Chile FDI

Transnational Strategic Networks and PoUcymaking in Chile: CORFO's High Technology Investment Promotion Program
Roy C. Nelson
ABSTRACT Once prey to government patrimonial practices, the Corporacion de Fomento de la Produccion (CORFO), Chile's economic development agency, overcame this problem in the early 1990s. In 2000 CORFO established a High Technology Investment Promotion Program to promote foreign direct investment in high technology and other nontraditional sectors. This article applies concepts of political survival and cooperation to explain how COREO moved from patrimonialism to technocratic independence. Then it demonstrates that governments possessing technocratic independence but lacking other characteristics typically associated with successful investment promotion efforts can develop transnational strategic networks of individuals, business associations, and universities to facilitate their learning process in order to devise more effective strategies to promote nontraditional EDI.
n early 2000, Mario Castillo, a deputy director of Corporacion de Fomento de la Produccion (CORFO), Chile's economic development agency, with a small group of other CORFO managers, devised a plan that signaled a dramatic change in direction for Chile. Fven during the Pinochet regime and thereafter, with the supposedly market-oriented Chilean Model in place, the Chilean government had provided export incentives and subsidies to specific industries, as well as special incentives for any firm investing in the extreme north or south of the country, in order to promote economic development (Agosin 1999; FfrenchDavis 2002; Kurtz 2001; Macario 2000; Perez-Aleman 2000, 2003; Schurman 1996). Unlike many other Latin American countries, however, Chile had refrained from actively promoting foreign direct investment (FDI) from particular sectors and certainly from specific firms. While the government did have a Foreign Investment Committee, this agency mainly responded to inquiries from prospective investors seeking information about the Chilean business environment. For the most part, the government allowed market forces alone to determine which specific foreign companies invested in the country. As a result, however, primary products-based and
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Other traditional industries, such as copper mining, fishing, forestry, and wine, dominated FDI in Chile. High technology companies, which CORFO believed could be especially useful in diversifying Chile's economy, providing rapid growth, and creating highly paid jobs for skilled workers, had passed over Chile as a potential site for irivestment. Intel's decision in 1996 to locate a major manufacturing plant in Costa Rica rather than in Chile particularly shocked Chilean government officials. Determined to change this situation, Castillo and his team proposed that CORFO make a concerted effort to attract FDI specifically from high technology firms. CORFO's directors, the government's Foreign Investment Committee, and President Ricardo Lagos himself agreed with the new plan. Months later, in November 2000, President Lagos traveled to the Silicon Valley in California to give a talk at a conference CORFO and the Foreign Investment Committee organized for potential high technology investors. This conference and Lagos's talk marked the launch of Chile's new High Technology Investment Promotion Program. Promoting FDI from high technology and other nontraditional investors can be a demanding task.' The underlying technologies driving these industries can change rapidly, and competitive pressures are fierce. As a result, business executives in such industries need to make decisions quickly (Maxwell 1999; Telford 1998). For nontraditional investors, therefore, the most effective investment promotion strategies are those that target and are highly responsive to the needs of firms best suited to the country's business environment. CORFO had difficulty developing such an investment promotion strategy initially, but the effectiveness of its strategy increased over time. Many factors, not just the effectiveness of a government's investment promotion effort, determine whether companies decide to invest in a particular country: the cost of doing business in the country, the training level of the workers, the quality of the infrastructure, the tax incentives, and so on. Because so many variables are involved, this article cannot account for all of the factors that explain levels of nontraditional FDI in Chile. Nevertheless, an effective investment promotion strategy can be a significant factor in influencing corporate site selection, especially if a country has not yet established itself as a location for a particular kind of FDI. Therefore, understanding what makes government investment promotion strategies effective is important, especially because this is something governments can control, unlike a country's geography or market size. This article therefore seeks to explain the factors that account for the effectiveness of a government's investment promotion strategy, which is itself an important factor in explaining the ultimate outcome, the level of nontraditional FDI. CORFO's ability to develop an effective investment promotion strategy is surprising for a number of reasons. Created in 1939 as an
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autonomous public development agency, from the beginning CORFO had a cadre of technical specialists and professionals who were attracted by the organization's developmental mission (Cavarozzi 1975, 129; Troncoso 2005). Nevertheless, by the late 1950s, under democratically elected presidents, and continuing through the military years 1973-90, different governments used CORFO to promote narrower, particularistic interests, such as providing economic assistance to political allies (Cavarozzi 1975, 356-60; Troncoso 2000, 2005). With the return of democratic government in the 1990s, however, CORFO underwent a restructuring. Chile's new democratic governments once again respected CORFO's autonomy to carry out development programs without political interference. At the same time, CORFO changed its approach to ensure that these programs would operate according to market-oriented, technocratic practices. How did CORFO move beyond its patrimonial phase and become once again a more technocratic institution? After this fundamental step was achieved, how did CORFOwithout significant experience in investment promotion, with a relatively small budget for its High Technology Investment Promotion Program in the beginning, and without foreign offices or a staff with extensive international business experiencelearn so quickly how to adapt its investment promotion strategy to suit the needs and concerns of prospective nontraditional investors that would be most suited to the Chilean business environment? The answers to these questions have implications not only for industrial policy in general but also, more specifically, for government efforts to develop an effective investment promotion strategy. The argument of this study is in two parts. The first part, which explains briefly how CORFO moved from patrimonialism to technocratic independence, applies existing concepts of political survival and political cooperation. As useful as these concepts are, however, they cannot provide an adequate understanding of how even a technocratic agency such as CORFO could develop, with its limited resources, a highly targeted, responsive investment promotion policy that was well adapted to the concerns and needs of suitable prospective foreign investors. Thus the second part of the argumentthe article's central focusshows how governments can use transnational strategic networks to facilitate their learning process about global business trends, prospective foreign investors, and the kinds of nontraditional FDI that would be best suited to their country's business conditions. This knowledge can help governments to develop more effective investment promotion policies and to attract more nontraditional FDI.
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EXPLAINING THE MODEL Figure 1 shows the causal chain of variables that lead an investment promotion agency (IPA) to attract nontraditional FDI. The level of technocratic independence determines the IPA's ability to form transnational strategic networks. An IPA with technocratic independence is insulated from political interference. Such an organization selects its staff on the basis of merit rather than politics. Moreover, it decides, develops, and evaluates its programs on the basis of technical rather than political criteria. These characteristics result in an organization with the ability and the will to form relevant transnational strategic networks to increase the effectiveness of the IPA's investment promotion strategy. The effectiveness of the strategy, along with other factors, such as the quality of the country's infrastructure and the training level of workers, determines the dependent variable, level of nontraditional FDI. Most governments conduct investment promotion efforts through public IPAs or collaborate closely with private IPAs. Thus the level of technocratic independence, as used here, refers to an IPA's, and therefore a government's, ability to form and carry out broaci investment promotion goals independent of pressures from specific individuals, domestic and international social groups, transnational corporations, or other external forces, as well as from narrow political interests of individual government officials themselves. The measures for technocratic independence are how extensively an IPA's staff is selected on the basis of merit rather than political considerations, how much its programs are decided and evaluated on the basis of technical rather than political criteria, and how many other agencies collaborate in attaining the organization's goals (since other agencies can help monitor each other to ensure that the original goal is attained). The second variable, the extent of the government's transnational strategic network, refers to the size of the government's network of foreign offices and linkages with individuals, business associations, universities, and transnational corporations that can facilitate its understanding of the needs and concerns of prospective Ibreign investors, and their suitability for investment in the country. Technocratic independence provides IPAs with the ability and the will (qualified personnel working on behalf of the country's collective interests) to create a transnational strategic network to enhance the country's investment promotion capabilities. The more extensive the government's transnational strategic network, the more easily it can learn about prospective investors and adapt its investment promotion strategy appropriately. The third variable, effectiveness of the government's investment promotion strategy, refers to how much a government's investment promotion strategy is attuned to the needs of prospective nontraditional
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Figure 1. The Model
Level of IPA's Technocratic Independence
on: Extent of Transnational Strategic Network
Effectiveness of Government Promotion Effort Other Factors " Level of Nontraditional FDI' Other Factors
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investors and promotes FDI from those nontraditional firms best suited to the country's business environment. Therefore the measure for this variable is the extent to which the government's investment promotion strategy targets and responds to the needs of the most appropriate nontraditional firms. The dependent variable, the amount of nontraditional FDI a country attracts, is determined not only by the effectiveness of a government's investment promotion strategy but also by many other factors, such as the level of training of the country's workers and the quality of the country's infrastmcture. Clearly, however, as this article will show, the effectiveness of a government's investment promotion strategy can have a major impact on the level of nontraditional FDI a country receives, especially if that country is not well known to prospective nontraditional investors. Far from being effective in this way, CORFO's initial approach to promoting nontraditional FDI was unfocused and failed to account adequately 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, after it had attained a high level of technocratic independence. Because CORFO's initial investment promotion policy was ineffective, in the beginning the agency did not specifically target those investors who would benefit most from Chile's unique characteristics. Other governments were more successful at developing effective investment promotion strategies. Notable examples are the governments of Ireland, Singapore, and Costa Rica. Like almost all governments undertaking investment promotion efforts, these governments worked
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through or collaborated closely with IPAs. Although CORFO was Chile's economic development agency, now, with the creation of the High Technology Investment Promotion Program, it was also taking on the role of an IPA. Ireland and Singapore also conducted these activities through government-run, or public, IPAs. The Industrial Development Authority in Ireland (IDA, now known as IDA Ireland) and the Economic Development Board (EDB) in Singapore were iDOth government agencies. The Costa Rican government, in contrast, collaborated closely with a private IPA, the Coalicion Costarricense de Iniciativas para el Desarolio (CINDB). Although they had different ways of achieving the same objective, IDA Ireland, the EDB in Singapore, anci CINDE in Costa Rica all developed well-targeted, responsive investment promotion strategies early on, and did not struggle to develop them over time as CORFO did. Working through or collaborating with their respective IPAs provided the governments of Ireland, Singapore, and Costa Rica with high levels of technocratic independence and extensive transnational strategic networks specifically relevant to the promotion of nontraditional FDI. With regard to technocratic independence, all of these IPAs selected personnel and designed and evaluated programs on the basis of merit rather than political considerations, and all collaborated with many other agencies in their investment promotion efforts (IDA Ireland; Singapore EDB). With regard to transnational strategic networks, all these IPAs had budgets large enough to maintain multiple foreign offices in the countries from which they wanted to attract FDI, as well as to hire staff with significant prior experience dealing with transnational corporations.^ Thus they were ableas were, by extension, the governments of which they were a part or with which they collaboratedto develop highly effective strategies to promote nontraditional FDI. CORFO differed from these agencies in that, even though it had a high level of technocratic independence by 2000, it still lacked a transnational strategic network relevant to the promotion of nontraditional 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; Sutin 2007), was unable to open multiple foreign offices or to hire staff with significant prior international business experience. CORFO overcame these obstacles to create a different type of transnational strategic network, which helped the agency to revise its investment promotion strategy and, as a result, to attract more nontraditional FDI.
