Harnessing Globalization: The Promotion of Nontraditional Foreign Direct Investment in Latin America 9780271051239

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HARNESSING GLOBALIZATION

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ROY C. NELSON

HARNESSING GLOBALIZATION The Promotion of Nontraditional Foreign Direct Investment in Latin America

The Pennsylvania State University Press University Park, Pennsylvania

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library of congress cataloging-in-publication data Nelson, Roy C., 1961 Harnessing globalization : the promotion of nontraditional foreign direct investment in Latin America / Roy C. Nelson. p. cm. Includes bibliographical references and index. Summary: ‘‘An analysis of recent government efforts to promote nontraditional foreign direct investment (fdi) in Costa Rica; the state of Rio Grande do Sul, Brazil; and Chile. For comparative purposes, the book also examines the highly successful cases of Ireland and Singapore’’—Provided by publisher. isbn 978-0-271-03513-0 (cloth : alk. paper) 1. Investments, Foreign—Latin America. 2. Investments, Foreign—Latin America—Case studies. I. Title. HG5160.5.A3N45 2009 332.67⬘3098—dc22 2008043839

Copyright  2009 The Pennsylvania State University All rights reserved Printed in the United States of America Published by The Pennsylvania State University Press, University Park, PA 16802-1003 The Pennsylvania State University Press is a member of the Association of American University Presses. It is the policy of The Pennsylvania State University Press to use acid-free paper. This book is printed on Natures Natural, containing 50% post-consumer waste, and meets the minimum requirements of American National Standard for Information Sciences—Permanence of Paper for Printed Library Material, ansi z39.48-1992.

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CONTENTS

List of Figures and Tables

vii

Preface ix Acknowledgments xi List of Acronyms and Abbreviations xv

Introduction 1 1

Costa Rica and cinde 30

2

Rio Grande do Sul and Po´lo 87

3

Chile and corfo’s High Technology Investment Promotion Program 120

4

The ida, ida Ireland, and Forfa´s: Lessons for Latin America, Part 1 152

5

Singapore’s Economic Development Board: Lessons for Latin America, Part 2 190 Conclusion 220 References 233 Index 253

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F I G U R E S A N D TA B L E S

Figure 1. The model

4

Figure 2. Latin America telecom comparative ranking: broadband, fiber optics, and other networks Table 1.

Established companies in electronics, medical devices, and services, Costa Rica

Table 2. Table 3. Table 4.

135

61

fdi in electronics, medical equipment, and services, 1997–2005 (millions US$), Costa Rica

80

Information technology salary comparisons, in annual US$

134

Comparative costs for a three-minute peak-time international phone call, US$

135

Table 5.

Economist Intelligence Unit’s E-readiness rankings, 2005

136

Table 6.

corfo’s High Technology Investment Promotion Program: Companies and industry categories

149

Table 7.

Ireland’s total receipts from the eu budget, 1973–2000

154

Table 8.

Ireland—foreign direct investment inflows, 1985–2000

155

Table 9.

Ireland—employment trends by occupation, 1993–2000

157

Table 10. Ireland—hourly compensation costs for production workers (all manufacturing), 1975–2000 Table 11.

Singapore—hourly compensation costs for production workers (all manufacturing), 1975–2005

Table 12. Singapore—foreign direct investment inflows, 1990–2005 Table 13.

158 209 212

Singapore—manufacturing fixed asset investment commitments by industry (by percent), 2001–2007

212

Table 14. Singapore—services investment commitments total business spending (by percent), 2001–2007

213

Table 15.

214

edb performance indicators, 2002–2005

Table 16. Applying the model to the cases

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FIGS

222

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P R E FA C E

As a professor of international studies at a school of international business, I became interested in how transnational corporations (tncs) select locations for their manufacturing plants and how governments attempt to influence their decisions. I was intrigued by this topic because it had broad development implications. I wanted to learn to what extent governments, faced with powerful, mobile corporations seeking to maximize profits, really can ‘‘harness globalization’’ to advance their own economic development and the circumstances that make this more or less possible. In conducting field research on this topic in Latin America, I was surprised by how often corporate executives referred to their experiences with investment promotion agencies (ipas). Some were very good, others very bad—but all had made an impression on executives making decisions about where to locate manufacturing plants or other major investments. As I continued with my research, I became increasingly impressed by the extent to which corporate site selection decisions are influenced by this contact with ipas. In my interviews with corporate executives, government officials, ipa personnel and others in Latin America, I began to learn what made some ipas more effective than others. And I also heard frequent references to ipas elsewhere, which were considered to be benchmarks for ipas all over the world: the Industrial Development Authority (now ida Ireland) in Ireland and Singapore’s Economic Development Board (edb). Thus, my field research took me beyond Latin America, to Ireland and Singapore, to learn what made ida Ireland and Singapore’s edb so phenomenally successful that there were widely credited with contributing, in a major way, to the astonishing economic development these two countries have experienced in the last several decades. I wanted to know what lessons, if any, these agencies could offer to their counterparts in

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PREFACE

Latin America attempting to do the same thing—albeit under very different circumstances. The result is this book. My hope is that it can contribute not only to understanding why some ipas are more effective than others but, more generally, to helping developing countries use globalization to promote their own development.

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ACKNOWLEDGMENTS

I am very grateful to many people, in numerous countries on multiple continents, who assisted me during the years when I gathered information for this book. In the course of writing this book, I spoke with hundreds of people who were very generous with their time. Although I can highlight only a few names here, I thank all those who took the time to speak with me about their work and who assisted me in other ways. I thank especially Kurt Weyland, who took time to discuss various aspects of my argument and who provided very helpful comments on earlier versions of the Introduction and Chapter 3. I have been privileged to have had Kurt and his wife, Wendy Hunter, as friends since our time together in Brazil in 1989–90, when we were all doing field research for our Ph.D. dissertations. They have been exceptionally kind and helpful, both personally and professionally, ever since, for which I will always be grateful. Tim Power, another friend from those early days of field research in Brazil, provided very useful comments on some aspects of my argument, in particular on the politics of Rio Grande do Sul, which were helpful in developing the arguments in Chapter 2. I also appreciated Peter Kingstone’s comments on an early version of Chapter 3 (when it was just a conference paper), as well as his insights into some of the key policymakers in the state of Sa˜ o Paulo. Damien Shiels of the World Bank was very generous in sharing his insights and contacts as I prepared to do research in Costa Rica for what became Chapter 1. I want to thank him, too, for inviting me to give a presentation based on my research at a World Bank seminar for investment promotion officials in Rio de Janeiro. I also greatly appreciate his facilitating my meeting with his father, Tony Shiels, in Ireland. Based on

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ACKNOWLEDGMENTS

his extensive experience with the ida and as a consultant to cinde, Tony provided special insight into the cinde-ida connection. In Costa Rica, Enrique Egloff, former executive director of cinde, was of great assistance, as were other former and current members of cinde’s staff. Related to my research in Costa Rica and on Chapter 1 generally, my former student Ted Telford provided special insight and assistance with corporate and government contacts based on his experience working in site selection at Intel. I wish to thank him for speaking to me so many times about various aspects of the Costa Rica case. A highlight of my research on this case was the opportunity to interview—one-on-one, for well over an hour—Jose´ Marı´a Figueres, the former president of Costa Rica who played such a key role in bringing Intel to that country, when he visited Thunderbird at the invitation of his friend (and president of ´ ngel Cabrera. I wish to thank Dr. Cabrera for facilitatThunderbird), Dr. A ing that visit and for being so supportive of my research. In Guadalajara, Mexico, Sergio Garcı´a de Alba, former executive director of seproe (and later secretary of the economy in the Fox administration), went above and beyond the call of duty in helping me gather information about seproe’s early years under Governor Alberto Ca´rdenas of Jalisco. I also wish to thank Federico Lepe and Elı´as Rangel of seproe, as well as Ernesto Sanchez of Jabil Circuits, for speaking with me numerous times and at length, as well as Dr. Arturo Santa-Cruz at the Universidad de Guadalajara, who helped with some crucial information about elections in Jalisco. In Sa˜ o Paulo, Brazil, I want to thank Emerson Kapaz, former director of the Secretaria de Cieˆ ncia, Tecnologia e Desenvolvimento Econoˆ mico (sctde), and especially Jorge Funaro, former chief of staff of that agency, for numerous interviews over many years. In Rio Grande do Sul, Brazil, I want to thank my Brazilian friends Francisco Peixe, his wife, Hilda, and son Gabriel, who invited me to stay as a guest at their home for extended periods when I was doing the research for Chapter 2. I must also acknowledge the exceptional assistance of Miguelangelo Aza´rio, formerly with both Po´lo and Dell, as well as numerous other Po´lo and Dell employees. I am also grateful to Thiago de Araga˜ o for helping to facilitate my contacts with two former governors of Rio Grande do Sul, Antoˆ nio Britto and Olivio Dutra. In Chile, Mario Castillo not only provided detailed information about corfo’s programs but also helped me arrange interviews with numerous key members of corfo’s staff. My former student David Hall was very helpful in gathering information and in assisting me with logistics during

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ACKNOWLEDGMENTS



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my visits to corfo. I also wish to thank my former students Nick Walker and Tripp Sickler for helping me develop contacts in the business community. In Ireland, David Lovegrove was of tremendous assistance in facilitating my interviews with numerous high level officials at ida Ireland; he was also an excellent source of information about Ireland’s overall development strategy. In addition to his special insights on the cinde-ida connection, Tony Shiels was an invaluable source of information on the ida, ida Ireland, Enterprise Ireland, and Forfa´s. In Singapore, I appreciated the assistance of Shirley Chen of the edb, as well as many others both at the edb and elsewhere who spoke with me and helped me in various ways, especially Beh Swan Gin, Anthony Ang, and Chris Fussner. Grants from Thunderbird’s Faculty Research Committee made my field research in all of these countries, over several years’ time, possible. Thunderbird itself, with the strong international emphasis of its curriculum, the global mindset of its students and faculty, and its unsurpassed network of contacts throughout the world, provides a stimulating and inspirational environment in which to work. I wish to thank the three anonymous reviewers for Penn State University Press who were clearly experts on the subject and who took the time to provide rigorous and helpful reviews. And I am especially grateful to Sandy Thatcher for his high level of professionalism, his kindness, and his expert oversight of the entire process involved with bringing this book to fruition. I must acknowledge some publishers who kindly allowed me to draw on some of my work that has been published previously in academic journals. Portions of Chapters 1, 2, and 3 draw in part on a heavily revised version of my article ‘‘Competing for Foreign Direct Investment: Efforts to Promote Nontraditional fdi in Costa Rica, Brazil, and Chile,’’ published in Studies in Comparative International Development (Springer Publications), vol. 40, no. 3 (December 2005): 3–28. Portions of Chapter 2 draw in part on heavily revised versions of my articles ‘‘Harnessing Globalization: Rio Grande do Sul’s Successful Effort to Attract Dell Computer Corporation,’’ published in the Journal of Developing Societies (Sage Publications India), vol. 19, nos. 2–3 (June 2003): 268– 307; and ‘‘State Competition for Foreign Direct Investment in Brazil: The Case of Dell Computer,’’ published in the Brown Journal of World Affairs 8, no. 2 (Winter 2002): 139–52. Portions of Chapter 3 draw in part on a heavily revised version of my

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ACKNOWLEDGMENTS

article ‘‘Transnational Strategic Networks and Policymaking in Chile: corfo’s High Technology Investment Promotion Program,’’ published in Latin American Politics and Society (Wiley-Blackwell), 49, no. 2 (Summer 2007): 149–81. In closing these acknowledgments, I want to give a huge thanks to my mother, who stood by me from the beginning, offering the most incredible encouragement and support imaginable every step of the way. Finally, I thank Julie Hines, the love of my life, who encouraged me throughout the long and difficult process of bringing the book to completion. Julie not only understood and appreciated what I was doing, and helped me throughout the process in so many important ways, but also made all the work that went into it fun and worthwhile.

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A C R O N Y M S A N D A B B R E V I AT I O N S

acm aea ais apc asexma asimet a*star atp banespa bdmg bic bmrc bms bndes btc cbi cemig cepe cinde cnea codin comex

Antoˆ nio Carlos Magalha˜ es (Brazil) American Electronics Association (USA) Autonomous Institutions (Costa Rica) Alianza por Chile, formerly known as Unio´n por Chile (Chile) Asociacio´n de las Empresas Exportadoras de Manufacturas y Servicios (Chile) Asociacio´n de Indu´strias Metalu´rgicas y Metalmeca´nicas (Chile) Agency for Science, Technology and Research (Singapore) Assembly and Test Plant Banco do Estado de Sa˜ o Paulo (Brazil) Banco de Desenvolvimento de Minas Gerais (Brazil) Bioinformatics Centre (Singapore) Biomedical Research Council (Singapore) Biomedical Sciences (Singapore) Banco Nacional de Desenvolvimento Econo´mico e Social (Brazil) Bioprocessing Technology Center (Singapore) Caribbean Basin Initiative Companhia Energe´tica de Minas Gerais (Brazil) Consejo Estatal de Promocio´n Econo´mica (Jalisco, Mexico) Coalicio´n Costarricense de Iniciativas para el Desarrollo (Costa Rica) Comisio´n Nacional de Energı´a Ato´mica (Argentina) Companhia de Desenvolvimento Industrial do Estado de Rio de Janeiro (Brazil) Ministerio de Comercio Exterior (Costa Rica)

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concamin confaz corfo cpd cpib crusa dr-cafta ecla edb edb bms(g) eec embraer eu fai fdi federasul fias fiergs ftz gdp gis gnp iac ibn ice icmb icms

icsti ict ida



ACRONYMS AND ABBREVIATIONS

Confederacio´n de Ca´maras Industriales (Mexico) Conselho Nacional de Polı´tica Fazenda´ria (Brazil) Corporacio´n de Fomento de la Produccio´n (Chile) Concertacio´n de Partidos por la Democracia (Chile) Corruption Practices Investigation Bureau (Singapore) Costa Rica–USA Foundation Dominican Republic—Central American Free Trade Agreement (with USA) United Nations Economic Commission for Latin America Economic Development Board (Singapore) Economic Development Board’s Biomedical Sciences Group (Singapore) European Economic Community Empresa Brasileira de Aerona´utica (Brazil) European Union, formerly European Economic Community (eec) Fixed Asset Investment Foreign Direct Investment Federac¸ a˜ o das Associac¸ o˜ es Comerciais e de Servic¸ os do Rio Grande do Sul (Brazil) Foreign Investment Advisory Services (World Bank) Federac¸ a˜ o das Indu´strias do Estado do Rio Grande do Sul (Brazil) Free Trade Zone, or ‘‘zona franca’’ Gross Domestic Product Genome Institute of Singapore Gross National Product International Advisory Council of Singapore’s Economic Development Board (edb) Institute of Bioengineering and Nanotechnology (Singapore) Instituto Costarricense de Electricidad (Costa Rica) Institute of Molecular and Cell Biology (Singapore) Imposto sobre as operac¸ o˜ es relativas a Circulac¸ a˜ o de Mercadorias e sobre a prestac¸ a˜ o de Servic¸ os de transporte intermunicipal e de comunicac¸a˜o (Brazil) Irish Council for Science, Technology and Innovation (Ireland) Information and Communication Technology Industrial Development Authority (Ireland)

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ACRONYMS AND ABBREVIATIONS

ida Ireland idb ifsc ima imf ina incae indi

ipa ipade ipc it itcr jtc kpmg Mercosul Mercosur miga mnc mti nafta nsf ntsb ntuc pac pan pap pc do b pdt ped pes pfl pl pln pmdb pml



xvii

Industrial Development Agency (Ireland) Inter-American Development Bank International Financial Services Centre (Ireland) Institute of Molecular Agrobiology (Singapore) International Monetary Fund Instituto Nacional de Aprendizaje (Costa Rica) Instituto Centroamericano de Administracio´n (Costa Rica) Instituto de Desenvolvimento Industrial de Minas Gerais, now known as Instituto de Desenvolvimento Integrado de Minas Gerais (Brazil) Investment Promotion Agency Instituto Panamericano de Alta Direccio´n de Empresa (Mexico) Investment Promotion Council (Dominican Republic) Information Technology Instituto Tecnolo´gico de Costa Rica Jurong Town Corporation (Singapore) Klynveld Peat Marwick Goerdeler Mercado Comu´n do Sul (Portuguese language version) Mercado Comu´n del Sur (Spanish language version) Multilateral Investment Guarantee Agency (a member of the World Bank Group) Multinational Corporation Ministry of Trade and Industry (Singapore) North American Free Trade Agreement National Science Foundation (U.S.) National Trade and Science Board (Singapore) National Trades Union Congress (Singapore) Partido Accio´n Ciudadana (Costa Rica) Partido Accio´n Nacional (Mexico) People’s Action Party (Singapore) Partido Comunista do Brasil (Brazil) Partido Democra´tico Trabalhista (Brazil) Plano Estadual de Desestatizac¸ a˜ o (Sa˜ o Paulo, Brazil) Partidas Especı´ficas (Costa Rica) Partido da Frente Liberal (Brazil) Partido Liberal (Brazil) Partido Liberacio´n Nacional (Costa Rica) Partido do Movimento Democra´tico Brasileiro (Brazil) Partido Movimiento Libertario (Costa Rica)

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Po´lo ppb pr pri procomer pr-stv psb psdb pt puc pusc rbs sctde

sedai seproe sfi smd smes spring tbs tff tnc tse ufrgs unctad unicamp unido usaid va wbg wda wto



ACRONYMS AND ABBREVIATIONS

Po´lo-RS, Ageˆ ncia de Desenvolvimento (Brazil) Processo Produtivo Ba´sico (Brazil) Proportional Representation Partido Revolucionario Institucional (Mexico) Promotora de Comercio Exterior (Costa Rica) Proportional Representation—Single Transferable Vote electoral system (Ireland) Partido Socialista Brasileiro (Brazil) Partido da Social Democracia Brasileira (Brazil) Partido dos Trabalhadores (Brazil) Pontifı´cia Universidade Cato´lica (Brazil) Partido Unidad Social Cristiana (Costa Rica) Rede Brasil Sul (Rio Grande do Sul, Brazil) Secretaria de Cieˆ ncia, Tecnologia e Desenvolvimento Econoˆ mico, now known as Secretaria de Desenvolvimento (Sa˜ o Paulo, Brazil) Secretaria do Desenvolvimento e dos Assuntos Internacionais (Rio Grande do Sul, Brazil) Secretaria de Promocio´n Econo´mica del Estado de Jalisco (Mexico) Science Foundation Ireland Single-Member District electoral system (Singapore) Small- and Medium-sized Enterprises Standards, Productivity, and Innovation Board (Singapore) Total Business Spending Technology Foresight Fund (Ireland) Transnational Corporation Tribunal Supremo de Elecciones (Costa Rica) Universidade Federal de Rio Grande do Sul (Brazil) United Nations Conference on Trade and Development Universidade Estadual de Campinas (Brazil) United Nations Industrial Development Organization United States Agency for International Development Value-Added World Bank Group Workforce Development Agency (Singapore) World Trade Organization

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Introduction

Many Latin American countries are taking advantage of globalization to advance their development efforts. One way they are doing this is by taking on a new and significant role, that of attracting and harnessing nontraditional foreign direct investment (fdi).1 Nontraditional fdi consists of fdi not only in high technology industries, such as computer manufacturing, software development, and biotechnology, but also in service-related industries that require relatively high levels of education from their workers, such as financial services, technical support centers, and call centers. The objectives of governments seeking to attract such fdi are to diversify their economies, to provide higher-paying jobs for their people, and to develop linkages to transnational firms that can enable their countries or states to move up the value chain in the global production process. Numerous scholars argue that attracting nontraditional fdi alone is not enough to promote development. Proactive government policies to ensure that a country or state reaps the maximum benefit from this fdi are also important (Gallagher and Chudnovsky 2009; Gallagher and Zarsky 2007; Paus 2005). But to obtain any benefit whatsoever from nontraditional fdi, a country or state must first succeed in attracting it. Therefore, understanding why some governments are more effective than others at attracting nontraditional fdi is extremely important. That is why it is the focus of this book. In each case study presented here, however, in addition to addressing each government’s success in attracting fdi, I will also discuss 1. ‘‘Foreign direct investment’’ (fdi) refers to investment in plants, factories, land, or other physical assets.

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the impact of this fdi on development, which is an equally important consideration. Some governments clearly are better at attracting and harnessing nontraditional fdi than others. The cases I discuss in this book exemplify such differences in outcome. For example, the Costa Rican government succeeded in winning Intel’s investment in a US$ 300 million manufacturing plant. This plant, employing thousands of workers, served as an anchor investment that caught the attention of other prospective investors. Successive Costa Rican administrations from different political parties continued to pursue the successful strategy that contributed to winning the Intel plant. This one investment helped the Costa Rican government bring in nontraditional fdi in other industries, for example, software development, medical device manufacturing, and technical support centers. It helped to diversify the economy, stimulated growth in other industries, and provided a wider range of opportunities for Costa Rica’s population beyond the more traditional sectors, such as coffee and bananas.2 In contrast to the success in Costa Rica, the fdi initiative in the state of Rio Grande do Sul in Brazil led to a different result. The state government succeeded in attracting a major investment in a manufacturing plant from Dell Computer Corporation. But when a new governor took office, he followed a different approach, and the new administration failed to attract additional nontraditional fdi. Chile experienced a still different outcome. Seeking to diversify the economy beyond its traditional strengths in primary products and wine, the Chilean government was initially unsuccessful in developing an effective investment promotion strategy. Over time, however, the government’s effort became more successful. By 2008, Chile had attracted fdi in software development, shared financial services, and technical support centers, and the prospects for a continuation of the government’s strategy looked good. Although these governments all had some degree of success, the level of success varied considerably. Of course, many factors explain why companies decide to invest in specific countries or states: the quality of the infrastructure, the level of training of workers, tax incentives, and so on. In this book I cannot account for all the variables that influence and help explain levels of nontraditional fdi in a particular country or state. Never2. While acknowledging some of these positive aspects of Intel’s investment in Costa Rica, Paus (2005) is more skeptical about its long-term benefits for the country. I address Paus’s arguments further later in this introduction and in Chapter 1.

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theless, an effective investment promotion strategy—one that is responsive to investors’ needs, targeted appropriately, and sustained over time—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 governments able to develop effective investment promotion strategies is important, especially since this is something governments can control, unlike a country’s geography or market size. Thus, the central question I seek to answer in this book is: why are some governments better at developing effective investment promotion strategies? The effectiveness of a government’s investment promotion strategy is, in turn, an important factor in explaining the ultimate outcome, that is, the level of nontraditional fdi a country or state attracts. What makes this question particularly intriguing is that promoting nontraditional fdi poses unique challenges for governments. Understanding the needs and concerns of prospective foreign investors is especially important in high technology and other kinds of nontraditional industries. Because of the rapidly changing, competitive nature of such sectors, executives in these industries need to make decisions quickly and will respond best to agencies that can adapt their strategies to the needs of prospective investors in a flexible, speedy manner. Yet this is not always something that government agencies are well equipped to do. As a highly influential World Bank study explained: ‘‘Investment promotion is, in fact, more like activities typical of the private sector, particularly 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 promotion strategies that are consistent throughout a long period. . . . Conventional government organizations are typically not very good at these tasks’’ (Wells and Wint 2000). In order to explain why at least some governments are better able to develop an effective investment promotion strategy than others, in this book I provide an in-depth analysis of recent government efforts to promote nontraditional fdi in Costa Rica; the state of Rio Grande do Sul, Brazil; and Chile. For comparative purposes, I also examine the highly successful cases of Ireland and Singapore. These cases not only provide useful lessons for Latin American governments about investment promotion but also demonstrate that success can bring its own challenges. In my field research on these cases, which lasted for a total of nine months

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spread out over several years, I conducted interviews with key decision makers in transnational corporations (tncs) as well as in governments. Most governments, including all those analyzed here, conduct investment promotion efforts through public investment promotion agencies (ipas) or collaborate closely with private ipas. Therefore, a government’s investment promotion effort is only as effective as that of the ipa undertaking it. This is true whether the ipa is a government agency or a private agency working in partnership with the government. A government that lacks the characteristics needed to conduct investment promotion effectively can enhance its capabilities by collaborating with a private ipa. By working with a capable private ipa, a government can ‘‘graft on’’ to itself the attributes of the ipa that make it effective, thereby increasing its own abilities. Thus, in order to assess the effectiveness of a government’s investment promotion effort, it is necessary to assess the effectiveness of the ipa developing and carrying out that effort, whether that ipa is a government agency or a private agency collaborating with the government. My argument, as illustrated in Figure 1, is that a causal chain of variables leads an ipa to attract nontraditional fdi successfully. Building on existing concepts of political survival and cooperation, I maintain that the level of political security the president or governor in a country or state possesses determines the extent to which the government will delegate

Figure 1. The model

Level of Political Security

Level of ipa’s Technocratic Independence

Level of Transnational Learning Capacity

Effectiveness of Government Promotion Effort Other Factors

Other Factors Level of Nontraditional fdi

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authority for investment promotion to—or collaborate with—an independent technocratic agency. This in turn determines the ipa’s level of technocratic independence. 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 on, 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 (capable employees working on behalf of a common goal) to develop its transnational learning capacity. A high level of transnational learning capacity can increase the effectiveness of the ipa’s investment promotion strategy. The effectiveness of the ipa’s investment promotion strategy, in turn, along with other factors—such as the quality of the country’s infrastructure, the level of training of the workers, and so on—determines the dependent variable, level of nontraditional fdi.

Explaining the Model Level of Political Security The first variable, the level of political security, refers to the extent to which presidents or governors are secure from highly competitive political rivals. The literature on political survival demonstrates that when presidents or governors have a high level of political security, they are more willing to delegate authority over economic policy to technocratic agencies (Geddes 1994; Montero 2001a, 2001b, 2002). When the political positions of presidents or governors are less secure, they are more likely to centralize control over economic policy in their own hands, using it as a source of political patronage. This approach might help a particular politician stay in power, but it can lead to misallocation of scarce resources, corruption, and overall economic mismanagement. It is highly unlikely to result in policies that will produce long-term, sustainable growth and development. In contrast to standard political survival arguments, I maintain that patronage may not be the only reason that politically insecure politicians seize control over economic policy. I broaden the political survival concept to argue that politically insecure leaders in a highly polarized, competitive environment may also wish to have greater control over policymaking as a way to differentiate themselves from their competitors. Pursuing a different approach or adopting different positions on particular issues from those pursued by technocratic agencies can serve as a way to appeal to particular interest groups or supporters. This can be especially important

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when there is intraparty competition and politicians find themselves driven to stake out more extreme positions as a way to appeal to the party’s base of supporters (Power 2006). Such supporters are often crucial to an individual politician’s success in winning a party’s nomination, in countries or states that have such nominating processes, and in winning an election. Measures for the level of political security used in this book are: (1) the strength of party discipline in the country or state, (2) the stability of political coalitions, (3) the level of partisan conflict (the extent to which the political elite is divided on key issues), (4) the margin of victory the leader (president or governor) received in the election, and (5) the extent of the leader’s support in the legislature. Because the political structures and institutional rules of countries and states differ, some of these measures are more important in some contexts than in others.

Level of Technocratic Independence The second variable, level of technocratic independence, refers to an ipa’s—and, therefore, a government’s—ability to form and carry out broad 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. Those ipas lacking in technocratic independence succumb to such pressures and pursue narrow objectives of particularistic interests rather than goals that will advance the overall development of a country or state. The measures for technocratic independence are: (1) the extent to which an ipa’s staff are selected on the basis of merit (using previously established, well-defined criteria to hire people with relevant qualifications) rather than political considerations, (2) the extent to which an ipa’s programs are decided on and evaluated on the basis of technical criteria (previously established, well-defined goals or targets) rather than political criteria, and (3) the extent to which 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). ipas with a high level of technocratic independence are not only able to increase their transnational learning capacity but also have the motivation to do so.

Level of Transnational Learning Capacity The third variable, level of transnational learning capacity, refers to the ability of an ipa (and thus the ability of the government) to learn about

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prospective foreign investors, the global business trends that influence their decisions, and the potential benefits they offer to the government’s country or state. This is a novel concept and is central to this book; therefore, it warrants a thorough discussion. 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 (Maxwell 2000, 2003; Telford 1998, 2006). Therefore, especially when attempting to promote nontraditional fdi, governments that are most effective are those that have the capability to anticipate and respond quickly to emerging trends in global business and to the needs and concerns of specific firms (Nelson 1999, 2003, 2005, 2007; Wells and Wint 2000). ipas (and by extension, 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 will not only provide benefits to their particular country or state but also be well suited for making investments there. Transnational learning capacity has three principal measures or components. These are: (1) the level of ‘‘internationalization’’ of the ipa’s personnel, (2) the extent to which the ipa has a systematic practice of proactively researching global business trends and prospective foreign investors, and (3) the extent of the ipa’s transnational strategic network related to promotion of nontraditional fdi. The first measure, the level of internationalization of ipa personnel, is the degree of international educational background of the ipa’s staff and their level of international business experience. The specific indicators I use for this measure of transnational learning capacity are the following: (a) the number of staff members who studied or lived abroad before working for the ipa; (b) the extent to which staff members’ prior education was related to international business; (c) the number of staff members who have prior work experience in international business, such as working abroad or with foreign business people, exporting or importing from foreign countries, and so on; and (d) the extent to which that earlier work experience is with transnational corporations (either at home or abroad). The second measure is the extent to which the agency has a systematic practice of proactively researching global business trends and prospective foreign investors. The specific indicators I use for this measure of transna-

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tional learning capacity are: (a) whether ipa officials monitor trade magazines, the Internet, and other sources of information to learn about trends in specific industries; (b) whether ipa officials attend trade shows on a regular basis to learn about trends in specific industries; (c) the extent to which ipa officials research specific prospective foreign investors to anticipate their needs and concerns; and (d) the extent to which ipa officials make regular visits to executives working in firms in targeted industries to discuss developments in their sectors. Finally, connections with international business people or groups can be especially useful in helping an investment promotion agency understand potential foreign investors. Therefore, the third measure of transnational learning capacity is the extent to which an ipa is linked to a transnational strategic network of individuals, business associations, and universities, both domestically and internationally, 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 ipas lack a highly internationalized staff or a systematic practice of proactively researching prospective foreign investors, developing such a network can be an effective way for these agencies to enhance their transnational learning capacity. As the Ireland and Singapore cases demonstrate, ipas in countries at a later stage of development must go beyond their investment promotion role, or at least collaborate with other agencies that can do so, if they are to continue to promote nontraditional fdi effectively. As ipas seek to attract fdi in increasingly knowledge-intensive areas, such as biotechnology, they need to promote basic scientific research in these areas (i.e., provide scholarships for students studying for PhDs in these fields, fund research institutes, award research grants to firms and individuals, etc.) in order to maintain the attractiveness of their locations to prospective investors.3 For ipas or other agencies promoting such research, an additional, fourth measure of transnational learning capacity applies: the extent to which the ipa possesses an organizational culture that is democratic and egalitarian as opposed to authoritarian and hierarchical. Scientific researchers in highly knowledge- and research-intensive sectors, such as the more advanced segments of the biotechnology industry, demand more input into policies that affect them than do engineers or technicians in other nontraditional but less knowledge-intensive industries (Tsui-Auch 2004, 2005). 3. In this context, ‘‘basic’’ means theoretical research seeking to contribute to knowledge with possible future application rather than applied research for immediate practical ends.

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Since Latin American ipas have not yet reached the stage at which they are supporting basic scientific research as part of their overall investment promotion effort, this fourth measure of transnational learning capacity does not apply to them. Therefore, in this book I will not discuss this additional dimension of transnational learning capacity in the cases on Latin American ipas but only in the cases on Ireland and Singapore. This discussion serves as a cautionary lesson for Latin American ipas, many of which have a tendency toward authoritarian and hierarchical patterns of decision-making, should they seek to make similar efforts to promote such industries in the future.

The Effectiveness of the Government’s Investment Promotion Effort Whereas transnational learning capacity refers to the ability of an ipa to learn about prospective foreign investors, the fourth variable, the effectiveness of the government’s investment promotion strategy, refers, in large part, to how much the ipa has learned. The effectiveness of the government’s investment promotion strategy has three measures or components: (1) how well targeted the investment promotion strategy is, (2) how responsive it is to investors’ needs and concerns, and (3) how sustainable it is over time. Learning can be defined as ‘‘a change of beliefs . . . or the development of new beliefs, skills or procedures as a result of the observation, interpretation, (or evaluation) of experience’’ (Levy 1994, 283). While sustainability is a separate component of effectiveness, targeting and responsiveness are directly related to how much an ipa has learned. To avoid semantic confusion, it is important to note that as used here, an ‘‘effective’’ strategy is not synonymous with a ‘‘successful’’ strategy. An effective investment promotion strategy—one that is well targeted, responsive, and sustained over time—is an important factor that can contribute to a successful outcome, a high level of nontraditional fdi attracted. As noted earlier, however, many other factors are also involved in determining the level of fdi an ipa succeeds in attracting (the dependent variable), such as the quality of a country’s infrastructure, the level of training of the workers, and so on. Therefore, although very important, an effective strategy alone may not be sufficient to ensure that a country or state attracts a high level of nontraditional fdi. The first measure of effectiveness, how well targeted the investment promotion strategy is, assesses the extent to which that strategy seeks to attract fdi from nontraditional sectors (and specific firms) that would be most appropriate, or a good match, for the attributes specific to a particular

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country or state (or other type of subnational unit) within a country. For nontraditional fdi to be appropriate for a particular location, that location must possess the necessary characteristics (workforce with the skills the company requires, availability of necessary materials, and so on) for the investment to be profitable in that location. For ipas without significant knowledge of global business trends or specific industries, targeting nontraditional fdi that is suitable, in this sense, can be a difficult task. For example, lacking transnational learning capacity with respect to the promotion of nontraditional fdi, the Chilean government’s initial strategy was unfocused and failed to take adequately into account the particular kinds of fdi that would be the best fit for Chile. Over time, however, as the transnational learning capacity of the government’s public ipa, Corporacio´n de Fomento de la Produccio´n (corfo), increased, corfo learned how to adapt its strategy to promote fdi from nontraditional firms best suited to the country’s business environment. The more corfo learned, the more well targeted its strategy became. Thus, an ipa with a well-targeted strategy is knowledgeable enough about prospective investors and their needs to know the specific qualities they require in an investment location and can then use its time and resources more efficiently. It can focus on the kinds of companies whose characteristics and needs make them especially well suited for investing in the ipa’s country or state rather than wasting time on companies that are a poor match. The second measure of effectiveness, how responsive the ipa is to the needs and concerns of prospective foreign investors, is also related to how much the ipa has learned. This measure assesses the ipa’s sensitivity to matters of importance to foreign investors and the extent to which its actions address them. A relevant example is the way Coalicio´n Costarricense de Iniciativas para el Desarollo (cinde), the private ipa with which the Costa Rican government collaborated, dealt with Intel Corporation. Intel needed to make its site selection decision quickly. Given its high level of transnational learning capacity, cinde (and therefore the Costa Rican government) not only was aware of the speed at which Intel needed to act but also was able to anticipate questions Intel executives might have and research them in advance. This facilitated the site selection team’s decision-making process greatly. Given the importance Intel placed on making decisions rapidly, cinde’s responsiveness enhanced Costa Rica’s attractiveness as a location. Although not directly related to how much an ipa has learned, sustainability, the third measure of effectiveness, is important in its own right. Sustainability means that the government’s investment promotion

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effort—even as it adapts and evolves according to the changing needs of investors—can continue throughout successive governments or administrations. In contrast, an investment promotion strategy that begins with one leader and is dropped completely by the next is unlikely to be successful. This is what happened with the state government of Rio Grande do Sul’s collaboration with a private ipa, Po´lo-RS, Ageˆ ncia de Desenvolvimento (Po´lo). Although one governor developed a well-targeted and responsive strategy as a result of the partnership with Po´lo, when a new governor took office—in a more polarized environment with less political security—he ended this collaboration. Without Po´lo’s technocratic independence and high level of transnational learning capacity, the state government’s efforts to promote nontraditional fdi failed. Sustainability in this sense goes beyond funding. 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, private ipas need the government’s approval to proceed. Moreover, arranging meetings between prospective investors and relevant government officials is a central part of the investment promotion process. If a new government refuses to cooperate, the ipa cannot successfully sustain its investment promotion strategy on its own. At the same time, a government investment promotion effort that relies heavily on its relationship with a private ipa in order to develop responsive strategies may not be sustainable if a new government attempts to undertake this effort without the ipa’s assistance. As the case studies will show, many governments need the benefit of the special skills that private ipas can provide if they are to adapt their strategies appropriately.

The Level of Nontraditional fdi Finally, the dependent variable, the amount of nontraditional fdi a country or state attracts, is determined by many factors, such as the level of training of the workers, the quality of the country’s infrastructure, and so on. But as I 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.

The Debate About the Development Impact of fdi A growing scholarly debate addresses the circumstances under which fdi contributes to development, and indeed whether fdi—nontraditional or

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otherwise—can contribute to development at all. Certainly fdi can benefit developing countries by providing capital, jobs, multiplier effects (spending by foreign firms that increases demand for local goods and services), training, exports, and economic diversification. At least in theory, fdi can also provide more specific benefits to local firms in numerous ways, including backward linkages (use of local suppliers), technology transfer, guidance and training to local suppliers, demonstration of advanced business methods that local firms can acquire, development of skills and experience by employees of foreign firms who then bring their knowledge to local firms (or set up their own firms), and so on. Many works have analyzed the impact of fdi on development,4 but several recent works have focused more specifically and systematically on the issue that most concerns us here: the role that government should play to ensure that fdi promotes development. Paus’s Foreign Investment, Development, and Globalization: Can Costa Rica Become Ireland? (2005) is particularly relevant because it focuses directly on two cases analyzed in this book, Costa Rica and Ireland. Paus first analyzes the aspects of the Ireland’s successful development, arguing that small latecomer developing countries, such as Costa Rica, can benefit from fdi—and move toward emulating Ireland’s success—only if their governments proactively implement policies to improve their countries’ location-specific assets, foster a continuing good match between those assets and foreign investors’ needs, and promote local firms’ capabilities to absorb technology and create linkages with foreign investors (Paus 2005, 3). While acknowledging that the Costa Rican government was successful in attracting such anchor investments as Intel, which in turn facilitated its ability to promote fdi from other nontraditional sectors, for example medical devices and shared services, Paus argues that this is not enough. The Costa Rican government needs a more cohesive strategy to obtain the maximum benefit from such investment, particularly with regard to expanding the capabilities of local firms to form linkages with transnational corporations (Paus 2005, 185). Gallagher and Zarsky (2007), in an in-depth case study of investment by electronics firms in and around Guadalajara, Mexico (often referred to as ‘‘Mexico’s Silicon Valley’’), argue similarly that without proactive government policies to promote the capabilities of local firms, fdi will have 4. Excellent surveys of this literature can be found in Porzecanski and Gallagher (2007), chap. 1 of Gallagher and Zarsky (2007), and Gallagher, Chudnovsky, and Porzecanski (2009).

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little positive impact on development and in fact can be detrimental to a country’s development prospects. These authors argue that in Mexico, the government’s adoption of a hands-off, neoliberal approach toward economic policy since the 1980s, and in particular its membership in the North American Free Trade Agreement (nafta) since 1994, resulted in the electronics industry in the Guadalajara region becoming part of an ‘‘enclave’’ economy. This meant that it was dominated by foreign transnational corporations with minimal linkages to local firms. By reducing tariff barriers, allowing majority ownership by foreign firms, eliminating rules on domestic content, and other market-oriented policies, the Mexican government failed to support the development of indigenous technological capabilities. As a result, foreign contract manufacturers with highly competitive global supply chains ‘‘crowded out’’ local firms as they supplied the needs of even larger transnational corporations, such as IBM. When China joined the World Trade Organization (wto) in 2001, Mexico lost its advantage as a low-cost manufacturing location. Lacking substantive ties to the local economy, many foreign firms moved their manufacturing operations to China. For Mexico, then, promotion of fdi in the segments of the electronics industry related to information technology (it) were not enough. In the absence of more proactive, coordinated policies to use this fdi to promote the indigenous technological capabilities of local firms, Mexico’s ability to benefit from this fdi in a sustained way was limited (Gallagher and Zarsky 2007, 188). A more recent edited volume by Gallagher and Chudnovsky (2009) comes to similar conclusions regarding fdi not only in Mexico but in the Latin American region as a whole. Moran (Moran et al. 2005, Moran 2006) presents a very different argument. He maintains that when governments protect local markets and impose performance requirements on transnational corporations, such as requiring them to form joint ventures with or transfer technology to local firms or to use a specified amount of domestic content in their manufacturing processes, the fdi attracted will not provide significant benefits to the local economy and can create adverse effects. Under these circumstances, foreign firms tend to create local subsidiaries that produce solely for the domestic market. Faced with obstacles to integrating these plants more fully into efficient global supply chains, foreign firms will use outdated technology and employ less advanced business methods, resulting in economic stagnation for the local economy. In contrast, when governments liberalize restrictions on trade and impose minimal performance requirements on foreign firms, fdi can provide significant benefits to a country.

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Under these conditions, plants established by foreign firms become an integral part of global supply networks and can take advantage of economies of scale. Consequently, such plants will be highly competitive, using the most advanced technology, management techniques, and quality control methods. Given these considerations, Moran maintains that government intervention should focus less on placing rigid demands on foreign firms and more on facilitating the ability of these firms to integrate a location fully into their production process. Such efforts could include improving a location’s infrastructure, promoting investment in selected industries to overcome a lack of information about a location’s relevant characteristics, providing training programs to increase workers’ skills, and making information about potential suppliers available to foreign firms (while encouraging these firms to play an active role in working with these suppliers to upgrade their capabilities). In Moran’s view, the most effective way to promote linkages between transnational corporations and local suppliers ‘‘is for the host country to appeal to foreign investors’ own self-interest in finding low-cost, reliable suppliers, not to impose onerous requirements for domestic content and technology transfer’’ (2006, 23). Although each of these authors has widely different views about the extent to which the government should intervene to ensure that fdi promotes development, all would agree that at least some proactive government intervention is essential for this outcome to prevail. Even Moran, while opposing more heavy-handed industrial policies, argues that governments have an important role not only in overcoming a lack of information among prospective investors about the potential of their countries or states for particular kinds of investment, but also in improving infrastructure and providing training programs that can enhance their location-specific assets (2006, 29). Thus in addition to efforts to target nontraditional fdi that is a good match for their locations’ specific characteristics, governments at a minimum need to have a coherent, well-coordinated plan in place with regard to how their country or state can obtain the most advantage from this fdi. The rules of the wto no longer permit many of the policies used effectively by some governments in the past, particularly in East Asia (Amsden 2001, Evans 1995), such as protectionist import-substitution policies, domestic content requirements, and export subsidies. In any event, if implemented poorly and without effective controls, in some cases such policies can actually be detrimental to a country’s development (Evans 1995, 2005). Nevertheless, governments can still take numerous steps to ensure that their countries or states absorb the benefits of nontraditional fdi.

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As Lall notes, it is still possible for governments to promote, in a selective way, ‘‘skill formation, technology support, innovation financing, fdi promotion and targeting, infrastructure development, and other general subsidies that do not affect trade’’ (2005, 63). Gallagher and Zarsky observe that most recently, the governments best able to capture benefits from fdi were those that ‘‘aggressively utilized education and training, science and technology policy, and public-private partnerships with mncs [multinational corporations] to promote further industrial evolution’’ (2007, 41). Without requiring foreign firms to use a specified percentage of domestic content, governments can also implement creative programs to encourage transnational corporations to use local suppliers and to upgrade the capabilities of suppliers to make such linkages possible. For instance, governments can develop supplier development programs to train prospective local suppliers, provide financing to them, and make foreign firms aware of their capabilities. They might even hire managers or engineers from subsidiaries of foreign firms to help them identify and train promising local suppliers (a practice Singapore’s Economic Development Board has used effectively) (Moran 2006, 22–23; World Bank/ibrd 2005, 172). Governments in each of the Latin American case studies discussed in this book had used at least some of these policies. For example, the Costa Rican government, with guidance from Intel, strengthened the curriculum of its public technical schools and expanded enrollment in these institutions significantly. In 2001, in a collaborative effort on the part of cinde, the Inter-American Development Bank (idb), and the Promotora de Comercio Exterior (procomer; Costa Rica’s export promotion agency), the government also created a supplier development program: Costa Rica Provee (officially a part of procomer since 2004), which facilitated linkages between local firms and transnational corporations.5 In Mexico, the investment promotion agency in the state of Jalisco (discussed briefly in Chapter 1) and other state-level agencies did not stand by passively when faced with the loss of manufacturing jobs in the electronics sector in Mexico after 2001. Instead, they adapted to changing competitive circumstances, promoting new kinds of investment in areas where Mexico could be competitive, such as companies whose products needed to get to market quickly or with operations requiring their foreign plants to be in the same time 5. Of course, as Cordero and Paus point out (2009), although Costa Rica Provee has already had some success in developing linkages, it needs more than its current budget of US$ 275,000 and staff of seven to make a significant impact.

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zone as the United States (Lepe 2006; Moran 2006, 39; E. Sanchez 2007). For their part, Chile and Brazil had longstanding, well-developed nationallevel programs to enhance the capabilities of small- and medium-enterprises (smes) (Castillo and Nelson 2003). Certainly, to take better advantage of nontraditional fdi, each government discussed in this book could—and indeed, should—do much more to expand its support for the development of human resources and the capabilities of local firms. Furthermore, each government should better coordinate these initiatives with ongoing efforts to attract nontraditional fdi as part of a larger development effort. But as noted above, no country or state can receive benefits from nontraditional fdi unless it first receives such fdi. Thus, an effective government effort to promote nontraditional fdi is itself a vitally important part of any government’s effort to harness globalization for development. That is why my argument focuses on what makes some governments more effective than others at attracting nontraditional fdi.

The Cases: Varying Outcomes In order to prove my argument for Latin America, I examine recent investment promotion efforts in Costa Rica; the state of Rio Grande do Sul, Brazil; and Chile. I selected the Latin American cases analyzed here from the larger group of all Latin American governments actively engaged in promoting nontraditional fdi. In Chapters 4 and 5, I go beyond Latin America to test the model on investment promotion efforts in Ireland and Singapore, two countries widely regarded as having the most successful strategies to promote nontraditional fdi. The advantage of using in-depth case studies is that they can complement large-N studies of ipas. For example, a recent World Bank large-N study by Morisset and Andrews-Johnson (2004) cites a number of factors that make ipas successful 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. Thus the Morisset and Andrews-Johnson study, in contrast to my own, attempts to account for all factors that explain levels of fdi countries or states attract, including the quality of the business environment, rather than just analyzing the nature of governments’ investment-promotion efforts alone. The advantage of this approach is that it demonstrates the importance of other factors, such as a good business environment and a large budget, to an

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ipa’s ability to attract fdi. Studies such as my own, however, that use in-depth case analysis to focus specifically on governments’ investment promotion strategies, can provide additional insights on this specific issue. Morisset and Andrews-Johnson themselves acknowledge that their largeN study of seventy-five ipas might lack sufficient variation in factors they found to be 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 an ipa’s ability to attract fdi (50). Using carefully selected cases, my study can take such factors into account. I selected the Latin American cases examined here for two reasons. First, they represent significant and current, yet very different, efforts to promote nontraditional fdi in Latin America. Second, they vary with regard to all the key variables: level of political security, degree of technocratic independence, level of transnational learning capacity, effectiveness of investment promotion effort, and level of nontraditional fdi.6 With regard to my first reason for selecting these cases, they differ considerably in their approach to promoting nontraditional fdi. As noted, the Costa Rican and Rio Grande do Sul governments both collaborated with private investment promotion agencies: Coalicio´n Costarricense de Iniciativas para el Desarrollo (cinde) in Costa Rica and Po´lo-RS, Ageˆ ncia de Desenvolvimento (Po´lo) in Rio Grande do Sul. The Chilean government, in contrast, did not collaborate with a private agency. Instead, the government’s own agency, Corporacio´n de Fomento de la Produccio´n (corfo), undertook the investment promotion effort. This difference is useful in comparing the impact 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, less significant, difference is that the Costa Rican and Chilean investment promotion efforts were at the national level, whereas the Rio Grande do Sul effort was at the state level. This reason alone does not create a serious problem in comparing the different cases because 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 such key policies as tax incentives and government loans to prospective investors. Brazil did not even have a national-level ipa until 2002 (‘‘Brazil Takes One-Stop Shopping Further’’ 2002; Investe Bra6. Cuba would potentially be another interesting case to study, particularly because of its ability to attract fdi in some segments of the biotechnology industry. Although for the purposes of this study I chose to focus on capitalist countries, a useful (if somewhat dated) source on Cuba’s efforts to promote fdi is Pe´rez-Lo´pez (2000).

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sil Web site). For this reason, the state of Rio Grande do Sul’s investment promotion effort is comparable to the national level efforts in Costa Rica and Chile. The second reason for selecting these cases is that they present a range of variables based on the model: level of political security, level of technocratic independence, level of transnational learning capacity, effectiveness of investment promotion effort, and level of fdi attracted. For example, Costa Rica’s political environment provided a high level of political security for its leaders. The more polarized Rio Grande do Sul offered a relatively high level of political security to its governors, but this declined rapidly in the late 1990s as the level of partisan conflict in the state increased. In Chile, in contrast, the political environment offered low levels of political security to its leaders from the 1950s to the 1970s but a much more politically secure environment after the democratic transition in the 1990s. These different levels of political security resulted in different levels of technocratic independence for the ipas through which the governments worked or with which they were willing to collaborate. Because of the high level of political security in Costa Rica, different governments from different political parties were willing to collaborate with cinde, an ipa that possessed a high level of technocratic independence. In Rio Grande do Sul, initially a relatively high level of political security led the government to collaborate initially with Po´lo, an ipa with a high level of technocratic independence. But after partisan conflict in the state increased and a new administration took office in 1999 in an environment that provided a much lower level of political security, the new governor centralized control over investment promotion policy, refusing to collaborate further with Po´lo. Chile provides another example of how changing levels of political security can change a government’s willingness to delegate authority to an agency with a high level of technocratic independence. From the 1950s to the 1970s, in a highly polarized, unstable political environment that provided very low levels of political security to its leaders, Chilean presidents used corfo for patrimonial purposes to shore up their political support. After the democratic transition in the 1990s, however, and with the advent of new institutions and a political context that created a more secure political environment for Chile’s leaders, Chile’s presidents made reforms that gave corfo a high level of technocratic independence. When corfo initiated the government’s effort to promote nontraditional fdi in 2000, President Ricardo Lagos (2000–2006) allowed the agency to design and implement this program with minimal interference. Since taking office

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in 2006, Lagos’s successor, President Michelle Bachelet (2006–10), has continued to delegate a high level of authority over investment promotion to corfo. Investment promotion agencies with technocratic independence have the ability and the will to develop transnational learning capacity. Thus, since the level of technocratic independence varied across the cases and over time, the level of transnational learning capacity varied as well. 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, technocratically independent ipas, cinde and Po´lo, respectively, that already possessed this quality. Because the Costa Rican government continued to collaborate with cinde through successive administrations, it continued to benefit from cinde’s high level of transnational learning capacity. In Rio Grande do Sul, however, the state government lost the transnational learning capacity that its collaboration with Po´lo had provided after the new governor took direct control over investment promotion policy. Chile provides yet another case. Here the government’s level of transnational learning capacity varied over time even though corfo had a high level of technocratic independence when it began its investment promotion effort in 2000. corfo initially lacked transnational learning capacity in investment promotion because this was a new area of activity for the agency. Nevertheless, corfo’s high level of technocratic independence gave the agency the ability and the motivation to develop this capacity over time. Finally, the level of effectiveness of the investment promotion strategies and the level of nontraditional fdi attracted also varied. Whereas the Costa Rican government and the state government of Rio Grande do Sul developed responsive, well-targeted strategies early on to lure nontraditional investment, the Chilean government had difficulty with this initially but became more effective over time as its transnational learning capacity increased. With the loss of technocratic independence and transnational learning capacity that occurred after the collapse of its partnership with Po´lo, the state government of Rio Grande do Sul was not able to sustain its investment promotion strategy over time; as a result, the effectiveness of its investment promotion effort declined.7 Although there were no com7. Of course, cinde had financial support from a permanent endowment, created largely from funds provided by the U.S. Agency for International Development when it withdrew from Costa Rica in the 1990s (Clark 1995, 1997, 2001), whereas Po´lo did not. But as Po´lo’s experience in Rio Grande do Sul demonstrates, an independent source of funds alone was insufficient to ensure that an ipa’s collaboration with the government would be sustainable.

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pletely ineffective cases, the cases did vary in this respect. These different levels of effectiveness contributed to different levels of success in attracting nontraditional fdi. They help explain why Costa Rica attracted Intel and why it has continued to attract additional nontraditional fdi from numerous firms in multiple sectors; why Rio Grande do Sul succeeded in attracting Dell but failed to attract any new nontraditional fdi until very recently; and why Chile, after a slow start, has begun attracting significant levels of nontraditional fdi and seems likely to continue to do so in the future. I selected the two non–Latin American ipa cases, ida Ireland in Ireland and the Economic Development Board (edb) in Singapore, because they provide instructive lessons for Latin American governments attempting to promote nontraditional fdi. Although both were frequently benchmarked by other ipas for their successful practices, they operated in very different political contexts. Beyond that, as both of these ipas sought to move their countries into more knowledge-intensive industries, Singapore’s edb, with its more authoritarian and hierarchical organizational culture, encountered difficulties in attempting to promote the biotechnology industry that the more democratic and egalitarian ida Ireland did not experience. This contrast offers lessons not only about the importance of organizational culture in promoting knowledge-intensive development successfully but also about the challenges even successful governments can encounter as they seek to move their countries up the value chain into more advanced areas of economic activity.8

The Argument in Theoretical Context Political Security and Technocratic Independence The political security and technocratic independence variables have their basis in the literature on political survival and cooperation. The work of Barbara Geddes (1994) and Alfred Montero (2001a, 2001b, 2002) is particularly relevant to my argument. Employing a rational actor approach, Geddes argues that presidents are 8. It is important to remember that neither Singapore nor Ireland was a particularly attractive location for nontraditional fdi, or at least high technology fdi, when their respective ipas began their investment promotion efforts. As these case studies show, Singapore’s edb and the ida/ida Ireland made use of their transnational learning capacity not only to market their respective countries more effectively but also to better inform their governments on how to transform these countries into locations that were even more attractive for nontraditional fdi. Thus both of these cases—and particularly Singapore’s edb—serve as useful examples for Latin American ipas of the importance of this aspect of an ipa’s role.

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more likely to initiate reforms when their 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 lacking in party discipline 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 (1994, 21–22). Building on such models of political survival, Montero (2001a, 2001b, 2002) maintains that politicians face a ‘‘delegative dilemma’’ between short-term and long-term political interests (2002, 7). When their positions are secure, politicians are more willing to delegate control over resources to technocratic agencies, which can develop policies that serve the long-term collective interests of the country. But when there is a high level of intraregional conflict (political conflict among elites as well as social opposition from such key groups as business and labor), potentially threatening the ability of those in power to retain their positions, politicians will centralize their control over resources to win political support in the short term without regard to the country’s overall interests. Montero argues further that where 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 toward advancing the common goal, which can monitor each other’s progress and keep the policy on track (2001a, 2001b, 2002, 12). Of course, such horizontal accountability is important in authoritarian as well as democratic regimes. Leaders in stable authoritarian regimes may not have to worry about their own political security. Nevertheless, their lack of accountability to voters, even over the long term, means that leaders and other government officials in such regimes may lack incentives to pursue the broad overall interests of the nation (Geddes 1994, 192–94). Evans holds that states that are most effective at advancing a nation’s collective interests, whether operating in a democratic or authoritarian context, are those that can remain insulated from the demands of narrow societal interests while at the same time establishing connections with key social groups, such as business and labor, in order to remain responsive to broad societal needs (1995, 59). Evans refers to such states as ‘‘developmental states’’ and places Singapore squarely in this category. More recently, Kohli (2004) argued that ‘‘cohesive capitalist states’’ were those that could resist pressures from social groups and members of the elite in order to achieve national industrialization and development. Clearly,

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however, to the extent that they delegate authority to technocratic agencies that possess horizontal embeddedness, even developmental states or cohesive capitalist states in authoritarian regimes are more likely to achieve outcomes that advance the broad overall interests of the nation. Although Geddes discusses the role of presidents in delegating authority to technocratic agencies, much of her analysis focuses on the circumstances under which, in a democratic context, the legislative branch of government will enact reforms to minimize clientelism and enhance state capacity. Geddes argues that such outcomes are more likely when the larger parties in a political system hold approximately the same number of seats in the legislature and thus control the same amount of patronage. Under these circumstances, the cost of making reforms is shared by all parties equally. If one party has a dominant position in the legislature, however, it would be less willing to make such reforms because it would bear the cost alone. In contrast to Geddes, Montero holds that ‘‘parity may not be necessary and that politicians in a more secure position will have incentives to delegate.’’ Montero shows that more politically secure politicians can view delegation of control over industrial policy to highly competent, technocratic agencies as an ‘‘investment’’ that can provide a future political payoff: the ability to ‘‘claim credit for improved economic performance over the long haul.’’ Montero points out that the main benefit of both the ‘‘partisan parity’’ and the ‘‘political dominance’’ arguments is that ‘‘they highlight the importance of low elite polarization’’ (2002, 9). Based on this discussion, it is certainly reasonable to assume that the degree of political division among the political elite in a country or a state would affect a leader’s prospects for political survival. This is why one of my indicators for the level of political security a country or a state provides to its leaders is the extent of partisan conflict in the country or state. My other indicators for political security also have a basis in the discussion of the importance of ‘‘political dominance’’ versus ‘‘partisan parity’’ in achieving technocratic reforms. Geddes has been criticized for focusing to such an extent on the role of the legislature in initiating reforms rather than on the executive branch of government, which generally has a far more important role in policymaking in Latin America (E. Huber and Dion 2002; Weyland 2002a, 2002b). Because my own study focuses mainly on the role of the executive branch in policymaking at the national and state levels, I am primarily concerned with the political security of presidents and governors, not the political security of legislators. Because presidents and governors face different

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incentives than legislators, I maintain that political dominance of the president’s or the governor’s party in the legislature can enhance the leader’s level of political security and thus (in contrast to Geddes and similar to Montero) can also increase his or her willingness to delegate authority to technocratic agencies. Of course, this is especially true if such political dominance is combined with other positive indicators for a leader’s level of political security, such as a low level of partisan conflict, strong party discipline, stable coalitions, and a large margin of victory for the leader in the election. In circumstances in which a leader’s party or coalition of parties is closer to parity with an opposing party or coalition of parties in the legislature, he or she may still have a high level of political security if these other indicators are strongly positive. The political survival literature generally holds that politically insecure politicians centralize control over economic policy to win political support by providing jobs and other economic benefits to their allies, but I extend the political survival concept further. I maintain that when competition is strong and the level of partisan conflict is very high, politicians may wish to use control over economic policy as a way to establish positions on key issues that differ from their competitors but appeal to key groups of supporters, particularly the more ideologically driven activists in the political party base that can be so essential to winning elections.9 Thus, rather than always serving as a means to distribute patronage, taking direct control over policymaking may sometimes simply be a way for a politically insecure politician to demonstrate his or her support for an ideological position—for example, opposing privatization of all state-owned firms or promoting fdi only from companies that meet a certain ‘‘ideologically correct’’ profile—that might not be valid from a purely technocratic standpoint but can help the politician win support from his or her electoral base. The outcome of the Rio Grande do Sul case demonstrates what can happen when a politically insecure leader refuses to collaborate with a technocratically independent ipa. Other cases also highlight the importance of the political security and technocratic independence variables. For example, the case of Companhia de Desenvolvimento Industrial do Estado de Rio de Janeiro (codin), the ipa for the state of Rio de Janeiro, is very relevant. In a highly polarized environment with intense conflict among the political elite, the governor’s appointees on codin’s staff misappropriated the agency’s funds to provide favors to specific groups (Montero 9. I wish to thank Tim Power for helping me to develop and clarify this idea.

