Chile FDI

8/4/2019 Chile FDI

1/34

Transnational Strategic Networksand PoUcymaking in Chile:CORFO's High TechnologyInvestment Promotion Program

Roy C. NelsonABSTRACT

Once prey to government patrimonial practices, the Corporacion deFomento de la Produccion (CORFO), Chile's economic develop-ment agency, overcame this problem in the early 1990s. In 2000CORFO established a High Technology Investment Promotion Pro-gram to promote foreign direct investment in high technology andother nontraditional sectors. This article applies concepts of politi-cal survival and cooperation to explain how COREO moved frompatrimonialism to technocratic independence . Then it demonstratesthat governments possessing technocratic independence but lack-ing other characteristics typically associated with successful invest-ment promotion efforts can develop transnational strategic net-works of individuals, business associations, and universities tofacilitate their learning process in order to devise more effectivestrategies to promote nontraditional EDI.

I n early 2000, Mario Castillo, a deputy director of Corporacion deFomento de la Produccion (CORFO), Chile 's economic developmentagency, with a small group of other CORFO managers, devised a planthat signaled a dramatic change in direction for Chile. Fven during thePinochet regime and thereaf ter , with the supposedly market-or ientedChilean Model in place, the Chilean government had provided exportincentives and subsidies to specific industries, as well as special incen-tives for any firm investing in the extreme north or south of the coun-try, in order to promote economic development (Agosin 1999; Ffrench-Davis 2002; Kurtz 20 01; M acario 2000; Perez-Alem an 2000, 2003;Schurman 1996).

Unlike many other Latin American countries, however, Chile hadrefrained from actively promoting foreign direct investment (FDI) fromparticular sectors and certainly from specific firms. While the government

8/4/2019 Chile FDI

2/34

150 LATIN AMERICAN POLITICS AND SOCIETY 49; 2

Other traditional industries, such as copper mining, fishing, forestry, andwine, dominated FDI in Chile. High technology companies, whichCORFO believed could be especially useful in diversifying Chile's econ-omy, providing rapid growth, and creating highly paid jobs for skilledworkers, had passed over Chile as a potential site for irivestment. Intel'sdecision in 1996 to locate a major manufacturing plant in Costa Rica ratherthan in Chile particularly shocked Chilean governm ent officials.

Determined to change this situation, Castillo and his team proposedthat CORFO make a concerted effort to attract FDI specifically from hightechnology firms. CORFO's directors, the government's Foreign Invest-ment Committee, and President Ricardo Lagos himself agreed with thenew plan. Months later, in November 2000, President Lagos traveled tothe Silicon Valley in California to give a talk at a conference CORFO andthe Foreign Investment Committee organized for potential high tech-nology investors. This conference and Lagos's talk marked the launch ofChile's new High Technology Investment Promotion Program.Promoting FDI from high technology and other nontraditionalinvestors can be a demanding task.' The underlying technologies driv-ing these industries can change rapidly, and competitive pressures arefierce. As a result, business executives in such industries need to make

decisions quickly (Maxwell 1999; Telford 1998). For nontraditionalinvestors, therefore, the most effective investment promotion strategiesare those that target and are highly responsive to the needs of firms bestsuited to the country's business environment. CORFO had difficultydeveloping such an investment promotion strategy initially, but theeffectiveness of its strategy increased over time.Many factors, not just the effectiveness of a government's invest-ment promotion effort, determine whether companies decide to investin a particular country: the cost of doing business in the country, thetraining level of the workers, the quality of the infrastructure, the taxincentives, and so on. Because so many variables are involved, this arti-cle cannot account for all of the factors that explain levels of nontradi-tional FDI in Chile. Nevertheless, an effective investment promotionstrategy can be a significant factor in influencing corporate site selec-tion, especially if a country has not yet established itself as a locationfor a particular kind of FDI. Therefore, understanding what makes gov-ernment investment promotion strategies effective is important, espe-cially because this is something governm ents can control, unlike a coun-try's geography or market size. This article therefore seeks to explain the

8/4/2019 Chile FDI

3/34

NELSON; COR FO 151

autonomous public development agency, from the beginning CORFOhad a cadre of technical specialists and professionals w ho w ere attractedby the organization's developmental m ission (Cavarozzi 1975, 129; Tron-coso 2005). Nevertheless, by the late 1950s, under democraticallyelected presidents, and continuing through the military years 1973-90,different governm ents used CORFO to prom ote narrower, particularisticinterests, such as providing economic assistance to political allies(Cavarozzi 1975, 356-60; Troncoso 2000, 2005). With the return of dem -ocratic government in the 1990s, however, CORFO unde rwent a restruc-turing. Chile's new democratic governments once again respectedCORFO's autonomy to carry out development programs without politi-cal interference. At the same time, CORFO changed its approach toensure that these programs would operate according to market-ori-ented, technocratic practices.How did CORFO move beyond its patrimonial phase and becomeonce again a more technocratic institution? After this fundamental stepwas achieved, how did CORFOwithout significant experience ininvestment promotion, with a relatively small budget for its High Tech-nology Investment Promotion Program in the beginning, and withoutforeign offices or a staff with extensive international business experi-encelearn so quickly how to adapt its investment promotion strategyto suit the needs and concerns of prospective nontraditional investorsthat would be most suited to the Chilean business environment? Theanswers to these questions have implications not only for industrialpolicy in general but also, more specifically, for government efforts todevelop an effective investment promotion strategy.The argument of this study is in two parts. The first part, whichexplains briefly how CORFO moved from patrimonialism to technocraticindependence, applies existing concepts of political survival and politi-cal cooperation. As useful as these concepts are, however, they cannotprovide an adequate understanding of how even a technocratic agencysuch as CORFO could develop, with its limited resources, a highly tar-geted, responsive investment p romotion policy that was well adapted tothe concerns and needs of suitable prospective foreign investors. Thusthe second part of the argumentthe article's central focusshowshow governments can use transnational strategic networks to facilitatetheir learning process about global business trends, prospective foreigninvestors, and the kinds of nontraditional FDI that would be best suitedto their country's business conditions. This knowledge can help gov-

8/4/2019 Chile FDI

4/34

152 LATIN AMERICAN POLITICS AND SOCIETY 49: 2

EXPLAINING THE MODE LFigure 1 shows the causal chain of variables that lead an investment pro-motion agency (IPA) to attract nontraditional FDI. The level of techno-cratic independence determines the IPA's ability to form transnationalstrategic networks. An IPA with technocratic independence is insulatedfrom political interference. Such an organization selects its staff on thebasis of merit rather than politics. Moreover, it decides, develops, andevaluates its programs on the basis of technical rather than political cri-teria. These characteristics result in an organization with the ability andthe will to form relevant transnational strategic networks to increase theeffectiveness of the IPA's investment promotion strategy. The effective-ness of the strategy, along with other factors, such as the quality of thecountry's infrastructure and the training level of workers, determines thedependent variable, level of nontraditional FDI.

Most governments conduct investment promotion efforts throughpublic IPAs or collaborate closely with private IPAs. Thus the level oftechnocratic independence, as used here, refers to an IPA's, and there-fore a government's, ability to form and carry out broaci investment pro-motion goals independent of pressures from specific individuals,domestic and international social groups, transnational corporations, orother external forces, as well as from narrow political interests of indi-vidual government officials themselves. The measures for technocraticindependence are how extensively an IPA's staff is selected on the basisof merit rather than political considerations, how much its programs aredecided and evaluated on the basis of technical rather than political cri-teria, and how many other agencies collaborate in attaining the organi-zation's goals (since other agencies can help monitor each other toensure that the original goal is attained).

