Competing for Foreign Direct Investment Efforts to Promote Nontraditional FDI in Costa Rica Brazil and Chile

8/7/2019 Competing for Foreign Direct Investment Efforts to Promote Nontraditional FDI in Costa Rica Brazil and Chile

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Roy C. Nelson is an associate professor of International Studies at Thunderbird, the Garvin Schoolof International Management. He is currently completing a book entitled Harnessing Globaliza-tion: The Promotion of Nontraditional Foreign Direct Investment in Latin America.

Competing for Foreign DirectInvestment: Efforts to Promote

Nontraditional FDI in Costa Rica,Brazil, and Chile

Roy C. Nelson

This article examines government efforts in Costa Rica, Rio Grande do Sul in Bra-zil, and Chile to promote nontraditional foreign direct investment (FDI). Rather than attempting to account for the overall level of FDI attracted, this article seeks toexplain the ability of governments to develop a well-targeted, responsive, and sus-tained strategy specifically to attract nontraditional FDI. It concludes that three in-dependent variables play an important role in making some governments moreeffective than others at developing strategies to promote nontraditional FDI. Theseare the extent of the government’s autonomy from special interest groups, both do-mestic and foreign; the extent of the government’s transnational learning capacity;and the extent to which there is an ideological consensus among political parties inthe country or state in favor of working closely with the business community.

A fierce competition between governments is currently under way in LatinAmerica to attract foreign direct investment (FDI) from nontraditional1 indus-

tries. Seeking to harness the benefits of globalization, governments throughout LatinAmerica are actively promoting FDI from companies that might help them to cap-ture the benefits of growth in nontraditional, high value-added sectors. Their objec-

tives are to diversify their economies, to provide higher-paying jobs for their people,and to develop linkages between domestic and transnational firms that can enabletheir countries or states to play a larger role in the increasingly globalized world economy.2

Governments undertaking such an effort face numerous challenges. Understandingthe needs and concerns of prospective foreign investors is especially important inhigh technology and other nontraditional kinds of industries. Because of the rapidlychanging, competitive nature of such sectors, executives in these industries need to



4 Studies in Comparative International Development / Fall 2005

make decisions quickly, and will respond best to agencies that can adapt their strat-egies flexibly and swiftly to the needs of prospective investors. This is not alwayssomething that government agencies are well equipped to do. A highly influentialWorld Bank study explained:

Investment promotion is, in fact, more like activities typical of the private sector, particu-larly marketing. It requires continuous liaison with the private sector; the flexibility torespond speedily to investors’ needs, adjust to changing market conditions, and acquirescarce management skills; and the autonomy to generate and implement investment pro-motion strategies that are consistent throughout a long period. . . . Conventional govern-ment organizations are typically not very good at these tasks (Wells and Wint, 2000: 56).

While all the cases analyzed here contradict the standard view that governmentshave difficulty developing effective investment promotion strategies, their level of

success varied. This article seeks to explain why some governments are better ableto develop effective investment promotion strategies than others. The measures for this dependent variable—the effectiveness of a government’s investment promotionstrategy—are how much that strategy (a) targets and is highly responsive to theneeds of those nontraditional firms that would be most suited to the business condi-tions of a given country or state;3 and (b) targets FDI that will provide the countryor state with net benefits, such as additional jobs, exports, FDI in other sectors, and overall economic diversification; (c) is a sustained effort. “Sustained” means thatthe effort—even as it adapts and evolves according to the changing needs of inves-tors—would continue throughout successive governments or administrations. A strat-

egy that begins with one leader, and is dropped completely by the next, is likely to fail.Sustainability in this sense goes beyond funding. Many investment promotion

agencies (IPAs) are government agencies; others are private agencies that work in partnership with the government in their country or state. Even if a private IPA hasan independent source of funds, successful investment promotion requires at leastsome degree of collaboration with the government. At a minimum, the private IPAneeds the government’s approval to proceed. Moreover, arranging meetings between

prospective investors and relevant government officials is a central part of the in-vestment promotion process. Therefore, if a new government refuses to cooperatewith a private IPA for any reason, the IPA’s investment promotion strategy cannot

be sustained successfully on its own. At the same time, a government investment promotion effort that relies heavily on its relationship with a private IPA to developresponsive strategies may not be sustainable if a new government attempts to un-dertake this effort without the IPA’s assistance. As the case studies will show, manygovernments need the benefit of the special skills private IPAs can provide if theyare to adapt their strategies appropriately.

The purpose of this article is not to explain why one country succeeded in at-tracting a particular investment while another country did not. Rather, this articleseeks to explain why some governments are better able to develop well-targeted

strategies, attuned to the needs of suitable prospective nontraditional investors, which

can last through successive administrations.Obviously, many factors explain why companies decide to invest in specific coun-tries or states: the quality of the infrastructure the level of training of workers tax



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incentives, among other things. Yet, especially in more remote locations or in thedeveloping world, government promotion efforts can also be significant. The rea-son is that even large U.S. transnational corporations often lack information about

potential foreign sites or are unaware of the advantages of specific foreign loca-

tions. Under such circumstances, aggressive marketing on the part of a capableIPA, highly responsive to the needs and concerns of prospective foreign investors,can have a major impact.

In a recent World Bank study, Morisset and Andrews-Johnson (2004: 50) citeseveral factors that make IPAs effective at attracting FDI: the size of the agency’s

budget, the quality of the country’s business environment, the agency’s level of political visibility, and the extent of private sector involvement. My study is differ-ent. Rather than explaining overall levels of aggregate FDI attracted, my study seeksto explain the ability of a government to develop a well-targeted, responsive, and sustained strategy, specifically, to attract nontraditional FDI. Because my depen-

dent variable is different, Morisset and Andrews-Johnson’s independent variablesare insufficient to account for the variation in outcomes in the cases I examine.Morisset and Andrews-Johnson themselves acknowledge that their large-N studyof 75 IPAs might have lacked sufficient variation in factors deemed insignificant,such as the qualifications of an IPA’s personnel and the number of overseas officesit has, to account for the possible impact of these factors on IPA effectiveness. Mystudy, using carefully selected case studies, takes such factors into account.

I argue that three independent variables play an important role in making somegovernments more effective than others at developing strategies to promote non-traditional FDI. These are the extent of the government’s autonomy from special inter-

est groups, both domestic and foreign; the extent of the government’s transnationallearning capacity; and the extent to which there is an ideological consensus among

political parties in the country or state in favor of working closely with the businesscommunity.

Transnational learning capacity refers to the government’s ability to learn about prospective foreign investors, the global business trends that influence their deci-sions, and the potential benefits they offer to the government’s country or state.Acquiring in-depth knowledge about specific prospective foreign investors—and about how to interact with them successfully—is especially useful for promotinginvestment from nontraditional firms. Because business executives in such firms

face intense competition in industries that are undergoing constant innovation and rapid change, they place a premium on making business decisions quickly (Max-well, 2000, 2003; Telford, 1996). Therefore, especially when attempting to promotenontraditional FDI, governments that are most effective are those that have the ca-

pability to anticipate and respond quickly to emerging trends in global business,and to the needs and concerns of specific firms (Nelson, 1999; Wells and Wint,2000). Governments that possess a high degree of transnational learning capacityare better at relating to and communicating with foreign firms, and can also focustheir promotional efforts toward such firms more efficiently, targeting those thatnot only will provide benefits to their particular country or state but will also be

well suited for making investments there.Governmental transnational learning capacity has several components that can

serve as measures for this variable One is budget size A larger budget means that




an IPA can hire more qualified staff and open more foreign offices. Although theMorisset and Andrews-Johnson large-N survey found these factors to be insignifi-cant, the in-depth case studies examined here show that they can help an IPA learnabout global business trends and prospective foreign investors. But a large budget

is ineffective unless used to enhance transnational learning capacity. Another mea-sure of this variable is the level of “internationalization” of the staff of the govern-ment investment promotion agency, i.e., the international educational background of its personnel and their level of international business experience. Still another measure is how much the agency has an established practice of proactively research-ing specific prospective foreign investors to anticipate their concerns and needs.