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2001a, 2001b, 2002). Another example is the Investment Promotion Council (ipc) in the Dominican Republic (Schrank 2000). In this case, a new government replaced several of the agency’s board of directors, industrialists from the ‘‘crony Santo Domingo elite’’ who blocked reforms that might jeopardize the president’s interests, even though these reforms were necessary to attract fdi successfully (83). The rational choice model that serves as the basis for political survival arguments has come under criticism from some scholars who question its applicability to Latin America. One criticism is that the assumption that politicians pursue their self-interests by doing everything they can to win reelection is an oversimplification. Indeed, many countries in Latin America do not even allow their leaders to be reelected. But as Geddes points out, even in these circumstances most leaders at least want to complete their terms in office, and many wish to remain influential within their party after their term is over (1995, 12). And even politicians who care deeply about broad public policy issues need to retain support for their government if they are to remain in office and carry out their plans. Among other limitations with the rational choice approach, however, Weyland (2002a, 2002b) points out perhaps the most telling criticism: some studies in the rational choice tradition do not sufficiently take into account the broader historical or structural context that can explain the origin of individual actors’ interests. Such context, which goes beyond the narrow emphasis on utility-maximizing, self-interested politicians seeking to win reelection that prevails in some rational choice studies, is essential for a fuller, more nuanced explanation of politicians’ behavior in specific circumstances. For example, the desire to avoid the past experience of severe partisan conflict in Chile in the 1960s to 1980s, not self-interest alone, helps explain why individual parties sought to moderate their differences after democracy was restored in the 1990s (Weyland 2002b, 75). To provide a more nuanced explanation for politicians’ actions, my study explicitly incorporates such context.

Transnational Learning Capacity My concept of transnational learning capacity is rooted in the vast and rapidly growing literature on organizational learning. There have been a variety of attempts to apply concepts of organizational learning to government organizations (some include Ferlie et al. 1996; Leeuw, Rist, and Sonnichsen 1999; Perez-Aleman 2000, 2003). There is also a considerable body of literature in this area oriented toward foreign policymaking, as

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summarized well by Levy (1994). More recently, Weyland (2004a, 2007) has applied cognitive learning models to Latin American governments in order to explain policymakers’ decision-making processes. Most of the literature on learning within organizations, however, has focused on business firms rather than on government organizations. I maintain that some of these concepts are also relevant to learning by governments. For example, the idea of ‘‘absorptive capacity,’’ as originally conceived in the seminal work of Cohen and Levinthal, refers to ‘‘a firm’s ability to identify, assimilate and exploit knowledge from the environment’’ (1990, 128). This is related to my concept of ‘‘transnational learning capacity,’’ which I apply to ipas and, by extension, to governments. A government ipa—or a private ipa collaborating with a government—that possessed a high level of transnational learning capacity 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.10 Nevertheless, 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 assumption is that ‘‘the organization needs prior related knowledge to assimilate and use new knowledge’’ (Cohen and Levinthal 1990, 129). In my concept of transnational learning capacity, in contrast, prior accumulated knowledge (for example, knowledge about foreign business trends on the part of a highly internationalized 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 a systematic practice of proactively researching specific prospective foreign investors in order to anticipate their concerns and needs or a transnational strategic network. Of course, an agency that had only one or two of the components for transnational learning capacity would not have as much of this capacity as an agency that did well on all of the measures for this variable. 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 ‘‘grafting’’ (G. Huber 1991). Firms often learn by ‘‘grafting on’’ the 10. Later authors have applied absorptive capacity at the national level (Crisculo and Narula 2002; Paus 2003). These analyses, however, do not focus specifically on governments or government agencies but rather on the overall absorptive capacity of firms and other institutions in the nation as a whole.

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knowledge of other firms. Firms 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 difference 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 Latin American 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, however, as corfo developed a transnational strategic network, its level of transnational learning capacity increased. Thus transnational learning capacity, like absorptive capacity, is a factor 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 manufacturing. 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 processes more efficient. Firms can also increase absorptive capacity by providing advanced training for their employees. Similarly, transnational learning capacity can increase if an ipa 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 promotion.

The Structure of the Book The cases analyzed here highlight factors that enable a government to develop an effective investment promotion strategy, thus contributing to its ability to attract nontraditional fdi. In Chapter 1 I examine the most successful case: the Costa Rican government’s partnership with cinde. It demonstrates that, at least from 1949 to 2002, Costa Rica’s low level of partisan conflict, relatively disciplined political parties, stable bipolar political system, and legislature dominated (usually) by the incumbent president’s political party provided the country’s presidents with a high level of political security. For this reason, successive presidents in Costa Rica, from different political parties, were willing to collaborate with and delegate authority over investment promotion strategy to cinde, an ipa with a high level of technocratic independence. This technocratic independence

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enabled cinde (and thus the Costa Rican government) to develop a high level of transnational learning capacity. All of these factors resulted in an effective investment promotion strategy, as indicated by cinde’s targeting of prospective nontraditional investors that were highly appropriate to Costa Rica’s particular business conditions, by its responsiveness to investors’ concerns and needs, and by the sustainability of this strategy over successive administrations from different political parties. This, in turn, contributed to the high levels of nontraditional fdi that Costa Rica succeeded in attracting. In Chapter 2 I examine the (ultimately) less successful collaboration between the state government of Rio Grande do Sul and Po´lo. Brazil is notorious for its undisciplined political parties and fragmented coalitions, but Rio Grande do Sul was somewhat different: its parties were relatively disciplined and were organized into two broad, relatively stable coalitions. Nevertheless, the state was also susceptible to high levels of partisan conflict. Because Brazil was just emerging from a severe economic crisis in the mid-1990s, the level of partisan conflict was relatively low in 1995 when Po´lo was created. As a result, the political context at that time, in addition to the political dominance of the governor’s coalition in the state legislature, provided a moderate level of political security to the governor. This helps explain why the governor was willing to collaborate with and delegate a great deal of authority over investment promotion to Po´lo, a private ipa with a moderately high level of technocratic independence. It also explains why political parties from both the left and the right of the political spectrum endorsed this collaboration at the time. Po´lo’s technocratic independence enabled it to develop a high level of transnational learning capacity. This facilitated its efforts (and, therefore, those of the state government) to develop an effective investment promotion strategy that resulted in the attraction of a manufacturing plant by Dell Computer Corporation. But as partisan conflict increased after a new governor—with only minority support in the legislature—took office in 1999, the situation changed. Lacking political security, the new governor refused to collaborate with Po´lo, choosing instead to centralize control over investment promotion policy in his own hands. Without the technocratic independence and transnational learning capacity that the collaboration with Po´lo had provided, the new government’s investment promotion strategy was ineffective, and its efforts to promote nontraditional fdi failed. In Chapter 3 I examine corfo’s High Technology Investment Promotion Program in Chile, which struggled at first after its creation in 2000

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but became more successful over time. In the highly polarized, unstable political environment from the 1950s to the 1970s, as well as during the military dictatorship from 1973 to 1990,11 corfo experienced problems with patrimonialism. After the transition to democracy in the 1990s, however, Chile’s more disciplined political party system, organized into two stable coalitions, and its low level of partisan conflict provided a high level of political security for Chilean presidents. As a result, since the 1990s corfo has possessed a high level of technocratic independence. Despite this, at its launch in 2000 corfo’s High Technology Investment Promotion Program initially lacked all of the components of transnational learning capacity. Lacking a highly internationalized staff or multiple foreign offices, corfo sought to develop its own transnational strategic network of companies, universities, business associations, and individuals that could facilitate its work in the promotion of nontraditional fdi. Because corfo’s transnational learning capacity developed over time, its investment promotion strategy was initially not as effective as that of cinde or Po´lo. At first, it did not target industries appropriate to Chile, and corfo officials were not as responsive to investors’ needs and concerns as those at cinde and Po´lo were. Over time, however, as corfo’s transnational strategic network developed, so did its transnational learning capacity and the effectiveness of its investment promotion strategy. This more effective strategy has contributed to Chile’s ability to attract nontraditional fdi. Chapters 4 and 5 provide useful lessons for Latin America from two highly successful ipas, ida Ireland and Singapore’s edb, respectively. Although Ireland is a democracy and Singapore is an authoritarian regime, both countries have a political context that provides their leaders with a high level of political security. As a result, ida Ireland and Singapore’s edb have high levels of technocratic independence as well as high levels of transnational learning capacity, and they have developed exceptionally effective investment promotion strategies—widely considered to be among the most effective in the world—that have contributed to each country’s success in attracting high levels of nontraditional fdi. With regard to the Ireland and Singapore cases, a key finding is that for governments seeking to promote basic scientific research as part of their effort to attract highly knowledge-intensive fdi, an additional component 11. As I explain more fully in Chapter 3, although the authoritarian Pinochet government in Chile may have been politically secure, it was clearly not as insulated from particularistic interests as were authoritarian developmental states (such as Singapore).

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of transnational learning capacity is relevant. This is the extent to which the ipa has a democratic, egalitarian organizational culture as opposed to one that is authoritarian and hierarchical. Because scientists and other researchers involved in knowledge-intensive industries insist on having influence on policies that affect their work, ipas or other agencies with an authoritarian, hierarchical organizational culture, such as Singapore’s edb, will have more difficulties promoting basic scientific research than those that are more democratic and egalitarian, such as ida Ireland. In the Conclusion I draw on this study’s findings and explain their implications. With the benefit of the comparative perspective provided by the cases, I underscore the importance of political security, technocratic independence, and transnational learning capacity and highlight some key lessons for Latin American governments. Among the key lessons are: political security can have a significant impact on a government’s ability to promote nontraditional fdi (specifically, that the way in which a country or state provides political security to its leaders matters); technocratic independence can be achieved in many different ways; and transnational learning capacity can either be acquired by collaborating with an ipa that possesses this quality or can be developed by a government itself over time. Investment promotion can be an appropriate response when the market mechanism alone fails to provide information to prospective investors about viable opportunities. Promoting investment in nontraditional fdi 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. As the cases will show, ipas (and thus governments) that operate in a political context conducive to providing high levels of political security to national or state leaders can attain high levels of technocratic independence and transnational learning capacity. Those that possess these characteristics can develop well-targeted, highly responsive, and sustained investment promotion efforts to capture the benefits of nontraditional fdi. Knowing this, government officials in developing countries will be better equipped to harness globalization in order to maximize development prospects for their countries or states.

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Costa Rica and CINDE

Ted Telford faced a dilemma. As the only full-time member of Intel Corporation’s worldwide site-selection team, he had to make a recommendation about where Intel should locate its first manufacturing plant in Latin America.1 After months of analysis, involving desk research and numerous field trips to potential country locations, the site-selection team had narrowed the choice to four countries: Brazil, Chile, Mexico, and Costa Rica. All were attractive in different ways, but now it was October 1996, and Telford had to write his final report for Intel headquarters in Santa Clara, California. Headquarters would want evidence to support his recommendation. He shifted uneasily in his chair. At stake was a long-term investment decision involving US$ 300 million, a substantial amount even for a company such as Intel, with more than $20 billion in annual revenues. Ultimately, and to the consternation of government officials in the other countries on Intel’s short list, Telford recommended Costa Rica as the best site in Latin America for Intel’s assembly and test plant. Intel’s top executives agreed with this recommendation, and the plant was approved. It opened in Heredia, Costa Rica, just outside of the capital city of San Jose´, 1. The principal members of the site-selection team were Ted Telford, international siteselection analyst; Chuck Pawlak, director, New Site Development; and Bob Perlman, vice president for Tax, Customs, and Licensing. Telford and Pawlak worked out of Intel’s Chandler, Arizona, office; Perlman was based at the headquarters office in Santa Clara, California. Beyond these three members, there was an extended group of about fifteen Intel employees all over the world who participated in detailed assessment of countries on such issues as energy availability, construction, operations, security, and so on. Frank Alvarez, vice president of the Technology and Management Group, was also based in Santa Clara and ultimately had final say over the site-selection decision, along with Mike Splinter, vice president of Worldwide Manufacturing and, of course, Craig Barrett, Intel’s chief operating officer (and later CEO).

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on March 18, 1998, with about 950 workers. Since then, Intel’s investment has proven to be a success for the company as well as for Costa Rica. By 2008, Intel had expanded to two assembly and test plants at the same site in Heredia (with plans to eventually open two more), as well as a global distribution center. The company had also established a ‘‘shared services group’’ at the site, which provided support for Intel in five areas, including engineering services, information technology, and financial services. The Financial Services Center handled all of the company’s financial services in the Americas (‘‘Intel Establecera´ Centro’’ 2005; World Bank/miga 2006, 8). Intel Capital for Latin America, also located at the site, invested in local technology-related companies (for example, software development centers) relevant to Intel’s operations in the region (World Bank/miga 2006, 8). In all, Intel directly employed more than 3,000 people in Costa Rica, most of them relatively well paid technicians and engineers. Through numerous linkages with local firms, it provided indirect employment for another 2,000 people (World Bank/miga 2006, 7; ‘‘Intel and Costa Rica’’ 2007, 27). The value of Costa Rica’s exports had expanded dramatically as exports of Intel’s microprocessors far surpassed exports of Costa Rica’s more traditional products, bananas and coffee (Economist Intelligence Unit 2005a, 26; Economist Intelligence Unit 2006, 23). Hanson (2001) argues that Intel’s investment in Costa Rica was not worth the incentives the government provided in order to win this investment. Others (Larrain 2001; Rodrı´guez-Clare 2001; Monge 2005; World Bank/miga 2006) disagree. These economists provide evidence documenting Intel’s positive impact on the Costa Rican economy overall. There is no doubt, however, that Intel’s investment provided more jobs, helped diversify Costa Rica’s economy, provided linkages with local firms (albeit primarily to supply packaging and services rather than components and parts), and spurred on reforms to improve the country’s overall competitiveness. Also important was the impact this investment had on other companies. As I will show in this chapter, Intel’s plant served as an ‘‘anchor’’ investment that attracted fdi from other nontraditional firms. This, in turn, led to more jobs and established Costa Rica as a haven for investment in other nontraditional industries, industries whose executives had previously not considered Costa Rica as a possible investment location. Although Paus acknowledges Intel’s positive impact on Costa Rica’s development, she argues that the Costa Rican government could have done more to increase the developmental impact of such high technology fdi (2005, 183–84). Specifically, as Paus (2005) and more recently Cordero and Paus (2009) maintain, successive Costa Rican governments

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should have implemented a more comprehensive and better-coordinated plan to use such fdi to promote the technological capabilities of local firms. These arguments are persuasive. But the fact remains that Costa Rica could not obtain any benefit from nontraditional fdi whatsoever without first attracting it successfully. That is my focus in this chapter. A number of factors influenced Intel’s choice of Costa Rica, but clearly the efforts of the Coalicio´n Costarricense de Iniciativas para el Desarrollo (cinde), the private investment promotion agency working in collaboration with the Costa Rican government, played an important role. Indeed, Intel would not have considered Costa Rica had it not been for cinde’s persistent efforts. During the site-selection team’s visit to Costa Rica, Intel executives were very pleased with how well cinde officials understood Intel’s needs and concerns. For executives in need of making a decision quickly, this made a strong impression, especially in contrast to the reception the team received in other countries on their short list. The approach cinde took with Intel was indicative of how effective (responsive, appropriately targeted, and sustained) its investment strategy was. Costa Rica’s low level of partisan conflict, relatively disciplined political parties, stable coalitions (or in this case, stable two-party system), and normally the presence of majorities or near majorities for the president’s party in the legislature provided the country’s leaders with a high level of political security. As a result, Costa Rican presidents from different political parties in successive administrations were willing to collaborate with and delegate authority over investment promotion policy to cinde, an ipa with a high level of technocratic independence. Without this political security, they would have been more inclined to centralize control over investment promotion policy in their own hands, using it to win political support in the short term rather than to promote Costa Rica’s overall objectives. Instead, cinde’s high level of technocratic independence gave it the ability and the will to develop its transnational learning capacity. All of these factors enabled cinde, and thus the Costa Rican government, to develop a highly effective investment promotion strategy that, in turn, contributed to Costa Rica’s ability to attract significant levels of nontraditional fdi. The effectiveness of cinde’s strategy in Costa Rica becomes apparent when it is contrasted with Intel’s far less positive experiences with the other governments on its short list: Brazil, Chile, and Mexico.2 2. Despite the differences in the size of these countries’ markets—at the time, Costa Rica’s population was only 3.5 million, compared with Brazil’s 170 million, Chile’s 15 million, and Mexico’s 100 million—this was irrelevant for this particular plant, which would be exporting 100 percent of its production.

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cinde’s investment promotion strategy had results that went far beyond attracting Intel. Continuing its collaboration with the government throughout consecutive administrations, cinde’s technocratic independence and transnational learning capacity gave the agency the ability to make modifications to its strategy as needed over time. Thus cinde was able to adapt its strategy, and that of the Costa Rican government, not only to changing business conditions within Costa Rica but also to evolving business trends in the global economy. This kept cinde’s strategy effective, which contributed to the government’s ability to continue attracting nontraditional fdi.

The Origins of Costa Rica’s Strategy to Promote Nontraditional fdi Jose´ Marı´a Figueres, Costa Rica’s president from 1994 to 1998, played a key role in attracting Intel to Costa Rica.3 Educated at West Point and Harvard, where he received a master’s degree in public administration, Figueres had a vision. He dreamed of 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 remained principally an exporter of bananas and coffee, with only some manufacturing investment in low-tech, low-wage, low-value-added industries, such as textiles (Figueres 2006). Costa Rica’s gradual increase in gdp per capita, education levels, and living standards, combined with the end of political unrest in neighboring Central American countries, had already resulted in a migration of investment out of Costa Rica’s textile sector. New investment in this industry was going to countries such as Nicaragua, where wages were much lower. Figueres wanted Costa Rica to develop a more productive, higher valueadded role in the global economy and saw attracting high technology investment as a way to do this (Figueres 2006). Clearly, changes in the world economy meant that Costa Rica would have to change its strategy as well. As Figueres explained his government’s plan: ‘‘We wanted to incorpo3. Jose´ Marı´a Figueres was the son of Jose´ (Pepe´) Figueres Ferrer, who led a civil war in 1948 when the Costa Rican legislature nullified the outcome of a legitimate presidential election. During a brief period as interim president immediately following the war (1948– 49), Pepe´ Figueres succeeded in writing a new constitution and abolishing Costa Rica’s military entirely, an unprecedented feat in Latin America (or virtually anywhere else, for that matter). He then turned power over to the rightful victor in the 1948 presidential election. He was elected president of Costa Rica himself several years later (1953–57).

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rate Costa Rica into the global economy in an intelligent way. Globalization was more than simply opening the country to foreign trade. We needed a national strategy not based on cheap labor or the exploitation of natural resources. We wanted to compete based on productivity, efficiency, and technology. . . . Many textile firms [had] left the country, and the government received severe criticism for not trying to sustain the maquila industry . . . [but] the foreign investment attraction strategy had changed. We wanted to attract industries with higher value-added, that would allow Costa Ricans to increase their standard of living’’ (Quoted in Ketelho¨hn 1998). By the time Figueres took office in 1994, cinde was already developing a strategy along these lines. Created in 1982 with funding from the United States Agency for International Development (usaid), cinde’s original purpose was to serve as a private, nonprofit export promotion center. Its board of directors was (and remains) composed almost entirely of business executives from the Costa Rican private sector. cinde was a collaborative effort between usaid and civic-minded business executives in Costa Rica to promote nontraditional exports (in Costa Rica at that time, this meant anything that was not bananas or coffee) and to enhance economic development in Costa Rica. At the time cinde was created, the Reagan administration hoped to strengthen the private sector in Central America and the Caribbean to prevent the spread of political instability in these regions. The Reagan administration’s Caribbean Basin Initiative (cbi), which gave preferential access to the U.S. market for manufactured goods from Central America and the Caribbean, was one way to do this. The cbi was consistent with Costa Rica’s efforts to promote nontraditional exports. Hoping to further this goal, in the early 1980s the government created export-processing zones, also known as free trade zones (ftzs) or ‘‘Zonas Francas,’’ which gave tax exemptions to firms planning to export what they produced. Firms operating in the ftzs paid no tariffs on imports of components and equipment and no corporate income taxes for eight years, with a 50 percent reduction in taxes for four years after that (Rodrı´guez-Clare 2001).4 usaid’s creation of cinde to facilitate nontraditional exports was separate from the Reagan administration’s cbi and the Costa Rican government’s 4. Although Costa Rica’s ratification of the Dominican Republic–Central American Free Trade Agreement (dr-cafta) with the United States will allow the country to maintain free trade status on most components imported from the United States, the World Trade Organization (wto) ruled recently that Costa Rica’s tax exemptions specifically for exporting companies must be eliminated entirely by 2009.

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creation of ftzs, but it complemented these strategies well (Clark 1995, 1997, 2001). Over time cinde’s mission evolved (Clark 1995, 1997, 2001). After the end of the cold war in the early 1990s and the fall of the Sandinista regime in Nicaragua in 1990, usaid reduced its funding to Costa Rica, finally closing its offices there in 1996. cinde officials realized that not only would the agency have to work with a smaller budget, but Costa Rica was losing its competitive edge as a stable investment haven in the Central American region. Moreover, nafta would give Mexico better access to the U.S. market than countries benefiting from the cbi (Rodrı´guez-Clare 2001). Thus in the mid-1990s, cinde modified its strategy and developed a new purpose: the promotion of fdi in nontraditional, high value-added industries. cinde’s new mission dovetailed well with President Figueres’s vision for the country. He, too, realized that with the global and regional changes taking place in the early 1990s, Costa Rica had lost its competitive advantage as a stable, democratic country in the middle of an unstable region and would have to find another way to differentiate itself to prospective foreign investors. As he stated later: I arrived at the conclusion that in this changing world, competitive advantages that we had been able to build as a nation for the last 40 or 50 years—our stability, our stable democracy—were now becoming commoditized throughout the region, instead of continuing to be special factors that set us apart. So, the drive of my government was to find a way to create new competitive advantages in this new world that was emerging . . . to ask, what can we do to build on our competitive strengths, to leverage our education as one of those strengths, and to continue to move up the value chain? I realized that attracting high technology investment was the obvious way to go. Technology was the emerging sector, it was the sector that was pushing the global economy forward. That is why we planned to attract high technology investment. (Figueres 2006) Given that Costa Rica’s political environment provided him with a great deal of political security, which made it possible to delegate control over investment promotion strategy to an ipa with a high level of technocratic independence, and realizing that cinde could help him achieve his goals for Costa Rica, Figueres chose to collaborate closely with cinde (Figueres 2006). The objective of this collaboration was to attract high technology

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and other types of nontraditional fdi that could contribute to Costa Rica’s economic development. cinde devised the strategy and carried out the investment promotion, and Figueres’s government provided the government cooperation and support necessary for cinde to carry out its efforts effectively. Figueres’s high level of political security enabled him to collaborate with cinde on this new strategy even though at the time this was not a politically popular thing to do. Many in Costa Rica perceived the entirely private cinde, with its globe-trotting, relatively well paid officials, to be somewhat elitist. Moreover, key sectors of Costa Rican society disapproved of the government’s overall shift in strategy (for example, key members of the agricultural sector feared that the new strategy would result in a loss of governmental support) (Figueres 2006). Nevertheless, Figueres felt sufficiently politically secure to proceed. For example, despite his pursuit of this and other policies that were even more politically unpopular in the short term, such as the reform of the government pension system, at no time during his presidency did Figueres perceive his government’s or his own political survival to be in question (Figueres 2006). As a result of its collaboration with cinde, the Costa Rican government enhanced its own capabilities by ‘‘grafting on’’ cinde’s high levels of technocratic independence and transnational learning capacity in the area of investment promotion. In this way, the government acquired a highly effective investment promotion strategy that was well-targeted, responsive, and—because of the high level of political security Costa Rican afforded its presidents—sustained through successive presidential administrations. The effectiveness of Costa Rica’s investment promotion strategy contributed to its ability to attract high levels of nontraditional fdi, not only from Intel but from many other nontraditional firms as well.

Political Security in Costa Rica The political environment in Costa Rica, a country well known for its stable democratic government, clearly provided its presidents with a high level of political security. Since the promulgation of its 1949 constitution until at least 2002, Costa Rica had a low level of partisan conflict,5 relatively disciplined political parties, a stable two-party system, and (normally) 5. Despite highly competitive elections, Costa Rica’s main political parties were not highly polarized on key issues.

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majorities or near majorities for the president’s party in the legislature. Although after 2002 the country experienced increasing fragmentation of its political party system, the country’s presidents continued to benefit from a relatively high level of political security. As noted above, the 1949 constitution was the outcome of a civil war that broke out in 1948, precipitated by fraud in that year’s presidential elections. Jose´ Figueres Ferrer (whose son would later become president and play an important role in bringing Intel to Costa Rica), led the war. As part of the pact that ended the war, Jose´ Figueres Ferrer served as president for eighteen months, ruling by decree (during which time, among other rulings, he abolished Costa Rica’s military) while a popularly elected Constituent Assembly wrote a new constitution. After this eighteen-month period, as agreed, Figueres handed over the presidency to the legitimate winner of the 1948 election, Otilio Ulate Blanco.

Low Level of Partisan Conflict The 1949 constitution both resulted from the interlude of political security that followed the civil war and helped create enduring political security in Costa Rica. In 1948–49, with the political opposition largely in exile after the civil war, a pact in place between Figueres and president-designate Ulate to transfer power to Ulate after eighteen months, and Ulate’s party controlling thirty-four of the forty-five seats in the Constituent Assembly (Wilson 1998, 44), the majority of the members of the Constituent Assembly had sufficient political security to design a constitution that promoted technocratic rather than patrimonial policymaking. Although Geddes would argue that legislators are unlikely to enact technocratic reforms unless there is an approximate parity between the largest parties in a political system, others writing from the political survival perspective question this view (Montero 2002). Even Geddes agreed that members of a majority party might be willing to enact reform under some circumstances, for example, if ‘‘public outrage over bureaucratic incompetence and graft had become so vehement that politicians might fear that they would lose more votes by opposing reform than by reducing their ability to distribute patronage’’ (Geddes 1994, 95). In any event, historical context is always important in explaining outcomes, and it was clearly important in this case. The people who assumed power in the aftermath of the civil war sought to establish a system in which political interference in elections and in the policymaking process in general would be minimized. Furthermore, the

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vanquished and discredited opposition, at this time almost entirely in exile, posed little threat to the immediate political survival of those in power. Indeed, the political opposition did not return as a viable political force until the late 1950s (Lehoucq 2005, 143). Although tensions between Figueres and Ulate certainly existed, partisan conflict about moving toward a more technocratic approach to policymaking was minimal, and the Constituent Assembly was able to make significant reforms. Thus, in addition to ratifying Figueres’s decree to abolish the military, the constitution enacted in 1949 delegated policymaking control over important areas of government, such as the monetary policy, health care, pensions, and overseeing elections, to nonpartisan, autonomous government agencies (Lehoucq 2006, 2; Wilson 1998, 56). As Lehoucq points out, taking control over these important areas away from elected officials contributed ‘‘to reducing the stakes of political conflict and . . . [promoted] a consensual style of decision-making’’ in Costa Rica (2006, 2). Contributing greatly to this new, more politically secure environment was the creation of an independent, nonpartisan body, the Tribunal Supremo de Elecciones or tse (Supreme Electoral Tribunal), to oversee elections. As Wilson notes, ‘‘The tse took control of elections away from incumbent governments and has guaranteed free, fair, and honest elections since the end of the civil war’’ (46). The high level of political security members of the Constituent Assembly experienced after the civil war, and the historical context in which they lived, enabled them to write a constitution that reduced the level of partisan conflict over elections, as well as other important policymaking areas. This, in turn, helped create a political system that would continue to give Costa Rica’s presidents a high level of political security. While the 1949 constitution limited the extent of partisan political conflict, the effects of Costa Rica’s economic crisis in the early 1980s reduced the level of partisan conflict still further. Facing severe trade and budget deficits, the outgoing right-of-center government defaulted on Costa Rica’s debts in 1982. In the aftermath of this crisis, the International Monetary Fund (imf ), World Bank, and usaid pressured the Costa Rican government to implement structural reforms. Responding to these external pressures as well as to its own shift in thinking about Costa Rica’s development model, the newly elected left-of-center Partido Liberacio´n Nacional (pln) government implemented neoliberal policies, adopting a market-oriented, export-led development strategy. Since then, both of Costa Rica’s dominant political parties, the left-of-center pln and the right-of-center Partido Unidad Social Cristiana (pusc), have continued to support this approach

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(Lehoucq 2005, 145; 2006, 18; Wilson 1998, 125). As a result, partisan conflict in Costa Rica, already relatively low, declined further. In addition to this first factor, a low level of partisan conflict, other factors contributed to the high level of political security Costa Rica provided its presidents from the 1950s until 2002. These other factors were: relatively disciplined political parties; stable coalitions in the form of a stable bipolar political party system; and majorities or near majorities (usually) for the president’s party within the Legislative Assembly.

Relatively Disciplined Political Parties By comparison, Costa Rica’s parties were relatively well disciplined. Although not as highly disciplined as the political parties in Chile, Costa Rica’s parties had more leverage over their deputies in the legislature (at least early in the president’s term) than did Brazil’s, which were notorious for their fragmentation and lack of discipline (Ames 2001; Mainwaring 1999; Weyland 1996). Wilson maintains that the ban on reelection for the president (a policy that changed in 2003), deputies’ inability to run for immediate reelection, and the reluctance of parties to sanction deputies in the Legislative Assembly who did not vote the party line all weakened political party discipline in Costa Rica (Wilson 1998, 59–62). Despite these obstacles, Costa Rica’s parties, and Costa Rica’s presidents, did have two key sources of leverage over deputies: Costa Rica’s closed-list proportional representation electoral system, and the Partidas Especı´ficas. Closed-list proportional representation (pr) electoral systems tend to enhance party discipline. In such systems, the party itself selects and ranks candidates, thus determining which candidates can be elected, and voters cast ballots for the party list rather than for individual candidates. Furthermore, in Costa Rica’s closed-list pr electoral system, parties selected and ranked candidates after the presidential candidate for that party was selected. As Lehoucq notes, this was ‘‘an important source of why deputies from the president’s party would and do support him. Simply put, they owe[d] their job in the Assembly to the president’’ (2006, 20–21). Another reason Costa Rica’s political parties were reasonably well disciplined was that up to 2 percent of every government’s budget was set aside for Partidas Especı´ficas (pes), or Special Projects. The president could give this money to members of the legislature, either within his own party or in other parties, to spend on projects for their constituents. As Wilson notes, the president’s control over the allocation of pe money was a ‘‘carrot’’ that gave the president the opportunity ‘‘to control the votes of his or

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her copartisans [in the legislature] and, during periods of divided government . . . to cajole the party controlling the Legislative Assembly into supporting his or her agenda’’ (1998, 60).

Stable Bipolar Political System Complementing Costa Rica’s low level of partisan conflict and its relatively disciplined political parties was the stability of its bipolar political party system.6 This system developed gradually, beginning in the 1950s, and lasted until 2002. Although other parties existed, until 2002 these smaller parties elected few representatives to the Legislative Assembly. Thus the pln and a coalition of parties that by the early 1980s had become the pusc formed a stable bipolar system. In 1995, Mainwaring and Scully ranked Costa Rica’s political party system with Chile’s and Uruguay’s as among the most highly ‘‘institutionalized’’ in Latin America (1995, 17). In Mainwaring’s and Scully’s terms, this meant that Costa Rica’s political parties were stable, autonomous organizations that represented well-defined constituencies in a consistent way and respected the electoral process (4–5). Clearly, such characteristics indicated a highly stable political party system, which contributed to the stability of the government as a whole. In addition to this high level of institutionalization, the emergence of the bipolar party system contributed to stability. Unlike more highly fragmented political systems, in which coalitions can shift suddenly, two-party dominant systems tend not to experience such sudden changes. Political parties in such systems are less prone to represent extreme or narrow viewpoints; instead, they seek to win the support of the ‘‘median voter’’ (Lehoucq 2006, 3). Thus the bipolar political system helped make policymaking in Costa Rica less volatile, promoting a higher level of political security for the country’s presidents. Wilson notes that four aspects of Costa Rica’s political system contributed to the development of two dominant political parties: (1) an unusual feature of Costa Rica’s pr electoral system, (2) laws governing the financing of campaigns, (3) a rule requiring presidential candidates to carry at least 40 percent of the vote to win a presidential election, and (4) concurrent elections for the legislative and executive branches of government (1998, 46–47). With regard to the first point, the unusual feature of Costa Rica’s pr 6. The term ‘‘bipolar’’ to refer to Costa Rica’s political party system comes from Lehoucq (2006).

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electoral system—the existence of seven multimember electoral districts in Costa Rica, rather than the single multimember district for a whole nation more common to pr electoral systems—prevented pr’s normal tendency to create a fragmented party system. Costa Rica’s Supreme Electoral Tribunal (tse) decided how many of the fifty-seven seats in the Costa Rican legislature each district would receive based on the population of that district. Smaller parties, competing in each of these seven districts, found it difficult to consistently get sufficient votes to win seats in the Legislative Assembly (Wilson 1998, 47). The second aspect of Costa Rica’s political system that contributed to the development of two dominant parties was the country’s campaign finance laws. Because these laws required parties to win a certain percentage of the vote in order to receive campaign financing, they favored the largest parties. The third aspect, the rule that presidential candidates had to win at least 40 percent of the vote to get elected, favored a two-party dominant political system because only larger parties or coalitions could win this much of the vote. This was related to the fourth aspect, concurrent elections for the president and the Legislative Assembly, since supporters of the two most likely winners of the presidential election (those with the best chance of winning at least 40 percent of the vote) were more likely to turn out to vote in the election.

Dominance of the President’s Party in the Legislative Assembly Concurrent elections for the president and the Legislative Assembly created a coattail effect that tended to increase the president’s support in the legislature. This meant that the president’s party generally had a majority or near majority in the Legislative Assembly. As Lehoucq notes, seven of the thirteen presidents from 1949 to 2002 benefited from legislative majorities, and ‘‘between 1953 and 2002, the average size of the pro-government contingent was 48 percent. . . . So, even if the president held the support of a minority of deputies in the legislature, it was only rarely a small share of all deputies’’ (2006, 20). For example, during the term of President Jose´ Marı´a Figueres (1994– 98) of the pln party, the pln had a near majority of twenty-eight of the fifty-seven seats (49 percent) in the Legislative Assembly. The pusc had twenty-five seats, and four smaller parties each had one seat (Wilson 1998, 48). Although not a majority, 49 percent of the seats in the legislature was sufficiently close to reduce the difficulty of obtaining a majority by means of collaborating with third parties. In any case, this situation certainly pro-

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vided more political security for Figueres than ever existed in Brazil, where the president’s party typically held fewer than 20 percent of the seats in the national legislature, and most governors’ parties held a similarly small percentage of the seats in the state legislatures.

The Demise of the Two-Party System Costa Rica’s stable two-party dominant system began to decline in the early 2000s. Lehoucq argues that the cause was the dissatisfaction of a more sophisticated, ‘‘increasingly educated and urban electorate’’ with the twoparty system’s lack of transparency and accountability (2005, 146). Also important, however, was that Costa Rica’s governmental Autonomous Institutions (ais), which had such an important role in policymaking, lacked both effective regulatory oversight and also what Montero called ‘‘horizontal embeddedness.’’ (As already noted, this is directly related to my study’s third measure of technocratic independence, the extent to which an agency works in tandem with other agencies pursuing similar goals so that they can each monitor progress toward those goals.) This lack of ‘‘horizontal accountability’’7 made Costa Rica’s ais prone to political interference by the two dominant political parties. After changes in the rules related to the governance of the ais, by the early 1980s the two dominant parties shared complete control over appointing their board members, and the president had the power to appoint the head of the organizations, a power he had not possessed when the ais were originally created (Authers 2004; Lehoucq 2005, 146). Such changes, and the resulting decline in effectiveness of the ais, contributed to the growing disenchantment of the electorate with the two-party dominant system (Lehoucq 2005, 146). The decline of the two-party dominant system became clear with the 2002 elections. In the elections for the Legislative Assembly that year, the pusc won only nineteen seats and the pln only seventeen, while other parties won twenty-one seats (37 percent), including fourteen seats (25 percent) for the anticorruption Partido Accio´n Ciudadana (pac), which had been founded only in 2000 (Tribunal Supremo de Elecciones, Repu´blica de Costa Rica Web site). Otto´n Solı´s, the pac’s presidential candidate, won 26 percent of the votes in the presidential election, forcing a run-off election between the pusc and pln candidates as neither candidate received 7. Lehoucq’s term.

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the required minimum 40 percent of the vote in the first round—the first time this had happened in almost fifty years (Lehoucq 2005, 146). Contributing to the disenchantment of the electorate with the two-party dominant system were the arrests in 2004 of two former presidents from ´ ngel Rodrı´guez the pusc, Rafael Caldero´n (1990–94) and Miguel A (1998–2002), for allegedly taking bribes from foreign firms while they were in office. They were accused of taking bribes to influence Autonomous Institutions to buy equipment from, issue permits to, or in other ways enhance business prospects for foreign firms in Costa Rica. Later, former president Jose´ Marı´a Figueres of the pln (1994–98) was accused of taking payments from a foreign firm for this same purpose. By 2008, the cases against Caldero´n and Rodrı´guez continued to work their way through the Costa Rican court system. For his part, Figueres argued that the accusations against him, a high-profile former president from the pln, were politically motivated to balance the political damage to the pusc. Stating that he did not wish to participate in this ‘‘political game,’’ Figueres, now living in Europe, refused to return to Costa Rica in person to testify on this issue (Villalobos 2005). The evidence supported Figueres’s argument: he provided detailed documentation showing that he received regular payments from a Costa Rican consulting company from 2000 to 2003, long after he was out of office, for work he did that was unrelated to the foreign firm in question (Villalobos 2005).8 Finally, in late 2007 Costa Rica’s attorney general requested that the commission looking into the matter drop the case for lack of evidence against Figueres. In any event, these incidents weakened already declining support for the twoparty system and particularly for the pusc. The decline of the two-party system continued in the 2006 elections. In the elections for the Legislative Assembly, the pln (even with its successful ´ scar Arias, providing a coattail effect) received only presidential candidate, O twenty-five seats (44 percent), while the pac and the pml now eclipsed the pusc: the pac won seventeen seats (30 percent), and the pml won six, with the pusc winning a mere five (9 percent). (Other parties accounted for the other four.) Furthermore, although Arias ultimately won the presidential election in the first round, the results were initially too close to call. After a manual recount, the tse declared that Arias had beaten his opponent— significantly, not a pusc candidate, but Otto´n Solı´s from the pac—by a 8. Figueres was asked to resign from his position as managing director of the World Economic Forum (wef ) in Geneva, which had strict rules about doing outside work while employed at the wef.

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razor-thin margin of only 1.2 percent of the votes cast (Tribunal Supremo de Elecciones, Repu´blica de Costa Rica Web site). Although Costa Rica’s political system was changing, it clearly provided the country’s presidents with a high level of political security from 1949 to 2002. While the Costa Rica experience shows that this high level of political security allowed presidents during this period to delegate considerable authority to technocratic agencies, it also underscores the importance of the third measure of technocratic independence, the extent to which an agency collaborates with other organizations working toward similar goals, to ensure that such agencies continue to pursue the overall interests of the nation. The government’s partnership with cinde, an agency that possessed a high level of technocratic independence (including this third component), helped the government develop an investment promotion strategy that could advance the overall interests of Costa Rica.

cinde’s Technocratic Independence Because Costa Rica’s political environment meant that he did not have to be unduly concerned with his own political security, Jose´ Marı´a Figueres was willing to form a partnership with cinde that in effect delegated control over Costa Rica’s investment promotion strategy to that agency. Figueres understood full well that cinde possessed a high level of technocratic independence. Not needing to provide political patronage to allies in order to remain in power, Figueres knew that he could allow cinde to devise the best possible investment promotion policy to attract nontraditional fdi without concern for political considerations (Figueres 2006). cinde had a high level of technocratic independence based on all three measures for this variable: (1) hiring based on merit, (2) evaluations of programs on the basis of technical criteria, and (3) collaboration with other agencies pursuing similar goals. First, cinde’s staff was selected on the basis of merit rather than political criteria. cinde used previously established, well-defined criteria to hire all those working in investment promotion. These personnel had to possess the following minimum competencies: a bachelor’s degree and an ability to innovate, plan, and organize; research capability and a propensity for continuous learning; sales ability; a willingness to take a leadership role in meetings and presentations; and good interpersonal skills (Galva 2005; Egloff 2006). An absolute requirement, since most prospective foreign investors were from the United States, Canada, or Europe, was flu-

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ency in English (both written and oral) (Galva 2005; Egloff 2006). All personnel working in investment promotion, both when Intel was making its site selection decision and more recently, had prior relevant work experience, either within other parts of cinde itself or in marketing, sales, or engineering (Egloff 2003, 2006; Galva 2005). Additionally, all personnel had degrees in economics, engineering, or law, and many had MBAs. The evidence confirms cinde’s strong emphasis on merit in hiring personnel. In 1996, when Intel was beginning its site selection process in Costa Rica, of the ten staff working directly in investment promotion, five had MBAs or the equivalent (one had a MSc degree in international finance from the University of London), three had law degrees, and two had bachelor’s degrees in business administration. All had prior experience either studying abroad or working with foreign firms (cinde 2006a). cinde continued to hire on the basis of merit, as shown by the similarly accomplished profile of cinde’s staff more then ten years later: of a total of eleven staff working directly in investment promotion in 2007, five had MBAs, one had a master’s degree in communications, and all had prior international study or work experience with foreign firms (Galva 2005; cinde 2006b; cinde Web site, accessed February 18, 2007). With regard to the second measure of technocratic independence, cinde also evaluated its programs and personnel on the basis of technical criteria rather than political considerations. cinde established goals for each sector every year, and these were evaluated internally and by donors on the basis of such previously established, well-defined criteria as the number of site visits by foreign firms, the number of new investment projects, the amount of investment, and the total employment generated (cinde 2006b; Morice 2005; Egloff 2006). This information was then provided to cinde’s board of directors (Morice 2005; Egloff 2006). Finally, with regard to the third measure for technocratic independence, cinde collaborated with many different government agencies in carrying out its work, but primarily with the Ministry of Foreign Trade. The wide range of different institutions monitoring its progress prevented cinde— and therefore the Costa Rican government itself, at least in the area of investment promotion—from becoming captured by any single company or industry’s interests. Contributing to this monitoring was the fact that the bulk of cinde’s budget was administered by another agency, the Costa Rica–USA Foundation (crusa), which itself possessed a high level of technocratic independence. In the beginning, usaid funded cinde entirely. When that agency withdrew from Costa Rica in the early 1980s, it left cinde with a fund to

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finance its operations. This fund, with additional contributions from the Costa Rican government, became a permanent endowment administered by crusa. With this money, crusa not only provided cinde with the majority of its income but also financed other development-related organizations in Costa Rica (Sader 1999).Using well-established technical criteria, crusa evaluated an agency’s projects for funding. These included the methodology of the project, the clarity of its objectives, and its likely impact on Costa Rica (crusa 2003, 30; crusa Web site). In addition to cinde’s technocratic independence, Costa Rica itself, despite the recent scandals involving former presidents, was known for having an overall low level of corruption. In 2006, even after the scandals had become widely publicized, Costa Rica ranked fifty-fifth out of 163 countries, the third lowest level of corruption in Latin America (after Chile and Uruguay). By 2007, Costa Rica’s ranking had actually improved, to forth-sixth out of 179 countries (Transparency International Web site, accessed February 18, 2007; December 26, 2007). Thus on balance, Costa Rica’s level of perceived corruption was considerably lower than that of most nations in Latin America. Furthermore, while the Costa Rican government itself might become involved in such controversies, cinde’s own high level of technocratic independence prevented it from getting entangled in these problems and helped keep the government focused, in the investment promotion area at least, on the collective goal of attracting nontraditional fdi.

cinde’s Transnational Learning Capacity The high level of transnational learning capacity demonstrated by cinde made it well suited to the task of designing a new investment promotion strategy. cinde had an abundance of all the components of transnational learning capacity relevant to Latin American ipas: a highly internationalized staff, a proactive, systematic approach to learning about prospective foreign investors and global business trends, and an extensive transnational strategic network.

Internationalization of Personnel A budget of about US$ 1.9 million per year (cinde 2006b, 28; Fuentes 2004; A. Sanchez 2004)—sizeable for a middle-income country like Costa Rica, considering that the median budget for such countries (including

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those much larger than Costa Rica) was only US$ 569,574 (Morisset and Andrews-Johnson 2004, 15)9 —allowed cinde to hire well-qualified staff with relevant educational backgrounds and business experience. Because most of cinde’s budget came from the permanent endowment administered by crusa, its ability to hire such people was not likely to diminish over time. As a private agency, cinde could use its budget to pay higher salaries than government agencies. It also provided bonuses as incentives when corporate goals were met: for example, if a major manufacturing firm decided to invest in Costa Rica as a result of cinde’s efforts, all staff members shared in the bonus (Madrigal 2005). Finally, because of cinde’s reputation as an organization that operated internationally, it attracted employees who had an interest in global issues. As one staff member stated, ‘‘people like to work here because it exposes you to the global economy, to understanding what’s happening around the world’’ (Madrigal 2005). Therefore, cinde was able to hire personnel with significant international educational backgrounds and business experience, who had the skills to pursue fdi creatively and aggressively. The key criteria for selection were that cinde staff members needed to have the education, experience, and personality that would enable them to understand and respond to prospective foreign investors. They needed to be versatile and quick and able to adapt to constant change in the international business environment (Egloff 2003, 2004, 2005; Galva 2005; Madrigal 2005). By demanding such qualities in its staff, cinde ensured that its investment promotion officials were highly internationalized. In the early 1980s, when usaid still provided large amounts of funding and cinde’s mission was more broadly defined, the staff was as large as three hundred. By the mid-1990s, however, when the cold war and U.S. concerns about stability in Central America ended, usaid cut its external funding, and cinde began focusing exclusively on investment promotion, cinde reduced its staff to fifty. Of those working directly in investment promotion at that time, all (100 percent) had either studied or worked 9. cinde’s budget was also large in per capita terms compared to the other Latin American ipas discussed in this book. The budget per capita for each of the ipas examined here was approximately as follows: cinde (US$0.54/capita); Po´lo (US$0.13/capita); corfo (US$0.05/ capita); ida Ireland (US$ 62/capita); and Singapore’s edb (US$ 45/capita). Note that for Po´lo, the population figure I used in making this calculation was the population for the state of Rio Grande do Sul, rather than for Brazil as a whole. For corfo, I used the average budget for the High Technology Investment Promotion Program from 2000 to 2006 since the budget for corfo’s investment promotion efforts increased dramatically (to about US$0.94/ capita) after 2006.

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abroad or had worked for transnational companies (Arias 1998; Egloff 2003, 2005; Foreign Investment Advisory Service 1998, 2; Mora 1998; cinde 2006a). Significantly, Enrique Egloff, cinde’s chief executive officer from 1995 to 1999 (during the time when Intel was making its site selection decision), had extensive international business experience and educational background himself as the former managing director and marketing and sales director for Bridgestone/Firestone Costa Rica and with a degree in business administration and marketing from the University of Oklahoma. The profile of Armando Heilbron, the director of cinde’s New York office from 1995 to 1999, further illustrates the high level of internationalization of cinde’s staff. With an MBA in international marketing from University of California–Berkeley, Heilbron had worked as Procter and Gamble’s brand manager in Venezuela and Puerto Rico from 1987 to 1991 and also had extensive experience handling marketing and distribution in Costa Rica for multiple foreign firms from the United States, Sweden, and Japan (cinde 2006a). The high level of internationalization of cinde’s staff continued over time despite restructuring to reduce administrative costs. By 2007, cinde had reduced its overall staff to only twenty-eight, yet the agency did not cut back on those working directly in investment promotion. Of the twentyeight total staff, eleven were directly involved in investment promotion. These eleven all had relevant educational backgrounds: as noted, five had MBAs, one had a master’s degree in communications, and the others had degrees in engineering, economics, or international relations (Galva 2005; cinde 2006b; cinde Web site, accessed February 18, 2007).10 Additionally, all eleven had prior experience in the private sector that involved working directly for North American transnational corporations, either in Costa Rica or in the United States (Galva 2005; cinde Web site, accessed February 18, 2007). For example, one staff member had worked for kpmg in Costa Rica; another had been an investment office with Scotiabank; and another had been a project engineer for Schrickel, Rollins, and Associates in Texas (Galva 2005; cinde Web site, accessed February 18, 2007). cinde’s CEO (now called managing director), Edna Camacho, who had a master’s degree in economics from the Ohio University, had somewhat less firsthand experience working with transnational corporations than cinde’s investment promotion officers, but she had an impressive re´sume´ of relevant business and government experience nonetheless: her former 10. cinde did not experience significant changes in its investment promotion personnel from 2005 to 2007.

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positions included stints as deputy minister of finance (1998–2001), vice president of the Bank of Costa Rica, and working as a consultant to usaid and the World Bank (cinde 2005; cinde Web site, accessed February 18, 2007).

Systematic, Proactive Approach to Learning In its proactive, systematic approach to learning about global business trends and prospective foreign investors, cinde was thorough and involved. cinde staff members learned as much as they could about likely sectors, subsectors, and specific companies to target from attending trade conferences, reading trade magazines, monitoring the Internet, and speaking with industry officials (Morice 2005). They studied targeted companies in great detail, learning as much as possible about them before they visited Costa Rica. They prepared answers to potential questions particular companies might be likely to ask and devised itineraries for site-selection teams, scheduling appointments with specific government officials that a given company would find relevant (Arias 1998; Bravo 1998; Egloff 2003, 2005; Mora 1998). Of course, cinde did this research on prospective investors even if no companies from that sector had invested in Costa Rica before; indeed, under these circumstances this proactive approach was especially important. To address needs and concerns of investors already in Costa Rica, and better deal with future investors from those same sectors, cinde officials made frequent visits to the companies and surveyed them annually, asking investors in different sectors to rate cinde’s performance in dealing with them and what cinde could do to improve Costa Rica’s investment climate in the future. For example, in 2006, 41 percent of investors who had been in Costa Rica for more than a year stated that they would like to facilitate the process of obtaining visas and work permits for their executives, and 20 percent stated that they would like faster installation of telephone and Internet services (cinde 2006b, 17). Knowing such information made it easier for cinde to meet the needs not only of current investors but prospective investors as well. It is important to emphasize the significance of this aspect of cinde’s transnational learning capacity. While a proactive, systematic approach to learning about global business trends and prospective foreign investors might seem to be something that any ipa’s investment promotion officials would be expected to do, in practice not all ipas did this. For example, the Secretaria de Cieˆ ncia, Tecnologia e Desenvolvimento Econoˆ mico (sctde),

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the ipa for the state of Sa˜ o Paulo, did not have such a proactive, systematic approach (Funaro 1999, 2005, 2006; Kapaz 2005), and although corfo did increasingly monitor broad industry trends, it did not conduct in-depth research on prospective foreign investors to anticipate any concerns or potential questions they might have during the site selection process (Castillo 2002; Gligo 2002, 2006a, 2006b; Hall 2004).

Transnational Strategic Network Because cinde was a technocratic institution, with capable and motivated staff working toward a common goal, its officials—given their international training and business experience—recognized the need to develop a transnational strategic network of individuals, universities, and foreign offices in order to learn about global business trends and prospective foreign investors. cinde’s transnational strategic network consisted not only of its foreign office in New York (as well as briefly in San Jose, California, in the late 1990s), but also its relationships with the trade associations in the United States, such as the American Electronics Association (aea) and the Greater Dallas Chamber of Commerce; with U.S.–based consulting firms, such as Deloitte and Touche, Ernst & Young, Price WaterhouseCoopers, kpmg, and Markowitz & McNaughton, Inc.; with Costa Rican universities, such as the Instituto Centroamericano de Administracio´n (incae); with international development agencies, such as usaid and the World Bank; and with Ireland’s ipa, the Industrial Development Authority (ida, now known as ida Ireland) (Egloff 2006). The transnational strategic network developed by cinde was instrumental to its ability to devise a new strategy for attracting foreign investment. For example, in the mid-1990s, cinde sought advice from Ireland’s ipa, the ida. cinde’s highly internationalized staff specifically requested assistance from the ida because they knew it was considered to be one of the most successful ipas in the world (cinde 1998). In response, the ida sent one of its staff members, Tony Shiels, to Costa Rica as a consultant, and he stayed for almost two years (Shiels 2004). The ida often sent staff on short-term consulting missions as a form of charity to developing nations and as a way to keep its personnel, most of whom had strong interest in foreign travel, fulfilled in their jobs and committed to working for the ida (Lovegrove 2004). In this case, because cinde wanted Shiels to stay on longer, usaid agreed to pay his salary and he thus technically became a consultant for usaid during this period (Shiels 2004). Following advice from Shiels, as well as from the World Bank’s Foreign

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Investment Advisory Service (fias), cinde’s directors realized that they should focus on promoting nontraditional fdi from specific firms in a few specifically targeted industries rather than from a wide range of industries (cinde 1998; Shiels 2004). Based on this advice cinde also established the practice of doing in-depth, systematic analysis of prospective foreign investors, in order to anticipate investors’ needs and concerns before the agency initiated contact with them. These methods for securing fdi came from cinde’s conscious, purposeful use of its transnational strategic network. Based on their own training and experience in international business, as well as advice from such consultants as Tony Shiels, cinde officials also recognized the importance of including the Instituto Centroamericano de Administracio´n (incae), Costa Rica’s premier business school, as part of cinde’s transnational strategic network (Shiels 2004; Egloff 2005). incae 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 and Porter himself 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; Ketelho¨hn and Porter 2003; Vogel 1998). Building on this recommendation, the World Bank’s fias, in a detailed study, recommended to cinde that it should target the electronics industry (Foreign Investment Advisory Service 1996).11 fias argued that the level of technical education in Costa Rica, and the number of electronics assembly plants already located in the ftzs there, made Costa Rica a suitable location for attracting a number of 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. With its strategy in place, cinde worked with its foreign office and U.S.–based trade associations and consulting firms to develop contracts and learn more about how to implement it its investment promotion efforts (Egloff 2006). Even after cinde succeeded in winning Intel’s investment, it continued to work with such organizations to further develop its contacts and refine its strategy, which it continued to adapt to changing trends over time. 11. Although this study was officially published in 1996, the World Bank began disseminating its conclusions to cinde officials some time before that.

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The Effectiveness of cinde’s (and the Government’s) Investment Promotion Strategy cinde’s transnational learning capacity helped the agency to learn. This is evident in the well-targeted investment promotion strategy, one highly responsive to the needs of prospective foreign investors, that cinde (and therefore, the Costa Rican government) developed. Furthermore, because of the high level of political security Costa Rica’s political environment provided its leaders, the government’s close collaboration with cinde—an ipa with a great degree of technocratic independence—continued across successive administrations from different political parties. Thus cinde’s (and therefore the government’s) investment promotion strategy excelled on every measure of effectiveness, as defined here: it was well targeted, it was highly responsive, and it was sustained over time.

Targeting and Responsiveness cinde’s strategy was clearly well targeted and responsive. As a result of its learning, cinde began to focus its efforts, as well as the efforts of the government, on specific industries and companies that would be most suitable for Costa Rica. Based on 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, made a point of cultivating contacts with a network of individuals, some of them expatriate Costa Ricans, working in the Silicon Valley area. Through them, cinde learned that Intel was looking for a Latin American site for a new assembly and test plant (atp). Costa Rica was not on the short list of countries Intel’s site-selection team planned to visit in 1996, which included only Brazil, Chile, and Mexico. When members of cinde’s staff heard about Intel’s plans, Egloff, with his years of international business experience, knew that cinde would have to act swiftly to have any chance of getting the deal. He and several cinde investment promotion officials made a quick visit to Intel’s headquarters in Santa Clara, California. Having researched Intel thoroughly and knowing to some extent the kinds of questions executives from such a company were likely to ask (demonstrating cinde’s responsiveness), they gave a very focused and effective presentation about the suitability of Costa Rica as a site for the plant.12 They were able to persuade Intel’s 12. In addition to highlighting other advantages for Intel’s investment in Costa Rica, the cinde officials informed the Intel executives about the incentives Costa Rica offered to companies located in its eight industrial parks with ftz status. Costa Rica’s incentives for

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management that Costa Rica should be on the short list and that the siteselection team should visit Costa Rica. Following specific advice from cinde contact Michael Porter as well as from the World Bank’s Foreign Investment Advisory Service (an agency at the World Bank that provides less-developed countries with advice on investment promotion), and based on their own international experience, cinde’s staff members knew that for a high technology company such as Intel, rapid, well-researched answers to questions were essential. To meet this need, Egloff assigned three cinde staff members to work on the Intel project full time to research potential questions in advance (Arias 1998; Bravo 1998; Egloff 2003, 2005; Mora 1998). These staff members also organized visits for the Intel executives with key government officials. Although anticipating Intel’s needs and providing quick, thorough responses might seem an obvious thing to do, other agencies did not fully appreciate the importance of speed to high technology firms. Driven as they were by the fast pace of change in their industry, executives in these firms needed answers quickly and were wary of dealing with governments that seemed to have difficulty on this score (Maxwell 1999; Telford 1998). Many other governments and ipas, lacking cinde’s responsiveness, did not understand this. For example, corfo was shocked when Intel wanted answers to specific questions within one week (Castillo 2002). Intel entered into discussions with the Sa˜ o Paulo Secretaria de Cieˆ ncia, Tecnologia, a Desenvolvimento Econoˆ mico (sctde) but was unimpressed with what seemed to be the staff ’s lackadaisical attitude toward winning Intel’s investment (Telford 1998). And when the Intel executives visited with the vice president of Brazil, they were astonished when he told them that he had not heard of Intel. Clearly sctde had not briefed the vice president. This lack of preparedness indicated to them that they were likely to have difficulty dealing with the Brazilian government (Perlman 1998; Telford 1998). In another site selection negotiation, Dell Computer Corporation withdrew from negotiations with Companhia de Desenvolvimento Industrial (codin), Rio de Janeiro’s ipa, in part because of codin’s lack of understanding of the way Dell operated (see Chapter 2). Accustomed to long, drawn-out negotiations with automobile firms, the executive director proposed some points in the negotiations that he knew Dell would not accept. He assumed that the company would come back with counterproposals. companies in the zonas francas were considerably more generous than the incentives Brazil, Chile, or Mexico offered.

