Nelson 3

Competing for Foreign Direct

Investment: 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 to
explain 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 more
effective than others at developing strategies to promote nontraditional FDI. These
are 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 in
the country or state in favor of working closely with the business community.

A fierce competition between governments is currently under way in Latin

America to attract foreign direct investment (FDI) from nontraditional1 indus-
tries. Seeking to harness the benefits of globalization, governments throughout Latin
America 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 enable
their countries or states to play a larger role in the increasingly globalized world
economy.2
Governments undertaking such an effort face numerous challenges. Understanding
the needs and concerns of prospective foreign investors is especially important in
high technology and other nontraditional kinds of industries. Because of the rapidly
changing, competitive nature of such sectors, executives in these industries need to

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

Studies in Comparative International Development, Fall 2005, Vol. 40, No. 3, pp. 3-28.
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 always
something that government agencies are well equipped to do. A highly influential
World 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 to
respond speedily to investors’ needs, adjust to changing market conditions, and acquire
scarce 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 governments
have difficulty developing effective investment promotion strategies, their level of
success varied. This article seeks to explain why some governments are better able
to develop effective investment promotion strategies than others. The measures for
this dependent variable—the effectiveness of a government’s investment promotion
strategy—are how much that strategy (a) targets and is highly responsive to the
needs 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 country
or state with net benefits, such as additional jobs, exports, FDI in other sectors, and
overall economic diversification; (c) is a sustained effort. “Sustained” means that
the 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 has
an independent source of funds, successful investment promotion requires at least
some degree of collaboration with the government. At a minimum, the private IPA
needs 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 cooperate
with 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 develop
responsive 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, many
governments need the benefit of the special skills private IPAs can provide if they
are 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 article
seeks 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
Nelson 5

incentives, among other things. Yet, especially in more remote locations or in the
developing 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 capable
IPA, 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) cite
several 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 seeks
to 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 variables
are insufficient to account for the variation in outcomes in the cases I examine.
Morisset and Andrews-Johnson themselves acknowledge that their large-N study
of 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 offices
it has, to account for the possible impact of these factors on IPA effectiveness. My
study, using carefully selected case studies, takes such factors into account.
I argue that three independent variables play an important role in making some
governments 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 transnational
learning 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 business
community.
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 promoting
investment 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 promote
nontraditional 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 capacity
are better at relating to and communicating with foreign firms, and can also focus
their promotional efforts toward such firms more efficiently, targeting those that
not 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
6 Studies in Comparative International Development / Fall 2005

an IPA can hire more qualified staff and open more foreign offices. Although the
Morisset 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 learn
about 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 is
the 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 prospective
foreign firms, and the potential benefits they offer to the country or state. Because
many 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 effective
way 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 working
closely 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 also
when there is a relative ideological consensus among the political parties in the
country or state in favor of working closely with the business community to attract
nontraditional 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 its
strategic 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 a
consensus 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 are
very sharp, even positive results may not bring consensus on working closely with
the business community, as the case studies analyzed here demonstrate. Therefore,
in a democratic context, ideological consensus increases the prospects for a country
to develop an effective long-term investment promotion strategy.

The Cases: Varying Outcomes

To test these propositions, this article looks at recent investment promotion efforts
in Costa Rica; Rio Grande do Sul, Brazil; and Chile. I define my universe of cases
Nelson 7