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FROM PATRIMONIALISM TO TECHNOCRACY Numerous scholars have already advanced explanations about the circumstances under which democratic governments in Latin America can avoid patrimonialism and instead enact growth-enhancing economic policies that serve the broad developmental goals of the nation. At least some factors raised in these arguments are directly relevant to the successful effort to restructure CORFO and its approach in the 1990s. Specifically, after the transition to democracy in 1990, Chile benefited from three key factors: a disciplined party system, organized into two stable coalitions; a low level of partisan conflict; and a small and (now) highly open economy. Stability of Party Systems and Coalitions Employing a rational actor approach, Geddes (1994) argues that presidents are more likely to initiate reforms when their own positions are secure from military intervention or highly competitive political rivals and when they have the benefit of strong party discipline. In such circumstances, presidents are willing to create technocratic agencies and give control over specific policy areas to experts. In contrast, in political systems in which party discipline is lacking and in which a president's position is threatened, presidents will use such agencies as a source of patronage 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 shortterm and long-term political interests (Montero 2002, 7). When their positions are secure, politicians are more willing to delegate control of resources to technocratic agencies, which can develop policies that serve the long-term collective interests of the country. When, however, a high level of elite conflict exists, potentially threatening the ability of those in power to retain their positions, politicians will centralize their own control over resources in order to win political support in the short term, without regard to the country's overall interests. Montero argues further that when politicians have delegated authority to technocratic agencies, industrial policy in the collective interest will be sustained over time only when there is "horizontal embeddedness": an array of agencies working to advance the common goal, capable of monitoring each other's progress and keeping the policy on track (Montero 2001, 2002, 12). These models explain political outcomes in Chile very well. In the years before the 1973 military coup, Chile's political system was extremely fragmented and highly polarized; political parties lacked discipline; and coalitions were unstable (Geddes 1994, 111-15). In the 1930s and 1940s, Chile managed to achieve a stable compromise among
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key political players. By the early 1950s, however, this compromise began to break down, a process precipitated by the exhaustion of the import substitution model and the government's inability to address obstacles to further industrial development (Barrett 2000, 3; Cavarozzi 1975, 403-4). Political instability and political polarization intensified during the early 1960s and early 1970s. Geddes notes that the lack of party discipline and the unstable coalitions in Chile made comprehensive reform of the civil service unlikely: "[S]ome agencies were highly professionalized and others extremely politicized" (Geddes 1994, 112). As political instability and polarization increased, so did the prospects for politicization of CORFO. After the democratic transition in 1990, Chile once again achieved political stability, with strong party discipline and two stable coalitions: the center-left Concertacion de Partidos por la Democracia (CPD) and the center-right Union por Chile (now called Alianza por Chile, or APC). As Weyland demonstrates empirically (1997, 1999), these broad coalitions of multiple (yet disciplined) parties, in addition to other encompassing organizations, such as peak associations of labor and business and a unified state apparatus, encouraged politicians to appeal to collective interests rather than to narrow political interest;;. In other countries, such as Brazil, fragmented, undisciplined political party systems prevailed (besides a lack of encompassing organizations and a government mired in internal bureaucratic politics). Narrower, particularistic interests dominated, and reform was much more difficult. While different from the political survival arguments of Montero and Geddes, this argument is consistent with the idea that politicians are more inclined to make reforms when stable coalitions and disciplined political party systems prevail. One reason for the emergence of stable national-le\ el coalitions was Chile's unique binomial electoral system. Before the 1973 coup, Chile had a traditional open-list, multiparty district, proportior.al representation electoral 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 before the transition to democracy took place as a way to protect its interests in the new regime and to preserve stability (Siavelis 2000, l68). Under the binomial system, each of Chile's electoral districts has two representatives, and coalitions are binding at a national level. As Aninat et al. explain, "each of the lists (coalitions/parties) receiving the two highest vote shares wins one of the two available seats per district unless receiving the most votes outpolls its second place rival by a ratio of more than two to one, in which case it receives both seats" (2006, 23). While encouraging parties to form national-level coalitions, this system makes it difficult to develop more than two coalitions. This is
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one reason why Chile has had two national coalitions since the implementation of this system, each of which includes close to 50 percent of the members of Congress. This system also gives individual parties a strong incentive to stay in the national coalition. Because it is difficult for one coalition to double the percentage of the vote received by the other in any specific district, moreover, each of the two principal coalitions usually has at least one secure seat per district. This is another factor that encourages coalitions to address national concerns rather than immediate political interests (Aninat et al. 2006, 2425). Level of Partisan Conflict Siavelis maintains that Chile's binomial system alone is not sufficient to explain how the country's political parties divided into two stable coalitions. He argues that such outcomes also depend "on the party context of the country at a given moment" (Siavelis 2000, l69). Because the current party context in Chile favors such a result, two stable coalitions have formed. The reason for the current party context has much to do with the nature of Chile's transition to democracy, which also helps explain Chile's current low level of partisan conflict. The current democratic transition occurred as the result of the 1988 plebiscite, which gave Chileans only two voting options: continue the military regime or return to democracy. This stark choice encouraged prodemocratic forces to lay aside their partisan differences in order to win the plebiscite. Once democracy was restored, parties were reluctant to return to the high levels of partisan conflict Chile had experienced in the late 1960s and early 1970s (Aninat et al. 2006; Barrett 2000; Weyland 1997, 1999). Beyond that, formerly highly ideological parties moderated their positions. Following Montero (2002), this low level of polarization created a political environment more conducive to politicians' delegating control over economic policy to technocratic agencies. Size and Openness of the Economy Katzenstein's Small States in World Markets (1985) demonstrated that small European countries with open markets were more inclined to political compromise and harmonious relations between key players in order to maintain their competitiveness in the global economy. Similarly, Aninat et al. note that Chile's small and open economy makes the consequences of poor economic policies "keenly felt" (Aninat et al. 2006, 7). Indeed, such consequences could be devastating. This is therefore yet another factor inhibiting patrimonial policies and encouraging technocratic reforms at CORFO since the return to democracy.
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CORFO'S Evolution All of these factors help explain the evolution of CORFO's approach. At its creation in 1939, CORFO was designed to be a legally autonomous institution, meaning that its own Board of Directors would make policy decisions without interference from Congress or the president (Cavarozzi 1975, 120; CORFO 2005a; Rivas 2002). Indeed, instrumental figures in the creation of CORFO, then-president Pedro Aguirre Cerda and his finance minister, Roberto Wachholtz, emphasized that they wanted CORFO's personnel to design the organization's policies without outside political pressures (Cavarozzi 1975,125). In practice, CORFO's engineers and other technical experts essentially made all key decisions, because the Board of Directors lacked the technical expertise to do so (Cavarozzi 1975, 123-24). CORFO maintained this strong technocratic orientation, and could develop a highly capable staff, because its personnel were selected on the basis of merit rather than political patronage, its actions were decided on the basis of technical rather than political criteria, and its developmental mission gave CORFO's staff a strong sense of purpose (Cavarozzi 1975, 129-31). These characteristics are also true of CORFO today (Castillo 2002, 2005; Donoso 2002; Gligo 2002; Rivas 2002; Troncoso 2002, 2005). Given Chile's fragmented party system, unstable coalitions, and increasing political polarization from the 1950s to 1973, however, at least some loss of technocratic independence was likely to occur during this period. This happened initially during the presidency of Jorge Alessandri (1958-64). Elected with the support of large industrialists in Chile, Alessandri took steps to bring CORFO and other formerly autonomous institutions (such as the Central Bank) directly under his control, so that they would be more responsive to the immediate needs of business. For example, Alessandri appointed an important ally from the business community, Pierre Lehmann, as CORFO's executive vice president. Lehmann centralized decisic)nmaking power at CORFO in his own (and thus Alessandri's) hands rather than those of CORFO's technical cadre (Cavarozzi 1975, 358-59). It was during this period that CORFO became a development bank, making loans directly to private firms. Political interference in CORFO's affairs continued during the Allende years (1970-73) and during the military regime: (1973-90). Leftist president Salvador Allende, whose political as well as physical survival was under constant threat of military intervention, used CORFO as a state holding company for nationalized private ente;rprises (CORFO 2005a) and appointed managers of these firms on the basis of political rather than technocratic criteria (Geddes 1994, 17). The Pinochet regime reversed CORFO's direction completely, making it responsible for the
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government's privatization program. It also used CORFO to provide subsidies in the form of loans to key supporters, leaving the organization heavily indebted (CORFO 2005a; Troncoso 2005). Stable coalitions, strong party discipline, a low level of partisan conflict, and Chile's small and now open economy provided the political context in which CORFO adopted a more independent, technocratic approach in the post-Pinochet years. During the governments of Presidents Patricio Aylwin (1990-94) and Eduardo Frei (1994-2000), CORFO restructured its entire approach in a way consistent with technocratic rather than patrimonial policies. These reforms began in the early 1990s but accelerated under the leadership of CORFO's Executive Vice President Felipe Sandoval (1994-97) and his deputy. General Manager Eduardo Bitran (1994-97), both appointed by President Frei. Although political appointees, both men were highly qualified for their posts, with years 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, CORFO continued to select its own technical personnel on the basis of merit rather than political criteria (although the executive vice president and general manager positions continued to be appointed by the president of Chile). For example, while none of the executive-level personnel affiliated with the High Technology Investment Promotion Program had international business experience, all either held a degree in engineering or business or had pursued advanced university training in the United States (Castillo 2002; Donoso 2002; Gligo 2002). During this period, however, CORFO instituted three key reforms that made its operations more technocratic than in the past. It decided no longer to provide loans directly to individual companies but instead to work through private banks and other financial intermediaries. It shifted its focus to promoting the competitiveness of small- and medium-sized enterprises (SMEs) by providing financing to associations of such firms and requiring them to cofinance part of the cost of the programs. It also implemented systematic, independent evaluations of these SME programs. To implement the first reform, CORFO negotiated lines of credit with multilateral institutions, such as the World Bank and the InterAmerican Development Bank. It then offered these lines to private banks on a competitive basis, depending on which banks provided the lowest administrative costs. The selected banks then provided loans to SMEs on the basis of well-established market practices. Most important, the banks, not CORFO, assumed all the risks for these loans. Working through private banks in this manner helped to ensure that funding provided to SMEs would be allocated on the basis of objective market criteria (Castillo 2005; CORFO 2005a).