The second variable, the extent of the government's transnationalstrategic network, refers to the size of the government's network of for-eign offices and linkages with individuals, business associations, uni-versities, and transnational corporations that can facilitate its under-standing of the needs and concerns of prospective Ibreign investors,and their suitability for investment in the country. Technocratic inde-pendence provides IPAs with the ability and the will (qualified person-nel working on behalf of the country's collective interests) to create atransnational strategic network to enhance the country's investment pro-motion capabilities. The more extensive the government's transnational

8/4/2019 Chile FDI

5/34

NELSON: CORFO 153

Figure 1. The Model

Level of IPA's Technocratic Independence1Extent of Transnational Strategic Network

1on:iEffectiveness of Government Promotion Effort

Other Factors Other Factors" Level of Nontraditional FDI'

investors and promotes FDI from those nontraditional firms best suitedto the country's business environment. Therefore the measure for thisvariable is the extent to which the government's investment promotionstrategy targets and responds to the needs of the most appropriate non-traditional firms.The dependent variable, the amount of nontraditional FDI a coun-try attracts, is determined not only by the effectiveness of a govern-ment's investment promotion strategy but also by many other factors,such as the level of training of the country's workers and the quality ofthe country's infrastmcture. Clearly, however, as this article will show,the effectiveness of a government's investment promotion strategy canhave a major impact on the level of nontraditional FDI a countryreceives, especially if that country is not well known to prospective non-traditional investors.Far from being effective in this way, CORFO's initial approach topromoting nontraditional FDI was unfocused and failed to account ade-quately for the specific kinds of FDI that would be the best fit for Chile.This was the case even though CORFO began this effort in 2000, afterit had attained a high level of technocratic independence. BecauseCORFO's initial investment promotion policy was ineffective, in thebeginning the agency did not specifically target those investors who

8/4/2019 Chile FDI

6/34


through or collaborated closely with IPAs. Although CORFO was Chile'seconomic development agency, now, with the creation of the HighTechnology Investment Promotion Program, it was also taking on therole of an IPA. Ireland and Singapore also conducted these activitiesthrough government-run, or public, IPAs. The Industrial DevelopmentAuthority in Ireland (IDA, now known as IDA Ireland) and the Eco-nomic Development Board (EDB) in Singapore were iDOth governmentagencies. The Costa Rican government, in contrast, collaborated closelywith a private IPA, the Coalicion Costarricense de Iniciativas para elDesarolio (CINDB). Although they had different ways of achieving thesame objective, IDA Ireland, the EDB in Singapore, anci CINDE in CostaRica all developed well-targeted, responsive investment promotionstrategies early on, and did not struggle to develop them over time asCORFO did.

Working through or collaborating with their respective IPAs pro-vided the governments of Ireland, Singapore, and Costa Rica with highlevels of technocratic independence and extensive transnational strate-gic networks specifically relevant to the promotion of nontraditionalFDI. With regard to technocratic independence, all of these IPAsselected personnel and designed and evaluated programs on the basisof merit rather than political considerations, and all collaborated withmany other agenc ies in their investment promotion efforts (IDA Ireland;Singapore EDB).With regard to transnational strategic networks, all these IPAs hadbudgets large enough to maintain multiple foreign offices in the coun-tries from which they wanted to attract FDI, as well as to hire staff withsignificant prior experience dealing with transnational corporations.^Thus they were ableas were, by extension, the governments of whichthey were a part or with which they collaboratedto develop highlyeffective strategies to promote nontraditional FDI.CORFO differed from these agencies in that, even though it had ahigh level of technocratic independence by 2000, it still lacked atransnational strategic network relevant to the promotion of nontradi-tional FDI. CORFO's High Technology Investment Promotion Program,with an average annual budget for the first several years of the program,(2000-2003) of less than US$700,000 (Castillo 2006; CORFO 2007; Sutin2007), was unable to open multiple foreign offices or to hire staff withsignificant prior international business experience. CORFO overcamethese obstacles to create a different type of transnational strategic net-

8/4/2019 Chile FDI

7/34

NELSON: CORFO 155

FROM PATRIMONIALISM TO TECHNOCRACYNumerous scholars have already advanced explanations about the cir-cumstances under which democratic governments in Latin America canavoid patrimonialism and instead enact growth-enhancing economicpolicies that serve the broad developmental goals of the nation. At leastsome factors raised in these arguments are directly relevant to the suc-cessful effort to restructure CORFO and its approach in the 1990s.Specifically, after the transition to democracy in 1990, Chile benefitedfrom three key factors: a disciplined party system, organized into twostable coalitions; a low level of partisan conflict; and a small and (now)highly open economy.

Stability of Party Systems and CoalitionsEmploying a rational actor approach, Geddes (1994) argues that presi-dents are more likely to initiate reforms when their own positions aresecure from military intervention or highly competitive political rivalsand when they have the benefit of strong party discipline. In such cir-cumstances, presidents are willing to create technocratic agencies andgive control over specific policy areas to experts. In contrast, in politicalsystems in which party discipline is lacking and in which a president'sposition is threatened, presidents will use such agencies as a source ofpatronage in order to win political allies (Geddes 1994, 21-22).

Building on such models of political survival, Montero (2001, 2002)maintains that politicians face a "delegative dilemma" between short-term and long-term political interests (Montero 2002, 7). When their posi-tions are secure, politicians are more willing to delegate control ofresources to technocratic agencies, which can develop policies that servethe long-term collective interests of the country. When, however, a highlevel of elite conflict exists, potentially threatening the ability of those inpower to retain their positions, politicians will centralize their own con-trol over resources in order to win political support in the short term,without regard to the country's overall interests. Montero argues furtherthat when politicians have delegated authority to technocratic agencies,industrial policy in the collective interest will be sustained over time onlywhen there is "horizontal embeddedness": an array of agencies workingto advance the common goal, capable of monitoring each other'sprogress and keeping the policy on track (Montero 2001, 2002, 12).

8/4/2019 Chile FDI

8/34

156 LATIN AMERICAN POLITICS AN D SOCIETY 49 : 2

key political players. By the early 1950s, however, this compromisebegan to break down, a process precipitated by the exhaustion of theimport substitution model and the government's inability to addressobstacles to further industrial development (Barrett 2000, 3; Cavarozzi1975, 403-4). Political instability and political polarization intensifiedduring the early 1960s and early 1970s. Geddes notes that the lack ofparty discipline and the unstable coalitions in Chile made comprehen-sive reform of the civil service unlikely: "[S]ome agencies were highlyprofessionalized and others extremely politicized" (Geddes 1994, 112).As political instability and polarization increased, so did the prospectsfor politicization of CORFO.

After the democratic transition in 1990, Chile once again achievedpolitical stability, with strong party discipline and two stable coalitions:the center-left Concertacion de Partidos por la Democracia (CPD) andthe center-right Union por Chile (now called Alianza por Chile, or APC).As Weyland demonstrates empirically (1997, 1999), these broad coali-tions of multiple (yet disciplined) parties, in addition to other encom-passing organizations, such as peak associations of labor and businessand a unified state apparatus, encouraged politicians to appeal to col-lective interests rather than to narrow political interest;;. In other coun-tries, such as Brazil, fragmented, undisciplined political party systemsprevailed (besides a lack of encompassing organizations and a govern-ment mired in internal bureaucratic politics). Narrower, particularisticinterests dominated, and reform was much more difficult. While differ-ent from the political survival arguments of Montero and Geddes, thisargument is consistent with the idea that politicians are more inclined tomake reforms when stable coalitions and disciplined political party sys-tems prevail.One reason for the emergence of stable national-le\ el coalitions wasChile's unique binomial electoral system. Before the 1973 coup, Chilehad a traditional open-list, multiparty district, proportior.al representationelectoral system. As noted, this system resulted in highly fragmented,undisciplined political parties and unstable coalitions (Geddes 1994,111-15). The military implemented the binomial electoral system beforethe transition to democracy took place as a way to protect its interests inthe new regime and to preserve stability (Siavelis 2000, l68). Under thebinomial system, each of Chile's electoral districts has two representa-tives, and coalitions are binding at a national level. As Aninat et al.explain, "each of the lists (coalitions/parties) receiving the two highest

8/4/2019 Chile FDI

9/34

NELSON: COR FO 157

one reason why Chile has had two national coalitions since the imple-mentation of this system, each of which includes close to 50 percent ofthe members of Congress. This system also gives individual parties astrong incentive to stay in the national coalition. Because it is difficultfor one coalition to double the percentage of the vote received by theother in any specific district, moreover, each of the two principal coali-tions usually has at least one secure seat per district. This is anotherfactor that encourages coalitions to address national concerns ratherthan immediate political interests (Aninat et al. 2006, 2425).Level of Partisan ConflictSiavelis maintains that Chile's binomial system alone is not sufficient toexplain how the country's political parties divided into two stable coali-tions. He argues that such outcomes also depend "on the party contextof the country at a given moment" (Siavelis 2000, l69). Because the cur-rent party context in Chile favors such a result, two stable coalitionshave formed. The reason for the current party context has much to dowith the nature of Chile's transition to democracy, which also helpsexplain Chile's current low level of partisan conflict.