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Instead, to the executive director’s chagrin, Dell’s executives, in a hurry to make decisions quickly and with other options available, ended the negotiations with codin immediately (Maxwell 1999, 2000, 2003; Weber 2000). These ipas might have been able to overcome this lack of responsiveness by developing a transnational learning capacity. For example, they could have developed one component of transnational learning capacity, a transnational strategic network, by (among other things) hiring international consulting firms to brief them on the needs and concerns of Intel and Dell. Ultimately, corfo did follow this approach (see Chapter 3). That agency’s transnational learning capacity—and the effectiveness of its investment promotion strategy—increased as result. Yet the other agencies, such as Sa˜ o Paulo’s sctde and Rio de Janeiro’s codin did not do this (see Chapter 2). cinde, in contrast, with its high level of transnational learning capacity, developed a highly effective investment promotion strategy (highly responsive, well targeted, and sustained over time), which contributed greatly to its ability to attract nontraditional fdi. The systematic, proactive background research that cinde’s staff conducted before the Intel team’s visit facilitated the agency’s understanding of Intel’s special needs and concerns. Having spoken with individuals familiar with the company’s site selection process, cinde’s staff knew that the Intel executives would speak with multiple sources to confirm any information they received. Therefore, cinde made sure that government officials the Intel team met were thoroughly briefed so that they would present unified, clear, and coherent responses (Egloff 2003, 2004, 2005; Spar 1998). During the team’s visit, cinde’s staff also set up some appointments with executives from other foreign firms that had invested in Costa Rica and then purposely stayed out of those meetings so that the Intel team could ask questions freely (Mora 1998). This advance preparation and attention to Intel’s specific needs made a significant impression on the Intel site-selection team. Given the pressure they were under to make their decision quickly, they appreciated working with an agency that did so much to facilitate their decision-making process. Additionally, they realized that if any problems or issues arose with the government after the investment had been made, cinde, whose staff understood their needs so well, could help mediate any discussions. This contributed to a sense of confidence about investing in Costa Rica (Perlman 1998; Telford 1998, 2006). The Intel executives were especially impressed with Costa Rica’s transparent and predictable rules. The Intel site-selection team had made clear

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to officials at cinde that they did not like ‘‘special deals.’’ They wanted tax incentives and other favorable policies where they could find them—but only if these policies were available to all other firms that met the same criteria as Intel. They most definitely did not want Intel to be given special benefits or rules to be bent or broken just to convince Intel to invest in a particular country. There were numerous reasons for this policy. One was simply public relations. Intel did not wish to antagonize other firms that might feel left out if the government provided Intel with extraordinary benefits (Telford 1998, 2006). Also important, Intel did not want to make special arrangements with one president or governor only to find that everything changed when a new administration came to office. Operating in a business environment with stable, predictable, transparent rules of the game would help Intel to avoid this problem (Perlman 1998). Officials at cinde paid careful attention to Intel’s concern and emphasized that they would not be offering any special deals of this type (Mora 1998). They made sure that Costa Rican government officials understood this as well. Therefore, even when the government changed some policies in response to Intel’s requests, government officials were careful to explain that such changes would benefit all firms, not just Intel, and that the benefits would accrue to the country as a whole. cinde’s understanding of this issue, and its ability to raise the awareness of government officials on this point, further demonstrates its high level of responsiveness and how the government was able to ‘‘graft on’’ this responsiveness when it dealt with Intel directly. The response of cinde officials to Intel’s doubts that Costa Rica had enough personnel with the needed training is a good example of cinde’s ability to raise government officials’ sensitivity to Intel’s concerns. Although Costa Rica appeared to have a sufficient number of engineers, it lacked midlevel technicians, crucial for staffing the assembly and testing plant. The engineers needed to keep the plant operating might number in the several hundreds, but the need for midlevel technicians would be in the thousands (Perlman 1998; Telford 1998). Finding enough people with the necessary skills was clearly going to be a problem in Costa Rica. Understanding the seriousness of Intel’s concerns, cinde helped the government form a team of cinde staff, Intel human resources personnel, and Costa Rican government officials with expertise in education who studied ways to improve the technical qualifications of Costa Rica’s workforce. With additional feedback from professors from the Instituto Tecno´logico de Costa Rica (Costa Rican Technological Institute, or itcr) and

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teachers from Costa Rican technical high schools who were sent to visit Intel’s plants in the United States, the team made specific recommendations, which the government adopted. These were that the itcr create a one-year certificate program for high school graduates to qualify them as technicians, that the itcr and Intel create an additional associate degree program for well-prepared graduates of technical high schools and graduates of the certificate program to get more advanced training, and that the itcr provide additional training in English for newly hired Costa Rican technicians and in Spanish for expatriates (Spar 1998, 19–20). Having been made aware by cinde about the need to avoid special deals, however, the Costa Rican government made sure that the agreement to modify the itcr’s curriculum did not fall into this category. Although the new curriculum would be created in direct response to Intel’s concerns, adapting the itcr’s curriculum to Intel’s rigorous standards would make the school’s graduates better trained overall and thus better equipped to work for any high technology firm. Following cinde’s guidance, the government made clear that the modifications were not just for Intel—they were strengthening the itcr and the technical skills of Costa Rica’s workforce overall (Mora 1998; Telford 1998; Figueres 2006). Thus cinde’s understanding of Intel’s concerns about special deals was crucial to the way the government handled this issue. The government came up with a similar solution for a problem with the airport. Intel’s main concern was that the airport did not offer sufficient flights. This presented a very serious problem because Intel would need to export all of its chips by air. Furthermore, the demands of justin-time manufacturing and concerns about losing valuable shipments of microprocessors, worth ‘‘more than their weight in gold’’ (as Intel executives stated repeatedly), meant that the company wanted more frequent flights in and out of the country and to more locations (Perlman 1998; Telford 1998). Another concern was that insurance firms would insure cargo only up to a certain value; larger shipments of chips would exceed that amount (Ketelho¨hn and Porter 2003; Telford 2006). After discussing the problem at length with Intel’s executives, Costa Rica’s Ministry of Transportation and Public Works was willing to be flexible in creating an ‘‘open skies’’ program. It began issuing more licenses and encouraging other airlines to use the national airport (Spar 1998). Again, cinde and the Costa Rican government officials emphasized that this was not a special concession for Intel; it also benefited other companies and other industries, especially the tourism industry (Telford 1998). The government provided still another solution along these lines with

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its approach to Intel’s concerns about the cost of electrical power. Because Costa Rica was not accustomed to industrial projects of the size that Intel proposed, it did not have discounted rates for heavy industrial users. The rate for industrial users varied between $0.07 and $0.09 per kilowatthour—much more expensive, for example, than Mexico’s rate of about $0.025 per kilowatt-hour (Arias 1998; Ketelho¨hn and Porter 2003). After discussing this issue, the Instituto Costarricense de la Electricidad (ice), a state-owned company, agreed to create a new rate for especially heavy users of electricity: $0.05 per kilowatt-hour. This rate would apply to any company using more than 12 megawatts of electricity (Spar 1998). Although this was more than any other company in the country used at the time, it was not a special concession to Intel because any large industrial user that chose to invest in Costa Rica could also take advantage of this heavy-use rate (Arias 1998). With its new investment promotion strategy, the government hoped to attract many more heavy users in the future. One area that the government did not need to modify was its policies on labor unions. Labor unions were a major concern for Intel. It did not want unions in its plants anywhere in the world, even if they were weak or labor unions in name only. In large part this had to do with the company’s complex, highly technical production processes, which simply could not function properly with work stoppages or other kinds of union-related disruptions. These kinds of issues appeared to present few problems for Intel in Costa Rica. In fact, only about 7 percent of Costa Rica’s private sector workers belonged to labor unions (Wilson 1998, 70). Furthermore, in the 1950s the Costa Rican government had created company-based solidarista associations as an alternative to more confrontational, industry-wide unions. Workers who belonged to these solidarista associations received numerous benefits, including low-interest loans and participation in special savings plans with contributions made by employers as well as employees (Wilson 1998, 69). Solidarista associations were quite different from labor unions in that they allowed management as well as workers to participate, and they had no negotiating power of their own. Some believed that this system contributed greatly to ‘‘labor peace’’ in the Costa Rican workplace (cinde Web site, accessed November 18, 2004). More than 90 percent of multinational corporations in Costa Rica, including Firestone, McDonald’s, and Colgate-Palmolive, had solidarista associations (Wilson 1998, 69–70). Created during the 1953–58 social democratic, left-of-center pln government of President Jose´ (‘‘Pepe´’’) Figueres Ferrer, the solidarista organizations were an alternative to traditional labor unions (Wilson 1998,

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69). Clearly, while these organizations did provide benefits to workers and did involve significant costs for foreign firms (Figueres 2006), their primary purpose was to reduce labor strife in companies. Since this alternative was available, labor unions would not be a major concern for Intel in Costa Rica. What most impressed the Intel team, however, was the response of one government official who told them—consistent with cinde’s advice that government officials should make clear they would not offer any special deals—that he could promise nothing in response to a specific request: to change the tax incentives Costa Rica offered. Costa Rica already offered generous incentives to companies located in its eight industrial parks with ftz status. As noted earlier, companies operating in an ftz not only did not pay duties on imported parts or components, but they were also completely exempt from income tax for eight years and 50 percent exempt for four years after that. Intel wanted even more than this and the Costa Rican government was willing to negotiate. After all, other transnational corporations operating in the ftzs, such as Baxter and Conair, had expressed concern about paying the higher tax rate at the end of their eight-year exemption, even if they planned to reinvest in the country. Jose´ Rossi, Costa Rica’s minister of foreign trade, agreed to lobby the Costa Rican legislature for a change in the legislation. The new law would give a company a 75 percent exemption after eight years, provided that it reinvested more than 25 percent of its initial investment after the fourth year. Again, this would benefit not just Intel but also other transnational corporations. Rossi emphasized to the Intel executives, however, that although he would do his best to push for the new policy to become law, he could promise no more than that (Rossi 1998). Although they were definitely interested in the outcome, Rossi’s emphatic statement that he could not promise Intel anything on this point—that he could only present the proposal to the legislature and hope that it would be approved—pleased the site-selection team (Rossi 1998; Telford 1998). This meant that the rule of law was strong in Costa Rica and that the policies, once established, could not change easily. Unlike other kinds of regimes in which the rules could change suddenly on a leader’s whim, Costa Rica’s solidly established, well-functioning democracy offered stability in the policies under which Intel would be operating. Whether the tax change was enacted or not, this stability in the rules of the game was enormously important to a transnational corporation operating in a dynamic, constantly changing industry, with worldwide operations. Intel simply did not have the time or resources to monitor, in all of

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its offices and plants all over the world, which politician had promised the company what under which circumstances, or constantly to maintain old alliances with political players and to establish new ones every time there was an election or change of government in every country where it operated. Therefore, Rossi’s approach, far from annoying the Intel executives because he could not promise them what they wanted, reassured the siteselection team enormously.13

Sustaining the Investment Promotion Strategy After Intel announced its decision to invest in Costa Rica in 1996, many other high technology firms began to invest in Costa Rica. Because of its high profile and prestige, Intel served as an anchor investment that put Costa Rica on the map as a potentially attractive site for other high technology firms. A 1999 survey of possible investors indicated that 72 percent were more aware of Costa Rica as a prospective investment location after Intel decided to locate its plant there (Rodrı´guez-Clare 2001, 319). Although cinde modified its strategy over time to adapt to changing market forces, consecutive administrations from different political parties continued to collaborate with cinde and delegate authority over investment promotion strategy to the agency. Thus, even as cinde’s strategy evolved, its effort to promote nontraditional fdi was sustained over time. Another measure of the effectiveness of cinde’s (and thus the government’s) investment promotion effort, this helps explain how Costa Rica continued to attract high levels of nontraditional fdi. While cinde continued to focus on electronics firms, its internationally experienced staff, attuned to global trends and guided by United States– based consulting firms (an important part of cinde’s transnational strategic network) (Egloff 2006), also recognized that Costa Rica had potential to attract fdi in the rapidly growing nontraditional areas of medical devices and services, specifically shared services, software development centers, and call centers. ‘‘Shared services,’’ an increasingly important phenomenon among large companies, 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, and so on, into one location. cinde’s promotion of fdi in this sector reflected its sophisticated understanding of global business trends 13. In any case, the tax reduction Intel sought, working its way through Costa Rica’s slow but democratic legislative process, finally became law in 1998, long after Intel had made its decision.

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as well as its awareness that Costa Rica would be well suited as a location for this sort of nontraditional fdi. As a result of cinde’s new focus, it specifically promoted clusters of investment in electronics, medical devices, and services (shared services, software development centers, and call centers). By 2007, it had attracted a number of firms in these sectors (see Table 1). The Costa Rican government’s successful collaboration with cinde ´ ngel continued beyond the Figueres administration: President Miguel A Rodrı´guez (1998–2002) from the opposition pusc party; President Abel ´ scar Arias Pacheco (2002–6), also from pusc; and the current president, O (2006–10) from the pln, have all continued this collaboration.

Contrasting Cases: Intel’s Experiences in Brazil, Chile, and Mexico The effectiveness of cinde is highlighted when compared with the experiences of the Intel executives in the other countries on their short list. While these cases, discussed below, show that other factors—for example, labor issues, infrastructure, proximity to the United States, and tax incentives—were important in Intel’s site selection decision, they also reveal the significant role that an effective (or ineffective) investment promotion strategy could play. In Brazil, Mexico, and Chile, Intel’s site-selection team encountered ipas that were far less prepared than cinde to deal with prospective foreign investors, particularly those from nontraditional sectors. Key Intel executives acknowledged the importance of the public sector’s role in influencing the site selection decision (Perlman 1998; Telford, 1998, 2005, 2006; Pawlak 2006), but they also stated that its importance was difficult to quantify and therefore was not assigned a specific weight in the overall decision (Telford 2006). Of course, one can argue that the effectiveness of cinde’s investment promotion effort played a crucial role from the outset: without cinde’s transnational learning capacity, which alerted it to the fact that Intel was considering locating a major manufacturing plant in Latin America, it would not have contacted the Intel siteselection team in the first place, and Costa Rica would not have been considered as a possible location (Perlman 1998; Telford 1998, 2005). Beyond that, Ted Telford made clear that an ipa’s approach could definitely tilt the decision one way or the other (Telford 2005). Telford and other members of the site-selection team repeatedly cited cinde’s key role in influencing the site selection decision, contrasting their positive experience working

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Table 1 Established companies in electronics, medical devices, and services, Costa Rica Electronics

Medical devices

Semiconductors/assembly and test • Intel Supporting companies • AEC Electronics • Capris Engineering • DEK • Ibiden • KES Systems • NTK • Pycon • Samsung Electromechanical • Shinko Telecommunication components • L3 Communications • Merrimac Industries • Panduit • Remec • Sawtek • Smiths Interconnect • Suttle Electronic components • Current Controls • Hitrı´nicos CML • itT Industries • Magne´ticos Toroid • Marysol Technologies • Pharos • Trimpot/Bourns

Original equipment manufacturers (OEMs) • Allergan • Amoena • Arthrocare • Baxter Healthcare • Boston Scientific • Cytyc Surgical Products • De Royal • Horizons Intl. • Hospira • Koros USA • Sabila Industrial Contract manufacturers • Atek Medical • MedTech • Precision Concepts Suppliers • Advanced Thermoforming • Cook Spring • IPM • Point Technologies • PPC Ind. • Recoms • Specialty Coating System • WestStar Medical Dental laboratory • Smith Sterling

Consumer and industrial electronics • Atlas Ele´trica • Conair • Costa Vista Trade • Panasonic • Saco International • Vitec/CPP • Xeltron

Software • Avionyx • Cypress Creek • Fiserv • Ridge Run • Round Box Media • Schematic • Simple Software Solution • Slim Soft • Via Information Tools Contact center • Alienware • Amadeus • Fujitsu • ict Group • Language Line • Omnex • Pacific Interpreters • People Support • Qualfon • Stream • SYKES • United Collections Bureau • UPS Supply Chain • Van Ru • Western Union Shared service • Baxter Americas • British American Tobacco SSC • Chiquita Brands GBS • Dole Shared Services • Intel SS • Procter & Gamble GBS Back office • Access Personnel • Amba Research • Apl • BPO Internacional • Dakota Imaging • Hewlett Packard • IBM • LL Bean • Seaton Centra • Trax Technologies

Electrical assembly • Bticino • Eaton • Phelps Dodge • Schneider • Sylvania

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Table 1 (continued) Electronics

Medical devices

PCB engineer design and repair • CCMM • KES Systems • Photocircuits • Teradyne

Services Design, architecture, and construction • Agilis Engineering • Aling Technologies • Gensler Architecture • Holland Roofing • MTW Architecture • Pacific West • Hotocircuits • Rehkemper & Sons

Electronic contract manufacturing • Aetec • Camtronics • Irazu´ Electronics • Tico Electronics Supporting industries • Metal-stamped and precision-machined parts and assemblies, molds, tools and dies, plating • AKA Precision • Daniels Manufacturing • FEMA/Preinsa • Motrosa • Oberg Industries • Olympic Machining • Prolex TechShop • R&R Precision • Ryan Group Plastic moulded parts and components • Electroplast • Delfiplast • Pla´sticos Modernos Source: cinde.

with cinde with their relatively negative experiences with the ipas in the other countries on Intel’s short list (Perlman 1998; Telford 1998, 2005, 2006; Pawlak 2006). What happened during the site selection process demonstrates the effectiveness of cinde’s investment promotion strategy when compared to those of the other ipas; thus some discussion of Intel’s experiences in these other countries is instructive. In this section I will consider each country in turn. After examining the ‘‘other factors’’ that Intel considered,

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related to the nature of the country’s business environment (quality of the infrastructure, qualifications of the workforce, etc.), I will analyze each ipa with regard to the variables that determine an ipa’s level of effectiveness: political security, technocratic independence, and transnational learning capacity. It is beyond the scope of this book to determine the exact causal weight of the ipa’s role in each case; the Intel executives themselves were unable to do this. In this section, however, I will demonstrate that the different approaches the ipas used did in fact exert a significant influence on the site-selection team’s decision.

Brazil The site-selection team’s experience in Brazil was in marked contrast to what happened in Costa Rica. Although Brazil had positive characteristics—some tax incentives, good infrastructure, and a talented labor pool— other concerns, particularly the government’s lack of understanding of Intel’s needs, compared unfavorably to what the Intel executives had encountered in Costa Rica and far outweighed Brazil’s positive attributes in the team’s overall assessment. Brazil’s size alone was an enormous contrast: at that time, Brazil’s population was more than 170 million people in contrast to Costa Rica’s relatively small 3.5 million. Certainly Brazil did have a huge and very attractive domestic market. But for this particular project, Intel had no interest in the domestic market of the country where its plant would be located. One hundred percent of the product manufactured in the plant would be exported. Whereas other companies might be lured to Brazil by the size of the market alone, Intel could consider countries as markedly different in this regard as Costa Rica and Brazil. Other characteristics were more important for this decision. A contrast with Costa Rica that was potentially more important was that unlike Costa Rica’s simple, unitary political system, where power was centered in the national legislature and the president, Brazil offered another layer of complexity: it had a federal system. This meant that Intel could pick and choose among Brazil’s twenty-six states for just the right investment deal. States and municipalities had some control over taxation policy and could offer individual incentives in order to lure investment. This practice had grown to such an extent that in Brazil it had come to be known as the guerra fiscal or ‘‘taxation war.’’ Some states had driven themselves to the point of bankruptcy in their efforts to compete with other

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states in offering the most generous exemptions from the state valueadded tax, the icms,14 as well as government loans and other incentives. At the federal level, Brazil provided a tax incentive specifically directed toward the computer industry through the Processo Produtivo Ba´sico (ppb), or Basic Productive Process law. In order to receive this incentive (which included a reduction of up to 50 percent of corporate income tax as well as reductions in some other taxes), companies had to invest 5 percent of total revenue in research and development. At least 2 percent of this had to be invested in universities or other government-approved institutions; the rest could be invested internally (Bastos 1998, 15). Nevertheless, despite these state federal incentives, Brazil offered no general exemption from corporate income tax—and it had a high rate of taxation. Moreover, the fiscal incentives at the state level turned out to be not very relevant. The site-selection team had already decided that the best location for a plant would be in the state of Sa˜ o Paulo, where the governor, Mario Covas, explicitly rejected offering any additional tax incentives.15 In any case, the icms tax itself would not apply in Intel’s situation since this tax was not levied on exported products (American Chamber of Commerce 1999, 17). Covas refused to offer incentives because Sa˜ o Paulo did not need to do much to lure investment. During the Plano Real period (1994–99), when Brazil’s economy finally became stable after a long period of volatility (and before the massive devaluation in 1999), billions of dollars of foreign investment flowed into Brazil every year. The lion’s share of this investment went to Sa˜ o Paulo, the most heavily populated and economically developed state in the country. What intrigued Intel about Sa˜ o Paulo was that the state had already succeeded in attracting numerous high technology firms. In fact, within a couple hours’ drive of the capital, the megacity of Sa˜ o Paulo (population: 16 million people), were the much smaller cities of Sa˜ o Jose´ dos Campos and Campinas. In these cities, hundreds of high technology firms had already established themselves. Sa˜ o Jose´ dos Campos was the home of Empresa Brasileira de Aerona´utica (embraer) and many other high technology firms. Campinas, of particular interest to Intel, had managed to attract IBM, Compaq, Hewlett Packard, DEC, and Texas Instruments, to name 14. icms stands for Imposto sobre as operac¸ o˜ es relativas a Circulac¸ a˜ o de Mercadorias e sobre a prestac¸ a˜ o de Servic¸ os de transporte intermunicipal e de comunicac¸ a˜ o. 15. Although Sa˜ o Paulo did allow an exception for the computer industry by reducing its relatively high icms from 18 percent to 12 percent for computer products only, this was still a high rate. (See Bastos 1998, 15.)

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just a few. Significantly, while Sa˜ o Paulo state did not offer much in the way of special tax incentives, Campinas’s municipal government did provide them. Specifically, it granted exemption from city property and service taxes for any high technology companies that established manufacturing plants in either of two industrial parks in the city, both specifically oriented toward high technology firms (Prefeitura Municipal de Campinas 1998). Clearly, Brazil had a lot to offer. In terms of adequate numbers of technical personnel, there was no question that the numbers in Campinas (home of the famed technological university, the Universidade Estadual de Campinas, or unicamp) would be far superior to what Intel could find in Costa Rica. Infrastructure was more than adequate, electrical power was readily available at reasonable cost, and the airports were already capable of meeting Intel’s needs. Other issues worried Intel’s site-selection team. Security was of some concern; according to some reports, hijacking of trucks in the Sa˜ o Paulo area was on the rise (Telford 1998). Another concern was labor unions, which, although not as powerful as they were in some Latin American countries, could be more militant than those in Costa Rica. While workers’ base wages were relatively low, overall labor costs in Brazil tended to be higher than in other Latin American countries because mandatory benefits for full-time employees, such as paid vacations, lengthy maternity (also paternity!) leaves, and social security taxes, added 50–80 percent to the total cost (Economist Intelligence Unit 1999). The operational costs may have been the biggest problem that the siteselection team could quantify, but the government also had a negative, though less quantifiable, impact. In contrast to cinde’s highly responsive approach, Brazilian government officials seemed indifferent to Intel’s concerns. The impression Telford and others on the site-selection team had was that foreign firms were so eager to get into Brazil to get access to its huge internal market, that state and national government officials did not need to address the special concerns of individual corporations—even the concerns of an industry giant like Intel (Perlman 1998; Telford 2005). This certainly appeared to be the case with representatives from the national government as well as from the key Sa˜ o Paulo agency involved in negotiating with Intel, the Secretaria de Cieˆ ncia, Tecnologia, e Desenvolvimento Econoˆ mico (sctde), which, in addition to promoting science and technology, also served as the state’s ipa for high technology industries. In fact, sctde was very interested in attracting Intel’s investment. Years later sctde officials involved in the negotiations still expressed amazement and frustration that the state of Sa˜ o Paulo ‘‘lost’’ Intel to Costa Rica

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(Funaro 1998, 2005, 2006; Kapaz 2005). The problem was that sctde lacked transnational learning capacity. The context is important. At the time of the Intel team’s 1996 visit to Sa˜ o Paulo, sctde, with the support of reform-oriented Governor Mario Covas (1995–98; 1999–2001), had only recently developed more technocratic independence than it possessed under previous governors. Furthermore, Sa˜ o Paulo’s previous two governors had succeeded in almost bankrupting the state’s treasury, which had a severe impact on sctde’s budget (Montero 2002, 186). Partly for these reasons and partly because the flood of fdi into Sa˜ o Paulo in the mid-1990s meant that the agency had not really been compelled to develop its transnational learning capacity, sctde lacked a highly internationalized staff; a proactive, systematic approach to researching prospective investors; and an extensive transnational strategic network. Thus sctde did not possess the characteristics that would enable it to develop a highly responsive investment promotion strategy. After Brazil’s transition to democracy in the mid-1980s, Sa˜ o Paulo’s governors had been primarily concerned with their own political security. Indeed, the two governors immediately prior to Mario Covas, Orestes Que´rcia (1987–90) and Luiz Antoˆ nio Fleury Filho (1991–94), were very politically insecure and used the state development bank, banespa, as a source of patronage, financing massive public works projects to benefit political supporters as a means to shore up their political standing. Because of this mismanagement, by the time Covas took office in 1995, the state was more than $20 billion in debt (Gall and Mendes 1995). Such outcomes are consistent with my overall argument: during this politically precarious time, with Brazil’s new democracy still fragile and the economy experiencing severe hyperinflation, these governors operated in a context of very low political party discipline, unstable coalitions, and a high level of partisan strife. During Que´rcia’s time in office, the Sa˜ o Paulo state legislature was highly fragmented politically, with seven political parties; Que´rcia’s own party, the Partido do Movimento Democra´tico Brasileiro (pmdb), held only thirty-seven of the eighty-four seats. During Fleury’s time in office, the state legislature was even more highly fragmented, with thirteen political parties, and his coalition of the pmdb, Partido da Frente Liberal (pfl), and Partido Liberal (pl) parties held only twenty-nine of the eighty-four seats (Assemble´ia Legislativa do Estado de Sa˜ o Paulo Web site; Samuels 2003, 94).16 Under these circumstances, it is 16. Brazil’s political system was notorious for its undisciplined political parties, unstable coalitions, and high level of partisan conflict, and the Legislative Assembly of Sa˜ o Paulo was no different. Assemble´ia Legislativa do Estado de Sa˜ o Paulo Web site; Samuels 2003).

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not surprising that patrimonialism was rampant, few state agencies possessed technocratic independence (Montero 2002, 183–84), and sctde itself was staffed by political appointees with minimal private sector experience (Funaro 2005, 2006; Kapaz 2005). Covas’s election ushered in a new era of reform. At first glance, his ability to make such reforms was surprising. In many respects, the political situation when Covas took office in 1995 and during his time in office did not appear to provide much more political security for the new governor than his predecessors had possessed. Covas’s first term as governor was from 1995 to 1999; his second, from 2000 to 2001, was cut short by his death from cancer. During this period, the state legislature was even more highly fragmented than under the previous governors. Of fourteen political parties, Covas’s own Partido Social da Democracia Brasileira (psdb) party held only seventeen seats out of what was now a total of ninety-four seats, or just over 18 percent. Political coalitions remained unstable; indeed, the psdb’s coalition with the pfl, which itself had only five seats in the legislature, dissolved after just one year. Yet other factors favored Covas’s political situation greatly, providing him with the political security he needed to make significant reforms. First of all, the severity of the state’s fiscal crisis created support for change. By 1995, it was widely known that the actions of the two previous governors had left the state virtually bankrupt (Gall and Mendes 1995; Montero 2002, 186). In this context, the level of partisan conflict over the need for reform diminished, creating support for a reform effort that would otherwise have been impossible. Secondly, Covas himself had enormous political prestige and influence in the state of Sa˜ o Paulo. A highly regarded former mayor of the city of Sa˜ o Paulo (the state capital) with its enormous population, and later a leader in the Constitutent Assembly that wrote Brazil’s new constitution after the transition to democracy, a cofounder in 1988 (with then-Senator Fernando Henrique Cardoso) of the psdb party, and a representative and senator in the National Congress, Covas was well known and well respected in the state. Thus even though the psdb had not won a majority in the elections for the state legislature, Covas himself personally won a strong mandate in the gubernatorial election, with a clear margin of victory over his opponent of 56 percent to 43 percent (Tribunal Superior Eleitoral do Brasil Web site). It helped also that Covas was a close friend and strong ally of President Cardoso (president of Brazil 1995–98, 1999–2002), who in 1995 was still at the height of his popularity as the creator of the Plano Real, which had brought an end to Brazil’s decades-long economic insta-

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bility and hyperinflation. Thus while the other indicators for political security were not favorable, Covas’s personal clout, as shown by the large margin of victory he received in the gubernatorial election, gave him sufficient political security to make important reforms. Determined to solve the state’s fiscal crisis, Covas implemented a widescale Programa Estadual de Desestatizac¸ a˜ o (ped) designed to privatize state-owned enterprises, give private concessions, and generally remove the state from direct involvement in the areas of public transportation, electrical energy, natural gas, and water treatment. He also fired more than 100,000 state employees and transferred banespa to the federal government, which privatized it. While not popular, these moves were successful in averting the crisis Sa˜ o Paulo faced. (Significantly, despite implementing these tough reforms, Covas won reelection to a second term.) Covas’s reformist approach extended to sctde. In 1995 Covas hired Emerson Kapaz, a well-known business leader, to become head of sctde and gave him the independence he needed to make the agency more capable and efficient (Kapaz 2005). Nevertheless, by the time Intel’s site-selection team visited Sa˜ o Paulo in 1996, sctde, having only recently achieved technocratic independence, facing a severe budget crunch because of the state’s fiscal crisis, and—given the billions of dollars in fdi flowing into Sa˜ o Paulo at that time—not highly concerned about its abilities to persuade prospective foreign investors to come to Sa˜ o Paulo, still lacked all of the indicators for transnational learning capacity. First, sctde lacked a highly internationalized staff. During Covas’s time as governor, the investment promotion staff was relatively well qualified compared to those who had worked in this capacity before. For the first time those working in this area all had prior business experience, and all had university degrees in engineering, economics, or business (Funaro 2005, 2006; Kapaz 2005). But none of the investment promotion staff had studied abroad or had prior international work experience. Emerson Kapaz himself, a highly capable individual who went on to become a member of Brazil’s national congress and future candidate for governor, had impressive credentials and extensive experience in the private sector (he had an MBA from Fundac¸ a˜ o Getu´lio Vargas, a well-known Brazilian institution, had been CEO of his family’s large toy manufacturing firm, and had been head of an important industry association). But Kapaz had no experience studying or working overseas or even working for foreignbased multinational firms in Brazil. Kapaz’s highly capable chief of staff, Jorge Funaro, who was closely involved in the negotiations with Intel, also lacked any prior experience with international business (Funaro 2005,

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2006).17 Second, sctde lacked a proactive, systematic approach to researching prospective foreign investors; instead, it passively relied on the local office of the U.S. Foreign Commercial Service or the AmericanBrazilian Chamber of Commerce in Sa˜ o Paulo to send along any executives interested in investing in Sa˜ o Paulo (Funaro 2005, 2006). Finally, with regard to the third indicator of transnational learning capacity, sctde did not possess a transnational strategic network of offices in foreign countries. All of this together helps explain the Intel team’s relatively negative experience with sctde. Lacking the transnational learning capacity that cinde possessed, sctde was far less equipped to deal with Intel. As already noted, sctde did not brief the vice president of Brazil prior to his meeting with the Intel team. Indeed, the site selection’s team visit with the vice president of Brazil was a particularly revealing illustration of the Brazilian government’s overall approach. The vice president came out of his office, greeted each member of the team, and said, ‘‘Intel . . . now, what is it your company does again?’’ (Telford 1998). cinde would never have been caught so unprepared or at least would have been sure to brief key government officials. Although the exact weight of sctde’s role in influencing the site-selection team’s decision is difficult to quantify, and other factors certainly played a role in Intel’s ultimate decision to invest in Costa Rica rather than Sa˜ o Paulo, the lack of responsiveness clearly had a strongly negative impact on the team’s impressions of Sa˜ o Paulo as a location for Intel’s manufacturing plant (Perlman 1998; Telford 1998, 2005, 2006; Pawlak 2006). After their meetings with sctde and the vice president, the siteselection team quickly scratched Sa˜ o Paulo from their list.

Chile In Chile, the Intel team found a politically and economically stable business environment but one that did not necessarily meet its criteria. Technically trained workers were not that numerous, salaries for engineers were relatively high, and Chile offered no tax incentives for foreign firms to invest in the country, unless they were willing to locate their plants in remote regions. The team encountered four main problems: distance, labor costs, capital controls, and lack of government incentives. The larger problem, of course, was that Intel’s investment was not really appropriate 17. After his time at sctde, Funaro took a job with Flextronics, a United States–based transnational electronics manufacturer (Funaro 2005).

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for Chile’s business environment. Intel’s executives learned this on their first visit to the country and quickly rejected Chile as unsuitable. The reaction in Chile was different (see Chapter 3). Because of the high degree of political security in Chile’s stable post-Pinochet democracy, successive presidents delegated a high level of technocratic independence to corfo. Nevertheless, in the mid-1990s, Chile’s exports of primary products were booming, and the need to diversify into higher value-added industries was not pressing. Thus, corfo still lacked transnational learning capacity related to the promotion of nontraditional fdi. As a result, corfo officials did not realize at first that Intel’s plant was not appropriate for Chile’s business environment. When Intel passed over Chile for Costa Rica, these officials, devastated by having ‘‘lost’’ this investment and realizing that Chile’s economy needed to diversify beyond primary products, launched a determined but unfocused effort to attract high technology fdi, including manufacturing plants similar to the one they had lost. With the help of a growing transnational strategic network, corfo gradually devised a more well-defined investment promotion strategy that was far more appropriate for Chile’s business environment. Chile was indeed a poor fit for Intel’s plant. With regard to distance, the site-selection team was struck by the travel time from the United States to Santiago, Chile (almost twelve hours, given the scarcity of direct flights). Aware of the number of expatriate executives who would have to be traveling to the plant, at least in the start-up phase, the team saw that this could present a problem. Costa Rica, in contrast, was only a three-hour flight from Texas or California. Although labor unions were not really an issue for Chile, labor costs for skilled workers were high. A legacy of the dictatorship of General Augusto Pinochet (1973–89), Chile’s labor code inhibited the development of powerful, confrontational labor unions (Moffett 1997, A-10). Partly as a result of these rules, labor costs for unskilled workers were low in Chile, even though the country had one of the highest gdps per capita in all of Latin America. But salaries for technically trained personnel, which Intel needed most, were relatively high in the mid-1990s compared to other countries in Latin America. The starting salary for an engineer in Chile was between $30,000 and $40,000—not very different from what it would be in the United States at that time. In the mid-1990s, Intel could hire engineers in Costa Rica or Mexico for almost half that amount (Telford 1998). The site selection was also concerned about Chile’s capital controls. At the time the Intel executives visited in 1996, Chile’s Central Bank had a policy designed to control capital flight during times of market volatility.

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This policy stated that for portfolio capital investments (not for direct foreign investments, such as what Intel planned), investors would be restricted from withdrawing their investment from Chile for one full year. In addition, investors would be required to deposit an amount, called the encaje, equivalent to 30 percent of their overall investment in a special account at Chile’s Central Bank during that time period.18 This policy was a legacy of an earlier era when capital controls were common throughout Latin America. Most Latin American countries had already eliminated this kind of policy, considering it to be counterproductive. Even though Intel presumably would not be affected, since the proposed plant would be a direct foreign investment (as opposed to portfolio investment, e.g., investment in the Chilean capital markets), Intel executives were spooked by this policy. One government official was struck with how often the Intel executives brought up this issue, in meeting after meeting (Troncoso 2002). corfo officials were unable to convince them that it would be irrelevant to their project. Beyond these other concerns, the Chilean government simply was not able to offer any significant tax incentives to Intel. corfo officials explained to the site-selection team that their adherence to the marketoriented ‘‘Chilean model’’ was designed not to interfere with market forces in this area, that is, not to give tax incentives to specific foreign firms in order to attract foreign investment in selected industries (Troncoso 2002).19 corfo was authorized to offer certain kinds of incentives to foreign firms if the fdi were to be located in an especially poor region of the country in need of economic development. corfo officials went so far as to suggest a location for Intel’s plant that would meet these criteria, a poor region of Chile not far from Valparaı´so. But the site-selection team made very clear to corfo that they did not want to be outside of the general vicinity of Santiago (Castillo 1998; Troncoso 1998). Given all its concerns, it was not surprising that Intel did not select Chile as the location for the plant. Still, corfo officials were devastated. Since this was before corfo had developed a transnational strategic network and targeted its investment promotion strategy more precisely, corfo officials thought Intel’s large manufacturing plant would be a good fit for Chile. Having acquired a greater degree of transnational learning 18. This policy has since been eliminated. 19. Of course, as noted earlier, the Chilean government did intervene significantly in the market—but not in the form of large tax incentives—in order to attract foreign investment from specific industries.

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capacity since then, corfo would never attempt to attract such a plant now.

Mexico In Mexico, the Intel team encountered another ipa, the Secretaria de Promocio´n Econo´mica del Estado de Jalisco (seproe) that, capable as it was, lacked cinde’s in-depth understanding of Intel’s concerns. In addition to seproe’s role, ‘‘other factors’’ affected Intel’s decision. Mexico offered many advantages as a location for Intel’s manufacturing plant. nafta, which would greatly facilitate the plant’s ability to import components and export the finished product, had just been enacted. The state of Jalisco, especially the region around its capital, Guadalajara, where the plant would be located, had excellent universities and technical schools and also an abundant supply of well-trained technicians and engineers at relatively low salaries. Many other high technology manufacturing firms from the United States, attracted by these favorable conditions, had already located in the region. Despite these favorable characteristics, Mexican federal law had certain rules about unions that potentially posed a problem for Intel. Mexico’s federal law stated that if a minimum of twenty employees in a given company decided to form a union, the company would be required to recognize it. If only two employees chose to affiliate with a union from outside the company, the company would be required to recognize and work with that union, provided that it was already recognized by Mexican labor authorities. The workers would have to decide which form of representation they wanted because only one union was allowed to represent workers in a specific company (Hinkelman 1994). Although companies were not required to have unions, in practice union organizers from outside the company would often work with company employees to organize a union or recruit them to affiliate with outside unions. This meant that most large companies in Mexico had to deal with unions and that the country had a high rate of unionization. Of Mexico’s total workforce, nearly 40 percent was unionized; of industrial workers in companies with more than twenty employees, the figure was closer to 80 percent (Economist Intelligence Unit 1998). Many companies in Mexico ensured harmonious labor relations by working with company unions referred to as sindicatos blancos (‘‘white unions’’). In some cases, these unions were not really representative of the workers but served only to comply technically with Mexico’s legal require-

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ments. Outside organizers would not be able to come in and form a more combative union (unless a majority of the workers voted for this) because the company technically already had union representation. Other white unions were more genuinely representative of the workers but worked in a collaborative way with management. In any case, white unions were much easier to work with than the more combative, confrontational unions that existed in many industries in Mexico. Nevertheless, Intel had a firm no-union policy in its plants, no matter where in the world they were located. This was crucially important to Intel because of the sensitivity of the manufacturing process. A work stoppage, slowdown, or disruption of any kind could be devastating for the microprocessors Intel was trying to produce. For that reason, Intel informed all its workers that it had no unions whatsoever. If the company bent its policy in Mexico, it would no longer be able to make this statement to its employees. While Intel had no intentions of breaking this rule, seproe officials sought to reassure the Intel team that there were ways around this problem and that the white unions were not real unions in the traditional sense. This approach revealed seproe’s lack of understanding of Intel’s corporate culture and its abhorrence of special deals. Regardless of the white unions’ true status—already a concern—the Intel team perceived seproe’s attitude about white unions as a willingness to bend the rules. That alone raised serious doubts in their minds about Mexico’s suitability as a site for its manufacturing operations (Telford 1998). Thus despite all of Mexico’s positive attributes as a location, Intel rejected it. In 1996, seproe was in the process of becoming a highly capable agency. It operated in a political environment within the state of Jalisco that had recently come to provide a high level of political security for its governors. As a result, seproe was rapidly acquiring a high level of technocratic independence. But because in 1996 seproe had only recently been reorganized as a technocratically independent agency, it was still in the process of developing a relatively high level of transnational learning capacity. For this reason, when Intel negotiated with seproe, the agency’s transnational learning capacity was not at the same level as cinde’s. This explains seproe’s lack of understanding of Intel’s concerns on the union issue and its relative lack of responsiveness in dealing with Intel. In 1996, Mexico was just beginning its transition to democracy after decades of one-party dominance by the Partido Revolucionario Institucional (pri). Under authoritarian rule, Mexico’s government had been far from an archetypical developmental state, seeking solely to advance the collective interests of the nation. Indeed, it was widely perceived as among

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the most corrupt governments in Latin America. pri-dominated state governments in Jalisco had been no exception to this general tendency, and the pri’s hold on power in the state had only recently been broken. Indeed, the first opposition governor to be elected in Jalisco in sixty-six years, Alberto Ca´rdenas (1995–2001) of the Partido Accio´n Nacional (pan), took office in 1995. Thus while Ca´rdenas was determined to make reforms and had sufficient political security to delegate authority to technocratic agencies such as seproe, these developments were in their early stages in 1996. Ca´rdenas did have a high level of political security during his term in office. In 1995, capitalizing on dissatisfaction in the state with the governing pri party, precipitated by Mexico’s severe financial crisis of 1994–95, high unemployment, and a sharp increase in crime in Jalisco, the pan won not only the gubernatorial election but also the presidencies of the most important municipalities in the state and a large majority in the state legislature (Alba Vega 2002, 129; 2005).20 The pan held 65 percent of the seats in the Jalisco state congress, compared to only 32 percent for the next largest party, the pri (Hurtado 1999, 32). Ca´rdenas personally won a large victory in the governor’s race, with 52.7 percent of the vote compared to 37.1 percent for the pri candidate (Tribunal Superior Electoral de Me´xico, www.tse.gob.mx, accessed October 6, 2006). Ca´rdenas’s large margin of victory, the large majority for the pan in the state legislature and other state offices, and the high level of party discipline within the pan meant that Ca´rdenas could afford to delegate authority over investment promotion to a highly technocratic agency. The goal was to attract fdi that would bring jobs to the state. Formerly known as the Departamento de Economia and later Departamento de Programacio´n y Desarollo, seproe took its new name, and was completely reorganized, after Cardenas took office. Previous pri governors from Jalisco, particularly Ca´rdenas’s immediate predecessor, who had squabbled with Mexico’s president and was ultimately forced out of office, had delegated little control over investment promotion to the far weaker agencies that were precursors to seproe (Casillas 2006; Robles 2006; Alba Vega 2005). Ca´rdenas, however, took immediate steps to change the nature of Jalisco’s investment promotion effort. Reflecting his reformist, more technocratic approach, Ca´rdenas did not 20. The financial crisis and devaluation in 1994 took place two months before the state and local elections in Jalisco.

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select a political crony to serve as executive director of seproe21 or even someone he already knew but instead appointed a highly qualified and well-respected business executive, Sergio Garcı´a de Alba Zepeda, who came to the position strongly recommended for his professionalism, his honesty, and his excellent administrative capabilities (Alba Vega 2005). With an MBA from the Instituto Panamericano de Alta Direccio´n de Empresa (ipade), a well-known business school in Mexico City, Garcı´a de Alba’s previous experience included serving as a founding partner and general director of his own manufacturing firm, as well as vice president of Mexico’s Confederacio´n de Ca´maras Industriales (concamin, the Confederation of Chambers of Industry) from 1994 to 1995. Demonstrating the esteem with which he was held in the Jalisco business community, the Guadalajara Association of Sales and Marketing Executives named him executive of the year in 1993 (Presidencia de la Repu´blica, Me´xico Web site).22 During his tenure as executive director (1995–2001), Garcı´a de Alba pushed for extensive technocratic reforms within the agency. seproe hired new personnel on the basis of merit. It specified strict criteria for each position, and those hired for these positions all had years of relevant experience in similar positions in the private sector or government, along with relevant educational experience, such as degrees in finance, MBAs, and so on (Gobierno del Estado de Jalisco 2001, 237–75; Rangel 2006; Alba Vega 2005). seproe also evaluated its programs in a systematic way, at least internally; indeed, it had an entire division devoted to evaluation of its programs and projects (Gobierno del Estado de Jalisco 2001, 245). Most important, however, it began collaborating with a broad range of other technocratically independent agencies, seven in all, that the Ca´rdenas government established to promote economic development in Jalisco (Garcı´a de Alba 2006; Gobierno del Estado de Jalisco 2001, 276–314). The most important of these was the Consejo Estatal de Promocio´n Econo´mica (cepe), the state board for economic development. Created in 1995, cepe coordinated its own investment promotion efforts very closely with those of seproe. seproe identified which sectors 21. Although the Spanish term for the head of seproe is ‘‘secretario,’’ literally translated as ‘‘secretary,’’ I use the term ‘‘executive director’’ throughout this section, since in English that phrase conveys the meaning of the position more clearly. 22. Further attesting to Sergio Garcı´a de Alba’s abilities, in 2005 President Vicente Fox named him secretary of the economy, a cabinet position roughly equivalent to secretary of commerce in the United States. He served in this position from 2005 to 2006.

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and firms to target, while cepe determined the extent of the incentives the state government could offer for specific investments. Operating under an investment promotion law already passed by the state legislature (but never implemented by Ca´rdenas’s predecessor), cepe provided investment incentives according to a formula that corresponded to well-defined criteria: the amount of the investment a firm proposed to make, how many jobs the investment would generate; the salaries those jobs would provide, the extent to which the project would provide linkages to supplier firms in Jalisco, and so on (Alba Vega 2002, 131; Robles 2006). Significantly, previous governments in Jalisco had not used such a transparent, technocratic process for awarding incentives. Indeed, previous governors had sometimes completely bypassed agencies that were supposed to handle such matters and instead negotiated directly with the companies themselves as a way to obtain kickbacks (Casillas 2006). The increased level of technocratic independence for seproe resulted in a relatively high level of transnational learning capacity. Government financial support facilitated the development of seproe’s transnational learning capacity; indeed, Ca´rdenas increased seproe’s overall budget from about US$ 1.2 million per year in 1995 to more than US$ 12 million per year in 2000 (Alba Vega 2002, 131), although the amount allocated specifically for investment promotion was considerably less (well under US$ 1 million in 2000) (Gobierno del Estado de Jalisco 2001, 252, 260). Nevertheless, although some aspects of seproe’s transnational learning capacity were strong, such as its transnational strategic network, other aspects were lower than cinde’s, such as the internationalization of its personnel and proactive, systematic procedures for learning about prospective foreign investors. Through its contacts with Mexican consulates in other countries, seproe did have a fairly extensive transnational strategic network, and it did send its representatives to trade shows to meet with prospective investors in targeted industries. It also maintained close ties with foreign companies in the electronics sector that were already established in Jalisco (Alba Vega 2002, 132; Garcı´a de Alba 1998; Lepe 2006). In 1996, however, when Intel was negotiating with the agency, seproe did not yet have highly internationalized personnel, even among those who worked specifically in investment promotion. Almost none of the employees had studied abroad (Gobierno del Estado de Jalisco 2001). Even Sergio Garcı´a de Alba himself, while a highly capable business executive and administrator, lacked any experience in international business before becoming executive director of seproe. Ten years later, by 2006, this had

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changed, as one would expect of an ipa with a high level of technocratic independence seeking to promote nontraditional fdi. For example, Federico Lepe, seproe’s general coordinator for foreign promotion and investment, had been the former head of Hewlett-Packard in Mexico (Lepe 2006). Of the eleven personnel working directly in investment promotion, approximately 50 percent had studied overseas, and 40 percent had previous international business experience (Rangel 2006). Having been created in 1995, however, when Intel visited in 1996, seproe—despite its already high level of technocratic independence—had not yet fully developed this aspect of its transnational learning capacity. Nor did seproe have a proactive, systematic procedure for learning about prospective foreign investors to the extent that cinde did. Those involved in investment promotion did target particular sectors that would be well suited to the state of Jalisco’s unique conditions (Gobierno del Estado de Jalisco 2001, 177). They visited trade shows all over the world to meet prospective foreign investors in selected industries, such as electronics (Garcı´a de Alba 1998, 2000, 2006; Lepe 2006; Rangel 2006). But they did not study the needs and concerns of prospective foreign investors in order to anticipate possible questions or make a focused study of individual companies themselves. As a result, in 1996, seproe’s investment promotion strategy was less responsive to Intel’s needs and concerns than cinde’s had been. Even years later, key officials at seproe were perplexed as to the reasons Intel had not chosen Jalisco. When the labor union issue was suggested as one factor, seproe’s top management refused to believe that this was a genuine concern for Intel since the use of white unions was readily available as an alternative solution (Garcı´a de Alba 1998). Clearly, seproe did not understand, to the extent that cinde (and therefore Costa Rica’s government) did, the degree to which even the perception of a willingness to bend the rules—in other words, a perceived lack of transparency and predictability in a government’s policies—would concern Intel’s site-selection team. Ultimately, of course, Intel chose Costa Rica as the location for its plant. Although a number of factors influenced Intel’s decision to choose Costa Rica over the competing countries, the effectiveness of the Costa Rican government’s investment promotion strategy played a major role. Clearly, the Costa Rican government’s collaboration with cinde enhanced the government’s transnational learning capacity significantly. Costa Rica would not have been on Intel’s short list if cinde had not been alert to Intel’s plans and able to respond quickly, in a proactive way, to Intel’s strategy.

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Later, during the site-selection team’s visit to Costa Rica, cinde’s transnational learning capacity helped make the government much more responsive to Intel’s needs and concerns than any of the other governments on Intel’s short list.

Outcome: Level of Nontraditional fdi Attracted The high level of political security that Costa Rica’s political context provided its leaders enabled successive administrations to continue the partnership with cinde. cinde’s technocratic independence and transnational learning capacity enhanced the effectiveness of its investment promotion strategy and, therefore, that of the government. This, in turn, contributed to the high levels of nontraditional fdi Costa Rica succeeded in attracting. Its success in attracting Intel was a significant achievement for cinde. Intel’s initial investment in 1997 was about US$ 300 million, and it later significantly expanded its operations in Costa Rica. By 2007, Intel had invested more than US$ 800 million in Costa Rica (World Bank/miga 2006, 7; ‘‘Intel and Costa Rica’’ 2007, 26). These investments included two plants (with plans to construct two more), a global distribution center, a shared services group providing services to Intel in five areas (including all of the company’s financial services in the Americas), and Intel Capital for Latin America, which invested in technology-related companies (such as local software development companies) relevant to Intel’s operations (World Bank/miga 2006, 8). In all, Intel’s operations in Costa Rica provided direct employment for more than 3,000 people and, through its linkages with local firms, indirect employment for more than 2,000 (World Bank/miga 2006, 7; ‘‘Intel and Costa Rica’’ 2007, 27). Intel’s investment and other effects of its presence in Costa Rica had a significant impact on the country. Beyond this, however, Intel’s investment signaled to other prospective investors that Costa Rica was promising location for nontraditional fdi. The results were significant. For example, in the late 1980s and early 1990s, a relatively small percentage of fdi inflows in Costa Rica went to manufacturing; from 1997 to 2005, however, approximately 65 percent of fdi went to manufacturing sectors (Paus 2005, 143; Ministerio de Comercio de Exterior de Costa Rica [comex] Web site). From 1997 to 2003, about one-third of this fdi went into electronics (Paus 2005, 143). After 1997, cinde, recognizing the potential to leverage its success with

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Intel by expanding its investment promotion efforts into medical devices and services (call centers, shared services, software development centers), made a conscious decision to target ‘‘anchor’’ investments in these sectors that would promote further investment from other medical devices and services firms, just as Intel had done for the electronics sector. Among the anchor investments that cinde succeeded in attracting in the medical devices sector were investments from Abbott Laboratories and Boston Scientific, which, in addition to all of the media attention Costa Rica had received from Intel, helped put Costa Rica on the map as an attractive location for nontraditional fdi (World Bank/miga 2006, 14–15). Western Union’s investment in a call center and Procter and Gamble’s 2000 investment in shared services center played a similar anchor investment role in the services sector (15). Executives from all of these firms, including Intel, often accompanied cinde officials on road shows throughout the United States to promote further investment in Costa Rica in these specific industries (9). Thus fdi in the electronics, medical devices, and services increased significantly after 1997, the year Intel invested in Costa Rica. As noted earlier (see Table 1), by 2007, cinde had attracted investments from fiftysix electronics firms (employing 11,000 people), twenty-three medical devices firms (employing 6,000), and forty-eight services firms (employing 15,000 people and including software development centers, shared services, and call centers) (cinde 2006b, 8). With the exception of a brief downturn during the slowdown in technology-related industries during 2000, fdi in electronics, medical devices, and services grew from 1997 to 2005 (see Table 2). Assisted by the expansion of fdi in these sectors, Costa Rica’s overall fdi also increased, from US$ 406.9 million in 1997 to US$ 653.2 million in 2005. Significantly, in 1997 only 37.3 percent of Costa Rica’s total fdi went into electronics, medical equipment, and services. By 2005, these three sectors alone accounted for more than 64.1 percent of the country’s total fdi (cinde 2007; Ministerio de Comercio de Exterior de Costa Rica [comex] Web site). These numbers indicate the extent to which cinde’s investment promotion strategy had succeeded in attracting higher levels of nontraditional fdi.

Intel’s Impact on Costa Rica Was the Costa Rican government’s investment promotion strategy, and specifically its effort to attract Intel, worth it? Despite the views of such

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Table 2 fdi in electronics, medical equipment, and services, 1997–2005 (millions US$), Costa Rica

500 450 400 350 300 250 200 150 100 50 0 1997

1998 Year 1997 1998 1999 2000 2001

1999

2000

2001

E + ME + S

2002

2003

Year

151.8 310.0 201.0 110.9 144.4

2004

2005

E + ME + S

2002 2003 2004 2005

187.3 310.9 403.1 418.6

Source: cinde; Ministerio de Comercio de Exterior de Costa Rica (comex).

critics as Hanson (2001), Intel, without counting its signaling effect to investors from other sectors, clearly had a net positive effect on the Costa Rican economy. Intel’s decision to invest in Costa Rica led to direct and indirect benefits for the country by creating thousands of jobs, improving the quality of technical education available, increasing Costa Rica’s trade balance, creating linkages with local suppliers, developing the Costa Rican workforce, and spurring reforms that have enhanced the competitiveness of the Costa Rican economy.

Job Creation One of Intel’s most direct effects in Costa Rica was that it provided a number of relatively well-paid jobs. In 2007, Intel’s operation employed about 3,400 people directly (‘‘Intel and Costa Rica’’ 2007, 27). Of this number,

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approximately 70 percent were operators and technicians working in the plants and another 30 percent were engineers and professionals (Villalta 2005; ‘‘Intel and Costa Rica’’ 2007, 27). Although wages were about half of what Intel would pay for similar work in the United States (Villalta 2005), they were still significantly higher than other manufacturing jobs in the country (Rodrı´guez-Clare 2001, 323). Indeed, the average salary of an Intel employee in Costa Rica in 2005, including employees at all levels, was US$ 836 per month, in contrast to the Costa Rican national average of US$ 438 and the average manufacturing salary in Costa Rica of just US$ 491 per month (‘‘Intel and Costa Rica’’ 2007, 27–28). Furthermore, Intel’s decision to invest in Costa Rica helped attract more fdi, which in turn has led to more jobs. As noted above, by 2007, cinde had attracted investments from fifty-six electronics firms (employing 11,000 people), twenty-three medical devices firms (employing 6,000), and forty-eight services firms (including software development centers, shared services, and call centers), which employed 15,000 people (cinde 2006b, 8).

Improvements in Technical Education Hanson (2001) argued that increased demand for skilled workers would drive up the wages for those workers, thereby hindering the development of domestic firms. In Costa Rica, however, increased demand for skilled workers led to an increased supply. Intel gave ‘‘Intel Associate’’ status to the Instituto Tecnolo´gico de Costa Rica (an important public technical school) and the University of Costa Rica, as well as to four private universities. With this designation came Intel’s support, both technical and financial, to improve and expand the technical training offered by those institutions. Because of the improved curriculum and increased demand for technicians and engineers, more students enrolled. For instance, the number of students enrolled in electrical engineering at the itcr increased from 577 in the first quarter of 1997 to 874 in 2000 (Larrain, Lopez-Calva, and Rodrı´guez-Clare 2001, 23). The number of students enrolled in electronics-related programs at the Instituto Nacional de Aprendizaje (ina), Costa Rica’s largest public technical school, rose from 4,019 in 1999 to 7,758 in 2005; and in information technology, the numbers rose from 13,832 to 33,694 during the same time period (cinde 2006c; Instituto Nacional de Aprendizaje Web site). This increase in supply constrained the rise in labor costs for technically trained workers. Additionally, the larger supply of such workers made Costa Rica even more attractive as a site for nontraditional fdi.

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Trade Balance Intel also contributed to Costa Rica’s trade balance (Hidalgo Capita´n 2003, 248). Intel’s exports were enormous. At approximately US$ 1.75 billion in 2006, they represented about 20 percent of Costa Rica’s total exports that year (Economist Intelligence Unit 2007; ‘‘Intel Selects Local Plant’’ 2006). In addition, Intel helped diversify Costa Rica’s exports. Before Intel, Costa Rica’s principal exports were low value-added manufactured goods, such as textiles, or more traditional products, such as coffee and bananas. While those exports are still important, Costa Rica’s single most important export product now is microprocessors. Intel’s investment helped Costa Rica attract more nontraditional fdi, which further diversified Costa Rica’s exports. As a result, Costa Rica’s manufacturing exports shifted away from more traditional sectors into more high-growth, high value-added industries. From the mid-1990s to 2005, textile exports fell from 35 percent of total exports from the ftzs to only 9.5 percent. During the same period, exports of electronic goods grew from 20 percent to 47 percent of total exports from the ftzs, exports of medical devices grew from 5.9 percent to 13.2 percent, and foreign sales from shared services and call centers increased from about US$ 20 million to more than US$ 100 million (R. Monge et al. 2005, 11). The net contribution of all ftz trade to Costa Rica’s overall current balance was positive, even after subtracting remittances foreign firms sent back to their home countries. Indeed, from 2000 to 2005 the ftzs reduced Costa Rica’s overall current account deficit by 1.5 percent of gdp per year every year (18). Beyond trade, Intel contributed to domestic economic growth as well. Costa Rica’s Central Bank estimates that Intel’s overall contribution to the country’s gdp has been a significant percentage of the growth rate. In 1999, for example, Intel contributed 5 percentage points out of the 8 percent growth that year (Larrain, Lopez-Calva, and Rodrı´guez-Clare 2001; World Bank/miga 2006, 9).

Linkages with Local Suppliers In addition to creating jobs, improving technical training, and contributing to Costa Rica’s trade balance, Intel also formed linkages with local suppliers. An overly simplistic critique sometimes made about Intel’s investment in Costa Rica was that as a company operating within one of Costa Rica’s ftzs, it had no impact on the local economy. The reason critics sometime made this charge was that firms operating in the ftzs paid no

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tariffs on imports of components and equipment and no corporate income taxes for eight years, with a significant reduction in taxes for the next four years (Rodrı´guez-Clare 2001; Spar 1998). As a result, these firms, including Intel, imported most of the components for the products they manufactured. However, even though the World Trade Organization ruled that after 2009, Costa Rica would no longer be able to give exemptions on corporate taxation to firms operating in ftzs, Intel had no plans to leave. The Dominican Republic–Central American Free Trade Agreement (dr-cafta) with the United States (which Costa Rica ratified in 2007) would, of course, continue to provide free trade status for most products traded between the United States and Costa Rica after that time, but the corporate income tax rates would rise. This meant that Intel would have to begin paying a significant amount of corporate income tax to the Costa Rican government. Although most of the advanced high technology inputs Intel used in its microprocessors came from outside of Costa Rica, even U.S. plants imported many of these same inputs from elsewhere. For example, some components in Intel’s microprocessors were produced in Asia, and even Intel fabrication plants in the United States had to obtain those components from Asia. Yet a significant and growing amount of less technologically advanced products that Intel used in Costa Rica, such as packaging and equipment, or services such as repair or transportation services, were produced or provided locally. Currently approximately 460 firms provide local goods and services for Intel in Costa Rica (World Bank/miga 2006, 22). Services Intel buys locally include computer services, maintenance of clean rooms, document translation, security, catering, and hotel services. Manufactured goods include computer equipment, office equipment, and packaging material (Larrain, Lopez-Calva, and Rodrı´guez-Clare 2001; World Bank/miga 2006, 22). Companies that invested in Costa Rica specifically to supply Intel include RVSI, NTK, Phillips, Magne´ticos Toroid de Costa Rica Alphasem Corp., Delta Design S.A. and Esec USA, Inc. (Rodrı´guez-Clare 2001). In 2003, Intel paid its suppliers more than US$ 250 million (Villalta 2005), although normally Intel’s expenditures on local goods and services ranged from US$ 50 million to US$ 150 million per year (World Bank/ miga 2006, 16). With the growth Intel was experiencing in Costa Rica, Intel’s local expenditures were likely to continue to rise (Villalta 2005). In 2001 the Costa Rican government, in a collaborative effort between cinde, the Inter-American Development Bank (idb), and procomer, created a supplier development program called Costa Rica Provee. Accord-

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ing to Intel–Costa Rica’s business development manager, within its first three years, this program helped to increase the number of suppliers Intel used by a factor of ten (Villalta 2005). Costa Rica Provee increased the number of linkages it facilitated with all companies, overall, from 18 in 2003 to 140 in 2006 (Cordero and Paus 2009). Intel itself also helped develop many new local suppliers. A 1999 survey showed that a large percentage of Intel suppliers had received training from Intel or improved their organizational practices in response to Intel’s influence (Larrain, Lopez-Calva, and Rodrı´guez-Clare 2001). As noted earlier, Paus (2005) and Cordero and Paus (2009) argue persuasively that successive Costa Rican governments should have provided more support to Costa Rica Provee—which in 2007 had a budget of only US$ 275,000 and a staff of seven (Cordero and Paus 2009)—and could have coordinated this agency’s efforts more closely with those of cinde and other government programs to promote indigenous technological development, such as the government’s initiatives to enhance and expand technical training. These authors maintain that the Costa Rican government’s resources to do this were limited in part by the tax exemptions provided to firms investing in the ftzs and the lack of a more coherent national strategy in this area. Although the government certainly could have done more, there is no question that some linkages with local firm have already occurred, even if the inputs provided have primarily been in the form of packaging and services rather than in more technologically sophisticated component parts or equipment. Furthermore, the wto-mandated end to the corporate tax exemptions will provide the government with more revenues to expand support for agencies like Costa Rica Provee in the future.

Workforce Development Intel had a significant impact on the development of the Costa Rican workforce. This included training its own employees. Since starting up operations, Intel has sent between eighty and one hundred employees per year on long-term job assignments or training programs overseas, for periods ranging from three months to three years, in the United States, Asia, or Israel; few other institutions in Costa Rica could afford to do this (Villalta 2005; Rodrı´guez-Clare 2001). There was at least anecdotal evidence of former employees using skills learned at Intel to start their own firms or taking skills learned at Intel with them to other firms (Villalta 2005; Rodrı´guez-Clare 2001). In 2004, a survey of local suppliers of inputs to

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transnational corporations (tncs) in Costa Rica found more widespread evidence of such spillovers of knowledge from foreign to local firms: 6.2 percent of local firms’ managers, 27.6 percent of their engineers, and 31 percent of their technicians had prior experience working for a tnc (cited in Cordero and Paus 2009).

