to identify clearly the institution that will lead these exercises and provide monitoring and periodic reports.<sup>58</sup> In addition, the World Bank-sponsored Science for the Knowledge Economy Project (IBRD 71720) had two development objectives, which should place Chile on the path to a knowledge-based economy. First, the project sought to establish a strong and coherent policy framework, promoting high-quality and relevant science and technology activities and by supporting international linkages and linkages between the public and private sector. Second, the project sought to improve the stock of human capital in the Chilean science and technology sector. The project pursued these objectives through three components: (i) improving Chile's science, technology and innovation system; (ii) strengthening Chile’s science base; and (iii) enhancing public-private linkages. The project closed in March 2007. The World Bank is developing a follow-up innovation project with public- and privatesector partners.

Finally, Chile would benefit from the examples of some of the countries with which it competes. For example, many countries have established five and 10-year action plans to encourage technological development. These exercises include broad consultations with national and international experts and with active private-sector and university participation. They include real strategic agreements on a diagnostic and propose measures to be implemented over time. They are driven by an integrated and macro level approach to innovation, limited resources and the need to generate a minimal critical mass to obtain relevant research and development results.

Israel and Finland provide two two examples of this decision to build a national innovation system and target R&D investment. Israel began subsidizing R&D in 1968 with the establishment of the Office of the Chief Scientist in the Ministry of Trade and Labor. Industrial R&D increased by an average of 14 percent over the next 20 years. In 1985, with the adoption of the Law for the Encouragement of Industrial R&D, the sector received another boost. Matching funds of up to 50 percent for existing firms and 66 percent for start-ups “crowded in” private sector investments of 41 cents for every dollar of subsidy. Successful firms must repay 3 percent of annual sales up to the dollar-indexed value of the grant. Products must be manufactured in Israel. Know-how acquired in this way cannot be transferred to third parties.<sup>59</sup> Finland established a national target of increasing R&D investment from 1.5 percent of GDP in 1983 to 2.7 percent by 2000. Tekes, the National Technology Agency, was set up in 1983 to finance applied and industrial R&D investments, especially through clusters. To strengthen coordination with the private sector, the Science and Technology Policy Council was established in 1987. Subsequently, to address the lack of a fully functioning venture capital market, Tekes began financing up to 40 percent of R&D investments in its projects. This subsidy strengthens the strategic and operational links between businesses and research institutes.<sup>60</sup>

# **_Foreign Direct Investment and the Knowledge Economy_**

Attracting foreign direct investment (FDI) is one way to incorporate knowledge in a country’s economic activities **.** FDI is usually composed of investment capital, management experience, product design and process advances. Chile has been very successful in attracting FDI, particularly since 1990. Its public security level, institutional transparency and well-established democracy make it an

> 58 Chile: New Economy Study, Volume 1, Executive Summary and Policy Recommendations, Feb. 18, 2004.

> 59 See <u>http://www.tamas.gov.il/NR/exeres/CE7F61C9-9B1E-462C-BE43-26EF711283E2.htm.</u>

> 60 See <u>http://www.tekes.fi/eng/. World Bank, 2003. For more examples, see: In the United Kingdom, the Department of</u> Business Regulation and Reform (formerly, the Department of Trade and Industry) <u>http://www.dti.gov.uk/about/index.html;</u> in New Zealand, the Ministry of Research, Science and Technology <u>http://www.morst.govt.nz/; and in Ireland, the National</u> Policy and Advisory Board for Enterprise, Trade, Science, Technology and Innovation <u>http://www.forfas.ie/about/index.html .</u>

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