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

ROY C. NELSON

HARNESSING

GLOBALIZATION

The Promotion of Nontraditional Foreign Direct Investment

in Latin America

The Pennsylvania State University Press

University Park, Pennsylvania

LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA

Nelson, Roy C., 1961

Harnessing globalization : the promotion of nontraditional foreign direct investment in Latin America / Roy C. Nelson.

p. cm.

Includes bibliographical references and index.

Summary: An analysis of recent government efforts to promote nontraditional foreign direct investment (FDI) in Costa Rica; the state of Rio Grande do Sul, Brazil; and Chile. For comparative purposes, the book also examines the highly successful cases of Ireland and Singapore—Provided by publisher.

ISBN 978-0-271-03513-0 (cloth : alk. paper)

ISBN 978-0-271-03514-7 (pbk. : alk. paper)

1. Investments, Foreign—Latin America.

2. Investments, Foreign—Latin America—Case studies.

I. Title.

HG5160.5.A3N45 2009

332.67'3098—dc22

2008043839

Copyright © 2009 The Pennsylvania State University

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Printed in the United States of America

Published by The Pennsylvania State University Press,

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The Pennsylvania State University Press is a member of the Association of American University Presses.

It is the policy of The Pennsylvania State University Press to use acid-free paper. Publications on uncoated stock satisfy the minimum requirements of American National Standard for Information Sciences—Permanence of Paper for Printed Library Material, ANSI Z39.48-1992.

CONTENTS

List of Figures and Tables

Preface

Acknowledgments

List of Acronyms and Abbreviations

Introduction

1   Costa Rica and CINDE

2   Rio Grande do Sul and Pólo

3   Chile and CORFO's High Technology Investment Promotion Program

4   The IDA, IDA Ireland, and Forfás: Lessons for Latin America, Part 1

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

Conclusion

References

Index

FIGURES AND TABLES

PREFACE

As a professor of international studies at a school of international business, I became interested in how transnational corporations (TNCS) select locations for their manufacturing plants and how governments attempt to influence their decisions. I was intrigued by this topic because it had broad development implications. I wanted to learn to what extent governments, faced with powerful, mobile corporations seeking to maximize profits, really can harness globalization to advance their own economic development and the circumstances that make this more or less possible.

In conducting field research on this topic in Latin America, I was surprised by how often corporate executives referred to their experiences with investment promotion agencies (IPAS). Some were very good, others very bad—but all had made an impression on executives making decisions about where to locate manufacturing plants or other major investments. As I continued with my research, I became increasingly impressed by the extent to which corporate site selection decisions are influenced by this contact with IPAS.

In my interviews with corporate executives, government officials, IPA personnel and others in Latin America, I began to learn what made some IPAS more effective than others. And I also heard frequent references to IPAS elsewhere, which were considered to be benchmarks for IPAS all over the world: the Industrial Development Authority (now IDA Ireland) in Ireland and Singapore's Economic Development Board (EDB).

Thus, my field research took me beyond Latin America, to Ireland and Singapore, to learn what made IDA Ireland and Singapore's EDB so phenomenally successful that there were widely credited with contributing, in a major way, to the astonishing economic development these two countries have experienced in the last several decades. I wanted to know what lessons, if any, these agencies could offer to their counterparts in Latin America attempting to do the same thing—albeit under very different circumstances.

The result is this book. My hope is that it can contribute not only to understanding why some IPAS are more effective than others but, more generally, to helping developing countries use globalization to promote their own development.

ACKNOWLEDGMENTS

I am very grateful to many people, in numerous countries on multiple continents, who assisted me during the years when I gathered information for this book. In the course of writing this book, I spoke with hundreds of people who were very generous with their time. Although I can highlight only a few names here, I thank all those who took the time to speak with me about their work and who assisted me in other ways.

I thank especially Kurt Weyland, who took time to discuss various aspects of my argument and who provided very helpful comments on earlier versions of the Introduction and Chapter 3. I have been privileged to have had Kurt and his wife, Wendy Hunter, as friends since our time together in Brazil in 1989–90, when we were all doing field research for our Ph.D. dissertations. They have been exceptionally kind and helpful, both personally and professionally, ever since, for which I will always be grateful.

Tim Power, another friend from those early days of field research in Brazil, provided very useful comments on some aspects of my argument, in particular on the politics of Rio Grande do Sul, which were helpful in developing the arguments in Chapter 2. I also appreciated Peter Kingstone's comments on an early version of Chapter 3 (when it was just a conference paper), as well as his insights into some of the key policymakers in the state of São Paulo.

