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PROJECT INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
Project Name
Region
Sector
Project ID
Borrower(s)
Implementing Agency
Environment Category
Date PID Prepared
Date of Appraisal
Authorization
Date of Board Approval
Report No.: AB3484
CL: Promoting Innovation and Competitiveness Project
LATIN AMERICA AND CARIBBEAN
General industry and trade sector (45%); General public
administration sector (15%);Tertiary education (40%)
P082927
REPUBLIC OF CHILE
Ministry of Economy
[ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined)
June 6, 2008
December 10, 2007
July 15, 2008
1. Country and Sector Background
Chile has been the fastest growing economy in Latin America since 1990 (Table 1). The
impressive performance of the economy owes much to a strong institutional framework,
exemplary monetary policies and deep integration into the global economy. Due to strong growth
Chile has made notable progress towards the goal of convergence with OECD economies. The
income gap, however, remains sizeable. Per capita income in Chile (adjusted for purchasing
power parity) is currently less than 40 percent of the OECD average leaving ample room for
further catch-up in relative living standards.
Table 1: Chile and comparator countries: GDP per capita growth (percent)
1970s
1980s
1990s
2000-2005
0.26
4.21
3.01
5.84
1.89
2.72
2.47
3.42
1.13
2.72
6.02
-0.35
0.83
-2.19
0.12
2.33
3.19
1.93
4.66
6.82
1.32
0.28
3.19
1.66
1.79
0.99
2.15
3.24
7.21
1.24
1.13
0.82
1.51
1.65
2.46
1.79
Chile
East Asia & Pacific
Latin America & Caribbean
Brazil
Argentina
Mexico
OECD
Finland
Australia
Source: World Development Indicators (2007)
The Asian financial crises of the late 1990s revealed vulnerabilities of the Chilean economy to
external shocks, in part due to shortcomings in productivity and economic diversification.
Despite progress in recent decades, Chile remains highly dependent on the export of unprocessed
natural resources, notably copper (Figure 1). Growth deceleration in 2006 has also raised
concerns that Chile may have started to exhaust previous sources of growth. While there have
been concerns in the private sector of a real effective exchange rate appreciation (16 percent
from 2003 to 2007), there is little evidence that this has affected (non-copper) export growth
(IMF 2007) thus far. That said, this calls for further productivity increases in the (non-copper)
sector.
Figure 1: Chile’s copper export as share of total exports
100%
% of total Exports
80%
60%
40%
20%
Copper
Other mining
Agricultural, Forestal and Fishing
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0%
Manufacturing
Source: Comtrade, United Nations. Own elaboration.
Chile will need fast and sustained growth to further reduce poverty, continue improving living
standards, and close the income gap with the lower tier of OECD countries by 2020. The
perception of sound macroeconomic management is now well entrenched. Chile is one of the
few sovereign borrowers in Latin America, along with Mexico and more recently Brazil and
Peru, to enjoy an investment-grade credit rating. Hence, Chile is in a favorable position to focus
on microeconomic reforms aimed at boosting the capacity of firms to sustain productivity growth
and develop new business opportunities. Evidence from economies that have successfully
diversified and added value to their natural resource base such as Australia and Finland suggests
that boosting Chile’s capacity to innovate should be at the center of such reforms. Cross-country
analysis indicates that half of all differences in income and growth is attributable to differences
in total factor productivity (TFP), generally associated with technological development,
innovation, and the investment climate (see Chile, Development Policy Review, 2006). Chile’s
total factor productivity has historically been relatively high, however during the 1990s, this
trend has reversed and Chile’s TFP has sharply decreased.
A potential explanation for the low levels of TPF is related to the microeconomic constraints to
institutional adjustment costs (Bergoeing and Repetto, 2003). However, as mentioned by the
Development Policy Review for Chile (2006), if the gap in TPF were due solely to
microeconomic obstacles, the inefficiencies would appear to be surprisingly large relative to the
US given the extensive microreforms that have taken place in Chile. The latter suggests that
innovation deserves to be a central issue due to its impact on raising firms’ capacity to introduce
productivity-improving measures. Cohen and Levinthal (1989) argue that R&D is not only
crucial to generate new knowledge, but to enhance “absorptive capacity” (i.e., the firm´s ability
to use and benefit from existing information). Investments in innovations that do not necessarily
involve R&D may also yield high dividends in the medium term for Chile. Marimon (2008), for
example, indicates that innovations in process and organizational forms that are not accounted
for in official statistics have facilitated the growth of outward looking industries such as banking,
tourism and textiles in Spain.
