Chile: The New Service Platform for Business in Latin America?
Following in the footsteps of India and Ireland, Chile is making a major commitment to attract multinational investment, taking advantage of the growing trend to relocate corporate service centers. More than 40 major companies have set up their headquarters for shared services in the Chilean capital of Santiago. Their software development offices and call centers manage operations throughout Latin America and even outside the region.
According to the 2004 index compiled by A. T. Kearney, the American consulting firm, Chile is one of the top ten destinations for multinationals that are trying to establish centers for their Latin American operations. Overall, Chile occupied ninth spot in the rankings of the 25 best global destinations. At the top of the index are India, China and Malaysia. In Latin America, only Brazil seems to be ahead of Chile because of its broader and lower-cost workforce. Nevertheless, the study emphasizes that Chile “offers the best business environment and infrastructure in the region, with a solid digital network and excellent satellite services.”
In the E-readiness rankings conducted by the Economist Intelligence Unit, Chile earned the highest grades of any Latin American country for Internet connectivity and e-commerce potential. Nevertheless, Santiago does not rank above Miami in those indicators, notes Jaime Campos, assistant professor of economics at the University of Santiago. “Santiago compensates for that, however, by offering a significant cost advantage, especially when it comes to commercial real estate prices and salaries. Moreover, Santiago has a good hotel infrastructure that is developing quickly. When it comes to human capital, Santiago offers first-rate computer engineers and top-flight executive talent.”
It no longer seems strange to hear Delta or Air France employees with a Chilean accent making flight reservations for residents of Panama City and Asunción. Meanwhile, employees of Citigroup or Santander Central Hispano [bank] in Lima and Caracas use computer systems developed for their banks at software centers located in Chile.
Much the same thing is happening at giant Kodak, which has moved its regional headquarters from Miami to Santiago. Kodak plans to expand its health-sector business through a pilot plan involving online transmission and analysis of diagnostic information [from Chile] about patients located in the U.S. Meanwhile, Xerox will manage its operations in Argentina, Uruguay, Paraguay and Bolivia from its subsidiary in Chile. Xerox hopes to use its Chilean location to provide support systems for business and IT systems, as well as logistics and marketing support. Other companies relying on their Chilean locations nowadays include HP and Telecom Italia (for call centers); Unilever, BHP Billiton, Sodexho, Nestlé and Beiersdorft (for shared services); IBM, Unilever Bestfood, General Electric, Noranda, Packard Bell, Eurocopter, Outokumpu, TNT, Ambev, Barrica, Cellstar, RR Donnelley & Sons, and Equifax (for software development.) In late June, other companies announced similar news, including BBVA, the Spanish bank; Telmex, the Mexican telecom company; and Shell, the Anglo-Dutch energy giant.
Stability and Trade Liberalization
During the past decade, the government of Chile has developed several mechanisms for promoting the country to foreign investors. The country has a two-pronged strategy, managed jointly by CORFO, the governmental institution that promotes manufacturing and investment, and Cinver, the governmental committee on foreign investment. The two programs are called Platform Country, run by CORFO, and the invest@chile initiative, managed by Cinver.
Platform Country develops ways for foreign companies to relocate in Chile and use the country to do business throughout Latin America. To assist in that effort, Chile’s congress has approved tax code changes that exempt foreign investors from paying additional Chilean taxes when they use a Chilean location to do business elsewhere in the region. The next challenge is to expand the network of international agreements on double taxation. This year Chile’s tax agency expects to conclude new agreements with Brazil, Peru, Norway, Spain, South Korea and Ecuador. It has already signed such agreements with the United Kingdom, Denmark, Croatia, and New Zealand.
The second plan, invest@chile, is targeted at service-sector companies and high-tech manufacturers. Its goal is to provide them with incentives for relocating their offices to Chile. Carlos Alvarez, corporate manager of CORFO, explains that invest@chile provides appropriate support services as soon as a company arrives in the country. “This is something essential, since many companies don’t know about Chile’s special characteristics and advantages. They imagine that there is some risk, but that goes away as soon as they contact the government and learn about the country’s strengths first-hand. We help them schedule meetings. We explain the regulatory environment, and the benefits they will be getting.”
