Chile Facing the challenge of the New Economy

1. Chile Facing the challenge of the New Economy Carlos Alvarez August 2004

2. Contents • Economic Performance. • Competitiveness • National System of Innovation. • Innovation Policy. • Future Challenges.

3. Snapshot of the Chilean Economy Population: 15.1 million GDP (2003): US$ 72.1 billion Income per capita (PPP): US$ 9,992 (IMF) Exchange rate (July, 2004): 1 US$ = 632 CLP Interest rate (Monetary Policy): 1.75% (July 2004) Unemployment rate (July 2004): 9.7%

4. Economic PerformanceGDP Average Annual Growth Rate (Selected Countries) Source: International Monetary Fund (www.imf.org), 1990 - 2004

5. Economic PerformanceGDP Growth in Chile (%) Source: Central Bank of Chile (www.bcentral.cl), 1994 - 2004 (e)

6. Economic PerformanceFiscal Balance (% of GDP) Source: Central Bank of Chile (www.bcentral.cl), 1994 - 2003

7. Economic PerformanceEvolution of Inflation in Chile (%) Source: Central Bank of Chile (www.bcentral.cl), 1994 - 2003

8. Economic PerrformanceIndustrial Structure Source: Central Bank of Chile (www.bcentral.cl), 2003

9. Economic PerrformanceExports of Goods (Total: US$ 21.0 billion FOB) Source: Central Bank of Chile (www.bcentral.cl), 2003

10. Economoic Performance Increasingly Diversified Exports… Selling 3,854 products (200 in 1975), to 165 countries (50 in 1975), by 6,024 exporters (200 in 1975) … and Markets (2003 figures) Asia 31.5 % Europe 25.5 % United States & Canada 19.7 % Latin America 18.8 % Africa 0.5 % Others 4.0 %

11. CompetitivenessGlobal Competitiveness Ranking (Selected Economies) Source: World Economic Forum (www.weforum.org), 2003 - 2004

12. CompetitivenessGlobal Competitiveness index rankings Source: World Economic Forum (www.weforum.org), 2003 - 2004

13. CompetitivenessEconomic Regime Variables Source: Knowledge for Development WBI

14. CompetitivenessGovernance Variables Source: Knowledge for Development WBI

15. CompetitivenessICT Variables Source: Knowledge for Development WBI

16. CompetitivenessEducation Variables Source: Knowledge for Development WBI

17. CompetitivenessInnovation Variables Source: Knowledge for Development WBI

18. R&D Indicators Country R&D Expenditure (as % of GDP) Basic Research (as % of R&D) Chile 0.56 55,3 Mexico 0.43 Poland 0.54 Finland 3.37 Spain 0,75 Natioanal System of Innovation Source: OECD (www.oecd.org), CONICYT (www.conycit.cl) 23 37 33

19. National System of Innovation Sources: OECD (www.oecd.org), CONICYT (www.conycit.cl)

20. National System of Innovation SourceÑ World Bank (2003)

21. Innovation Policy1990´s: Market FailureApproach In 1991 it is launched a first explicit effort to promote innovation in Chile, through the creation of two funds: FONDEF (that provides grants for S&T projects, performed by universities or technological institutes) and FONTEC (that provides grants for R&D projects performed by companies). They were followed by the establishment of other funds (FDI, focused in pre-competitive research, FIA for the agricultural sector, etc.). These funds share the same principles: they are “demand driven” (the pertinence of a project is based on the willingness of private firms to perform and to co-finance it); they are horizontal (no sector or technology is privileged; they provide grants after a strict process of evaluation.

22. Innovation Policy1990´s: Market FailureApproach These initiatives are complemented, on the one hand, by funds that promote basic research (FONDECYT, FONDAP and Millenium Program) and on the other, programs that facilitates technology difussion (in general “soft technologies” especially focused on the small and medium sized enterprises).

23. Innovation Policy1990´s: Market FailureApproach

24. Innovation Policy2000´s : Towards a more comprehensive approach. Several evaluations have demonstrated de effectiveness and impact of the funds. However in the late 90´s it became clear that the provision of financing was not enough to unchain a wider innovative effort in Chile. Then, a more comprehensive approach was developed, which includes: • A focused effort to promote crucial technologies: IT, Biotechnologies, Cleaner Production and Quality. This effort includes not only provision of grants, but the establishment of integrated policies in each area. • Promotion of entrepreneurship. • Foreign Investment Promotion. • Promotion of patenting. • Promoting the creation of technology consortia.

25. Innovation Policy2000´s : Towards a more comprehensive approach. Digital Agenda A set of 34 initiatives whose objective is “to contribute toChile´s development by using information and communications technologies to increase competitiveness and improve equity, individual liberties, quality of life, and public sector efficiency and transparency”. Areas of activity: • Widely available access • Education and Training. • Online Government • Digital development for business • Takeoff of the ICT Industry • Legal Framework

26. Innovation Policy2000´s : Towards a more comprehensive approach. Biotechnology Policy. Broad effort that includes passing a new Law for Bio-safety, strengthen intellectual property rights, personnel training, additional efforts in R&D. Promotion of Entrepreneurship. Establishment of business incubators, feasibility studies, seed capital funds, venture capital funds, etc. Technology Consortia: Establishment of assotiative proyects, with participation of groups of companies and universities or technological institutes. High Technology Investment Attraction Program: with a main focus in the software and international services areas.

27. Innovation Policy2000´s Structure of the Innovation Government Support System President Minister of Education Minister of Economy Other Ministries CONICYT Fondecyt, Fondef CORFO: Fontec, FDI Universities Technology Institutes

28. Innovation PolicyChallenges In order to recover high rates of growth, Chile has to increase significantly its innovative effort. A medium-term challenge is to become an economy endowed by a critical mass of companies that have innovation as a crucial component of their strategies. This means to promote simultaneously: • Innovation around natural resource-based clusters to encourage the emergence of world class providers of services and equipment. • To promote domestic entrepreneurship. • To strengthen the current investment attraction efforts. But it also demand to overcome the weaknesses of some components of our National System of Innovation and Policy Framework

29. Innovation PolicyChallenges Build a broad strategic orientation for the innovation policy through an integrative dialog with key actors (business community, researchers, public sector authorities, etc.). Update the institutional design to overcome the excessive fragmentation of institutions and policy initiatives. Particularly important is the integration of the educational policy (especially in its tertiary education component) in to the innovation policy effort. Build coherent responses in neglected policy areas such as technological diffusion and sustainability of technologycal infrestructure (technology institutes, metrology labs, etc.). Increase the total budget allocation for innovation policy. Strengthen the capacities of key institutions, especially in the area of human resources (quantity and quality).