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CORFO's second reform, developing cofinanced jprograms exclusively to promote the competitiveness of SMEs, also avoided providing funds directly to these companies. Instead, CORFO provided financing through private intermediaries, called agentes operadores (operating agents), and required these associations of firms to cofinance the cost of the programs. CORFO-designated operating agents that administered these lines of financing typically were trade associations, such as the Asociacion de las Empresas Exportadoras de Manufacturas y Servicios (ASEXMA, Manufacturing Exporters Association), or the Asociacion de Indilstrias Metalurgicas y Metalmecdnicas CASIMET, the Metal Industries Association). While CORFO provided the financing for projects such as technology enhancements or improvements in management practices, these large associations collaborated with CORFO in designing the programs, implementing them, and monitoring the results. In order to obtain financing, individual firms had to apply through the association. Using money from CORFO, the association financed part of the cost for the projects the firms wished to undertake, while the firms themselves cofinanced the rest (usually 30 percent to 50 percent). In order to ensure the transparency of this process, CORFO always publicized its work on specific programs to the large, open membership of these organizations. Thus, all firms in the association had the same opportunities to participate in CORFO's programs (CORFO 2004). This approach encouraged accountability by the associations and individual firms. In addition,working through associations with a broad range of membership made it less likely for CORFO to be captured by the interests of any one individual or group in the association. The third reform that CORFO initiated was systematic, independent evaluations of these SME programs. CORFO conducted such assessments regularly. To ensure the independence of the evaluations, the agency outsourced them to universities or private consultants (Castillo 2005; Rivas 2002). All these reforms increased CORFO's technocratic independence. Still another factor helping CORFO sustain technocratic practices rather than revert to patrimonialism was its collaboration with other agencies working toward similar goals in specific areas. This recalls Montero's argument that "horizontal embeddedness," or ties between government agencies, can also enhance a state's ability to implement technocratic rather than patrimonial policies (Montero 2001, 2002). For example, Montero shows that strong ties between development-oriented public agencies in Minas Gerais helped them to fend off successive governors' attempts to use the state's industrial polices for clientelistic purposes. Consistent with this principle, CORFO involved a wide range of organizations in its efforts to develop the High Technology Investment Program. On the program's website, CORFO itself referred to the group
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of agencies with which it collaborated as Chile's Pro-Technology Network (Invest@Chile 2004). Among the agencies were CONICYT, the National Commission for Science and Technology, which (among other things) financed a CORFO program of "technological internships" for young Chilean engineers at companies in Silicon Valley and elsewhere in the United States; and Fundacion Chile, the independent, nonprofit foundation that supported projects to develop new technological applications in a number of industries. By far CORFO's most important and closest collaborator on the High Technology Investment Promotion Program, however, was the Foreign Investment Committee. On its website, the Foreign Investment Committee listed as its principal aim "to consolidate Chile's position as an attractive destination for foreign investment" (Comite de Inversion Extranjera 2004; Invest@Chile 2004). Primarily, the Foreign Investment Committee's duties involved informing potential investors about Chile's investment laws. It also helped to represent Chile in negotiations on international trade agreements and disputes and maintained a database of all foreign investment in Chile. It is significant that because of the nature of Chile's economic policies, the Foreign Investment Committee had not actively promoted foreign investment in any particular sector or industry before the High Technology Investment Program came into existence. After that, however, it assisted CORFO by participating in and helping to organize investment promotion conferences and seminars for prospective investors in this area. While CORFO ran the High Technology Investment Promotion Program office and served as the principal point of contact for potential investors from high technology industries considering investing in Chile, the Foreign Investment Committee's involvement helped ensure that the program stayed on course. TRANSNATIONAL STRATEGIC NETWORKS The underlying political factors discussed thus far help explain how an agency such as CORFO would have the technocratic independence necessary to develop an effective investment promotion strategy, rather than being just a patrimonial agency doling out favors to the president's supporters. Nevertheless, these factors provide only part of the explanation. They still do not explain the process by which investment promotion agencies (IPAs) learn how to adapt their investment promotion strategies to the needs and concerns of specific foreign investors. Transnational strategic networks can facilitate this process. Other scholars have discussed the role government-business networks can play in policymaking, although usually in a domestic context. For example, Evans's concept of embedded autonomy holds that states
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that not only have some independence ("autonomy") from domestic societal groups but also maintain connections with, and work through, such groups (that is, are "embedded" in them) are most able to achieve their policy goals (Evans 1995). Silva (1997) found that during the early years of the Pinochet regime in Chile, the Chicago Boys; consulted with business groups, but only with a small, closed group of industrial leaders they already knew, who shared their (initially) ideologically rigid views. Later, however, responding partly to public protests in 1983-84 that resulted from earlier mistakes, the regime's key economic policymakers made sure to appoint to key positions business executives representing a range of industries. This helped them to formulate policies on sensitive economic issues. What the discussions of business networks do not adequately consider, however, is the extent to which an IPA such as CORFO can develop and use such networks to facilitate its learning process. Initially, after it began its High Technology Investment Promotion Program in 2000, CORFO had difficulty developing an effective investment promotion strategy. Yet even without any change in the size of its budget or the international experience of its staff, CORFO managed to increase its ability to learn about prospective foreign investors by developing a transnational strategic network of companies, universities, and individuals that could facilitate its work in the promotion of nontraditional FDI. This concept of transnational strategic networks has its origins in the rapidly growing literature on organizational learning. With some exceptions (for example, Perez-Aleman 2000, 2003; Weyland 2004), most of the literature on learning in organizations has focused on business firms rather than on government organizations. However, many of these concepts are very relevant to the study of learning by governments. For example, Cohen and Levinthal's highly influential concept of absorptive capacity (1990) is related to this explanation of how transnational strategic networks can facilitate a government's ability to learn. Absorptive capacity refers to "a firm's ability to identif;/, assimilate and exploit knowledge from the environment" (Cohen and Levinthal 1990, 128). A governmentor a private agency collaborating with a governmentthat possessed an extensive transnational strategic network would certainly be able to identify global business trends and beneficial prospective foreign investors, assimilate this information, and exploit this knowledge in developing an effective investment promotion strategy. The concept developed in this study, however, is different. Central to the idea of absorptive capacity is the notion that an organization needs "prior related knowledge to assimilate and use tiew knowledge" (Cohen and Levinthal 1990, 129). Of course, prior accumulated knowledge (for example, knowledge about foreign business trends among a highly internationalized staff, paid for by a sizable budget) would help
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the organization learn, but it is not essential. An IPA could still learn effectively if it had a transnational strategic network. The governments of Costa Rica and Rio Grande do Sul, Brazil, acquired extensive transnational strategic networks by collaborating with private IPAs that already had such networks (Nelson 1999, 2003). In this instance, another important concept from the organizational learning literature, Huber's notion of grafting (1991), is relevant. Firms can learn by "grafting on" the knowledge of other firms. Mergers and acquisitions or joint ventures with other firms provide opportunities for firms to do this (Inkpen 2000). Similarly, governments can graft on the ability to learn, as the Costa Rica and Rio Grande do Sul cases show, by partnering with a private IPA that already possesses a sizable transnational strategic network. Like IDA Ireland and Singapore's EDB, CORFO did not partner with another agency that already had such a network. In contrast to those other agencies, however, CORFO's own ability to learn what it needed to 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 specific nature of this investment or whether it was well suited to Chile's specific business conditions. Yet the agency overcame this problem. As CORFO developed a transnational strategic network relevant for nontraditional FDI promotion, the effectiveness of its investment promotion strategy increased. In order to understand the extent to which CORFO failed initially at developing a well-targeted, responsive investment promotion strategy but succeeded at developing such a strategy later on, it is important to know more about Chile's business environment. CHILE AS A SITE FOR NONTRADITIONAL FDI Because of its relatively small market, Chile is not attractive for many nontraditional firms seeking to manufacture products for sale in the local market. Furthermore, Chile's distance from the United States means that it cannot serve effectively as a platform to export products to the U.S. market. While Chile's cost structure is lower in some sectors than that of some Latin American countries, it is certainly not competitive with India for low-cost services or with China for low-cost manufacturing. Unlike many other governments involved in investment promotion, moreover, the Chilean government does not offer tax incentives to attract specific foreign companies from high technology and other nontraditional sectors. As part of the High Technology Investment Promotion Program, CORFO does now offer such companies a set of "soft" incentives.
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Table 1. Information Technology Salary Comparisons, in annual US$ Position Senior Analyst/Designer Junior Programmer Office Administrator
Source: Watson Wyatt 2004 Chile 32,653 12,728 14,846 Brazil 38,697 13,320 17,599 Mexico 49,551 19,367 20,489 Argentina 21,036 10,730 11,987
including paying for the cost of pre-investment studies and subsidizing training expenses for employees hired after companies have invested in the country (CORFO 2002b). Nevertheless, these incentives are quite small compared to the major tax incentives other governments offer, which, over a number of years, can be worth tens of millions of dollars for a single company. All these factors combined help explain why Intel passed over Chile as a potential site for its Latin American manufacturing plant. In general, Chile is not competitive for nontraditional FDI involving extensive manufacturing operations and requiring large tax incentives, or for manufacturing firms intending to export from Chile to the United States. Still, Chile does offer a number of advantages, if not in comparison with China or India then at least within the Latin American region itself, as a site for specific kinds of nontraditional FDI. For example, Chile's political and economic stability, relevant to FDI generally, also makes the country ideal for companies' regional headquarters. Table 1 shows that Chile's well-trained technical personnel in information technology (IT) are available at competitive rates compared to other Latin American countries with which it often competes for nontraditional FDI, with the exception of Argentina. (Belbre the massive devaluation of the Argentine peso in 2002, Argentina's salaries were much higher than Chile's. Although they have dropped dramatically since the devaluation, the significant political and economic uncertainty in the country continues to be a deterrent for FDI.) The availability of relatively low-cost, highly trained human resources is clearly relevant to prospective investors deciding where to locate software development centers to serve the Latin American region. Chile's reliable and cost-competitive telecommunications infrastructure provides additional benefits for a number of noniraditional industries, at least for those that have operations in Latin America. The competitiveness of a country's telecommunications infrastructure is especially relevant for evaluating a country's attractiveness for FDI in call centers or technical support centers, as well as for FDI in "shared services," which depend heavily on transmission of data via the Internet. Shared services are the consolidation of identical services per-
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Table 2. Comparative Costs for a Three-Minute Peak-Time International Phonecall, US$