According to Alvarez, the financial grants and assistance programs that invest@chile provides for market feasibility studies may be even more important. “They enable companies to evaluate Chile, and compare it with other locations for establishing their centers. Later, if they decide to set up operations here, we provide aid for personnel training because companies have their specific needs; they have to train people to adjust to their requirements. Finally, we help people when it comes to the fixed assets and long-term leases they need when setting up operations.”
Michael Mortimore, head of the investment and business strategy division at the Economic Commission for Latin America and the Caribbean (ECLAC), emphasizes the consistency of this approach. “First of all, Chile has access to lots of countries through trade agreements that make it easier to conform to a single financial or business platform. Second, Chile has traditionally had a policy of attracting foreign investment in the so-called first and second phases of investment promotion, involving horizontal policies such as multilateral and bilateral agreements. Third, these initiatives reflect Chile’s more active approach and take a distinctive institutional form in CORFO. It says something when a country has an investment promotion agency that proposes policies that are highly effective and focused.”
In Latin America, very few countries have decided to advance to the third stage of investment promotion strategy, which involves more active institutions and policies. That has happened in Costa Rica and in Mexico, to some extent. “Chile has always been important because its constitution prohibits discrimination between Chilean firms and foreign firms. CORFO benefits from policy that predates constitutional measures. CORFO is taking advantage of Chile’s strengths to develop a multifaceted policy for attracting foreign direct investment. At the same, CORFO benefits from Chile’s economic performance, which has been among the best in the region.”
In its brochures aimed at foreigners, Cinver explains that Chile’s broad network of free-trade treaties provides companies that locate in Chile with privileged access and, in many cases, zero tariffs in worldwide markets with more than 1.2 billion consumers. Many foreign investors take advantage of that opportunity. “Chile wants to be not only a Latin American bridge for companies in Europe and North America but also a bridge for companies in Asia. In other words, they are thinking globally,” notes Mortimore.
What the Multinationals Leave Behind
When it comes to analyzing the benefits of direct investment, Campos explains, “The main thing is, the country that takes in the investment acquires access to superior technology flowing from the head office into its subsidiaries.” Campos says these advantages are especially important in the case of Chile. “We need to increase our investment in technology if we are going to grow at high rates again. The motor for this could be the greater role of multinational companies. They are the main generators of technological innovation on a global level.”
Beyond these advantages, Mortimore adds “the benefits of agglomeration. There is a higher level of demand for specialized people. You need personnel who are more highly skilled. It’s not only about looking for people who cost you less, but people who have the skills you need for these activities. For example, call centers are not very sophisticated but they require language skills. If you don’t have everything you need, the government can try to train people and satisfy your needs.”
According to Cinver, using Chile as an international platform has created 2,000 new jobs – as many jobs as the country’s exports have created.
At first glance, it seems that a strategy based on establishing high-tech service centers would have fewer benefits than a strategy based on exporting high-technology manufactured goods. For example, Costa Rica has managed to raise its high-technology exports from just 3.3% of all total exports in 1995 to 28.1% in 2001.
Nevertheless, Alvarez argues that developing services has a greater overall economic impact. “Services are extremely intensive in their added value because they are in human resources. The value comes from adding up all the salaries, profits and taxes that stay in your country. You can have a large computer assembly plant, but all the inputs come from overseas. In such a case, the computers are assembled in Chile and they are exported. But the added value is ultimately the same because a large part of your inputs [for making computers] are imported.”
Moreover, when it comes to manufacturing, Alvarez argues that there is “hyper-competition” on the global level. The major Asian companies, especially those in China, have an advantage, especially when they add greater value by supplying their own components as in South Korea and Taiwan. “We are not focused on this approach, given the [low] input levels Chile has. For us, the real opportunity involves the world of services. The important thing, as a country, is to achieve early positioning because this is going to allow us to improve the quality of our human resources and continue adapting our infrastructure more and more.”