The current democratic transition occurred as the result of the 1988plebiscite, which gave Chileans only two voting options: continue themilitary regime or return to democracy. This stark choice encouragedprodemocratic forces to lay aside their partisan differences in order towin the p lebiscite. Once democracy w as restored, parties were reluctantto return to the high levels of partisan conflict Chile had experienced inthe late 1960s and early 1970s (Aninat et al. 2006; Barrett 2000; Weyland1997, 1999). Beyond that, formerly highly ideological parties moderatedtheir positions. Following Montero (2002), this low level of polarizationcreated a political environment more conducive to politicians' delegat-ing control over economic policy to technocratic agencies.Size and Openness of the EconomyKatzenstein's Small States in World Markets (1985) demonstrated thatsmall European countries with open markets were more inclined topolitical compromise and harmonious relations between key players inorder to maintain their competitiveness in the global economy. Simi-

8/4/2019 Chile FDI

10/34

158 LATIN AMERICAN POLITICS AN D SOCIETY 49: 2

CORFO'S EvolutionAll of these factors help explain the evolution of CORFO's approach. Atits creation in 1939, CORFO was designed to be a legally autonomousinstitution, meaning that its own Board of Directors would make policydecisions without interference from Congress or the president(Cavarozzi 1975, 120; CORFO 2005a; Rivas 2002). Indeed, instrumentalfigures in the creation of CORFO, then-president Pedro Aguirre Cerdaand his finance minister, Roberto Wachholtz, emphasized that theywanted CORFO's personnel to design the organization's policies with-out outside political pressures (Cavarozzi 1975,125). In practice, CORFO'sengineers and other technical experts essentially m ade all key decisions,because the Board of Directors lacked the technical expertise to do so(Cavarozzi 1975, 123-24). CORFO maintained this strong technocraticorientation, and could develop a highly capable staff, because its per-sonnel were selected on the basis of merit rather than political patron-age, its actions were decided on the basis of technical rather than polit-ical criteria, and its developmental mission gave CORFO's staff a strongsense of purpose (Cavarozzi 1975, 129-31). These characteristics arealso true of CORFO today (Castillo 2002, 2005; Donoso 2002; Gligo2002; Rivas 2002; Troncoso 2002, 2005).

Given Chile's fragmented party system, unstable coalitions, andincreasing political polarization from the 1950s to 1973, however, atleast some loss of technocratic independence was likely to occurduring this period. This happened initially during the presidency ofJorge Alessandri (1958-64). Elected with the support of large industri-alists in Chile, Alessandri took steps to bring CORFO and other for-merly autonomous institutions (such as the Central Bank) directlyund er his control, so that they wou ld b e m ore responsive to the imm e-diate needs of business. For example, Alessandri appointed an impor-tant ally from the business community, Pierre Lehmann, as CORFO'sexecutive vice president. Lehmann centralized decisic)nmaking powerat CORFO in his own (and thus Alessandri's) hands rather than thoseof CORFO's technical cadre (Cavarozzi 1975, 358-59). It was during thisperiod that CORFO becam e a development bank , making loans directlyto private firms.Political interference in CORFO's affairs continued during theAllende years (1970-73) and during the military regime: (1973-90). Left-ist president Salvador Allende, whose political as well as physical sur-

8/4/2019 Chile FDI

11/34

NELSON; COR FO 159

governm ent's privatization program. It also used CORFO to provide sub-sidies in the form of loans to key supporters, leaving the organizationheavily indebted (CORFO 2005a; Troncoso 2005).Stable coalitions, strong party discipline, a low level of partisan con-flict, and Chile's small and now open economy provided the politicalcontext in which CORFO adopted a more independent, technocraticapproach in the post-Pinochet years. During the governments of Presi-dents Patricio Aylwin (1990-94) and Eduardo Frei (1994-2000), CORFOrestructured its entire approach in a way consistent with technocraticrather than patrimonial policies. These reforms began in the early 1990sbut accelerated under the leadership of CORFO's Executive Vice Presi-dent Felipe Sandoval (1994-97) and his deputy. General ManagerEduardo Bitran (1994-97), both appointed by President Frei. Althoughpolitical appointees , both m en were highly qualified for their posts, withyears of relevant work experience and superb academic credentials(indeed, Bitran had a Ph.D. in economics from Boston University).As a result of reforms instituted after the democratic transition,CORFO's overall mission and approach changed. As always, CORFOcontinued to select its own technical personnel on the basis of meritrather than political criteria (although the executive vice president and

general manager positions continued to be appointed by the presidentof Chile). For exam ple, while none of the executive-level personnel affil-iated with the High Technology Investment Promotion Program hadinternational business experience, all either held a degree in engineeringor business or had pursued advanced university training in the UnitedStates (Castillo 2002; D onoso 2002; Gligo 2002). During this period, how-ever, CORFO instituted three key reforms that made its operations moretechnocratic than in the past. It decided no longer to provide loansdirectly to individual companies but instead to work through privatebanks and other financial intermediaries. It shifted its focus to promotingthe competitiveness of small- and medium-sized enterprises (SMEs) byproviding financing to associations of such firms and requiring them tocofinance part of the cost of the programs. It also implemented system-atic, independent evaluations of these SME programs.To implement the first reform, CORFO negotiated lines of creditwith multilateral institutions, such as the World Bank and the Inter-American Development Bank. It then offered these lines to privatebanks on a competitive basis, depending on which banks provided thelowest administrative costs. The selected banks then provided loans to

8/4/2019 Chile FDI

12/34

l6 0 LATIN AMERICAN POLITICS AND SOCIETY 49: 2

CORFO's second reform, developing cofinanced jprograms exclu-sively to promote the competitiveness of SMEs, also avoided providingfunds directly to these companies. Instead, CORFO provided financingthrough private intermediaries, called agentes operadores (operatingagents), and required these associations of firms to cofinance the costof the programs. CORFO-designated operating agents that administeredthese lines of financing typically were trade associations, such as theAsociacion de las Empresas Exportadoras de Manufacturas y Servicios(ASEXMA, Manufacturing Exporters Association), or the Asociacion deIndilstrias M etalurgicas y Metalmecdnicas CASIMET, the Metal IndustriesAssociation). While CORFO provided the financing for projects such astechnology enhancements or improvements in management practices,these large associations collaborated with CORFO in designing the pro-grams, implementing them, and monitoring the results.

In order to obtain financing, individual firms had to apply throughthe association. Using money from CORFO, the association financedpart of the cost for the projects the firms wished to undertake, while thefirms themselves cofinanced the rest (usually 30 percent to 50 percent).In order to ensu re the transparency of this process, CORFO always pub-licized its work on specific programs to the large, open membership ofthese organizations. Thus, all firms in the association had the sameopportunities to participate in CORFO's programs (CORFO 2004). Thisapproach encouraged accountability by the associations and individualfirms. In addition,working through associations with a broad range ofmembership made it less likely for CORFO to be captured by the inter-ests of any one individual or group in the association.The third reform that CORFO initiated was systematic, independentevaluations of these SME programs. CORFO conducted such assess-ments regularly. To ensure the independence of the evaluations, theagency outsourced them to universities or private consultants (Castillo2005; Rivas 2002).All these reforms increased CORFO's technocratic independence.Still another factor helping CORFO sustain technocratic practices ratherthan revert to patrimonialism was its collaboration with other agenciesworking toward similar goals in specific areas. This recalls Montero'sargument that "horizontal embeddedness," or ties between governmentagencies, can also enhance a state's ability to implement technocraticrather than patrimonial policies (Montero 2001, 2002). For example,Montero shows that strong ties between development-oriented public

8/4/2019 Chile FDI

13/34

NELSON: CORFO l6l

of agencies with which it collaborated as Chile's Pro-Technology Net-work (Invest@Chile 2004). Among the agencies were CONICYT, theNational Commission for Science and Technology, which (among otherthings) financed a CORFO program of "technological internships" foryoung Chilean engineers at companies in Silicon Valley and elsewherein the United States; and Fundacion Chile, the independent, nonprofitfoundation that supported projects to develop new technological appli-cations in a number of industries.

By far CORFO's most important and closest collaborator on theHigh Technology Investment Promotion Program, however, was theForeign Investment Committee. On its website, the Foreign InvestmentCommittee listed as its principal aim "to consolidate Chile's position asan attractive destination for foreign investment" (Comite de InversionExtranjera 2004; Invest@Chile 2004). Primarily, the Foreign InvestmentCommittee's duties involved informing potential investors about Chile'sinvestment laws. It also helped to represent Chile in negotiations oninternational trade agreements and disputes and maintained a databaseof all foreign investment in Chile.