Chile Brazil Mexico Argentina Source: Pyramid Research 2004 $0.78 $0.87 $1.68 $0.60
formed in different country offices or branches of one company in a given region, such as sales and technical support, accounting, human resources (for example, payroll), and billing, into a single location in that region. Table 2 and Figure 2 demonstrate the relative strength of Chile's telecommunications infrastructure compared to some of its competitors in Latin America. Table 2, focusing exclusively on costs for fixed-line telephone operators, shows that Chile's long distance costs are lower than those of key competitors, again with the exception of Argentina since its massive devaluation. This is especially important for call centers or technical support centers. Figure 2, a comparison of key cities in a number of countries, ranks the telecommunications sector in broader terms, including not only costs but also the level of development of the telecommunications infrastructure for broadband, fiber optics, and other networks. Here, Chile's capital, Santiago, ranks first among major cities in the Latin American region (as well as Miami). This ranking is relevant to technical support centers as well to FDI in shared services. Table 3 shows the Economist Intelligence Unit's 2005 e-readiness ranking for a number of countries. This ranking measures how attractive a country is for investment in online operations; therefore it is also highly relevant to Chile's attractiveness for FDI in shared services. As the figure shows, Chile scores the highest in Latin America in this ranking. All these characteristics help make Chile a good location for software development centers specifically serving the interests of firms doing business in Latin America, for technical support or call centers servicing the Latin American region, or for firms seeking to consolidate shared services within one Latin American location. Unfortunately, however, in this instance the market mechanism failed. Despite Chile's advantages as a location for specific kinds of nontraditional FDI, when Mario Castillo did a preliminary survey of prospective high technology investors, he found that few of them knew much about Chile except as a source of high-quality, inexpensive wines (Castillo 2002). At the same time, however, CORFO, still lacking an extensive transnational strategic network related to the promotion of nontraditional FDI, initially pursued
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Figure 2. Latin America Telecom Comparative Ranking: Broadband, Fiber Optics, and Other Networks
OJ!
Sao Paiilo
de Janei
enos Air
Santia
lexico C
Carac
Mia
O)
CO CD
.>
cd
CD
ir
Score scale: 1-5 points Source: Pyramid Research 2003
3 CO
a broad range of prospective investors in the general category of high technology, regardless of whether they would be a good match for Chile's specific business conditions. Indeed, the very name of CORFO's High Technology Investment Promotion Program indic:ated the emphasis on attracting high technology investment, even though other kinds of nontraditional FDI not necessarily high technology-related (call centers or shared services, for example) would be more appropriate for the Chilean business environment. Defining Chile's Niche for Nontraditional FDI Even large transnational corporations often lack information about potential foreign sites or the advantages of specific international locations. Under such circumstances, aggressive marketing by a capable IPA can have a major impact. For example, Intel would never have selected Costa Rica as a site for its manufacturing plant if CINDE had not been so successful at persuading Intel executives to visit the country in the first place and then handled the effort so well (Nelson 1999). Apple Computer's location of a plant in Ireland in 1979, an anchor investment that helped attract many other high technology firms to that country before it became widely known as a haven for such investment, would
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Table 3. Economist Intelligence Unit's E-readiness Rankings, 2005