Finally, connections with international business people or groups can be espe-cially useful in helping an investment promotion agency understand potential for-eign investors. A fourth measure for the transnational learning capacity variable isthe extent of the government’s linkages with a transnational strategic network of

individuals, business associations, and universities, both domestically and interna-tionally, that can assist it in understanding the needs and concerns of prospectiveforeign firms, and the potential benefits they offer to the country or state. Becausemany government investment promotion agencies lack a large budget, highly inter-nationalized staff, or an established practice of proactively researching specific pro-spective foreign investors, collaboration with such a network can be an effectiveway to enhance a government’s transnational learning capacity.

All of the learning about prospective foreign investors described here—espe-cially collaboration with a transnational strategic network—often requires workingclosely with business executives or with the business community in general. There-fore, governments are more likely to maintain a high degree of transnational learn-ing capacity throughout consecutive administrations, not only when a government

possesses autonomy, or some independence from special interest groups, but alsowhen there is a relative ideological consensus among the political parties in thecountry or state in favor of working closely with the business community to attractnontraditional FDI. Where such a consensus does not exist, a change in administra-tions can result in the collapse of the partnership between the government and itsstrategic network, as well as the staff and organizational practices that further con-tribute to the organization’s ability to learn about prospective foreign investors.Under these circumstances, the effectiveness of the government’s investment pro-motion strategy will decline.

It is conceivable that successful investment promotion might itself promote aconsensus within a country in favor of working closely with the business commu-nity. Nevertheless, positive results from investment promotion often take longer than one administration to become evident. And where the ideological divisions arevery sharp, even positive results may not bring consensus on working closely withthe business community, as the case studies analyzed here demonstrate. Therefore,in a democratic context, ideological consensus increases the prospects for a countryto develop an effective long-term investment promotion strategy.

The Cases: Varying Outcomes

To test these propositions, this article looks at recent investment promotion effortsin Costa Rica; Rio Grande do Sul Brazil; and Chile I define my universe of cases



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as governments in Latin America actively engaged in promoting nontraditional FDI.I selected the particular cases examined here for several reasons.

First, these cases are important because they represent significant and current— yet very different—efforts to promote nontraditional FDI in Latin America. The

Costa Rican and Rio Grande do Sul governments both collaborated with privateIPAs: Coalición Costarricense de Iniciativas para el Desarrollo (CINDE) in CostaRica and Pólo-RS, Agência de Desenvolvimento (Pólo) in Rio Grande do Sul. TheChilean government, on the other hand, did not collaborate with a private agency inthis way. Instead, the government’s own economic development agency, Corporaciónde Fomento de la Producción (CORFO), undertook the investment promotion ef-fort. This difference is useful in comparing the impact these different types of IPAs—

private agencies working in collaboration with the government or purely governmentagencies—have on the effectiveness of the promotion effort. Another differencethat is less significant is that the Costa Rican and Chilean investment promotion

efforts were at the national level, while the Rio Grande do Sul effort was at the statelevel. The reason this does not create a serious problem in comparing the differentcases is that in Brazil, individual states have a great deal of independent policymaking

power. Each state has its own state legislature, governor, and authority—separatefrom the federal government’s authority—over key policies such as tax incentivesand government loans to prospective investors. Brazil did not even have a nationallevel IPA until 2002 (<http://www.investebrasil.org/html/home.htm>, accessed: 1September 2004). For this reason, the state of Rio Grande do Sul’s investment pro-motion effort is comparable to the national level efforts in Costa Rica and Chile.

A second reason for selecting these cases is that they experienced different levels

of success in devising an effective strategy for attracting nontraditional FDI. Whilethe Costa Rican government and the state government of Rio Grande do Sul devel-oped well-targeted strategies early on to lure nontraditional investment, the Chileangovernment had difficulty doing this initially. Also, the state government of RioGrande do Sul was not able to sustain its strategy over time.4 Therefore, while therewere no cases of pure failure, the outcomes did vary in their level of effectiveness.

Finally, these cases are also useful because they vary considerably about two of the three independent variables, level of transnational learning capacity and ideo-logical consensus. The level of transnational learning capacity varied across thecases, and in the Chilean case over time. The Chilean government, for example,

initially had a low level of transnational learning capacity but developed more astime went on. In contrast, the Costa Rican and Rio Grande do Sul governmentseach acquired a high level of transnational learning capacity from the outset simply

by collaborating with private IPAs that already possessed this quality. With regard to ideological consensus, Costa Rica and Chile had a relative ideological consensusamong political parties about working with the business community to attract FDI,while the political parties in Rio Grande do Sul notably lacked consensus on thisissue.

Although the level of autonomy was high in all three cases, the evidence pro-vided by the cases themselves indicates the importance of this variable in develop-

ing an effective investment promotion strategy.5

Other cases where autonomy waslow also highlight the importance of this variable. Wells and Wint (2000) providean example of lack of autonomy resulting from political interference from the gov




ernment in their discussion of the Malaysian Industrial Development Authority(MIDA). MIDA was hampered in its investment promotion efforts in the 1970s

because of the government’s insistence that all foreign companies adhere to rigid hiring quotas based on ethnic origin. Montero (2001) provides an example of lack

of autonomy resulting from an agency becoming captured by special interests in hisdiscussion of Companhia de Desenvolvimento Industrial do Estado do Rio de Janeiro(CODIN). CODIN was corrupted by political appointees who misused its funds to

provide favors for specific groups. The Investment Promotion Council (IPC) in theDominican Republic is yet another example of an IPA that became captured byspecial interests (Schrank, 2000). In this case, a new government replaced severalof the agency’s board of directors with new directors, industrialists from the “cronySanto Domingo elite” (Schrank, 2000: 83) who blocked reforms that might jeopar-dize the president’s political interests, even though these reforms were necessary toattract FDI successfully. Such activity led the U.S. Agency for International Devel-

opment (USAID) to withdraw its funding for the agency, resulting in its collapse.These examples demonstrate the different ways lack of autonomy can hinder anagency’s effectiveness.

The Argument in Theoretical Context

Autonomy

Autonomy, as used here, refers to a government’s ability to form and carry out broad programmatic goals independent of pressures from specific individuals, do-

mestic and international social groups, or other external forces. As noted, MIDA inMalaysia, CODIN in Rio de Janeiro, and the IPC in the Dominican Republic, agen-cies significantly lacking in autonomy, all experienced problems that demonstratethe importance of this variable. The three cases discussed here, in which autonomywas present, further underscore its significance. Autonomy is especially importantamong agencies that seek to work closely with the business community in promot-ing nontraditional FDI.

In Peter Evans’ concept of “embedded autonomy,” states that not only possessautonomy from domestic societal groups, but also maintain linkages with and oper-ate through such groups (i.e., are “embedded” within them), are most able to ac-

complish policy objectives (Evans, 1995). Evans classifies states with the greatestdegree of embedded autonomy (Japan, South Korea, Taiwan) as “developmental”states. States with the lowest degree of embedded autonomy (e.g., Nigeria) are “preda-tory” states, in which individuals can sway state policy to meet their own privateends, and corruption is rampant. States that fall somewhere in between—those thathave the characteristics of predatory states, yet still possess some autonomy in someof their institutions—are “intermediary” states.