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 private
IPAs: Coalición Costarricense de Iniciativas para el Desarrollo (CINDE) in Costa
Rica and Pólo-RS, Agência de Desenvolvimento (Pólo) in Rio Grande do Sul. The
Chilean government, on the other hand, did not collaborate with a private agency in
this way. Instead, the government’s own economic development agency, Corporación
de 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 government
agencies—have on the effectiveness of the promotion effort. Another difference
that 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 state
level. The reason this does not create a serious problem in comparing the different
cases is that in Brazil, individual states have a great deal of independent policymaking
power. Each state has its own state legislature, governor, and authority—separate
from the federal government’s authority—over key policies such as tax incentives
and government loans to prospective investors. Brazil did not even have a national
level IPA until 2002 (<http://www.investebrasil.org/html/home.htm>, accessed: 1
September 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. While
the Costa Rican government and the state government of Rio Grande do Sul devel-
oped well-targeted strategies early on to lure nontraditional investment, the Chilean
government had difficulty doing this initially. Also, the state government of Rio
Grande do Sul was not able to sustain its strategy over time.4 Therefore, while there
were 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 the
cases, and in the Chilean case over time. The Chilean government, for example,
initially had a low level of transnational learning capacity but developed more as
time went on. In contrast, the Costa Rican and Rio Grande do Sul governments
each 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 consensus
among political parties about working with the business community to attract FDI,
while the political parties in Rio Grande do Sul notably lacked consensus on this
issue.
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 was
low also highlight the importance of this variable. Wells and Wint (2000) provide
an example of lack of autonomy resulting from political interference from the gov-
8 Studies in Comparative International Development / Fall 2005

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 his
discussion 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 the
Dominican Republic is yet another example of an IPA that became captured by
special interests (Schrank, 2000). In this case, a new government replaced several
of the agency’s board of directors with new directors, industrialists from the “crony
Santo Domingo elite” (Schrank, 2000: 83) who blocked reforms that might jeopar-
dize the president’s political interests, even though these reforms were necessary to
attract 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 an
agency’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 in
Malaysia, CODIN in Rio de Janeiro, and the IPC in the Dominican Republic, agen-
cies significantly lacking in autonomy, all experienced problems that demonstrate
the importance of this variable. The three cases discussed here, in which autonomy
was present, further underscore its significance. Autonomy is especially important
among 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 possess
autonomy 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 greatest
degree 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 private
ends, and corruption is rampant. States that fall somewhere in between—those that
have the characteristics of predatory states, yet still possess some autonomy in some
of their institutions—are “intermediary” states.
In states that are less than fully developmental, working closely with business
groups 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 the
country. 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
Nelson 9

example, 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 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 policymakers
made 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 government
agencies, can also enhance a state’s autonomy, as defined here (Montero, 2001,
2002). Montero showed that the strong ties between development-oriented public
agencies in Minas Gerais, for example, helped them to deflect attempts from suc-
cessive governors to divert the state’s industrial policies away from promoting the
overall 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 learning
capacity and ideological consensus.

Transnational Learning Capacity

Transnational learning capacity is rooted in the vast and rapidly growing literature
on 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 by
Levy (1994). More recently, Weyland (2004) has applied cognitive learning models
to Latin American politics to explain policymakers’ decision-making processes.
However, most of the organizational learning literature has focused on business
firms, rather than on government organizations. Many of these concepts are very
relevant for learning by governments.
For example, the idea of “absorptive capacity,” as originally conceived in the
seminal 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 collaborating
with a government—that possessed a high level of transnational learning capacity
would certainly be able to identify global business trends and beneficial prospec-
tive foreign investors, assimilate this information, and exploit this knowledge in
developing an effective investment promotion strategy.
My concept is different. The main premise of absorptive capacity is that it is
determined 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 it
is not essential. An IPA could still possess transnational learning capacity if it had
10 Studies in Comparative International Development / Fall 2005

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 transnational
learning 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 that
already had this capability. A highly influential article that categorizes different
methods 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 joint
ventures 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 private
IPA 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, as
CORFO 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) note
that 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 providing
advanced training for their employees. Similarly, transnational learning capacity
can 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 the
importance 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 research
on Brazilian industrialists (1993) showed that they viewed stable adherence to es-
tablished rules and policies as the most important factor determining their support
for any given government. For managers of transnational corporations, who are
likely 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
Nelson 11

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 with
key investors such as Intel, IBM, and Hewlett-Packard before these companies were
ready 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 in
developing 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 making
Costa Rica a haven for high technology investment. He believed very strongly that
the 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 the
global 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, nonprofit 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 with
President Figueres’ vision for the country. The Figueres administration and CINDE
collaborated to attract high technology, nontraditional FDI that could contribute to
Costa 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 many
different government agencies. This wide representation, with various individuals
and 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.
12 Studies in Comparative International Development / Fall 2005