2005 rank in region Unitecd States Canada Chile Mexico Brazil Argentina
1 2
2004 rank in region

1
Overali ranking E-readiness score (of 10) (of 65)

2 11
3
4
3
4
31
36
38 39
5 6
5 6
8.73 8.03 5.97 5.21 . 5.07 5.05
Source: Economist Intelligence Unit 2005
not likely have occurred without the determined efforts of the IDA (Mac Sharry and White 2000). Dell Computer Corporation would never have established a manufacturing plant in Rio Grande do Sul had it not been for the aggressive, capable efforts of that state's IPA, Polo-RS, Agencia de Desenvolvimento (Polo) (Maxwell 1999; Nelson 2003). These IPAs all benefited from relatively large budgets and extensive transnational strategic networks. The financial resources helped them to create extensive international networks of foreign offices, and also to pay higher salaries to attract staff who had significant domestic and international business experience or who, at a minimum, had worked and studied extensively abroad (Egloff 2003; Martins 1999a, b). CORFO lacked the large budget, highly internationalized staff, and multiple foreign offices of IDA Ireland and Singapore's EDB; also, unlike the governments of Rio Grande do Sul and Costa Rica, CORFO lacked a partnership with a private IPA that could provide these characteristics. As a result, as CORFO officials launched their High Technology Investment Promotion Program, they were not fully aware of what specific nontraditional industries would be most suited to iiivestment in Chile. Over time, however, as the agency's transnational strategic network related to the promotion of nontraditional FDI grew, CORFO's strategy became more appropriately targeted.
CORFO's TRANSNATIONAL STRATEGIC NETWORK