Contribution to output per worker growth (%)
Figure 2: Total factor productivity in Chile, 1986-2003 (percentage)
7.0
6.0
5.03
5.0
4.0
3.31
3.0
2.0
1.27
1.0
0.41
0.0
-1.0
1986-1990
Capital
Education
1991-1995
1996-2000
Total Factor Productivity
2001-2003
Output per w orker
Note: The data show the average annual percentage point contribution of TFP, education, and physical
capital to output per worker growth. The numbers in the white squares next to the circle icons denote the
compound annual growth rate of output per worker.
Source: Updated dataset from Bosworth and Collins (2003).
Sector issues
In the area of science, technology and innovation (STI), Chile has made gains over the last
decade but continues to lag substantially advanced economies with respect to most STI
indicators (Table 2). Chile’s R&D spending per capita, full-time equivalent researchers as a
percent of population, and patent activity significantly lag the efforts of OECD countries, even
those with a natural resource base, in many cases by more than an order of magnitude. The
differences are not due solely to income disparities; on some indicators Chile also falls behind
dynamic economies with lower GDP per capita such as China and India. Several factors explain
Chile’s low performance relative to more advanced economies:
Chile’s policies and institutional framework for innovation is underdeveloped preventing an
efficient use of public support for innovation. Until recently, the country did not have a fully
articulated innovation policy with coherent and achievable objectives. The institutional
framework takes current shape more from historical precedent, rather than from explicit
decisions regarding the roles and functions of actors; in many cases, it is fragmented, shows
overlaps and lacks clear accountability mechanisms. Diverse studies and assessments have
warned about the lack of policy coordination in Chile’s national innovation system. Several
ministries –including the Ministries of Economy, Education, Planning, Agriculture, Transport
and Telecommunications, Public Works, and Foreign Affairs– have historically been involved in
the formulation of STI policies and the design and management of programs (Box 1), but
cooperation between actors has been minimal.
Table 2: Indicators of STI and cost of doing business
R&D/GDP
(%)
R&D per
capita
(US$)
FTE Researchers
per 1000
economically
active persons
USPTO patents
granted per mill.
Population
Private R&D
as percent of
total
Ease of doing
business
(rank)
Cost of starting a
business (% of
income per
capita)
Australia
1.77
573
8.4
143.6
51.6
8
1.8
Canada
1.95
675
7.4
267.4
46.7
4
0.9
Chile
0.68
39
2.2
3.4
45.8
28
9.8
China
1.44
79
0.7
1.6
62.4
93
132
Finland
2.26
1 ,091
16.5
387.3
69.3
14
1.1
India
0.85
20
0.1
1.3
23.0
134
88
Spain
1.12
304
5.7
16.2
48.0
39
16.2
United
States
2.68
1,063
9.6
701.3
63.7
3
0.7
Country
Source: RICYT (2007), OECD (2006), USPTO (2007), UNESCO (2007) and World Bank (2007)
As a result, Chile has had a wide array of uncoordinated policies and programs for R&D and for
technology diffusion with significant overlap between content and objectives. For instance,
coordination between Chile’s two key implementing agencies--the Chilean Science and
Technology Council (CONICYT) and the Innovation promotion group (InnovaChile) of the
Chilean Development Agency (CORFO)--has traditionally been modest. Support for team-based
research, which could potentially have a high impact, is also fragmented among various
institutions that follow different principles and strategic priorities for allocating funding.
Fragmentation reduces the effectiveness of public expenditures, results in duplication and leads
to excessive diffusion of programs including to some areas with relatively low social rates of
return. The lack of explicit policy-making evaluation mechanisms has impeded learning, created
inertia and prevented change despite duplication and fragmentation. This is an area for
significant improvement.