In states that are less than fully developmental, working closely with businessgroups creates the potential for these groups to “capture” the state. If this happens,government programs or policies would tend to benefit only these groups, as well

as a few rent-seeking bureaucrats, rather than the overall development needs of thecountry. Yet Haggard, Maxfield, and Schneider point out that networks that are trans-parent competitive and open are often able to avoid this problem (1997: 56) For



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example, Silva (1997) found that during the early years of the Pinochet regime inChile, the “Chicago Boys” consulted with business groups, but only with a small,closed group of industrial leaders that they already knew and who shared their (ini-tially) ideologically rigid views. Later, responding in part to public protests in 1983

and 1984 resulting from earlier mistakes, the regime’s key economic policymakersmade sure to appoint business executives representing a range of industries to key

posts. This helped them to formulate policies on sensitive economic issues. After that, the economy prospered.

Montero argues that “horizontal embeddedness,” or ties between governmentagencies, can also enhance a state’s autonomy, as defined here (Montero, 2001,2002). Montero showed that the strong ties between development-oriented publicagencies in Minas Gerais, for example, helped them to deflect attempts from suc-cessive governors to divert the state’s industrial policies away from promoting theoverall economic development of the state and into more clientelistic directions.

Fortunately, the agencies discussed here, unlike MIDA, CODIN, or the IPC, all possessed autonomy. Where they varied was in their level of transnational learningcapacity and ideological consensus.

Transnational Learning Capacity

Transnational learning capacity is rooted in the vast and rapidly growing literatureon organizational learning. There have been various attempts to apply concepts of organizational learning to government organizations (some include Leeuw, Rist,and Sonnichsen, 1999; Perez-Aleman, 2000, 2003). There is also a great deal of

literature in this area oriented toward foreign policymaking, as summarized well byLevy (1994). More recently, Weyland (2004) has applied cognitive learning modelsto Latin American politics to explain policymakers’ decision-making processes.

However, most of the organizational learning literature has focused on businessfirms, rather than on government organizations. Many of these concepts are veryrelevant for learning by governments.

For example, the idea of “absorptive capacity,” as originally conceived in theseminal work of Cohen and Levinthal (1990), refers to “a firm’s ability to identify,assimilate and exploit knowledge from the environment” (Cohen and Levinthal,1990: 128). This idea is related to my concept of “transnational learning capacity,”

which I apply to governments. A government—or a private agency collaboratingwith a government—that possessed a high level of transnational learning capacitywould certainly be able to identify global business trends and beneficial prospec-tive foreign investors, assimilate this information, and exploit this knowledge indeveloping an effective investment promotion strategy.

My concept is different. The main premise of absorptive capacity is that it isdetermined by the extent of a firm’s previously accumulated knowledge. The as-sumption is that “the organization needs prior related knowledge to assimilate and use new knowledge” (Cohen and Levinthal, 1990: 129). In contrast, my concept of transnational learning capacity shows that prior accumulated knowledge (for ex-

ample, knowledge about foreign business trends on the part of a highly internation-alized staff, paid for by a sizeable budget) would help the organization learn, but itis not essential An IPA could still possess transnational learning capacity if it had




an established practice of proactively researching specific prospective foreign in-vestors to anticipate their concerns and needs, or a transnational strategic network.Of course, an agency that had only one or two of the four components for transnationallearning capacity would not have as much of this capacity as an agency that did

well on all four measures.My study also shows that the governments of Costa Rica and Rio Grande do Sul

acquired transnational learning capacity by collaborating with private IPAs thatalready had this capability. A highly influential article that categorizes differentmethods of organizational learning refers to a similar type of learning called “graft-ing” (Huber, 1991). Firms often learn by “grafting on” the knowledge of other firms, and can do this by means of mergers and acquisitions or by forming jointventures with other firms (Inkpen, 2000). Governments can do something similar,as the Costa Rica and Rio Grande do Sul cases show, by partnering with a privateIPA that itself possesses a high level of transnational learning capacity. The differ-

ence is that in collaborating with such an agency, governments are doing more than just learning; they are acquiring an enhanced ability to learn.

In contrast to the other cases discussed here, CORFO in Chile did not partner with another agency that already had a high level of transnational learning capacity.Initially, CORFO’s transnational learning capacity was relatively low. Over time, asCORFO developed a transnational strategic network relevant for nontraditional FDI

promotion, its level of transnational learning capacity increased.Thus transnational learning capacity, like absorptive capacity, is an independent

variable that can change over time. For instance, Cohen and Levinthal (1990) notethat absorptive capacity can be developed as a result of a firm’s experience in manu-

facturing. With more understanding of production processes, a firm is better equipped to leverage this knowledge in other areas, such as marketing, or to make its pro-cesses more efficient. Firms can also increase absorptive capacity by providingadvanced training for their employees. Similarly, transnational learning capacitycan increase if an IPA acquires a larger budget, increases the internationalization of its staff, adopts a practice of proactively researching prospective foreign investors,or develops a transnational strategic network related to nontraditional FDI promo-tion.

Ideological Consensus

The literature on business executives’ attitudes toward uncertainty underscores theimportance of ideological consensus. For business executives, predictability in the“rules of the game” in the business environment where they operate is of para-mount importance. Without such predictability, making long-term strategy or plan-ning for the future becomes extremely difficult. For example, Leigh Payne’s researchon Brazilian industrialists (1993) showed that they viewed stable adherence to es-tablished rules and policies as the most important factor determining their supportfor any given government. For managers of transnational corporations, who arelikely to be operating in multiple countries and lacking the time to form close work-

ing relationships with various governments, predictability and stability of this kind is even more crucial. Evans argues that the top management of TNCs, faced with



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having to manage operations in numerous business environments simultaneously, put even more importance on such issues than do managers of local firms (Evans,1997).

Ruane and Gorg (1997) argue in a study of Ireland’s investment promotion agency,

the Industrial Development Authority (IDA), that ideological consensus—or, in their terms, “strategic consensus”—is important for yet another reason: the long lead time needed to attract FDI. The IDA spent more than a decade in discussions withkey investors such as Intel, IBM, and Hewlett-Packard before these companies wereready to invest in Ireland. Without continuity in policy over successive govern-ments, this strategy would not have worked.

Based on the review of the literature, there is a theoretical basis for the impor-tance of autonomy, transnational learning capacity, and ideological consensus indeveloping an effective strategy to promote nontraditional FDI. The case studies

provide an opportunity to test this argument.

Costa Rica and CINDE

Background

José María Figueres, Costa Rica’s president from 1994–1998, envisioned makingCosta Rica a haven for high technology investment. He believed very strongly thatthe country would be left behind in its quest for economic development if it re-mained principally an exporter of bananas and coffee, with only some manufactur-ing investment in low-tech, low-wage, low value-added industries such as textiles.

He wanted Costa Rica to develop a more productive, higher value-added role in theglobal economy, and saw attracting high technology investment as a way to do this.

When Figueres took office in 1994, CINDE had already been developing a strat-egy along these lines. Created in 1982 with funding from USAID to serve as a

private, nonprof it export promotion center, CINDE’s mission had evolved over time(Clark, 1995, 1997, 2001). By the mid–1990s, CINDE’s focus was investment pro-motion in nontraditional, high value-added industries. This dovetailed well withPresident Figueres’ vision for the country. The Figueres administration and CINDEcollaborated to attract high technology, nontraditional FDI that could contribute toCosta Rica’s economic development. CINDE devised the strategy and carried out

the investment promotion, and Figueres provided political support to CINDE’s ef-forts.