Damien Shiels of the World Bank was very generous in sharing his insights and contacts as I prepared to do research in Costa Rica for what became Chapter 1. I want to thank him, too, for inviting me to give a presentation based on my research at a World Bank seminar for investment promotion officials in Rio de Janeiro. I also greatly appreciate his facilitating my meeting with his father, Tony Shiels, in Ireland. Based on his extensive experience with the IDA and as a consultant to cinde, Tony provided special insight into the CINDE-IDA connection.

In Costa Rica, Enrique Egloff, former executive director of CINDE, was of great assistance, as were other former and current members of CINDE'S staff. Related to my research in Costa Rica and on Chapter 1 generally, my former student Ted Telford provided special insight and assistance with corporate and government contacts based on his experience working in site selection at Intel. I wish to thank him for speaking to me so many times about various aspects of the Costa Rica case. A highlight of my research on this case was the opportunity to interview—one-on-one, for well over an hour—José¸ María Figueres, the former president of Costa Rica who played such a key role in bringing Intel to that country, when he visited Thunderbird at the invitation of his friend (and president of Thunderbird), Dr. Ángel Cabrera. I wish to thank Dr. Cabrera for facilitating that visit and for being so supportive of my research.

In Guadalajara, Mexico, Sergio García de Alba, former executive director of SEPROE (and later secretary of the economy in the Fox administration), went above and beyond the call of duty in helping me gather information about SEPROE'S early years under Governor Alberto Cárdenas of Jalisco. I also wish to thank Federico Lepe and Elías Rangel of SEPROE, as well as Ernesto Sanchez of Jabil Circuits, for speaking with me numerous times and at length, as well as Dr. Arturo Santa-Cruz at the Universidad de Guadalajara, who helped with some crucial information about elections in Jalisco.

In São Paulo, Brazil, I want to thank Emerson Kapaz, former director of the Secretaria de Ciência, Tecnologia e Desenvolvimento Econômico (SCTDE), and especially Jorge Funaro, former chief of staff of that agency, for numerous interviews over many years.

In Rio Grande do Sul, Brazil, I want to thank my Brazilian friends Francisco Peixe, his wife, Hilda, and son Gabriel, who invited me to stay as a guest at their home for extended periods when I was doing the research for Chapter 2. I must also acknowledge the exceptional assistance of Miguelangelo Azário, formerly with both Pólo and Dell, as well as numerous other Pólo and Dell employees. I am also grateful to Thiago de Aragão for helping to facilitate my contacts with two former governors of Rio Grande do Sul, Antônio Britto and Olivio Dutra.

In Chile, Mario Castillo not only provided detailed information about CORFO'S programs but also helped me arrange interviews with numerous key members of CORFO'S staff. My former student David Hall was very helpful in gathering information and in assisting me with logistics during my visits to CORFO. I also wish to thank my former students Nick Walker and Tripp Sickler for helping me develop contacts in the business community.

In Ireland, David Lovegrove was of tremendous assistance in facilitating my interviews with numerous high level officials at IDA Ireland; he was also an excellent source of information about Ireland's overall development strategy. In addition to his special insights on the CINDE-IDA connection, Tony Shiels was an invaluable source of information on the IDA, IDA Ireland, Enterprise Ireland, and Forfás.

In Singapore, I appreciated the assistance of Shirley Chen of the EDB, as well as many others both at the EDB and elsewhere who spoke with me and helped me in various ways, especially Beh Swan Gin, Anthony Ang, and Chris Fussner.

Grants from Thunderbird's Faculty Research Committee made my field research in all of these countries, over several years' time, possible. Thunderbird itself, with the strong international emphasis of its curriculum, the global mindset of its students and faculty, and its unsurpassed network of contacts throughout the world, provides a stimulating and inspirational environment in which to work.

I wish to thank the three anonymous reviewers for Penn State University Press who were clearly experts on the subject and who took the time to provide rigorous and helpful reviews. And I am especially grateful to Sandy Thatcher for his high level of professionalism, his kindness, and his expert oversight of the entire process involved with bringing this book to fruition.