It is significant that because of the nature of Chile's economic poli-cies, the Foreign Investment Committee had not actively promoted for-eign investment in any particular sector or industry before the HighTechnology Investment Program came into existence. After that, how-ever, it assisted CORFO by participating in and helping to organizeinvestment promotion conferences and seminars for prospectiveinvestors in this area. While CORFO ran the High Technology Invest-ment Promotion Program office and served as the principal point ofcontact for potential investors from high technology industries consid-ering investing in Chile, the Foreign Investment Committee's involve-ment helped ensure that the program stayed on course.

TRANSNATIONAL STRATEGIC NETWORKSThe underlying political factors discussed thus far help explain how anagency such as CORFO would have the technocratic independence nec-essary to develop an effective investment promotion strategy, ratherthan being just a patrimonial agency doling out favors to the president'ssupporters. Nevertheless, these factors provide only part of the expla-nation. They still do not explain the process by which investment pro-motion agencies (IPAs) learn how to adapt their investment promotion

8/4/2019 Chile FDI

14/34

162 LATIN AMERICAN POLITICS AND SOCIETY 49 : 2

that not only have some independence ("autonomy") from domesticsocietal groups but also maintain connections with, and work through,such groups (that is, are "embedded" in them) are most able to achievetheir policy goals (Evans 1995). Silva (1997) found that during the earlyyears of the Pinochet regime in Chile, the Chicago Boys; consulted withbusiness groups, but only with a small, closed group of industrial lead-ers they already knew, who shared their (initially) ideologically rigidviews. Later, however, responding partly to public protests in 1983-84that resulted from earlier mistakes, the regime's key economic policy-makers made sure to appoint to key positions business executives rep-resenting a range of industries. This helped them to formulate policieson sensitive economic issues.

What the discussions of business networks do not adequately con-sider, however, is the extent to which an IPA such as CORFO candevelop and use such networks to facilitate its learning p rocess. Initially,after it began its High Technology Investment Promotion Program in2000, CORFO had difficulty developing an effective investment promo-tion strategy. Yet even without any change in the size of its budget orthe international experience of its staff, CORFO managed to increase itsability to learn about prospective foreign investors by developing atransnational strategic network of companies, universities, and individ-uals that could facilitate its work in the promotion of nontraditional FDI.This concep t of transnational strategic netw orks has its origins in therapidly growing literature on organizational learning. With some excep-tions (for example, Perez-Aleman 2000, 2003; Weyland 2004), most ofthe literature on learning in organizations has focused on business firmsrather than on governm ent organizations. However, many of these con-cepts are very relevant to the study of learning by governments.

For example, Cohen and Levinthal's highly influential concept ofabsorptive capacity (1990) is related to this explanation of how transna-tional strategic networks can facilitate a government's ability to learn.Absorptive capacity refers to "a firm's ability to identif;/, assimilate andexploit knowledge from the environment" (Cohen and Levinthal 1990,128). A governmentor a private agency collaborating with a govern-mentthat possessed an extensive transnational strategic network wouldcertainly be able to identify global business trends and beneficialprospective foreign investors, assimilate this information, and exploit thisknowledge in developing an effective investment promotion strategy.The concept developed in this study, however, is different. Central

8/4/2019 Chile FDI

15/34

NELSON: CORFO l63

the organization learn, but it is not essential. An IPA could still learneffectively if it had a transnational strategic network.

The governments of Costa Rica and Rio Grande do Sul, Brazil,acquired extensive transnational strategic networks by collaboratingwith private IPAs that already had such networks (Nelson 1999, 2003).In this instance, another important concept from the organizationallearning literature, Huber's notion of grafting (1991), is relevant. Firmscan learn by "grafting on" the knowledge of other firms. Mergers andacquisitions or joint ventures with other firms provide opportunities forfirms to do this (Inkpen 2000). Similarly, governments can graft on theability to learn, as the Costa Rica and Rio Grande do Sul cases show, bypartnering with a private IPA that already possesses a sizable transna-tional strategic network.

Like IDA Ireland and Singapore's EDB, CORFO did not partner withanother agency that already had such a network. In contrast to thoseother agencies, however, CORFO's own ability to learn what it neededto design an effective investment promotion strategy was low. Indeed,CORFO's initial investment promotion strategy called for promoting"high technology" investment without much regard to the specificnature of this investment or whether it was well suited to Chile's spe-cific business conditions. Yet the agency overcame this problem. AsCORFO developed a transnational strategic network relevant for non-traditional FDI promotion, the effectiveness of its investment promotionstrategy increased.

In order to understand the extent to which CORFO failed initially atdeveloping a well-targeted, responsive investment promotion strategybut succeeded at developing such a strategy later on, it is important toknow more about Chile's business environment.

CHILE AS A SITE FOR NONTRADITIONAL FDIBecause of its relatively small market, Chile is not attractive for manynontraditional firms seeking to manufacture products for sale in thelocal market. Furthermore, Chile's distance from the United States meansthat it cannot serve effectively as a platform to export products to theU.S. market. While Chile's cost structure is lower in some sectors thanthat of some Latin American countries, it is certainly not competitivewith India for low-cost services or with China for low-cost manufactur-ing. Unlike many other governments involved in investment promotion,

8/4/2019 Chile FDI

16/34


Table 1. InformationPositionSenior Analyst/DesignerJunior ProgrammerOffice Administrator

Technology SalaryChile

32,65312,72814,846

Comparisons, inBrazil38,69713,32017,599

Mexico49,55119,36720,489

a n n u a l U S $Argentina

21,03610,73011,987Source: Watson Wyatt 2004

including paying for the cost of pre-investment studies and subsidizingtraining expenses for employees hired after companies have invested inthe country (CORFO 2002b). Nevertheless, these incentives are quitesmall compared to the major tax incentives other governments offer,which, over a number of years, can be worth tens of millions of dollarsfor a single company. All these factors combined help explain why Intelpassed over Chile as a potential site for its Latin American manufactur-ing plant. In general, Chile is not competitive for nontraditional FDIinvolving extensive manufacturing operations and requiring large taxincentives, or for manufacturing firms intending to export from Chile tothe United States.Still, Chile does offer a num ber of advantages, if not in comparisonwith China or India then at least within the Latin American region itself,as a site for specific kinds of nontraditional FDI. For example, Chile'spolitical and economic stability, relevant to FDI generally, also makesthe country ideal for companies' regional headquarters.Table 1 shows that Chile's well-trained technical personnel in infor-mation technology (IT) are available at competitive rates compared toother Latin American countries with which it often competes for non-traditional FDI, with the exception of Argentina. (Belbre the massivedevaluation of the Argentine peso in 2002, Argentina's salaries weremuch higher than Chile's. Although they have dropped dramaticallysince the devaluation, the significant political and economic uncertaintyin the country continues to be a deterrent for FDI.) The availability ofrelatively low-cost, highly trained hum an resources is clearly relevant toprospective investors deciding where to locate software developmentcenters to serve the Latin American region.Chile's reliable and cost-competitive telecommunications infrastruc-ture provides additional benefits for a number of noniraditional indus-

8/4/2019 Chile FDI

17/34

NELSON: CORFO 165

Table 2. Comparative Costs for a Three-Minute Peak-TimeInternational Phonecall, US$Chile $0.78Brazil $0.87Mexico $1.68Argentina $0.60

Source: Pyramid Research 2004formed in different country offices or branches of one company in agiven region, such as sales and technical support, accounting, humanresources (for example, payroll), and billing, into a single location inthat region. Table 2 and Figure 2 demonstrate the relative strength ofChile's telecommunications infrastructure compared to some of its com-petitors in Latin America.Table 2, focusing exclusively on costs for fixed-line telep hone oper-ators, shows that Chile's long distance costs are lower than those of keycompetitors, again with the exception of Argentina since its massivedevaluation. This is especially important for call centers or technicalsupport centers.