Accelerating Reforms Finally, Intel spurred on reforms that helped make Costa Rica even more attractive for nontraditional fdi. In addition to improvements in technical training, Intel’s presence led to an increase in the number of flights from Costa Rica to the United States. This was beneficial in a number of ways but was especially helpful to Costa Rica’s tourism industry. Additionally, Intel’s need for frequent cargo shipments led FedEx and UPS to invest in the country; this significantly improved the logistical capabilities for all firms exporting from Costa Rica (Rodrı´guez-Clare 2001; World Bank/ miga 2006, 17). Intel’s engineers also provided suggestions to enhance the efficiency of Costa Rica’s telecommunications and electrical power sectors (Villalta 2005; cinde 2006b; World Bank/miga 2006, 17–18), leading to improvement in the country’s infrastructure that was beneficial to all firms doing business there.

Implications Obviously, many factors determine corporate site selection decisions. But especially for locations such as Costa Rica, which are not well known as havens for nontraditional fdi, an effective investment promotion strategy can play a significant role. The effectiveness of the Costa Rican government’s investment promotion strategy can be attributed in large part to its successful collaboration with cinde. The political security that Costa Rica provided to its presidents made it possible for successive governments to collaborate with cinde, an ipa with a high level of technocratic independence and transnational learning capacity. This collaboration enhanced the Costa Rican government’s own capabilities, enabling it to develop a targeted, responsive strategy and deal with prospective nontraditional investors in a sensitive, proactive way. Because the government’s collaboration with cinde was sustained over consecutive administrations, cinde (and thus the government) were able to adapt the strategy to evolving trends in global business as well as in

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Costa Rica itself. This ability to develop an investment promotion strategy over the long term and adapt it over time made cinde better able to target nontraditional sectors most suited to Costa Rica. As a result, cinde now promotes fdi not only in the electronics sector but also in such areas as medical devices, shared services, and call centers. Ultimately, then, the Costa Rican government’s effective investment promotion strategy contributed to its success in attracting Intel’s manufacturing plant and the large amounts of nontraditional fdi that followed. This investment, in turn, brought benefits to Costa Rica, benefits that had a significant impact on the country’s development. Certainly the Costa Rican government could do still more to enhance the developmental impact of this fdi by integrating cinde’s investment promotion efforts into a larger and more cohesive strategy to promote the development of local firms. Clearly, however, the Costa Rican case demonstrates that governments that can at least ‘‘graft on’’ technocratic independence and transnational learning capacity can develop investment promotion strategies that can help them to attract nontraditional fdi, an essential part of harnessing the benefits of globalization.

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Rio Grande do Sul and Po ´ lo

In mid-March 1999, Keith Maxwell, senior vice president for worldwide operations, Dell Computer Corporation, looked out the window of his office in Dell’s headquarters in Round Rock, Texas, and pondered the frustrating situation he faced in Brazil, which Dell had chosen as the site of its first manufacturing plant in Latin America. Just over a year earlier, Maxwell had led the site selection team in visits to five states in Brazil to determine where Dell should locate its plant.1 In June 1998, after the team confirmed its initial findings and concluded its negotiations, Maxwell made the final recommendation to Michael Dell: the plant should be built in Brazil’s southernmost state, Rio Grande do Sul. By mid-March 1999, Dell had signed an agreement with the state government on the terms of the investment, the process of hiring local personnel to manage the plant had begun, and construction on the plant itself was scheduled to start soon. Suddenly, however, the political climate in Rio Grande do Sul changed. A new governor, Olivio Dutra of the Partido dos Trabalhadores (pt, or Workers’ Party),2 had taken office on January 1, 1999, and he now appeared likely to rescind the agreement. This was a setback, and Maxwell would have to decide on which course of action to recommend: (1) leave Brazil entirely, (2) move the plant to another state, or (3) try to renegotiate with Governor Dutra. 1. The principal members of the initial team, in addition to Maxwell, included Daryl Robertson, vice president, Dell Latin America; Tom Armstrong, vice president, Tax and Administration; Kip Thompson, vice president, Worldwide Facilities Management and Corporate Real Estate; and Charlene Coor, director of International Tax. 2. Brazil’s Partido dos Trabalhadores (pt), the Workers’ Party, is a leftist political party with a socialist ideology.

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Dell’s decision to locate its manufacturing plant in Rio Grande do Sul, and the situation it found itself in now, had much to do with the state government’s relationship with a private, Rio Grande do Sul–based investment promotion agency called Po´lo-RS, Ageˆ ncia de Desenvolvimento, known more commonly as Po´lo. Po´lo was similar in many ways to cinde in Costa Rica. Both cinde and Po´lo were private, well-funded nonprofit agencies staffed by people with extensive private sector and international experience. Both had high levels of technocratic independence and transnational learning capacity. As with the Costa Rican government’s partnership with cinde, the collaboration between the state government of Rio Grande do Sul and Po´lo increased the government’s technocratic independence and transnational learning capacity in the area of investment promotion. These ‘‘grafted on’’ characteristics greatly enhanced the government’s ability to develop an effective strategy to promote nontraditional fdi, including Dell. But the two cases differed: unlike the situation in Costa Rica,3 the level of political security in Rio Grande do Sul changed significantly over time. Because Governor Dutra was less politically secure than the previous governor, Antoˆ nio Britto, he was unwilling to continue to collaborate with Po´lo. Without Po´lo’s collaboration, the effectiveness of the government’s investment promotion efforts declined. This contributed to the inability of the Dutra government to attract more nontraditional investment. Dell ultimately succeeded in renegotiating with Governor Dutra. Having faced protests when Ford left the state because of his stance, Dutra changed his position and allowed Dell to retain all the incentives. Dutra altered his approach to such an extent that he even sought to attract other companies like Dell to invest in Rio Grande do Sul. While the government’s relationship with Dell improved, its relationship with Po´lo did not. Dutra’s unwillingness to continue the collaboration with Po´lo had a serious impact on the government’s ability to attract additional nontraditional fdi.

Background Leaders of Rio Grande do Sul’s two main business associations, the Federac¸ a˜ o das Associac¸ o˜ es Comerciais e de Servic¸ os do Rio Grande do Sul 3. I am referring to Costa Rica from 1949 to 2002. As I explained in Chapter 1, after 2002 Costa Rica’s stable two-party system became somewhat more fragmented and polarized, thus reducing the level of political security in the Costa Rican political environment. Nevertheless, the level of political security Costa Rica’s political system provided remained higher than that of Rio Grande do Sul during the Dutra years.

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(federasul) and the Federac¸ a˜ o das Indu´strias do Estado do Rio Grande do Sul (fiergs), created Po´lo in late 1995. Their intent was to form an agency that would promote economic development by collaborating with the state government to attract fdi. During the 1994 gubernatorial campaign, both candidates—Antoˆ nio Britto from the centrist Partido do Movimento Democra´tico Brasileiro (pmdb) and Olivio Dutra from the leftist pt—endorsed the idea for the creation of Po´lo (Magadan 1999; J. C. Martins 1999, 2006). After winning the election and taking office in January 1995, Britto had reason to feel politically secure, at least initially. Despite the undisciplined political parties, unstable coalitions, and high level of partisan conflict that normally prevailed throughout much of Brazil, Britto won a solid victory in the gubernatorial election and his political coalition won a large majority in the state legislature. Because Britto was relatively politically secure, he was willing to collaborate with Po´lo, a private agency with a high level of technocratic independence, in his government’s investment promotion efforts (Britto 2007). By working closely with Po´lo, the Britto administration grafted on a high level of transnational learning capacity that enabled it to develop a highly effective investment promotion strategy, focused on and highly responsive to the needs of specific kinds of nontraditional companies that would be well suited to Rio Grande do Sul’s unique characteristics. This helps explain how Rio Grande do Sul competed successfully in 1998 against four other states to win Dell’s investment in a large manufacturing plant. Over time, however, Rio Grande do Sul’s political environment became increasingly polarized. During his second campaign for governor against Britto, in 1998, Dutra charged Britto with giving excessive incentives to foreign multinational companies, arguing that the state should not give any incentives whatsoever to such firms. In 1998, in the context of a nationwide recession and increasing leftist criticism throughout Brazil and in Rio Grande do Sul of President Fernando Henrique Cardoso’s neoliberal policies, Dutra won a narrow victory over Britto, one of Cardoso’s strongest allies. From the start, the Dutra administration (1999–2002) had a low level of political security. Dutra, the first pt candidate to be elected governor in Rio Grande do Sul, lacked a majority in the state legislature; indeed, political parties supportive of his government never held more than a small minority of the seats in Rio Grande do Sul’s Legislative Assembly (Arturi 2006a, 2006b; Tribunal Regional Eleitoral, Rio Grande do Sul [1998] Web site). Additionally, Dutra’s radical rhetoric during his campaign had

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polarized the electorate. Specific actions the Dutra administration took, such as refusing to provide incentives the Britto government had promised Ford Motor Corporation if it located a large manufacturing plant in the state, further increased the level of partisan conflict in the state, especially after Ford decided to locate the plant in Bahia, taking with it the thousands of jobs the plant would have created. Increasingly isolated politically and fearful of losing still more fdi, Dutra let Dell keep the incentives promised by Britto. He even made efforts to promote more nontraditional fdi. But in the context of the high level of partisan conflict and lacking widespread political support, Dutra refused to collaborate with Po´lo. Instead, he chose to keep his administration’s investment promotion efforts entirely under his own government’s control. In contrast to other political survival explanations for leaders’ seeking to maintain such control and refusing to delegate authority to technocratic agencies, I argue that Dutra did not want to keep control over investment promotion policy primarily as a means to distribute patronage. Rather, he did this as a way to distance himself from the Britto administration. The Britto government’s investment promotion efforts were so closely linked with Po´lo that for Dutra to continue this collaboration would be, symbolically at least, to continue the approach that he had criticized so severely during the campaign (Grohmann 2006; J. C. Martins 1999, 2006; de Araga˜ o 2006). Furthermore, Dutra needed to win the pt’s gubernatorial primary in 2002 to run for reelection. Timothy Power, an Oxford University Brazilianist and former president of the Brazilian Studies Association (2004–6) who was a Fulbright scholar in Rio Grande do Sul in 2002, argues that Dutra, politically weak as he was, sought to establish clear differences not only between Britto’s policies and his own but also between himself and his more moderate competitor in the 2002 pt gubernatorial primary, Tarso Genro, to rally the more radical pt electoral base to his side (Power 2006). Certainly Genro was a competitive threat, for Dutra had won the 1998 primary over Genro by only 191 votes; ultimately he lost the 2002 primary to Genro (Hoffman 1998). In any case, as he emphasized repeatedly in an interview with me, Dutra sought to distance himself from the Britto administration’s investment promotion strategy (Dutra 2006). Having his government pursue investment promotion efforts on its own, without Po´lo’s assistance, was one way to do this.4 4. Lending further support to this argument was the explanation of Jose´ (‘‘Zeca’’) Vianna de Mora˜ es, Dutra’s head of the Secretaria do Desenvolvimento e dos Assuntos Internacionais (sedai), the state economic development agency that was also involved in investment promotion. Vianna de Mora˜ es stressed in an interview that unlike the Britto administration, the

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Thus, after Dutra took office the collaboration between the state government and Po´lo came to an end. But Dutra’s go-it-alone approach was not good for his government’s investment promotion efforts. Lacking the grafted-on transnational learning capacity that Po´lo had provided to the Britto government, the Dutra administration pursued a far less effective approach to working with nontraditional companies. Partly for this reason, no more nontraditional firms invested in Rio Grande do Sul during Dutra’s time in office.

Political Security in Rio Grande do Sul At the national level, Brazil is notorious for its fragmented political system, unstable political coalitions, and high levels of partisan conflict (Ames 2001; Mainwaring 1999; Weyland 1996). Many Brazilian states share these characteristics. Under highly polarized circumstances, as Montero showed with his analysis of the state of Rio de Janeiro (Montero 2002, 154–60), state governors are politically vulnerable and are therefore reluctant to delegate authority to technocratic agencies. Although political party discipline was relatively strong in Rio Grande do Sul, the level of partisan political conflict could be very high (Grohmann 2002, 2006; Power 2006). Still, Governor Antoˆ nio Britto (1995–98) managed to achieve a relatively high level of political security, at least during the early years of his administration. In contrast, Olivio Dutra (1999– 2002) experienced an especially low level of political security from the beginning of his time in office. This explains Britto’s willingness to collaborate with Po´lo, and Dutra’s reluctance to do so. Although the level of party discipline and stability of coalitions in Rio Grande do Sul did not change significantly during the period encompassed by the Britto and Dutra governments (1995–2002), three other measures of political security explained the contrasting levels of political security Britto and Dutra experienced. These were: (1) the margin of victory each governor received in the election, (2) the extent of the governor’s Dutra administration intended to work on behalf of workers, not business owners. Although the Dutra government respected the international expertise and experience of Po´lo’s personnel, it planned to pursue certain projects without regard for return on investment, such as encouraging workers’ cooperatives to take over the management of failed private firms, with which the technocratic, private sector–oriented personnel at Po´lo might not be comfortable (Vianna de Mora˜ es 2007). (Significantly, projects such as this would be of interest to the radical base of the pt.) This, then, was a related reason the Dutra administration and Po´lo could not work together (Vianna de Mora˜ es 2007).

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support in the state legislature, and (3) the level of partisan conflict (political polarization) in the state.

Margin of Victory in the Gubernatorial Elections In the 1994 election for governor, Britto won a decisive second round victory of 49.57 percent against Dutra’s 45.38 percent (Tribunal Regional Eleitoral, Rio Grande do Sul [1994] Web site). These figures actually underestimate Britto’s strength at this time relative to Dutra, for in the first round Britto received 39.85 percent of the votes cast, winning that round by almost 12 percentage points over Dutra, who received 28.13 percent. (The next highest contender received only about 7 percent of the vote.)5 (Tribunal Regional Eleitoral, Rio Grande do Sul [1994] Web site). In round two of the election, which paired Britto and Dutra against each other as the two candidates who received the highest percentage of votes in round one, Dutra was unable to beat Britto, even though all of Britto’s opponents could now unite behind Dutra, and even though Dutra was a well-known, popular mayor of Porto Alegre. Britto’s significant margin of victory contributed to his relatively high level of political security, at least in the early years of his administration. Although Britto ultimately lost his bid for reelection in 1998, during his four-year term as governor he never perceived his political survival to be threatened; indeed, until the day of the election, he was fully confident he would win reelection to a second term (Britto 2007). In some ways, Britto’s confidence was justified because he came close to winning a second term. In fact, Britto actually won the first round of the 1998 gubernatorial election, with 39.83 percent of the votes cast compared to Dutra’s 39.42 percent. In the second round, however, Dutra won with 49.97 percent of the votes compared to Britto’s 47.97 percent (Tribunal Regional Eleitoral, Rio Grande do Sul [1998] Web site). In contrast to Britto’s margins of victory in the first and second rounds of the 1994 election, in 1998 Olivio Dutra won a much slimmer victory. Moreover, Dutra’s road to victory had not been easy. In 1998 he had to compete for the pt’s nomination in a fiercely contested primary with another well-known, highly respected, and more moderate pt candidate, Tarso Genro. After losing the primary by only 191 votes, Genro gave his full support to Dutra, 5. In Brazilian gubernatorial (and presidential) elections, if no candidate receives a majority in the first round, the two candidates who received the most votes in the first round proceed to a second round run-off election.

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but many of Genro’s supporters were disgruntled, believing that their candidate would have been the better choice (Hoffman 1998). Significantly, four years later Dutra lost the pt’s gubernatorial primary to Genro, and thus was unable to run for reelection in 2002. Given the context, this loss was indicative of how weak Dutra’s political position was, even within his own party. Dutra lost the 2002 primary even though he was the incumbent governor, seeking what under normal circumstances would be a formality: ratification of his party’s support to run for reelection. This weakness may have contributed to Dutra’s stance with regard to Po´lo (Power 2006). By refusing to work with a private agency that had been so closely allied with the Britto government, Dutra could differentiate himself not only from the Britto government but also from Genro, the more moderate competitor within his own party, thus appealing to the more radical members of the party—significantly, the ones more likely to vote in primary elections.

Support in the Legislative Assembly Antoˆ nio Britto had a significant degree of support in Rio Grande do Sul’s forty-ninth Assemble´ia Legislativa (Legislative Assembly), the state legislature, from 1995 to 1998. Deputies from parties within Britto’s coalition numbered thirty-five (64 percent) of the fifty-five deputies in the Legislative Assembly, including ten from his own Partido do Movimento Democra´tico Brasileiro (pmdb), thirteen from the Partido Progressista Brasileiro (ppb), ten from the Partido Trabalhista Brasileiro (ptb), one from the Partido da Frente Liberal (pfl), and one from the Partido Social da Democracia Brasileira (psdb) (Grohmann 2002, 15; ‘‘Os Inimigos Se Tornaram Aliados’’ 2006; Tribunal Regional Eleitoral, Rio Grande do Sul [1994] Web site; Anais da 49a Legislatura Web site).6 In contrast to Britto’s extensive majority, the opposing coalition in Rio Grande do Sul’s Legislative Assembly numbered only nineteen (34.5 percent), including six deputies from the Partido dos Trabalhadores (pt), nine from the Partido Democra´tico Trabalhista (pdt), three from the Partido Socialista Brasileiro (psb), and one from the Partido Comunista do Brasil (pc do b) (Arturi 2006a, 2006b; Grohmann 2002, 15; 2006; ‘‘Os Inimigos Se Tornaram Aliados’’ 2006; 6. Note that the online records (anais) of the forty-ninth and fiftieth Legislative Assemblies show that there were more than fifty-five deputies, even though Rio Grande do Sul’s Legislative Assembly is constitutionally limited to fifty-five. The reason is that the records show all deputies who held office during that time, even if some of the fifty-five elected deputies left the legislature for whatever reason (often to take positions in the governor’s cabinet), and were replaced by other members of their party.

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Anais da 49a Legislatura Web site).7 The size of Britto’s majority in the Legislative Assembly, in contrast to the opposition’s much smaller representation, increased his level of political security. Indeed, during Britto’s tenure in office, the Legislative Assembly approved almost all of his government’s proposed laws and amendments to the state constitution, and rejected fewer than ten of them entirely (‘‘Os Inimigos Se Tornaram Aliados’’ 2006). In contrast to the Britto government’s political dominance in the fortyninth Legislative Assembly, in the fiftieth Legislative Assembly (1999– 2002), which coincided with Dutra’s time in office, Dutra’s coalition was always a minority in the legislature and actually grew smaller over time (Arturi 2006a, 2006b; Grohmann 2002, 15; 2006). Dutra’s original coalition in Rio Grande do Sul’s Legislative Assembly consisted of only eleven deputies from the pt, one from the pc do b, and one from the psb, with additional but inconsistent support from some but not all deputies from the pdt (which had a total of seven deputies). By the midpoint of Dutra’s term, however, the sole psb deputy had left the government coalition to join another party, and the pdt, never a strong supporter, had completely renounced its support for Dutra’s government. That left a total of only twelve deputies in Dutra’s coalition in the state legislature (22 percent of the deputies) (Grohmann 2002, 16; 2006). Clearly, Dutra had very little support in Rio Grande do Sul’s Legislative Assembly.

Level of Partisan Political Conflict During the gubernatorial campaign of 1994, the level of partisan strife was relatively low. Indeed, during the campaign both Britto and Dutra agreed on the creation of Po´lo. But during the next gubernatorial campaign, in 1998, the level of partisan conflict increased. Although Britto remained secure in his belief that he would be reelected (Britto 2007), the political situation in the state became more and more polarized as a result of Dutra’s strident campaign rhetoric (Nelson 2003, 2005). Dutra charged again and again that Britto had given too many incentives to foreign multinational firms. After winning the election and taking office in January 1999, Dutra took actions that increased the level of polarization in Rio Grande do Sul. Compelled to act on his campaign pledges, Dutra made clear that he would rescind incentives Britto’s government had promised to Ford. When Ford 7. The ptb was the last to join Britto’s coalition (‘‘Os Inimigos Se Tornaram Aliados,’’ 2006).

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cancelled its plans to locate a manufacturing plant in the state and went elsewhere, the political backlash against Dutra was severe, with workers themselves protesting his actions (‘‘Guı´aba, de Luto, Grita ‘Fica, Fica’’’ 1999). Concerned about losing yet another manufacturing plant, Dutra chose to let Dell keep its incentives and even sought to attract similar companies. Lacking in political security, however, Dutra refused to collaborate with the highly technocratically independent agency, Po´lo. This hindered his government’s investment promotion efforts, for Po´lo possessed not only a high level of technocratic independence but also a high level of transnational learning capacity, a quality sorely lacking in the Dutra government’s investment promotion efforts. For its part, Po´lo was unable to continue its investment promotion work without the government’s collaboration. During the Britto government, Po´lo received most of its income from government consulting contracts, contracts that were discontinued under the Dutra government. Although Po´lo had an independent source of funds in the subscription fees from companies that continued to provide it with financing for its operations, its budget fell from an average of about US$ 1.3 million per year from 1996 to 1998 to about US$ 400,000 per year during the Dutra years (1999–2002) (Merlin 2004). Even then, Po´lo could have continued its investment promotion efforts, but the government was unwilling to cooperate with the agency in this endeavor. Po´lo’s investment promotion effort ended during the Dutra government, shifting the agency’s focus toward local development activities, not because of a lack of funds but because no private ipa can undertake serious investment promotion work without government cooperation. Thus by ending the successful cooperation between the state government and the technocratically independent Po´lo, the Dutra administration, and also the state of Rio Grande do Sul, lost the benefit of Po´lo’s investment promotion capabilities.

Po´lo’s Technocratic Independence Although not as technocratic in its approach as cinde, Po´lo clearly did possess a high level of technocratic independence. Much smaller and newer than cinde, with far fewer employees—when Dell was making its investment decision in 1998, for example, the key officials were a president, a vice president, and two other executives working directly in investment promotion—Po´lo did not evaluate its programs as systematically as

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cinde did (A. Martins 2006; J. C. Martins 2006). But Po´lo did possess other elements of technocratic independence: (1) it hired its personnel on the basis of merit rather than politics, (2) it made its decisions primarily on the basis of technical rather than political criteria, and (3) it collaborated with other agencies pursuing similar goals. With regard to the first of these aspects of technocratic independence, hiring of personnel, the evidence clearly demonstrates that Po´lo hired on the basis of merit rather than political criteria. In 1998, when Dell was making its investment promotion decision, Po´lo’s two principal investment promotion executives, Diego Puerta and Alex Martins, both had MBAs from highly respected foreign universities: Puerta’s degree was from University of California–Berkeley and Martins’s was from Sheffield University in England. Martins had also completed a postgraduate course in managerial accounting at Oglethorpe University in Atlanta, Georgia. Both Puerta and Martins had extensive experience working in the private sector prior to coming to Po´lo: Martins worked for the U.S.-based consulting firm kpmg for several years, and Puerta worked in investment management (A. Martins 1999, 2006; Puerta 1999, 2006). In 1999 Po´lo hired another investment promotion executive, Miguelangelo Aza´rio, who had an MBA from Florida International University as well as prior international business experience working in the United States (Aza´rio 1999, 2001). In addition to its investment promotion officials, Po´lo’s president, Jose´ Ce´sar Martins (no relation to Alex), had extensive experience in business, having previously worked for a software firm and founded two companies of his own (J. C. Martins 1999, 2006). Although Richard Goldberg, Po´lo’s vice president, did not have prior international business experience, his background working for a previous governor and for the state legislature provided useful experience and contacts in that important area (Goldberg 2006; J. C. Martins 2006). On the second element of technocratic independence, criteria for making decisions, Po´lo used well-defined, previously established, technical criteria to decide on actions that would advance Rio Grande do Sul’s longterm growth. The principal metrics Po´lo’s executives used to evaluate companies’ proposed investment projects were: how many jobs the investment would bring to the state, how much revenue the state would gain from the investment, whether the proposed investment would create pollution, and the company’s willingness to invest in poorer parts of the state (A. Martins 2006; Puerta 2006). The entire executive team (Po´lo’s investment executives, president, and vice president) evaluated prospective companies using these criteria (A. Martins 2006; Puerta 2006). For example, the decision

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to try to win Dell’s investment (see below) highlights the importance Po´lo placed on making sure that the company was a good long-term ‘‘fit’’ for Rio Grande do Sul’s unique characteristics. In relation to the third aspect of technocratic independence, collaboration with other agencies pursuing similar goals, Po´lo’s closest collaborator was the government’s economic development agency, the Secretaria do Desenvolivmento e dos Assuntos Internacionais (sedai). During the Britto years, Po´lo was primarily responsible for developing Rio Grande do Sul’s strategy to promote nontraditional fdi and interacting with prospective foreign investors during the investment promotion process. sedai, in addition to supplying technical support to local firms and facilitating the state’s participation in Mercosul, represented the state government officially in negotiations with prospective foreign investors. Nelson Proenc¸ a, the director of sedai during the Britto administration, was far more than a mere political appointee. As a former IBM and Olivetti executive with years of experience in international business, he had an understanding of the needs of prospective nontraditional foreign investors and provided his own input into the government’s overall investment promotion strategy in this area (Cabral 2005; Proenc¸ a 1999). Thus as a separate agency concerned with investment promotion, sedai’s involvement in the investment promotion process provided independent oversight of Po´lo’s investment promotion efforts.

Po´lo’s Transnational Learning Capacity Po´lo’s technocratic independence, and the state government’s determination to attract fdi, gave the agency the ability and the will to develop a high level of transnational learning capacity. Po´lo’s highly internationalized staff, its systematic, proactive approach to learning about global business trends and prospective foreign investors, and its transnational strategic network clearly demonstrate the extent of the agency’s transnational learning capacity. A budget averaging about US$ 1.3 million per year in its first three years of operation (1996–98) contributed to Po´lo’s ability to hire a highly internationalized staff, if not quite as internationalized as that of cinde. Financed by government consulting contracts as well as by a wide range of business associations and companies in Rio Grande do Sul, Po´lo was able to pay salaries that, while not high in comparison with private firms, were sufficient to attract highly qualified, talented personnel from the pri-

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vate sector, several with international business experience and MBAs from U.S. and European universities. More important than the salaries, however, was the experience the agency offered—to work closely with top state government officials and high-level local and international business executives on a wide range of important projects (Aza´rio 2001; Cabral 2005; A. Martins 2006; Puerta 2006). In contrast to cinde’s executive director, Enrique Egloff, Po´lo’s president, Jose´ Ce´sar Martins, and vice president, Richard Goldberg, did not have extensive international educational backgrounds and work experience, although Jose´ Ce´sar Martins had been in the private sector for many years and Goldberg had relevant experience in the Rio Grande do Sul state government. Nevertheless, all of Po´lo’s investment promotion executives, those working day-to-day to attract specific firms, had extensive international educational backgrounds and work experience: as noted above, Diego Puerta had an MBA from the University of California–Berkeley, Alex Martins had an MBA from Sheffield University (and further graduate study in the United States), Miguelangelo Aza´rio had an MBA from Florida International University, and all had prior international business experience. Po´lo was able to recruit personnel with these qualifications because for relatively young, highly internationalized individuals such as these, the agency provided a stimulating environment to work on matters relevant to their interests. It is significant that Dell, recognizing their talent, later hired these three individuals to work in executive-level positions at Dell’s new Brazilian headquarters in Rio Grande do Sul (Aza´rio 2001; A. Martins 1999, 2006; Puerta 1999, 2006). In Costa Rica, Intel did the same with a number of cinde staff members. In addition to a highly internationalized staff, Po´lo also had a systematic, proactive approach to learning about global business trends and prospective foreign investors. In order to assess prospects for foreign high technology investors in Rio Grande do Sul, Po´lo commissioned a U.S.based consultant with expertise in this area to undertake a comprehensive study (Kirkpatrick 2006). Based on this study, Po´lo began actively pursuing such firms, a process that ultimately resulted in the agency’s effort to attract Dell. As Po´lo’s efforts to prepare for Dell’s visit to Rio Grande do Sul indicate (see below), Po´lo, like cinde, went to great lengths to learn as much as possible about individual corporations and to anticipate potential questions executives from these companies might ask before site selection teams visited. Finally, another important part of Po´lo’s transnational learning capacity was its transnational strategic network. Po´lo’s transnational strategic net-

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work consisted of three key components. The first component was Po´lo’s overseas office in San Francisco, which was run by a full-time staff person, a U.S. citizen. This office generated leads on prospective investors and followed up by informing these prospective investors about investment opportunities in Rio Grande do Sul. For budgetary reasons this office was in operation only a short time, from 1997 to 1998 (J. C. Martins 2006). A second component of Po´lo’s transnational strategic network was the representatives of many prominent domestic firms that sat on Po´lo’s board of directors and also the domestic firms and subsidiaries and branch offices of foreign firms that served as contributing partners to the agency. Membership in Po´lo as a contributing partner was available to any business association or company that contributed subscription fees to help finance the agency’s operations. Organizations represented included not only fiergs and federasul but also at least forty other business associations and companies from virtually every industry in Rio Grande do Sul (Aza´rio 1999; J. C. Martins 1999). This total membership elected the fivemember board of directors, which in turn made a recommendation to the governor of Rio Grande do Sul as to the choice of president of the agency.8 Contributing partners collaborated with Po´lo by making recommendations as to companies that agency might seek to attract to Rio Grande do Sul, facilitating contacts, and meeting with prospective investors from relevant industries, at Po´lo’s request, to discuss Rio Grande do Sul’s business environment (A. Martins 2006).These firms enhanced Po´lo’s transnational learning capacity by facilitating contacts with prospective foreign investors, meeting with visiting site selection teams, and providing suggestions to Po´lo’s staff about how to deal with international firms (Cabral 2005; Goldberg 2006; J. C. Martins 2006). The third component of Po´lo’s transnational strategic network was its contacts with expatriate business executives from Rio Grande do Sul working in the United States who served as ‘‘virtual agents’’ of the agency abroad.9 These contacts were a central component of Po´lo’s transnational strategic network (Cabral 1999, 2005; J. C. Martins 1999, 2006). Drawing on their knowledge of U.S. business practices, Po´lo’s virtual representatives instructed the organization’s staff on how best to approach, anticipate the needs of, and negotiate with foreign executives. 8. In 1998, Po´lo 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. 9. ‘‘Virtual agents’’ was Po´lo’s term. It referred to expatriates from Rio Grande do Sul working in the United States or Europe who were willing to assist Po´lo’s efforts to attract fdi.

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All of these aspects of Po´lo’s transnational learning capacity helped the agency to learn about and adapt quickly to the needs of potential foreign investors. These qualities, and Po´lo’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.

The Context for Dell’s Decision While Po´lo had high levels of technocratic independence and transnational learning capacity, the changing level of political security in Rio Grande do Sul’s political environment, and thus the willingness of different governors in different political contexts to collaborate with Po´lo, were important factors in determining the effectiveness of the state government’s investment promotion strategy. Before examining Po´lo’s role in attracting Dell and what happened subsequently, it is useful to have some background on Dell itself, the process it went through in selecting Rio Grande do Sul, and the factors that influenced its decisions. Dell began the process of selecting a site for its manufacturing plant in Brazil in 1998, after the company experienced a long period of astonishing growth. In order to maintain this rapid growth, Dell had adopted a strategy of emphasizing international expansion. From its headquarters in Round Rock, Texas, the company had already expanded its operations to the point that by the year 2000, it had offices in 34 countries around the world, sales in more than 170 countries and territories, and manufacturing facilities in 5 countries, including Ireland and China. Although the company outsourced some of its manufacturing to contract manufacturers in Mexico, it did not have any manufacturing facilities of its own in Latin America when, in 1998, it began evaluating possible sites for the construction of a manufacturing plant in Brazil. Brazil was a logical place for a manufacturing plant. In the late 1990s, sales of personal computers were growing faster in Latin America than anywhere else in the world, and Brazil, the largest Latin American country with a population of more than 170 million, was a very attractive market for the company. Despite the massive devaluation of Brazil’s currency, the real, in January 1999, Dell decided to invest in Brazil as part of its longterm strategy. Dell executives realized that having a plant in Brazil was essential if the company were to enter the Brazilian market successfully. Although in 1992 the Brazilian government had abandoned its ‘‘market

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reserve’’ policy of allowing only domestic manufacturers to make computers in the country, Brazil’s protectionist barriers for imports were still high. Moreover, Brazil was a member of Mercado Comu´n do Sul (Mercosul), the South American customs union that included Argentina, Uruguay, and Paraguay, with Chile and Bolivia as associate members.10 The benefit of Mercosul was that any company that produced at least 60 percent of a given product in any of the Mercosul countries would, with some exceptions, be able to export the product to any of the other Mercosul countries with zero tariffs. Clearly, Brazil’s Mercosul membership was another plus for putting the plant in Brazil. Once Dell selected Brazil, the question remained as to exactly where the manufacturing plant would be located. Brazil had a federal system, with twenty-six separate states, each with its own governor and state legislature, as well as a federal district, and many of these states eagerly sought Dell’s investment. Dell’s site selection team visited five different states in Brazil: Sa˜ o Paulo, Minas Gerais, Rio de Janeiro, Parana´, and Rio Grande do Sul. All met the requirements for levels of education and sufficient numbers of qualified personnel, adequate supply of electrical energy and telecommunications infrastructure, and solid transportation infrastructure. The main differences of interest to Dell were the special financial incentives each state offered and the nature of the agency with which the company interacted when making the investment decision.

Competition Between the States The Guerra Fiscal In their exuberance during Brazil’s transition to democracy, politicians elected to Brazil’s Constituent Assembly approved a constitution in 1988 that gave states considerably more power than they had had before. Among other things, states were authorized to collect a state value-added tax, the icms (see Chapter 1, 64 n. 14). Although the average for these taxes was 12 percent, states had some leeway to reduce it in order to attract investment. In theory, individual states could not change their icms tax rates unless 10. By 2008, Mercosul had expanded considerably. Along with Brazil, Argentina, Paraguay, and Uruguay, Venezuela was in the process of becoming a full member, and in addition to Chile and Bolivia, associate members included Peru, Colombia, and Ecuador.

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all states within the Conselho Nacional de Polı´tica Fazenda´ria (confaz), the representative body for the states on finance and taxation policy, agreed to do so. Nevertheless, from the beginning states made such changes without confaz approval. Since the early 1990s, the competition between the states to lower their taxes and attract investment had become so fierce that journalists called it the guerra fiscal, or taxation war. Taxation rates mattered to large transnational corporations trying to decide where to invest. Competition between these companies was fierce, and a difference in value-added tax meant that companies could offer their products at reduced costs without passing on the tax burden to consumers. Such incentives also compensated for the extra costs associated with investing outside of the more industrialized and heavily populated locations of Brazil, especially the state of Sa˜ o Paulo, which traditionally received by far the greatest proportion of Brazil’s foreign investment. Significantly, Sa˜ o Paulo itself did not offer this particular incentive; it did not need to do so. But many in Brazil saw this policy as detrimental to the country’s overall interests. Critics of the guerra fiscal argued that transnational corporations (tncs) could use it to play one state off against another for their own benefit, without concern for the welfare of the country as a whole. Poor Brazilian states, these critics maintained, were in no position to be giving tax concessions to large, wealthy transnational corporations (Moreira 2000; Neumann and Santana 1997). Supporters of the policy, in contrast, argued that without such incentives, the tncs would not invest in states far from the more industrialized regions (Caldeira 1999). And as one supporter of the policy put it, ‘‘12% [the full taxation rate] of nothing is still nothing’’ (R. Hinkelman 1999). The incentives that Brazil’s states could offer to attract foreign investment went beyond reductions in the icms. State governments could (and did, in many cases) also offer to provide free land, to build infrastructure (usually roads or port facilities), and to provide government loans on highly concessional terms, including lengthy grace periods and low interest rates. As with the icms tax reductions, these incentives also came under harsh attack from critics. This was the environment that Dell entered when it began its site selection process in Brazil.

Financial Incentives and Contrasting Approaches to Investment Promotion As Dell executives began their site selection process in Brazil, investigating the prospects for obtaining financial incentives in each state was clearly

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one of their chief concerns. Upon actually visiting each state, however, the site selection team’s initial and most important contacts were with the agency responsible for investment promotion. The nature of the working relationships Dell established with these agencies played a major role in the company’s decision-making process. Each state in Brazil had a unique approach to promoting foreign investment, and in every state, the investment promotion organization responsible for meeting with the Dell team had a slightly different organizational structure and style. With the exception of Po´lo, which collaborated with the state government of Rio Grande do Sul, all the state agencies that the Dell executives encountered were government agencies. As ida Ireland and Singapore’s edb have made clear (see Chapters 4 and 5), government agencies clearly can possess high levels of technocratic independence and transnational learning capacity and certainly can develop highly effective investment promotion strategies. In this instance, however, most of the agencies Dell encountered lacked these qualities, or at least lacked Po´lo’s high level of transnational learning capacity. This made a difference in how these agencies interacted with Dell. Although other states, for example, Minas Gerais, offered Dell similar financial incentives, only in Rio Grande do Sul did the Dell executives, working with Po´lo as an intermediary, encounter an investment promotion agency that they felt had made a concerted effort to understand Dell’s specific needs. Dell executives perceived that the government officials they were dealing with in the other states either did not sufficiently understand Dell’s unique requirements or were not sufficiently committed to attracting high technology investment. Sa˜ o Paulo, for example, was a state that initially attracted Dell. It had a large pool of skilled labor, and because of its large, relatively prosperous population, it was the principal market for computers in Brazil. Sa˜ o Paulo’s sheer market size was the main reason that, in the final selection process, two possible sites in the state—one in the city of Sa˜ o Jose dos Campos and the other in Campinas—were ranked high on the list, although still below Rio Grande do Sul. But as was the case with Intel executives during their visit to the state (see Chapter 1), Dell executives formed a negative impression of Sa˜ o Paulo when harried state government officials at the Secretaria de Cieˆ ncia, Tecnologia e Desenvolvimento Economico (sctde) appeared to be somewhat indifferent to Dell’s specificˆ concerns (Maxwell 2000, 2003). Thus once again sctde’s lack of responsiveness hindered the agency’s effectiveness. Additionally, Sa˜ o Paulo, which already had significant investment, had a policy of not offering special financial incentives (Funaro 1999).

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In Rio de Janeiro, Dell encountered a different situation with the state government’s ipa, the Companhia de Desenvolvimento Industrial do Estado do Rio de Janeiro (codin). Montero has documented that a high level of political polarization, and a corresponding lack of political security among political leaders in Rio de Janeiro, resulted in successive governors using codin as a source of patronage to strengthen their political positions (2001b, 2002). Thus codin lacked technocratic independence. Dell’s experience with the agency showed that it also lacked transnational learning capacity. The head of codin, accustomed to long, drawn-out negotiations with automobile firms that sometimes lasted for a year or more and unaware of Dell’s unique concern about concluding negotiations quickly, made a very low initial offer for financial incentives to Dell, expecting the company to come back with a counteroffer. He was stunned when the Dell executives, accustomed to making decisions on a much speedier basis, never returned (Weber 2000). In Parana´, the state government was not able to offer Dell financial incentives that matched what Rio Grande do Sul offered (Simia˜ o 1999; Sicuro 1999). In addition, Dell perceived that the state was giving the same presentation to them as it gave to all companies, regardless of the specific sector the company represented (Maxwell 2000). Other than Sa˜ o Paulo, which was ranked high principally because of the size of its market rather than its investment promotion efforts, only Minas Gerais came close to winning Dell’s investment. In Minas, Dell executives met with state government officials from various agencies, as well as with te´cnicos from Minas’s public investment promotion agency, the Instituto de Desenvolvimento Industrial de Minas Gerais (indi). Significantly, Montero shows that indi was a highly technocratic agency and that the political situation in Minas Gerais—a low level of political polarization among elites, in contrast to the situation in Rio de Janeiro—encouraged the state government to delegate significant authority over industrial policy to indi (2001a, 2002). Despite indi’s high level of technocratic independence, the agency lacked Po´lo’s high level of transnational learning capacity. One reason for this difference was that the industries Minas Gerais sought to attract (mining, steel, and automobiles) were different in many respects from high technology and other nontraditional industries. Prospective investors in nontraditional industries were more demanding and impatient than prospective investors from the more traditional industries that were the primary focus of indi’s investment promotion efforts (Maxwell 2000; Telford 1998, 2006). Thus indi, while possessing a high level of technocratic independence and staffed by highly competent personnel, did

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not need to develop transnational learning capacity to the same extent as other agencies such as cinde or Po´lo. Created in 1968, indi had a unique structure. It was financed partly by the Companhia Energe´tica de Minas Gerais (cemig), the state energy company—a ‘‘mixed enterprise,’’ 70 percent state owned, 30 percent private—and partly by the Banco de Desenvolvimento de Minas Gerais (bdmg), the state-owned Minas Gerais Development Bank. While indi was a government institution, then, the partially private ownership of one of indi’s supporting institutions, cemig, gave indi more flexibility in hiring personnel than it would have had if it were purely a state-owned institution.11 As a result, at least some of indi’s staff also received salaries that were considerably higher than those working in regular government agencies (Fontes 1999). In this way, indi was able to recruit highly qualified staff that specialized in at least six broadly diversified industrial sectors, who might otherwise have taken jobs in the private sector.12 It is a testament to indi’s effectiveness that Dell’s site selection team made three separate visits to Minas Gerais to meet with state government officials. The final proposal that indi prepared was only slightly less favorable than that of Rio Grande do Sul. Minas Gerais was able to offer Dell a 70 percent reduction in the icms tax for ten years; a loan for R$ 20 million (20 million reais, approximately US$ 17 million at then-prevailing exchange rates), with a four-year grace period and a four-year repayment period; and free land for the plant site (Governo de Minas Gerais 1998). But in the end, Dell chose Rio Grande do Sul. In spite of indi’s tremendous success at attracting traditional foreign direct investment to Minas Gerais in capital-intensive industries, such as mining and automobiles (for example, indi was principally responsible for attracting Fiat to the state in the 1970s, and later its suppliers), in some ways indi was less suited than Po´lo to the task of attracting fast-paced, nontraditional, high technology companies. Although indi’s cemig connection and its frequent contacts with key members of the mineiro business community gave it ties to local business executives, it did not have Po´lo’s degree of transnational learning capacity. 11. In fact, strictly speaking indi did not have its ‘‘own’’ staff because all of indi’s personnel worked for cemig or bdmg or were outsourced from other agencies and were technically ‘‘on loan’’ from these other institutions (Khoury Rolim Dias 2001, 2002). 12. These sectors included the following: Mining and Metallurgy; Chemicals and NonChemical Materials; Industry and Tourism; Agroindustries; Textiles, Garments, Leather, Footwear, Furniture and Publishing; and Mechanics, Electroelectronics and Computers (indi Web site). Clearly, indi, an older, larger, more established institution with a wider range of investment promotion activities, did not have what Po´lo was able to develop in a very short time: a specific focus on attracting high technology industries.

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First, indi’s staff was not as highly internationalized as Po´lo’s. None of indi’s regular employees, capable as they were, had prior executivelevel business experience of any kind, and certainly none had prior executive-level experience in international business or had received MBAs overseas (Khoury Rolim Dias 2002). Second, indi did not have, at least to the same extent as Po´lo, a transnational strategic network with connections to the foreign business community. Of course, indi staff traveled internationally to promote their state to potential investors. But, unlike Po´lo, indi did not have a network of expatriate business executives working abroad who served as ‘‘virtual agents’’ to the agency, alerting it to transnational companies considering making an investment in Latin America and advising it on how best to approach specific companies (Khoury Rolim Dias 2002). Furthermore, unlike the contacts with the foreign business community that Po´lo’s board of directors and contracting partners provided, with representatives from a wide range of domestic and foreign firms, indi’s board of directors consisted entirely of state government officials, all of whom were appointed by the governor. It was composed of the secretary of industry and commerce, the secretary of finance, the secretary of planning, and the presidents of cemig and bdmg. Beyond these missing aspects of transnational learning capacity, there was still another obstacle to indi’s ability to attract fdi in nontraditional, or at least in high technology, industries: indi was in some ways a victim of its own success. The agency’s past achievements in attracting companies from more traditional sectors had made such an impact on the state that when the Dell site selection team arrived, they had the impression that this was the primary focus of the government’s activities. Historically, of course, Minas Gerais had always had a strong mining sector (Minas Gerais itself means ‘‘general mines’’ in Portuguese). indi’s later success in attracting foreign investment from companies in the heavy capital equipment and automobile sectors further contributed to the state’s industrial development. Observing the results of this prior industrialization, the Dell executives came away with the impression that Minas Gerais, especially in the vicinity of the Fiat plant and the greater metropolitan region of Belo Horizonte, was a ‘‘heavy industry’’ or ‘‘rust belt’’ region. This reinforced their sense that the government officials they were dealing with in Minas had grown accustomed to working with the large, capital-intensive, and more traditional firms that were common in the mining and automobile industries and would not fully be able to appreciate Dell’s specific needs as a fast-paced, just-in-time–oriented, knowledge-intensive company (Maxwell 2000). Fair impression or not, the indi staff were unable

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to change this view during the Dell executives’ time in Minas Gerais, and it had a strong influence on the company’s decision not to invest there.

The Effectiveness of Po´lo’s Investment Promotion Strategy Po´lo’s collaboration with the state government of Rio Grande do Sul clearly played an important role in Rio Grande do Sul winning Dell’s investment. Po´lo’s technocratic independence and transnational learning capacity enabled the agency to develop a highly focused investment promotion strategy, targeting fdi from nontraditional companies, such as Dell, that would serve to diversify the state’s economy but would still be very appropriate given the state’s unique characteristics. Po´lo’s strategy, similar to that employed by cinde with Intel, was to use Dell’s plant as an anchor investment, which would attract further investment of that type. Po´lo’s staff made use of their internationally oriented skills and experience; their proactive, systematic approach to learning about prospective foreign investors; and their transnational strategic network. This greatly enhanced their responsiveness—and the responsiveness, therefore, of the state government—to the needs of a prospective foreign investor like Dell. Unfortunately, with a much lower level of political security than Britto had experienced, and not wanting to work with an agency or follow an approach that had been central to the Britto government’s policies, Governor Dutra refused to continue the state government’s successful collaboration with Po´lo. As a result, this investment promotion strategy could not be sustained over consecutive administrations. During the Britto administration, Po´lo and the state government collaborated very effectively. Indeed, it was Po´lo that instigated the initial contact with Dell. Rio Grande do Sul was not on Dell’s short list when representatives from Po´lo and the state government visited the company in early 1998 and convinced Dell’s senior executives that the state deserved a closer look. Yet by June 1998—less than six months after that initial visit—Dell had decided to establish a plant in Rio Grande do Sul. Certainly Rio Grande do Sul had a lot to offer. It had well-developed, modern infrastructure, and as the first state to privatize its telecommunications company, its telecommunications infrastructure was among the best in the country. Home to a number of well-regarded universities, Rio Grande do Sul had a well-educated population. It was one of the most prosperous of Brazil’s states, with a standard of living that some rated as the highest in Brazil. In the end, too, the Rio Grande do Sul state govern-

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ment was able to offer very generous terms: a 75 percent reduction in the icms tax for twelve years, plus a loan for R$ 20 million loan (US$ 17 million) with a five-year grace period, to be paid back over a ten-year period (Diefenthaeler 1999, 39). While offering generous incentives, the state government made sure that Dell would be providing benefits to Rio Grande do Sul as well. In the contract that the government signed with the company, Dell promised to develop joint research and development projects with local universities, such as the Universidade Federal de Rio Grande do Sul (ufrgs) and the Pontifı´cia Universidade Cato´lica (puc) (Fontoura 1998a, 1998b).13 In addition to the company’s R$ 128 million investment in its plant (about US$ 108 million), which would create beneficial linkage effects in the local economy in its construction and continued operation, Dell promised to hire 260 direct employees in the first year and 700 employees within five years. If it did not, the contract would be nullified (‘‘Alvorada Instala Po´lo Tecnolo´gico Com a Dell’’ 1998; Fontoura 1998a). These potential benefits help to explain why so many states in Brazil considered Dell’s investment to be such a prize and why Rio Grande do Sul was willing to offer such attractive incentives. Nevertheless, without Po´lo’s intervention Dell would not have considered the state. Collaboration with Po´lo clearly helped to enhance the effectiveness of the state government’s investment promotion strategy, key to Dell’s decision to invest in Rio Grande do Sul.

Targeting High Technology Firms After Britto, the pro-business moderate, won the 1994 gubernatorial election, he wanted to fulfill his promise to promote foreign investment that would bring jobs and economic development to Rio Grande do Sul. Britto was, for the most part, able to follow through with his plans. Using tax and other incentives aggressively, he was able to land large investments (Portas Abertas 1998). To convince General Motors to establish a plant in 13. Of course, in order to qualify for a tax incentive the federal government gave to the computer industry known as the proceso produtivo ba´sico (ppb), which included a reduction of up to 50 percent of corporate income tax, companies such as Dell had to invest 5 percent of their total revenue in Brazil on research and development (R&D) within the country. At the time, at least 2 percent of this had to be invested in universities or other governmentapproved institutions; the rest could be invested inside the company. (See Bastos 1998, 15.) As a result of these provisions, Dell would have to spend some money in Brazil on R&D in any case. The federal law, however, did not specify where in Brazil this expenditure on R&D would have to be made.

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the state, for example, Britto had offered substantial reductions in the icms state sales tax and generous loans at low interest rates, totaling hundreds of millions of dollars (D. Oliveira 1997). Jose´ Ce´sar Martins, who became president of Po´lo midway through Britto’s administration in 1997, collaborated closely with the state government in an aggressive effort to attract more foreign investment like the General Motors plant. In addition to its representative in the San Francisco office from 1997 to 1998, the agency maintained close contacts with several virtual representatives, expatriate business people working in New York City and San Francisco who helped the agency by keeping tabs on investment trends and providing advice on how to deal with foreign investors. Martins also made sure that Po´lo’s staff participated in frequent investment forums and road shows around the world in order to make contacts with potential investors and persuade them of the merits of investing in Rio Grande do Sul. On one of these visits, Martins and other representatives from Po´lo accompanied Governor Britto himself, as well as Nelson Proenc¸ a, head of sedai, to New York City for a series of meetings with potential investors. Marcelo Cabral, U.S. managing director for Banco Fator (a Brazilian investment bank) in New York City and one of Po´lo’s virtual agents in the United States, had a substantial role in arranging this event. A former equity analyst for Morgan Stanley, Cabral had extensive experience dealing with U.S. institutional investors interested in Latin America, such as Scudder and Alliance Capital, and knew something about what made them tick. As an informal (‘‘virtual’’) advisor to Po´lo, he explained to Martins that such investors would want to hear only briefly from the governor and from Proenc¸ a before speaking directly with managers of local companies looking for investment capital. To Cabral’s surprise, Martins, a businessman himself, understood immediately and followed his suggestion (Cabral 1999, 2005; J. C. Martins 1999). At the meeting, one of the investors argued that Rio Grande do Sul should seek to attract high technology companies. Although Governor Britto was at first resistant to this idea, Nelson Proenc¸ a, formerly an executive for IBM in Brazil, was intrigued by this possibility. He reasoned that focusing on high technology investment made a lot of sense given Rio Grande do Sul’s unique characteristics: the large number of universities in the state offering degrees in computer science and electrical engineering and the overall high levels of education in the state’s population as a whole (Proenc¸ a 1999). Jose´ Ce´sar Martins also thought the idea was worth pursuing. After

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discussing it further with Proenc¸ a, Martins asked Cabral to help Po´lo find a consultant in the area of high technology. From his extensive contacts in the financial community, Cabral knew the person to call: Duane Kirkpatrick, head of international operations for Robertson Stephens in San Francisco, a leading investment bank in the area of financing for high technology businesses. Kirkpatrick agreed to serve as an outside consultant to Po´lo in assessing Rio Grande do Sul’s prospects for attracting investment from high technology companies (Kirkpatrick 2006). After an extended visit to Rio Grande do Sul, Kirkpatrick concluded that high technology investment would provide the state with high-wage jobs in addition to linkages to the local economy. He also made a number of suggestions about how Po´lo and the state government could attract such firms (Kirkpatrick 2006). Impressed, Po´lo, in collaboration with Nelson Proenc¸ a and Governor Britto, decided to focus future investment promotion efforts in this area (J. C. Martins 1999; Proenc¸ a 1999).

Responsiveness As part of the new strategy, in February 1998, Jose´ Ce´sar Martins and a number of representatives from Po´lo flew to San Francisco to attend a symposium for high technology industries sponsored by Robertson Stephens. By this time, Po´lo, with the help of Kirkpatrick and its ‘‘virtual agents’’ at Banco Fator (Marcelo Cabral and Dennis Rodriquez), had identified a list of high technology companies that it would like to attract to Rio Grande do Sul. One of these was Dell Computer Corporation. During the conference, Dennis Rodriquez came upon an article in Ame´rica Econo´mica magazine about Dell’s interest in building a manufacturing plant in Brazil, which he showed to Martins. Demonstrating just how quick and flexible Po´lo could be, Martins and his staff immediately left the conference, went back to their hotel, and put in a call to Dell. When they got through to Tom Armstrong, Dell’s vice president for tax and administration, they learned that the company’s site selection team had been to Brazil three times and was closing its short list of potential sites. ‘‘You are going to lose a big opportunity,’’ Armstrong said. Martins protested, ‘‘But we are fast!’’ Martins told Armstrong that he, his staff, and Nelson Proenc¸ a (who was in New York at the time) could be at Dell’s headquarters the next day. They packed up, left the hotel, and were on a plane to Texas that night. At Dell headquarters, the group was to be received by some of Dell’s senior executives, including Darryl Robertson and Tom Armstrong. Before

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the meeting, they were given a tour of Dell’s facilities and manufacturing plant in Round Rock, accompanied by one of the workers in the plant, a skilled technician who happened to be Brazilian. During this tour, Marcelo Cabral, having heard from Duane Kirkpatrick about Ireland’s Industrial Development Authority (ida, now known as ida Ireland), which like Po´lo sought to attract fdi to promote development, mentioned in Portuguese to the Dell technician that Po´lo was pursuing an ida-style strategic plan for Rio Grande do Sul. ‘‘I’ll tell you how to win the hearts of Dell management,’’ the technician responded. ‘‘Make sure you tell them that Po´lo is like the ida’’ (Cabral 2005; J. C. Martins 1999). He explained that Dell’s senior executives had had an excellent experience working with the ida. They had returned from a site selection trip to Ireland raving about how professional and helpful the ida had been. Dell’s experience with the ida was an important factor in its decision to build a plant in Ireland. Significantly, although Po´lo had not consciously modeled itself after the ida, it had many of the same characteristics. Po´lo was entirely private but worked in close collaboration with the government. It also had a well-targeted investment promotion strategy: it selected specific industries appropriate for its business conditions and then focused on attracting investment from specific companies in those industries. Similarly, ida’s targeted investment promotion strategy allowed it to research an industry and specific companies thoroughly to anticipate any questions that site selection teams might have and address questions, concerns, or potential problems in advance, before the team raised them. These aspects of transnational learning capacity helped make the organization highly effective. In its effort to target high technology companies appropriate for Rio Grande do Sul’s business environment, Po´lo was pursuing a strategy similar to ida’s. Thus, in the meeting with Dell’s senior management, Jose´ Ce´sar Martins emphasized that Po´lo was like the ida. He noticed that this comment definitely caught the attention of the Dell executives. After listening attentively to presentations from Proenc¸ a and Martins and asking a number of penetrating questions about Rio Grande do Sul’s level of education, rules about unions, and infrastructure, the Dell team told the visitors that they had already visited Sa˜ o Paulo, Parana´, and Minas Gerais but would like to return to Brazil to visit Rio Grande do Sul. The Dell executives came to Rio Grande do Sul sooner than expected, only five days after that first meeting. With only short notice of the visit, Po´lo called on all its speed and agility. Notified over the weekend that the Dell executives were arriving Monday, Martins immediately called his staff and explained that they would have to make some urgent preparations for

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the meeting: charts would have to be prepared, statistics ready; in short, everything that would be relevant to Dell’s concerns. Martins also called Proenc¸ a, who convinced the governor to cancel meetings that Monday in order to give a presentation to the visiting Dell team. Thinking ahead, Martins arranged to hold the meeting with Dell in a hotel, rather than in Po´lo’s offices, in order to avoid unwanted press attention at this delicate stage of the negotiations process. But most important, Martins was able to use his contacts in the business community, most of them contributing partners to Po´lo, to arrange private interviews for the Dell team with important business leaders in the state. These included high-level executives from three local companies: Gerdau, a steel conglomerate; Ipiranga, a gasoline distribution firm; and Rede Brasil Sul (rbs), a media company. Also present was one U.S. multinational, Coca-Cola. Martins was sensitive to the concerns of business executives. He knew the Dell team would want to talk privately with local business executives in order to gain a perspective independent of that of Po´lo and the state government officials. The Po´lo officials also made sure to take the Dell executives to a very popular local microbrewery called Dado Bier on the first night they were in town. They knew that the ambience of this popular local restaurant and bar would make a favorable impression on the Dell executives, and it did. To the visitors from Dell, the obviously well-educated, high-energy young clientele at Dado Bier seemed very similar to the kind of crowd that frequented such places in Austin, Texas (Maxwell 2003). This was another indication that Dell would be able to find the kinds of employees it needed in Rio Grande do Sul. In addition to executives, engineers, and technicians, Dell’s new plant in Brazil (which would also become its headquarters there) would need a large staff of personable, articulate, and technically proficient employees to take orders and handle technical questions over the telephone. All of Po´lo’s quick, highly focused 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 said that they were interested (Aza´rio 1999, 2001; J. C. Martins 1999; Maxwell 1999). They would send more teams later to examine potential sites more carefully, to ask additional questions, and to negotiate financial incentives. The Dell executives made clear that they would continue to negotiate with other states but that they had decided that Rio Grande do Sul was definitely one of the leading candidates. To

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that extent, then, Po´lo had been successful. Rio Grande do Sul would now just have to win against the other competing states. In the end, of course, this was what happened. The Dell team, clearly intrigued by the initial visit, sent more teams and continued negotiations. Ultimately, determined to win high technology investment for the state, the Britto government offered Dell the best terms for its investment. Less than six months after it had begun negotiations with Po´lo and the state government, Dell had decided to build its manufacturing plant in Rio Grande do Sul.