I must acknowledge some publishers who kindly allowed me to draw on some of my work that has been published previously in academic journals. Portions of Chapters 1, 2, and 3 draw in part on a heavily revised version of my article Competing for Foreign Direct Investment: Efforts to Promote Nontraditional FDI in Costa Rica, Brazil, and Chile, published in Studies in Comparative International Development (Springer Publications), vol. 40, no. 3 (December 2005): 3–28.

Portions of Chapter 2 draw in part on heavily revised versions of my articles Harnessing Globalization: Rio Grande do Sul's Successful Effort to Attract Dell Computer Corporation, published in the Journal of Developing Societies (Sage Publications India), vol. 19, nos. 2–3 (June 2003): 268–307; and State Competition for Foreign Direct Investment in Brazil: The Case of Dell Computer, published in the Brown Journal of World Affairs 8, no. 2 (Winter 2002): 139–52.

Portions of Chapter 3 draw in part on a heavily revised version of my article Transnational Strategic Networks and Policymaking in Chile: CORFO'S High Technology Investment Promotion Program, published in Latin American Politics and Society (Wiley-Blackwell), 49, no. 2 (Summer 2007): 149–81.

In closing these acknowledgments, I want to give a huge thanks to my mother, who stood by me from the beginning, offering the most incredible encouragement and support imaginable every step of the way. Finally, I thank Julie Hines, the love of my life, who encouraged me throughout the long and difficult process of bringing the book to completion. Julie not only understood and appreciated what I was doing, and helped me throughout the process in so many important ways, but also made all the work that went into it fun and worthwhile.

ACRONYMS AND ABBREVIATIONS

Introduction

Many Latin American countries are taking advantage of globalization to advance their development efforts. One way they are doing this is by taking on a new and significant role, that of attracting and harnessing nontraditional foreign direct investment (FDI).¹

Nontraditional FDI consists of FDI not only in high technology industries, such as computer manufacturing, software development, and biotechnology, but also in service-related industries that require relatively high levels of education from their workers, such as financial services, technical support centers, and call centers. The objectives of governments seeking to attract such FDI are to diversify their economies, to provide higher-paying jobs for their people, and to develop linkages to transnational firms that can enable their countries or states to move up the value chain in the global production process.

Numerous scholars argue that attracting nontraditional FDI alone is not enough to promote development. Proactive government policies to ensure that a country or state reaps the maximum benefit from this FDI are also important (Gallagher and Chudnovsky 2009; Gallagher and Zarsky 2007; Paus 2005). But to obtain any benefit whatsoever from nontraditional FDI, a country or state must first succeed in attracting it. Therefore, understanding why some governments are more effective than others at attracting nontraditional FDI is extremely important. That is why it is the focus of this book. In each case study presented here, however, in addition to addressing each government's success in attracting FDI, I will also discuss the impact of this FDI on development, which is an equally important consideration.

Some governments clearly are better at attracting and harnessing nontraditional FDI than others. The cases I discuss in this book exemplify such differences in outcome. For example, the Costa Rican government succeeded in winning Intel's investment in a US$ 300 million manufacturing plant. This plant, employing thousands of workers, served as an anchor investment that caught the attention of other prospective investors. Successive Costa Rican administrations from different political parties continued to pursue the successful strategy that contributed to winning the Intel plant. This one investment helped the Costa Rican government bring in nontraditional FDI in other industries, for example, software development, medical device manufacturing, and technical support centers. It helped to diversify the economy, stimulated growth in other industries, and provided a wider range of opportunities for Costa Rica's population beyond the more traditional sectors, such as coffee and bananas.²

In contrast to the success in Costa Rica, the FDI initiative in the state of Rio Grande do Sul in Brazil led to a different result. The state government succeeded in attracting a major investment in a manufacturing plant from Dell Computer Corporation. But when a new governor took office, he followed a different approach, and the new administration failed to attract additional nontraditional FDI.

Chile experienced a still different outcome. Seeking to diversify the economy beyond its traditional strengths in primary products and wine, the Chilean government was initially unsuccessful in developing an effective investment promotion strategy. Over time, however, the government's effort became more successful. By 2008, Chile had attracted FDI in software development, shared financial services, and technical support centers, and the prospects for a continuation of the government's strategy looked good.

Although these governments all had some degree of success, the level of success varied considerably. Of course, many factors explain why companies decide to invest in specific countries or states: the quality of the infrastructure, the level of training of workers, tax incentives, and so on. In this book I cannot account for all the variables that influence and help explain levels of nontraditional FDI in a particular country or state. 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.

Figure 1. The model

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