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 government
agencies. Consequently, it was able to hire personnel with significant international
educational backgrounds and international business experience, who had the skills
to pursue FDI creatively and aggressively. Of the seven staff (out of a total of about
50) 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 advice
from 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). It
was also during this time that CINDE established a practice of doing in-depth,
systematic analysis of prospective foreign investors to anticipate investors’ needs
and concerns, even before the agency had initiated contact with them.
Another part of CINDE’s transnational strategic network, the Instituto
Centroamericano 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 frequent
visitor to the school and a close adviser to Costa Rica’s President Figueres. INCAE
recommended 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 level
of technical education in Costa Rica, and the number of electronics assembly plants
already located in the Free Trade Zones (FTZs) there, made Costa Rica a suitable
location for attracting companies and creating clusters of firms in this industry, as
well as in other technically oriented industries such as call centers and technical
support centers for high technology firms.

Ideological Consensus among Political Parties

In addition to the autonomy and transnational learning capacity that collaboration
with CINDE provided, Costa Rica had another advantage: a relative ideological
consensus among the political parties about working with CINDE, and the business
community 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
Nelson 13

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 Costa
Rica 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 specific
industries and companies that might be suitable for Costa Rica. Based on the sug-
gestions and advice from Michael Porter and experts at INCAE, the consultant
from IDA, and the World Bank, CINDE chose to focus on electronics firms. Enrique
Egloff, CINDE’s chief executive officer from 1995 to 1999, who had significant
international 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 them
expatriate Costa Ricans working in the Silicon Valley area. This was how CINDE
learned that Intel was looking for a Latin American site for a new $500 million
assembly and test plant (ATP).
Costa Rica had not even been on the “short list” of countries Intel’s site selection
team 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 Silicon
Valley 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 a
company 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 the
site selection team should visit Costa Rica on their way to Brazil.
Following specific advice from CINDE contact Michael Porter, as well as from
the World Bank’s Foreign Investment Advisory Service (an agency that provides
less-developed countries with advice on investment promotion), and based on their
own international experience, CINDE’s staff knew that for a high technology com-
pany 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 to
research potential questions in advance (Egloff, 2003; Arias, 1998; Bravo, 1998;
Mora, 1998). These staff members also organized visits for the Intel executives
with 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 the
team 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,
14 Studies in Comparative International Development / Fall 2005

CINDE, whose staff understood their needs so well, could help facilitate discus-
sions. This knowledge contributed to a sense of confidence about investing in Costa
Rica (Telford, 1998; Perlman, 1998).
After Intel’s decision to invest in Costa Rica was announced publicly in 1996,
many other high technology firms 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 high
technology firms. While CINDE continued to focus on electronics firms, its inter-
nationally experienced staff, attuned to global trends, also recognized that Costa
Rica 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 1
Investments 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

Table 1 (continued)
Investments in Costa Rica since Intel
Cluster Company
• 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
Software
Development • 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.

16 Studies in Comparative International Development / Fall 2005

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 in
many ways to the Costa Rican government’s collaboration with CINDE. Both CINDE
and Pólo were private, well-funded nonprofit agencies, staffed by people with ex-
tensive private sector and international experience. Both had high levels of autonomy
and 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 a
very different outcome.
Leaders of Rio Grande do Sul’s two main business associations, the Federação
das 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 promote
economic 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. Working
with Pólo, the state developed a highly effective investment promotion strategy that
focused on attracting specific kinds of nontraditional companies and was highly
responsive to their concerns. This helps explain how in 1998 Rio Grande do Sul
was able to compete successfully against four other states to win Dell Computer
Corporation’s investment in a large manufacturing plant. However, after the arrival
of 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 private
sector, 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 nontraditional
companies.