The key components of CORFO'^ transnational strategic network related to nontraditional investment promotion included the agency's relationship with a business school in the United States; with international consultants associated with successful IPAs, specifically CINDE in Costa Rica and IDA Ireland; with U.S.-based consulting firms specializing in shared services, software, and call centers; with U.S. business associations; with its own Silicon Valley office; and with investors in Chile themselves. All
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played important roles in the effective development and evolution of the High Technology Investment Promotion Program's strategy. Other IPAs, those with large budgets and highly internationalized staffs, had no difficulty developing extensive transnational networks. They simply set up multiple overseas offices in countries from which they hoped to attract investment. For example, by 2005, IDA Ireland had 13 foreign offices, many of which were in the United States. Singapore's EDB had 18 (IDA Ireland website; Singapore EDB). CORFO stands out for its ability to establish an effective transnational strategic network with a relatively small budget, and for the success of this network in assisting CORFO's investment promotion effort. Affiliation with a U.S. Business School CORFO formed a close relationship with an internationally oriented graduate school of business located in the United States. The school was Thunderbird School of Global Management in Glendale, Arizona. CORFO's affiliation provided a means for the agency to develop extensive international contacts quickly. The school's MBA students also served as a source of inexpensive but often highly knowledgeable consultants on U.S. business trends in high technology and other nontraditional industries, as well as on market research and strategy. CORFO established an official contract with Thunderbird to provide consulting seivices. As part of this contract, which lasted from 2000 to 2003, the agency and a professor at the school set up a consulting workshop for Thunderbird students on campus and an internship for Thunderbird students at CORFO. The group of students working on the project on campus, all with some market research or specific industry experience, researched target industries for Chile to inv estigate further, as well as specific potential investors. Also, each semester, a student with a set of skills useful to CORFO (market research skills or experience in a specific high technology industry) went to Chile to work in the high technology investment office at CORFO. CORFO paid the student's expenses while on the internship out of its budget for the High Technology Investment Promotion Program. The students' experience in specific industries enabled them to provide insights into U.S. business practices and trends in high technology that were useful to the Chilean officials. Specifically, several of the students began to suggest that CORFO should narrow its focus. Instead of attempting to target high technology industries generally, they recommended that CORFO would be wise to target industries in which Chile genuinely had the potential to attract FDI. One specific sector they recommended was software (Hall 2004). As CORFO refined its investment promotion strategy, it adopted a number of these recommendations, this one in particular.
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During this time, Thunderbird also facilitated CORFO's initial contacts with a number of key organizations in the Silicon Valley, such as the American Electronics Association, the San Jose Business Incubator, and the Silicon Valley office of IDA Ireland. Relationship with International Consultants Associated with Successful IPAs Hoping to learn from the experience of IPAs that had already been successful in attracting high technology investment, CORFO also hired consultants associated with CINDE in Costa Rica and IDA Ireland. A key consultant early on was Enrique Egloff, who had served as executive director of CINDE from 1995 to 1999. David Lovegrove, another consultant, for many years had been a senior executive at IDA Ireland, the agency that serves as a benchmark for IPAs all over the world, especially those interested in attracting high technology investment. By this time, Lovegrove was a senior official at Forfas, the Irish government agency responsible for Ireland's overall economic development strategy. CORFO hired these consultants originally because it thought that given the knowledge they had acquired in the IPAs with which they were associated, they could help the agency attract high technology investment. Yet the investment promotion efforts of both of those IPAs had evolved over time to focus on specific nontraditional sectors. Thus these consultants, who had themselves witnessed and participated in the their own IPAs' shift in approach, were highly qualified to help CORFO's investment promotion strategy evolve. As CINDE's executive director, Egloff had been responsible for a major achievement: attracting Intel's 1996 investment in a manufacturing plant in Costa Rica, the company's first plant in Latin America. Intel's investment had established Costa Rica's reputation as an attractive site for high technology investment. Even more important from CORFO's perspective was that Chile had "lost" this investment to Costa Rica, despite being on the short list of four countries that Intel had considered (Brazil and Mexico were also on the list). This frustrating outcome convinced Mario Castillo and others at CORFO that Chile needed to do something more if it wanted attract this kind of investment (Castillo 2002, 2004). CORFO's emerging transnational strategic network again facilitated matters, as a contact at Thunderbird introduced Egloff to CORFO officials, who promptly hired him as a consultant. With his industry experience and practical suggestions, Egloff helped CORFO develop an investment promotion strategy oriented more toward Chile's unique strengths. For example, Egloff recommended specific consulting firms specializing in financial services and call centers, which would help CORFO move away from an exclusive
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emphasis on high technology. The firms he recommended helped CORFO embrace the sort of investment promotion strategy that CINDE had begun to develop. This strategy now went beyond high technology to focus also on FDI in technical support centers, ca.ll centers, and shared services (Castillo 2004; Egloff 2003, 2004). The consolidation of shared services can take different forms. For example, a company might channel all its sales and service calls from customers through one call center. Over time, the same company might consolidate its internal operations, such as payroll services from multiple offices, into one regional office. While certainly not: "high technology," FDI in shared services offered Chile a way to diversify its economy and provide job opportunities requiring technical training, just as it had for Costa Rica. Lovegrove had been centrally involved in IDA Ireland's and Forfas's plans to move Ireland's investment promotion effort beyond high technology manufacturing and into financial services. In addition, Lovegrove had helped the IDA begin a separate consulting service, providing advice to governments all over the world on how to attract investment and, more important, how to focus and target their strategies in order to attract investment most suited to the business environments of their countries. One of Lovegrove's recommendations to CORFO was that the High Technology Investment Promotion team should focus its (efforts on financial services (Lovegrove 2002). He provided a detailed assessment of what IDA Ireland had done in this area and, on the basis of Chile's competitive advantages, what it should do next to build on and publicize its existing strengths in order to attract more investment from this sector. Lovegrove's recommendations reinforced the idea of making shared financial services a key focus area for CORFO's investment promotion efforts. He also influenced CORFO's incentive policies (C;astillo 2004). Relationship with U.S.-based Consultants CORFO's High Technology Investment Promotion team gradually came to the realization that most high technology manufacturing firms would not be interested in Chile. Frequent discussions with the team's transnational strategic networkThunderbird students, Enrique Egloff, David Lovegrove, and executives from high technology firms already in Chilehelped make this clear, as did an objective analysis of Chile's competitive advantages. In contrast to Brazil or Mexico, Chile had a small domestic market of only 15 million. Unlike Costa Rica, it was far from the United States, which ruled it out as a potential export base for manufacturing companies wishing to export to that market. While not the principal reason for Chile's change in strategy, the dramatic decline in growth rates in high technology industries that began in 2000 pro-
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vided still another impetus to consider promoting FDI from other nontraditional industries (Castillo 2004). Based on suggestions from the transnational strategic network as well as on the kinds of investments Chile was already receiving, CORFO's High Technology Investment Promotion team concluded that U.S. Fortune 500 firms might be interested in locating shared services operations and call centers in Chile, and that software companies might consider locating regional software development centers in the country. Following Enrique Egloffs advice (Castillo 2002; Egloff 2003, 2004), the CORFO team hired a Washington-based firm (WBF), which had expertise on shared services and software, to develop a strategy and a target list of 200 companies that CORFO should pursue in the eastern part of the United States, where most Fortune 500 firms were located.^ After speaking to Egloff, Lovegrove, and a number of executives who had already consolidated shared services in Chile, the CORFO team realized that Chile, with its political and economic stability, its welldeveloped, competitive telecommunications industry, and its existing strength in financial services generally, had many advantages as a regional center for shared services. WBF's study was useful in helping the team learn more about this industry, identify companies that might potentially be interested in investing in Chile, and develop an approach for marketing Chile to these companies. Regarding software development, the other focus of the WBF's study, the type of activity most relevant to Chile was the outsourcing of certain kinds of software development by large software firms trying to reduce costs. Although India had a cost advantage over Chile, Chile had many advantages within Spanish-speaking Latin America. For many technology-related firms seeking to enter the Latin American market or to do business in Latin America, locating a software development center in Latin America itself, capable of designing software to respond to local needs, is often very important. In addition to its political and economic stability and well-developed infrastructure, Chile's salaries for IT personnel, as table 1 shows, were lower than those in many other Latin American countries. Furthermore, enrollment in technically related programs in Chile was increasing rapidly; indeed, it doubled from 1992 to 2002 alone, partly as a result of government efforts to promote such programs (Invest@Chile 2005). Even if more FDI in software development centers and other ITrelated sectors increased the demand for IT workers, this would not necessarily result in dramatically higher salaries in the long run if rising salaries led to increased supply. While acknowledging that large U.S. software companies tended to have a negative perception of Latin America generally as a location for software development, WBF took note of the positive aspects of Chile for prospective investors in this
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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 who were already in the country, the CORFO team continued to find ways to build on Chile's existing strengths. For example, PierceTech, another consulting firm Egloff recommended .that specialized exclusively in call centers, suggested that Chile develop a niche as a key location for investment in technical support centers or call centers attending not only to Latin American markets but also to the U.S. Hispanic market (Towers 2002). Again, Chile's low-cost, reliable telecommunications infrastructure, as well as the availability of relatively low-cost, well-trained, Spanishspeaking personnel, provided competitive advantages to Chile in this area. These recommendations helped convince CORFO's High Technology Investment Promotion team of the potential for the expansion of call centers and technical support centers in Chile. Representatives from this consulting firm later also participated in CORFO's investment promotion seminars in the United States to explain Chile';? advantages to prospective call center investors (Invest@Chile 2004). Business Associations in the United States U.S. business associations helped CORFO by facilitating connections with prospective nontraditional investors. For example, branches of the American Electronics Association in Silicon Valley (Santa Clara office), Austin, Seattle, and Fort Lauderdale assisted the High Technology Investment Promotion team in advertising its investment promotion seminars in these cities by sending out invitations to carefully selected members (software companies, companies using technic:al support centers, telecommunications-related companies) likely to be interested in investing in Chile. The AEA was also a cosponsor of all these events. Other cosponsors, in addition to Thunderbird, included the San Jose Chamber of Commerce and the San Jose Business Incubator (in Silicon Valley), the IC2 Institute (in Austin), and the Washington Software Association and Technology Alliance (in Seattle). The U.S.-based International Data Corporation (IDC), a highly reputable consulting firm in the information technology field, helped CORFO with all the logistics involved in organizing investment promotion seminars in New York, Chicago, and San Francisco. (IDC's Latin America director was already a part of CORFO's strategic networka Thunderbird MBA graduate who had done an internship at CORFO in her student days^v/hich facilitated CORFO's relationship with the IDC) (Castillo 2004). All these organizations provided contacts and helpful suggestions about how to approach nontraditional investors in their respective cities.