CINDE’s Autonomy

CINDE had a high degree of autonomy because its board of directors consisted of representatives from a wide range of the Costa Rican business community. In addi-tion, to carry out its investment promotion work, CINDE collaborated with manydifferent government agencies. This wide representation, with various individualsand institutions monitoring its progress, prevented CINDE—and therefore, the Costa

Rican government itself, at least in the area of investment promotion—from be-coming captured by any single company or industry’s interests.




CINDE’s Transnational Learning Capacity

CINDE’s high level of transnational learning capacity made it well suited to design-ing a new investment promotion strategy. First, CINDE had a sizeable budget that

averaged more than USD $ 1.9 million per year (Fuentes, 2004; Sanchez, 2004),6

which help provide CINDE with a highly internationalized staff. Because it was a private agency, CINDE could use its budget to pay higher salaries than governmentagencies. Consequently, it was able to hire personnel with significant internationaleducational backgrounds and international business experience, who had the skillsto pursue FDI creatively and aggressively. Of the seven staff (out of a total of about50) working full-time in investment promotion activities, all had either studied or worked abroad, or had worked for transnational companies (Arias, 1998; Mora,1998; Foreign Investment Advisory Service, 1998: 2).

CINDE’s transnational strategic network was also instrumental to its ability to

devise a new strategy for attracting foreign investment. For example, following advicefrom a consultant with Ireland’s highly successful investment promotion agency IDA,as well as from the World Bank, CINDE’s directors realized that they should focus on

promoting investment from specific firms in specific industries (CINDE, 1998). Itwas also during this time that CINDE established a practice of doing in-depth,systematic analysis of prospective foreign investors to anticipate investors’ needsand concerns, even before the agency had initiated contact with them.

Another part of CINDE’s transnational strategic network, the InstitutoCentroamericano de Administración (INCAE), Costa Rica’s premier business school,

provided the agency with additional advice about the importance of focusing its

promotional efforts on specific firms and specific industries. Founded by Harvard University, INCAE was influenced by Harvard professor Michael Porter, a frequentvisitor to the school and a close adviser to Costa Rica’s President Figueres. INCAErecommended that CINDE pursue Porter’s idea of promoting clusters of firms in

particular industries as a way to accelerate national economic development (CINDE,1998). In a detailed study, the World Bank recommended to CINDE that it should target the electronics industry (World Bank, 1996). The bank argued that the levelof technical education in Costa Rica, and the number of electronics assembly plantsalready located in the Free Trade Zones (FTZs) there, made Costa Rica a suitablelocation for attracting companies and creating clusters of f irms in this industry, as

well as in other technically oriented industries such as call centers and technicalsupport centers for high technology firms.

Ideological Consensus among Political Parties

In addition to the autonomy and transnational learning capacity that collaborationwith CINDE provided, Costa Rica had another advantage: a relative ideologicalconsensus among the political parties about working with CINDE, and the businesscommunity in general, to attract FDI. Both of Costa Rica’s dominant political par-ties, the relatively left-of-center Partido de Liberación Nacional (PLN), Figueres’

own party, and the relatively right-of-center Partido de Unión Social Cristiano(PUSC), fully supported CINDE, its approach, the way it operated, and the kind of



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work it was doing. This meant that the agency’s good relationship with the govern-ment—essential if it was to succeed in its investment promotion efforts—would continue no matter who succeeded Figueres. (This was especially important in CostaRica where presidents served only one four-year term.)

Outcome: An Effective Strategy, Intel, and Continued Success

CINDE’s transnational learning capacity helped it to focus its efforts on specificindustries and companies that might be suitable for Costa Rica. Based on the sug-gestions and advice from Michael Porter and experts at INCAE, the consultantfrom IDA, and the World Bank, CINDE chose to focus on electronics firms. EnriqueEgloff, CINDE’s chief executive officer from 1995 to 1999, who had significantinternational business experience himself as the former managing director and marketing and sales director for Bridgestone/Firestone Costa Rica, as well as a

degree in business administration and marketing from the University of Oklahoma,made a point of cultivating contacts with a network of individuals, some of themexpatriate Costa Ricans working in the Silicon Valley area. This was how CINDElearned that Intel was looking for a Latin American site for a new $500 millionassembly and test plant (ATP).

Costa Rica had not even been on the “short list” of countries Intel’s site selectionteam planned to visit in 1995. The team originally intended to visit only Brazil,Chile, and Mexico. When members of CINDE’s staff heard from contacts in SiliconValley about Intel’s plans, Egloff, with his years of international business experi-ence, knew that CINDE would have to act swiftly or lose any chance at the deal. He

and several CINDE investment promotion officials immediately arranged for a quick visit to Intel’s headquarters in Santa Clara, California. Having researched Intel thor-oughly and knowing to some extent the kinds of questions executives from such acompany were likely to ask, they gave a very effective presentation about the suit-ability of Costa Rica as a site for the plant.7 The result was that they were able to

persuade Intel’s management that Costa Rica should be on the short list and that thesite selection team should visit Costa Rica on their way to Brazil.

Following specific advice from CINDE contact Michael Porter, as well as fromthe World Bank’s Foreign Investment Advisory Service (an agency that providesless-developed countries with advice on investment promotion), and based on their

own international experience, CINDE’s staff knew that for a high technology company such as Intel, rapid, well-researched responses to questions were essential.Aware of the importance this kind of response would have for the Intel executives,Egloff assigned three CINDE staff members to work on the Intel project full time toresearch potential questions in advance (Egloff, 2003; Arias, 1998; Bravo, 1998;Mora, 1998). These staff members also organized visits for the Intel executiveswith key government officials they knew the team would want to meet.

This advance preparation and attention to Intel’s specific needs made a signifi-cant impression on the Intel site selection team. Given the pressure imposed on theteam to decide quickly, they appreciated working with an agency that seemed to

facilitate the decision-making process. Additionally, the team realized that if any problems or issues arose with the government after the investment had been made,




CINDE, whose staff understood their needs so well, could help facilitate discus-sions. This knowledge contributed to a sense of confidence about investing in CostaRica (Telford, 1998; Perlman, 1998).

After Intel’s decision to invest in Costa Rica was announced publicly in 1996,

many other high technology f irms began to invest in Costa Rica. This major invest-ment from such a high-profile, prestigious company served as an anchor invest-ment that put Costa Rica on the map as a potentially attractive site for other hightechnology firms. While CINDE continued to focus on electronics firms, its inter-nationally experienced staff, attuned to global trends, also recognized that CostaRica had potential to attract FDI in the rapidly growing nontraditional areas of medical devices, shared services,8 and call centers. As a result, CINDE specifically

promoted clusters of investment in these areas as Table 1 indicates.The Costa Rican government’s successful collaboration with CINDE continued

beyond the Figueres administration. President Figueres’ immediate successor, Presi-

dent Miguel Angel Rodríguez from the opposition PUSC party, continued this suc-cessful collaboration, as has current President Abel Pacheco, also of the PUSC.

Table 1Investments in Costa Rica since Intel

Cluster Company

Electronics • ADEPSA, S.A.• Aetec de CR, Ltda.• Centro de Producción Profesional—CPP• Cía. EMC Tecnología, S.A.

• Componentes Intel de CR S.A.• Controles de Corriente S.A.• Kes Systems & Services CR • L3 Comunicaciones CR, S.A.• Marysol Technologies• Micro Technologies, S.A.• Multimix Microtechnology S.R.L.• NTK • Oberg Industries• Pycon de Costa Rica• Remec, S.R.L.