Pólo’s Autonomy
Pólo’s close ties to business and foreign investors potentially created opportunities
for clientelism. However, Pólo avoided this problem through an organizational struc-
ture that allowed for a widely representative membership and board of directors
from 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’s
operations. Organizations represented included not only FIERGS and FEDERASUL,
Nelson 17

but also at least 40 other business associations and companies from virtually every
industry in Rio Grande do Sul (Martins, 1999). This total membership elected the
five-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 associations
and 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 European
universities.10 In addition, Pólo expanded its reach within the foreign business com-
munity by cultivating contacts with expatriate business executives from Rio Grande
do Sul working in the United States who could serve as “virtual agents”11 of the
agency 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 with
foreign executives. Pólo also had an established practice of proactively researching
specific 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 close
collaboration with the state government, were especially important in helping the
government develop an effective strategy for promoting nontraditional FDI from
high 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 working
with 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 Britto
for 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 a
former 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’s
greatest strengths. This led essentially to the collapse of the relationship between
Pólo and the new government. Significantly, without the linkages to the business
community that Pólo had provided, the new government had tremendous difficulty
in devising a strategy to attract more nontraditional FDI from high technology and
18 Studies in Comparative International Development / Fall 2005

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 most
of 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 average
of 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 the
government’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 appro-
priate given the state’s unique characteristics. Pólo’s strategy, similar to CINDE’s in
Costa 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 internationally
oriented skills and experience, which greatly enhanced their responsiveness to the
needs 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 investment
community, these two individuals arranged for a series of meetings in 1998 be-
tween then-Governor Britto and prospective investors during one of the governor’s
visits to New York. The prospective investors themselves suggested that Rio Grande
do Sul should focus on attracting high technology industries.
Realizing that the investors might be correct, Martins had one of the virtual
agents use his contacts to find a consultant on high technology. As a result of this
contact, Duane Kirkpatrick, head of international operations for Robertson Stephens
in San Francisco, one of the leading investment banks in the world in financing
high technology businesses, came to Rio Grande do Sul and made an assessment.
Kirkpatrick concluded that the state’s large number of universities already offering
degrees 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 com-
panies in high technology industries such as computer manufacturing or software
development.
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 tip
while attending a conference in San Francisco, Martins contacted the company’s
Round Rock, Texas headquarters immediately. Informed that Dell’s site selection
was closing its short list of potential sites, but had never even considered Rio Grande
do Sul, he arranged a visit to the company (Martins, 1999).
At Dell headquarters, Martins and others from Rio Grande do Sul met with some
of Dell’s senior executives. Having been advised by a Brazilian employee that Dell
greatly 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’s
level of education, union rules, and infrastructure. The Dell team told the visitors
that 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, only
five days after that first meeting. Nevertheless, Pólo was ready. Notified on the
weekend that the Dell executives were arriving Monday, Martins immediately called
his staff, who had already begun researching the company, and explained that they
would 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 in
the state, including executives from multinational companies such as Coca-Cola, as
well as local firms. A businessman himself with extensive experience dealing with
international executives, Martins was sensitive to their concerns. He knew that the
Dell 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 Rio
Grande 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 Grande
do Sul.
Dell’s plans to build its plant finally 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-
20 Studies in Comparative International Development / Fall 2005

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 original
incentives, 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 dislike
for the new administration, and the government’s own reluctance to collaborate
with 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 foreign
investors, the new government experienced significant difficulties in attracting new
FDI, especially from the more demanding nontraditional companies.13 Executives
at Intel’s offices in São Paulo, for example, were not impressed with the new
government’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 was
a blow to CORFO, which had been a key player in the negotiations. CORFO sought
to 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 funding
directly to specific firms. Rather, it worked with large associations, such as the
Santiago Chamber of Commerce (with more than 1,400 corporate affiliates), or
with industry trade associations. While CORFO provided the financing for projects
such as technology enhancements, or improvements in management practices, these
large associations collaborated with the agency in designing the projects, imple-
menting them, and monitoring the results (Rivas, 2002). Firms applied for financ-
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 the
large, 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 learning
capacity 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 was
only 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 learning
capacity, 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 Promotion
Program’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 from
multinational 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 policymaking
and minimal government intervention in the economy. Even current President
Ricardo Lagos, a Socialist, had no intention of tampering with the central aspects
of 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 companies
from 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 have
invested in the country (CORFO, 2002a). But these incentives were small com-
pared to the major tax incentives other governments offered, which, over several
years, 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, who
might otherwise overlook the country’s inherent advantages. Consistent with Chile’s
free market principles, CORFO was simply trying to correct a flaw in the market
22 Studies in Comparative International Development / Fall 2005