Box 1. Chile’s support system for innovation
President
National Innovation Council
Inter-Ministerial Cabinet on Innovation
Policy making
and coordination
Ministry of Education
Implementing
Line Ministers: Ministers of Finance, Transport and
Telecommunications, Public Works, Agriculture,
Foreign Affairs, and Education
Ministry of Economy
CONICYT
FIA, MSI-MIDEPLAN
CORFO
agencies
Innovation
support
programs
Beneficiaries
Innova Chile
FONDECYT
PBCT
FONDEF
Universities
Individuals
Sectoral Funds
Enterprises
Technology Institutes
Need to build capacity in the Ministry of Economy (MoE) to design, manage and evaluate
innovation and microeconomic policies. Shortly after the presentation of the National Innovation
Strategy (volume 1) prepared by the National Innovation Council in February 2007, the
Government formed an Inter-Ministerial Committee on Innovation tasked with the responsibility
of formulating innovation policies, giving orientation to Chile’s support system for innovation
and addressing problems that hinder the systems effectiveness, including fragmentation and
overlap. The Committee is led by the MoE and comprises the Minister of Finance, the Minister
of Education, and other line ministries. The Committee has a Technical Secretariat attached to
the MoE. The Ministry is also tasked with the formulation, implementation, and evaluation of
policies concerning markets regulation and small and medium size enterprises (SMEs). It will
need a strong capacity to set the policy agenda, monitor the impact of innovation and
microeconomic policies and hold implementing agencies accountable for results, a capacity that
it currently does not possess. A major institutional strengthening effort is thus required to
enhance its capacity.
Chile's stock of human capital for innovation and technology management is low and
geographically concentrated. A major barrier to innovation in Chile is the insufficient level of
advanced human capital and disarticulation between skill production and the needs of the
productive sector. This is partially demonstrated by the low number of young researchers
working in private companies, but pertains also to the nature and quality of the skills being
produced. Despite a strong increase in the number of researchers in the last decade, the stock is
still comparatively low (Figure 3). Furthermore, Chilean universities have a limited tradition of
stimulating entrepreneurship or linkages with industry, and young researchers tend to stay in the
public sector, working either for government research institutes or universities. An additional
barrier to innovation in Chile is the lack of mobility of advanced human capital within the
country and modest international linkages. The existent stock of advanced human capital is
geographically concentrated in the Santiago area, which reflects the lack of a bridge between the
regions and the metropolitan area.
Researcher per million inhabitants
Figure 3: Number of researchers per million inhabitants
9000
8000
7000
OECD Average
6000
Australia
5000
Finland
4000
Lac average
3000
Chile
2000
1000
0
1998
2000
2002
2004
Source: UNESCO Institute for Statistics
Low overall research and development, lack of investment focus, and poor articulation with
private sector needs. Overall investment in research and development is increasing, but from a
comparatively low baseline (Figure 4). This is only partially attributable to the structure of
production. Even when R&D investment rates per sector are controlled, countries such as
Australia continue to show much higher rates of R&D intensity (Maloney and Rodriguez Clare
(2007). The effectiveness of public R&D has been hindered by a lack of policy focus and
definition of strategic priorities connected to the needs of its production base coupled with
adequate accountability measures. In this context, Chile has not been able to optimize the
effectiveness of public investment.
Expenditure in R & D in % GDP
Figure 4: Expenditures in R&D as Percent of GDP
4.0
3.5
3.0
OECD Average
2.5
LAC average
2.0
Chile
1.5
Australia
1.0
Finland
0.5
0.0
1998
2000
2002
2004
Source: UNESCO Institute for Statistics
Business Enterprise investment is 45.8 percent of all R&D spending—a reasonable percentage
by regional standards. Nonetheless, the existing evidence suggests that the private and public
R&D efforts are mostly isolated and parallel rather than complementary, impeding the
transformation of knowledge into productive innovation. There is a growing consensus that Chile
is not close to deriving full commercial benefit from either the knowledge or the skills that its
publicly-financed research efforts are producing. In recent years, successful pilot initiatives for
public-private research partnerships have emerged in Chile. These initiatives are modest and
fragmented among CORFO, CONICYT, and FIA.
