Cover image for Harnessing Globalization: The Promotion of Nontraditional Foreign Direct Investment in Latin America By Roy C. Nelson

Harnessing Globalization

The Promotion of Nontraditional Foreign Direct Investment in Latin America

Roy C. Nelson

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$30.95 | Paperback Edition
ISBN: 978-0-271-03514-7

280 pages
6" × 9"
2009

Harnessing Globalization

The Promotion of Nontraditional Foreign Direct Investment in Latin America

Roy C. Nelson

“Roy Nelson’s research has shed light on an immensely important subject and offered a new understanding of the way that investment promotion agencies (IPAs) can make a difference in the decisions of corporations with global reach. Nelson uses the comparative method intelligently through the careful design of qualitative comparisons that span multiple cases within Latin America, traverse the national-subnational divide, and include cross-regional comparisons of archetypal cases for good measure. The research, based on extensive interviews with IPA officials and politicians, official documents, and secondary sources, is extremely well crafted, with rich detail and nuanced analysis. This enables Nelson to take the reader into the thinking of public officials in a way that only the most finely done fieldwork can make possible.”

 

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How can countries in the underdeveloped world position themselves to take best advantage of the positive economic benefits of globalization? One avenue to success is the harnessing of foreign direct investment (FDI) in the “nontraditional” forms of the high-technology and service sectors, where an educated workforce is essential and the spillover effects to other sectors are potentially very beneficial. In this book, Roy Nelson compares efforts in three Latin American countries—Brazil, Chile, and Costa Rica—to attract nontraditional FDI and analyzes the reasons for their relative success or failure. As a further comparison, he uses the successes of FDI promotion in Ireland and Singapore to help refine the analysis. His study shows that two factors, in particular, are critical. First is the government’s autonomy from special interest groups, both domestic and foreign, arising from the level of political security enjoyed by government leaders. The second factor is the government’s ability to learn about prospective investors and the inducements that are most important to them—what he calls “transnational learning capacity.” Nelson draws lessons from his analysis for how governments might develop more effective strategies for attracting nontraditional FDI.
“Roy Nelson’s research has shed light on an immensely important subject and offered a new understanding of the way that investment promotion agencies (IPAs) can make a difference in the decisions of corporations with global reach. Nelson uses the comparative method intelligently through the careful design of qualitative comparisons that span multiple cases within Latin America, traverse the national-subnational divide, and include cross-regional comparisons of archetypal cases for good measure. The research, based on extensive interviews with IPA officials and politicians, official documents, and secondary sources, is extremely well crafted, with rich detail and nuanced analysis. This enables Nelson to take the reader into the thinking of public officials in a way that only the most finely done fieldwork can make possible.”
“Latin American countries are in the throes of redefining their policies toward foreign direct investment in order to harness the forces of globalization to the structural transformation of their own economies. Professor Nelson’s book is a ‘must-read’ for policy makers and academics interested in this process and in the practical lessons that can be derived from the experiences of Costa Rica, Brazil, Chile, Ireland, and Singapore.”
“This book is a fascinating account of the comparative strategies of Brazil, Costa Rica, and Chile to attract foreign direct investment. In particular, it concentrates on those foreign investors who can bring in high technology, new services, and research and development. Modern development theories now accept the fact that quality foreign investments can both contribute to the economic growth rate of a country and become a key pillar for long-term development in less developed countries. Harnessing Globalization focuses on providing solid evidence for the Asiatic and European models. These comparative policies should be considered by countries that are still thought of as newcomers in this grand strategic game.”
“While the focus of the book is Latin America, Nelson also provides cases from Ireland and Singapore, adding breadth to the applicability of the conclusions. This volume will be of value to students and practitioners of international business, public policy, and development economics.”

Roy C. Nelson is Associate Professor of Global Studies at Thunderbird School of Global Management. He is the author of Industrialization and Political Affinity: Industrial Policy in Brazil (1995).

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).

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 forthcoming; 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 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.

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. Nevertheless, 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 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 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 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 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). The 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 transnational 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 their attractiveness to prospective investors. 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).

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 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, Corporación de Fomento de la Producción (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 Coalición Costariccense 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 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, Pólo-RS, Agência de Desenvolvimento (Pólo). Although one governor developed a well-targeted and responsive strategy as a result of the partnership with Pólo, when a new governor took office—in a more polarized environment with less political security—he ended this collaboration. Without Pólo’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 otherwise—can contribute to development at all. Certainly FDI can benefit developing countries by providing capital, jobs, multiplier effects (spending by foreign firm 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, 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 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 (forthcoming) 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. 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.

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 (IADB), 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. 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 zone as the United States (Lepe 2006; Moran 2006, 39; E. Sanchez 2007). For their part, Chile and Brazil had longstanding, well-developed national-level 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. The universe of Latin American cases analyzed here represents 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 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 large-N 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.

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: Coalición Costarricense de Iniciativas para el Desarrollo (CINDE) in Costa Rica and Pólo-RS, Agência de Desenvolvimento (Pólo) in Rio Grande do Sul. The Chilean government, in contrast, did not collaborate with a private agency. Instead, the government’s own agency, Corporación de Fomento de la Producción (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 Brasil 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 Pólo, 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 Pólo. 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 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 Pólo, 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 Pólo 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. The agency initially lacked transnational learning capacity in investment promotion because this was a new area of activity for it. 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 Pólo, 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. Although there were no completely 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.

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 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, 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 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. 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 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 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.

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 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 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 Pólo. 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 Pólo 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 Pólo, 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.

Pólo’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 Pólo, 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 Pólo 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 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, 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 Pólo. 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 Pólo 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 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.

© 2009 Penn State University