• Ryan Trading• Teradyne de CR • Tico Electronics*• Trimpot Electrónicas, Ltda.• Wai-Semicon, Ltda• Merlin Electronics• Daniels Manufacturera• Samsung• Ryan Manufactured • Smith Aerospace

Medical Devices • Alcon Centroamérica

• Arthrocare Costa Rica SRL• ATE Thermoforming



Nelson 15

• Boston Scientific• Conceptos de Precisión• De Royal Científica Latinoamérica• Estrella de Precisión Tecnológica• Glidewell• Hospira, Inc.• Inamed Costa Rica, S.A.• Med Tech• Novacept Costa Rica, S.A.• Point Technologies• PPC Industrias S.A.

Shared Services • Centro Global de Procesamiento Chiquita• Access Nurses• Baxter • British American Tobacco SSC• Dole Fresh Fruit• Global Business Services de CR • Holland Engineering S.A.• IBM• LL Bean Latinoamérica• Maersk Americas, SSC• Partner Tel

• Seton Centra• Trax Tech• Via Information Tools

Call Centers • Align Technology de CR, S.R.L.• Baan Centroamérica• Hewlett-Packard CR • Language Line Services• Supra Telecom de CR, S.A.• Sykes Latin America• Telefónica de Promociones de San José (Qualfon)• Unión del Oeste de CR

SoftwareDevelopment • Cypress Creek Technologies SA

• Dakota• Fiserv• Avionyx

Other Investments • AEK: Engineering services• Alcoa: Plastics, components• Bridgestone/Firestone: Major Expansion• General Electric: GE Capital regional office• Intel Engineering Design Center for the Americas• Neeman Medical: Clinical research

Source: CINDE, April 2005.

Table 1 (continued )Investments in Costa Rica since Intel

Cluster Company




Clearly, CINDE has benefited not only from its autonomy and transnational learn-ing capacity, but also from the relative ideological consensus among political par-ties in Costa Rica on working with the business community for the promotion of nontraditional FDI.

Rio Grande do Sul and Pólo

Background

The state government of Rio Grande do Sul’s collaboration with Pólo was similar inmany ways to the Costa Rican government’s collaboration with CINDE. Both CINDEand Pólo were private, well-funded nonprofit agencies, staffed by people with ex-tensive private sector and international experience. Both had high levels of autonomyand transnational learning capacity. The two cases differed because, unlike Costa

Rica, Rio Grande do Sul had a low level of ideological consensus among its politi-cal parties on working with the business community to promote FDI. This led to avery different outcome.

Leaders of Rio Grande do Sul’s two main business associations, the Federaçãodas Associações Comerciais e de Serviços do Rio Grande do Sul (FEDERASUL)and the Federação das Indústrias do Estado do Rio Grande do Sul (FIERGS), cre-ated Pólo in late 1995. Their intent was to form an agency that would promoteeconomic development by collaborating with the state government to attract for-eign direct investment.

Pólo collaborated effectively with Governor Antonio Britto (1995–1998) from

the centrist Partido do Movimento Democrático Brasileiro (PMDB) party. Workingwith Pólo, the state developed a highly effective investment promotion strategy thatfocused on attracting specific kinds of nontraditional companies and was highlyresponsive to their concerns. This helps explain how in 1998 Rio Grande do Sulwas able to compete successfully against four other states to win Dell Computer Corporation’s investment in a large manufacturing plant. However, after the arrivalof a new governor, Olivio Dutra (1999–2002) of the Partido dos Trabalhadores (PT,or Workers’ Party), with a very different view on collaborating with the privatesector, the effective relationship between Pólo and the state government broke down.Lacking the grafted-on transnational learning capacity that Pólo had provided, Dutra’s

government pursued a far less effective approach to working with nontraditionalcompanies.

Pólo’s Autonomy

Pólo’s close ties to business and foreign investors potentially created opportunitiesfor clientelism. However, Pólo avoided this problem through an organizational struc-ture that allowed for a widely representative membership and board of directorsfrom the local business community. This structure reinforced the transparency of the agency’s operations.

Membership in Pólo as a “Contributing Partner” was open to any business asso-ciation or company that contributed subscription fees to help finance the agency’soperations Organizations represented includednot onlyFIERGS andFEDERASUL



Nelson 17

but also at least 40 other business associations and companies from virtually everyindustry in Rio Grande do Sul (Martins, 1999). This total membership elected thefive-member board of directors, which in turn made a recommendation to the gov-ernor of Rio Grande do Sul as to the choice of the agency’s president.9 This wide

membership, with such a large number of business associations, companies, and others monitoring the activities of the agency, gave Pólo an openness and transpar-ency that kept it from becoming captured by any one company or set of bureaucrats.

Pólo’s Transnational Learning Capacity

With a budget averaging about USD $1.3 million annually in its first three years of operation (1996–1998), Pólo had a highly internationalized staff. Financed by gov-ernment consulting contracts, as well as by a wide range of business associationsand companies in Rio Grande do Sul, Pólo was able to pay salaries sufficient to

attract highly qualified, talented personnel from the private sector, including sev-eral with international business experience and MBAs from U.S. and Europeanuniversities.10 In addition, Pólo expanded its reach within the foreign business com-munity by cultivating contacts with expatriate business executives from Rio Grandedo Sul working in the United States who could serve as “virtual agents”11 of theagency abroad. This was Pólo’s transnational strategic network. Drawing upon their own knowledge of U.S. business practices, these virtual representatives instructed Pólo’s staff on how best to approach, anticipate the needs of, and negotiate withforeign executives. Pólo also had an established practice of proactively researchingspecific prospective foreign investors. All of this helped Pólo learn about and adapt

quickly to the needs of potential foreign investors. These qualities, and Pólo’s closecollaboration with the state government, were especially important in helping thegovernment develop an effective strategy for promoting nontraditional FDI fromhigh technology industries.

Ideological Consensus among the Political Parties

Rio Grande do Sul’s major political parties had widely divergent views about work-ing with the business community generally. They disagreed even more on workingwith the business community to attract FDI. During the 1993–1994 gubernatorial

campaigns, Olivio Dutra of the PT attacked his relatively centrist opponent, Anto-nio Britto of the PMDB, for his ties to business. Later, when Britto was running for reelection in 1998, Dutra was again his challenger. This time Dutra attacked Brittofor giving large investment incentives to multinational corporations (including Dell)to persuade them to invest in Rio Grande do Sul. Dutra won this election.

After the bitter, divisive election, Pólo’s president, José Cesar Martins, himself aformer business executive, was reluctant to work with the new PT government (Mar-tins, 1999). The PT government itself seemed wary of working with an organiza-tion with such strong ties to the local and foreign business community, one of Pólo’sgreatest strengths. This led essentially to the collapse of the relationship between

Pólo and the new government. Significantly, without the linkages to the businesscommunity that Pólo had provided, the new government had tremendous difficultyin devising a strategy to attract more nontraditional FDI from high technology and




other nontraditional industries. This was not just because of its ideological orienta-tion, but because, on its own, it was far less effective at dealing with potential non-traditional investors.

Without the government’s collaboration, Pólo was not able to continue its invest-

ment promotion work either. During the Britto government, Pólo had received mostof its income from government consulting contracts. Because it refused to work with Pólo, the Dutra government discontinued these contracts. Although Pólo had an independent source of funds in the subscription fees from companies that con-tinued to provide it with financing for its operations, its budget fell from an averageof about USD $1.3 million per year from 1996–1998 to an average of about USD$400,000 per year during the Dutra years (1999–2002) (Merlin, 2004). Even then,Pólo could have continued its investment promotion efforts. The problem was thegovernment’s unwillingness to cooperate with the agency in this effort. Therefore,the reason Pólo’s investment promotion effort ended during the Dutra government,

shifting the agency’s focus toward local development activities, was not because of a lack of funds but because no private IPA can undertake serious investment promo-tion work without government cooperation.

