 employees. Most firms (54%) have 75% of its employees supporting clients from Puerto Rico with the difference (46%) supporting their clients from outside Puerto Rico. In terms of revenue, 40% of the firms have revenues in the range of 50 thousand to less than 1 million US dollars; 33% in the range of 1 million to less than 5 million; 13% in the range of 5 million or more and 13% have a range of less than or equal to 50 thousand US dollars. In short, more than half firms (55%) report that their revenue is from 50 thousand to less than or equal to 1 million US dollars. Almost half firms (45%) report its total annual revenues to be more than 1 million US dollars. In terms of the geographical area served by the firms, most of them (89%) serve in all areas of Puerto Rico, while only eleven percent report to only serve in the Northern area of Puerto Rico.

7 Most firms (55%) serve only in Puerto Rico, followed by 16% with serve both Puerto Rico and international markets (not including United States). Another 16% serve in Puerto Rico, the United States, and international markets. Lastly, 13% of the firms serve in Puerto Rico and the United States. In short, most firms (55%) serve in Puerto Rico and the rest of the firms (45%) serve in Puerto Rico, the United States, or internationally. Another way of summarizing where firms serve is that most firms (76%) serve in Puerto Rico and the United States and the rest of the firms (24%) serve in Puerto Rico and internationally. From the firms which serves the United States, 22% serves in different states of the United States while 7% serves Florida, 5% serves New York, 5% serves New Jersey, 5% serves Pennsylvania, 5% serves Texas, 5% serves California, 4% serves Illinois and 4% serves Washington, D.C. In terms of the firm s market internationally, most of the firms (20%) serve in the Caribbean (mostly the Dominican Republic), while 7% serves the Caribbean and Central America, 4% serves the Caribbean, Central and South America, 4% serves Central America and 7% serves other countries. In terms of the aging of the IT firms of the study, they were founded between 1968 and The average year of their foundation is 2000, with a standard deviation of 9 years. The average year the firms started serving the United States is 2004, with a standard deviation of 8 years, while the average year they started serving internationally is 2006, with a standard deviation of 6 years. The collected data indicates that it takes an average of 6 years for PR IT firms to open business in the United States, with a standard deviation of 6.68 years; in the case of international business the average is 4.63 years with a standard deviation of 4.27 years. The firms which operate in Puerto Rico and in other markets The collected data shows that 7% of the firms ventured into markets outside of Puerto Rico (United States and internationally) within the first year of their foundation. Within 3 years of their foundation, 11% of the firms expanded their service to United States and internationally. Seven percent of firms open business the same year in both Puerto Rico and the United States. Another seven percent open business the same year in both Puerto Rico and abroad. Two percent (one firm) open business the same year (2004) in Puerto Rico, the United States, and abroad. Discussion A summarized radiography of the PR IT firms is described. Most firm main area of service is pharmaceutical, biotechnology, project management, cloud computing services, hardware installation and maintenance, enterprise systems, and information technology auditing. Most firms serve different sectors including professional services, manufacturing, health care, government, banking, education, retailing, insurance, and accounting. Most firms (84%) of firms serve customers from the private sector. The rest of the firms serve the central, and city government. More than half percent (57%) of the firms have 26 customers or more. More than

8 half percent (55%) of the firms have from one to 10 employees. Most firms employees work in Puerto Rico. More than half firms (55%) report to have its total annual revenues from fifty thousand US dollars but less than or equal to one million US dollars. Almost half firms (45%) report its total annual revenues to be more than one million US dollars. Most firms (89%) serve in all areas of Puerto Rico. Only eleven percent of the firms serve in the Northern area of Puerto Rico. The northern area is where San Juan, the capital city, is located. Most firms (55%) serve only in Puerto Rico and the rest (45%) serve in Puerto Rico, the United States, or abroad. From the PR IT firms, which serve the Caribbean, most (16%) serve in the Dominican Republic. Most firms (55%) serve only in Puerto Rico. These firms are what López, Kundu, & Ciravegna (2009) describe as born- locals. Most PR IT firms are found and do business successfully in Puerto Rico. The Vasilchenko & Morrish (2011) study show that even though New Zeland is an advanced technological country, most of its IT firms operate domestically. This finding is similar to this study s finding since most PR IT firms (55%) operate in Puerto Rico, the place of its foundation. In terms of internationalization, close to half (45%) percent of firms serve in other countries than in Puerto Rico. This group of firms shows the Kärreman (2010) knowledge- intensive firm ease to export their business. If PR IT firm export continues increasing, its contribution to the Puerto Rican economy will be well recognized and appreciated. The Johanson & Vahlne (2009) psychic distance for the PR IT firms is conquered since close to half firms (45%) operate in Puerto Rico and outside Puerto Rico. From that percent, there are sixteen percent of the firms serving in both Puerto Rico and abroad. Another sixteen percent of the firms serve in Puerto Rico, the United States, and abroad. Lastly, thirteen percent of the firms serve in Puerto Rico and the United States. It takes an average of 12 years for Indian IT firm to internationalized (Paul & Gupta, 2013), but to PR IT firms it takes half that period (6 years) to internationalize to the United States and even less years (4.63 years) to internationalize abroad. It is interesting to highlight that it takes less years (2 years less approximately) for PR IT firms to internationalize abroad than it takes to internationalize to the United States. Most firms, which serve in the United States, have operations in different states across that nation. Again, the Johanson & Vahlne (2009) psychic distance is succeed by the PR IT firms. It is important to note that a low percentage of the PR IT firms (4%) serve in the Washington, D.C., which may bring customers from the federal government. Note, also that from the PR IT firms, which serve the Caribbean, most (16%) serve in the Dominican Republic.