Lack of Sustainability Dell’s plans to build its plant finally appeared to be set, and then the time came for another round of gubernatorial elections. Unfortunately, Britto’s challenger—Olivio Dutra once again—did not approve of the deal Britto had negotiated with Dell. A member of Brazil’s socialist pt, or Workers’ Party, Dutra opposed granting of benefits to foreign transnational corporations. One of the main charges he raised against Britto during his campaign for governor was that ‘‘excessive’’ concessions granted to foreign transnational corporations would have to stop. Dutra had served as mayor of Porto Alegre, where both he and the pt had a reputation for honest and effective government. Moreover, the Workers’ Party was popular in 1998, as Brazil’s financial crisis deepened and the federal government attempted to solve it with higher interest rates and other austerity measures. Perhaps not too surprisingly, Dutra won the 1998 election. During his campaign, Dutra repeatedly talked about the excessive benefits given to tncs and, as a result, once he was in office he had to take action. During the first several weeks, he argued that the tax incentives granted to Dell, and also to Ford, which planned to build a multimilliondollar plant in the state and had been offered millions in incentives, would have to be renegotiated (R. Oliveira 1999). Ford’s attempts to negotiate with Dutra were futile. The new governor held fast to his position regarding the incentives by suspending the payment of loans the Britto government had promised the company (Fritsch 1999). Realizing that other states would offer the same incentives and with minimal capital sunk into the project, Ford investigated its opportunities elsewhere. The state government of Bahia was quick to offer incentives identical to those the Britto administration had offered. Additionally, by

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locating its plant in Bahia, Ford would receive special incentives from the federal government for automobile manufacturers investing in the poorer northeastern states of Brazil (Silveira 1999). It helped Bahia’s case considerably, of course, that the federal government was more than willing to intervene to make it an attractive alternative to Rio Grande do Sul. Antonio Carlos Magalha˜ es, president of the Brazilian Senate at the time, was an enormously influential politician from Bahia who was a key member of President Cardoso’s governing coalition. It was Magalha˜ es who pushed through the Congress a modification of the legislation on incentives for manufacturing automobiles in the northeast so that Ford could still take advantage of it—even though the deadline for additional companies to do this had passed (Maduen˜ o 1999, 1). The federal government approved additional incentives in order to compensate for the extra costs Ford would face by putting its plant in Bahia rather than the more conveniently located Rio Grande do Sul. It was also significant that Brazil’s national development bank, Banco Nacional de Desenvolvimento Econo´mico e Social (bndes), provided a low interest loan of over US$ 300 million to Ford, more than it had planned to give for Ford’s investment in Rio Grande do Sul. Again, the justification was that the additional amount was needed to make up for the extra costs associated with locating the plant in Bahia (Klein 1999; Marin 1999). Realizing that Ford was likely to withdraw from its plan to invest in Rio Grande do Sul, Dutra tried to negotiate with the company, but he was too late. Ford had made its decision and soon signed a contract with the Bahian state government. The loss of Ford’s investment was politically disastrous for Dutra. Residents of the town where the plant was to have been located protested (‘‘Guaı´ba, de Luto, Grita ‘Fica, Fica’’’ 1999). The press lambasted the governor. And of course, the political opposition had a field day lamenting the jobs that had been lost. Many interviewees argued that the loss of Ford’s investment was a turning point in Dutra’s stance toward Dell (de Munno 1999; R. Hinkelman 1999; Klein 1999; J. C. Martins 1999). Wary of losing another large transnational investment, the governor backed off on his tough negotiating stance with Dell. In the new contract, Dell, unlike Ford, kept all of the original financial incentives the Britto government had offered. At the same time, the government was able to negotiate a politically face-saving deal with the company. Dell agreed to commit itself to providing at least seven hundred jobs in the state within five years and also agreed to donate

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US$ 10 million for research centers and for teaching purposes.14 Dell would channel the money for teaching purposes through two nongovernmental organizations operating in Rio Grande do Sul: Parceiros Volunta´rios and the Comiteˆ para a Democratizac¸ a˜ o da Informa´tica, or cdi (an organization that provided computers to favelas in the state). Dell’s director of corporate affairs, Fernando Loureiro, emphasized that Dell’s system of direct sales meant that the sales tax paid on its products stayed in Rio Grande do Sul rather than being paid in other states. ‘‘We are democratizing tax collections for Rio Grande do Sul,’’ he affirmed (Diefenthaeler 1999). Amanha magazine noted that Loureiro appeared to have ‘‘assimilated rapidly the language of the (pt) government’’ (Diefenthaeler 1999). Dell’s key managers in Rio Grande do Sul maintained very friendly relations with the new state government. Whenever possible, they stressed that the computer industry conformed to the egalitarian ideals of the Workers’ Party, since computers facilitated the dissemination of information, which had a socially democratizing influence (de Munno 1999). Government officials, including the new head of the Secretaria de Desenvolvimento e dos Assuntos Internacionais (sedai), Jose´ (‘‘Zeca’’) Vianna de Mora˜ es, readily adopted and echoed this ‘‘democratizing’’ theme in public speeches. Although Dell and the new government were able to maintain close relations, Po´lo and the new government were not. Unwilling to delegate authority over investment promotion to Po´lo, the government no longer collaborated with the agency in attracting investment to the state. Therefore, they began to operate entirely independently of one another. Lacking qualified personnel of Po´lo’s caliber, trained and qualified to work with potential foreign investors, the new government experienced significant difficulties in attracting new foreign investment, especially from the more demanding high technology companies.15 Executives at Intel’s offices in Sa˜ o Paulo, for example, were not impressed with the new government’s efforts to persuade Intel to locate an investment in the state (Aza´rio 1999). 14. Even these particular ‘‘concessions’’ were really not that different from what Britto had negotiated earlier. In the earlier contract, Dell had agreed to provide seven hundred jobs within five years and to spend a portion of its federally mandated expenditures on R&D in Brazil locally, in Rio Grande do Sul, by financing research projects on product development with local universities. 15. It was significant that even the head of sedai in the Dutra government, Jose´ (‘‘Zeca’’) Vianna de Mora˜ es, had absolutely no prior experience in international business (Vianna de Mora˜ es 2007)—in marked contrast to the head of sedai during the Britto years, Nelson Proenc¸ a, who had many years of experience working for IBM and Olivetti.

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sedai’s initial efforts to contact the company seemed clumsy and amateurish—a problem that Po´lo had never experienced.

Outcome: Level of Nontraditional fdi Attracted Po´lo’s well-targeted, responsive strategy did lead to Rio Grande do Sul’s winning Dell’s US$ 108 million investment. But because the new government was unwilling to continue to collaborate with a technocratically independent agency, such as Po´lo, the strategy could not be sustained over time. In part for this reason, the state government of Rio Grande do Sul was unable to attract more nontraditional fdi during the time the Dutra government was in office, and Dell did not serve as an anchor investment to the extent that originally had been anticipated. By the end of the Dutra years, Po´lo had remodeled itself as essentially a regional development agency rather than an investment promotion agency (Krummenauer 2006; Merlin 2005). For this reason, future governments lacked the benefit of the agency’s former expertise in this area. Even if they had wanted to collaborate again, Po´lo’s transnational learning capacity was severely diminished. The highly internationalized personnel who had worked for Po´lo during the Britto and Dutra years left to take jobs in the private sector, and the new agency’s focus was on projects to promote regional development, not efforts to promote nontraditional fdi.

Dell’s Impact on Rio Grande do Sul and Brazil Although the investment promotion strategy could not be sustained over time, and in spite of the difficulties the Dutra government faced in attracting new investment, Rio Grande do Sul continued to benefit from the earlier collaboration between Po´lo and the previous government.16 Dell built its plant and stayed on.17 The company’s investment was successful: 16. Even after the Dutra government ended and more moderate governors took office, Po´lo and the state government never reestablished the close partnership they had had in the past (Merlin 2005). Such an outcome seemed possible again, however, after Governor Yeda Crusius from the moderately left-of-center psdb party, having defeated Olivio Dutra by 54 percent to 46 percent in Rio Grande do Sul’s 2006 gubernatorial election, took office in January 2007 and appointed Nelson Proenc¸ a once again as head of sedai. 17. Although Dell built its plant on schedule, an unusual development forced the company to build its temporary headquarters, and the plant itself, in the municipality of Eldorado do Sul rather than in Alvorada as originally planned. The owner of the land in Alvorada where the plant was to be built demanded much more money for the sale of his land than

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within a short time Dell was exporting computers from its plant in Rio Grande do Sul not only throughout Brazil but also to the rest of Mercosul (Brandt 2001). Dell’s initial investment in its plant was about $108 million. Its contract with the government required that it create over 700 jobs within five years. By 2005, Dell had more than accomplished this goal, with a total of more than 750 direct jobs created. About 550 of these jobs were at Dell’s headquarters in Eldorado do Sul, the location of the plant itself as well as Dell’s Brazilian technical support center and marketing and sales divisions (sedai 2005). As part of its contract with the government, Dell also agreed to invest in joint development projects with local universities. Toward that end, Dell developed a partnership with the Pontifı´cia Universidade Cato´lica (puc) in Porto Alegre to create a software development center housed within the university. This center created about 200 additional jobs (Merlin 2005; sedai 2005). Dell imported its advanced components from the United States or Asia. But it used a number of indirect materials from Rio Grande do Sul, other inputs from suppliers located in the state of Sa˜ o Paulo (Merlin 2005), and monitors from the Zona Franca de Manaus, a free trade zone located in the state of Amazonas (sedai 2005). Finally, although no new nontraditional fdi came to the state during Dutra’s government, after Dutra’s term ended and more moderate governors took office, fdi from nontraditional sectors began to return. Dell’s presence in the state, if not an anchor luring significant additional amounts of nontraditional fdi as Intel did in Costa Rica, was at least a selling point. For example, Softek, a Mexican-based software development company, invested in the state in 2005. Executives making the decision explained that their initial interest in Rio Grande do Sul was sparked by their knowledge that Dell had chosen to invest there (Merlin 2005; Po´lo RS—Ageˆ ncia de Desenvolvimento Web site). On May 9, 2006, Dell announced that it was moving its manufacturing plant to the city of Hortolaˆ ndia, in the state of Sa˜ o Paulo, to be closer to customers (‘‘Dell Reinforces Commitment with Brazil’’ 2006). Apparently, sales in other countries of Mercosul had not been as promising as anticipated, and most of Dell’s customers continued to be in the state of Sa˜ o Paulo. Nevertheless, Dell chose to keep its Brazilian headquarters, had been anticipated, and Dell could not wait for the negotiations over this issue to be concluded before constructing its plant. Therefore, it proceeded at an alternative site in Eldorado do Sul.

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sales, marketing, and services divisions, as well as its software development center—all told, by 2008 still accounting for more than 700 direct jobs—in the state of Rio Grande do Sul. A senior executive at Dell Brazil confirmed that this move affected only manufacturing, and Dell had no intention whatsoever of moving any of these other, relatively well-paid jobs outside of the state (da Silveira 2007).

Implications As this case indicates, states that collaborate with an agency like Po´lo can enhance their ability to attract nontraditional fdi. Po´lo’s transnational learning capacity contributed greatly to its ability to understand the needs and concerns of prospective nontraditional firms, such as Dell. At least one aspect of that transnational learning capacity, Po´lo’s close ties with the domestic and foreign business community provided by its transnational strategic network, could create opportunities for clientelism. But Po´lo’s technocratic independence allowed it to avoid this problem. The enhanced transnational learning capacity that Rio Grande do Sul’s partnership with Po´lo provided helps explain why Rio Grande do Sul, among all the states on Dell’s short list, was successful in winning Dell’s investment. Other than Sa˜ o Paulo (which Dell considered primarily because of its market size), the state that came closest to attracting Dell was Minas Gerais, which also had an effective investment promotion agency, indi. In spite of its expertise at investment promotion, however, indi did not have the same level of internationalization of its staff or the same sort of transnational strategic network that helped make Po´lo so successful with demanding nontraditional investors. As the partnership between Po´lo and the state government of Rio Grande do Sul also shows, this sort of collaboration was more likely to continue successfully throughout consecutive administrations when the level of political security remained high. In Rio Grande do Sul this was not the case. The high level of partisan conflict in the state during Dutra’s time in office (1999–2002), leading to Dutra’s increasing isolation and vulnerability, made him unwilling to collaborate with Po´lo. As a result, the relationship between Po´lo and the state government collapsed. The new government’s lack of transnational learning capacity contributed to its inability to attract additional nontraditional fdi. Despite this failure, Dell’s original investment and its further investments in joint projects with local universities brought about continuing

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benefits for Rio Grande do Sul in the form of jobs, partnerships with educational institutions, and linkages with local suppliers. These benefits continued even after Dell moved its manufacturing plant to Sa˜ o Paulo, keeping its headquarters office and all other operations in Rio Grande do Sul. This result suggests that even when an effective investment promotion strategy cannot be sustained over time, initial successes can continue to bring lasting benefits, albeit less than what might have been possible if the strategy had continued. The growing literature on subnational policymaking in Latin America indicates that some of the most impressive and innovative efforts to promote economic development in the region are being made at the subnational level.18 Nevertheless, globalization presents a challenge to states attempting to promote local economic development. Indeed, it can present a challenge to state sovereignty itself. As this case demonstrates, however, collaboration with an agency like Po´lo can enhance a state’s ability to harness globalization for its own ends.

18. Important works on subnational policymaking include Willis, Garman, and Haggard 1999; Tendler 1997; and Montero 2000, 2001a, 2001b, 2002.

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Chile and CORFO’s High Technology Investment Promotion Program

In early 2000, Mario Castillo, a deputy director of Corporacio´n de Fomento de la Produccio´n (corfo), Chile’s economic development agency, helped to devise a plan that signaled a dramatic change in direction for Chile.1 Even during the Pinochet regime and thereafter, with the supposedly market-oriented ‘‘Chilean Model’’ in place, the Chilean government had provided export incentives and subsides 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; Ffrench-Davis 2002; Kurtz 2001; Macario 2000; Perez-Aleman 2000, 2003; Schurman 1996). But unlike many other Latin American countries, Chile had refrained from actively promoting foreign direct investment (fdi) from particular sectors or from specific firms. Although the government had a Foreign Investment Committee, this agency responded mainly to inquiries from prospective investors seeking information about the Chilean business environment. For the most part, the government relied on market forces alone to determine which specific foreign companies invested in the country. As a result, primary products-based and 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 bypassed Chile as a poten1. Those involved in the initial planning included Mario Castillo, deputy director of strategic planning at corfo; Carlos Alvarez, director of investment and development; and corfo’s executive vice president and CEO, Gonzalo Rivas.

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tial site for investment. Intel’s 1996 decision to locate a major manufacturing plant in Costa Rica, rather than in Chile, particularly shocked Chilean government officials. The concern about moving Chile’s economy into new areas took on added urgency after the Asian crisis of 1997. Given Chile’s emphasis on commodity exports and the dramatic decline in demand for primary products in Asia, Chile’s economic growth rate fell from an average of almost 8 percent per year from 1987 to 1997 to less than 3 percent per year from 1998 to 2000 (Cadot, Casanova, and Trac¸ a 2002, 6–7). Copper alone, the basis for more than 40 percent of Chile’s exports, declined in price by 50 percent from 1997 to 1999 (Cadot, Casanova, and Trac¸ a 2002, 7). Seeing a strong need for economic diversification and still dismayed by Chile’s loss of the Intel plant, 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 Silicon Valley to give a talk at a conference organized by corfo and the Foreign Investment Committee for potential high technology investors. This conference, and Lagos’s talk, marked the launch of Chile’s new High Technology Investment Promotion Program.2 corfo differed from cinde and Po´lo. Created in 1939 as an autonomous public development agency, by the late 1950s, in the context of a democratic regime that provided a low level of political security for Chile’s presidents, corfo lost its technocratic independence. From the late 1950s under democratically elected presidents, and continuing through the military years from 1973 to 1990, different governments used the agency to promote narrow, particularistic interests, such as providing economic assistance to political allies (Cavarozzi 1975, 356–60; Troncoso 2002, 2005). But with the advent of a new democratic regime in Chile in the 1990s, which brought with it stable coalitions, a disciplined political party system, a low level of partisan conflict, and solid margins of victory for winning candidates in presidential elections—all of which provided a much higher level of political security to Chile’s presidents—corfo underwent a restructuring, regaining its technocratic independence. Thus by the time corfo began its High Technology Investment Promotion Pro2. In fact, Lagos had first announced the new program publicly during a visit to New York City several months before, but few noticed at the time. The Silicon Valley Conference attracted much more media attention.

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gram in 2000, it once again had a high level of technocratic independence. Unlike cinde and Po´lo, however, it still possessed only a low level of transnational learning capacity. In marked contrast to cinde and Po´lo, corfo’s High Technology Investment Promotion Program lacked a highly internationalized staff; a systematic, proactive approach to learning about global business trends and prospective foreign investors; and a relevant transnational strategic network. With a low level of transnational learning capacity related to the promotion of nontraditional fdi, corfo’s initial investment promotion strategy was unfocused and failed to take adequately into account the specific kinds of nontraditional fdi that would be the best fit for Chile. But corfo’s experience is remarkable in that even with a relatively small initial budget for its High Technology Investment Promotion Program, and lacking an array of foreign offices or a staff with extensive experience with international corporations, it was able to learn how to adapt its strategy, albeit with some difficulty and delays, to the needs of prospective foreign investors. corfo did this by developing one aspect of transnational learning capacity—a transnational strategic network related to the promotion of nontraditional fdi—on its own, without the benefit of foreign offices or virtual representatives and with a budget for its High Technology Investment Promotion Program of only about US$ 700,000 per year from 2000 to 2003 (Castillo 2006; corfo 2007; Sutin 2007).3 Once created, this network enabled corfo to develop a more effective investment promotion strategy in the sense that this strategy was targeted and responsive to those nontraditional investors most suited to Chile’s business conditions. corfo’s effort to attract nontraditional fdi has important implications. It highlights the importance of political security, technocratic independence, and transnational learning capacity in developing effective strategies to promote nontraditional fdi. It also demonstrates that a transnational strategic network is a vital component of an ipa’s (and hence a government’s) transnational learning capacity. Finally, corfo’s effort shows that it is possible for governments to create such a network, and use it to develop effective investment promotion strategies, even without a large budget or a highly internationalized staff. 3. Although from 2004 to 2006 the average annual budget increased to just over US$ 1 million (corfo 2007, Sutin 2007), this was still small in comparison to the budgets for cinde and Po´lo. (Note that as with the budgets cited for cinde and Po´lo, these figures do not include the cost of incentives.)

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Political Security in Chile Political Party Discipline and Stability of Party System/Coalitions Chile’s evolving political context affected the level of political security the country’s presidents experienced. In the years before the 1973 military coup, the level of political security in Chile was low. 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 between key political players. By the early 1950s, however, this compromise began to break down, a process precipitated by the exhaustion of the importsubstitution model and the inability of the government 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 unstable coalitions in Chile made comprehensive reform of the civil service unlikely. As she states, ‘‘some agencies were highly professionalized and others extremely politicized’’ (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 Concertacio´n de Partidos por la Democracia (cpd) and the center-right Unio´n 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 ones. One reason for the emergence of stable, national-level coalitions was Chile’s unique binomial electoral system. Before the 1973 coup, Chile had a traditional open list, multiparty district, proportional representation electoral system. 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 as a way to protect its interests in the new regime and to preserve stability (Siaveles 2000, 168). Under the binomial system, each of Chile’s electoral districts has two representatives, and coalitions are binding at a

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national level. As Aninat, Londregan, Navia, and Vial explain, ‘‘each of the lists (coalitions/parties) receiving the two highest vote shares wins one of the two available seats per district unless the list 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 into national-level coalitions, this system makes the development of more than two coalitions difficult. This is one reason why Chile has had two national coalitions since the implementation of this system, with each claiming close to 50 percent of the members of the Congress. This system also gives individual parties a strong incentive to stay in the national coalition. Finally, because it is rare for one coalition to receive twice the vote of the other in any specific district, each of the two principal coalitions usually has at least one secure seat per district, a factor that encourages coalitions to address national concerns rather than immediate political interests (Aninat et al. 2006, 24–25).

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’’ (2000, 169). 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 options: either a vote for the continuation of the military regime or a vote for the return of democracy. This stark choice encouraged pro-democratic 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.

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Leaders’ Margins of Victory in Elections Although the binomial electoral system may not have allowed either coalition to win a significant majority in Chile’s National Congress, successive candidates from the cpd coalition did win decisive victories in Chile’s presidential elections after the transition to democracy. In 1989, Patricio Aylwin (president from 1990 to 1994) won the election 55.2 percent to 29.4 percent against his closest opponent; in 1993, Eduardo Frei (1994–2000) won 58 percent to 24.4 percent against his main competitor; in 1999, Ricardo Lagos (2000–2006) won 51.3 percent to 48.7 percent; and in 2006 Michelle Bachelet (2006–10) won 53.5 percent to 46.5 percent (Gobierno de Chile, Ministerio de Interior, Sitio Histo´rico Electoral Web site). Combined with disciplined political parties, stable coalitions, and a low level of partisan conflict, these solid victories—all by candidates from the same coalition—contributed to these presidents’ level of political security and therefore to their willingness to delegate control over economic policy to technocratic organizations, such as corfo.

corfo’s Technocratic Independence: From Patrimonialism to Technocracy The level of political security experienced by Chile’s leaders helps explain corfo’s evolving level of technocratic independence. On its creation in 1939, corfo was designed to be a legally autonomous institution, meaning its own board of directors would make policy decisions without interference from the Congress or president (Cavarozzi 1975, 120; corfo Web site, accessed March 1, 2007; Rivas 2002). Indeed, figures instrumental in the creation of corfo—then-president of Chile 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 was able to 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 its staff a strong sense of purpose (Cavarozzi 1975,

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129–31). These characteristics are also true of corfo today (Castillo 2002, 2006; Gligo 2002, 2006a; Rivas 2002; Troncoso 2002, 2005). Given Chile’s fragmented party system, unstable coalitions, and increasing political polarization from the 1950s to 1973, some loss of technocratic independence was likely to occur during that period. This happened initially during the presidency of Jorge Alessandri (1958–64). Significantly, Alessandri lacked a large margin of victory in the election, which contributed to his low level of political security. Although he had the support of large industrialists in Chile, Alessandri won only 31.6 percent of the popular vote, with the rest split among four other candidates, including his strongest rival, Socialist Salvador Allende (who won 28.9 percent). Since no candidate won 50 percent of the votes, Chile’s constitution at that time required that the National Congress decide the outcome. The vote in the National Congress gave Alessandri the victory (Base de Datos de Elecciones en Chile Web site). Seeking to bolster his support with his electoral base, upon taking office 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 decision-making power at corfo in his own (and thus Alessandri’s) hands (Cavarozzi 1975, 358–59). During this period 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). In the 1970 presidential election, Allende won a razor-thin plurality of 36.6 percent versus 35.5 percent for his main rival, Alessandri, and 28.1 percent for another candidate. Again the election went to the National Congress, which gave the victory to Allende (Base de Datos de Elecciones en Chile Web site). Allende was in a weak position politically from the start. Moreover, as a leftist, his political as well as physical survival was under constant threat from potential military intervention. In this extremely politically insecure context, Allende used corfo as a state holding company for nationalized private enterprises (corfo Web site, accessed March 1, 2007) and appointed managers of these firms on the basis of political rather than technocratic criteria (Geddes 1994, 17). The Pinochet military regime (1973–90) reversed corfo’s direction completely, making it responsible for the government’s privatization program. While the authoritarian Pinochet government may have been politi-

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cally secure, it lacked accountability. At the same time, it was clearly not as insulated from particularistic interests as were authoritarian developmental states, such as those analyzed in the work of Evans (1995), WooCumings (1999), and Kohli (2004). Indeed, as Schamis demonstrates, during the Pinochet years there was extensive collusion between major Chilean business conglomerates seeking to buy privatized firms and policymakers pushing for rapid privatization. This led to poor regulatory oversight of the privatization process (2002, 41–42, 53–65). Thus during this time, corfo gave dominant Chilean business groups highly concessional loans to buy newly privatized firms and—in a marked departure from sound banking practices—allowed them to use the very firms they were buying as collateral. When many of these newly privatized firms later went bankrupt, the government absorbed the loss (42). As a result, by the time Pinochet left power, corfo was heavily in debt (corfo Web site, accessed March 1, 2007; Troncoso 2005). After Chile’s transition to democracy in 1990, stable coalitions, strong party discipline, a low level of partisan conflict, and decisive margins of victory for leaders in presidential elections provided the political context in which corfo adopted a more independent, technocratic approach. 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 Felipe Sandoval (1994–97), corfo’s executive vice president, 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 PhD in economics from Boston University). As a result of reforms instituted after the democratic transition, corfo’s overall mission and approach changed. As before, corfo selected its own 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 the republic). But during this period, corfo instituted three additional key reforms that made its operations more technocratic than in past: (1) it decided to no longer provide loans directly to individual companies but instead to work through private banks and other financial intermediaries; (2) it shifted its focus to promoting the competitiveness of small- and medium-enterprises (smes) by providing financing to associations of such firms and requiring them to co-finance

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part of the cost of the programs; and (3) it implemented systematic, independent evaluations of these sme programs. In order to implement the first reform, corfo negotiated lines of credit with such multilateral institutions as the World Bank and the Inter-American Development Bank. It then offered these lines to private banks on a competitive basis, depending on which banks provided the lowest administrative costs. The banks selected 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 Web site, accessed October 10, 2005). corfo’s second reform, developing co-financed programs 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 co-finance the cost of the programs. corfo-designated operating agents that administered these lines of financing typically were trade associations, such as the Asociacio´n de las Empresas Exportadoras de Manufacturas y Servicios (asexma), Chile’s Manufacturing Exporters Association, or the Asociacio´n de Indu´strias Metalu´rgicas y Metalmeca´nicas (asimet), 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. 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, and the firms co-financed 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 Web site, accessed November 30, 2004). This approach encouraged accountability on the part of the associations and individual firms. In addition, it helped protect corfo from falling prey to particularistic interests. Working through associations with a broad range of membership made it less likely that corfo would be captured by the interests of any one individual or group within the association. Finally, the third reform corfo initiated was systematic, independent

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evaluations of these SME programs. corfo conducted these assessments on a regular basis. In order to ensure the independence of the evaluations, the agency outsourced them to universities or private consultants (Castillo 2005; Rivas 2002). 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. For example, corfo collaborated on a regular basis with Fundacio´n Chile, an independent, nonprofit foundation that supported projects to develop new technological applications in a number of industries in Chile, with a particular focus on facilitating the development of Chilean smes. corfo’s high level of technocratic independence extended to its High Technology Investment Promotion Program. As in corfo as a whole, (1) the staff in this program were hired strictly on the basis of merit; (2) strategies were decided on and evaluated on the basis of technical rather than political criteria; and as in other areas in which corfo worked, (3) the program’s staff collaborated with collaborated with other agencies pursuing similar goals. With regard to first component of technocratic independence—hiring on the basis of merit—all of those working in the High Technology Investment Promotion Program in 2000, and most who worked in the program later, came from within corfo, which had hired all managerial as well as technical personnel (aside from the two top appointed positions) strictly on the basis of merit since the early 1990s. The key officials who initiated the High Technology Investment Promotion Program in 2000, Mario Castillo, Carlos Alvarez, and Nicolo Gligo, had worked for corfo since the mid-1990s. Although lacking prior experience in international business, these three key officials had strong, relevant credentials in other respects. Alvarez, head of corfo’s Investment and Development Division from 2000 to 2002, had a bachelor’s and a master’s degree in engineering from the University of Chile and a master of public administration degree from Harvard’s Kennedy School of Government. Before joining corfo he held senior positions in both Chile’s Ministry of Foreign Relations and its Ministry of the Economy. Alvarez later became general manager of corfo from 2002 to 2004, served as deputy minister of the Ministry of Economy from 2004 to 2006, and was named executive vice president and CEO of corfo in 2006. Castillo, named director of the newly created High Technology Invest-

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ment Department in 2000 (established initially as a subunit of the Investment and Development Division), also had a degree in engineering from the University of Chile and not one, but two MBAs from different universities in the United States. Before coming to corfo he had worked as an analyst for the United Nations Economic Commission for Latin America (ecla) and as a consultant on various projects for the Inter-American Development Bank (idb) and the United Nations Industrial Development Organization (unido). While still director of High Technology Investment, Castillo served as head of corfo’s Silicon Valley office from 2003 to 2005. In 2006, he was named head of corfo’s Investment and Development Division. Gligo, director of corfo’s Strategic Planning Department in 2000 (at that time, another subunit of the Investment and Development Division), had a bachelor’s and a master’s degree in engineering from the University of Chile, as well as a master’s degree in technology management from the Massachusetts Institute of Technology. When Castillo became head of corfo’s Silicon Valley office in 2003, corfo fused the Strategic Planning and High Technology Investment Departments, and Gligo managed the High Technology Investment Promotion Program from Chile during 2003–5 (Castillo 2006; Gligo 2006a, 2006b; Sutin 2003, 17). In addition to Alvarez, Castillo, and Gligo, from 2000 to 2005 the program also employed between four and five investment executives. (This brought the total number of professional personnel working for the program to between eight and nine throughout these years.) These individuals were responsible for gathering information relevant to specific sectors, helping to organize investment promotion conferences, and contacting individual firms. Each investment executive had a minimum of a bachelor’s degree in engineering or business administration. The only exception was Constanza Donoso, who had a degree in journalism (with postgraduate study at San Jose State University) (Gligo 2006b; Sutin 2006). With respect to the second component of technocratic independence, deciding on and evaluating programs on the basis of technical rather than political criteria, corfo’s High Technology Investment Promotion Program established goals and evaluated its programs on the basis of specific performance indicators, at least after the initial start-up phase in the first year or so. In the beginning, as Gligo noted, the focus was just to get the program launched and to produce some quick results (2006a). Later, however, corfo targeted fdi from specific sectors based on overall trends in global business and their relevance to the Chilean business environment. corfo’s officials defined goals in terms of how many companies

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they planned to contact in that sector, how many prospective investors they would identify, how many executives would visit Chile, and how many new investment projects Chile would receive as a result of these efforts (Castillo 2006). corfo evaluated its efforts to attract fdi in specific sectors primarily in terms of the amount of fdi generated in that sector and the number of jobs produced (Castillo 2006; Donoso 2006). When deciding upon the amount of incentives to provide a specific company, corfo used previously established, well-defined guidelines, based on best practices learned from other agencies, such as ida Ireland, to assess the economic and social benefits of the project. Because these guidelines were set in advance, incentives were not subject to negotiation. Factors corfo’s guidelines took into consideration included the amount of fixed assets a particular investment would bring to Chile, the number of jobs it would provide, and so on (Castillo 2006). Finally, corfo’s High Technology Investment Promotion Program was also strong with regard to the third aspect of technocratic independence: collaborating with other agencies pursuing similar goals. corfo involved a wide range of organizations in its efforts to develop this program. On the High Technology Investment Promotion Program’s Web site, corfo referred to the group of agencies that it had collaborated with on this program as ‘‘Chile’s Pro-Technology Network’’ (Invest@Chile Web site, accessed November 8, 2004; March 1, 2007). Among these agencies was 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 Fundacio´n Chile. By far corfo’s most important and closest collaborator on the High Technology Investment Promotion Program, however, was the Foreign Investment Committee. On its Web site, the Foreign Investment Committee listed its principal aim as ‘‘to consolidate Chile’s position as an attractive destination for foreign investment’’ (Comite´ de Inversio´n Extranjera Web site, accessed November 20, 2004; Invest@Chile Web site, accessed November 8, 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. Significantly, 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

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Investment Program came into existence. After that time, however, it assisted corfo by participating in and helping to organize investment promotion conferences and seminars for prospective high technology investors. corfo ran the High Technology Investment Promotion Program office and was the principal point of contact for potential investors from high technology industries considering investing in Chile, but the Foreign Investment Committee’s involvement helped ensure that the program stayed on course. Even after attaining technocratic independence, corfo, in contrast to the other principal cases considered in this book, had a low level of transnational learning capacity initially. Only after its transnational learning capacity increased did the agency develop an effective investment promotion strategy. Unlike the governments of Costa Rica and Rio Grande do Sul, corfo did not acquire transnational learning capacity by collaborating with a private ipa that possessed this quality. And unlike ida Ireland or Singapore’s edb, corfo’s own ability to learn what it needed to design an effective investment promotion strategy was low. Eventually, corfo found a way to develop its transnational learning capacity. To understand the extent to which corfo failed initially at developing a well-targeted, responsive investment promotion strategy yet 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 The Chilean government’s initial investment promotion strategy called for promoting ‘‘high technology’’ investment, without much regard to the nature of this investment or whether it was well suited to Chile’s specific business conditions. An assessment of Chile’s business environment in the early 2000s, when corfo was beginning its effort to promote nontraditional fdi, underscores not only how poorly targeted and unresponsive corfo’s initial investment promotion strategy was but also how much more effective it ultimately became.4

Disadvantages Because of the relatively small size of its market, Chile was not attractive for many nontraditional firms seeking to manufacture products for sale in 4. In 2008 Chile’s advantages and disadvantages as a location for nontraditional fdi, relative to its principal competitors for such fdi, remain largely the same as those cited here.

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the local market. Furthermore, Chile’s distance from the United States meant that it could not serve effectively as a platform to export products to the U.S. market. Although Chile’s cost structure was lower in some sectors than that of some Latin American countries, it was certainly not competitive with India for low-cost services or with China for low-cost manufacturing. Finally, unlike many other governments involved in investment promotion, the Chilean government did 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 finally began to offer these companies a set of ‘‘soft’’ incentives, including paying for the cost of pre-investment studies and subsidizing training expenses for employees hired after companies have invested in the country.5 Nevertheless, these incentives were quite small compared to the major tax incentives other governments offered, which, over a number of years, could be worth tens of millions of dollars for a single company.6 These factors combined help explain why Intel passed over Chile as a potential site for its Latin American manufacturing plant. In general, Chile was 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 U.S.

Advantages Nevertheless, Chile did 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. Chile’s high level of political and economic stability, relevant to fdi generally, also made the country an ideal site for companies to locate their regional Latin America headquarters. 5. The full set of incentives corfo offered to prospective high technology and other nontraditional investors included the following: (1) co-financing of preinvestment studies—not to exceed 60 percent of the study’s cost, with a ceiling of US$ 30,000 per company; (2) assistance for investment facilitation—up to US$ 30,000 per company to investor consultants responsible for bringing high technology investment to Chile; (3) human resource development for on-the-job training—up to $3,500 in one year per employee hired; (4) assistance for investment in fixed locked-up assets—not to exceed 40 percent of the investment in fixed locked-up assets, with a ceiling of US$ 500,000 per company; (5) assistance for long-term property leasing—up to five years, not to exceed 40 percent of the investment in fixed locked-up assets, with a ceiling of US$ 500,000 per company (corfo 2002a). 6. Of course, numerous studies of government efforts to promote fdi have shown that tax or financial incentives are often ineffective (Rondinelli and Burpitt 2000, Bergsman 2003).

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Chile’s well-trained technical personnel in information technology (it) were available at competitive rates compared to other Latin American countries with which it often competed for nontraditional fdi, with the exception of Argentina (see Table 3). (Before the massive devaluation of the Argentine peso in 2002, Argentina’s salaries were much higher than Chile’s. Although they dropped dramatically after the devaluation, the significant political and economic uncertainty in the country continued to be a deterrent for fdi.) Availability of relatively low-cost, highly trained human resources was 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 provided additional benefits for a number of nontraditional industries, at least for those that had operations within Latin America. The competitiveness of a country’s telecommunications infrastructure is especially relevant for evaluating a country’s attractiveness for fdi in call centers/ technical support centers as well as for fdi in shared services, which depends heavily on transmission of data via the Internet. Shared services is the consolidation of identical services performed in different offices or branches of one company in a given region, such as sales and technical support, accounting, human resources (e.g., payroll), billing, and so on, into a single location in that region. Comparative data indicate the relative strength of Chile’s telecommunications infrastructure compared to some of its competitors in Latin America. Focusing exclusively on costs for fixed line telephone operators, Chile’s long-distance costs were lower than those of key competitors, again with the exception of Argentina after its massive devaluation (see Table 4). This was especially important for call centers or technical support centers. A comparison of key cities in a number of countries that 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, shows Chile’s capital of Santi-

Table 3 Information technology salary comparisons, in annual US$ Position Senior analyst/designer Junior programmer Office administrator

Chile

Brazil

Mexico

Argentina

32,653 12,728 14,846

38,697 13,320 17,599

49,551 19,567 20,489

21,036 10,730 11,987

Source: Watson Wyatt 2004.

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Table 4 US$

135

Comparative costs for a three-minute peak-time international phone call, Chile Brazil Mexico Argentina

$0.78 $0.87 $1.68 $0.60

Source: Pyramid Research.

ago as first among major cities in the Latin American region, including Miami (see Figure 2). This ranking was relevant to technical support centers as well to fdi in shared services. The Economist Intelligence Unit’s 2005 E-readiness ranking for a number of countries measures how attractive a country is for investment in online operations. This ranking was highly relevant to Chile’s attractiveness for fdi in shared services as Chile scored the highest in Latin America (see Table 5). All of these characteristics helped make Chile a good location for software development centers specifically serving the interests of firms doing

Figure 2. Latin America telecom comparative ranking: broadband, fiber optics, and other networks Score Scale: 1–5 points.

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

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Source: Pyramid Research, http://www.pyramidresearch.com (accessed: January 23, 2003).

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Table 5 Economist Intelligence Unit’s E-readiness rankings, 2005

United States Canada Chile Mexico Brazil Argentina

2005 rank in region

2004 rank in region

Overall ranking (of 65)

E-readiness score (of 10)

1 2 3 4 5 6

1 2 3 4 5 6

2 11 31 36 38 39

8.73 8.03 5.97 5.21 5.07 5.05

Source: Economist Intelligence Unit 2005b.

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, 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 in 2000, he found that few of them knew much about Chile except as a source of high-quality, inexpensive wines (2002). At the same time, corfo, still lacking transnational learning capacity, initially targeted 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 investment promotion effort, the High Technology Investment Promotion Program, indicated the emphasis on attracting high technology investment, even though other kinds of nontraditional fdi (call centers or shared services, for example) would have been more appropriate for the Chilean business environment.

corfo’s Transnational Learning Capacity In the beginning, corfo lacked all the aspects of transnational learning capacity currently relevant to the Latin American cases. First, corfo’s High Technology Investment Promotion Program lacked a highly internationalized staff. Although three of the eight to nine professionals working in the program from 2000 to 2005 had studied extensively in foreign universities, absolutely none—in marked contrast with cinde and Po´lo—had prior international business experience (Castillo 2006; Gligo 2006b). Second, corfo lacked a proactive, systematic approach to learning about global business trends and prospective foreign investors. For instance,

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corfo officials did not have an established practice of tracking trends in specific industries on a systematic basis or learning in detail about specific prospective foreign investors in advance, as did such agencies as cinde and Singapore’s edb (see Chapter 5). Third, with an annual budget for its High Technology Investment Promotion Program of only US$ 700,000 from 2000 to 2003 (corfo 2007; Sutin 2007), corfo was unable to create an extensive transnational strategic network as ida Ireland and Singapore’s edb had done, that is, by establishing a wide array of foreign offices devoted to investment promotion. Without these components of transnational learning capacity, the agency made some serious mistakes at first. But after corfo began using an alternative, low-budget approach to develop at least one of the elements of transnational learning capacity—its transnational strategic network—the agency became increasingly adept at modifying the High Technology Investment Promotion Program’s strategy to the changing needs of nontraditional investors. 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 where they hoped to attract investment. For example, in 2008 ida Ireland had thirteen foreign offices, many of them in the United States; Singapore’s edb had a total of nineteen. But corfo did not have the budget to set up multiple foreign offices or hire personnel with extensive international business experience. corfo stood out for its ability to establish an effective transnational strategic network with a relatively small budget and for the impact this network had on the effectiveness of its investment promotion effort. For that reason, further analysis of the process by which corfo initiated, developed, and expanded this network, which helped the agency’s investment promotion strategy evolve from an unfocused endeavor to a highly targeted effort, is important. Key components of corfo’s 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 (which facilitated relations with multinational firms located there); and with investors themselves in Chile. All played important roles in the effective development and evolution of the High Technology Investment Promotion Program’s strategy.

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Affiliation with a U.S. Business School One way corfo succeeded in establishing an effective transnational strategic network with a limited budget was by forming a close relationship with an internationally oriented graduate school of business in the United States, the Thunderbird School of Global Management, located in Glendale, Arizona. corfo’s affiliation with the school was useful because it 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 analysis and strategy. corfo established an official contract with Thunderbird to provide consulting services. 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. A group of students on campus, all of whom had some market research or specific industry experience, researched target industries for Chile to investigate further as well as specific potential investors. Also, each semester, a student with a set of skills useful to corfo (market research skills and/or experience in a specific high technology industry) went to Chile to work as an intern in the High Technology Investment office at corfo. corfo paid this student’s expenses out of its budget for the High Technology Investment Promotion Program. Many of these MBA candidates had significant business experience in specific industries. As a result, they were able 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. Rather than attempting to target high technology industries generally, they recommended that corfo target industries in which Chile genuinely had the potential to attract fdi. One sector they recommended was software (Hall 2004). As corfo refined its investment promotion strategy, which initially sought to promote fdi from virtually any high technology sector, it adopted a number of these recommendations, in particular the recommendation of targeting fdi in the software industry. Still other contacts, however, contributed to corfo’s learning process. During this time, Thunderbird facilitated corfo’s initial contacts with a number of key organizations in Silicon Valley, for example, the American Electronics Association, the San Jose Business Incubator, and the Silicon Valley office of ida

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Ireland, which would later prove to be important components of corfo’s transnational strategic network.

Relationship with International Consultants Associated with Successful ipas In addition to its affiliation with Thunderbird, corfo, hoping to learn from the experience of ipas that had been successful in attracting high technology investment, hired consultants associated with cinde in Costa Rica and ida Ireland. A key consultant early on was Enrique Egloff, executive director of cinde from 1995 to 1999. David Lovegrove, who had been a senior executive at ida Ireland for many years and was now a senior official at Forfa´s, the agency responsible for Ireland’s overall economic development strategy, also contributed to corfo’s transnational learning capacity. corfo hired these individuals 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 cinde and ida Ireland had evolved over time to focus on other specific nontraditional sectors. Thus these consultants, who had witnessed and participated in the transformation in approach of their own ipas, were uniquely situated to help corfo’s investment promotion strategy evolve as well. The cinde Connection: Enrique Egloff. As the executive director of cinde, Enrique Egloff had been responsible for a major achievement: attracting Intel’s investment in a manufacturing plant, its first plant in Latin America, to Costa Rica in 1996. Intel’s investment established Costa Rica’s reputation as an attractive site for high technology investment (see Chapter 1). Even more important from corfo’s perspective, Chile ‘‘lost’’ this investment to Costa Rica despite being on the short list of countries that Intel considered. This frustrating outcome convinced Mario Castillo and others at corfo that Chile needed to do something more if it wanted to attract this kind of investment (Castillo 2002, 2003b). corfo’s emerging transnational strategic network again facilitated matters: a contact at Thunderbird introduced Egloff to corfo officials, who promptly hired him as a consultant. Egloff ’s long years of experience in high technology investment promotion at cinde and his practical suggestions on how to proceed were useful to corfo, which had never undertaken this sort of work before. Most important, Egloff helped corfo develop an investment promotion strategy

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more oriented toward Chile’s unique strengths. For example, Egloff recommended specific consulting firms specializing in financial services and call centers that would help corfo move away from an exclusive 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, call centers, and shared services (Castillo 2002, 2003b; Egloff 2003, 2004). The current trend is for companies with multiple offices in different countries to consolidate identical services performed in different offices or branches in one regional office as a way to reduce costs. This sort of consolidation of services (known as ‘‘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. Although certainly not ‘‘high technology,’’ fdi in shared services would offer Chile a way to diversify its economy and provide job opportunities requiring technical training, just as it had for Costa Rica. The ida Ireland Connection: David Lovegrove. David Lovegrove also contributed to corfo’s move away from its broad emphasis on high technology to a more focused investment promotion strategy. Lovegrove’s long career as a senior executive at the ida, now known as ida Ireland, made him a useful addition to corfo’s transnational strategic network. Lovegrove was now a part of the senior management team at Forfa´s, the Irish government agency responsible for overseeing ida Ireland’s investment promotion efforts and coordinating Ireland’s overall economic development strategy.7 Because of his position at Forfa´s and his many years at ida Ireland before that, Lovegrove had acquired tremendous knowledge about attracting high technology fdi. He had also been centrally involved in ida Ireland’s and Forfa´s’s plans to move Ireland’s investment promotion effort beyond high technology manufacturing and into financial services. Additionally, 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 7. ‘‘Forfa´s’’ is a combination of the English word ‘‘for’’ and the Gaelic word ‘‘fa´s,’’ meaning growth. Thus, the name means ‘‘for growth.’’

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their countries. As a result, Lovegrove was in a good position to advise corfo on its investment promotion strategy. 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, of what Chile 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 incentives policies (Castillo 2004).

Relationship with U.S.-Based Consultants Washington, D.C.–Based Consulting Firm (WBF).8 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 network—Thunderbird students, Enrique Egloff, David Lovegrove, and executives from high technology firms already in Chile—helped 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 16 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. Although not the principal reason for Chile’s change in strategy, the dramatic decline in growth rates in high technology industries that began in 2000 provided still another impetus to consider promoting fdi from other types of nontraditional industries (Castillo 2005). For these reasons, corfo decided to shift its focus to other nontraditional sectors for which Chile’s business environment would be more suited. 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 software companies might consider locating regional software development centers in the country. Following Enrique Egloff ’s advice (Castillo 2002; Egloff 2003, 2004), the corfo team hired the Washington, D.C.–based firm WBF, which had expertise on shared ser8. At corfo’s request, the name of this firm based in Washington, DC (hereafter referred to as WBF) must remain anonymous.

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vices 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 well-developed, competitive telecommunications industry, and its existing strength in financial services generally had a number of 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 area that was a 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 a number of advantages within Spanish-speaking Latin America. In addition to its political and economic stability and well-developed infrastructure, Chile’s universities produced a fairly substantial number of software engineers every year. Furthermore, salaries for it personnel were lower in Chile than in many other Latin American countries (see Table 3). Although WBF noted that large software companies in the United States tended to have a negative perception of Latin America as a location for software development, it also highlighted some strategies that corfo could use to attract U.S. companies from this sector (WBF 2001). PierceTech. Following this advice and continuing to listen to investors who were already in the country, the corfo team found more ways to build on Chile’s existing strengths. For example, PierceTech, a consulting firm recommended by Egloff 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, Spanish-speaking personnel provided competitive advantages to Chile in this area. These recommendations helped persuade corfo’s High Technology Investment Promotion team about the potential for the expansion of call centers and technical support centers in Chile. Representatives from this consulting firm also participated in corfo’s investment promotion seminars in the United

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States, explaining Chile’s advantages to prospective call center investors (Invest@Chile Web site, accessed November 20, 2004).

Business Associations in the United States Business associations in the United States also helped corfo by facilitating its connections with prospective nontraditional investors. For example, branches of the American Electronics Association (aea) 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 technical support centers, telecommunications-related companies) likely to be interested in investing in Chile. The aea was also a co-sponsor of all of these events, as was Thunderbird. Other co-sponsors 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 the logistics of organizing investment promotion seminars in New York City, Chicago, and San Francisco. (The fact that the idc’s Latin America director was already a part of corfo’s strategic network—a Thunderbird MBA graduate who had done an internship at corfo in her student days—facilitated corfo’s relationship with the idc [Castillo 2004].) These organizations provided contacts and helpful suggestions about how to approach nontraditional investors in their respective cities.

The Silicon Valley Office In March 2001, corfo opened up an office in San Jose, California—the very heart of Silicon Valley—to 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 worldwide, 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 one person. Initially this was Constanza Donoso, a young, highly articulate Chilean woman with strong marketing skills. Having an office in Silicon Valley would seem to create more opportunities for corfo to strengthen its connections with U.S.

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high technology, thereby increasing its effectiveness. For its first eighteen months, corfo maintained the office with only Constanza Donoso as a part-time employee. In 2003, however, Mario Castillo, now director of high technology investment at corfo, took over operation of the office on a full-time basis. 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 program, the ‘‘technology internships’’ program. These internships brought fifteen to twenty young Chileans, all recent university graduates in technical fields, to the Silicon Valley on technology internships, during which they worked for U.S.-based high technology firms. Finally, 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 (ibi), corfo chose to locate its Silicon Valley office in the IBI’s building in downtown San Jose. This was an ideal location for a number of reasons. The purpose of the ibi 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 lower-thanmarket-rate rent 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 within the building. This was true in corfo’s case as well. The great benefit to corfo of being located in the ibi building was that one of its primary objectives was to promote networking events, at which ibi members could mix with key players in Silicon Valley. During the first eighteen months, Constanza Donoso attended as many of these and other networking events as she could and also contacted hundreds of companies (Donoso 2002). The plan was that Mario Castillo would continue to use this office to further develop corfo’s transnational strategic network in the high technology sector and to find prospective high technology investors for Chile. 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 time, however, it did expand corfo’s transnational strategic network, thereby enhancing the agency’s transnational learning capacity. The Silicon Valley office put corfo, or at least corfo’s representatives, in direct contact with high technology companies. After hundreds of meetings with executives from these companies, it was clear that most of them were not the kind that Chile would be suc-

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cessful in attracting. Most of the Silicon Valley companies 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 had international investment were mainly interested in outsourcing production that could be moved easily offshore to very low cost centers, such as India. It became increasingly clear that corfo should focus its fdi promotion efforts in other areas. As Constanza Donoso summarized the situation at the end of her eighteen-month 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 investors most appropriate for Chile’s business environment, the Silicon Valley office provided further evidence of the mistakes corfo made in the beginning. Nevertheless, its very existence in the early days as part of corfo’s transnational strategic network, and the contacts with Silicon Valley firms it facilitated, contributed to corfo’s transnational learning capacity. In the end, the Silicon Valley office accelerated corfo’s learning process on how to focus its investment promotion strategy more precisely, so that the agency could attract nontraditional fdi more suited to Chile’s business environment. Despite the shift in direction and the apparent lack of interest from the Silicon Valley companies, corfo kept the office open until early 2005. Some on the High Technology Investment Promotion team continued to believe that it could still serve as a useful base for generating investment. Others believed that whether or not the office generated significant further investment, 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). Finally, however, given the definite shift in its investment promotion strategy, corfo closed the Silicon Valley office in March 2005. From then on corfo focused its efforts on attracting nontraditional fdi from outside of the Silicon Valley area—especially fdi in shared services, software development centers, or technical support centers—that was far more suited to Chile’s business environment (Castillo 2005).

The Investors Themselves All of the companies that fell under the auspices of the High Technology Investment Promotion Program had frequent contact with corfo (author

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interviews 2002; Castillo 2005). From its contacts with these companies, corfo learned still more about the needs and concerns of investors who had already invested in Chile, information that was useful for refining the agency’s strategy to attract future prospective investors. Thus in-depth contact with investors already in Chile helped corfo to further adapt its strategy over time.

An Increasingly Effective Investment Promotion Strategy Developing a Well-Targeted, Responsive Strategy Initially, the focus of corfo’s investment promotion effort seemed to encompass almost every industry that could possibly fall into the ‘‘high technology’’ category: semiconductors, computer hardware, and so on, even though many of these industries were unsuited to investment in Chile. Perhaps an ipa with a larger budget, with an already existing network of foreign offices in the United States, and staffed with former international marketing executives would have had a more well-defined program, better-suited to Chile’s specific business conditions right from the start. Yet despite the shortcomings in the High Technology Investment Program’s initial approach, corfo—using its growing transnational strategic network—was able to adapt its strategy relatively quickly to Chile’s unique competitive advantages and the needs of prospective investors. Within a year from the time the High Technology Investment Program was launched—and within months of the opening of the Silicon Valley office—corfo 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 the 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 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/call centers, and software development centers. Executives from companies that had already invested successfully in these sectors in Chile—and now a part of corfo’s transnational strategic network—were active participants at these seminars. Events in 2003 and

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2004 in Santiago, Boston, Fort Lauderdale, New York City, Chicago, and San Francisco featured such speakers 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 GE-Chile (which operated a technical support center), among others, all of whom expounded upon 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. Clearly, the agency’s strategy had changed. Moving from the more glamorous but vaguely defined goal of attracting ‘‘high technology investment,’’ corfo had established a more suitable and well-defined objective: attracting nontraditional fdi in shared services, software development centers, and technical support/call centers. Indeed, by mid-2005 the High Technology Investment Promotion Program’s Web site highlighted only companies that fell into these three specific categories (Invest@Chile Web site, accessed April 25, 2005).

Sustaining the Strategy The high level of cooperation among political parties in Chile meant that there were good prospects for corfo’s more focused, responsive investment promotion strategy to be maintained over successive governments. Because of the high level of political security Chile’s presidents enjoyed, presidents from either the relatively left-of-center cpd coalition and the relatively right-of-center apc coalition were likely to continue to delegate authority over investment promotion to corfo. It helped that in designing the High Technology Investment Promotion Program, corfo had been very careful not to stray too far away from the central market-oriented principles of the Chilean Model, to which both coalitions essentially adhered.9 For example, the Chilean government did 9. 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 (Agosin 1999; Kurtz 2001; Ffrench-Davis 2002; Schurman 1996). Nevertheless, even the left-of-center cpd coalition and the Socialist presidents Ricardo Lagos and Michelle Bachelet continued to adhere to many aspects of a neoliberal policy model—for example, private pension plans for workers, a low uniform external tariff, and no large tax incentives to lure fdi from specific firms in specific industries.

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not offer tax incentives to lure specific prospective foreign investors from high technology and other nontraditional sectors, as so many other governments did. The soft incentives corfo did offer such companies, including paying for the cost of pre-investment studies and subsidizing training expenses for employees hired after companies had invested in the country, were quite small compared to the major tax incentives other governments offered (corfo, 2002a). corfo’s very 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 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 Technology Investment Promotion Program was the sort of endeavor that not only Socialist presidents Lagos and Bachelet (2006–10) but also members of the right-of-center apc coalition—and any future presidents from this coalition—could reasonably support.

Outcome: Level of Nontraditional fdi Attracted (and Its Impact) By mid-2005, twenty companies had invested under the High Technology Investment Promotion Program.10 Despite the continued use of the term ‘‘high technology’’ in the name of the program, virtually all of these investments were in shared services, software development centers, or technical support/call centers, the very sectors that were the focus of corfo’s now more well-defined promotional efforts. Table 6 provides a listing of the companies that had invested as part of the program and the categories in which they belonged. By 2005 corfo’s more focused promotional efforts had begun to yield results, especially considering that in 2000, as a survey that year showed, 10. In the latter part of 2005, corfo began some of its first forays into promotion of ‘‘biotechnology.’’ Consistent with its effective use of its strategic network, corfo hired a consultant in Boston familiar with this industry to help the agency define the correct niche of this sector in which Chile could be competitive. As a result, by 2007 corfo was not seeking highly research- and knowledge-intensive biotechnology fdi on the cutting edge of development, as ida Ireland and Singapore’s edb were doing, but rather fdi more related to Chile’s fishing and agricultural sectors, such as companies that performed laboratory tests on salmon to determine if it met international health standards, firms that conducted analysis of soils to determine which fertilizers would be most suitable, or companies that provided artificial insemination services for cattle. By 2007, corfo had attracted four firms in these areas (Castillo 2006, 2007).

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Table 6 corfo’s High Technology Investment Promotion Program: Companies and industry categories Shared services

Company Air France (France) Banco Santander (Spain) BBva Bank (Spain) BHP Billiton (Australia) Cell Star (USA) Citigroup Inc. (USA) Delta Airlines (USA) General Electric (USA) Grupo SP (Spain) Hewlett-Packard (USA) IBM (USA) Kodak (USA) Nestle´ (Switzerland) Packard Bell (Japan) Santander Bank (Spain) Shell (Netherlands) Software AG Soluziona (Spain) SP Group (Spain) Unilever (Netherlands)

Technical support/ call centers

Software development

• •

• • • • • • • •

•

Electronics

• • •

•

• •

•

• • •

Sources: Castillo 2003a; Invest@Chile; corfo.

few prospective investors in nontraditional sectors knew anything about Chile except as a location for high-quality, inexpensive wines (Castillo 2002). Of course, not all of this fdi could be attributed solely to corfo’s efforts; other factors influenced prospective investors’ decisions as well. Chile provided a number of competitive advantages within the Latin American region for companies from these industries: political and economic stability; a highly developed, competitive telecommunications infrastructure; and well-trained, relatively low cost it personnel. Nevertheless, corfo’s transnational strategic network enhanced the agency’s ability to learn which sectors would be most appropriate for investment in Chile and to focus its efforts in areas where its High Technology Investment 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. By 2005, the overall amount of nontraditional fdi in Chile that fell

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under the auspices of corfo’s High Technology Investment Promotion Program was still much smaller than the amount of fdi cinde had attracted (over a much longer period). It was also still small in comparison with Chile’s overall level of fdi, which totaled US$ 3.78 billion in 2005 (of which 42.9 percent went into the mining sector alone) (Comite´ de Inversio´n Extranjera Web site, accessed March 1, 2007). Nevertheless, this nontraditional fdi was already beginning to have a positive impact on Chile’s economy. Although no single investment was as significant as Intel’s in Costa Rica or even Dell’s in Rio Grande do Sul, as a whole, by 2005, the twenty companies listed in Table 6 had invested just under US$ 100 million and created approximately 2,180 jobs (corfo 2005). 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 incentives—indeed, even the other kinds of incentives the government offered were very small—these companies contributed positively to Chile’s tax revenues. Additionally, this nontraditional fdi helped diversify Chile’s economy. Finally, 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 Sul cases demonstrate, this in turn should lead to more fdi. Indeed, this process has already begun. Impressed with the success of the High Technology Investment Promotion Program, in 2006 President Michelle Bachelet (2006–10) suggested that corfo expand the program to include promotion in other areas. As a testament to her belief in the success of the program, Bachelet appointed Carlos Alvarez (one of the program’s founders) as corfo’s new CEO and executive vice president. Thus in 2006 corfo expanded its investment promotion effort to include not only ‘‘high technology’’ (as corfo broadly defined this term), but also nontraditional fdi that could upgrade the competitiveness of Chile’s traditional economic clusters (mining, wine, fruit, salmon) as well as fdi in renewable energy. This broader effort, consolidated with an existing program, Todo Chile, that promoted investment in specific regions of Chile, is now known simply as the Investment Attraction Program. Under the auspices of corfo’s Investment and Development Division—now headed by Mario Castillo—this program has a budget of more than US$ 15 million per year (including incentives) (Castillo 2006; Jime´nez 2006; Donoso 2006). By early 2007, it had succeeded in attracting more than US$ 100 million in fdi from a total of twenty-nine firms, accounting for over 2,250 jobs (Castillo 2006, 2007).

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Comparing the Latin American cases, Costa Rica was clearly the most successful at attracting nontraditional fdi, but Chile was well on its way to becoming the next most successful, largely because its effort was sustained over time, unlike Rio Grande do Sul’s. Many factors determine the amount of nontraditional fdi a country or state attracts. Clearly, however, the effectiveness of the ipa’s investment promotion effort—the extent to which it was focused, responsive, and sustained—played an important role in each of these cases. corfo’s increasing level of transnational learning capacity explains how its investment promotion strategy became more effective over time.

Implications Despite its early mistakes and with a very limited budget for its High Technology Investment Promotion Program, corfo managed to make significant progress in adapting its investment promotion strategy to the needs of suitable prospective international investors. Other governments did this in different ways. Some governments, such as those of Ireland and Singapore, did this by using their large budgets to establish foreign offices in target countries and hiring personnel with extensive international experience. Others collaborated with private ipas that already had high levels of transnational learning capacity, as in the case of the Costa Rican government’s collaboration with cinde and the Rio Grande do Sul government’s collaboration with Po´lo. corfo, in contrast, found an alternative way to accomplish this objective. Lacking a large budget for foreign offices and staff with international experience, corfo focused its efforts on building an extensive transnational strategic network of individuals, other government agencies, business associations, and universities, which developed its transnational learning capacity over time. As a result, after a number of missteps, the agency was able to develop a focused, targeted effort to promote nontraditional fdi in areas where Chile genuinely offered a number of advantages as a site for investment. Given the high level of security Chile’s political environment provides to its presidents, the likelihood of corfo’s sustaining this strategy over future administrations is high. An effective investment promotion strategy alone is by no means a guarantee that a country will be able to attract more nontraditional fdi, an important part of any government’s effort to harness globalization. Nevertheless, corfo’s ability to align the investment promotion effort with investors’ real concerns and needs enhanced Chile’s prospects to achieve this goal.

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...... 4

The IDA, IDA Ireland, and Forfa ´ s:

Lessons for Latin America, Part 1

In January 2000, David Lovegrove, a senior official at Forfa´s, the Irish government agency responsible for overseeing the direction of Ireland’s economic policy, pondered the report he held in his hands. The report was the result of the Technology Foresight Exercise, an information-gathering exercise involving hundreds of participants, primarily executives with manufacturing and service operations in Ireland, which Forfa´s had organized. The objective was to ask participants where they saw key industrial sectors headed in the next ten to fifteen years and what the Irish government could do to respond to those changes. The answer, compiled in the report Lovegrove studied, came back loud and clear: Ireland was no longer competitive as a low-cost investment location within the European Union (eu). In the previous fifteen years, Ireland, or the ‘‘Celtic Tiger,’’ as some called it, had experienced an economic transformation. During this period, Ireland made the transition from a relatively poor nation with high levels of unemployment and low costs to a fast-growing, comparatively developed economy at full employment. A number of factors accounted for this rapid growth. Many analysts argued that annual subsidies from the eu played a central role. Of course, other countries received similar subsidies but did not develop at the same rate as Ireland. Most scholars agreed that another factor in Ireland’s rapid growth was its ability to attract nontraditional fdi in fast-growing high technology manufacturing sectors, such as the computer, medical devices, and pharmaceutical industries, and later in the financial services industry (Barry 1999, 2004; Barry and Bradley 1997;

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O’Hearn 1998; O’Riain 2004; Paus 2005; Ruane and Gorg 1997). The levels through the year 2000 of eu subsidies and aggregate fdi, respectively, are listed in Tables 7 and 8. Although fdi statistics can sometimes be misleading,1 figures on employment further document the real impact of fdi inflows on Ireland’s economy. In 1991, total employment in all 847 ida-supported companies was 75,018; by 2000, total employment in the now 1,278 ida-supported companies had risen to 141,259 (ida Ireland 2000, 4). In 1990, high technology manufacturing in such sectors as electronics and pharmaceuticals accounted for only 25 percent of Ireland’s employment in manufacturing; by 2000, it accounted for 36 percent, with fdi providing 80 percent of the jobs (Paus 2005, 57). Inflows of nontraditional fdi resulted from a number of factors, including improvements in infrastructure, membership in the European Economic Community (eec) and later the European Union, an Englishspeaking population, a low corporate tax rate,2 and generous tax incentives for individual firms. Yet the same analysts who agreed that fdi was a factor in explaining Ireland’s growth also agreed that Ireland’s investment promotion agency, originally called the Industrial Development Authority (ida) and later ida Ireland, with overall strategy coordinated by Forfa´s, played an important role in bringing about this outcome. It is significant that other eec (later eu) members with far weaker investment promotion agencies than Ireland (if any) received large subsidies from the eu for infrastructure development, worker training programs, 1. In Table 8, fdi includes not only equity capital but also reinvested earnings and ‘‘other capital’’ (primarily intracompany loans). Thus, although Ireland clearly experienced enormous fdi inflows throughout the 1990s and into the early 2000s, the way in which fdi is measured means that fdi statistics can sometimes give a misleading perception of fdi flows. Because of Ireland’s low taxation rates, transnational corporations’ widespread use of transfer pricing tended to inflate figures for fdi inflows (Paus 2005, 50–51). At the same time, however, changes in tax regime in countries in which the fdi originated could also lead to dramatic outflows of funds. Ireland’s Central Bank noted that the American Jobs Relief Act of 2004, which temporarily allowed U.S. subsidiaries in foreign countries to pay a reduced corporate tax rate on repatriated profits, accounted for significant outflows of fdi from Ireland in 2004 and 2005, as did an increase in intra-company loans in those years, another way in which transnational corporations reduced their tax liabilities (Everett 2006, 104). Nevertheless, the Central Bank’s analysis indicated that these were temporary situations that were unlikely to have a negative long-term impact on fdi flows (Everett 2006, 104). 2. In the 1950s Ireland established low rates of corporate taxation, including a 0 percent tax on exports. In the 1970s the government changed this to a 10 percent corporate taxation rate in order to comply with European Economic Community rules. It changed this rate again to a still-low 12.5 percent rate after 2003.