Outcome: Initial Success (Dell), but after the 1998 Gubernatorial Election, Breakdown

Pólo’s transnational learning capacity clearly played a role in winning Dell’s invest-ment for Rio Grande do Sul. This helped the agency develop a highly focused in-vestment promotion strategy, targeting FDI from nontraditional companies such as

Dell that would serve to diversify the state’s economy, but would still be very appropriate given the state’s unique characteristics. Pólo’s strategy, similar to CINDE’s inCosta Rica with Intel, was to use Dell’s plant as an anchor investment, which would attract further investment of that type. Additionally, Pólo’s staff made use of all of the agency’s transnational strategic network, as well as their own internationallyoriented skills and experience, which greatly enhanced their responsiveness to theneeds of a prospective foreign investor such as Dell.

For example, the state government’s initial decision in 1998 to focus on attract-ing nontraditional, high technology investment resulted from a seminar organized

by two of Pólo’s virtual agents—expatriates from Rio Grande do Sul working in

New York City as investment bankers. Using their connections in the investmentcommunity, these two individuals arranged for a series of meetings in 1998 be-tween then-Governor Britto and prospective investors during one of the governor’svisits to New York. The prospective investors themselves suggested that Rio Grandedo Sul should focus on attracting high technology industries.

Realizing that the investors might be correct, Martins had one of the virtualagents use his contacts to f ind a consultant on high technology. As a result of thiscontact, Duane Kirkpatrick, head of international operations for Robertson Stephensin San Francisco, one of the leading investment banks in the world in financinghigh technology businesses, came to Rio Grande do Sul and made an assessment.

Kirkpatrick concluded that the state’s large number of universities already offeringdegrees in computer science and electrical engineering, and the overall high levels



Nelson 19

of education in the state’s population, made it a viable place for investment by companies in high technology industries such as computer manufacturing or softwaredevelopment.

Now determined to promote the state to prospective investors from such indus-

tries, Pólo’s staff soon had a tip from a virtual agent that Dell Computer Corpora-tion was considering locating a manufacturing plant in Brazil. Receiving this tipwhile attending a conference in San Francisco, Martins contacted the company’sRound Rock, Texas headquarters immediately. Informed that Dell’s site selectionwas closing its short list of potential sites, but had never even considered Rio Grandedo Sul, he arranged a visit to the company (Martins, 1999).

At Dell headquarters, Martins and others from Rio Grande do Sul met with someof Dell’s senior executives. Having been advised by a Brazilian employee that Dellgreatly admired Ireland’s investment promotion agency, the IDA, Martins empha-sized the similarity between IDA and Pólo in the meeting. He noticed that this

comment definitely caught the attention of Dell’s senior management. Intrigued,the Dell executives asked several penetrating questions about Rio Grande do Sul’slevel of education, union rules, and infrastructure. The Dell team told the visitorsthat they had already visited São Paulo, Paraná, and Minas Gerais, but now would like to return to Brazil to visit Rio Grande do Sul.

Dell’s site selection team came to Rio Grande do Sul sooner than expected, onlyfive days after that first meeting. Nevertheless, Pólo was ready. Notified on theweekend that the Dell executives were arriving Monday, Martins immediately called his staff, who had already begun researching the company, and explained that theywould have to make some urgent preparations for the meeting. Charts would have

to be prepared, statistics ready; in short, everything relevant to Dell’s concerns.Most important, Martins was able to use his contacts in the business community

to arrange private interviews for the Dell team with important business leaders inthe state, including executives from multinational companies such as Coca-Cola, aswell as local firms. A businessman himself with extensive experience dealing withinternational executives, Martins was sensitive to their concerns. He knew that theDell team would want to talk privately with local business executives to gain a

perspective that was independent of Pólo and the state government officials.The preparations worked. After listening to the presentations, speaking privately

with business executives already in the state, and touring greater Porto Alegre for

possible manufacturing sites, the Dell team concluded that Rio Grande do Sul should be a leading candidate for the plant (Azário, 1999, 2001; Martins, 1999; Maxwell,2000). While continuing to negotiate with other states, Dell sent more teams to RioGrande do Sul for further negotiations. Ultimately, determined to win high technol-ogy investment for the state, the Britto government offered Dell the best terms for its investment.12 Less than six months after it had begun negotiations with Pólo and the state government, Dell decided to build its manufacturing plant in Rio Grandedo Sul.

Dell’s plans to build its plant f inally appeared to be set. Problems arose, however,when Olivio Dutra won the gubernatorial election in 1998. The new governor op-

posed the incentives that Dell, and other transnational corporations such as Ford,had negotiated with the previous governor. When Ford decided to put its manufac-




turing plant elsewhere, Dutra, not wanting to lose still another large investment,softened his stance with regard to Dell. He allowed Dell to keep all of its originalincentives, and it stayed.

Although Dell and the new government were able to remain on good terms, Pólo

and the new government were not. This difficulty reflected Martins’ obvious dislikefor the new administration, and the government’s own reluctance to collaboratewith Pólo in attracting investment. After Dutra came into office, Pólo and the gov-ernment began to operate entirely independently of one another. Lacking qualified

personnel of Pólo’s caliber, trained and qualified to work with potential foreigninvestors, the new government experienced significant difficulties in attracting newFDI, especially from the more demanding nontraditional companies.13 Executivesat Intel’s offices in São Paulo, for example, were not impressed with the newgovernment’s efforts to persuade Intel to locate an investment in the state (Azário,1999, 2001). Under a new director with little experience in dealing with foreign

investors, the Secretaria de Desenvolvimento e dos Assuntos Internacionais (SEDAI)made efforts to contact the company that seemed clumsy and amateurish—a prob-lem that Pólo had never experienced.

Chile and CORFO

Background

CORFO, Chile’s economic development agency, was created in 1939. A govern-ment organization, CORFO focused primarily on developing private firms within

Chile and diversifying Chile’s economy.Although Chile had been on the short list of possible locations when Intel was

deciding where to build its Latin American plant, Intel chose Costa Rica. This wasa blow to CORFO, which had been a key player in the negotiations. CORFO soughtto compete more effectively for such investment and in 2000, with the support of Chilean President Ricardo Lagos, launched its High Technology Investment Pro-motion Program.

CORFO’s Autonomy

CORFO’s overall approach prevented it from becoming a clientelistic agency. For example, in its Suppliers’ Development Program, CORFO did not provide fundingdirectly to specific firms. Rather, it worked with large associations, such as theSantiago Chamber of Commerce (with more than 1,400 corporate affiliates), or with industry trade associations. While CORFO provided the f inancing for projectssuch as technology enhancements, or improvements in management practices, theselarge associations collaborated with the agency in designing the projects, imple-menting them, and monitoring the results (Rivas, 2002). Firms applied for f inanc-ing through the association, and then the firms themselves co-financed a portion of the cost (usually 30–50 percent). CORFO helped maintain the transparency of this

process by always making sure to publicize its work on specific programs to thelarge, open membership of these organizations (Troncoso, 2002; <http://www corfo cl> accessed: 3 January 2003)



Nelson 21

CORFO’s Transnational Learning Capacity

Although CORFO had extensive autonomy, it had to develop transnational learningcapacity over time. CORFO did this by developing a transnational strategic net-

work of companies, universities, and individuals that could facilitate its work in the promotion of FDI from high technology companies. CORFO lacked such a net-work at the start, as well as other aspects of transnational learning capacity. For example, its budget for the High Technology Investment Promotion Program wasonly about USD $500,000 per year, considerably less than the budget for CINDE or for Pólo (in the beginning at least) (CORFO 2002b). Also, while some members of the staff working on this program had studied overseas, none had international busi-ness experience. Nor did CORFO have a proactive, systematic approach to research-ing prospective foreign investors. Without these components of transnational learningcapacity, the agency made some critical mistakes in the beginning. However, as one

aspect of this learning capacity developed, i.e., the transnational strategic network,CORFO was increasingly able to adapt the High Technology Investment PromotionProgram’s strategy to the changing needs of nontraditional investors.