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The Silicon Valley Office In March 2001, CORFO opened an office in San Jose, Californiathe very heart of Silicon Valleyto serve as the center for its investment promotion efforts there. Although the agency planned to continue to hold high technology investment promotion conferences in cities all over the world, Silicon Valley was important enough, CORFO decided, to have its own office. Given the High Technology Investment Promotion Program's budget limitations, the office staff consisted of only one person: Constanza Donoso, a young, highly articulate Chilean with strong marketing skills. For its first 18 months, CORFO maintained the office with only Donoso as a part-time employee. In 2003, Mario Castillo, now director of high technology investment at CORFO, took over operation of the office full-time. The purpose of the office was specifically to provide CORFO with a base of operations in Silicon Valley that would facilitate its ability to contact prospective high technology investors. It also served as a headquarters for a related CORFO project, the technology internships program, which brought 15 to 20 young Chileans, all recent university graduates in technical fields, to Silicon Valley to work for U.S.-based high technology firms. In addition, the office hosted a number of videoconferences, also sponsored by CORFO, on topics relevant to high technology companies. Having already established contact with the San Jose International Business Incubator, CORFO chose to locate its Silicon Valley office in the Incubator's building in downtown San Jose. This was an ideal location for a number of reasons. The purpose of the business incubator was to provide a base for startup companies from outside the United States to establish themselves. Members had to apply to join, but paid a relatively low 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.) Usually, a company's office would consist of just a few cubicles in the building. This was true in CQRFO's case as well. However, the great benefit to CORFO of being located in the business incubator building was that it promoted networking events, at which Incubator members could mix with key players in Silicon Valley. During the first 18 months, Donoso not only attended as many of these and other networking events as she could, but also contacted hundreds of companies (Donoso 2002). The plan was that Castillo would continue to use this office to develop CORFO's transnational strategic network in the high technology sector and to find prospective high technology investors for Chile. As it turned out, the Silicon Valley office was a partial failure for CORFO. It did not serve as a conduit of high technology companies from Silicon Valley to Chile, as CORFO had anticipated. At the same
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time, however, it clearly did expand CORFO's transnational strategic network, thereby enhancing the agency's ability to learn about prospective foreign investors. The Silicon Valley office put CORFO, or at least CORFO's representative, in direct contact with high technology companies. After hundreds of meetings with executives from these companies, however, it was clear that most of them were not the kind that Chile would succeed in attracting. Most were either too small or too focused on the U.S. domestic market to be interested in investing in Chile. Those that were larger and did invest internationally mainly did it to outsource production that could be moved easily offshore to ver;>' low cost centers, such as India. It became increasingly clear that CORFO should focus its FDI promotion efforts in other areas. As Donoso summarized the situation at the end of that period, since CORFO ultimately shifted its focus to attracting financial and other related services (in the form of regional shared services operations), it would have made more sense for CORFO to have an office in New York City, the financial center of the United States, rather than in Silicon Valley (Donoso 2002). Representative of CORFO's early difficulty in targeting those investors most appropriate for Chile's business eiivironment, the Silicon Valley office provided further evidence of the mistakes CORFO made in the beginning. Nevertheless, its very existence as part of the transnational strategic network, and the contacts with Silicon Valley firms it facilitated, contributed to CORFO's ability to learn more about what nontraditional sectors would be the best sectors for Chile to target. In the end, the Silicon Valley office accelerated CORFO's learning process on how to focus its investment promotion strategy more precisely. Despite the shift in direction and the apparent lack of interest from the Silicon Valley companies, CORFO decided to keep the office open until March 2005. Some on the High Technology Investment Promotion team continued to believe that it could serve as a useful base for generating investment. Others believed that whether it could or not, it served other purposes as well, as a center for CORFO's technology interns and as a symbol of CORFO's effort to attract a different kind of investment (Gligo 2002). Ultimately, however, CORFO shifted its focus toward attracting nontraditional FDI from outside th(; Silicon Valley areaespecially FDI in shared services, software development centers, and technical support centersthat was far more suited to Chile's business environment (Castillo 2005). EVOLUTION OF THE PROGRAM Despite the shortcomings in the High Technology Investment Program's approach in the beginning, CORFO, using its growing transnational strategic network, managed to adapt its strategy relatively quickly to
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Chile's unique competitive advantages and the needs of prospective investors. Within a year from the time the program was launchedand within months of opening the Silicon Valley officeCORFO began to define its target sectors more precisely. By August 2001, the opening statement of the third edition of the promotional pamphlet "Invest@Chile," jointly published by CORFO and Chile's Foreign Investment Committee, stated, "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 communication technologies (ICT)" (CORFO 2001, 5). Clearly, CORFO and the Foreign Investment Committee had already begun to change their initial strategy. By 2003, CORFO and the Foreign Investment Committee were organizing investment promotion seminars specifically targeting shared services, technical support or call centers, and software development centers. Executives from companies that had already invested successfully in these sectors in Chileand now belonged to CORFO's transnational strategic network^were active participants at all these seminars. Events in 2003 and 2004 in Santiago, Boston, Fort Lauderdale, New York, Chicago, and San Francisco featured speakers such as Patricio Melo, general manager of Altec (Banco Santander's software development operation in Chile); Ernesto Labarut, president of Unilever-Chile (which had a shared services operation in the country); and Hugo Huepe, corporate business development manager for General Electric-Chile (which operated a technical support center), all of whom expounded on the virtues of Chile as a location for FDI in their specific sectors. The focused, targeted, and relevant nature of these investment promotion seminars showed the extent to which CORFO's strategy had evolved to accommodate both changing circumstances and the needs of prospective investors. Moving from the more glamorous but vaguely defined goal of attracting "high technology investment," CORFO established an objective that was more suitable and better defined: attracting nontraditional FDI in shared services, software development centers, and technical support or call centers. Indeed, by mid-2005, the High Technology Investment Promotion Program's website highlighted only companies that fell into these three specific categories (Invest@Chile 2005). T H E RESULTS: LEVEL AND IMPACT OF FDI ATTRACTED By mid-2005, 20 companies had invested under the High Technology Investment Promotion Program. Despite the continued use of the term high technology in the name of the program, virtually all of these invest-
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Table 4. High Technology Investment Promotion Program: Companies and Industry Categories, 2003 Shared Services Technical Support/ Softwaire Call Centers Development Electronics . . . .
Company Air 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 technical support/call centers. Table 4 provides a list of all the companies that invested as part of the program and the categories of their enterprises. Not all of this FDI can be attributed solely to CORFO's efforts. FDI in these areas has grown in Chile as companies have responded to market forces and to Chile's competitive advantages in the Latin American region for companies from these industries, as noted earlier. Nevertheless, CORFO's transnational strategic network enhanced the agency's ability to learn from these investors and focus its efforts in areas where its High Technology Investment Promotion Program could succeed. Knowing which investors to target, and which characteristics to promote, benefited CORFO's investment promotion efforts, contributing to its ability to educate prospective investors about Chile's advantages as a location for nontraditional FDI."* The FDI CORFO succeeded in attracting has already had a positive impact on Chile's economy. Although in Chile no single: investment was
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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 under US$100 million and created approximately 2,180 jobs (CORFO 2005b). Most of these jobs required advanced technical training, thereby providing opportunities for the development of Chile's human resources. Because Chile did not offer extensive tax incentivesindeed, even the other kinds of incentives the government did offer were very small these companies contributed positively to Chile's tax revenues. In addition, this nontraditional FDI helped diversify Chile's economy. Overall, the presence of these companies put other prospective investors on notice that Chile was a promising location for this sort of FDI. As the Costa Rica and Rio Grande do Sui cases demonstrate, this, in turn, should lead to still more FDI in Chile. CONCLUSIONS The case of CORFO in Chile has important implications for other countries attempting to implement industrial policy, as well as for those specifically seeking to develop an effective investment promotion strategy to attract nontraditional FDI. CORFO could not have developed an effective investment promotion policy without its transnational strategic network, but it would never have had the ability or the will to develop such a network without technocratic independence. Technocratic independence provided CORFO with qualified personnel working in an environment that promoted the country's collective interests. Agencies that lack technocratic independence cannot carry out such tasks. The experience of Companhia de Desenvolvimento Industrial do Estado do Rio de Janeiro (CODIN), the investment promotion agency for the state of Rio de Janeiro, illustrates this problem. In a highly polarized political context with intense conflict atnong political elites, the governor's appointees to CODIN's staff misappropriated the agency's funds to provide favors for specific groups (Montero 2001, 2002). CORFO, too, experienced problems with patrimonialism for a time. However, after the democratic transition in 1990, Chile's disciplined political party system, organized into two stable coalitions; its lack of partisan conflict; and its small, open economy provided political conditions more conducive to reform. In this context, CORFO was able to make reforms that consolidated and strengthened its technocratic independence, and to recruit a staff with the ability and the will to develop a transnational strategic network. CORFO's experience not only demonstrates the underlying political conditions necessary for an agency to achieve technocratic independence, but also shows that governments possessing this quality can create
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a transnational strategic network, and use it to develop effective investment promotion strategies, even without a large budget, a highly internationalized staff, or a wide array of foreign offices. Beyond that, CORFO's use of its transnational strategic network highlights the important role governmental learning can play in the policymaking process and the extent to which states can use the forces of globalization to advance their own goals.
NOTES I would like to thank Kurt Weyland, Peter Kingstone, and three anonymous reviewers from LAPS for their comments on earlier versions of this article. I would also like to thank Mario Castillo and other members of CORFO's staff for speaking with me about CORFO's programs. 1. As used here, nontraditional refers not only to high technology industries, such as semiconductor and computer manufacturing, software development, pharmaceutical manufacturing, and biotechnology, but also to service-related industries that require relatively high levels of technical training 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 the emphasis was still on attracting high value-added industries that make use of technology and provide opportunities for technically trained personnel, CORFO continued to refer to the program as the High Technology Investment Promotion Program. 2. IDA Ireland and Singapore's EDB had budgets of more than US$200 million per year. (IDA Ireland; Singapore EDB). CINDE's budget was more than US$2.5 million per year (Foreign Investment Advisory Ser/ice 1999; Fuentes 2004). This was a significant sum, given that the average budget for IPAs in middle-income countries is only $500,000 per year (Morisset and Andrews-Johnson 2004, 15). IDA Ireland had 13 foreign offices in countries throughout the world. Singapore's EDB had 18. At the time that CINDE succeeded in attracting Intel's investment in a major manufacturing plant, it had two offices in the United States: one in New York and another in San Jose, California. All these agencies 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 (hereafter referred to as WBF) must remain anonymous. 4. Because of its success with its High Technology Investment Promotion Program, in 2006 CORFO expanded its investment promotion effort to include promotion of FDI that could upgrade the competitiveness of Chile's traditional economic clusters (mining, wine, fruit, salmon) and also th(; promotion of FDI in renewable energy. This broader effort, consolidated with an existing program that promoted investment in specific regions of Chile, is now known simply as the Investment Attraction Program. It is under the auspices of CORFO's Investment and Development Division, currently headed by Mario Castillo.
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Transnational Strategic Networks and PoUcymaking in Chile: CORFO's High Technology Investment Promotion Program