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1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

Euros, millions

Year

47.1 85.6 138.5 151.7 346.5 520.9 671.8 711.8 643.5 764.5 924.0 1,100.5 1,433.2 1,455.9

99

97

19

93

95

19

19

19

91 19

89 19

87 19

75

81

83

19

19

79

Year

19

77

19

19

19

19

75

3200 3000 2800 2600 2400 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0

73

Euros, millions

Table 7 Ireland’s total receipts from the eu budget, 1973–2000

Euros, millions

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

1,397.1 1,474.9 1,644.7 2,210.6 2,795.0 2,531.9 2,850.9 2,338.1 2,568.9 2,818.2 3,179.9 3,015.9 2,678.9 2,602.1

Sources: Republic of Ireland, Department of Finance, 18; European Commission, 48.

and other uses but failed to receive anywhere near as much fdi as Ireland.3 For example, despite receiving similar levels of eu subsidies as Portugal and Greece, from 1990 to 2000 Ireland received more than three times the amount of fdi (adjusted for gdp) as Portugal and over nine times the amount of fdi as Greece (EIU 2000a, 2000b, 2000c; unctad, 3. For instance, during the 1990s Portugal and Greece received large amounts of funding from the European Structural and Cohesion Funds. European countries that received grants from the Structural Funds, designated for reducing imbalances between regions by building infrastructure, providing training, facilitating structural reform, and other needs, were allocated money on an annual basis equivalent to a specified percentage of their gross domestic products (gdps). From 1989 to 1993, Portugal received an amount equivalent to 3.07 percent of its gdp every year, while Greece received 2.65 percent and Ireland 2.66

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Table 8 Ireland—foreign direct investment inflows, 1985–2000

35 30 25

Millions

20 15 10 5

86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00

19

19

85

0 –5 –10 Year 1985 1986 1987 1988 1989 1990 1991 1992

US$, millions 164 –40 89 92 85 622 1,362 1,458

Year

US$, millions

1993 1994 1995 1996 1997 1998 1999 2000

1,078 857 1,443 2,617 2,712 8,579 18,500 26,447

Source: unctad, fdi Database.

percent; from 1994 to 1999, Portugal received 3.98 percent, Greece 3.67 percent, and Ireland only 2.67 percent (Dall’Erba 2003, 4). Each of these countries also received money from the Cohesion Fund, created in 1993 and designated for eu countries with gross national products (gnps) less than 90 percent of the eu average, which financed the construction of transportation infrastructure (roads, ports, airports, and railways) and environmentally related projects (such as water supply and waste water treatment projects). From 1993 to 1999, Portugal and Greece received a total of y3 billion each from the Cohesion Fund, and Ireland received y1.5 billion (National Development Plan, Ireland Web site). (After 2003, Ireland’s gnp was deemed to be too high to receive further support from the Cohesion Fund.)

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fdi Database, accessed December 21, 2007).4 Furthermore, Portugal and Greece did not attract fdi in high-growth, high technology sectors to the same extent as Ireland, where the ida and later ida Ireland specifically targeted such industries. While other factors were also at work,5 such contrasts further support the importance of the ida and later ida Ireland in attracting nontraditional fdi. This helps explain why so many experts referred to the ida as among the best investment promotion agencies in the world (Morisset and Andrews-Johnson 2004; Wint and Wells 2000). It also explains why so many governments in the developing world, including the Latin American governments analyzed in this book, looked to these agencies as a benchmark when it came to planning their own investment promotion efforts. As a result of Ireland’s dramatic growth, however, salary levels and other costs related to manufacturing in nontraditional sectors rose significantly. By 2000, countries like Poland, Hungary, and the Czech Republic, all destined to become eu members in the near future, were emerging to challenge Ireland’s status as a low-cost location for business operations in Europe. The shifts in employment that occurred in Ireland (see Table 9) and the upward trend in wages (see Table 10) were factors in this changing situation. The solution, as the Technology Foresight Report made clear, lay in ‘‘moving up the value chain.’’ Rather than being a low-cost manufacturing location, Ireland, if it were to remain competitive, would have to leverage its relatively well-educated population to become a center for innovation, research, design, and development. It would have to focus its efforts on attracting more knowledge-intensive business investment in cutting-edge sectors, such as biotechnology and information and communications technologies (ict). If the government pursued this approach, foreign companies would continue to invest in Ireland. But now instead of locating 4. To make these calculations, I took the average annual fdi each country received from 1990 to 2000, as reported in the unctad fdi database, and then divided that figure by each country’s gdp at purchasing power parity (ppp) for the year 1998 (as reported in the Economist Intelligence Unit country profiles for each country in 2000). 5. Among other things, Ireland had been a member of the eec (now the eu) since 1973, longer than these other countries; Greece joined in 1981 and Portugal in 1986. Also, in contrast to Ireland’s corporate taxation rate of 10 percent during the 1990–2000 period, Portugal and Greece had rates between 30 and 35 percent at this time. Other factors were Ireland’s excellent education system, higher-quality infrastructure, and better overall business environment. But the ida, and later Forfa´s and ida Ireland, played an important role in shaping these latter factors, at least, in a proactive way. They did this specifically to make Ireland more attractive for nontraditional fdi.

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Table 9 Ireland—employment trends by occupation, 1993–2000

1. Employed corporate managers, legislators, and senior officials (thousands) Employed

1993 1994 1995 1996 1997 1998 1999 2000

51.5 53.7 60.7 61.5 63.8 164.8 173.5 289.2

300 Employed (Thousands)

Year

250 200 150 100 50 1993 1994 1995 1996 1997 1998 1999 2000

SOURCE: ILO, Bureau of Labour Statistics.

Year

Employed

1993 1994 1995 1996 1997 1998 1999 2000

190.9 189.9 195.6 216.6 209.7 222.7 240.3 253.5

Employed Professionals (Thousands)

2. Employed professionals (thousands), 1993–2000 275

250

225

200

175 1993 1994 1995 1996 1997 1998 1999 2000

SOURCE: ILO, Bureau of Labour Statistics.

manufacturing plants and low-cost financial services operations in the country, they would establish design centers, regional corporate headquarters, or even, possibly, new manufacturing plants, as long as this manufacturing depended less on low costs and more on the expertise of highly trained engineers or research scientists. As Lovegrove and others at Forfa´s and ida Ireland discovered, this was not an easy task, and it presented new challenges. Yet Ireland’s democratic regime had provided a high level of political security to its leaders since the

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Table 10 Ireland—hourly compensation costs for production workers (all manufacturing), 1975–2000

Hourly Compensation

20

15

10

5

0 1975

1980

1985

1990

Year

U.S. dollars

Year

1975 1980 1985

3.06 6.02 6.00

1990 1995 2000

1995

2000

U.S. dollars 11.77 13.75 12.72

Source: U.S. Department of Labor, Bureau of Labor Statistics.

1950s. As a result, Ireland’s leaders were willing to delegate considerable authority over investment promotion policy to the ida and later to ida Ireland and Forfa´s, all of which possessed high levels of technocratic independence. This high level of technocratic independence enabled these agencies to develop high levels of transnational learning capacity, resulting in very effective investment promotion policies and, ultimately, greatly increased levels of nontraditional fdi. All indications were that ida Ireland and Forfa´s would continue to implement an effective investment promotion strategy, focused on promoting nontraditional fdi that was suitable for Ireland and that would advance the government’s goal of moving up the value chain. Given the difficulties that Latin American countries experienced in developing such investment promotion strategies, the past successes of ida, ida Ireland, and Forfa´s in developing effective strategies to promote nontraditional fdi provide useful lessons for governments in Latin America. The ongoing efforts of ida Ireland and Forfa´s to maintain Ireland’s competitiveness demonstrate further that even countries that have

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attained relatively advanced levels of economic development need constantly to adapt their strategies to changing domestic and global circumstances if they wish to continue to harness the benefits of globalization. Finally, the approach that the Irish government took toward accomplishing this goal—more democratic than authoritarian, allowing maximum input for executives and scientists in knowledge-intensive fields, such as biotechnology—offers an instructive comparison with the Singapore case about the importance of a democratic organizational culture. Ireland’s initial success and Singapore’s initial difficulties in promoting the most knowledge- and research-intensive segments of the biotechnology sector provide still more lessons for Latin American governments attempting similar undertakings in the future.

Background on the ida/ida Ireland The Industrial Development Authority (ida), as it was originally known, was created in 1949 within the Department of Industry and Commerce to promote industrial development in Ireland. In 1952, the government formed a complementary agency, Foras Tionscal (the Industry Board), to provide investment incentives to firms in the form of capital grants. After Ireland adopted an export-oriented development strategy in the late 1950s, the ida began to play a more active role in promoting fdi. Its focus was on promoting fdi in manufacturing sectors that could boost Ireland’s exports. ida personnel believed, however, that operating as part of the department—and therefore, as a full-fledged part of the civil service, with all of the restrictions that entailed—constrained these efforts in some ways (Wells and Wint 2000, 57). For example, every person hired, even secretaries, had to be approved by the Department of Finance, and every foreign investment promotion mission had to approved by the Department of Industry and Commerce (Mac Sharry and White 2000, 190). In 1969, following the recommendation of the consulting firm Arthur D. Little, Inc. (ADL), the Irish government restructured the ida into an independent government agency, legally separate from the department in many respects although broadly connected to it (for example, the department still provided most of its budget). In addition, the government merged Foras Tionscal, the agency responsible for giving financial incentives to firms, into the ida. Many ida officials had themselves come to realize that such a restructuring was needed; indeed, they provided most of the suggestions in the ADL report. Nevertheless, bringing in an outside,

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well-known consulting firm such as Arthur D. Little helped legitimize this action (Halpin 2004; McMenamin 2004). After these changes went into effect in 1970, the ida began to operate as a more independent, or quasi-governmental agency. As before, the agency had its own board of directors and made its own decisions, while continuing to operate broadly under the auspices of the Department of Industry and Commerce, the source of most of its funding. Now, however, the ida had more authority. It could establish its own procedures for hiring personnel. It could identify and promote fdi from specific industries without seeking final approval from the department. And it could provide financial grants as incentives to prospective investors directly. In addition to using such support to attract foreign direct investment (fdi), the ida was also responsible for providing it to local firms. During the 1970s, fdi in Ireland grew substantially. Increasingly, however, individuals both within and outside of the government began to argue that while foreign investment provided jobs, it had not done as much as had been hoped to spur development of local industry. The Telesis Report, a review of Ireland’s industrial policy commissioned by the Irish government and published in 1982, called for more support for indigenous industry. From at least the 1960s onward, the ida’s approach had been what many analysts called ‘‘industrialization by invitation’’: promoting fdi in order to bring in more jobs and overall growth for the Irish economy. The Telesis Report maintained that this was not enough. It held that the ida should do more to promote linkages between foreign and local firms as well as to promote the development of indigenous capabilities of local firms. Ten years later, the government commissioned another major review of Ireland’s industrial policy. Published in 1992, the Culliton Report again emphasized the importance of promoting indigenous industry and called for a restructuring of ida into separate agencies with different responsibilities. ida Ireland would be responsible for promoting fdi, and another agency would focus solely on promoting indigenous development. This idea was made into law in 1993 and implemented in 1994, with three separate agencies created out of the ida: ida Ireland for promotion of fdi, Forbairt for the promotion of indigenous industry, and Forfa´s for the development of overall strategy. In 1998 Forbairt was folded into some other government agencies and became Enterprise Ireland, charged with promoting indigenous development. Currently, ida Ireland, Enterprise Ireland, and Forfa´s all operate under the Department of Enterprise, Trade and Employment (Forfa´s 2002).

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Political Security in Ireland A parliamentary democratic republic, Ireland has provided its leaders with a high degree of political security since the 1950s. Ireland’s leaders have benefited from a high level of political security provided by a low level of partisan conflict, disciplined political parties, stable coalitions, and the dominance of one major party, Fianna Fa´il.6

Low Level of Partisan Conflict Recent Irish history helps explain the origins of the country’s low level of partisan conflict. Fianna Fa´il (Soldiers of Destiny) and Fine Gael (Irish Soldiers) emerged as Ireland’s main political parties in the aftermath of the Irish civil war of 1922–23, which arose over a dispute about the AngloIrish Treaty of 1921. This treaty allowed the southern part of Ireland to establish an independent state that would remain part of the British Commonwealth, with loyalty to the British crown, while the northern part of Ireland would remain entirely under British control. Fine Gael supported the treaty, but Fianna Fa´il, preferring a complete break with Britain and the immediate creation of a republic, opposed it. After the southern part of Ireland finally became an independent republic in 1949, the original rationale for the two different parties within the new Republic of Ireland disappeared, but the parties themselves continued to exist. Because of the way in which these parties emerged, based on a foreign policy issue that was no longer relevant rather than based on economic cleavages within the country, they never had strong ideological orientations to the right or to the left of the political spectrum with regard to economic policy (Mair 1999; ‘‘Civil-War Politics’’ 2004). For this reason, and also because of a corporatist system that ameliorated conflict between business and labor (Emmons 1999, 9–10), Ireland’s political system was not highly polarized, and there was little conflict between business and labor groups, or between the major political parties, on macroeconomic issues. 6. The Irish parliament, or Oirechtas, consists of two houses: the Da´il E´ireann (lower house, similar to Britain’s House of Commons) and the Seanad E´ireann (upper house, similar to Britain’s House of Lords). Because the Da´il has so much more power than the Seanad, which essentially can do little more than delay legislation enacted by the Da´il, in this chapter I refer to the Da´il as the Irish parliament. Note that the use of Irish terms is common in Ireland when referring to government organizations. Irish is the first official language of the Republic of Ireland (English is the second), and the Irish government publishes most official documents in both Irish and English.

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Indeed, Fianna Fa´il and Fine Gael were remarkably similar with regard to their views about economic policy and the government’s proper role in the economy. For example, in 1987, when Ireland faced a number of serious economic problems, both parties agreed to reforms, including social pacts with labor, which resulted in reduced government expenditures overall and ultimately reduced budget deficits and inflation. These reforms put the Irish economy on a sound footing, where it has remained since that time (Paus 2003, 9; Emmons 1999, 9–10). While agreeing with market-oriented policies for the most part, both parties were also quite willing to see limited government intervention in the form of targeting specific sectors for investment, providing government incentives to promote this investment, and so on. This was an important factor that enabled the ida and ida Ireland to continue their investment promotion efforts through successive administrations. In addition, the actions of the ida and later ida Ireland helped minimize political polarization over the government’s investment promotion efforts. First of all, some significant successes in attracting fdi (and jobs) in the 1960s and 1970s contributed to the public’s overall support for the ida. Beyond that, the ida and later ida Ireland knew how to build public support for their actions. While legally autonomous from the government, these agencies were also responsive to public opinion. For example, if the agency’s top executives knew that the government wanted to provide assistance to a poor area of the country, they would do what they could to assist (such as encouraging investors to locate their plants in that area), provided that doing so was consistent with previously established goals and objectives (Burbridge 2004; Halpin 2004; McMenamin 2004). This approach resulted in minimal political polarization among Ireland’s main political parties in general and with regard to the activities of the ida and later ida Ireland in particular. The low level of partisan conflict contributed to the political security of Ireland’s leaders and thus to the willingness of leaders from both major political parties to continue to delegate authority over investment promotion policy to the ida and later to ida Ireland. When a Fine Gael–led government created the ida in 1949 (during a relatively rare period from 1948 to 1951 when Fine Gael rather than Fianna Fa´il was the governing party), some Fianna Fa´il politicians were initially opposed to the idea but ultimately the party supported it fully. Indeed, after Fianna Fa´il returned to power, it actually increased the extent of the ida’s authority over investment promotion, allowing it to promote investment not only in underdeveloped areas in Ireland but throughout the country (Mac Sharry and White 2000, 183–87). Ever since,

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both parties have maintained their willingness to give the ida and later ida Ireland a high level of independent control over investment promotion policy.

Disciplined Political Parties Proportional representation (pr) electoral systems often produce highly fragmented political party systems. The particular type of pr system Ireland uses, known as the single transferable vote (pr-stv) system, creates strong intraparty competition, which tends to reduce political party cohesion and discipline. Nevertheless, in Ireland, given its history, its strong political traditions, and its possession of a stable party system for more than seventy years, in which most voters continued to affiliate themselves with specific political parties, a different outcome prevailed. In Ireland’s case, pr-stv coexisted with a political system with two main political parties, Fianna Fa´il and Fine Gael, in which just one party, Fianna Fa´il, dominated. Furthermore, all of Ireland’s political parties possessed very strong party discipline (M. Gallagher 1999, 179; Laver and Marsh 1999, 165–75; Marsh 2006a, 2006b; Sinnott 1999, 117).

Fianna Fa´il Dominance and Stable Political Coalitions By 1932, Fianna Fa´il was the largest party in the Irish parliament. From the 1940s until 1989, a political party structure emerged in Ireland in which Fianna Fa´il became the dominant party and Fine Gael, much smaller in size, formed coalitions with minor parties to gain political influence in the parliament. After 1989, both Fianna Fa´il and Fine Gael formed coalitions with smaller parties, but Fianna Fa´il–led coalitions continued to dominate the parliament and usually maintained control of the government. Although Fine Gael–led coalitions held executive office for brief periods, Fianna Fa´il was one of the most dominant ruling parties in the world, having control of the government, either on its own or as leader of a coalition of parties, during 1932–48, 1951–54, 1957–73, 1977–81, 1982, 1987–94, 1997–present (Coakley and Gallagher 1999, 376). Fianna Fa´il clearly dominated the Irish political system. Yet the low level of political polarization, the strong discipline of political parties, and the stability of political coalitions in Ireland, combined with the nature of the parliamentary system itself, in which governments were formed on the basis of parliamentary majorities, gave leaders from both Fianna Fa´il and Fine Gael a great deal of political security during periods when they

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controlled the government.7 Also, unlike some parliamentary governments, which were formed and fell frequently, Ireland’s parliamentary system and its political coalitions (once formed) were highly stable (M. Gallagher 1999, 183). For these reasons, Ireland’s political system provided its leaders with a high level of political security.

Technocratic Independence Because of their high level of political security, Ireland’s leaders were willing to grant a great deal of technocratic independence to the ida and later ida Ireland. From the beginning the ida had its own board of directors, devised its own strategies on the basis of technocratic criteria, and collaborated with other agencies pursuing similar goals. Nevertheless, it remained very much under the control of the Department of Industry and Commerce (now called the Department of Enterprise, Industry and Trade), needing to seek approval from department officials for all expenditures, no matter how minor, and required to follow civil service guidelines on the hiring of personnel. Finally, following the recommendations of outside consultants and ida officials themselves, the government decided to change this approach. From 1970 on, consecutive administrations, whether from Fianna Fa´il– or Fine Gael–led governments, gave the ida and later ida Ireland a quasi-governmental status that freed them from these bureaucratic constraints. Indeed, it was leaders from the Fianna Fa´il party, the party that initially opposed the very creation of the ida, who enacted the 1969 legislation that increased the ida’s level of technocratic independence. Their party having been in power continuously since 1957, Fianna Fa´il leaders had reason to feel secure. But given the high level of political security that Ireland’s political system provided to leaders from either party, it was not surprising that Fine Gael politicians maintained the agencies’ high level of technocratic 7. In Ireland’s parliamentary system, governments were formed in three ways: (1) an election in which a party or coalitions won a majority of seats in the parliament; (2) the formation of a majority coalition after an election in which no single party or coalition of parties was the clear winner; (3) a majority vote in the parliament after an election in which no single party or coalition of parties emerged as a clear winner and the formation of a majority coalition did not occur in the parliament on its own accord. The last outcome, which resulted in governments controlling only a minority of the seats in the parliament, occurred only six times from 1948 to the present, in the following general election years: 1951, 1961, 1981, February 1982, 1987, and 1997. In each case, however, the minority government was able to win sufficient support from other parties and independents to win the election in the parliament and thus form a government (Gallagher 1999, 181–82).

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independence after they returned to power, for brief periods, later on. Thus from 1970 onwards the ida and later ida Ireland established their own merit-based criteria for hiring personnel, devised and evaluated their own investment promotion strategies on the basis of technocratic criteria (departmental approval no longer required), and collaborated with other government agencies pursuing related goals (ida Ireland 2006a).

Merit-Based Hiring The ida and later ida Ireland hired on the basis of merit rather than political considerations. The year 1970 marked a transition. Freed from the normal civil service hiring requirements, the ida set out to recruit new personnel for a staff that would number about 230. About 80 percent of the civil service personnel at ida and Foras Tionscal, or approximately 105 people, chose to join the new ida, which now combined the functions of both agencies. By doing so, they proved themselves to be different from regular civil service employees as this meant that they had to give up the guaranteed tenure that their former civil service jobs provided. The hiring procedure for the remaining approximately 125 applicants included numerous, demanding interviews with the ida’s new managing director and head of administration. As a result of this process, the ida hired more than 100 new staff directly from the private sector, many with extensive industry experience (Mac Sharry and White 2000, 195–96). After 1970, all ida and later ida Ireland personnel continued to be thoroughly screened and had to meet very specific criteria. For example, recent applicants for the position of junior marketing executive in ida Ireland’s foreign offices had to give a presentation to demonstrate their business presentation skills and also had to undergo multiple interviews with senior ida Ireland executives. Required characteristics for successful applicants included, among others: • Fluency in the language of the country in which the foreign office was located • A business/marketing degree or direct business experience • The ability to identify target companies with potential for investing in Ireland • The ability to develop sectoral knowledge, including changing business models • The ability to analyze and interpret elements of business strategies • The ability to prepare and implement customized presentations to

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potential clients with a clear value proposition as to why they should consider Ireland as an investment location • The ability to help prepare appropriate itineraries for visiting executives to Ireland and to assist with the commercial assessment and implementation of projects • The ability to work in conjunction with the relevant divisions in Ireland to develop relationships with existing client companies aimed at maximizing their strategic potential by creating additional activities in their Irish subsidiaries (ida Ireland 2006b; Lee 2006) This rigorous, systematic process of selecting personnel resulted in a highly qualified staff. In 2006, ida Ireland had 281 personnel, with 120 involved in investment promotion. Of these, more than 14 percent had MBAs or PhDs, and 22.5 percent had previously worked or studied overseas. Of ida Ireland’s project and marketing executives, approximately 25 percent also had prior experience working for transnational corporations in Ireland (Lee 2006).

Decisions/Evaluations Based on Technical Criteria ida Ireland engaged in an annual planning process that began at the end of each year and culminated in the organization’s annual meeting in January. This planning process consisted of reviewing the previous year’s achievements and establishing goals and objectives for the coming year. These goals and objectives included specific performance targets for ida Ireland as a whole and for each industrial sector it sought to promote and also performance targets for individual ida Ireland executives. Originally, ida’s performance targets focused primarily on the number of new investments in targeted sectors and the number of new jobs those investments provided. The ida and later ida Ireland’s performance targets, however, evolved as the agencies’ strategies changed. Reflecting increased concerns on the part of Forfa´s and ida Ireland to attract research- and knowledge-intensive fdi, in the last few years ida Ireland’s performance targets have included measures for research and development (R&D) components of fdi. For example, by 2005 annual performance targets for ida Ireland as a whole, as well as for specific industrial sectors (with some variations), included the following: • Number of greenfield projects (i.e., new investment projects) • Number of expansion projects (i.e., additional fdi by firms already in Ireland)

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• • • • •

Capital investment in approved projects Average salary in new investments Annual corporate tax payments of ida client companies Employment creation (new jobs) Number of approved R&D capability and research, technology development, and innovation projects by ida companies • Investment by ida client companies in R&D • ida supported/initiated industry-academia R&D collaborations • Number of ida client companies with investment of more than y250,000 per year on R&D (ida Ireland 2006a, 18) ida offered incentives to prospective corporate investors to the extent to which they contributed to these targets. Performance targets for individual executives were also aligned with these goals. For example, for marketing executives based in ida Ireland’s foreign offices, performance targets were based on the number of company visits to Ireland from targeted sectors and the number of investment projects that resulted from those visits (Lee 2006). In addition to conducting evaluations of existing strategies and making decisions about them on the basis of technical rather than political criteria, ida Ireland made decisions about new investment strategies, specifically which new sectors to promote, on the basis of continuous study of trends in various industries. ida Ireland executives in the agency’s foreign offices provided detailed reports on visits to prospective investors. Project executives, assigned to specific sectors and based in ida Ireland’s headquarters office in Dublin, assisted the foreign offices in promoting fdi from those sectors and in organizing corporate site visits to Ireland. Over time, on the basis of these site visits, detailed study of individual sectors, frequent meetings with investors already in Ireland, and discussion among ida Ireland sector specialists and top executives themselves, awareness of evolving trends led to formation of new strategies (Donoghue 2004). ida Ireland’s executive committee, composed of the top divisional managers and executive directors within the agency, met approximately twice a month to assess the agency’s performance in meeting its targets and to discuss emerging trends.8 If the members of the executive committee 8. In addition to regional and operational divisions, by 2005 ida Ireland’s main division devoted to specific industries included its Life Sciences and Information and Computer Technology (ict) Division, which was further divided into narrower, more specific sectors: Pharmaceuticals and Biotechnology, Medical Technologies, and ict. The agency also had sectoral divisions devoted to International Financial Services and Globally Traded Business (ida Ireland 2006a).

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believed that promotion of fdi in specific new sectors was warranted, they presented their recommendation to ida Ireland’s board of directors (Donoghue 2004).

Collaboration with Other Agencies The ida’s 1994 restructuring and further changes in 1998 led to the formation of three separate agencies, all under the Department of Enterprise, Trade and Employment and all responsible for different aspects of Ireland’s economic development: ida Ireland for promotion of fdi, Enterprise Ireland for the promotion of indigenous industry, and Forfa´s for the development of overall strategy. Science Foundation Ireland (sfi), originally created as a part of Forfa´s but made into a full-fledged, legally separate agency in 2003 by an act of parliament, provided financial grants to firms and universities to promote R&D in Ireland. Collaboration with these agencies further strengthened ida Ireland’s technocratic independence. Because these agencies were very much aware of each other’s activities, they were able to monitor each other’s actions, further ensuring implementation of their broad developmental objectives. Forfa´s, Ireland’s national policy and advisory board for enterprise, trade, science, technology and innovation, collaborated closely with ida Ireland and Enterprise Ireland in the national effort to promote knowledge-intensive fdi. Forfa´s undertook extensive studies of global and domestic economic trends, advised the government on economic policy, and helped coordinate strategy between ida Ireland, Enterprise Ireland, sfi, and other government agencies to ensure that their efforts were aligned with this goal. Enterprise Ireland and sfi also worked closely with ida Ireland. Enterprise Ireland initially developed programs to help small- and mediumsized enterprises in Ireland upgrade their capabilities so that they could become suppliers to the transnational corporations (tncs) that ida Ireland was attracting. As manufacturing costs in Ireland rose, however, Enterprise Ireland began helping Ireland-based subsidiaries of tncs to find lower-cost suppliers in Eastern Europe. Enterprise Ireland also funded R&D by Irish firms and universities, and assisted university researchers to make their work commercially viable and available to Irish firms (Enterprise Ireland Web site). sfi was modeled, in part, on the U.S. National Science Foundation (nsf ). Indeed, Dr. William Harris, who served as sfi’s founding director general from 2001 to 2006, was a U.S. citizen and had been a director at

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nsf for many years (Harris 2006). Although sfi was originally established in 2000 as a part of Forfa´s, in 2003 it became a stand-alone agency, with its own board of directors (but still under the Ministry of Enterprise, Industry and Employment), as part of the Industrial Development (Science Foundation Ireland) Act. Different from Enterprise Ireland in that it funded any firms, institutions, or individual scientists engaged in R&D in Ireland, foreign or domestic, sfi provided funding for R&D projects, particularly in fields related to biotechnology and information and communications technology, which would advance Ireland’s capabilities in these areas. The goal of all of these agencies was to contribute to Ireland’s effort to move into more advanced industrial activities and to promote its overall economic development. At least from 2000 on, the specific objective for all of these agencies—each using its own well-defined criteria to measure progress—was to contribute to Ireland’s effort to move up the value chain into more knowledge-intensive activities. Of course, ida Ireland did not work just with these agencies. From the beginning the ida and later ida Ireland also collaborated with various government departments, such as the Department of Finance, the Department of Education and Science, and the Higher Education Authority, as well as the Department of Industry and Commerce (later the Department of Enterprise, Trade and Employment), in promoting Ireland’s economic development. This extensive collaboration on common goals among so many agencies, many of them highly technocratically independent themselves, limited the ability of the ida and later ida Ireland to become captured by the narrower interests of any particular individuals, corporations, or government officials.

Reputation of the ida and ida Ireland In addition to merit-based hiring practices, making decisions and evaluating programs on the basis of objective technical criteria, and collaborating with other technocratically independent institutions pursuing similar goals, still another factor contributed to the ability of the ida and later ida Ireland to remain free of political interference from the government. This was the political clout and status of the ida and later ida Ireland within Ireland. After its initial success in attracting fdi in 1960s and 1970s, the ida was seen as an agency that was doing outstanding work to solve Ireland’s unemployment problem. The agency had great respect and status among the general public. The public supported the organization fully, and the politicians respected it. As one former ida director stated, ‘‘no one

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dared go against the ida’’ (McMenamin 2004). ida Ireland continued to retain this respect. The highly regarded position it held contributed to the ida’s and later ida Ireland’s abilities to develop their own strategies and policies without significant political interference.

Technocratic Independence but Sensitivity to Government Concerns Despite the ida and later ida Ireland’s high level of technocratic independence, the agenda of the government and that of the ida and later ida Ireland never diverged too greatly. One reason was that ida Ireland received most of its operating income from the Department of Enterprise, Trade and Employment (a smaller portion came from other sources) (ida Ireland 2006a). Also, the head of the department was responsible for appointing the directors to ida Ireland’s board (Mac Sharry and White 2000, 195). Finally, members of the government served on the board. In addition to the chairman of ida Ireland, the chief executive of the agency, and the director of Science Foundation Ireland, the board included the assistant secretary of the Department of Enterprise, Trade and Employment among its members (ida Ireland 2006a).9 This limited degree of government involvement allowed the ida and later ida Ireland to retain their technocratic independence while at the same time remaining sensitive to government concerns. For example, if unemployment was especially high in one region of the country, ida Ireland would make an effort to direct investment to that location. But this would be done only if the investment was appropriate for the location, in accordance with ida Ireland’s previously established, well-defined plans to decentralize investments to certain locations in order to create more regional balance in the location of fdi. As one senior official at ida Ireland who had been with the ida for many years said, ‘‘it’s not as if a minister can phone me up and tell me that I want this project in a specific town’’ (Molumby 2004). O’Riain referred to specific incidents in which the ida bowed to pressure from influential politicians. Significantly, however, these occurred only in specific sectors, such as beef processing, where local interests were very strong. When it came to nontraditional fdi—the focus of the ida’s 9. To illustrate the breadth of representation on the board, in 2006 other members of the board included a partner in Deloitte & Touche; the chairman of Amarin Corporation (a British-based pharmaceutical firm); the managing partner of Kieran Corrigan & Co. (an Ireland-based accounting firm); the chairman of the American Ireland Fund (a U.S.-based charitable organization); and the general manager for pensions at the Electricity Supply Board (ESB, a government-owned corporation) (ida Ireland 2006a).

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investment promotion efforts—the organization was much more independent. In high technology sectors, O’Riain noted, ‘‘the presence of tncs, the peculiar position of the ida partly outside the state and the limited personal ties of politicians to the sector made clientelist relations less viable. Politicians did attempt to influence the location of factories but this had relatively little effect on the development of the industry and was consistent with the regional focus of ida policy through the 1960s and 1970s in any case’’ (2004, 236).

Transnational Learning Capacity The ida’s, and later ida Ireland’s, large budget contributed to its transnational learning capacity. ida Ireland’s budget was 183 million (more than US$ 264 million) in 2007 (ida Ireland 2008).10 It helped, of course, that both the ida and later ida Ireland received large subsidies from the eu. For this reason, in part, their budgets were significantly larger than the budgets of any of the Latin American ipas. Of course, the size of the budget was not relevant to all aspects of transnational learning capacity. In any case, what really mattered was how an agency used its budget. Nevertheless, large budgets did allow the ida and later ida Ireland to maintain numerous foreign offices and hire highly qualified personnel.

Internationalization of Personnel After the ida established itself as autonomous from the civil service in 1970, its quasi-governmental status allowed it to go outside of the usual pool of government recruits to hire the most appropriately qualified personnel, many with extensive industry and international experience or, at the very least, a strong interest in living and working overseas. Also, because the agency was autonomous from the civil service structure, its employees did not have the employment guarantees that automatically came with long-term civil service employment (Mac Sharry and White 2000). This selection process resulted in a staff that from the outset was different from typical civil service employees. They were risk-takers, confident of their own abilities, and because international service was expected 10. ida Ireland’s budget information is published in its annual report. In 2008 the most recent annual report available for ida Ireland was the 2007 annual report, published in 2008.

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of most employees at some point in their careers, strongly interested in working overseas (Fitzpatrick 2004; Shiels 2004). Employees at the ida, and later ida Ireland, were not attracted to the agency principally by the salary. For instance, although ida Ireland’s salary levels were slightly higher than those in the civil service, they were roughly comparable (Fitzpatrick 2004).11 Nevertheless, the ida, and later ida Ireland, had no difficulty recruiting highly talented—and highly internationalized—personnel. In 1970, with about 105 existing personnel but no longer bound by civil service hiring requirements, the ida set out to recruit additional staff. Within eight weeks, after subjecting applicants to multiple, rigorous interviews with top ida executives, the ida had succeeded in recruiting approximately 125 new staff members. Of these, more than 100 came from the private sector, many with international business experience (Mac Sharry and White 2000, 195–96). By the end of 2006, of the 281 employees at ida Ireland, 120 were significantly involved in investment promotion (in Ireland and overseas). Of this number, 22.5 percent had worked or studied overseas, and approximately 25 percent of the organization’s marketing and project executives had worked for transnational corporations in Ireland before joining the agency (Lee 2006). There were a number of reasons for the success of the ida and later ida Ireland in attracting this sort of personnel. For the ida in the 1970s, one reason was that Ireland was experiencing high levels of unemployment. With jobs scarce, employment with the ida was a good opportunity. Beyond the benefits of the job itself, however, the ida and later ida Ireland was a well-known, prestigious institution within Ireland. As one former ida official explained, ‘‘working at the ida was like working at the White House’’ (McMenamin 2004). This official himself, who began at the ida in the mid-1970s after finishing an MBA at the University of Chicago, certainly would have had other options. Yet he chose the ida, rising to become one of its most senior officials. In addition to the prestige associated with working at the ida and later ida Ireland, the unique esprit de corps these organizations possessed was another attraction. Those working in these agencies seemed to share a common feeling that they were doing good work for a good cause. This attitude, strong from the beginning at the ida, was still prevalent in ida 11. There were exceptions. For example, in the 1980s, when ida Ireland sought to promote investment in international financial services, and hired on numerous investment bankers on a short term basis to assist in this endeavor, it paid them salaries consistent with investment bankers (Fitzpatrick 2004).

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Ireland (author interviews with ida Ireland officials 2004). O’Riain confirmed similar findings on this characteristic of ida Ireland (2004). Still another attraction was the opportunity to work overseas. Most ida, and later ida Ireland, staff had spent or intended to spend at least part of their time in one of the agency’s foreign offices (Fitzpatrick 2004). Again, this highlighted the differences between ida/ida Ireland staff and the regular civil service employees, not all of whom would have seen this as attractive. These characteristics of ida personnel, all of which continued to hold true at ida Ireland, demonstrated that they were highly capable, talented, and internationalized individuals, able to understand and respond to the rapidly changing trends in international business. But the ida/ida Ireland transnational strategic network provided the other major part of the organization’s transnational connectedness and overall learning ability.

Transnational Strategic Network The ida’s, and later ida Ireland’s, transnational strategic network consisted of two main components: its overseas offices and its relations with investors already in Ireland. This transnational strategic network played a major role in the ida’s and ida Ireland’s understanding of changing trends in global business, as well as within Ireland itself, and how they might best adapt their strategy to take advantage of those trends. The ida opened its first overseas offices in the 1960s in London, Paris, Cologne, New York, San Francisco, and Chicago (Mac Sharry and White 2000, 190). These operations continued to expand, particularly in the United States. By 2007, ida Ireland had twelve foreign offices. The U.S. offices were in New York, Atlanta, Chicago, and Mountain View, California; the Asia-Pacific offices were in Australia, China (Shanghai), Japan, Korea, and Taiwan; and the European offices were in Germany, the Netherlands, and the United Kingdom (ida Ireland Web site, accessed May 27, 2007). The overseas offices of the ida and later ida Ireland were the key component of the transnational strategic network. The staff working in these offices was on the front lines in the agencies’ constant effort to stay ahead of global business trends and be responsive to the evolving needs of transnational firms. The office staff might consist of just one director and a few support personnel, as in the Silicon Valley office in Mountain View, California, or a senior director and several deputy directors and marketing executives, as in the New York office. But all executives in the foreign

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offices had the same job description: to learn as much as possible about prospective investors in their region through trade journals, newspapers, and the Internet and to meet with prospective investors from targeted industries (Donoghue 2004; Fitzpatrick 2004).

Systematic, Proactive Approach to Learning Clearly, the ida and later ida Ireland had a systematic, proactive approach to learning about global business trends and specific prospective foreign investors. In the process of learning about and interacting with prospective investors in the overseas locations, ida Ireland’s executives gathered information about trends in targeted sectors or even about emerging sectors that deserved the agency’s attention. This information was transmitted to ida, and later ida Ireland, headquarters through regular reports (Burbridge 2004; Donoghue 2004). These reports influenced the annual planning process, which occurred within all divisions of the agency in the latter part of each year. Most significant for overall policy direction, however, at least since the creation of ida Ireland, were the annual meetings. All overseas managers were required to attend the annual ida Ireland meeting, always held in early January, during which they reported on their activities and the results for their regions. In addition to the ongoing reviews and evaluations of performance targets that occurred toward the end of the year, these annual meetings allowed key members of the organization, including the Strategy and Planning staff, to learn more about evolving trends among prospective investors and to announce new targets for the coming year (Burbridge 2004; Donoghue 2004). Although after 1994 Forfa´s was in charge of coordinating broad overall strategy for ida Ireland and Enterprise Ireland, ida Ireland’s Strategy and Planning division staff continued to play an important role in developing strategy for specific sectors. For example, the pharmaceutical industry was one of the ida’s originally targeted sectors. Throughout the 1990s executives at large pharmaceutical transnational corporations (tncs) informed ida Ireland executives about the growing importance of biotechnology. Ultimately, this information helped determine both the immediate targets established by ida Ireland and Forfa´s’s overall long-term strategy to promote biotechnology investment (Burbridge 2004). Understanding and acting on growing trends in this way affected more than which industries or subsectors of industries the organization targeted. It also guided the ida’s, and now ida Ireland’s and Forfa´s’s, efforts to inform and persuade the government to invest in infrastructure or in

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specific training programs to serve these industries’ future needs. This might involve changing legislation in ways that would encourage tncs from these sectors to invest in Ireland.

Organizational Culture In addition to an abundance of the other three principal components of transnational learning capacity, the ida and later ida Ireland and Forfa´s all possessed a fourth component, not yet relevant in the Latin American cases but important for ipas seeking to promote nontraditional fdi in knowledge-intensive industries: a democratic, egalitarian organizational culture. This extra dimension of transnational learning capacity contributed to the ability of these organizations to shape policies that would be responsive to the needs of highly advanced, research-oriented, knowledgeintensive industries. One example was the Technology Foresight Exercise, in which the government went out of its way to seek the advice and opinions of executives working in key industries on policies it should adopt. Another example was Forfa´s’s establishment of Science Foundation Ireland. As the government sought to promote nontraditional fdi in more advanced, knowledge-intensive industries, it set up sfi to fund basic scientific research and to promote start-up ventures in key areas, such as biotechnology. Although the government could decide what broad sectors to support, it did not attempt to control the specific direction of this research, and it allowed scientists, executives, and entrepreneurs to have a significant role in shaping government policies affecting their activities. This helped make Ireland a hospitable place for such professionals, all of whom demanded input into government decisions in these areas. This democratic aspect of ida Ireland’s and Forfa´s’s organizational culture was in marked contrast to the more hierarchical, top-down approach of Singapore’s edb, which produced very different results (see Chapter 5).

Effectiveness of Investment Promotion Effort Because the ida and later ida Ireland possessed high levels of technocratic independence and transnational learning capacity, they were very successful, over a number of administrations, at targeting their investment promotion strategy to those nontraditional investors most appropriate to Ireland. The agencies’ high level of technocratic independence allowed

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them to pursue investment promotion strategies based on objective criteria in a sustained way through consecutive governments rather than being forced to conform to new political directives from each new government. Their high level of transnational learning capacity led them to develop strategies focused on attracting investors most suited to Ireland’s business environment and to refine those strategies in response to investors’ changing needs and concerns. The ida had already begun to develop a highly effective investment promotion strategy in the 1950s. But the evolution of the ida’s, and later ida Ireland’s, investment promotion strategy from the 1960s to the present most clearly demonstrates the extent to which these agencies were able to develop an investment promotion strategy that was well targeted, responsive to the needs of prospective foreign investors, and sustained over time.

Developing a Well-Targeted, Responsive Investment Promotion Strategy: The 1960s to the 1980s Given the small size of Ireland’s economy, by the 1960s the Irish government had established promotion of manufacturing for export as a clear national objective. It had eliminated restrictions on foreign investment and passed attractive incentives for manufacturing firms, such as a 100 percent tax remission on export sales (changed in the 1970s to a 10 percent taxation rate on corporate profits in response to pressure from the eec, and raised to a 12.5 percent rate after 2003). In addition to the government’s tax incentives, in the 1960s Foras Tionscal complemented the ida’s work by offering generous grants as incentives to specific foreign firms it sought to attract to Ireland. (After 1970 this agency merged with the ida.) Despite these advantages, in the 1960s Ireland was still not well known as a promising location for foreign direct investment in the pharmaceutical and electronics industries, two sectors that the ida believed were especially well suited for export, as well as for providing high-skilled manufacturing jobs. Corporate executives from the United States, the source of most of the largest and fastest-growing firms in these sectors, seemed particularly uninformed about Ireland’s advantages as an investment location. As a high-level executive at the ida (and later managing director of ida Ireland) noted about that period: ‘‘For many years, there was a clash between how American business perceived Ireland and the changed economic reality that the ida sought to project, but which foreign investors were slow to recognize. . . . For quite a few Americans, Ireland remained a romantic misty isle . . . full of bog roads and stray donkeys. To the ida,

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Ireland had become a vibrant modern economy, and the ideal export base for foreign multinationals aiming to penetrate the European market. The ida had a hard fight, and it took a long time to dispel the dated image of the country’’ (Mac Sharry and White 2000, 239). After 1969, terrorism in Northern Ireland contributed further to creating a negative impression of Ireland as a whole among prospective foreign investors, even though this problem did not significantly affect the Republic of Ireland. Nevertheless, by targeting specific firms from suitable industries and showing responsiveness to their needs and concerns, the ida was able to convince numerous executives to visit the country and, once there, persuade them of the advantages to investing in Ireland. The ida’s early successes in the mid-1960s in attracting fdi from such widely respected firms as General Electric and Pfizer were instrumental in convincing other U.S.-based executives from the electronics and pharmaceutical industries to consider investing in Ireland (Mac Sharry and White 2000, 189–90; Alfaro, Dev, and McIntyre 2005, 3). By the end of the decade, the ida had won new fdi or expansions of existing fdi from more than 450 foreign firms (Alfaro, Dev, and McIntyre 2005, 3). By the 1970s, based on their transnational network of contacts resulting primarily from the foreign offices (established in the mid-1960s), officials at the ida and later ida Ireland were able to target nontraditional industries that were just emerging as potential high-growth sectors. As a result of the ida’s overseas executives’ constant visits with companies in various parts of the world, especially the United States, the agency increasingly became aware of new trends occurring in the global marketplace. For example, the 1970s, at least in the United States, was the beginning of the era of the personal computer. The ida, with its transnational connections, its internationalized staff, and its proactive approach to gathering information, was aware of this emerging sector within the electronics industry from the outset. ida overseas staff used their frequent contacts with companies in these emerging, high-growth sectors, as well as other marketing efforts, to make these companies aware of the advantages Ireland had to offer. Realizing that market forces alone would not bring the initial investments to Ireland, the ida did not wait for investors to contact the agency. It did not even make much use of investment seminars to promote Ireland. Instead, it proactively selected individual firms that met specified criteria (high profitability, strong growth, highly skilled workers) and then contacted these firms directly. In locations without overseas offices, the ida organized task forces of ida executives who visited hundreds of companies to

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make customized presentations. Having researched the firms intensively, the ida executives were able to demonstrate, using detailed financial analysis, the advantages for specific firms of locating manufacturing plants in Ireland. They could show executives from a particular firm, for example, that some of that firm’s product lines could be manufactured more efficiently in Ireland (Mac Sharry and White 2000, 231–33). In 1971, the first year the ida began using these task forces, ida made 105 such presentations; by 1974, ida executives had made more than 4,000 (Alfaro, Dev, and McIntyre 2005, 4; Mac Sharry and White 2000, 232). The very first company to invest from the emerging computer sector was Digital Equipment Corporation, at that time a leading manufacturer in this sector, which in 1971 opened a plant in Ireland that employed more than 1,000 people. Other firms soon followed, including Apple Computer in 1979. Apple’s investment was of great benefit for the ida because this firm, although not yet widely known by the public at large, was well respected among Silicon Valley executives for its innovation and rapid growth. Therefore, it helped establish Ireland as an attractive location for high technology investment. With Digital and Apple and other such high profile U.S. companies serving as ‘‘anchor’’ investments, Ireland began to register in the minds of U.S. computer industry executives as a location with investment potential. Still more investments followed, and soon Ireland had a cluster of firms in this industry (Mac Sharry and White 2000; O’Riain 1997). Recognizing that increased fdi from high technology electronics firms would require more trained engineers, in 1979 the ida alerted the Higher Education Authority. Within months the government gave the Higher Education Authority more funds to dramatically increase offerings of specialized courses for technicians and electrical engineers. The Higher Educations Authority helped solve the problem in the short term, at least to some extent, by using special one-year courses to convert science graduates to qualified employees for electronics firms (Paus 2005, 68–69). Nevertheless, training sufficient numbers of engineers would take considerably longer. This underscored the importance of the ida’s ability to sustain its investment promotion strategy over successive administrations.

Sustaining the Investment Promotion Strategy in the 1980s: Intel and the ifsc In the 1980s, Ireland experienced a deep recession and debt crisis brought on by high interest rates, excessive government spending in the past, and

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years of high unemployment. During this period, the ida continued its effort to attract nontraditional, high-growth industries with advanced production facilities by targeting semiconductor firms, such as Intel. It also moved beyond manufacturing to focus on the booming firms in servicerelated sectors, such as software development and international financial services, culminating in the creation of an International Financial Services Centre (ifsc) in 1987. Because both of these developments demonstrate the ida’s responsiveness to the needs of prospective foreign investors, they warrant further discussion here. The ida was highly responsive to Intel’s concerns about investing in Ireland. As we saw in Chapter 1, Intel Corporation conducts a rigorous, thorough site selection process when deciding where to locate its manufacturing plants. Therefore, the ida’s ability to win Intel’s 1989 simultaneous investment in two major manufacturing plants in Ireland (one employing 1,500 people to make microprocessors, another employing 1,000 people to make computer systems) illustrates the extent to which the ida’s actions contributed to an outcome that otherwise would almost certainly not have occurred. In the late 1980s, many of Ireland’s seven European competitors for this investment—Scotland, Wales, France, Germany, Austria, the Netherlands, and Spain—were potentially better locations for these plants. A major drawback for Ireland was that while the other countries had such plants, Ireland had no existing large-scale manufacturers of microprocessors (Pawlak 2006). Thus the ida realized that an immediate, and legitimate, concern for Intel would be that Ireland lacked sufficient numbers of experienced engineers that the microprocessor plant would require (Mac Sharry and White 2000, 217). Indeed, as a top ida official at the time noted, convincing Intel that Ireland would be an appropriate location for such an investment would be ‘‘a mammoth task’’ (Mac Sharry and White 2000, 215). Despite the obstacles, the ida’s transnational learning capacity made up for Ireland’s lack of factor endowments related to this type of investment. First of all, the ida found out about Intel’s interest in locating a manufacturing plant in Europe even before Intel contacted the agency formally, and even before Intel had initiated its search, by means of its highly internationalized staff, its proactive approach to learning about prospective foreign investors, and its transnational strategic network. Specifically, the ida already had a foreign office located in Silicon Valley (at that time located in Menlo Park, California, now located in nearby Mountain View). For this reason, the ida’s Menlo Park office had already routinely been

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visiting Intel’s headquarters in nearby Santa Clara, California, and networking with high-level Intel executives at informational sessions, for more than a decade before Intel became interested in locating a plant in Europe (Alfaro, Dev, and McIntyre 2005, 7). Thus as soon as Intel began considering investing in Europe, the ida knew about its prospective plans—and also knew about Intel’s potential concerns regarding Ireland. Realizing that Intel’s chief concern was Ireland’s lack of engineers with relevant experience, the ida’s U.S.-based staff swung into action. Making use of their transnational strategic network, they contacted a highly specialized consulting firm that had the ability to locate, contact, and question qualified expatriate Irish engineers, asking them about their willingness to return to Ireland should the ida secure Intel’s investment. Within a relatively short time, this firm had located more than 300 such engineers, mainly in the United States, all with several years of relevant work experience, and contacted them. On the basis of this research, Kieran McGowan, then director of the ida’s international division, was able to present Intel with a report on this finding, indicating that 80 percent of the engineers would be willing to return to Ireland if they had a suitable job opportunity with a company such as Intel. The report also contained the names, addresses, and telephone numbers for many of these engineers (Alfaro, Dev, and McIntyre 2005, 7; Mac Sharry and White 2000, 217; Pawlak 2006). This reassured Intel that there would be sufficient numbers of engineers in Ireland for its needs and thus contributed significantly to its decision to invest in Ireland (Pawlak 2006). The ida’s promotion of Ireland’s International Financial Services Centre (ifsc) also indicates its responsiveness to prospective investors’ needs. Ireland did not have much fdi in international financial services before the creation of the ifsc in 1987, a project strongly supported by the prime minister as a way to increase employment in the midst of a deep recession. Although the ida itself had already begun promoting other kinds of services and had earlier proposed international financial services as a potential growth sector, in 1987 it had no significant experience in promoting fdi from this sector. Lacking expertise in this industry, the ida managed to enhance its understanding of the sector by hiring new staff members with extensive experience in financial services industries, such as investment bankers. Investment bankers and others most knowledgeable about this sector often preferred not to leave it for long periods at a time, but the ida was able to hire such people for short stints at the highly attractive compensation rates they required (Fitzpatrick 2004). Without the ida’s

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flexibility as a semi-governmental, technocratically independent organization, this would not have been possible. With their extensive, detailed knowledge of the international financial services industry, these temporary ida staff members were able to help the organization target the kinds of services most suitable for Ireland and be responsive to the concerns of prospective investors in this sector. For example, realizing that the telecommunications infrastructure available in Ireland at that time was insufficient to the needs of prospective investors in this sector, these staff members communicated this potential problem to ida personnel, who persuaded the government of the need to increase investment in that area (Lovegrove 2004). Ireland’s effort to promote international financial services was a success. Unknown as a promising location for such investment in the early 1980s, by 2005 Ireland—more precisely, the ifsc—had attracted sufficient investment to employ more than 8,500 people (Paus 2005, 50).

Responding to Ireland’s Loss of Competitiveness: The 1990s, 2000s, and Beyond Throughout the 1990s, ida Ireland continued its new emphasis on promoting nontraditional fdi in semiconductors, software, and international financial services. But now the agency faced a new dilemma: Ireland was losing its competitiveness as a low-cost manufacturing center. Increasingly, ida Ireland was a victim of its own success. As company after company established operations in Ireland, the country’s high levels of unemployment fell. But with increased fdi and higher levels of employment came upward pressure on wages. As wages climbed in the 1990s, Ireland became less and less competitive as a low-cost manufacturing center. Exacerbating the problem, countries from the former Soviet bloc joined the eu, offering nontraditional tncs other low-cost options within the European market for manufacturing of their goods. Whereas the needs of prospective investors had always changed and shifted over time, now the very regional context in which Ireland operated was changing as eu enlargement brought new competitors onto the scene. Ireland’s position as a premier location for high technology fdi from the United States was being challenged by such new or soon-to-be eu members as Poland, the Czech Republic, and Hungary (Barry and Hannan 2001). In the face of this competition, the ida Ireland needed to use all of the resources its transnational network could provide. As aware of global trends as they were, ida Ireland and the agency

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overseeing overall strategy, Forfa´s, had anticipated that this would happen—just not that it would happen as quickly as it did (Lovegrove 2004). Nevertheless, the ida, ida Ireland, and Forfa´s had always been good at adapting to changing circumstances. The solution was, once again, to reorient the overall investment promotion strategy to reflect this changing reality. If Ireland was not to be a low-cost manufacturing center, then it would have to move up the value chain and become a center for research and development (R&D), innovation, and perhaps a location for non-European tncs to locate their European headquarters, with all of the value-added activities becoming such a hub implied (Dunne 2003; Molumby 2004). Forfa´s and ida Ireland approached this new challenge, as was typical throughout the ida’s history, in a highly proactive way. ida Ireland, following its systematic approach for gathering information about new trends, had long sought to promote fdi from the biotechnology industry and emerging sectors of the information and communications technology (ict) industry. These industries, by their very natures, involved R&D at the cutting edge of technological development. Forfa´s, in charge of coordinating overall strategy, also increasingly took on more responsibility in developing a plan for Ireland to make the transition from a low-cost manufacturing location to an economy oriented toward high value-added, R&D–related activities.

Moving up the Value Chain Forfa´s informed the Irish government about policy that would support a transition toward high value-added industry and worked in collaboration with such government organizations as the Irish Council for Science, Technology and Innovation (icsti, created in 1997) and the Expert Group on Future Skills needs (Forfa´s Web site). Most important, however, was Forfa´s’s role in devising a systematic way to obtain information about future needs of executives in biotechnology and information technology areas. This was the Technology Foresight Exercise. The Technology Foresight Exercise involved bringing together 180 representatives from industry, higher education, research institutes, and different government departments in 1998–99 to form eight panels, representing a broad range of economic sectors. The sectors included health and life sciences, information and communication technologies (ict), chemicals and pharmaceuticals, materials and manufacturing processes, natural resources, construction and infrastructure, transport and logistics, and energy. Participants were placed on the panels based on their

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areas of expertise. Representatives from the private sector, who made up more than 60 percent of the participants, were from Ireland-based firms, either domestic or foreign, that had worked extensively with ida Ireland and were part of ida Ireland’s list of more than one thousand companies that had invested with the assistance (financial and otherwise) of the agency. The key issue for each panel was to determine where they saw their industry sectors going over the next ten to fifteen years, and how Ireland could play a part in this evolution (Lovegrove 2004; Forfa´s, Technology Foresight Overview Web site). Specifically, ida Ireland and Forfa´s wanted to know what government policies the executives would recommend. After drafting preliminary reports, the panels set up consultative workshops with additional representatives from the private sector, academia, and so on, bringing another 430 participants into the process for further input (Forfa´s, Technology Foresight Overview Web site). By the end of the exercise, which lasted over a year, the responses the ida Ireland and Forfa´s officials received provided confirmation of something they had come to realize on their own. That is, if Ireland wished to remain competitive, it needed to do more to move up the value chain. The representatives from the private sector, in particular—almost all of whom were managers of subsidiaries of U.S.-based tncs—made clear that low-cost manufacturing was shifting out of Ireland and going elsewhere. The only way the existing subsidiaries, or at least some piece of the global manufacturing chain itself, could hope to remain competitive in Ireland was for the subsidiaries themselves to move up the value chain (Lovegrove 2004). For the ict and pharmaceutical industries, the areas in which Ireland’s fdi had been concentrated, this meant moving into activities that put more emphasis on a highly skilled workforce capable not only of using sophisticated manufacturing processes but going beyond this to actually create new technologies and products. Research scientists and engineers would be needed if Ireland were to develop further in areas like biotechnology and ict. For other industries, moving into more highly skilled, high value-added activities might mean that the subsidiary would take on new responsibilities—for example, marketing, technical support, and/or back office financial operations—that could enable it to become a regional headquarters for Europe. To facilitate this sort of transition, the government would have to do more (e.g., make more improvements in the telecommunications infrastructure) to promote Ireland as a potential headquarters for the European divisions of U.S.-based tncs. In 2000, with minimal debate, Ireland’s parliament approved Forfa´s’s

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recommendations for increased funding for R&D in the biotechnology and ict sectors. Ultimately, two new initiatives emerged. One, proposed by Forfa´s itself, was the Technology Foresight Fund (tff ) to promote and finance new basic and applied scientific and technological research in Ireland. It was supported by a second initiative that emerged from within Enterprise Ireland: the Millennium Entrepreneur Fund. This fund financed technology-related business projects developed by expatriate entrepreneurs returning to Ireland. Science Foundation Ireland, which Forfa´s had also proposed, would manage the tff. sfi’s purpose, like that of the National Science Foundation in the United States, was to provide financial support for R&D and the promotion of human capital in Ireland. Its specific charge for the 2000–2006 period, as part of the Irish government’s overall National Development Plan, was to provide financial support for these activities in the areas of biotechnology and ict. In providing more than y646 million (approximately US$ 845 million) for this first phase, the government planned to attract individual researchers and research teams to do advanced research in these areas in Ireland; to fund the construction of infrastructure related to these R&D activities; to initiate centers, institutes, and teams that would assist foreign and local firms in developing R&D in biotechnology and ict; and to provide funding for postgraduate research (Science Foundation Ireland Web site, accessed March 2, 2004, and December 17, 2006). For the next phase, as its part in implementing Ireland’s National Development Plan for 2007–13 and the government’s new Strategy for Science, Technology and Innovation for 2006–13, sfi would be responsible for investing y1.4 billion (more than US$ 1.8 billion) and would continue to prioritize the biotechnology and ict sectors (Science Foundation Ireland Web site, accessed December 23, 2007). The overall objective for this extensive sfi funding was to facilitate the abilities of both foreign and local firms in Ireland to move up the value chain into more advanced and sophisticated value-added activities, particularly in these two promising, high-growth sectors. The Millennium Entrepreneur Fund, administered under Enterprise Ireland, was a response to a welcome phenomenon: the gradual return of young people who had fled the country in search of better job prospects. For decades, promising young Irish engineers and scientists had left Ireland, hoping to find fame and fortune elsewhere. Now, with the Irish economy booming and employment at historically high levels, many of these same people were returning to Ireland. Many of them had worked on the cutting edge of high technology industries in the United States and now,

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with the funding from the Millennium Entrepreneur Fund, would have the opportunity to develop businesses of their own in Ireland (Shiels 2004). Enterprise Ireland could also provide 50 percent financing for a number of other venture capital firms with similar goals (Enterprise Ireland Web site, accessed February 13, 2004). By June 2007, sfi had provided more than y824 million (more than US$ 1 billion) in grants to over 1,661 projects, including those of individual researchers, research teams, and research centers, which employed well over 1,200 people total (Science Foundation Ireland, sfi Funded Research Web site; Science Foundation Ireland Web site, 6th Progress Report, March 2006). Likewise, the Millennium Entrepreneur Fund and other Enterprise Ireland–assisted venture capital funds disbursed millions in funds toward numerous projects during the same period.

