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

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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. 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. 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.

Although not directly related to how much an IPA has learned, sustainability, the third measure of effectiveness, is important in its own right. In contrast, an investment promotion strategy that begins with one leader and is dropped completely by the next is unlikely to be successful. 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.

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. 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.

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. 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 , 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. Lacking substantive ties to the local economy, many foreign firms moved their manufacturing operations to China.

Foreign direct Investment

For Mexico, then, promotion of FDI in the segments of the electronics industry related to information technology IT were not enough. 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. 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.

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 , 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 , Evans , such as protectionist import-substitution policies, domestic content requirements, and export subsidies.

Nevertheless, governments can still take numerous steps to ensure that their countries or states absorb the benefits of nontraditional FDI. 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.

Columbia FDI Perspectives

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 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 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 ; Moran , 39; E.

Sanchez 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 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.

Harnessing Globalization

That is why my argument focuses on what makes some governments more effective than others at attracting nontraditional FDI. 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. 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. The Chilean government, in contrast, did not collaborate with a private agency. 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.

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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. 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.

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 s as the level of partisan conflict in the state increased.

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In Chile, in contrast, the political environment offered low levels of political security to its leaders from the s to the s but a much more politically secure environment after the democratic transition in the s. 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.

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From the s to the s, 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. 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.

Chile provides yet another case. The agency initially lacked transnational learning capacity in investment promotion because this was a new area of activity for it. 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. 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.

Although both were frequently benchmarked by other IPAs for their successful practices, they operated in very different political contexts. 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 political security and technocratic independence variables have their basis in the literature on political survival and cooperation. The work of Barbara Geddes and Alfred Montero a, b, 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.

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.

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 , — 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.


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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. 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. 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 ; Weyland a, b. 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. 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.

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.