LATIN AMERICAN POLITICS AND SOCIETY

LATIN AMERICAN POLITICS AND SOCIETY

Figure 1. The Model

Level of IPA's Technocratic Independence

on: Extent of Transnational Strategic Network

LATIN AMERICAN POLITICS AND SOCIETY

LATIN AMERICAN POLITICS AND SOCIETY

LATIN AMERICAN POLITICS AND SOCIETY

LATIN AMERICAN POLITICS AND SOCIETY

LATIN AMERICAN POLITICS AND SOCIETY

LATIN AMERICAN POLITICS AND SOCIETY

Table 2. Comparative Costs for a Three-Minute Peak-Time International Phonecall, US$

LATIN AMERICAN POUTICS AND SOCIETY

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

2004 rank in region

Overali ranking E-readiness score (of 10) (of 65)

8.73 8.03 5.97 5.21 . 5.07 5.05

Source: Economist Intelligence Unit 2005

CORFO's TRANSNATIONAL STRATEGIC NETWORK

LATIN AMERICAN POLITICS AND SOCIETY

LATIN AMERICAN POLITICS AND SOCIETY

LATIN AMERICAN POLITICS AND SOCIETY

LATIN AMERICAN POLITICS AND SOCIETY

LATIN AMERICAN POLITICS AND SOCIETY

Sources: Castillo 2003; lrivestChile 2005; CORFO 2005b.

IJ\TIN AMERICAN POLITICS AND SOCIETY

LATIN AMERICAN POLITICS AND SOCIETY

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