Key aspects of CORFO’s nontraditional investment promotion network included the agency’s relationship with a business school in the United States, with interna-tional consultants, with U.S. business associations, with business executives frommultinational firms (through its Silicon Valley office), and with investors them-selves in Chile. All played important roles in the effective development and evolu-tion of the High Technology Investment Promotion Program’s strategy.

Ideological Consensus among the Political Parties

While Chile had numerous political parties, virtually all of them were organized into two broad coalitions: the relatively left-of-center Concertación de Partidos por la Democracia (CPD) and the relatively right-of-center Alianza Por Chile (APC).The coalitions differed on some key issues, yet both supported the central tenets of the Chilean model, which advocated a market-oriented approach to policymakingand minimal government intervention in the economy. Even current PresidentRicardo Lagos, a Socialist, had no intention of tampering with the central aspectsof the highly successful Chilean model.14

CORFO was very careful not to stray too far away from the market-oriented principles of the Chilean model in designing its High Technology Investment Pro-motion Program. For example, unlike many other governments involved in invest-ment promotion, the Chilean government did not offer tax incentives to companiesfrom high technology and other nontraditional sectors. CORFO did offer such com-

panies a set of soft incentives, including paying for the cost of pre-investment stud-ies, and subsidizing training expenses for employees hired after companies haveinvested in the country (CORFO, 2002a). But these incentives were small com-

pared to the major tax incentives other governments offered, which, over severalyears, could be worth tens of millions of dollars for a single company. CORFO’s

small incentives served merely to attract the attention of prospective investors, whomight otherwise overlook the country’s inherent advantages. Consistent with Chile’sfree market principles CORFO was simply trying to correct a flaw in the market




mechanism: a lack of information among prospective investors about the country’s potential as a site for high technology and other nontraditional FDI. Because of thisclose adherence to the basic tenets of the Chilean model, CORFO’s High Technol-ogy Investment Promotion Program was the sort of endeavor that not only Presi-

dent Lagos, but also members of the APC coalition—and any future presidentsfrom this coalition—could reasonably support.

Outcome: The High Technology Program’s Initial Mistakes, and Future Prospects

Unlike CINDE and Pólo, CORFO did not start out with a finely tuned investment promotion strategy. Once CORFO’s transnational strategic network began to takeshape, the agency was able to adapt relatively quickly to the needs of investors, and was successful in changing its strategy to fit rapidly changing circumstances.

CORFO’s definition of “high technology” initially seemed to encompass almost

every industry that could possibly fall into that category: semiconductors, computer hardware, software, biotechnology, among others, even though many of theseindustries were unsuited to investment in Chile (Castillo, 2002). Perhaps a privateagency, one staffed with former marketing executives with extensive internationalexperience, would have avoided this initial misstep.

Less than a year after the High Technology Investment Program was launched,CORFO began to define its target sectors more specifically. By August 2001, theopening statement in the third edition of the promotional pamphlet “invest@chile,”

jointly published by both CORFO and Chile’s Foreign Investment Committee,15

stated that “we believe Chile is particularly attractive as a location for investments

in software development and for those services, such as call and contact centers,shared-services and back-offices, that use new information and communicationtechnologies (ICT)” (CORFO, 2001: 5). Clearly, CORFO and the Foreign Invest-ment Committee were adapting their strategy quickly to fit Chile’s unique strengths.CORFO’s constant contacts with and feedback from business associations, pro-spective investors, business school interns from the United States, consultants— i.e., its transnational strategic network—facilitated this rapid learning process.

By January 2003, CORFO and the Foreign Investment Committee had orga-nized an investment promotion seminar in Santiago that specifically targeted shared services and software. Executives from companies that had already invested suc-

cessfully in this area in Chile, and now part of CORFO’s transnational strategicnetwork—such as Roberto Fuentes, managing director of Motorola-Chile; PatricioMelo, general manager of Altec (Banco Santander’s software development opera-tion); and Ernesto Labarut, president of Unilever-Chile—were featured speakers atthis event. Obviously, CORFO had shifted from a strategy that included a broad definition of high technology investment, including manufacturing of computer hardware, to a new emphasis on attracting FDI in shared services, software re-search and development (R&D), and call centers. This focused and targeted invest-ment promotion seminar showed how much CORFO’s strategy had evolved to fit

both changing circumstances and the needs of prospective investors.

By mid–2005, 18 companies had invested under the auspices of the High Tech-nology Investment Promotion Program. Despite the continued use of the term “hightechnology” in the name of the program virtually all of these investments were in



Nelson 23

shared services, software R&D, or call centers. Table 2 below provides a list of all18 of these companies:

Table 2

High Technology Investment Promotion ProgramCompanies and Industry Categories

Company Category

Air France (France) Call Center Cell Star (USA) Call Center Citigroup Inc. (USA) Call Center Delta Airlines (USA) Call Center General Electric (USA) Call Center Grupo SP (Spain) Call Center Hewlett-Packard (USA) Call Center

IBM (USA) Call Center Kodak (USA) Call Center Shell (Netherlands) Call Center Packard Bell (Japan) ElectronicsBHP Billiton (Australia) Shared Services Nestlé (Switzerland) Shared ServicesUnilever (Netherlands) Shared ServicesBanco Santander (Spain) Software DevelopmentBBVA Bank (Spain) Software DevelopmentSantander Bank (Spain) Software DevelopmentSoftware AG Software Development

Soluziona (Spain) Software DevelopmentSP Group (Spain) Software Development

Sources: Mario Castillo, “Towards the Technological International-ization of Chile,” unpublished document, CORFO, 2003; <http://www.corfo.cl> accessed: 12 May 2005, and CORFO, “CompanyList: 2000–2005,” 2005.

Significantly, most of the investment in these areas did not result primarily fromCORFO’s efforts. Rather, FDI in shared services, call centers, and software re-search and development grew in Chile as companies responded to market forces:

specifically, a general need for this kind of investment in the region and Chile’sinherent ability to meet these needs. This underscores CORFO’s weaker initial per-formance at investment promotion, at least in comparison with CINDE or Pólo.

Nevertheless, CORFO’s transnational network enhanced its ability to learn fromthese investors and focus its efforts in areas where its High Technology InvestmentPromotion Program could succeed. Knowing which investors to target, and whichcharacteristics to promote, provided CORFO with an enormous advantage. Cur-rently, CORFO is specifically targeting sectors and firms in financial services, soft-ware R&D, and call centers, areas in which Chile genuinely seems to offer numerous

benefits.

CORFO’s lack of transnational learning capacity in the beginning, and its onlygradual development of this capacity over time, meant that its effort to develop aneffective investment promotion strategy was slower and more painful than that of




its counterparts, CINDE and Pólo. But because of the development of its transnationalstrategic network, CORFO has been able to learn from its mistakes and shift itsstrategy more quickly than a typical government agency.