Outcome: Level of Nontraditional fdi Attracted The dramatic increase in fdi flows into Ireland is shown in Table 8. Although the way that fdi was measured could skew those results somewhat,12 the figures on employment further documented the real impact of fdi inflows on Ireland’s economy. By 2000, total employment in the 1,278 ida-supported companies had reached 141,259 (ida Ireland 2000, 4). This number alone was more than 10 percent of Ireland’s entire workforce, but the impact was greater, for more than 40 percent of Ireland’s workforce was employed at a foreign firm or a company directly related to a foreign firm (Mi-hui 2002). In ida-supported companies, 48.6 percent of total employment was in electronics and engineering, 29.5 percent in international and financial services, 13.9 percent in pharmaceuticals and healthcare, 5.6 percent in miscellaneous industries, and 2.4 percent in textiles (ida Ireland 2000, 2). By 2005, the situation had changed. After 2000, total employment in ida-supported companies began to fall, reflecting in part Ireland’s loss of competitiveness as a low-cost manufacturing location. In 2005, the number of ida-supported companies was 1,010, and total employment in these companies was 132,728 (ida Ireland 2006a, 20). Nevertheless, because Ireland had already reached full employment by the end of the 1990s, ida Ireland was now more concerned with the quality of fdi that Ireland attracted. ida Ireland’s new priorities were reflected, in part, in the sectoral 12. See note 1, above.

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distribution of employment in ida Ireland–supported companies. In 2005, 32.8 percent of this employment was in information and communications technologies (ict), 15.2 percent was in pharmaceuticals and healthcare, 10.2 percent was in engineering, and 6.2 percent was in miscellaneous industries. International financial services continued to be an important sector, with 35.7 percent, but textiles were no longer even mentioned (ida Ireland 2006a, 20) ida Ireland’s concern about the quality of the fdi it attracted was further reflected in its reporting on new performance targets for fdi, which were included for the first time with the 2005 annual report. In previous years, annual reports had always included indicators for ida-supported firms, such as the number of firms and the number of new jobs in specific sectors. They also included additional indicators on the economic impact of these firms, such as the export sales and expenditures in Ireland. Starting in 2005, however, ida Ireland’s annual report also included statistics on indicators of the quality of the fdi and how much R&D it would bring to Ireland. Based on these indicators, the Irish government’s push to move Ireland up the value chain, including sfi’s effort to promote more R&D and ida Ireland’s efforts to promote more high value-added and knowledge-intensive fdi, were showing results. By 2007, the average salary in new investments was y44,000 (approximately US$ 63,000), investment by idasupported companies in R&D had reached y470 million (over US$ 677 million), the number of ida client companies with a significant corporate R&D mandate was 165, and the number of ida client companies investing more than y250,000 (approximately US$ 360,000) per year on R&D was 222 (ida Ireland 2007, 17; 2008, 25). Indeed, the efforts of ida Ireland and sfi to move Ireland up the value chain had begun to pay off even before ida Ireland started reporting these kinds of statistics. For example, in 2002 Intel announced that it would restart construction on a new US$ 2.6 billion manufacturing plant, which would manufacture the company’s most advanced microprocessors using the latest technology available; by 2004, Intel announced a $1.4 billion expansion of this plant, which would add another 400 jobs. In 2003 Wyeth Medica announced that it would invest more than US$ 1 billion in an enormous biotechnology R&D and manufacturing facility in Ireland that would employ thousands of scientists and skilled technicians. Neither Intel nor Wyeth would have made these investments if they had not seen a supportive environment for these kinds of projects and good prospects for finding the numbers of highly skilled researchers needed to staff such

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undertakings. The Irish government’s strong determination to develop an expertise in ict and biotechnology helped convince executives from these firms that Ireland would be able to meet their staffing needs for the foreseeable future. Continuing the trend, in 2005, Microsoft established a software R&D center in Ireland, and Bristol-Myers Squibb, Genzyme, and Pfizer, among others, announced major investments in R&D–related projects. Major investments in another type of high value-added fdi that ida Ireland sought to attract—headquarters offices—came to Ireland in 2005 as well. For example, Yahoo established its European operations headquarters in Dublin, and Google announced a major expansion of its already established European headquarters there (ida Ireland 2006). In 2006–7, many more major investments in R&D and headquarters offices came to Ireland, including Cisco’s establishment of a world-class R&D center in Galway (ida Ireland 2007; 2008). These results indicated that the efforts of ida Ireland and its affiliated agencies to adapt to the changes in Ireland, helping to move the country up the value chain by attracting more knowledge-intensive and high valueadded kinds of fdi, were working. But perhaps most instructive of all was the continued support these organizations received for this new approach. Even though it meant letting some lower-skilled manufacturing jobs go to lower-cost countries—never an easy thing to do politically—and possibly even a decline in overall employment, at least in the short run, ida Ireland’s (and Forfa´s’s) new strategy had the complete backing of both major political parties in Ireland’s parliament. This demonstrated that Ireland’s politically secure leaders were still willing to delegate authority to an ipa with a high level of technocratic independence. It also showed the amount of credibility the ida and later ida Ireland and Forfa´s had developed over their many successful years of operation.

Lessons for Latin America Ireland’s experience, and the contrasting recent experiences of Latin American governments also attempting to promote nontraditional fdi, highlights some key factors that are highly relevant to the development of a successful strategy. First, political security and technocratic independence are essential. Nevertheless, even an ipa operating in a political system that provides a great deal of political security to its leaders, and which therefore has a high level of technocratic independence, can use positive

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results to generate additional political support for its efforts. Second, ipas function best when they possess all components of transnational learning capacity, and for ipas pursuing knowledge-intensive industries, this includes a fourth component: a democratic, egalitarian organizational culture. With regard to the first factor, even an ipa operating in politically secure environment and with a high level of technocratic independence, such as the ida and later ida Ireland, can benefit from additional political support. Although the ida and later ida Ireland had high levels of technocratic independence, they made sure, at times, to generate political support by supporting key politicians’ interests, as long as this did not go against their own broad developmental objectives. After Olivio Dutra was elected governor in Rio Grande do Sul, Po´lo was completely averse to working with him. In fact, Po´lo did not even allow the governor to select its president. In Ireland, in contrast, the ida and later ida Ireland made sure to gain the political goodwill of successive governments. Furthermore, the Department of Enterprise, Trade and Employment maintained some control over the ida even after it became a more autonomous organization in 1970. For example, the government not only provided funding but also appointed directors to the ida’s and later ida Ireland’s board. This helped the ida and later ida Ireland maintain a close collaboration with the government throughout successive administrations. With regard to the second factor mentioned, transnational learning capacity, the Irish case provides evidence to support the finding that a highly internationalized staff; a proactive, systematic approach to learning about global business trends and prospective foreign investors; and a transnational strategic network all contribute to the development of an effective investment promotion strategy. This case further shows, however, that a fourth component of transnational learning capacity—a democratic, egalitarian culture—is important for ipas seeking to promote knowledgeintensive sectors. The first three components of transnational learning capacity definitely were important for the ida and later ida Ireland. First, the agencies’ highly internationalized personnel, many of whom had studied and worked abroad or worked for transnational corporations in Ireland, clearly facilitated their abilities to form an effective investment promotion strategy. Second, the experiences of ida and ida Ireland also highlight the importance of an extensive transnational strategic network. These agencies’ regional offices provided an opportunity for staff to interact directly

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with prospective investors on a regular basis. This interaction was a crucial source of information. Third, the ida’s and later ida Ireland’s approach to gathering this information—that is, its systematic, proactive approach to learning about global business trends and specific prospective foreign investors—helped these organizations adapt to rapidly changing trends in global business. But in Ireland’s effort to move up the value chain to promote highly knowledge-intensive, research-oriented industries, the fourth component of transnational learning capacity, organizational culture, also played a key role. The democratic, egalitarian organizational culture of ida Ireland and Forfa´s was essential in these agencies’ efforts to promote nontraditional fdi in advanced sectors, such as biotechnology. Executives, scientists, and other professionals in such sectors demand some influence over policymaking, and indeed need to have some influence over policymaking, in order to ensure that the government’s policies will adequately serve the development of the sector. Beyond this practical aspect, scientists and other high-level researchers in knowledge-intensive industries are accustomed to having considerable control over their own activities. The approach that ida Ireland and Forfa´s took was consistent with the concerns of professionals in knowledge-intensive industries. For example, these agencies took great care to solicit information and opinions from executives in the ict and biotechnology industries about future needs in those industries and how the government could shape its policies to accommodate them. Additionally, Forfa´s proposed another agency, sfi, which carefully followed the best practices of other research funding agencies in providing financial support for basic scientific research and R&D in strategic areas without attempting to exert undue influence or control over the specific directions of that research. ida Ireland serves as a benchmark agency for Latin American governments for a reason. Certainly, Ireland had many advantages. Yet the responsiveness of the ida and later ida Ireland and Forfa´s, their ability to reinvent themselves in order to adapt to changing circumstances globally and within Ireland itself, is remarkable. Political security, technocratic independence, and transnational learning capacity were all important factors in the agencies’ ability to develop an effective investment promotion strategy and, ultimately, to attract high levels of nontraditional fdi.

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Singapore’s Economic Development Board: Lessons for Latin America, Part 2

In early 2005, Philip Yeo, co-chairman of Singapore’s Economic Development Board (edb) and chairman of Singapore’s Agency for Science, Technology, and Research (a*star), was pleased. His vision to promote the biomedical sciences sector in Singapore seemed to be coming to fruition. Some years earlier, in the 1990s, Singapore’s remarkable success in attracting nontraditional manufacturing fdi had been increasingly under siege by the rise of lower-cost competitors in Asia, especially China. Under the leadership of Yeo, chairman from 1986 to 2001 and co-chairman from 2001 to 2006, the edb responded by doing what it had done so successfully in the past: it began the push into more knowledge-intensive sectors and more highly value-added activities that would help keep Singapore ahead of its competitors. As one part of this effort, under Yeo’s direction the edb began to create a biomedical sciences (bms) cluster. In 2000, it officially established the goal to make Singapore a global hub for bms. Doing this meant everything from attracting fdi from large pharmaceutical firms to promoting basic scientific research1 in biotechnology. Three government agencies collaborated in this effort: the edb’s Biomedical Sciences Group (edb bmsg), charged with investment promotion and industrial development; edb’s Bio*One Capital, a government venture capital firm; and a*star’s Biomedical Research Council (bmrc), responsible for financing research and funding scholarships for students obtaining advanced degrees in the field. 1. In this context, ‘‘basic’’ refers to fundamental research that advances knowledge of the field rather than to applied research. In fact, basic scientific research is highly advanced research, done by some of the most highly trained scientists in the field.

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By 2005, the results of this undertaking were highly evident. The edb had succeeded in attracting fdi from a number of pharmaceutical and biotechnology firms. a*star was responsible for five government research institutes conducting basic research in biotechnology, funded scholarships for promising young students to study biomedical sciences abroad, and had succeeded in attracting hundreds of researchers to work in the modern US$ 300 million research complex known as Biopolis, where Yeo’s office was now located. Altogether, manufacturing output in the bms sector grew by almost 16 percent from 2002 to 2003 alone and exceeded the edb’s target of over US$ 7 billion in manufacturing output in 2004, a year earlier than expected (Swan Gin 2004, 12). Given this success, the edb set a new goal for the sector: to double manufacturing output to more than US$ 14 billion and to employ over 15,000 people in ten years (Swan Gin 2004, 12). Despite the edb’s early achievements and ambitious long-term goals, competition from the United States, Ireland, and other countries developing biotechnology and other biomedical sciences was fierce. For all of the edb’s triumphs in creating new manufacturing industries in the past, this latest endeavor, especially the promotion of basic research in biotechnology, was very different. It remained to be seen whether the edb and a*star, working together, could achieve sustainable long-term success in developing a thriving bms sector in Singapore. Increasingly, outside observers began to question whether the edb’s somewhat hierarchical, authoritarian organizational culture might hinder its efforts to develop a sector in which independent-minded, democratically inclined research scientists, accustomed to having major input into policy decisions, were so central to the success of the undertaking (Finegold, Wong, and Cheah 2004; Tsui-Auch 2004, 2005).2 As Latin American investment promotion agencies (ipas) seek to promote fdi into more knowledge-intensive industries, these issues are becoming increasingly relevant, especially given the historical tendency toward similarly hierarchical, authoritarian policymaking approaches among at least some Latin American organizations. Thus the case of Singapore’s edb serves not only as a positive but, in this respect at least, also as a negative example for Latin American governments seeking to devise successful strategies to promote nontraditional fdi. 2. Indeed, previous research had already demonstrated that highly educated individuals with advanced, specialized technical training placed a premium on having input into government policies, especially those policies that affected the sectors in which they were working (Bates 1991; Nelson 1995; Poneman 1982).

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Background Singapore’s latest push into such cutting-edge activities as basic research in biotechnology was emblematic of its approach throughout its relatively brief history as an independent nation. In the last forty years, Singapore had achieved dramatic economic growth and development. As is true for almost every country, multiple factors accounted for this dramatic growth, including a high savings rate, the government’s strong support for education, and the government’s promotion of technological development (Chen 2005; Huff 1999).Virtually all scholars agree, however, that the edb’s ability to maintain Singapore’s competitiveness by constantly attracting ever-more-knowledge-intensive and high value-added fdi was an important contributing factor. This is why Singapore’s edb, like the Irish government’s ipa, ida Ireland, was held in such high regard in the investment promotion community and why many Latin American ipas wished to emulate its success. Created in 1961, the edb, like ida Ireland, was a government agency under the authority of a government ministry (in the edb’s case, this was originally the Ministry of Finance and later the Ministry of Trade and Industry, or mti) but with considerable independence in devising its own policies and strategies. Initially, the edb was almost an ‘‘economic czar,’’ with economic development responsibilities that included providing land to prospective manufacturers and giving them financial support (Schein 1997, 65). In 1968, however, the government split up the agency, spinning off these other functions so that the edb could focus on its primary task: promoting fdi. The evolution of the edb’s strategy followed a pattern that was similar in some respects to ida Ireland’s, as well as to that of other successful ipas. At first, the edb sought to overcome Singapore’s initially high unemployment rate by means of attracting fdi in labor-intensive manufacturing industries. Later, after Singapore achieved full employment and costs rose relative to its competitors, the agency helped Singapore move up the value chain to higher-end activities by attracting high technology manufacturing companies that employed thousands of well-trained engineers and technicians. But by 2005 the time had come, as Philip Yeo and others in the edb realized, when Singapore could not compete as a manufacturing location even for many of these high technology industries any longer. As the governments of Costa Rica, Rio Grande do Sul, Chile, and Ireland had discovered, along with virtually all countries or states experiencing similar transformations in their economies, increasing levels of

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development brought rising costs, making the country or state less competitive for lower-end activities. As the Irish government found, a country could lose its competitiveness over time even for higher-end manufacturing activities. Along with ida Ireland and the other agencies mentioned in earlier chapters, the edb believed that the best way to overcome this problem was constantly to move into ever-higher value-added activities that would maintain Singapore’s competitive edge vis-a`-vis less developed countries. As with other ipas, the edb realized that diversifying into new sectors was central to its strategy for doing this successfully. Like Ireland, however, Singapore had developed to such an extent that it was compelled to promote fdi and indigenous development principally from the most knowledge-intensive, newly emerging sectors of the global economy. What makes the edb stand out is the phenomenal success it had in developing such an investment promotion strategy and in adapting that strategy over time to rapidly changing conditions within Singapore as well as to changing trends in global business. For this reason alone, Singapore’s edb, like ida Ireland, warrants further study for the comparative perspective it can shed on the Latin American cases. Yet the important differences in organizational culture between the edb and ida Ireland— and the impact of those differences on the edb’s ability to promote fdi from such highly knowledge-intensive sectors as biotechnology—provides a significant contrast between these two agencies. This contrast underscores the importance of organizational culture as a component of transnational learning capacity and provides a useful lesson for Latin American ipas. The edb succeeded because Singapore’s political system provided its leaders with a high level of political security which, in turn, led them to delegate a great deal of technocratic independence to the agency. As a result, the edb developed a high level of transnational learning capacity, with the exception, unlike ida Ireland, of its top-down, hierarchical organizational culture. An authoritarian organizational culture was not a serious impediment to the edb’s transnational learning capacity in the beginning. Indeed, even without a democratic, egalitarian organizational culture, the other aspects of the edb’s transnational learning capacity—its internationalized staff, its proactive approach to learning about global business trends and prospective foreign investors, and its transnational strategic network—enabled it to develop a highly effective strategy to promote nontraditional fdi. As a result, Singapore attracted exceptionally high levels of nontraditional fdi from the 1960s onward. But as the edb sought to move Singapore into

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even more knowledge-intensive areas, such as biotechnology, in which basic scientific research played a key role, the missing component of transnational learning capacity posed an obstacle to the agency’s efforts to accomplish its goals. Scientists, especially the kind of top research scientists that the edb and a*star hoped to attract to and create in Singapore, strongly preferred to have autonomy in decisions and policies regarding their professional activities (Finegold et al. 2004; Finegold 2005; Tsui-Auch 2004, 2005). Beyond this, basic research in biotechnology, and the development of this research into profitable applications, was most successful when there was collaboration among scientists, government, and entrepreneurs (Finegold et al. 2004; Finegold 2005). The edb’s hierarchical, elitist organizational culture made these qualities difficult to promote. Clearly, Singapore’s leaders did not have to concern themselves with short-term policies designed solely to maintain their own political survival in office. Their political security resulted from Singapore’s one-party-dominant political system and the government’s controls on political dissent. This level of security is why the country’s leaders were willing to grant the edb such a high level of technocratic independence. At the same time, however, many critics charged that Singapore’s authoritarian system hindered the country’s ability to foster an atmosphere conducive to innovation, basic scientific research, and entrepreneurship (Finegold et al. 2004; Haley and Low 1998; Tsui-Auch 2005; Piller 2004). These were the very qualities the edb sought to develop in the country as it moved into higherend activities. Thus this too contributed to the edb’s difficulties in developing this new sector. Before examining the edb’s effort to develop the bms sector and particularly the most advanced part of that sector, biotechnology, it is important to understand more about the factors that contributed to the edb’s past success: the high level of political security Singapore’s political system provided its leaders, the edb’s high level of technocratic independence, the edb’s relatively high level of transnational learning capacity, the effectiveness of the edb’s investment promotion policy, and the level of nontraditional fdi Singapore attracted. It is also important to know more about the fourth component of transnational learning capacity, the edb’s organizational culture, which could threaten to obstruct the agency’s current goals.

Political Security in Singapore A former British colony, Singapore attained self-governing status, electing its own parliament (and prime minister) in 1959. Because it was a small

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island country on the southern tip of the Malay Peninsula, with few natural resources of its own, Singapore chose to become part of the newly created nation of Malaysia in 1963. But sharp political differences quickly arose between Singapore’s leaders and national leaders in the Malaysian federation. Rising tensions over numerous issues led Malaysia to expel Singapore from the federation after two years. Thus Singapore achieved full independence as a sovereign state in 1965. Regular parliamentary elections, constitutionally mandated at least every five years, gave Singapore the trappings of democracy. In practice, however, Singapore was (and continues to be) an authoritarian regime, ruled by one party, the People’s Action Party (pap). The pap controlled political dissent with strict laws limiting freedom of speech. Only three prime ministers governed Singapore from 1959 onward, all from the pap: Lee Kuan Yew (1959–90), founder of the pap; Goh Chok Tong (1990– 2004); and Lee Kuan Yew’s son, Lee Hsien Loong (2004–present). After leaving the prime minister position in 1990, Lee Kuan Yew continued to have a leadership role, serving as senior minister during Goh Chok Tong’s time in office and later, from 2004 on, as minister mentor in his son’s government. Beyond the continued presence of Lee Kuan Yew within Singapore’s political system, the extent of the pap’s dominance was evident from the outcomes of parliamentary elections from 1959 onward. In Singapore’s plurality, or single-member district (smd), electoral system, only one individual could represent an electoral district. Although this type of electoral system discourages the formation of a large number of political parties, it in no way prevents the formation of a viable opposition. Nevertheless, while opposition parties existed in Singapore, they never won more than a few seats in the parliament and certainly never a controlling majority. Indeed, after Singapore attained independence in 1965, the pap always won at least 95 percent or more of the elected seats. For example, in the 2006 general elections, the pap won eight-two of the eight-four elected seats in the parliament, or approximately 98 percent of the total (Singapore Elections Web site; Singapore Elections Department Web site). Numerous sources agreed that the government did not rig elections or manipulate electoral results. However, the result of laws restricting freedom of speech and political association, as well as aggressive defamation suits brought against those who criticized the government, was that there had not been a serious threat to the pap’s dominance for over forty years (Freedom House Web site 2006; Restall 2006; Far Eastern Economic Review 2006; ‘‘Singapore Banning and Defamation Lawsuits’’ 2006).

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Technocratic Independence Under these highly politically secure conditions, in 1961 Lee Kuan Yew was willing to create the edb, allowing it a high level of technocratic independence and a great deal of authority over investment promotion policy, and he and his successors continued to support the edb in this role. The edb’s high level of technocratic independence was clearly evident in the degree to which it hired personnel on the basis of merit, decided on and evaluated programs on the basis of technical rather than political criteria, and collaborated with other agencies pursuing similarly broad developmental goals.

Merit-Based Hiring The edb hired strictly on the basis of merit. From the beginning, given the priority the government gave to economic development, the edb selected from among the best university graduates (Bock 2002, 31). The government in general, and the edb in particular, was able to attract the best and the brightest graduates because it offered very high salaries, prestige, and hundreds of university scholarships for top students that required the recipients to serve in the public sector upon graduation (Haley and Low 1998, 548). Normally, the edb recruited very talented students straight out of university and trained them, rather than hiring people with extensive experience. For more senior positions or where more specialized experience was needed, however, the agency made exceptions to this practice (Ang 2005). In order to work for the edb, university graduates had to meet very strict criteria. For example, when the edb was rapidly expanding its overseas operations during Philip Yeo’s time as chairman (1986–2005), the edb specifically sought to recruit personnel who, based on their high scores on exams, had won government scholarships to pursue degrees at foreign universities. In addition to these outstanding academic qualifications, and more important than any specific course of study, the edb required that new recruits be flexible, show a great deal of initiative, have the ability to work independently in a foreign country, and have sufficient persistence to pursue prospective projects over many years’ time (Schein 1997, 105). Current requirements for employment with the edb are equally rigorous. For example, in a recent advertisement for an entry-level position in Corporate and Strategic Planning, university graduates were required to possess the following attributes:

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• A good Honours or postgraduate degree in Economics or Engineering • An ability to synthesize information and conceptualize ideas through creative/logical thinking • A keen interest in current affairs particularly in the areas of business, technology, politics and organization (Singapore’s Economic Development Board [Campus Recruitment] Web site) For a starting position in the International Policy Division, which, among other duties, develops ‘‘R&D to strengthen the international business network in Singapore’’ and ‘‘supports and participates in international negotiations, such as free trade agreements,’’ university graduates were required to meet the following criteria: • A Bachelor/Masters in Public Administration and Policy, Economics or Business Management. For the R&D aspect of the position, it will be an advantage to have a Bachelor/Masters in Engineering and Computer Science • Willing to be hands-on and implement projects • Excellent communication and interpersonal skills (Singapore’s Economic Development Board [Campus Recruitment] Web site) Applicants who passed the initial screening process were then subjected to three separate rounds of interviews. The first rounds were with interviewers from different divisions within edb, and the final round was with senior managers. The edb selected from among the applicants who made it through this final stage of the process (Singapore’s Economic Development Board [Recruiting Process] Web site). This rigorously merit-based selection of personnel insured that edb personnel were highly qualified, and their qualifications increased over time. For example, from the beginning, 100 percent of edb officers had university degrees. In 1961, 6.0 percent of edb officers had graduate degrees, and in 1990, 11.9 percent had such degrees. In 1961, 22.0 percent of edb officers had degrees in engineering; in 1990 the figure was 24.3 percent. By 1990, senior officers were even more highly qualified: 26 percent had graduate degrees and 54 percent had degrees in engineering (Low et al. 1993, 96–97). My interviews with edb personnel, executives who have interacted with the edb, and Singapore-based scholars strongly suggest that this upward trend has continued and that by 2007 the edb’s approximately 450 officers

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were even more highly qualified than in the past. The edb is notoriously reluctant to disclose information about its operations and personnel (Finegold 2005; Tsui-Auch 2005). Nevertheless, while stating that the edb had not published information on the educational backgrounds of its officers since 1990 and that ‘‘we would rather not comment on the percentage profile of our workforce,’’ the edb’s head of talent attraction in its Human Resources division did confirm that in late 2006 the vast majority of the edb’s officers had an educational background in science or engineering (Tan 2006). This type of background was very relevant to the work of promoting fdi from high technology industrial sectors.

Decisions/Evaluations Based on Technical Criteria The edb made its decisions and evaluated its programs and personnel on the basis of technical rather than political criteria. Although the edb was a government organization, specific characteristics of the agency gave it freedom from political influence, both from the government itself and from societal groups. Beyond that, the edb’s own policies further enhanced its technocratic independence in this area. Structurally, the edb always had a significant degree of independence from the government. Although originally part of the Ministry of Finance and later part of the Ministry of Trade and Industry (mti), from the beginning the edb was legally constituted as an independent, stand-alone agency, or statutory body. This legal status gave the agency more independence than other government agencies. It could develop strategies and polices on its own, without consulting the mti on every issue. It could also develop its own regulations on salaries and promotions (Tan 1999, 1). Further limiting the potential for government political interference with the edb was the fact that although the agency received funds from the mti, it also had its own source of funds. This was the result of its practice in its early days of taking an ownership share of start-up ventures, and later selling that share when the firms became established and profitable (Bock 2002; Schein 1997). Therefore, the edb did not depend entirely on the government for financing any particular project but could make its own decisions. The edb enjoyed independence from government political interference for historical reasons as well. Like ida Ireland, the edb had enormous clout and respect in its home country. Initially this power was due to its instrumental role in addressing Singapore’s severe unemployment problem. After this problem was solved, the edb continued to be highly

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respected within Singapore for its achievements in helping the country move into higher value-added activities (Schein 1997). The edb, like the Singaporean government as a whole, also had considerable independence from the demands of societal groups. Scholars agreed that Singapore was a classic ‘‘developmental state’’ (Evans 1995; Woo-Cumings 1999). As in other developmental states, Singapore’s government, including such agencies as the edb, pursued objectives without undue concern for political pressures from domestic groups. While the government maintained contacts with societal groups, and collaborated with them in formulating and implementing policy, it pursued its own broad developmental agenda without falling prey to the narrower interests of special interests or individuals. One result of this approach was that Singapore’s government was remarkably free from corruption, as shown by its excellent ranking on Transparency International’s Corruption Perception Index: in 2007 Singapore was ranked fourth out of 179 countries (the United States was only ranked twentieth) (Transparency International Web site, accessed December 26, 2007). Contributing to this outcome were the high salaries for government officials and politicians, the work of the powerful and effective Corruption Practices Investigation Bureau (cpib), and strong penalties for corruption of any kind (Haley and Low 1998, 540; Singapore, Corruption Practices Investigation Bureau Web site, accessed December 2, 2006). For these reasons, the edb had independence from political interference from the government as well as from special interests and could pursue its own objectives. But the way the edb made decisions and evaluated its programs further strengthened its technocratic independence. The edb devised its strategies and goals at annual meetings in its headquarters office based on detailed reports on trends and developments from its officers in the regional offices and at headquarters (Ang 2005; Chen 2005). The agency targeted promising sectors on the basis of their potential contribution to Singapore’s gross domestic product (gdp) and the number of professional and skilled jobs they could create. The edb then established performance targets for new investment in each industrial sector. In assessing individual investment projects and in evaluating results specific performance targets included the following: 1. Value-added (va): the amount that an investment project would contribute to Singapore’s gross domestic product (gdp) 2. Total employment creation: the number of new jobs the project would create

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3. Skill profile of new jobs: the percentage of jobs that would be professional and skilled 4. Fixed Asset Investments (fai, for manufacturing sectors only): the amount of ‘‘capital investments in facilities, equipment, and machinery’’ that an investment would generate 5. Total Business Spending (for services sectors only): ‘‘a company’s incremental annual business expenditure’’ from implementation of a project in the services (Singapore, Economic Development Board 2006a, 6) Well-defined, previously established performance targets such as these, rather than political criteria, served as a basis to evaluate programs and personnel as well as prospective investors.

Collaboration with Other Agencies The edb’s collaboration with a number of other agencies or ministries within the government also provided it with a high degree of ‘‘horizontal embeddedness’’ (Montero’s term), which further enhanced its technocratic independence. Among the agencies with which the edb worked closely were the Jurong Town Corporation (jtc), which developed and leased manufacturing, warehouse, and research facilities; the National Trades Union Congress (ntuc), which advocated policies and programs on behalf of Singapore’s workers; the Standards, Productivity, and Innovation Board (spring), which developed the capabilities of small- and medium-sized enterprises (smes) to compete globally as well as to better support the needs of transnational enterprises operating in Singapore; and the Workforce Development Agency (wda), which provided training programs to enhance the competitiveness of Singapore’s workforce. Of the agencies with which the edb collaborated, the most important was a*star, charged with promoting the development of science and technology for Singapore. For example, a*star and the edb collaborated closely in the edb’s effort to promote biotechnology. The edb’s Biomedical Sciences Group (edb bmsg) handled investment promotion and industrial development in this sector, and a*star’s Biomedical Research Council (bmrc) financed research and funded scholarships for students obtaining advanced degrees in the field. Enhancing this close collaboration was that fact that Philip Yeo, edb’s chairman of edb from 1986 to 2001 and co-chairman from 2001 to 2006, was a*star’s chairman from 2001 until early 2007. Significantly, Yeo

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became chairman of spring in 2007.3 Yeo was clearly an exceptional individual; most of the agencies with which the edb worked did not share their leaders in this way. Nevertheless, close collaboration among agencies helped ensure that the edb’s policies and strategies kept their focus on the larger goal of advancing Singapore’s economic development rather than the interests of specific domestic groups. For all of these reasons, the edb had a high level of technocratic independence and could pursue its own agenda without political interference from the government or from special interests. This high level of technocratic independence was important to the edb’s ability to formulate and implement broad developmental goals in an independent way and to its development of a high level of transnational learning capacity. The edb’s transnational learning capacity, in turn, was crucial to the agency’s phenomenal ability to adapt Singapore’s investment promotion strategy to rapidly changing business conditions in Singapore, as well as to evolving trends in global business.

Transnational Learning Capacity The edb did exceptionally well on every aspect of transnational learning capacity except for the organizational culture dimension. Like other highly effective ipas, the edb had a highly internationalized staff, a proactive approach to learning about global business trends and prospective foreign investors, and an extensive transnational strategic network. Indeed, the edb went a step beyond other ipas in these areas, even ida Ireland in some ways. But the edb’s organizational culture did potentially pose obstacles to its ability to move into the most knowledge-intensive areas involving basic scientific research. Thus the edb offered both positive and negative lessons for Latin American ipas. Although the edb’s large budget did not affect the agency’s proactive approach or organizational culture, it was a tremendous asset in helping the agency develop a highly internationalized staff and a transnational strategic network of foreign offices. Indeed, the edb’s budget was huge, even by developed country standards. Morisset and Andrews-Johnson reported that the median budget for an ipa in a high-income country was US$ 9,316,800 (Morisset and Andrews-Johnson 2004, 15). The edb’s was more 3. At the same time that he became chairman of spring, Yeo also took on the roles of senior advisor for economic development to the prime minister and special advisor on science and technology to the minister of trade and industry.

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than US$ 200 million per year (Singapore’s Economic Development Board Web site, accessed December 2, 2006). Of course, more important than the size of an ipa’s budget is how the ipa uses it. The way the edb made use of its large budget was remarkable.

Internationalization of Personnel Unlike highly effective agencies in Latin America, such as cinde or Po´lo in its early years, few of the edb’s recruits had prior international experience. Nevertheless, as with the ida and later ida Ireland, there was a clear understanding that edb investment specialists would do at least part of their service overseas at one or more of the edb’s foreign offices. Thus, as with ida/ida Ireland, those applying to work at the edb had already undergone a self-selection process to be predisposed toward working overseas. Once employed at the edb, those working in investment promotion were encouraged to serve for at least two years at one of the edb’s foreign offices. During this overseas period, edb personnel visited corporate executives to explain Singapore’s advantages with regard to their companies. This process provided future senior managers at edb firsthand experience in dealing with corporate executives in the field. It not only provided them with a broad picture of the trends affecting various industries, it also gave them practical experience in interacting with and negotiating with prospective investors (Ang 2005; Chen 2005). As a future edb manager said about his initial experience dealing with a prospective investor, during which he was asked to fill in at the last moment for a more senior investment promotion officer who had fallen ill: ‘‘It taught me the importance of doing my homework. Within a few minutes a busy executive sizes you up, and decides if you are worth his [or her] time’’ (quoted in Bock 2002).

Systematic, Proactive Approach to Learning Upon joining the edb, those working in investment promotion spent their initial years at the edb’s headquarters assigned to a specific industry sector. They became experts, or industry specialists, on that sector, learning all that they could from trade journals, the Internet, and frequent discussions with investors from that sector already in Singapore (Ang 2005). edb officers stationed in foreign offices maintained meticulous files on specific company visits, recording this information electronically. It became part of the larger edb database, accessible to edb officers world-

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wide. In this way the edb maintained a record of which companies were visited, what happened in one branch of a large transnational company, and so on, so that analysts and industry specialists working in any the edb’s offices could assess broad trends in specific companies and industries (Ang 2005; Schein 1997). During annual corporate planning exercises in January, edb officers from different parts of the world returned to participate in planning future strategies and to establish future performance targets (Ang 2005; Chen 2005). Industry experts from outside Singapore frequently participated in such events, providing assessments of future trends in specific industries (Ang 2005).

Transnational Strategic Network The edb’s transnational strategic network was more extensive that of any other ipa in the world. The edb established its first overseas offices in New York and Hong Kong in 1968. By 2007, the edb had a total of nineteen foreign offices: seven in the United States (New York, Boston, Chicago, Dallas, Los Angeles, San Francisco, and Washington, D.C.), seven in Asia (Beijing, Shanghai, and Guangzhou in China; Tokyo and Osaka in Japan; Mumbai in India; and Jakarta in Indonesia), and five in Europe (Frankfurt, London, Milan, Paris, and Stockholm) (Singapore’s Economic Development Board Web site, accessed May 28, 2007). This extensive network of foreign offices enabled the edb to keep abreast of global business trends and learn directly about the needs and concerns of prospective investors. In most of the offices, an office director was responsible for maintaining contacts with a number of investors in a given area. In the smaller offices, the director might be the only edb staff member in the office, other than administrative support personnel. In the larger offices, the director might have support from assistant investment promotion officers, who would accompany the director on company visits, research prospective investors, monitor and prepare reports on trends in specific industry sectors, and so on. All the offices had the benefit of detailed reports and information from the industry specialists located in edb headquarters in Singapore. These industry specialists were usually hired as young university graduates with at least some educational background in the area: for example, an electrical engineer might become an industry specialist on the semiconductor industry. The assessments these industry specialists provided—of future

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trends in the industry and good companies to contact—helped the investment promotion offices in the field focus their efforts in a highly efficient way (Ang 2005; Chen 2005). Beyond the foreign offices, other aspects of the edb’s transnational strategic network also helped the agency stay abreast of global business trends. Most of the edb’s board members were representatives of transnational firms from multiple sectors. For example, in addition to the edb’s chairman and managing director, board members in 2007 included the deputy secretary (Industry) of the Ministry of Trade and Industry, the assistant secretary-general of the National Trades Union Congress (ntuc), the group president (Asia) for Procter and Gamble, the South Pacific regional vice president for Federal Express, the executive chairman of UniSteel Technology, the regional director for Rolls-Royce Singapore, the Asian Region vice president for Schering-Plough, the president and CEO of Schott Asia (a Germany-based manufacturer of specialized glass and optical products), the chairman of Hitachi Asia, and the dean of the University of Auckland Business School, and the president of the University of New South Wales Asia (Singapore, Economic Development Board 2007, 50–51). Additionally, the International Advisory Council (iac), created by the edb in 1995 and composed of CEOs and presidents from large transnational firms representing a wide range of industries, met once a year to monitor and provide input for Singapore’s economic plans. In 2007 the iac members, eighteen in total, included the following representatives from the international business community (in addition to the chairman, Singapore’s minister of defense, and the deputy chairman): the head of Singapore-based DBS Group (one of the largest banks in Asia): the CEO of DHL Logistics; the CEO of Rolls-Royce; the executive director of Royal Dutch Shell; the president and CEO of Philips Electronics; the chairman of the Tata Group (an India-based business conglomerate); the chairman and CEO of TCL Corporation (a Chinese electronics firm); the advisor to the board of Toshiba Corporation; the president of Waverly Associates (a California-based investment firm); the chairman, president, and CEO of 3M; the president of Sumitomo Chemical Company; the chairman and CEO of the Institute for Global Futures (a San Francisco, California–based think tank that forecasts innovations and trends); the managing director of Draper Fisher Jurvetson (a Silicon Valley–based venture capital firm); the vice chairman of global operations for Procter and Gamble; the president and CEO of Infineon Technologies (a Germany-based semiconductor firm); and the president and CEO of GE International (Singapore, Eco-

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nomic Development Board 2007, 52–53). As noted on the edb Web site, ‘‘The iac has proven to be a good way for Singapore to stay in touch with the international business community and ensure its economic strategies remain relevant and effective’’ (Singapore’s Economic Development Board Web site, accessed May 28, 2007). Finally, in addition to the board and the iac, the edb’s International Business Networks Group stayed on top of changes occurring in global business by means of the edb’s four business councils: the France-Singapore Business Council, the Germany-Singapore Business Forum, the Singapore-UK Business Council, and the Singapore-U.S. Business Council. These councils consisted of chambers of commerce, industry federations, foundations, and so on. They not only provided the edb with useful contacts but also provided valuable feedback on policy issues or strategies that the edb was pursuing.

Organizational Culture In the late 1990s, the edb commissioned Edgar Schein, a well-known professor of organizational behavior at MIT, to write a book about the edb’s organizational culture. Schein concluded that the edb was a ‘‘nonhierarchic hierarchy’’ (1997, 190). This meant that it had aspects of both hierarchy and egalitarianism built into its decision-making process. edb officers could disagree with their superiors while still showing deference to them. Although edb officers were encouraged to speak up to their boss, Schein notes that there was ‘‘a sense that one cannot or should not act on one’s own without consultation and approval from above’’ (192). Among related problems Schein noted within the edb’s organizational culture was a tendency toward elitism and arrogance on the part of edb officials. Based on their successful achievements to date, edb officials possessed enormous confidence that their views were correct. For all of the edb’s responsiveness to the needs of prospective foreign investors, this elitist attitude could be an obstacle to promoting industrial development in sectors heavily oriented toward independent-minded scientists, advanced researchers, and other highly trained individuals. Thus the edb’s organizational culture could impede the agency’s ability to promote a sector, such as bms (and specifically biotechnology), that depended so much on openness and collaboration between researchers; the willingness to take risks; and, most important, responsiveness to the suggestions, input, concerns, and demands of scientists and basic researchers. As the managing director of a Singapore-based biotechnology

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venture capital firm noted, ‘‘The traditional Singapore industrial model doesn’t work very well in the new knowledge-based economy . . . [because it] comes from a top-down, logistical mindset’’ (quoted in Finegold 2004, 934).

Effectiveness of the edb’s Investment Promotion Effort The edb’s high degree of technocratic independence and relatively high level of transnational learning capacity gave the agency an exceptional ability to develop well-targeted investment promotion strategies, highly responsive to the changing needs of prospective investors, and the high level of political security Singapore’s authoritarian regime provided to the country’s leaders allowed them to sustain this strategy over time. Because Singapore’s leaders continued to delegate authority to the edb over investment promotion policy from the 1960s onward, the agency was able to adapt its strategy as needed to changing conditions within Singapore as well as to evolving trends in global business. As the edb began to move into even more knowledge-intensive areas, such as certain segments of the Biomedical Sciences (bms) sector, however, questions arose as to whether the agency could be sufficiently responsive to prospective investors’ needs in these more research-oriented areas.

Developing a Well-Targeted, Responsive Investment Promotion Strategy: From the 1960s to the 1980s From the beginning, the edb targeted industries suitable to Singapore’s changing conditions and was responsive to evolving needs of prospective foreign investors. In the early 1960s, Singapore was primarily concerned with unemployment. Therefore, the edb targeted fdi from labor-intensive industries, such as textiles. After the national government of Malaysia expelled Singapore from the Malaysia federation in 1965, however, edb officials realized that they needed to change their approach. Having lost access to the Malaysian market, Singapore would have to reorient its overall development model away from away from an inward-focused, importsubstitution model in favor of an export-oriented strategy (Yew 2000). Aware that increasing the technical capabilities of Singapore’s workers would facilitate this process, the edb assisted in the government’s effort to set up programs to train workers in precision engineering, circuitry, technical drawing, and other skilled areas (Chen 2005). In 1968, the edb

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also set up foreign offices in Hong Kong and in the United States to attract export-oriented foreign investors to Singapore. Recognizing from their extensive study of evolving trends and their contacts with prospective investors that strong price competition from Japan was forcing many U.S. electronics firms to locate manufacturing plants in Asia, the edb specifically targeted rapidly growing U.S. semiconductor and other electronics firms (Tian 2002, 55–56; Singapore’s Economic Development Board [About Us: History] Web site). In the late 1960s, most U.S. executives did not consider Singapore as a prospective location for their plants. One edb officer working overseas in the late 1960s noted, ‘‘Singapore did not figure on mncs’ radar screens at all. . . . Those who looked at Asia went to Japan, Korea, Taiwan and Hong Kong’’ (Hwang 2002, 61). The edb’s first director of international operations noted that in the late 1960s, convincing companies from the United States to invest in Singapore was extremely difficult: ‘‘It was a tough sell, as many of the companies did not even know where Singapore was and investing there was the furthest thing on their minds’’ (Bin 2002, 106). At the time, U.S. firms that did invest overseas were more interested in Puerto Rico, Ireland, Taiwan, and Hong Kong (Bin 2002, 106). In 1968, the edb finally managed to convince one important semiconductor firm to invest in Singapore: National Semiconductor, based in California’s Silicon Valley. Because the rapidly growing and changing nature of the industry meant that semiconductor firms were extremely pressed for time in setting up new plants, the edb won over National Semiconductor with its responsiveness to the firm’s needs. Realizing that National Semiconductor wanted to begin production in a matter of weeks and that the only available location was a new government building, the edb arranged to move government personnel out and have the site prepared for National Semiconductor’s operations. As the edb’s then-director of international operations noted, ‘‘The National Semiconductor executives were ecstatic. edb had shown that it understood their needs and was willing to offer a solution. This seemed like home (the fast-moving Silicon Valley environment that National Semiconductor and its competitors were used to). . . . Silicon Valley is a place where things move fast and news travels fast. It is a tightly-knit community. . . . Within days of National Semiconductor’s decision to set up in Singapore, Fairchild Semiconductor heard about it’’ (Toh 2002, 45–46). Thus this one anchor investment led to more from other U.S. semiconductor and electronics firms. A major attraction was the edb’s responsiveness to the needs of prospective investors. As one analyst noted, ‘‘Once the

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companies had been selected, the edb worked very hard to solve any problems the companies might have in investing in Singapore’’ (Schein 1997, 84). Other companies took note. Within a short time the edb also managed to attract investments in major manufacturing plants, including not only Fairchild Semiconductor but also Texas Instruments, General Electric, and many others (Schein 1997, 80–83; Toh 2002, 46–53). Executives from other transnational corporations attested to the edb’s responsiveness to their needs. Charles Pawlak, Intel’s director of real estate and corporate site selection from 1985 to 2005, who dealt with investment promotion agencies from numerous countries in Europe, Asia, the Middle East, and Latin America, stated that the ida and the edb were the most impressive of all, but that the edb was by far the most effective in dealing with Intel’s specific concerns (Pawlak 2006). James Chirico, senior vice president and general manager, Asia Operations, for Seagate Technology from 2000 to 2006 (based at Seagate’s regional headquarters in Singapore), noted that edb officers assigned to the Seagate account visited him at least once weekly to stay abreast of developments at Seagate and to see how they could facilitate Seagate’s operations in Singapore (Chirico 2005). Explaining the rationale behind this highly attentive approach, the current edb chairman noted, ‘‘If we know what Motorola or Hewlett-Packard is going to do over the next three to five years globally, we can shape our policies so that we have everything they need in place to quickly implement their plans’’ (quoted in Shameen 2006, 116). By the 1970s, with Singapore’s employment problem essentially solved, the new issue was Singapore’s need to move up the value chain to remain competitive as an investment location. Building on its earlier efforts to promote semiconductor firms, the edb aggressively pursued investment from more automated and more advanced high technology sectors, ranging from computer parts and peripherals manufacturing to software development. Responsive to the needs of prospective investors from these sectors and realizing that to attract additional nontraditional fdi in these areas Singapore needed to do more to increase the numbers of skilled technicians, the edb assisted the government’s expanded efforts in this area. It facilitated the government’s collaboration with companies from Europe in the 1970s and the German and Japanese governments in the 1980s to form numerous training institutes to upgrade the skills of Singapore’s manufacturing workers, preparing them to work as highly skilled industrial technicians in the most advanced manufacturing sectors (Lin Cheng Ton 2002, 76–91). While continuing this effort, by the end of the 1980s the edb, given evolving trends in global business, shifted its strategy

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again, moving beyond the promotion almost exclusively of fdi in manufacturing to the promotion of fdi from service-oriented industries as well (this included accounting, financial, healthcare, educational, information technology, and other kinds of services).

Sustaining the Effort to Move up the Value Chain: The 1990s, the 2000s, and Beyond By the 1990s, given Singapore’s small size, (now) more highly skilled workforce, and increasing wages (see Table 11), the edb went a step further and began encouraging firms to locate their manufacturing operations outside of Singapore, in Singapore-owned and -operated industrial parks in lower-cost countries like China, India, Vietnam, and Indonesia. The

Table 11 Singapore—hourly compensation costs for production workers (all manufacturing), 1975–2005

8

Compensation/Hour (US$)

7 6 5 4 3 2 1 0 1975

1980

1985

1990

1995

2000

Year

U.S. dollars

Year

U.S. dollars

1975 1980 1985 1990 1995

0.83 1.53 2.52 3.74 7.57

2000 2002 2003 2004 2005

7.18 6.17 7.18 7.38 7.66

2005

Source: U.S. Department of Labor, Bureau of Labor Statistics.

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objective was to locate high value-added operations (headquarters offices, marketing, research and development activities, etc.) in Singapore and more labor-intensive, lower value-added activities elsewhere, making Singapore the hub for regional headquarters (Singapore’s Economic Development Board Web site, accessed December 2, 2006). In many ways, this was similar to ida Ireland’s recent strategy to encourage transnational corporations to establish regional headquarters and high value-added services in Ireland while undertaking lower-skilled manufacturing activities in Eastern Europe. From the late 1990s onward, the edb continued its effort to attract headquarters operations and services yet aggressively expanded its pursuit of fdi from highly research- and knowledge-intensive sectors, such as biotechnology and multimedia. Thus by the end of 2007, the edb focused on a highly diversified range of sectors, including manufacturing, services, and highly knowledge-intensive activities, as follows: • • • • • • • • • • • • •

biomedical sciences (bms) and healthcare services chemicals consumer education services electronics emerging industries (nanotechnology, information security, etc.) engineering and environmental services professional services infocommunications and media international organizations logistics precision engineering transport engineering (Singapore’s Economic Development Board [Industry Sectors] Web site) Starting as early as the late 1980s but accelerating rapidly after 2000, when the Singaporean government declared biomedical sciences (bms), along with electronics, chemicals, and engineering, to be one of the four ‘‘pillars’’ upon which it would base its economic development strategy going forward, the edb went to great lengths—in some ways, at least—to be responsive to the needs of prospective investors in the biotechnology sector, to better promote fdi from this most advanced, research-intensive segment of the bms sector. (In addition to biotechnology, the bms sector,

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as defined by Singapore’s edb, includes pharmaceuticals, medical technology, and healthcare services.) For example, in the early 2000s the edb collaborated closely with a*star in pouring hundreds of millions of dollars into developing facilities suitable for biotechnology research scientists in order to attract fdi from the most advanced and cutting-edge segments of the biotechnology industry. Despite strong initial results, questions existed, given the particular nature of this highly research- and knowledge-intensive sector, as well as the edb’s own hierarchical and authoritarian culture, as to whether the edb could be genuinely responsive—and, therefore, genuinely effective—to prospective investors from this sector, in ways that mattered most to them, over the long term.

Outcome: Level of Nontraditional fdi Attracted In the mid-1960s, Singapore was virtually unknown as a potential location for manufacturing fdi, much less high technology or other types of nontraditional fdi. Yet by the early 2000s, it had attracted billions of dollars worth of fdi (see Table 12), most of it nontraditional fdi requiring highly trained and skilled workers, and was known as one of the most promising locations for such fdi in the world. Given the effectiveness of the edb’s investment promotion strategy, its success in attracting such high levels of nontraditional fdi—or at least, alerting prospective investors to Singapore’s promise as a location for such fdi—was not really that surprising. More relevant to Singapore’s effort to move into more advanced and nontraditional industries, however, was the extent to which investment was directed to specifically targeted manufacturing industries (see Table 13) and service sectors (see Table 14). In manufacturing, edb-targeted sectors accounted for significant numbers of jobs; indeed, by 2005 they accounted for more than 275,000 jobs, which was more than 75 percent of all manufacturing jobs in Singapore (Singapore, Ministry of Manpower 2006). By 2005 electronics alone accounted for a total of 95,000 jobs; chemicals for approximately 23,000; precision engineering for approximately 92,000; biomedical sciences for over 10,000; and transport engineering for approximately 55,000 (Singapore, Economic Development Board 2006a; Pereira 2006, 123). Because Singapore had already reached full employment, however, more important to the edb than the numbers of jobs was the quality of jobs this investment provided. Based on the edb’s performance targets,

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Table 12 Singapore—foreign direct investment inflows, 1990–2005

FDI Inflows

22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000

92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

91

19

19

19

90

2,000 –

Year

Singapore

1990 1991 1992 1993 1994 1995 1996 1997

Year

5,575 4,887 2,204 4,686 8,550 11,535 9,682 13,753

1998 1999 2000 2001 2002 2003 2004 2005

Singapore 7,314 16,587 16,484 15,649 7,338 10,376 14,820 20,083

Source: unctad World Investment Report 2006 via http://stats.unctad.org/fdi/Table Viewer/tableView.aspx (accessed December 3, 2006).

Table 13 Singapore—manufacturing fixed asset investment commitments by industry (by percent), 2001–2007 Year

Electronics

Chemicals

Precision engineering

Biomedical sciences

Transport engineering

General industry

2001 2002 2003 2004 2005 2006 2007

50.3 51.6 56.2 55.4 50.6 48.9 31.9

20.8 22.5 20.9 19.2 23.5 29.5 53.7

18.3 10.7 5.6 4.8 4.2 4.5 2.6

9.2 9.5 11.3 9.6 10.6 10.2 5.8

0 3.3 2.8 6.2 7.1 5.7 3.1

1.4 2.4 3.0 4.8 3.5 1.2 2.9

Note: Approximately 90 percent of all fixed asset investment in Singapore resulted from foreign direct investment. Source: Singapore, Economic Development Board, Annual Reports 2001–7.

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Table 14 Singapore—services investment commitments total business spending (by percent), 2001–2007

Year

HQ & professional services

Healthcare services

2001 2002 2003 2004 2005 2006 2007

31.5 39.5 36.2 30.2 38.2 42.8 43.4

0.4 7.3 2.9 4.5 1.2 0.7 1.3

Education

Engineering & environmental science

Logistics

Infocommunications & media

0.4 7.3 5.8 4.9 4.4 2.9 4.6

0 0 8.7 11.8 10.0 14.3 21.1

19.5 12.6 13.9 17.6 17.1 14.3 9.2

48.6 40.6 32.4 29.3 29.1 25.0 20.4

Source: Singapore, Economic Development Board, Annual Reports 2001–7.

the skill profile for this new investment in terms of the percentage of professional and skilled jobs it provided was exceptionally high, averaging approximately 70 percent (see Table 15). Thus, the edb’s efforts to promote nontraditional fdi that would provide highly skilled employment appeared to be producing results. But the extent to which the edb could promote highly knowledge- and researchintensive fdi from the most advanced segments of the bms sector remained in question. On the surface the statistics were impressive. For example, Singapore’s Ministry of Trade and Industry reported that Singapore fixed asset investment (fai) commitments averaging more than US$ 500 million per year in ‘‘biomedical manufacturing’’ from 2002 to 2005 (2006, 77). The edb, referring to the bms sector as a whole (pharmaceuticals, biotechnology, medical technology, and health services) reported attracting more than US$ 517 million in fai commitments and more than US$ 90 million total business spending (tbs), for a total of US$ 597 million, in the bms sector as a whole in 2005 (Singapore, Economic Development Board 2006b; Pereira 2006, 123).By 2007, fai commitments in biomedical manufacturing were over US$ 630 million (Singapore, Economic Development Board 2007, 9). Other notable achievements proclaimed in the edb’s annual reports were the growth in numbers of bms firms with significant operations in Singapore. For example, from having no pharmaceutical companies engaged in drug discovery and development in 2000, Singapore had twenty-five firms engaged in such operations by 2005, including GlaxoSmithKline, Novartis, and Eli Lilly (Singapore, Economic Development

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edb performance indicators, 2002–2005 5.2 1.2 6.1 20,900 69%

2002

Total value-added per annum generated from manufacturing and services projects (US$ billion) Skill profile as percentage of professional and skilled jobs

Source: Singapore, Economic Development Board, Annual Reports 2001–6.

b

a

Fixed asset investment from manufacturing projects (US$ billions) Total business spending from services projects (US$ billions) Total value-addeda (US$ billions) Total employment creation Skill profileb

Indicator

Table 15 4.4 1.1 5.0 16,900 79%

2003

5.1 1.5 6.5 21,800 70%

2004

5.1 1.4 6.4 26,000 61%

2005

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Board 2006a, 53). By 2007, Singapore could claim that ‘‘eleven of the top biotechnology and pharmaceutical companies, as well as seventeen of the top medical technology companies’’ had set up commercial-scale operations in Singapore (Singapore, Economic Development Board [Industry Sectors: Biomedical Sciences and Healthcare Services] Web site). Despite these glowing accounts, what the statistics did not show was that most of this investment tended to be in bulk pharmaceutical manufacturing rather than in the higher-end segments of the bms sector (Pereira 2006, 115). Sometimes the figures did not make this point entirely clear. For example, the 10,200 jobs the edb reported in the bms sector in 2005 included only jobs in pharmaceutical manufacturing and medical technology, and 62 percent of these were in medical technology (Singapore, Economic Development Board 2006b). Although a notable investment in 2007 included Eli Lilly’s $142 million expansion of its R&D center (Singapore, Economic Development Board 2007, 15), there were no single investments that could compare to Wyeth’s US$ 1 billion investment in an R&D biotechnology manufacturing plant in Ireland. Thus, initial indications seemed to be pointing toward Singapore becoming a hub for bulk pharmaceutical and medical technology manufacturing rather than for the most cutting-edge, research-intensive biotechnology research. Thus despite the edb’s initial success in the bms sector, the question remained as to how responsive the edb could truly be to prospective investors from the most research- and knowledge-intensive segments of sectors such as biotechnology, and thus whether its effort to promote this sort of fdi could be sustained for the long term.

Can the edb’s Effort to Promote R&D–Intensive Sectors Be Sustained? In the context of a transparent developmental state with extremely low levels of corruption, Singapore’s high level of political security offered some advantages, even though it was the result of an authoritarian regime. This high level of political security enabled the edb to establish clear rules and policies for prospective investors and adhere to these rules and policies without concerns about policy changes that might occur with a change in administrations. As long as the People’s Action Party maintained overwhelming control over the legislature, and prime ministers followed similar principles and policies, investors could count on stable, predictable rules of the game that would continue over time. This helps explain how

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the edb was able to attract such high levels of nontraditional fdi from the 1960s to the present. At least some analysts believed, however, that Singapore’s authoritarian political context hindered the edb’s long-term prospects to attract increasingly knowledge-intensive investment (Finegold et al. 2004; Tsui-Auch 2004, 2005). As the edb sought to transform Singapore’s economy into a haven for investment in cutting-edge areas, such as biotechnology and multimedia, and a regional headquarters for tncs doing business throughout Asia, this issue became increasingly relevant. In order to promote high value-added, knowledge-intensive investment in these sectors quickly, the edb understood that it would have to attract talented, highly trained immigrants: scientists, engineers with PhDs in specific fields, and other highly educated professionals. Yet many people with these backgrounds, including Singaporeans who had received their graduate training in Europe or the United States, were accustomed to a freer, more open, and less hierarchical political context. Thus, although the edb had great success in getting a biotechnology sector started in Singapore, it remained unclear whether this success could be sustained for the long term. With its relatively high level of transnational learning capacity, the edb itself recognized that Singapore’s authoritarian political culture might hinder the edb’s ability to attract the sort of fdi and people it sought. At the same time, the edb’s hierarchical, elitist organizational culture sometimes caused even the edb to blunder on occasion, leading the agency to implement policies in a manner that was insensitive to the basic concerns of the researchers and scientists the edb hoped to attract. There was no question that the edb’s efforts to attract scientists, researchers, and others who would help promote the development of the bms sector were impressive. Starting in 1988, when the edb took charge of Singapore’s goal to develop the sector, the edb worked with the National Trade and Science Board (ntsb), the precursor to a*star, to create large research institutes to help develop the bms industry: the Institute of Molecular and Cell Biology (icmb), the Institute of Molecular Agrobiology (ima), and the Bioprocessing Technology Center (btc). The edb set up a venture capital fund to make investments initially in biotechnology firms in the United States and other countries, even if it did not contribute to Singapore’s development, just so the edb could learn more about how the industry operated (Swan Gin 2005). Known in its current form as Bio*One Capital, this firm, financed by the edb, continues to invest in local and foreign biotechnology firms.

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After 1999, when the edb developed a comprehensive plan to focus on building knowledge-based industries in Singapore, the edb made use of a relevant transnational strategic network of individuals working in bms and specifically biotechnology. It created the Biomedical Research Council (bmrc), composed of representatives from transnational corporations working in the bms sector and distinguished scientists from all over the world, to assist in designing policies for the sector and in attracting fdi. In the meantime, a*star, working closely with the edb, created three more biotechnology research institutes. These were the Genome Institute of Singapore (gis), Bioinformatics Centre (bic), and the Institute of Bioengineering and Nanotechnology (ibn). All six of Singapore’s research institutes devoted to research in the bms sector later became part of Biopolis, which began operating in 2003. The US$ 300 million Biopolis, consisting of government-constructed laboratories, offices, and living space and cafes, was Singapore’s attempt to build a biotechnology cluster similar to the electronics/it cluster in Silicon Valley. In creating Biopolis, the edb made every attempt to develop an environment that would be amenable to foreign researchers and other professionals. Acting as intermediary between the investors, scientists, and professionals working in this industry and the government, the edb learned from the industry what was needed to create a hospitable investment climate for biotechnology firms and then developed a plan to create that environment. Unfortunately, the edb’s hierarchical, authoritarian organizational culture caused it to make mistakes in the manner in which it made and implemented policies for this sector. On the positive side, the edb recognized that one concern foreign investors, venture capitalists, and entrepreneurs had with Singapore’s existing regime was a reluctance to take risks. This was the result not only of the regime’s unforgiving laws on bankruptcy but also on the Asian cultural norm of avoiding ‘‘loss of face,’’ or loss of respect and standing within one’s community. Understanding this problem, the edb convinced the government to change its bankruptcy laws concerning business ventures in order to encourage more investment in newer, riskier sectors, such as biotechnology. Given the close working relationship between the edb and the government in ‘‘Singapore Inc.,’’ this recommendation was readily enacted into law (Piller 2004). Another way in which the edb worked to make Singapore more investor- and research-friendly was to provide large amounts of funding to prospective researchers. Recognizing that a chief concern of most scientific researchers was obtaining research grants, the edb used its large budget

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to make sure that scientists who were part of the Biopolis project had steady and ample access to grant money and the most sophisticated, modern equipment available (Piller 2004). Although these policies did not make Singapore a democratic regime, they went a long way to reassure investors, researchers, and others who would be living, working, and doing business in the country that it would offer a friendly, helpful environment for their work. This did help Singapore recruit the talented workers it needed. Singapore has experienced an influx of many researchers in the last five years alone. The edb hoped that this influx would compensate for Singapore’s shortage of talent in this sector as it attempted to jump-start development in biomedical sciences and biotechnology, and as the Singaporean students, recipients of government scholarships for PhDs in biotechnology-related fields, completed their lengthy training (Swan Gin 2005). Indeed, the government’s effort to attract foreign talent resulted in many prominent researchers coming to live and work in Singapore. Their numbers included two Nobel Prize winners and Alan Coleman, the scientist from New Zealand famous for cloning Dolly the sheep. Nevertheless, for all the edb’s efforts to make investors and others working in the bms sector happy, at times it often followed a high-handed approach to policymaking that was abhorrent to those working in this sector. For example, in 2000 when the edb decided that Singapore should focus its efforts exclusively on health-related research rather than biotechnology research related to agriculture, it did not discuss this decision in advance with those most directly affected by this change, the researchers in the ima. Rather, it simply announced that ima researchers would be absorbed by another research institute and their work henceforth would be directed toward health-related issues rather than agricultural issues. Inevitably, this upset many ima researchers and sent ripples of concern throughout Singapore’s research community. As highly trained, highly qualified PhDs who had made a serious commitment to their highly specialized fields, these individuals expected a more participatory decisionmaking process (Tsui-Auch 2004). In this instance, at least, the edb’s past successes in dealing with engineers in other nontraditional sectors—who, unlike PhDs doing basic research, were more accustomed to following orders and changing their work on a moment’s notice—might have prevented the edb’s top management, most of whom came from an engineering background themselves, from understanding that people in other sectors needed to be treated very differently. But the evidence indicated that this was not an isolated inci-

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dent. Even the edb’s efforts to promote the development of human resources in the sector primarily by offering increased scholarship funds perhaps showed the lack of understanding on the part of edb managers. As one expert on the biotechnology industry noted, unlike engineers in manufacturing sectors who could switch from one project to another easily, people normally obtained PhDs in basic research, biotechnologyrelated fields because of their sheer love of the highly specialized subject matter (Tsui-Auch 2005). If people were influenced by scholarship money alone to choose a field, their commitment to the field might not be sustained for the long term.