Figure 2, a comparison of key cities in a number of countries, ranksthe telecommunications sector in broader terms, including not onlycosts but also the level of development of the telecom munications infra-structure for broadband, fiber optics, and other networks. Here, Chile'scapital, Santiago, ranks first among major cities in the Latin Americanregion (as well as Miami). This ranking is relevant to technical supportcenters as well to FDI in shared services.Table 3 shows the Economist Intelligence Unit's 2005 e-readinessranking for a number of countries. This ranking measures how attrac-tive a country is for investment in online operations; therefore it is alsohighly relevant to Chile's attractiveness for FDI in shared services. As thefigure shows, Chile scores the highest in Latin America in this ranking.All these characteristics help make Chile a good location for soft-ware development centers specifically serving the interests of firmsdoing business in Latin America, for technical support or call centersservicing the Latin American region, or for firms seeking to consolidateshared services within one Latin American location. Unfortunately,however, in this instance the market mechanism failed. Despite Chile'sadvantages as a location for specific kinds of nontraditional FDI, when

8/4/2019 Chile FDI

18/34

166 LATIN AMERICAN PO UT ICS AND SOCIETY 49: 2

Figure 2. Latin America Telecom Comparative Ranking:Broadband, Fiber Optics, and Other Networks

oO)Sa

Score scale: 1-5Source: Pyramid

io

SP

points

EMia

Research 2003

OJ

dJ

oir

COCD

e

Ar

3C O

.>lecC cd

Ca o

CD

1

a broad range of prospective investors in the general category of hightechnology, regardless of whether they would be a good match forChile's specific business conditions. Indeed, the very name of CORFO'sHigh Technology Investment Promotion Program indic:ated the empha-sis on attracting high technology investment, even though other kindsof nontraditional FDI not necessarily high technology-related (call cen-ters or shared services, for example) would be more appropriate for theChilean business environment.De fining C hile's Nich e for Nontraditional FDIEven large transnational corporations often lack information aboutpotential foreign sites or the advantages of specific international loca-tions. Under such circumstances, aggressive marketing by a capable IPAcan have a major impact. For example, Intel would never have selected

8/4/2019 Chile FDI

19/34

NELSON: CORFO l67

Table 3. Economist Intelligence Unit's E-readiness Rankings, 2005

Unitecd StatesCanadaChileMexicoBrazilArgentina

2005 rankin region123456

2004 rankin region

123456

Overali ranking(of 65)

21131363839

E-readinessscore (of 10)

8.738.035.975.21 .5.075.05

Source: Economist Intelligence Unit 2005

not likely have occurred without the determined efforts of the IDA (MacSharry and White 2000). Dell Computer Corporation would never haveestablished a manufacturing plant in Rio Grande do Sul had it not beenfor the aggressive, capable efforts of that state's IPA, Polo-RS, Agenciade Desenvolvimento (Polo) (Maxwell 1999; Nelson 2003).

These IPAs all benefited from relatively large budgets and extensivetransnational strategic networks. The financial resources helped them tocreate extensive international networks of foreign offices, and also topay higher salaries to attract staff who had significant domestic andinternational business experience or who, at a minimum, had workedand studied extensively abroad (Egloff 2003; Martins 1999a, b). CORFOlacked the large budget, highly internationalized staff, and multiple for-eign offices of IDA Ireland and Singapore's EDB; also, unlike the gov-ernments of Rio Grande do Sul and Costa Rica, CORFO lacked a part-nership with a private IPA that could provide these characteristics. As aresult, as CORFO officials launched their High Technology InvestmentPromotion Program, they were not fully aware of what specific nontra-ditional industries would be most suited to iiivestment in Chile. Overtime, however, as the agency's transnational strategic network related tothe promotion of nontraditional FDI grew, CORFO's strategy becamemore appropriately targeted.

CORFO's TRANSNATIONAL STRATEGIC N E T W O R KThe key components of CORFO'^ transnational strategic network relatedto nontraditional investment promotion included the agency's relation-

8/4/2019 Chile FDI

20/34


played important roles in the effective development and evolution ofthe High Technology Investment Promotion Program's strategy.Other IPAs, those with large budgets and highly internationalizedstaffs, had no difficulty developing extensive transnational networks.They simply set up multiple overseas offices in countries from whichthey ho ped to attract investment. For example, by 2005, IDA Ireland had13 foreign offices, many of which were in the U nited States. Singapore'sEDB had 18 (IDA Ireland website; Singapore EDB). CORFO stands outfor its ability to establish an effective transnational strategic networkwith a relatively small budget, and for the success of this network inassisting CORFO's investment promotion effort.

Affiliation w ith a U.S. Bu sines s Sc ho olCORFO formed a close relationship with an internationally orientedgraduate school of business located in the United States. The school wasThunderbird School of Global Management in Glendale, Arizona.CORFO's affiliation provided a means for the agency to develop exten-sive international contacts quickly. The school's MBA students alsoserved as a source of inexpensive but often highly knowledgeable con-sultants on U.S. business trends in high technology and other nontradi-tional industries, as well as on market research and strategy.CORFO established an official contract with Thunderbird to provideconsulting seivices. As part of this contract, which lasted from 2000 to2003, the agency and a professor at the school set up a consulting work-shop for Thunderbird students on campus and an internship for Thun-derbird students at CORFO. The group of students w orking on the proj-ect on campus, all with some market research or specific industryexperience, researched target industries for Chile to inv estigate further,as well as specific potential investors. Also, each semester, a studentwith a set of skills useful to CORFO (market research skills or experi-ence in a specific high technology industry) went to Chile to work inthe high technology investment office at CORFO. CORFO paid the stu-dent's expenses while on the internship out of its budget for the HighTechnology Investment Promotion Program.The students' experience in specific industries enabled them to pro-vide insights into U.S. business practices and trends in high technology thatwere useful to the Chilean officials. Specifically, several of the students

8/4/2019 Chile FDI

21/34

NELSON: CORFO l6 9

During this time, Thunderbird also facilitated CORFO's initial con-tacts with a number of key organizations in the Silicon Valley, such asthe American Electronics Association, the San Jose Business Incubator,and the Silicon Valley office of IDA Ireland.Relationship with International ConsultantsAssociated with Successful IPAsHoping to learn from the experience of IPAs that had already been suc-cessful in attracting high technology investment, CORFO also hired con-sultants associated with CINDE in Costa Rica and IDA Ireland. A keyconsultant early on was Enrique Egloff, who had served as executivedirector of CINDE from 1995 to 1999. David Lovegrove, another con-sultant, for many years had been a senior executive at IDA Ireland, theagency that serves as a benchmark for IPAs all over the world, especiallythose interested in attracting high technology investment. By this time,Lovegrove was a senior official at Forfas, the Irish government agencyresponsible for Ireland's overall economic development strategy.CORFO hired these consultants originally because it thought thatgiven the knowledge they had acquired in the IPAs with which theywere associated, they could help the agency attract high technologyinvestment. Yet the investment promotion efforts of both of those IPAshad evolved over time to focus on specific nontraditional sectors. Thusthese consultants, who had themselves witnessed and participated inthe their own IPAs' shift in approach, were highly qualified to helpCORFO's investment promotion strategy evolve.As CINDE's executive director, Egloff had been responsible for amajor achievement: attracting Intel's 1996 investment in a manufactur-ing plant in Costa Rica, the company's first plant in Latin America. Intel'sinvestment had established Costa Rica's reputation as an attractive sitefor high technology investment. Even more important from CORFO'sperspective was that Chile had "lost" this investment to Costa Rica,despite being on the short list of four countries that Intel had consid-ered (Brazil and Mexico were also on the list). This frustrating outcom econvinced Mario Castillo and others at CORFO that Chile needed to dosomething more if it wanted attract this kind of investment (Castillo2002, 2004). CORFO's emerging transnational strategic network againfacilitated matters, as a contact at Thunderbird introduced Egloff toCORFO officials, who promptly hired him as a consultant.

8/4/2019 Chile FDI

22/34


emphasis on high technology. The firms he recommended helpedCORFO embrace the sort of investment promotion strategy that CINDEhad begun to develop. This strategy now went beyond high technologyto focus also on FDI in technical support centers, ca.ll centers, andshared services (Castillo 2004; Egloff 2003, 2004).