9 Knight, Madsen, & Servais (2004) establish that firms should have an average of 20 years old. PR IT firms have 13 years old on average. But, that is the only part of their definition PR IT firms complies to be born- global. They define that firms are required to internationalize on an average of three years of their foundation to be called born- global firms. PR IT firms take an average of 5.27 years to internationalize to either the United States or abroad. In addition, this study did not collected data about the PR IT firm percent of total sales from abroad. Following part of the Knight, Madsen, & Servais (2004) definition of born- global, twenty- four percent of the firms were founded within three years in Puerto Rico as well as in the United States or abroad. To comply with the authors definition (Knight, Madsen, & Servais, 2004) of born- global, although the study asked about the year founded in Puerto Rico, the year starting operations in the United States, and the year starting operations abroad, the study should have asked about how much of the total sales come from the United States and from abroad. Conclusions According to the results of this study, PR IT firms while having a low number of employees serve close to a hundred customers in the areas of pharmaceutical, biotechnology, project management, cloud computing, and other related information technology areas. Most firms serve the private sector of the economy. Close to half of firms give services in United States, the Caribbean, and other countries. The Uppsala theory (Johanson & Vahlne, 2009) best describes the PR IT firms since it takes an average of 5.27 years, with a standard deviation of 5.36, to become international to either the United States or abroad. PR IT firms and Costa Rican IT firms (López, Kundu, & Ciravegna, 2009) are consistent in two ways. First, that is most of them do successful businesses in the same place they were founded, what the authors called born- locals. Second, that before both Puerto Rico and Costa Rica studies were conducted, the information about IT firms from those countries was scant. Since there are fifty- five percent PR IT firms operating in Puerto Rico, as Vasilchenko & Morrish (2011) suggest, PR IT firms can explore the possibility of forming social networks to open collaborations channels that can lead to the internationalization of its services. The authors also mention that unplanned encounters can inspire the business exploration, which can facilitate internationalization. In overall, the authors establish that the presence of personal business networks in foreign markets make easier to enter in those markets. In addition, entrepreneurs can generate internationalization opportunities through industry events, such as conferences or trade shows.

10 Close to half of the PR IT firms (45%) have business outside Puerto Rico. The common belief that PR IT firms give service only in Puerto Rico is starting to change after analyzing the results of this study. PR IT firms are indeed truly knowledge- intensive firms (Kärreman, 2010). The fact that twenty- two percent firms comply with part of the Knight, Madsen, & Servais (2004) definition of born- global, tells that PR IT firms have great potential to export its services to the United States and abroad. Limitations of the study A born- global definition for the PR IT firms, as Knight, Madsen, & Servais (2004) refer, is not possible in this study since its questionnaire did not ask about how much sales come from abroad. Future studies It would be very interesting to find out why it takes less years (2 years less approximately) for PR IT firms to internationalize abroad than it takes to internationalize to the United States. More in- depth studies can be performed to determine whether the Puerto Rican Information Technology firms comply with the Uppsala internationalization process (Johanson & Vahlne, 2009) or with the born- global firm theory (Knight & Cavusgil, 2004). Implications Since PR IT firms are fundamental in the Puerto Rico economy and are classified as knowledge- intensive, further studies are recommended so that the academia can continuously improve contributing those firms to sustain innovation. References: Caribbean Business (2011). Puerto Rico s leading information systems consulting firms. The Caribbean Business Book of Lists 2011, 23, Jadesadalug, V. (2011). The impact of organizational flexibility and autonomy on global competitiveness via the mediating effect of corporate mindset towards globalization. Review Of Business Research, 11(3), Johanson, J., Vahlne, J. (2009). The Uppsala internationalization process model revisited: From liability of foreigness to liability of outsidership. Journal of International Busiess Studies, 40, Kärreman, D. (2010). The Power of Knowledge: Learning from 'Learning by Knowledge- Intensive Firm'. Journal Of Management Studies, 47(7), doi: /j x

11 Knight, G. A., Madsen, T. K., & Servais, P. (2004). An inquiry into born- global firms in Europe and the USA. International Marketing Review, 21(6), López, L. E., Kundu, S. K., & Ciravegna, L. (2009). Born global or born regional? Evidence from an exploratory study in the Costa Rican software industry. Journal of International Business Studies, 40, Melnikas, B. (2011). High technologies sector: scientific research, studies and perpective of networking. (Lithuanian). Public Administration ( ), 1(29), Paul, J. & Gupta, P. (2013). Process and intensity of internationalization of IT firms Evidence from India. International Business Review, October 25, 2013, Sample Size Calculator (2013). Creative Research Systems. Petaluma, CA: The survey System. Retrieved November, 2013, from Schwab, K. & Sala- i- Martín, X. (2013). The Global Competitiveness Report World Economic Forum, 2013, 15. Retrieved November 16, 2013, from Starbuck, W. H. (1992). Learning by knowledge- intensive firms. Journal of Management Studies, 29, Value Proposition (2013). Why Puerto Rico. San Juan, PR: Puerto Rico Information Technology Cluster. Retrieved November 16, 2013, from Vasilchenko, E., & Morrish, S. (2011). The Role of Entrepreneurial Networks in the Exploration and Exploitation of Internationalization Opportunities by Information and Communication Technology Firms. Journal Of International Marketing, 19(4), doi: /jim