Lessons for Latin American ipas The experience of Singapore’s edb underscores the importance of transnational learning capacity. This allowed the agency to adapt to changing circumstances throughout its long history. The edb succeeded at doing this in part because it had all of the components of transnational learning capacity, except for an egalitarian, democratic organizational culture. Now, however, as the edb seeks to move Singapore into new, more knowledgeintensive sectors, the lack of this component of transnational learning capacity may increasingly impede its ability to develop an effective investment promotion strategy. Because ida Ireland’s organizational culture is far more egalitarian and democratic, ida Ireland and similar ipas may have an advantage in promoting the bms sector, and specifically the most advanced segment of that sector, biotechnology, that Singapore’s edb does not possess. The issue of organizational culture’s effect on transnational learning capacity is highly relevant in the Latin American context, where organizations with hierarchical, authoritarian cultures are more common. As Latin American governments seeking to harness globalization move up the value chain into ever more research-driven, knowledge-intensive areas of the economy, such considerations will become increasingly significant.

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CONCLUSION

For governments seeking to develop their countries or states, globalization brings opportunities as well as dangers. On one hand, a government that reacts defensively, imposing excessively severe restrictions and controls on fdi, will miss out on opportunities to gain access to foreign capital, to provide jobs for its people, to diversify its economy, and to use linkages between tncs and local firms to spur on its industrialization process. On the other hand, a government that does nothing may find its country or state quickly falling behind in the fierce global competition for fdi, as lower-cost nations position themselves to attract this investment. Furthermore, although attracting fdi can play a significant role in a government’s effort to harness globalization, fdi alone—even nontraditional fdi—does not automatically promote development to its fullest extent. Thus proactive governments that can modify their policies and investment promotion strategies in anticipation of emerging global trends, that can enhance the capabilities of their people to absorb the benefits of fdi, and that can coordinate these activities into a coherent program will be the most successful at harnessing globalization for their own ends. In this book I have focused on an important aspect of harnessing globalization: the promotion of nontraditional fdi. This alone is a challenging task. Few investment promotion agencies (ipas), either government ipas or private ipas collaborating with governments, have all the characteristics needed to develop an effective investment promotion strategy. Even those that do to a significant degree, such as Singapore’s edb, can encounter serious difficulties as they seek to attract more knowledge-intensive, higher value-added fdi. My analysis has sought to establish the importance of political security, technocratic independence, and transnational learning capacity to the ability of an ipa—and by extension, the ability of a government—to develop an effective investment promotion strategy, a

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significant part of a government’s ability to attract nontraditional fdi. For a summary of how the model applies to each of the cases, see Table 16. As the case studies demonstrate, the ida and later ida Ireland in Ireland and Singapore’s edb—despite important differences—stand out as benchmark examples of ipas that have successfully attracted high levels of nontraditional fdi. Of the Latin American cases, cinde in Costa Rica clearly attracted the most nontraditional fdi, followed by Po´lo in Rio Grande do Sul and corfo in Chile. Although the Britto government’s collaboration with Po´lo was successful in attracting a major investment from Dell, Po´lo’s investment promotion effort ended after Dutra took office. (The Dutra government itself attracted no further nontraditional fdi.) Although it has not yet attracted any single investment as large as Dell’s initial investment in Rio Grande do Sul, corfo’s investment promotion effort in Chile, sustained throughout the Lagos administration and continuing into the Bachelet government, has already attracted similar levels of nontraditional fdi overall and seems likely to far surpass Po´lo’s achievement in Rio Grande do Sul over time.

Theoretical Implications In this book I extend key theoretical concepts and develop new ones. Although I have expanded on existing concepts of political survival, transnational learning capacity is an entirely new concept, with roots in the literature on organizational learning.

An Extension of an Existing Concept: Political Survival My notion of political security further develops previously created theoretical concepts of political survival. Geddes (1994) argues that when a leader’s political position is not threatened and political party discipline is strong, he or she will be willing to delegate control over important policy areas to experts who can implement the best outcomes for the country. In contrast, when a leader’s political survival is endangered, he or she will retain control over policy for patrimonial purposes, using it as a source of patronage to bolster his or her political support. While discussing the circumstances under which leaders will delegate authority to technocratic agencies, Geddes’s primary focus is on the political conditions that permit legislatures to enact reforms that will enhance state capacity, enabling a government to avoid patrimonialism and implement broad developmental goals. Geddes maintains that in a democratic

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Low High High High High

Low High High High High

... ... Increasing High High

High Low

High

Level of transnational learning capacity

Variable

... ... Increasing High High

High Low

High

Level of effectiveness

... ... Increasing High High

High Low (none)

High

Level of nontraditional fdi attracted

Note: Because corfo did not take on the role of an ipa until 2000, when the High Technology Investment Promotion Program was created, the variables ‘‘level of transnational learning capacity,’’ ‘‘level of effectiveness of the ipa,’’ and ‘‘level of nontraditional fdi attracted’’ are not applicable for Chile from the 1930s to 2000. From 2000 to the present, the levels of transnational learning capacity, effectiveness, and fdi attracted were increasing over time.

High Low

High

ipa’s technocratic independence

High Low

High

Level of political security

Applying the model to the cases

Costa Rica Rio Grande do Sul Britto (1994–98) Dutra (1998–2002) Chile 1930s–1973 1990–2000 2000–present Ireland Singapore

Case

Table 16

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context, such outcomes are more likely when the larger parties in a legislature hold roughly the same number of seats, thus controlling the same amount of patronage, so that the cost of reform is borne more or less equally by all parties. In contrast to this ‘‘partisan parity’’ view, Montero (2001a, 2001b, 2002) holds that more politically dominant leaders with longer time horizons may also be willing to push for these kinds of reforms, as well as to delegate control over policy to technocratic agencies, so that they can take credit for positive results of such actions in the long run. Montero adds that these outcomes are more likely to prevail when multiple agencies are working together in the pursuit of similar goals and can monitor each other’s progress. This ‘‘horizontal embeddedness’’ helps ensure accountability on the part of each individual agency. Unlike Geddes’s approach, my focus is on the executive branch, so central to policymaking in Latin America, rather than the legislature. Presidents and governors have different incentive structures than legislators. Under some circumstances, at least, they may be more concerned about long-term results, including their own legacies. Thus my argument, similar to Montero’s, is that a leader who possesses a high level of political security (as measured by the discipline of political parties, the stability of coalitions, the level of partisan conflict, the margin of electoral victory, and the dominance of the leader’s party or coalition of parties in the legislature) will be more inclined to give control over investment promotion policy to an ipa with a high level of technocratic independence, and less politically secure leaders will be inclined to retain control over investment promotion policy. Further building on Montero, I argue that one measure of an ipa’s level of technocratic independence is the extent to which an ipa collaborates with other agencies, which can monitor the extent to which it is pursuing broad overall goals rather than particularistic goals of specific individuals or groups. Going beyond existing political survival arguments, I maintain that leaders operating in contexts that provide a low level of political security do not always use control over policymaking in key areas, such as investment promotion, as a way to distribute patronage. As with Dutra in Rio Grande do Sul, in some circumstances leaders may wish to retain such control simply as a way to differentiate themselves from their competitors in the electoral arena.

A New Concept: Transnational Learning Capacity My concept of transnational learning capacity is related to ideas in the organizational learning literature developed to explain learning in busi-

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ness firms. I argue that some of these concepts apply to ipas, and by extension to governments, as well. For example, Cohen and Levinthal’s notion of ‘‘absorptive capacity’’ (1990), which explains ‘‘a firm’s ability to identify, assimilate and exploit knowledge from the environment’’ can be applied to ipas as well as to business firms. But absorptive capacity, which holds that a firm’s prior accumulated knowledge helps determine its ability to learn, is insufficient to explain why some ipas (and therefore some governments) are better at identifying, understanding, and responding to global business trends and prospective foreign investors. In order to do that, at a minimum the three principal components of transnational learning capacity are necessary: the level of internationalization of its staff; the extent to which the ipa has a systematic, proactive approach to learning about global business trends and prospective foreign investors; and the extent of its transnational strategic network. For ipas promoting highly knowledgeintensive fdi, a fourth component applies: the degree to which the ipa’s organizational culture is egalitarian and democratic rather than hierarchical and authoritarian. The size of an ipa’s budget is not part of an ipa’s transnational learning capacity, because what matters is what the ipa does with the money it has. Of course, an ipa with a large budget can more easily develop one component of transnational learning capacity, a transnational strategic network, simply by establishing multiple foreign offices in the home countries of likely prospective investors. Nevertheless, as the corfo case shows, an ipa can also develop a transnational strategic network in other ways without a large budget (albeit with more difficulty). This is also true for two other aspects of transnational learning capacity: the level of internationalization of the ipa’s staff and the extent to which the ipa has a proactive, systematic approach to learning about global business trends and prospective foreign investors. With regard to internationalization of staff, although cinde in Costa Rica and ida Ireland offered higher salaries than many other agencies in their respective countries, people with international business or educational experience were attracted to these agencies for other reasons as well. And clearly an ipa could establish a proactive, systematic approach to learning about global business trends and prospective foreign investors without a large budget. Morisset and Andrews-Johnson argued in their statistical study (2004) that the quality of an ipa’s staff and the number of foreign offices it had did not have an impact on the ipa’s effectiveness. But the detailed case studies examined here clearly indicate otherwise. Of course, Morisset and Andrews-Johnson themselves acknowledge that their study may have

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lacked sufficient variation in these factors to account for their impact (50). Furthermore, these authors did not consider the extent to which an ipa has a proactive, systematic approach to learning about global business trends and prospective foreign investors, or the fourth component of transnational learning capacity, the degree to which an ipa’s organizational culture is egalitarian and democratic. As the Singapore case indicates, this fourth component can be highly relevant when a government attempts to promote nontraditional fdi in highly research- and knowledge-intensive industries. Thus the in-depth case studies in this book provide for a richer, more complete explanation than statistical studies alone. And clearly, transnational learning capacity is far more relevant to the sort of learning analyzed in these cases than absorptive capacity. ‘‘Grafting’’ is another concept from the organizational learning literature that applies to governments. Rather than acquiring knowledge alone by means of mergers, acquisitions, or joint ventures, governments can increase their ability to learn about global business trends and prospective foreign investors by means of collaborating with an ipa that already has this characteristic. Grafting in this manner clearly occurred, and had the desired effect, in the collaboration between the Costa Rican government and cinde and the state government of Rio Grande do Sul and Po´lo. Although none of the theorists who applied this concept to business firms considered applying it to governments in this way, grafting is clearly relevant in this context.

The Key Lessons for Latin American Governments In this book I have demonstrated the importance of political security, technocratic independence, and transnational learning capacity to the effectiveness of an ipa’s—and by extension, a government’s—effort to promote nontraditional fdi. ipas, and thus governments, that possess these characteristics are more likely to develop investment promotion strategies that are responsive to trends in global business as well as to the needs and concerns of specific prospective investors, that are well suited to the conditions and needs of the government’s own country or state, and that are sustainable throughout successive administrations or governments. These aspects of the effectiveness of the ipa’s (and, therefore, the government’s) investment promotion effort play a major role in the level of nontraditional fdi it attracts. After considering these factors in light of the evidence, and

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with the benefit of the comparative perspective the cases provide, some key lessons for Latin American governments emerge.

Political Security—Specifically, How It Is Provided—Matters Authoritarian as well as democratic regimes can supply the political environment necessary to provide political security to their leaders. The Singapore case demonstrates, however, that as governments seek to move their countries or states into more knowledge- and research-intensive areas of economic activity, the government’s approach matters. Top-down, hierarchical styles of policymaking can be abhorrent to research scientists and other highly trained personnel who are so essential to developing these highly sophisticated sectors. Such personnel need to operate in an environment that allows them more input into the policymaking process. Previous research in other contexts and other countries has already demonstrated that highly educated individuals with advanced technical training place a premium on having input into government policies, particularly those policies that affect the sectors in which they were working. My earlier book on Brazilian industrial policy demonstrated that highly trained scientists and others with advanced technical training working in the computer industry during Brazil’s democratic transition had a strong preference for democratic government and were determined to play a major role in shaping the new government’s policies in this sector (Nelson 1995). In Argentina, Poneman found that during the Pero´n years, nuclear scientists were willing to work on the development of Argentina’s nuclear power industry as long as they had independent control over the agenda of the agency developing policy in this sector, the National Atomic Energy Commission (Comisio´n Nacional de Energı´a Ato´mica, or cnea). But after Pero´n—seeking to take Argentina’s nuclear program in a new direction— interfered with the cnea’s independence, many of the most talented scientists quit in disgust (Poneman 1982, 76–77). Robert Bates argues that in the later stages of a country’s economic development, highly educated individuals with advanced, specialized training become the most important kind of economic capital. Because these individuals are so essential to a highly developed nation’s ability to continue to grow, they may come to have—and indeed, should have—more influence in government decisions that affect their areas of expertise. In this context, therefore, ‘‘those who possess skills and talents must be listened to, their needs made known, and their environment then structured so that they will happily do what they do best’’ (1991, 26–27). The way to

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do this, Bates argues, is to let the people themselves make the key decisions about what they are doing—that is, to let them have the authority to make decisions about the particular project or program with which they are involved. Bates suggests that this sort of process, carried out on a wide scale, was an important factor in bringing about peaceful transitions to democracy in Eastern Europe. Governments seeking economic growth gave up power ‘‘to those who control the key resource: the people themselves’’ (27). A stable, authoritarian developmental state gave Singapore’s leaders a great deal of political security. This enabled them to give the edb technocratic independence over successive administrations, allowing it to develop a high level of transnational learning capacity and a highly effective investment promotion policy. Nevertheless, as the Singapore case shows, an ipa seeking to promote nontraditional fdi that is operating in an authoritarian regime can face special difficulties. Especially as the ipa seeks to attract more research- and knowledge-intensive fdi, not only an ipa’s authoritarian managerial style but the authoritarianism of the country itself may pose a serious obstacle. Thus the quality of democracy that a country possesses, the extent to which the government is accountable to the rule of law and to democratic principles, is something that Latin American governments seeking to advance their countries’ economic development and move into increasingly more knowledge-intensive economic activities should keep firmly in mind.1

Technocratic Independence Can Be Achieved in a Number of Ways Although the ipas examined here benefited from high levels of technocratic independence—hiring on the basis of merit, making decisions on the basis of technical criteria, collaborating with other agencies pursuing similar goals—they achieved this in different ways, and sometimes unintentionally. For example, although not designed to be complementary agencies, corfo and the Foreign Investment Committee both collaborated in the Chilean government’s overall goal of promoting nontraditional fdi. In situations where ipas are vulnerable to pursuing particularistic interests, organizations pursuing similar goals can monitor each other closely, thus helping to ensure that the original goal is maintained. While having more than one agency pursue parallel agendas might help to maintain the government’s focus on its overall goal, doing this can also 1. Weyland (2004b) provides a useful assessment of the quality of democracy in various countries in Latin America.

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create problems with intragovernmental power struggles if the agencies’ missions are so similar that the organizations compete over turf. This problem did not occur to any significant degree with corfo and the Foreign Investment Committee because each agency had well-defined roles, which complemented each other yet differed sufficiently to keep their area of operation distinct. The Foreign Investment Committee performed more of a public relations function, participating in investment promotion seminars in various countries and providing information to prospective investors. corfo, while also a key participant in these seminars and usually having a major role in planning them, was more involved with developing an investment promotion strategy and negotiating directly with investors. Such parallel organizations could work well in other cases provided that, as with corfo and the Foreign Investment Committee, each organization’s role is well defined and distinct so as to avoid bureaucratic power struggles between the agencies. While the International Advisory Council (iac) of Singapore’s edb provided advice to the organization as a whole, and other, industry-specific advisory councils provided advice in more specialized areas, they also helped monitor the edb’s activities and progress toward achievement of its goals. While not entirely separate agencies, in this sense they served the function of distinct entities, monitoring the edb’s activities, which could help ensure that the edb stayed true to its original mission. Thus these advisory councils not only enhanced the edb’s transnational learning capacity, as they were intended to do, but the edb’s technocratic independence as well. Provided that such advisory bodies could be governed in a way that would ensure their technocratic independence, this arrangement could be emulated by Latin American ipas without too much difficulty or extra expense.

Transnational Learning Capacity Can Be Acquired or Developed Although the government of Costa Rica and the state government of Rio Grande do Sul did not possess much transnational learning capacity, they were able to ‘‘graft on’’ this capacity by collaborating with private ipas. Thus, even governments without highly internationalized personnel, proactive and systematic approaches to learning about global business trends and prospective foreign investors, and extensive transnational strategic networks can attain transnational learning capacity by collaborating with private ipas that have this characteristic and allowing them to develop and carry out the investment promotion strategy. Of course, doing that in a

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sustained way requires that the ipa operate in a political environment that provides a high level of political security to its leaders. As corfo’s experience in Chile shows, governments can also develop transnational learning capacity of their own over time, even with a limited budget. Few Latin American ipas are able to develop extensive networks of foreign offices in key markets as did Singapore’s edb and ida Ireland. Yet corfo’s linkages with a graduate school of international business and relevant business associations in the United States, as well as with executives who had already invested in Chile, provided an initial, inexpensive transnational network of contacts. From this base, corfo further expanded its network, modifying its investment promotion strategy over time to reflect input from its expanding array of contacts, advisors, and consultants. Po´lo in Rio Grande do Sul demonstrated still another way an ipa with financial constraints could develop a transnational strategic network. Lacking an extensive array of foreign offices, Po´lo relied on ‘‘virtual agents,’’ or expatriate Brazilians from Rio Grande do Sul working in the United States and elsewhere, who were willing to assist the state’s efforts to attract nontraditional fdi. This approach, which cinde in Costa Rica also used to supplement the efforts of its foreign offices, is another useful alternative for ipas with more limited budgets. Because the budgets of the edb and ida Ireland were so much larger than those of the Latin American ipas (more than US$ 200 million for each), they were able to establish many more foreign offices and do other things that Latin American ipas cannot emulate easily. More readily adopted, however, are elements of the highly proactive and systematic approach to learning about global business trends and prospective foreign investors that both the edb and ida Ireland used. For example, to help anticipate developments in key industries, the edb’s practice of establishing not only a general but also industry-specific advisory councils in key sectors provided useful contacts and suggestions in specific areas beyond the existing transnational strategic network. This proactive approach could easily be duplicated in the Latin American context. (It also has the added advantage of contributing to the ipa’s technocratic independence.) Executives from both ida Ireland and Singapore’s edb made a point of systematically monitoring industry trends by reading trade magazines and attending trade shows, as well as by visiting the local offices of companies that had already invested in their respective countries. This latter practice not only helped executives stay on top of evolving trends in specific indus-

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tries but ensured that the ipa (and the government) was doing all that it could to assist companies that had already invested in the country. The Latin American ipas in the case studies examined here followed these practices of monitoring industry trends to one extent or another. But following them in a more methodical way, perhaps institutionalizing on a regular basis something similar to the Technology Foresight Exercise used by Forfa´s and ida Ireland, could potentially reap manifold returns in terms of keeping existing investors happy and attracting future investors, while adding only marginally to an ipa’s operational costs.

The ipa’s Organizational Culture Is Relevant With regard to the fourth component of transnational learning capacity, organizational culture, ida Ireland and Singapore’s edb differed greatly: Singapore’s edb was hierarchical and authoritarian while that of ida Ireland was egalitarian and democratic. This contrast between the two agencies had serious implications for the effectiveness of their investment promotion strategies as they sought to promote fdi in highly knowledgeand research-intensive sectors, such as the most advanced, cutting-edge segments of the biotechnology industry. Although most Latin American ipas, including the ones considered here, are not yet pursuing this level of knowledge- and research-intensive fdi, many Latin American organizations, both public and private, have hierarchical and authoritarian organizational cultures. Thus the difficulties that Singapore’s edb encountered because of its top-down managerial style serves as a cautionary example for Latin American ipas should they seek to develop more research-oriented, highly knowledge-intensive fdi in the future.

Building Political Support Is Important As the Irish case shows, building political support for the ipa’s investment promotion effort can be important, even in political contexts that provide their leaders with a high level of political security. Even in countries or states with very low levels of partisan conflict or without any serious political polarization whatsoever, ipas can benefit from building political support for the promotion of nontraditional fdi and for policies that support such fdi. For example, by making sure that incoming fdi helped alleviate problems like unemployment and lack of growth in particular regions in the country, the ida and later ida Ireland helped win over politicians who were initially opposed to promoting nontraditional fdi. As time went on,

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the high level of success the ida and later ida Ireland achieved in attracting fdi, and this fdi’s contribution to the economic situation in the country, increased the clout of these organizations as well as the level of agreement among political parties regarding their investment promotion activities. In this way, the ida and ida Ireland built widespread political support for their efforts. For Latin American governments, this approach may pose unique dangers. Such an approach could easily devolve into clientelism or massive corruption if not done correctly. Indeed, in the Latin American context, only ipas with exceptionally high levels of technocratic independence would be able to implement this method of building political support effectively. Nevertheless, even in the case of Po´lo in Rio Grande do Sul under Governor Dutra (1999–2002), in a political environment with a high level of partisan conflict that provided its leader with a very low level of political security, both Po´lo and the state government could have taken more steps to overcome the conflict that led to the collapse of the government’s relationship with Po´lo. Certain actions on the part of either Po´lo or the government might have salvaged their relationship, preventing the breakdown in relations that occurred and the resulting decline in the effectiveness of the government’s investment promotion strategy. For example, if Po´lo had pursued an approach similar to Dell Computer Corporation’s, its collaboration with the government might have continued. Dell, of course, did all it could to convince Rio Grande do Sul’s new socialist governor that its goals and that of his government were aligned. As Dell’s executives explained to the governor, Dell manufactured computers; computers provided people with access to the Internet; the Internet gave people more access to information; and this created a more egalitarian social order—the very goals that Governor Dutra of the Workers’ Party hoped to achieve. Governor Dutra, seeing a way to save face while also saving an important investment that would provide jobs for his state, went along with this approach and allowed Dell to keep all of the incentives offered by the previous government, even though he had been strongly opposed to this originally. He even gave speeches stating that he hoped to attract more companies like Dell to invest in the state. But without Po´lo’s assistance, his efforts to promote additional nontraditional fdi were unsuccessful. Perhaps if Po´lo had been willing to make an argument similar to Dell’s, and—while maintaining its overall technocratic independence from direct political interference—focus some of its continuing investment promotion

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efforts on companies like Dell, companies the governor would find politically acceptable, it might have been able to win him over and continue its collaboration with the state government. Of course, part of the problem was that the governor was opposed to working with Po´lo, an agency that, despite its technocratic independence, was so closely associated with the Britto government’s investment promotion effort and that had such wide membership from all aspects of the private sector in Rio Grande do Sul, both domestic and foreign. Nevertheless, some such effort on Po´lo’s part might have been worth trying.

Final Observations The findings of this book provide grounds for optimism. A political environment that provides its leaders with a high level of political security is essential. But ipas that operate in such environments, and are part of governments or collaborate with governments, can achieve technocratic independence in a number of different ways. They can acquire or develop transnational learning capacity. And they can build political support for their efforts. Thus many governments can hope to develop effective investment promotion strategies. Such strategies can help governments to attract nontraditional fdi to diversify the economies of their countries or states, to provide good jobs for their people, and—potentially, at least—to create linkage effects for their economies. In short, such strategies can help governments to harness globalization. It is up to them to take action.

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ida Ireland. http://www.idaireland.com (accessed January 22, 2004; December 9, 2006; and May 27, 2007). ilo (International Labor Organization), Bureau of Labor Statistics. Labor Statistics Database. http://laborsta.ilo.org/ (accessed December 30, 2006). indi. http://www.indi.mg.gov.br (accessed 2001). Instituto Nacional de Aprendizaje (ina). http://www.ina.ac.cr (accessed February 23, 2007). Invest@Chile. http://www.hightechchile.cl (accessed November 8, 2004; April 25, 2005; March 1, 2007). Investe Brasil. http://www.investebrasil.org/html/home.htm (accessed September 1, 2004). Ministerio de Comercio Exterior de Costa Rica (comex). http://www.comex.go.cr/ estadisticas/inversion/IED%20x%20Destino%20Economico %20 2006.pdf (accessed May 5, 2007). National Development Plan, Ireland. http://www.ndp.ie/viewdoc.asp?fn%2F documents%2Fhomepage.asp (accessed December 21, 2007). Po´lo RS—Ageˆ ncia de Desenvolvimento. http://www.polors.com.br (accessed 1999; February 27, 2007). Presidencia de la Repu´blica, Me´xico—Gabinete (president of Mexico’s cabinet—for Fox administration). http://www.presidencia.gob.mx/gabinete (accessed October 6, 2006). Pyramid Research (data on Latin American telecommunications). http://www.py ramidresearch.com (accessed January 23, 2003; January 5, 2004). Republic of Ireland, Department of Finance. Budgetary and Economic Statistics, Table 10 (p. 18). http://www.finance.irlgov.ie/documents/publications/ other/bes_04.pdf (accessed March 2004). Science Foundation Ireland. http://www.sfi.ie/home/index.asp (accessed March 2, 2004; December 17, 2006; December 23, 2007). ———. sfi Funded Research. http://www.sfi.ie/content/content.asp?section _id179&language_ie1 (accessed December 23, 2007). Singapore, Corruption Practices Investigation Bureau. http:app.cpib.gov.sg (accessed December 2, 2006). Singapore, Economic Development Board. http://www.edb.gov.sg (accessed December 2, 2006a; May 28, 2007). ———. (About Us: History). http://www.edb.gov.sg/edb/sg/en_uk/index/about _us/our_history.html (accessed December 4, 2006b). ———. (Campus Recruitment). http://sg.dimension.jobsdb.com (accessed December 1, 2006). ———. (Industry Sectors). http://www.edb.gov.sg/edb/sg/en_uk/index/industry _sectors.html (accessed December 26, 2007). ———. (Industry Sectors: Biomedical Sciences). http://www.edb.gov.sg/edb/sg/ en_uk/index/industry_sectors/biomedical_sciences.html (accessed September 20, 2008). ———. (Recruiting Process). http://www.edb.gov.sg/edb/sg/en_uk/index/ careers/recruiting_process.html (accessed December 29, 2007). Singapore Elections. http://www.singapore-elections.com/ (accessed November 22, 2006). Singapore Elections Department, 2006 Parliamentary Election Results. http:// www.elections.gov.sg/parliamentary2006.htm (accessed March 17, 2007).

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251

Transparency International. http://www.transparency.org (accessed November 8, 2004; February 6, 2005; December 1, 2006; February 18, 2007; December 26, 2007). Tribunal Regional Eleitoral, Rio Grande do Sul (Rio Grande do Sul’s Regional Electoral Court, or state electoral commission). 1994. http://www.tre-rs .gov.br/eleicoes/1994 (accessed October 30, 2006). ———. 1998. http://www.tre-rs.gov.br/eleicoes/1998/gover.htm (accessed October 30, 2006). Tribunal Superior Electoral de Me´xico (Mexico’s Supreme Electoral Court, or national electoral commission). http://www.tse.gob.mx (accessed October 6, 2006). Tribunal Superior Eleitoral do Brasil (Brazil’s Supreme Electoral Court, or national electoral commission). http://www.tse.gov.br/internet/index.html (accessed September 3, 2006). Tribunal Supremo de Elecciones, Repu´blica de Costa Rica (Costa Rica’s Supreme Electoral Court, or national electoral commission). http://www.tse.go.cr/ elecciones2002.html (accessed April 8, 2007); http://www.tse.go.cr/ 2006_elecciones_.htm (accessed April 8, 2007). unctad (United Nations Conference on Trade and Development). Foreign Direct Investment Database. http://www.unctad.org/Templates/StartPage.asp?int ItemID2921&lang1.

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06-12-09 10:23:23

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INDEX

Page numbers in italics refer to figures and tables. a*star. See Agency for Science, Technology, and Research ‘‘Absorptive Capacity,’’ (Cohen and Levinthal), 25, 224 ADL. See Arthur D. Little, Inc. Agency for Science, Technology, and Research (a*star), 190–91, 200, 211, 216–17 Aguirre Cerda, Pedro, 125 Alessandri, Jorge, 126 Alianza por Chile (apc), 123, 147, 148 Allende, Salvador, 126 Altec, 147 Alvarez, Carlos, 129 Alvorada, 116–17 n. 17 Alywin, Patricio, 125 American Electronics Association (aea), 50, 138, 143 American-Brazilian Chamber of Commerce, 69 Andrews-Johnson, Kelly, The Effectiveness of Promotion Agencies at Attracting Foreign Direct Investment, 16–17, 224–25 Anglo-Ireland Treaty of 1921, 161 apc. See Alianza por Chile Apple Computer, 178 Argentina international phone call, comparative cost, 135 salaries, information technology, 134 ´ scar, 43, 60, 98 Arias, O Armstrong, Tom, 87 n. 1, 110 Arthur D. Little, Inc. (ADL), 159–60 asexma (Asociacio´n de las Empresas Exportadores de Manufacturas y Servicios), 128

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INDX

asimet (Asociacio´n de Indu´strias Metalu´rgicas y Metalmeca´nicas), 128 Asociacio´n de Indu´strias Metalu´rgicas y Metalmeca´nicas (asimet), 128 Asociacio´n de las Empresas Exportadores de Manufacturas y Servicios (asexma), 128 Association of Sales and Marketing Executives (Guadalajara), 75 Autonomous Institutions (AIs), 42–43 Aylwin, Patricio, 127 Aza´rio, Miguelangelo, 96 Bachelet, Michelle, 19, 125, 147 n. 9, 148, 150 Bahia, 114 Banco de Desenvolvimento de Minas Gerais (bdmg), 105 Banco do Estado de Sao Paulo (banespa), 66 Banco Fator, 109–10 banespa (Banco do Estado de Sao Paulo), 66 Bates, Robert, 226–27 bdmg (Banco de Desenvolvimento de Minas Gerais), 105 Bio*One Capital, 190, 216 Bioinformatics Centre (bic), 217 Biomedical Research Council (bmrc), 190, 200 biomedical sciences (bms), 190–91, 205–6, 210, 213, 215–19 Biopolis, 191, 217–18 Bioprocessing Technology Center (btc), 216 Bitran, Eduardo, 127 bmrc (Biomedical Research Council), 190, 200

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254



bms. See biomedical sciences Brazil currency devaluation, 100 Ford Motor Corporation, federal intervention, 114 Intel Corporation, 63–69 international phone call, comparative cost, 135 population, 63, 100 protectionism, 100–101 salaries, information technology, 134 sales taxes, 101–2 states, competition between, 101–7 taxes, 63–64 Bristol-Meyers Squibb, 187 Britto, Antonio, 89–94, 108–9, 113, 221 gubernatorial elections, margin of victory in, 92–93 legislative assembly, support in, 93–94 political security, 85 Cabral, Marcelo, 109–11 ´ ngel, xii Cabrera, A Caldero´n, Rafael, 43 Camacho, Edna, 48–49 Campinas, 64–65, 103 Ca´rdenas, Alberto, 74, 76 political security, 74 Cardoso, 67 Cardoso, Fernando Henrique, 89, 114 cases, application of model to, 222 Castillo, Mario, 120, 129, 136, 144 cemig (Companhia Energe´tica de Minas Gerais), 105 cepe (Consejo Estatal de Promocio´n Econo´mica), 75–76 Chile central bank, 70–71 copper as percentage of exports, 121 Corporacio´n de Fomento de la Produccio´n, 120–51 economy, growth rate, 121 foreign direct investment, 120, 150 Intel Corporation, 69–72 international phone call, comparative cost, 135 leaders’ margins of victory in elections, 125 Ministry of the Economy, 129 partisan political conflict, 124–25 political party discipline, 123–24 political security, 70, 121–25, 222 presidential election, 1970, 126 salaries, information technology, 134

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INDEX

salaries for technically trained personnel, 70 tax incentives, lack of, 133 telecommunications infrastructure, 134 transition to democracy, 127 Chilean Model, 120, 147–48, 147 n. 9 Chirico, James, 208 cinde. See Coalicio´n Costarricense de Iniciativas para el Desarrollo Cisco, 187 Coalicio´n Costarricense de Iniciativas para el Desarrollo (cinde), 10, 32–36, 83–86, 88, 98, 121–22, 136–37, 139 budget, 46–47 contrasting cases, 60–78 foreign direct investment, nontraditional attracted, 78–79, 221, 222 grafting, 225 investment promotion strategy, effectiveness of, 52–60, 222 investment promotion strategy, sustaining the, 59–60 investment promotion strategy, targeting and responsiveness of, 52–59 learning, approach to, 49–50 Mexico, 72–78 personnel, internationalization of, 46–49 technocratic independence, 44–46, 222 transnational learning capacity, 46–51, 69, 78, 222 transnational strategic network, 50–51, 229 codin. See Companhia de Desenvolvimento Industrial do Estado de Rio de Janeiro Cohen, Wesley N., ‘‘Absorptive Capacity,’’ 25, 224 Comite´ para a Democratizacao da Informa´tica (CDI), 115 Companhia de Desenvolvimento Industrial do Estado de Rio de Janeiro (codin), 23, 53 technocratic independence, 104 Companhia Energe´tica de Minas Gerais (cemig), 105 companies; in electronics, medical devices, and services; in Costa Rica, 61–62 concamin (Confederacio´n de Ca´maras Industriales), 75 Concertacio´n de Partidos por la Democracia (cpd), 123, 147, 147 n. 9 confaz (Conselho Nacional de Polı´tica Fazenda´ria), 102 Confederacio´n de Ca´maras Industriales (concamin), 75

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INDEX

CONICYT (National Commission for Science and Technology), 131 Consejo Estatal de Promocio´n Econo´mica (cepe), 75–76 Conselho Nacional de Polı´tica Fazenda´ria (confaz), 102 Coor, Charlene, 87 n. 1 copper, 121 corfo. See Corporacio´n de Fomento de la Produccio´n Corporacio´n de Fomento de la Produccio´n (corfo), 10, 18–19, 26, 27–28, 53–54, 70–71, 227–28 agentes operadores (operating agents), 128 agriculture and fishing, fdi related to, 148 n. 10 budget, 137 business associations, U.S., 143 Chile, high technology investment promotion program, 120–51 consultants, relationship with, 139–43 foreign direct investment, nontraditional attracted, 148–51 High Technology Investment Promotion Program, 121–22, 128–33, 136–51 incentives to prospective investors, 133 n. 5 investment promotion strategy, 146–48; effectiveness of, 222 investors, contact with, 146 MBA student consultants, 138 nontraditional foreign direct investment attracted, 148–51, 222 Silicon Valley, office in, 143–45 small- and medium enterprises, promotion, 127–29 technocratic independence, 121–22, 125–32, 222 Thunderbird School of Global Management, affiliation with, 138, 229 transnational learning capacity, 71–72, 122, 132, 136–46, 222 transnational strategic network, 122, 139–40, 149 Costa Rica airport, 56 corruption, 46 electrical power, cost of, 57 electronics, medical devices, and services, foreign direct investment in, 80 foreign direct investment, nontraditional, 78–79, 82 gross domestic product, 82 infrastructure, enhancement of, 85

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INDX

255

Intel’s impact on, 79–85 investment promotion strategy, 77 job creation, 80 labor unions, 57 political security, 32, 35–44, 52, 63, 78, 85, 222 salaries, 81 solidarista associations, 57 technical education, improvements in, 81 trade balance, 82 Costa Rica Provee, 83–84 Costa Rica-USA Foundation, 45–47 Covas, Mario, 64 political security, 66–68 cpd. See Concertacio´n de Partidos por la Democracia crusa (Costa Rica-USA Foundation), 45–47 Crusis, Yeda, 116 n. 16 Dado Bier, 112 Dell Computer Corporation, 2, 27, 53–54, 87, 221 context for decision, 100–101 financial incentives by Brazilian states, 102–8, 114 government relations, 115 initial investment, 117 job creation, 117 research and development projects in Rio Grande do Sul, 108, 114–15, 117 responsiveness to Po´lo, 110–13 sales taxes, 115 Deloitte and Touche, 50 DHL Logistics, 204 Digital Equipment Corporation, 178 Dominican Republic-Central American Free Trade Agreement (dr-cafta), 83–84 Donoso, Constanza, 130, 143–45 Draper Fisher Jurvetson, 204 dr-cafta (Dominican Republic-Central American Free Trade Agreement), 83–84 Dutra, Olivio, 87–95, 113–17, 118, 188, 223 political security, 85, 89–91, 107 Po´lo, refusal to collaborate with, 90 Tarso Genro, rivalry with, 90 workers, intent to work on behalf of, 90–91 n. 4 ecla (United Nations Economic Commission for Latin America), now known as the United Nations Commission for Latin America and the Caribbean (eclaC), 130

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256



Economic Development Board Biomedical Sciences Group (edb bmsG), 190, 200 Economic Development Board (Singapore), 103, 132, 137, 190–219, 220–21 agencies, collaboration with, 200–201 applicants, required characteristics, 196–97 background, 192–94 budget, 201–2, 229 culture, 205–6, 230 database of company visits, 202–3 decision and evaluations based on technical criteria, 198–200 France-Singapore-UK Business Council, 205 Germany-Singapore Business Forum, 205 hiring, merit-based, 196–98 International Business Networks Group, 205 investment promotion strategy, effectiveness of, 206–11 learning, approach to, 202–3 lessons for Latin America, 219 nonheirarchic hierarchy, 205 performance indicators, 214 performance targets, annual, 199–200 personnel, internationalization of, 202 r&d-intensive sectors, sustainability of effort to promote, 215–19 Singapore-UK Business Council, 205 technocratic independence, 193, 196–201, 201, 227 transnational learning capacity, 193, 201–6, 216, 219 transnational strategic network, 201–4, 217 value chain, moving up the, 209–11 Economist Intelligence Unit, e-readiness rankings, 136 edb bmsG (Economic Development Board Biomedical Sciences Group), 190, 200 Effectiveness of Promotion Agencies at Attracting Foreign Direct Investment, The (Morisset and Andrews-Johnson), 16–17, 224–25 Egloff, Enrique, 52, 98, 139–42 Eldorado do Sul, 116–17 n. 17 Eli Lilly, 215 embraer (Empresa Brasileira de Aerona´utica), 64 Enclave Economy, The (Gallagher and Zarsky), 12–15 Enterprise Ireland, 160, 168, 184–85

................. 17253$

INDX

INDEX

e-readiness rankings, Economist Intelligence Unit, 136 Ernst & Young, 50 executive branch, policymaking, 223 Fairchild Semiconductor, 207 fdi. See foreign direct investment Federacao das Associacoes Comerciais e de Servicos do Rio Grande do Sul (federasul), 88–89, 99 Federacao das Indu´strias do Estado do Rio Grande do Sul (fiergs), 89, 99 Federal Express, 204 federasul (Federacao das Associacoes Comerciais e de Servicos do Rio Grande do Sul), 88–91, 99 Fianna Fail (Soldiers of Destiny), 161–65 party dominance and political stability, 163 fias (Foreign Investment Advisory Service), 50–51 fiergs (Federacao das Indu´strias do Estado do Rio Grande do Sul), 89, 99 Figueres, Jose´ Marı´a, 1, 33–44, 33 n. 3 Filho, Luiz Antonio Fleury, 66 Fianna Fa´il (Soldiers of Destiny) 161–165 Fine Gael (Irish Soldiers), 161–65 Forbairt. See Enterprise Ireland Ford Motor Corporation, 90, 113–14 foreign direct investment, 11–14 foreign direct investment, development impact, 11–16 foreign direct investment; electronics, medical devices, and services; in Costa Rica, 80 foreign direct investment, nontraditional, 1–29, 220 Brazil, 2 Costa Rica, 2, 59–60, 78–79 definition, 1 level, 4, 11 strategy to promote, Costa Rica’s, 33–36 Foreign Investment Advisory Service (fias), 50–51 Foreign Investment Committee (Chile), 120–21, 131–32, 146, 227–28 Foreign Investment, Development, and Globalization (Paus), 12 Forfa´s, 139, 152–89 Technology Foresight Exercise, 182–83 Fox, Vicente, 75 n. 22 free trade zones (ftzs), 34 Frei, Eduardo, 125 ftzs (free trade zones), 34

06-12-09 10:23:23

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PAGE 256



INDEX

Funaro, Jorge, 68 Fundacio´n Chile, 129 Gallagher, Kevin P., The Enclave Economy, 12–15 Garcı´a de Alba, Sergio, 75–76 gdp (gross domestic product), 82 GE International, 204 GE-Chile, 147 Geddes, Barbara, Politician’s Dilemma, 20–23, 221–23 General Electric Company, 177, 208 Genome Institute of Singapore (gis), 217 Genro, Tarso, 90, 92–93 Genzyme, 187 Gligo, Nicolo, 129 Global Futures, 204 Goh Chok Tong, 195 Goldberg, Richard, 96, 98 Google, 187 government’s investment promotion effort, effectiveness of, 4–11 grafting, 4, 25, 36–37, 55, 86, 88–91, 225 Greater Dallas Chamber of Commerce, 50 Greece eu subsidies, 154–56 European Structural and Cohesion Funds, funding from, 154–55 n. 3 gross domestic product. See gdp Guadalajara, 72 guerra fiscal, 102 Harnessing Foreign Direct Investment for Development (Moran), 13–16 Harris, William, 168–69 Heilbron, Armando, 48 Hitachi Asia, 204 Hortolandia, 117 Huepe, Hugo, 147 IC2 Institute, 143 icms. See Imposto sobre as operaco˜es relativas a Circulaca˜o de Mercadorias e sobre a prestaca˜o de Servicos de transporte intermunicipal e de comunicaca˜o icsti (Irish Council for Science, Technology and Innovation), 182 ida Ireland, 50, 103, 111, 152–89, 192–93, 202, 208 agencies, collaboration with, 138–40, 168–69 applicants, required characteristics, 165–66 background, 159–60

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INDX

257

best practices, 130 budget, 229 culture, 175, 230 decision and evaluations based on technical criteria, 166–68 foreign direct investment, nontraditional attracted, 185–87, 221 government concerns, sensitivity to, 170–71 hiring, merit-based, 165 ida-supported companies, employment, 153, 185–86 investment promotion strategy, 175–85 learning, approach to, 174–75 Menlo Park, 179–80 performance targets, annual, 166–67 personnel, internationalization of, 171–72 reputation, 169–70 technocratic independence, 163–71, 188 transnational learning capacity, 132, 171–75, 179–80 transnational strategic network, 137, 173–74, 179–80, 188 idc (International Data Corporation), 143 ifsc (International Financial Services Centre), 180–81 implications, theoretical, 221–25 Imposto sobre as operaco˜es relativas a Circulaca˜o de Mercadorias e sobre a prestaca˜o de Servicos de transporte intermunicipal e de comunicaca˜o (icms), 64, 64 n. 14, 101–2, 105, 108 incae (Instituto Centroamericano de Administracio´n), 50–52 incentives, tax or financial, ineffectiveness of, 133 n. 6 indi. See Instituto de Desenvolvimento Industrial de Minas Gerais Industrial Development Authority. See ida Ireland Institute of Bioengineering and Nanotechnology (ibn), 217 Institute of Molecular Agribiology (ima), 216, 218 Institute of Molecular and Cell Biology (icmb), 216 Instituto Centroamericano de Administracio´n (incae), 50–52 Instituto de Desenvolvimento Industrial de Minas Gerais (indi), 104–7, 118 personnel, internationalization of, 118 salaries, 105 technocratic independence, 104 transnational learning capacity, 104–6 transnational strategic network, 118

06-12-09 10:23:24

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258



Instituto Panamericano de Alta Direccio´n de Empresa (ipade), 75 Instituto Tecnolo´gico de Costa Rica (itcr), 55–56, 81 Intel Corporation, 98, 179, 208 Brazil, 63–69 Chile, 69–72 Costa Rica, 121 infrastructure in Costa, ehhancement, 85 investment in Costa Rica, 2, 30–86, 139 linkages with local suppliers, 82 Mexico, 72–78 reforms in Costa Rica, acceleration, 85 workforce development, 84–85 Inter-American Development Bank (IDB), 15, 83, 128, 130 International Advisory Council (iac), 204–5, 228, 229 International Data Corporation (idc), 143 International Financial Services Centre (ifsc), 180–81 internationalization of personnel. See personnel, internationalization of ‘‘Invest@Chile,’’ 146 Investment Attraction Program, 150 investment promotion agencies, 4–29, 220–32 Investment Promotion Council (ipc), 24 investment promotion strategies, 2–29 ipade (Instituto Panamericano de Alta Direccio´n de Empresa), 75 ipas (investment promotion agencies), 4–29, 220–32 Ireland civil war, 161 competitiveness in manufacturing, loss of, 181–82 Culliton Report, 160 Da´il E´ireann, 161 n. 6 Department of Industry and Commerce, 159–60, 164, 169 economic transformation, 152 employment trends by occupation, 1993– 2000, 157 engineers, lack of, 179–80 eu budget, receipts from, 154 Foras Tionscal, 159, 176 foreign direct investment inflows, 155 foreign direct investment, measurement, 153 n. 1 foreign direct investment, nontraditional, 153 Higher Education Authority, 178 lessons for Latin America, 187–89

................. 17253$

INDX

INDEX

National Development Plan, 184 Oirechtas, 161 n.6 parliament, 161 n. 6, 164 n. 7 political parties, disciplined, 163 political security, 161–64 production workers, hourly compensation costs for, 158 proportional representation, 163 recession and debt crisis, 178–79 single transferrable vote, 163 Strategy for Science, Technology, and Innovation, 184 taxes, 153 n. 2 Telesis Report, 160 value chain, moving up the, 182–85 IDB (Inter-American Development Bank), 15, 83, 128, 130 Irish Council for Science, Technology and Innovation (icsti), 182 Irish Soldiers. See Fine Gael itcr (Instituto Tecnolo´gico de Costa Rica), 55–56, 81 Jalisco, 72, 74–77 political security, 73 job creation, Costa Rica, 80 Jurong Town Corporation (jtc), 200 Kapaz, Emerson, 68 Kirkpatrick, Duane, 110–11 kpmg, 50, 96 Labarut, Ernesto, 147 Lagos, Ricardo, 18–19, 121, 125, 147 n. 9, 148 Latin American governments, key lessons for, 225–32 Lee Hsien Loong, 195 Lee Kuan Yew, 195–96 Lehmann, Pierre, 126 Lepe, Federico, 77 Levinthal, Daniel A., ‘‘Absorptive Capacity,’’ 25, 224 Loureiro, Fernando, 115 Lovegrove, David, 139–41 Magalhaes , Antonio Carlos, 114 Manufacturing Exporters Association. See Asociacio´n de Indu´strias Metalu´rgicas y Metalmeca´nicas Markowitz & McNaughton, Inc., 50 Martins, Alex, 96 Martins, Jose´ Ce´sar, 96–98, 98, 109–12 Maxwell, Keith, 87 McGowan, Kieran, 180

06-12-09 10:23:25

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INDEX

Melo, Patricio, 147 Mercado Comu´n do Sul (Mercosul), 101, 117 Mercosul. See Mercado Comu´n do Sul Mexico international phone call, comparative cost, 135 labor unions, 72–73 salaries, information technology, 134 Microsoft, 187 Millenium Entrepreneur Fund, 184–85 Minas Gerais, 101, 103, 104, 111, 118 heavy industries, 106 Ministry of Trade and Industry (mti), 198, 204 Montero, Alfred, 22–26, 223 Moran, Theodore H., Harnessing Foreign Direct Investment for Development, 13–16 Morisset, Jaques, Effectiveness of Promotion Agencies at Attracting Foreign Direct Investment, The (with Kelly AndrewsJohnson), 16–17, 224–25 mti (Ministry of Trade and Industry), 198, 204 nafta (North American Free Trade Agreement), 72 National Atomic Energy Commission, 226 National Commission for Science and Technology (CONICYT), 131 National Science Foundation (nsf ), 168–69 National Semiconductor, 207 National Trade Union Congress (ntuc), 200, 204 nontraditional foreign direct investment. See foreign direct investment, nontraditional North American Free Trade Agreement (nafta), 72 nsf (National Science Foundation), 168–69 organizational culture, 230–32 pac (Partido Accio´n Ciudadana), 42 Pacheco, Abel, 60 pan (Partido Accio´n Nacional), 74 Parana´, 101, 104, 111 Parceiros Volunta´rios, 115 Partidas Especı´ficas, 39 Partido Accio´n Ciudadana (pac), 42 Partido Accio´n Nacional (pan), 74 Partido Comunista do Brasil (pc do b), 93 Partido da Frente Liberal (pfl), 66–67, 93 Partido da Social Democracia Brasileira (psdb), 116 n. 16

................. 17253$

INDX

259

Partido Democra´tico Trabalhista (pdt), 93 Partido do Movimento Democra´tico Brasileiro (pmdb), 66, 89, 93 Partido dos Trabalhadores, 87, 89–90, 92–93, 113, 115 Partido Liberacio´n Nacional (pln), 38, 41, 60 Partido Liberal (pl), 66 Partido Revolucinario Institucional (pri), 73–74 Partido Social da Democracia Brasileira (psdb), 67, 93 Partido Socialista Brasileiro (psb), 93–94 Partido Trabalhista Brasileiro (ptB), 93 Partido Unidad Social Cristiana (pusc), 38, 41, 43, 60 Paus, Eva A., Foreign Investment, Development, and Globalization, 12 Pawlak, Charles, 208 pc do b (Partido Comunista do Brasil), 93 pdt (Partido Democra´tico Trabalhista), 93 ped (Programa Estadual de Desestatizacao), 68 People’s Action Party (pap), 195, 215–16 Pero´n, Juan, 226 personnel, internationalization of, 7, 26 Coalicio´n Costarricense de Iniciativas para el Desarrollo (cinde), 46–49 Economic Development Board (Singapore), 202 ida Ireland, 171–72 Instituto de Desenvolvimento Industrial de Minas Gerais (indi), 118 Po´lo, 118 Secretaria de Promocio´n Econo´mica del Estado de Jalisco (seproe), 76 Pfizer, 177, 187 pfl (Partido da Frente Liberal), 93 Philips Electronics, 204 PierceTech, 141–42 Pinochet, Augusto, 70, 120, 126–27 pl (Partido Liberal), 66 Plano Real, 67–68 pln (Partido Liberacio´n Nacional), 38, 41, 60 pmdb (Partido do Movimento Democra´tico Brasileiro), 66, 89, 93 political security, 4–6, 11, 17–18, 20–24, 26–29, 221–23, 226–27 Britto, Antonio, 85 Ca´rdenas, Alberto, 74 Chile, 70, 121–25 Costa Rica, 32, 35–44, 52, 63, 78, 85, 222 Dutra, Olivio, 85, 89–91, 107 Jalisco, 73 Rio Grande do Sul, 85–91, 88–89, 91, 118 Singapore, 193, 194–95, 215–16

06-12-09 10:23:26

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PAGE 259

260



political support, 230–32 political survival, 221–23 Politician’s Dilemma (Geddes), 20–23, 221–23 Po´lo, 11, 18–19, 76, 103, 121–22, 188, 229 budget, 97 collaboration with Britto administration, 88–89 collaboration with other agencies, 97 criteria for decision making, 96–97 foreign direct investment, nontraditional, 222 foreign direct investment, nontraditional, level attracted, 116 investment promotion strategy, 107, 111; effectiveness of, 222 personnel, internationalization of, 118 personnel hiring, 96 technocratic independence, 95–97, 222 transnational learning capacity, 97–100, 111, 118, 222 transnational strategic network, 98–100, 118 Po´lo-RS, Agencia de Desenvolvimento. See Po´lo Pontifı´cia Universidade Cato´lica (puc), 108, 117 Porter, Michael, 51–53 Porto Alegre, 112–13 Portugal eu subsidies, 154–56 European Structural and Cohesion Funds, funding from, 154–55 n. 3 Power, Timothy, 23 n. 9, 90 pri (Partido Revolucinario Institucional), 73–74 Price Waterhouse-Coopers, 50 procomer (Promotora de Comercio Exterior), 83 Proctor and Gamble, 204 Proenca, Nelson, 97, 109–12, 116 n. 16 Programa Estadual de Desestatizacao (ped), 68 Promotora de Comercio Exterior (procomer), 83 psdb (Partido da Social Democracia Brasileira), 116 n. 16 pt. See Partido dos Trabalhadores ptB (Partido Trabalhista Brasileiro), 93 puc (Pontifı´cia Universidade Cato´lica), 108, 117 Puerta, Diego, 96, 98 pusc. See Partido Unidad Social Cristiana

................. 17253$

INDX

INDEX

Que´rcia, Orestes, 66 Republic of Ireland, 161 Rio de Janeiro, 101 Rio Grande do Sul, 16–20, 24, 101, 103, 105 high technology firms, targeting, 108–10 Impostos sobre a Circulacao de Mercadorias e Servicos (ICMs), 108 incentives, 108 infrastructure, 107 partisan political conflict, 94 political security, 85–91, 118, 222 Po´lo, 87–119 sustainable support for Dell, lack of, 113 transnational learning capacity, 89 Robertson, Darryl, 87 n. 1, 110 Robertson Stephens, 110 Rodriguez, Dennis, 110 ´ ngel, 43, 60 Rodrı´guez, Miguel A Rolls-Royce Singapore, 204 Rossi, Jose´, 58 Royal Dutch Shell, 204 salaries, Costa Rica, 81 San Jose Business Incubator, 143, 144 San Jose Chamber of Commerce, 143 Sandoval, Felipe, 127 Sao Jose´ dos Campos, 64, 103 Sao Paulo, 64–65, 68–69, 101, 103, 104, 111 Schein, Edgar, 205 Schering-Plough, 204 Schott Asia, 204 Science Foundation Ireland (sfi), 168, 175, 184–86 sctde. See Secretaria de Ciencia, Tecnologia, a Desenvolvimento Economico Seagate Technology, 208 Seanad Eireann, 161 n. 6 Secretaria de Ciencia, Tecnologia, a Desenvolvimento Economico (sctde), 53, 65–69, 103 Secretaria de Promocio´n Econo´mica del Estado de Jalisco (seproe), 72–77 budget, 76 personnel, internationalization of, 76 transnational learning capacity, 76 transnational strategic network, 76 Secretaria do Desenvolvimento e dos Assuntos Internacionais (sedai), 90–91 n. 4, 97, 110, 115–16, 116 n. 16 sedai. See Secretaria do Desenvolvimento e dos Assuntos Internacionais seproe. See Secretaria de Promocio´n Econo´mica del Estado de Jalisco

06-12-09 10:23:26

PS

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INDEX

sfi (Science Foundation Ireland), 168, 175, 184–86 shared services, 140 Shiels, Tony, 50 sindicatos blancos, 72–73 Singapore corruption, 199 fixed asset investment, 212, 213 foreign direct investment inflows, 212 foreign direct investment, nontraditional, 193, 209; attracted, 211–15 history, 194–95 political security, 193, 194–95, 215–16 production workers, hourly compensation costs for, 209 services investment, 213 Transparency International, ranking, 199 small- and medium enterprises, promotion, 200 Softek, 117 Soldiers of Destiny. See Fianna Fail Standards, Productivity, and Innovation Board (spring), 200–201 taxation war (guerra fiscal), 102 technical education, Costa Rica, improvements, 81 technocratic independence, 4–6, 223, 227–28 Coalicio´n Costarricense de Iniciativas para el Desarrollo (cinde), 44–46, 222 Corporacio´n de Fomento de la Produccio´n (corfo), 121–22, 125–32, 222 Economic Development Board (Singapore), 196–201 Instituto de Desenvolvimento Industrial de Minas Gerais (indi), 104 Po´lo, 95–97, 222 Technology Foresight Exercise, 152, 175, 182–83, 230 Technology Foresight Fund, 184 Technology Foresight Report, 156 telecommunications infrastructure, Latin America, comparative ranking, 135 Telford, Ted, 26, 30, 60–62 Texas Instruments, 208 Thompson, Kip, 87 n. 1 Thunderbird School of Global Management, 138, 143 tncs (transnational corporations). See transnational corporations Todo Chile (Investment Attraction Program), 150 Toshiba Corporation, 204

................. 17253$

INDX

261

transnational corporations, 4, 102, 113 transnational learning capacity, 4–5, 6–9, 223–25, 228–30 Coalicio´n Costarricense de Iniciativas para el Desarrollo (cinde), 46–51, 69, 78, 222 Corporacio´n de Fomento de la Produccio´n (corfo), 71–72, 122, 132, 136–46, 222 Economic Development Board (Singapore), 201–6 Instituto de Desenvolvimento Industrial de Minas Gerais (indi), 104–6 Po´lo, 97–100, 111, 118 Rio Grande do Sul, 89 Secretaria de Promocio´n Econo´mica del Estado de Jalisco (seproe), 76 transnational strategic network Coalicio´n Costarricense de Iniciativas para el Desarrollo (cinde), 50–51, 229 Corporacio´n de Fomento de la Produccio´n (corfo), 122, 139–40, 149 Economic Development Board (Singapore), 201–4, 217 ida Ireland, 137, 173–74, 179–80, 188 Instituto de Desenvolvimento Industrial de Minas Gerais (indi), 118 Po´lo, 98–100, 118 Secretaria de Promocio´n Econo´mica del Estado de Jalisco (seproe), 76 Transparency International Costa Rica, 46 Singapore, 199 Tribunal Supremo de Elecciones (tse), 38, 41 tse. See Tribunal Supremo de Elecciones two party system, decline of Costa Rica’s, 42–44 ufrgs. See Universidade Federal de Rio Grande do Sul unicamp (Universidade Estadual de Campinas), 65 unido (United Nations Industrial Development Organization), 130 Unilever-Chile, 147 Unio´n por Chile. See Alianza por Chile United Nations Economic Commission for Latin America (ecla), now known as United Nations Economic Commission for Latin America and the Caribbean (eclaC), 130 United Nations Industrial Development Organization (unido), 130 United States Foreign Commercial Service, 69

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262

Universidade Estadual de Campinas (unicamp), 65 Universidade Federal de Rio Grande do Sul (ufrgs), 108 University of Auckland, 204 University of New South Wales, 204 usaid (United States Agency for International Development), 45, 47, 50

Waverly Associates, 204 WBF, 141–42 Weyland, Kurt, xi, 24–25, 123, 227 n. 1 Workers’ Party. See Partido dos Trabalhadores Workforce Development Agency (wda), 200 World Bank, 50, 128 Wyeth, 215 Wyeth Medica, 186

Vianna de Moraes, Jose´ (‘‘Zeca’’), 90–91 n. 4, 115

Yahoo, 187 Yeo, Philip, 190–91, 200–201

Wachholtz, Roberto, 125 Washington Software Association and Technology Alliance, 143

................. 17253$

INDEX

INDX

Zarsky, Lyuba, The Enclave Economy, 12–15 Zona Franca de Manaus, 117

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