The consolidation of shared services can take different forms. Forexample, a company might channel all its sales and service calls fromcustomers through one call center. Over time, the same company mightconsolidate its internal operations, such as payroll services from multi-ple offices, into one regional office. While certainly not: "high technol-ogy," FDI in shared services offered Chile a way to diversify its econ-omy and provide job opportunities requiring technical training, just asit had for Costa Rica.Lovegrove had been centrally involved in IDA Ireland's and Forfas'splans to move Ireland's investment promotion effort beyond high tech-nology manufacturing and into financial services. In addition, Lovegrovehad helped the IDA begin a separate consulting service, providing adviceto governments all over the world on how to attract investment and,more important, how to focus and target their strategies in order to attractinvestment most suited to the business environments of their countries.One of Lovegrove's recommendations to CORFO was that the HighTechnology Investment Promotion team should focus its (efforts on finan-cial services (Lovegrove 2002). He provided a detailed assessment ofwhat IDA Ireland had done in this area and, on the basis of Chile's com-petitive advantages, what it should do next to build on and publicize itsexisting strengths in order to attract more investment from this sector.Lovegrove's recommendations reinforced the idea of making sharedfinancial services a key focus area for CORFO's investment promotion

efforts. He also influenced CORFO's incentive policies (C;astillo 2004).Re lationship w ith U.S.-based ConsultantsCORFO's High Technology Investment Promotion team gradually cameto the realization that most high technology manufacturing firms wouldnot be interested in Chile. Frequent discussions with the team's transna-tional strategic networkThunderbird students, Enrique Egloff, DavidLovegrove, and executives from high technology firms already inChilehelped make this clear, as did an objective analysis of Chile's

8/4/2019 Chile FDI

23/34

NELSON: CORFO 17t

vided still another impetus to consider promoting FDI from other non-traditional industries (Castillo 2004).Based on suggestions from the transnational strategic network aswell as on the kinds of investments Chile was already receiving,CORFO's High Technology Investment Promotion team concluded thatU.S. Fortune 500 firms might be interested in locating shared servicesoperations and call centers in Chile, and that software companies mightconsider locating regional software development centers in the country.Following Enrique Egloffs advice (Castillo 2002; Egloff 2003, 2004), theCORFO team hired a Washington-based firm (WBF), which had expert-ise on shared services and software, to develop a strategy and a targetlist of 200 companies that CORFO should pursue in the eastern part ofthe United States, where most Fortune 500 firms were located.^After speaking to Egloff, Lovegrove, and a number of executivesw ho had already consolidated shared services in Chile, the CORFO teamrealized that Chile, with its political and economic stability, its well-developed, competitive telecommunications industry, and its existingstrength in financial services generally, had many advantages as aregional center for shared services. WBF's study was useful in helpingthe team learn more about this industry, identify companies that mightpotentially be interested in investing in Chile, and develop an approachfor marketing Chile to these companies.Regarding software development, the other focus of the WBF'sstudy, the type of activity most relevant to Chile was the outsourcing ofcertain kinds of software development by large software firms trying toreduce costs. Although India had a cost advantage over Chile, Chile hadmany advantages within Spanish-speaking Latin America. For manytechnology-related firms seeking to enter the Latin American market orto do business in Latin America, locating a software development centerin Latin America itself, capable of designing software to respond to localneeds, is often very important.In addition to its political and economic stability and well-devel-oped infrastructure, Chile's salaries for IT personnel, as table 1 shows,were lower than those in many other Latin American countries. Fur-thermore, enrollment in technically related programs in Chile wasincreasing rapidly; indeed, it doubled from 1992 to 2002 alone, partly asa result of government efforts to promote such programs (Invest@Chile2005). Even if more FDI in software development centers and other IT-related sectors increased the demand for IT workers, this would not

8/4/2019 Chile FDI

24/34


sector and suggested strategies for CORFO to follow for attracting U.S.companies from this industry (WBF 2001).Following this advice and continuing to listen to investors w ho werealready in the country, the CORFO team continued to find ways to buildon Chile's existing strengths. For example, PierceTech, another consult-ing firm Egloff recommended .that specialized exclusively in call centers,suggested that Chile develop a niche as a key location for investment intechnical support centers or call centers attending not only to LatinAmerican markets but also to the U.S. Hispanic market (Towers 2002).Again, Chile's low-cost, reliable telecommunications infrastructure, aswell as the availability of relatively low-cost, well-trained, Spanish-speaking personnel, provided competitive advantages to Chile in thisarea. These recom mendations helped convince CORFO's High Technol-ogy Investment Promotion team of the potential for the expansion ofcall centers and technical support centers in Chile. Representatives fromthis consulting firm later also participated in CORFO's investment pro-motion seminars in the United States to explain Chile';? advantages toprospective call center investors (Invest@Chile 2004).

Bu siness Associations in the United StatesU.S. business associations helped CORFO by facilitating connectionswith prospective nontraditional investors. For example, branches of theAmerican Electronics Association in Silicon Valley (Santa Clara office),Austin, Seattle, and Fort Lauderdale assisted the High TechnologyInvestment Promotion team in advertising its investment promotionseminars in these cities by sending out invitations to carefully selectedmembers (software companies, companies using technic:al support cen-ters, telecommunications-related companies) likely to be interested ininvesting in Chile. The AEA was also a cosponsor of all these events.Other cosponsors, in addition to Thunderbird, included the San JoseChamber of Commerce and the San Jose Business Incubator (in SiliconValley), the IC2 Institute (in Austin), and the Washington Software Asso-ciation and Technology Alliance (in Seattle). The U.S.-based Interna-tional Data Corporation (IDC), a highly reputable consulting firm in theinformation technology field, helped CORFO with all the logisticsinvolved in organizing investment promotion seminars in New York,Chicago, and San Francisco. (IDC's Latin America director was already apart of CORFO's strategic networka Thunderbird graduate who

8/4/2019 Chile FDI

25/34

NELSON: CORFO 173

The Silicon Valley OfficeIn March 2001, CORFO opened an office in San Jose, Californiathevery heart of Silicon Valleyto serve as the center for its investmentpromotion efforts there. Although the agency planned to continue tohold high technology investment promotion conferences in cities allover the world, Silicon Valley was important enough, CORFO decided,to have its own office. Given the High Technology Investment Promo-tion Program's budget limitations, the office staff consisted of only oneperson: Constanza Donoso, a young, highly articulate Chilean withstrong marketing skills. For its first 18 months, CORFO maintained theoffice with only Donoso as a part-time employee. In 2003, MarioCastillo, now director of high technology investment at CORFO, tookover operation of the office full-time.The purpose of the office was specifically to provide CORFO witha base of operations in Silicon Valley that would facilitate its ability tocontact prospective high technology investors. It also served as a head -quarters for a related CORFO project, the technology internships pro-gram, which b rought 15 to 20 young Chileans, all recent university grad-uates in technical fields, to Silicon Valley to work for U.S.-based hightechnology firms. In addition, the office hosted a number of videocon-ferences, also sponsored by CORFO, on topics relevant to high tech-nology companies.Having already established contact with the San Jose InternationalBusiness Incubator, CORFO chose to locate its Silicon Valley office in theIncubator's building in downtown San Jose. This was an ideal locationfor a number of reasons. The purpose of the business incubator was toprovide a base for startup companies from outside the United States toestablish themselves. Mem bers had to apply to join, but paid a relativelylow fee and rent at lower than market rates for establishing an office.(This was a major benefit in the sky-high rental market of San Jose .) Usu-ally, a company's office would consist of just a few cubicles in the build-ing. This was true in CQRFO's case as well. However, the great benefitto CORFO of being located in the business incubator building was thatit promoted networking events, at which Incubator members could mixwith key players in Silicon Valley. During the first 18 months, Donosonot only attended as many of these and other networking events as shecould, but also contacted hundreds of companies (Donoso 2002). Theplan was that Castillo would continue to use this office to develop

8/4/2019 Chile FDI

26/34


time, however, it clearly did expand CORFO's transnational strategicnetwork, thereby enhancing the agency's ability to learn about prospec-tive foreign investors. The Silicon Valley office put CORFO, or at leastCORFO's representative, in direct contact with high technology compa-nies. After hundreds of meetings with executives from these companies,however, it was clear that most of them were not the kind that Chilewould succeed in attracting. Most were either too small or too focusedon the U.S. domestic market to be interested in investing in Chile. Thosethat were larger and did invest internationally mainly did it to outsourceproduction that could be moved easily offshore to ver;>' low cost cen-ters, such as India. It became increasingly clear that CORFO shouldfocus its FDI promotion efforts in other areas.