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 this
close 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 presidents
from 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 take
shape, 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, com-
puter hardware, software, biotechnology, among others, even though many of these
industries were unsuited to investment in Chile (Castillo, 2002). Perhaps a private
agency, one staffed with former marketing executives with extensive international
experience, 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, the
opening 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 communication
technologies (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 strategic
network—such as Roberto Fuentes, managing director of Motorola-Chile; Patricio
Melo, general manager of Altec (Banco Santander’s software development opera-
tion); and Ernesto Labarut, president of Unilever-Chile—were featured speakers at
this 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 “high
technology” 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 all
18 of these companies:
Table 2
High Technology Investment Promotion Program
Companies 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) Electronics
BHP Billiton (Australia) Shared Services
Nestlé (Switzerland) Shared Services
Unilever (Netherlands) Shared Services
Banco Santander (Spain) Software Development
BBVA Bank (Spain) Software Development
Santander Bank (Spain) Software Development
Software AG Software Development
Soluziona (Spain) Software Development
SP 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, “Company
List: 2000–2005,” 2005.

Significantly, most of the investment in these areas did not result primarily from
CORFO’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’s
inherent 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 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, 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 only
gradual development of this capacity over time, meant that its effort to develop an
effective investment promotion strategy was slower and more painful than that of
24 Studies in Comparative International Development / Fall 2005

its counterparts, CINDE and Pólo. But because of the development of its transnational
strategic network, CORFO has been able to learn from its mistakes and shift its
strategy 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. This
is 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 be
willing 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 an
effective investment promotion strategy. Because of its collaboration with CINDE,
the Costa Rican government possessed high levels of autonomy and transnational
learning 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 business
community to attract nontraditional FDI, as shown by the continuity of this strategy
throughout successive governments from different political parties. All of these
factors 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 carefully
targeted to prospective nontraditional investors appropriate to the state and highly
responsive 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 ca-
pacity. Therefore, it sought to develop its own transnational strategic network of
companies, universities, business associations and individuals that could facilitate
its work in promoting nontraditional FDI. CORFO’s investment promotion strategy
was 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’s
transnational 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 Costa
Rican government and the state government of Rio Grande do Sul “grafted on”
their transnational learning capacity by collaborating with private IPAs, the Chilean
government 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 diversify
their 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 business
community 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 com-
puter manufacturing, software development, and pharmaceutical manufacturing and biotechnol-
ogy, but also to service-related industries that require relatively high levels of education from
their 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 objective
of 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 my
criteria) 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’s
overall impact on the Costa Rican economy was positive. My definition of an effective strategy
takes 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 Costa
Rica in the 1990s (Clark, 1995, 1997, 2001), while Pólo did not. As Pólo’s experience in Rio
Grande do Sul demonstrates, an independent source of funds alone is insufficient to ensure that
an 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, none
of 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 Zona
Franca did not have to pay duties on imported parts of components, and were also exempt from
income tax for eight years, and 50 percent exempt for four years after that. These incentives were
considerably more generous than those offered by Brazil, Chile, or Mexico.
8. “Shared services” refers to the consolidation of identical services performed in different offices
or 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
26 Studies in Comparative International Development / Fall 2005

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 20
million reais (about $16 million at the prevailing exchange rate), with a five-year grace period, to
be paid back over a ten years (Diefenthaeler, 1999). Minas Gerais, Rio Grande do Sul’s closest
competitor, offered Dell a 70 percent reduction in the state sales tax for ten years, a loan for 20
million 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 the
neoliberal “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 a
neoliberal 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 with
CORFO in this aspect of the implementation of the High Technology Investment Program.

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