attractive choice for international investors. Chile’s disadvantages include a small domestic market and the distance from key markets in North America and Europe.

Many countries have tried to compensate for specific disadvantages with generous incentives, but too many subsidies have the risk of attracting investments that are not based on a country’s advantages. These investments eventually become uncompetitive in international markets. The investors stay only as long as the subsidies last and do not develop important linkages with the local economy. Incentives should be reserved for those sectors that offer a long-term prospect for competitive production, but due to industry-specific requirements would not attract sufficient FDI naturally. The most effective incentives for investments with a technology component support include training and capacity building, support for research and development, high quality infrastructure and, in general, high impact incentives that support the enterprise’s business.<sup>61</sup> Strong international competition to attract FDI has made it an area of growing specialization. Efforts to attract FDI can benefit from general dissemination campaigns on the country’s image, but they also require face-to-face work. This is particularly true for countries that are still not on the “mental map” of the decision makers. Ireland, Sweden, Costa Rica and various Asian countries have been especially successful because they have special agencies dedicated to attracting foreign investment and have established offices in the markets in which they concentrate their promotion efforts. In addition, promotion efforts should be sustained in time, providing updated information to established contacts.

Despite such promotional efforts, the low availability of engineers and qualified technicians is a limiting factor. Foreign companies with investments in high tech sectors have been able to hire sufficient skilled personnel for the early phase of development and production. However, due to inadequate numbers of skilled technicians, firms are frequently unable to expand their activities. To overcome this obstacle, some companies have reached agreements with local universities to train professional staff. Since CORFO already has a broad menu of technology support programs, these could also be part of an attractive package of incentives to attract FDI in high tech sectors. Another option would be for the government to ease immigration restrictions to enable firms to attract skilled technicians from other countries.<sup>62</sup>

# **_Technology Adoption, Adaptation and Innovation_**

There are three options to developing a technology-rich business environment: adoption, adaptation or innovation. The most profitable strategy for most Chilean companies is to adopt technological innovations from the large international innovation centers. This permits business applications without the enormous research and development costs incurred by inventors. This strategy is also the most profitable because it saves time and resources.<sup>63</sup> As a result of research and development investments in wine production, mining, and forest products, Chile has succeeded in exploiting its comparative advantages. These sectors have sustained the export growth of the last two decades and are operating very close to the international frontier of knowledge. These sectors are also candidates for cluster development, since they link research institutions and firms to boost Chile’s innovation capacity.<sup>64</sup> At the same time, these strategic production chains

> 61 See: UNCTAD (2002) p.205 for an analysis of the incentives offered to large transnationals. Bloningen and Van Kolpin (2002) find evidence that in the face of strong stimuli to reduce costs, enterprises can modify technology processes and reduce their innovation activities. This phenomenon is aggravated if, in addition, there is no critical mass of enterprises that favors the benefits of clustering. Egloff (2001); Marshall  (1996).

> 62 For example, CORFO's Programa de Desarrollo de Proveedores seeks to strengthen suppliers of firms that show significant sales, but not to support the creation of suppliers for start-up firms. CORFO should consider elaborating performance agreements to develop R&D activities with foreign enterprises established in the country, instead of forcing them to participate in tenders whose methods of operation are cumbersome for start-ups.

> 63 See the discussion in: de Ferranti, et. al, _Closing the Gap in Education and Technology,_ World Bank (2003). 64 Stern et al. (2000), p.3

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