As Donoso summarized the situation at the end of that period, sinceCORFO ultimately shifted its focus to attracting financial and otherrelated services (in the form of regional shared services operations), itwould have made more sense for CORFO to have an office in New YorkCity, the financial center of the United States, rather than in Silicon Valley(Donoso 2002). Representative of CORFO's early difficulty in targetingthose investors most appropriate for Chile's business eiivironment, theSilicon Valley office provided further evidence of the mistakes CORFOmade in the beginning. Nevertheless, its very existence as part of thetransnational strategic network, and the contacts with Silicon Valley firmsit facilitated, contributed to CORFO's ability to learn more about whatnontraditional sectors would be the best sectors for Chile to target. In theend, the Silicon Valley office accelerated CORFO's learning process onhow to focus its investment promotion strategy more precisely.

Despite the shift in direction and the apparent lack of interest fromthe Silicon Valley companies, CORFO decided to keep the office openuntil March 2005. Some on the High Technology Investment Promotionteam continued to believe that it could serve as a useful base for gen-erating investment. Others believed that whether it could or not, itserved other purposes as well, as a center for CORFO's technologyinterns and as a symbol of CORFO's effort to attract a different kind ofinvestment (Gligo 2002). Ultimately, however, CORFO shifted its focustoward attracting nontraditional FDI from outside th(; Silicon Valleyareaespecially FDI in shared services, software development centers,and technical support centersthat was far more suited to Chile's busi-ness environment (Castillo 2005).

8/4/2019 Chile FDI

27/34

NELSON: CORFO 175

Chile's unique competitive advantages and the needs of prospectiveinvestors. Within a year from the time the program was launchedandwithin months of opening the Silicon Valley officeCORFO began todefine its target sectors more precisely. By August 2001, the openingstatement of the third edition of the promotional pamphlet"Invest@Chile," jointly published by CORFO and Chile's Foreign Invest-ment Committee, stated, "we believe Chile is particularly attractive as alocation for investments in software development and for those services,such as call and contact centers, shared services and back offices, thatuse new information and communication technologies (ICT)" (CORFO2001, 5). Clearly, CORFO and the Foreign Investment Committee hadalready begun to change their initial strategy.

By 2003, CORFO and the Foreign Investment Committee wereorganizing investment promotion seminars specifically targeting sharedservices, technical support or call centers, and software developmentcenters. Executives from companies that had already invested success-fully in these sectors in Chileand now belonged to CORFO's transna-tional strategic network^were active participants at all these seminars.Events in 2003 and 2004 in Santiago, Boston, Fort Lauderdale, NewYork, Chicago, and San Francisco featured speakers such as PatricioMelo, general manager of Altec (Banco Santander's software develop-ment operation in Chile); Ernesto Labarut, president of Unilever-Chile(which had a shared services operation in the country); and HugoHuepe, corporate business development manager for General Elec-tric-Chile (which operated a technical support center), all of whomexpounded on the virtues of Chile as a location for FDI in their specificsectors. The focused, targeted, and relevant nature of these investmentpromotion seminars showed the extent to which CORFO's strategy hadevolved to accommodate both changing circumstances and the needs ofprospective investors.Moving from the more glamorous but vaguely defined goal ofattracting "high technology investment," CORFO established an objec-tive that was more suitable and better defined: attracting nontraditionalFDI in shared services, software development centers, and technicalsupport or call centers. Indeed, by mid-2005, the High TechnologyInvestment Promotion Program's website highlighted only companiesthat fell into these three specific categories (Invest@Chile 2005).

THE RESULTS: LEVEL AND I M P A C T

8/4/2019 Chile FDI

28/34


Table 4. High Technology Investment Promotion Program:Companies and Industry Categories , 2003

TechnicalShared Support/ SoftwaireCompany Services Call Centers Development ElectronicsAir France (France) Banco Santander (Spain) BBVA Bank (Spain)BHP Billiton (Australia)Cell Star (USA) .Citigroup Inc. (USA) Deita Airlines (USA) .General Electric (USA) Grupo SP (Spain) Hewlett-Packard (USA) IBM (USA)Kodak (USA) .Nestle (Switzerland) Packard Bell Qapan) .Santander Bank (Spain)Shell (Netherlands)Software AG Soluziona (Spain) SP Group (Spain) Unilever (Netherlands) Sources: Castillo 2003; lrivestChile 2005; CORFO 2005b.

ments were in shared services, software development centers, or techni-cal support/call centers. Table 4 provides a list of all the companies thatinvested as part of the program and the categories of their enterprises.Not all of this FDI can be attributed solely to CORFO's efforts. FDIin these areas has grown in Chile as companies have responded tomarket forces and to Chile's competitive advantages in the Latin Amer-ican region for companies from these industries, as noted earlier. Nev-ertheless, CORFO's transnational strategic network enhanced theagency's ability to learn from these investors and focus its efforts inareas where its High Technology Investment Promotion Program could

8/4/2019 Chile FDI

29/34

NELSON: CORFO 177

as significant as Intel's in Costa Rica or even Dell's in Rio Grande do Sui,as a whole, the 20 companies represented in table 4 invested just underUS$100 million and created approximately 2,180 jobs (CORFO 2005b).Most of these jobs required advanced technical training, thereby pro-viding opportunities for the development of Chile's human resources.Because Chile did not offer extensive tax incentivesindeed, even theother kinds of incentives the government did offer were very smallthese companies contributed positively to Chile's tax revenues. In addi-tion, this nontraditional FDI helped diversify Chile's economy. Overall,the presence of these companies put other prospective investors onnotice that Chile was a promising location for this sort of FDI. As theCosta Rica and Rio Grande do Sui cases demonstrate, this, in turn,should lead to still more FDI in Chile.

CONCLUSIONSThe case of CORFO in Chile has important implications for other coun-tries attempting to implement industrial policy, as well as for thosespecifically seeking to develop an effective investment promotion strat-egy to attract nontraditional FDI. CORFO could not have developed aneffective investment promotion policy without its transnational strategicnetwork, but it would never have had the ability or the will to developsuch a network without technocratic independence.

Technocratic independence provided CORFO with qualified per-sonnel working in an environment that promoted the country's collec-tive interests. Agencies that lack technocratic independence cannotcarry out such tasks. The experience of Companhia de Desenvolvi-mento Industrial do Estado do Rio de Janeiro (CODIN), the investmentpromotion agency for the state of Rio de Janeiro, illustrates this prob-lem. In a highly polarized political context with intense conflict atnongpolitical elites, the governor's appointees to CODIN's staff misappro-priated the agency's funds to provide favors for specific groups (Mon-tero 2001, 2002).

CORFO, too, experienced problems with patrimonialism for a time.However, after the democratic transition in 1990, Chile's disciplinedpolitical party system, organized into two stable coalitions; its lack ofpartisan conflict; and its small, open economy provided political condi-tions more conducive to reform. In this context, CORFO was able tomake reforms that consolidated and strengthened its technocratic inde-

8/4/2019 Chile FDI

30/34

178 IJ\TIN AMERICAN POLITICS AND SOCIETY 49: 2

a transnational strategic network, and use it to develop effective invest-ment promotion strategies, even without a large budget, a highly inter-nationalized staff, or a wide array of foreign offices. Beyond that,CORFO's use of its transnational strategic network highlights the impor-tant role governmental learning can play in the policymaking processand the extent to which states can use the forces of globalization toadvance their own goals.

NOTESI would like to thank Kurt Weyland, Peter Kingstone, and three anonymousreviewers from LAPS for their comments on earlier versions of this article. Iwould also like to thank Mario Castillo and other members of CORFO's staff forspeaking with me about CORFO's programs.1. As used here, nontraditional refers not only to high technologyindustries, such as semiconductor and computer manufacturing, softwaredevelopment, pharmaceutical manufacturing, and biotechnology, but also toservice-related industries that require relatively high levels of technical train-ing for their workers, such as financial services, technical support centers,and call centers. CORFO's High Technology Investment Promotion Program

eventually sought to attract investment from all these sectors. Because theemphasis was still on attracting high value-added industries that make use oftechnology and provide opportunities for technically trained personnel,CORFO continued to refer to the program as the High Technology InvestmentPromotion Program.2. IDA Ireland and Singapore's EDB had budg ets of more than US$200 mil-lion per year. (IDA Ireland; Singapore EDB). CINDE's budget was more thanUS$2.5 million per year (Foreign Investment Advisory Ser/ice 1999; Fuentes2004). This was a significant sum, given that the average budget for IPAs inmiddle-income countries is only $500,000 per year (Morisset and A ndrews-John-son 2004, 15). IDA Ireland had 13 foreign offices in countries throughout theworld. Singapore's EDB had 18. At the time that CINDE succeeded in attractingIntel's investment in a major manufacturing plant, it had two offices in theUnited States: one in New York and another in San Jose, California. All theseagencies had staffs with extensive international background and experience(Ang 2005; Egloff 2003, 2004; Fitzpatrick 2004).3. At CORFO's request, the name of this Washington, DC-based firm (here-after referred to as WBF) must remain anonymous.