The prospects for Chile to sustain this strategy appear promising—even after

President Ricardo Lagos’ term ends in 2006 and a new president takes office. Thisis true whether the new president is from Lagos’ left-of-center CPD coalition or from the APC coalition. Because CORFO designed the High Technology Invest-ment Promotion Program to be consistent with Chile’s market-oriented policies,future presidents from the relatively right-of-center APC coalition also should bewilling to support the program, which bodes well for the future of Chile’s efforts to

promote nontraditional FDI.

Conclusion

The cases analyzed here highlight factors that enable a government to develop aneffective investment promotion strategy. Because of its collaboration with CINDE,the Costa Rican government possessed high levels of autonomy and transnationallearning capacity, as indicated by its targeting of prospective nontraditional inves-tors that were most appropriate to Costa Rica’s particular business conditions and

by its responsiveness to investors’ concerns and needs. Also, Costa Rica’s political parties had a strong ideological consensus in favor of working with the businesscommunity to attract nontraditional FDI, as shown by the continuity of this strategythroughout successive governments from different political parties. All of thesefactors led to the development of a highly effective investment promotion strategy.

In Rio Grande do Sul, the state government’s collaboration with Pólo also pro-vided it with high levels of autonomy and transnational learning capacity. This helped the government initially to develop a highly effective strategy since it was carefullytargeted to prospective nontraditional investors appropriate to the state and highlyresponsive to their needs. Nevertheless, the lack of ideological consensus among

political parties in the state about FDI promotion—or even about working with the business community in general (an important element to success in this activity)— meant ultimately that this initial success could not be sustained.

In Chile, CORFO was highly autonomous but lacked transnational learning capacity. Therefore, it sought to develop its own transnational strategic network of

companies, universities, business associations and individuals that could facilitateits work in promoting nontraditional FDI. CORFO’s investment promotion strategywas initially not as effective as CINDE’s or Pólo’s. At first, it did not target indus-tries appropriate to Chile, and CORFO officials were not as responsive to investors’needs and concerns as those at CINDE and Pólo were. Over time, as CORFO’stransnational strategic network developed—and as its transnational learning capac-ity increased—the effectiveness of its development strategy increased as well.

These cases not only underscore the importance of transnational learning capac-ity, but also show that there is more than one way to develop it. Whereas the CostaRican government and the state government of Rio Grande do Sul “grafted on”

their transnational learning capacity by collaborating with private IPAs, the Chileangovernment developed this characteristic over time. This latter approach took longer



Nelson 25

and may not have been as effective. Yet it demonstrates another way for govern-ments to enhance their investment promotion capabilities.

Investment promotion can be an appropriate response when the market mecha-nism alone fails to provide information to prospective investors about viable oppor-

tunities. Promoting investment in nontraditional industries provides a way for governments in countries or states that might otherwise be overlooked to diversifytheir economies and create new opportunities for their people. Governments that

possess autonomy and transnational learning capacity can develop well-targeted,highly responsive investment promotion efforts to harness the benefits of nontradi-tional FDI. But those that have these characteristics and also operate in an environ-ment in which there is an ideological consensus in favor of working with the businesscommunity are more likely to sustain these efforts over the long term.

Notes

1. “Nontraditional” refers not only to high technology industries such as semiconductor and computer manufacturing, software development, and pharmaceutical manufacturing and biotechnol-ogy, but also to service-related industries that require relatively high levels of education fromtheir workers, such as financial services, technical support centers, and call centers.

2. It is significant that even the United Nations Conference on Trade and Development (UNCTAD),traditionally critical of foreign investment in developing nations, came to embrace the objectiveof attracting nontraditional FDI (UNCTAD, 2001).

3. Not all FDI is beneficial to a country, and in some cases may even be harmful. Hanson (2001)concludes that in most cases FDI provides no net positive benefit to the host country. For ex-ample, he maintains that Intel’s investment in Costa Rica (a “success” case according to mycriteria) was not worth the incentives the government provided to win this investment. Other

analysts (Larrain, 2000; Rodriguez-Claire, 2001) disagree. These authors conclude that Intel’soverall impact on the Costa Rican economy was positive. My definition of an effective strategytakes into account the net benefits the FDI provides.

4. CINDE had financial support from a permanent endowment, created largely from funds pro-vided by the U.S. Agency for International Development (USAID) when it withdrew from CostaRica in the 1990s (Clark, 1995, 1997, 2001), while Pólo did not. As Pólo’s experience in RioGrande do Sul demonstrates, an independent source of funds alone is insufficient to ensure thatan IPA’s collaboration with the government will be sustainable.

5. Some of the investment promotion personnel working for the IPAs discussed here later accepted positions with companies that they had sought to attract to their country or state. However, noneof these officials was involved in any way in deciding major issues affecting the companies.

6. The median budget for an IPA from a middle-income country is USD $569,574 (Morisset and

Andrews-Johnson, 2004: 15).7. The CINDE officials informed the Intel executives that Costa Rica offered incentives to compa-

nies located in its eight industrial parks with free trade zone status. Companies in the ZonaFranca did not have to pay duties on imported parts of components, and were also exempt fromincome tax for eight years, and 50 percent exempt for four years after that. These incentives wereconsiderably more generous than those offered by Brazil, Chile, or Mexico.

8. “Shared services” refers to the consolidation of identical services performed in different officesor branches of one company, such as sales and technical support, accounting, human resources(e.g., payroll), billing, into one location.

9. In 1998, Pólo changed the rule giving the governor the right to choose the president of the agency. Now, the board of directors alone chooses the agency’s president.

10. All of Pólo’s key staff had prior business experience and several had studied business in the

United States and Europe (Azário, 1999; Martins, 1999; Puerta, 1999).11. This was Pólo’s term. It referred to expatriates from Rio Grande do Sul working in the United




States or Europe who did not officially work for Pólo, but were willing to assist its efforts on behalf of Rio Grande do Sul to attract FDI.

12. Britto offered Dell a 75 percent reduction in the state sales tax for 12 years, and a loan for 20million reais (about $16 million at the prevailing exchange rate), with a f ive-year grace period, to

be paid back over a ten years (Diefenthaeler, 1999). Minas Gerais, Rio Grande do Sul’s closestcompetitor, offered Dell a 70 percent reduction in the state sales tax for ten years, a loan for 20million reais with a four-year grace period and four-year repayment period, and free land for the

plant site (Governo de Minas Gerais, 1998).13. Rio Grande do Sul failed to attract nontraditional FDI after Dell during the Dutra Administration’s

time in office (1999–2002) (Merlin, 2004).14. An extensive literature documents the strong role of the state in guiding and promoting Chile’s

economic development even during the era of military rule in the 1970s and 1980s, when theneoliberal “Chilean model” supposedly dominated policymaking, and continuing into the present(Schurman, 1996; Kurtz, 2001; Ffrench-Davis, 2002). Even the left-of-center CPD coalition,and the Socialist president Ricardo Lagos himself, continue to adhere to many aspects of aneoliberal policy model, such as private pension plans for workers, a low uniform external tariff,and not offering large tax incentives to prospective foreign investors.

15. This agency mainly provided information to prospective foreign investors. It collaborated withCORFO in this aspect of the implementation of the High Technology Investment Program.

References

Arias, Danilo (former Investment Officer, CINDE; currently, public affairs director, Intel-Costa Rica).1998. Author interview, San Jose, Costa Rica, 2 November.

Azário, Miguelangelo (former investment analyst, Pólo; currently, government relations manager,Dell Computer Corporation). 1999, 2001. Author interviews, Porto Alegre, Brazil, 5 November,1999 and 1 November, 2001.

Bravo, Julissa (former investment office, CINDE; currently, human resources manager, Intel-Costa

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Competing for Foreign Direct Investment Efforts to Promote Nontraditional FDI in Costa Rica Brazil and Chile

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