4. Because of its success with its High Technology Investment PromotionProgram, in 2006 CORFO expanded its investment promotion effort to include

8/4/2019 Chile FDI

31/34

NELSON: CORFO 179

REFERENCESAgosin, Manuel R. 1999. Trade and Growth in Chile. Cepal Review 68: 79-100.Ang, Anthony, 2005. Former director, EDB-North America. Author interview,Singapore, January 10,Aninat, Cristobal, John Londregan, Patricio Navia, andjoaquin Vial. 2006, Polit-ical Institutions, Policymaking Processes, and Policy Outcom es in Chile.Washington, DC: Inter-American Development Bank. 1-64.Barrett, Patrick S, 2000. Chile's Transformed Party System and the Future ofDemocratic Stability, Journal of Interamerican Studies and World Affairs42, 3 (Fall): 1-32,Castillo, Mario, 2003, Towards the Technological Internationalization of Chile,Unpublished docum ent, Santiago: CORFO,, 2002-5, Director, High Technology Investment, CORFO, Author inter-views, Santiago, December 20, 2002; teleph one , February 12, 2003; Novem-ber 5, 2004; June 10, 2005,, 2006, Director, Investment and Development Division, CORFO, Authorinterview. Telephone, December 7,Cavarozzi, Marcelo, 1975, The Government and the Industrial Bourgeoisie inChile, 1938-1964, Ph,D, diss,. Departm ent of Political Science, University ofCalifornia, Berkeley,Coalicion Costarricense de Iniciativas para el Desarollo (CINDE),

Accessed June 25, 2005,Cohen, Wesley M,, and Daniel A, Levinthal, 1990, Absorptive Capacity: A NewPerspective on Learning and Innovation, Administrative Science Q uarterly35: 128-52,Comite de Inversion Fxtranjera (Chile's Foreign Investment Committee), 2004, Accessed November 20, 2004,Corporacion de Fomento de la Produccion (CORFO), 2001, Invest@Chile, Pro-motional pamphlet, Santiago: CORFO,, 2002a, Unpublished internal documents related to High TechnologyInvestment Promotion Program,, 2002b, Incentives Line: High Technology Investment Program,, 2004, Website, Accessed November 30,, 2005a, Website, Accessed October 10,, 2005b, Company List: 2000-2005, Unpublished internal document relatedto High Technology Investment Program,Donoso, Constanza, 2002, Former Representative for CORFO's Silicon Valleyoffice. Author interview, Santiago, December 18,Economist Intelligence Unit, 2005, The 2005E-readinessRankings. London: TheEconomist Group,

Egloff, Enrique, 2003, 2004, Former Executive Director, CINDE; current presi-

8/4/2019 Chile FDI

32/34


Fitzpatrick, Denis, 2004, Personnel Manager, IDA Ireland, Author interview,Dublin, January 22,Foreign Investment Advisory Service, 1998, Investment Promotion Agency Pro-

file: CINDE, FDI News (Washington, DC), September 4,Fuentes, Miguel, 2004, Program Officer, CINDE, Personal correspondence byemail, September 6,Geddes, Barbara, 1994, Politician's Dilemma: Building State Capacity in LatinAmerica. Berkeley: University of California Press,Gligo, Nicolo, 2002, Director, High Technology Investment Support Unit,CORFO, Author interview, Santiago, December 19,Hall, Dennis, 2004, Former CORFO student intern. Author telephone interview,October 15,High Technology Investment Promotion Program, 2002, Corporate executives.Author interviews, subjects anonymous, Santiago, December,Huber, George P, 1991. Organizational Learning: The Contributing Proces.ses andthe Literatures, Organizational Science 2, 1: 88-115,IDA Ireland, Accessed February 26, 2005,Inkpen, Andrew C, 2000, Learning Through Joint Ventures: A Framework ofKnowledge Acquisition, fournal of Management Studies 37, 7: 10 19 ^3 ,Invest@Chile, CORFO's High Technology Investment Program, Accessed November 8, 2004, June 25, 2003, August 10, 2005,Katzenstein, Peter, 1985, Small States in World Markets. Ithaca: Cornell Univer-sity Press,Kurtz, Marcus, 2001, State Developmentalism Without a Developmental State:The Public Foundations of the "Free Market Miracle" in Chile, Latin Amer-ican Politics and Society 43, 2 (Summer): 1-25,Lovegrove, David, 2002, Member, Senior Management Team, Forfas, Authorinterview, Santiago, December 13,Mac Sharry, Ray, and Padraig A, White, 2000, The Making ofthe Celtic Tiger: TheInside Story of Ireland's Boom Economy. Cork: Mercier Press,Macario, Carla, ed, 2000, Export Growth in Latin America: Policies and Perfor-mance. Boulder: Lynne Rienner,Martins, Jose Cesar, 1999a, b. President of Polo RS, Agencia de Desenvolvi-mento. Author interviews, Porto Alegre, Brazil, November 11, December15,Maxwell, Keith, 1999, Senior Vice President, Dell Computer Corporation, Authorinterview. Round Rock, Texas, October 10,Montero, Alfred P, 2001, Making and Remaking "Good Government" in Brazil:Subnational Industrial Policy in Minas Gerais, Latin American Politics andSociety Ai, 2 (Summer): 49-80,, 2002, Shifting States in Global Markets: Subnational Industrial Policy inContemporary Brazil and Spain. University Park: Pennsylvania State Uni-

8/4/2019 Chile FDI

33/34

NELSON: CORFO 181

. 2003. Harnessing Globalization: Rio Grande do Sul's Successful Effort toAttract Dell Computer Corporation. Journal of Developing Societies 19, 2-3Oune): 268-307.Perez-Aleman, Paola. 2000. Learning, Adjustment and Economic Development:Transforming Firms, the State and Associations in Chile. World Development28, 1: 41-55.. 2003. A Learning Centered View of Business Associations: Building Busi-ness-Government Relations for Development. Business and Politics 5, 2:

193-213.Pyramid Research. 2003. Data on Latin America Telecom. Accessed January 23, 2003-. 2004. Data on Latin American telecommunications. Accessed January 5,2004.Rivas, Gonzalo. 2002. Executive Vice President and CEO, CORFO. Author inter-view. Santiago, December 17.Schurman, Rachel A. 1996. Chile's New Entrepreneurs and the "Economic Mira-cle": The Invisible Hand or a Hand from the State? Studies in ComparativeInternational Development yi, 2: 83-109.Siavelis, Peter M. 2000. The President and Congress in Postauthoritarian Chile.University Park: Pennsylvania State University Press.Silva, Eduardo. 1997. Business Elites, the State, and Economic Change in Chile.In Business and the State in Developing Countries, ed. Sylvia Maxfield andBen Ross Schneider. Ithaca: Cornell University Press. 152-88.Singapore Economic Development Board (EDB). AccessedFebruary 26, 2005.Sutin, Tania. 2007. Director of Operations, Investment and Development Divi-sion, CORFO. Personal communication (via email). March 8.Telford, Ted. 1998. Intel Worldwide Site Selection Analyst. Author interview.Glendale, AZ, October 2.Towers, Letty. 2002. Vice President, PierceTech. Author interview. Santiago,December 9.

Troncoso, Francisco. 2000. CORFO: The Chilean Economic DevelopmentAgency. Economic Development Review (Spring): 45-48.. 2002. Director of International Relations, COREO. Author interview. Santi-ago, December 9.. 2005. Author telephone interview. October 10.Washington-based firm (WBF). [CORFO consulting firm; name confidential.!2001. U.S. Fortune 500 and Software Companies' Interest in Locating SharedServices and Development Operations in Latin America. Unpublished doc-ument. O ctober 3.Weyland, Kurt. 1997. "Growth with Equity" in Chile's New Democracy? LatinAmerican Resesarch Review 32, 1: 37-68 .

8/4/2019 Chile FDI

34/34

Date post:	07-Apr-2018
Category:	Documents
Upload:	eduardo-munoz
View:	221 times
Download:	0 times

Chile FDI

Documents