Inadequate mechanisms for transferring technology to SMEs. Small and medium size enterprises
in Chile account for roughly 95 percent of the total employment. Hence, SME development is at
the heart of enhancing Chile’s innovative potential and TFP growth. Besides increasing R&D,
there is a large potential for non-R&D driven TFP growth by enhancing the capacity of SMEs to
adopt existing technologies and improving organization and management. There is little
experience of collaborative technology development in Chile that is led by the private sector and
substantially funded by them. Through InnovaChile’s programs, CORFO has supported the
formation of business networks for technology transfer but this initiative is not well articulated
with other programs nor is it tailored to the specific needs of firms in priority sectors of the
economy. Evidence from countries such as Spain and Ireland suggests that Chile would benefit
from a broad vision of innovation which includes the development of a coherent framework for
technology services targeting SMEs.
Weak incentives and insufficient support for technology based start-up companies. There has
been a wide range of initiatives implemented to foster the growth of new firms in sectors with
high growth potential, including the development of university based incubators, and networks of
angel investors. Yet, there are concerns that the impact of some of them has been weak (e.g.,
incubators and networks of angel investors) and that there are gaps within the value chain faced
by start-up companies.
2.
Government strategy
Innovation is a top priority in Chile’s competitiveness agenda. In November 2005 the Lagos
Government set up a high-level Commission to prepare the ground for the formulation of a
national strategy for innovation and competitiveness. In its final report from March 2006 the
Commission recommended the establishment of a permanent National Innovation Council
responsible for strategy formulation and providing policy advice to the executive. In May 2006,
President Michelle Bachelet formed such a Council with participation of high-level experts on
STI and government representatives. The Council presented the first volume of a National
Innovation Strategy in January 2007, which was endorsed by President Bachelet shortly
thereafter. The strategy underscores that becoming a knowledge economy means adding value to
sectors where Chile has demonstrated comparative advantages while supporting key emerging
sectors. The Council presented the second volume of the National Innovation Strategy with more
detailed recommendations in February 2008. The two volumes were prepared on the basis of
consultations with relevant stakeholders and advice from international independent experts to
incorporate best international practices.
The first volume of the Innovation strategy defines strategic innovation goals for a 12-year
horizon and general principles to guide innovation policy.1 Its key elements are to (i) build a
strong platform for human capital that will substantially expand tertiary education, especially in
technical areas, and will support the formation of highly specialized human capital in STI; (ii)
enhance research capacity, with an emphasis on applied research; (iii) foster innovation within
enterprises inter alia through the development of stronger interfaces with research groups and
new models to promote technology transfer; (iv) generate a pro-active culture of innovation
within Chile’s society; (v) set in place a robust governance structure for the innovation system;
and (vi) build regional STI capacity in areas linked to their economic specialization. A second
complementary volume of the National Innovation Strategy will be issued shortly providing
more detailed guidance on innovation policies and the supporting institutional framework. The
Inter-ministerial Committee on Innovation will be responsible for the strategy’s implementation
under the leadership of the MoE. A second volume with more detailed recommendations for
implementing the proposed National Innovation strategy was presented to President Bachelet in
February 2008.
The Government presented in mid-2007 a draft law to Congress to formalize the establishment of
the National Innovation Council and the Inter-Ministerial Committee on Innovation. The latter
will be chaired by the Ministry of Economy. Thus, the government recognizes the importance of
strengthening the Ministry of Economy (MoE) so that it can effectively play a leadership role on
innovation policy and the closely related competitiveness agenda.
3. Rationale for Bank involvement
Over the last few years, the World Bank has assisted the Government of Chile in the innovation
area through policy advice (e.g., the preparation of a Strategy to Promote Innovative SMEs
(2004), an Investment Climate Assessment (2006), and the Development Policy Review (2006))
and support for two investment projects – the Millennium Science Initiative followed by the
Science for the Knowledge Economy Project. The latter, implemented by CONICYT, was
conceived as a two-stage APL since testing new instruments in the innovation system involves a
learning and incubation process before they can be consolidated. The APL1 was satisfactorily
implemented and closed at the end of March 2007 as originally envisaged (see Annex 2.4 for a
summary of key results).
The Government of Chile has requested a new investment project to foster Innovation. The
project would build on the aforementioned APL1 but would have a wider set of objectives to
accommodate Chile’s more ambitious new policy vision. It would support key elements of the
national innovation strategy with a strong emphasis on building robust institutional foundations.
The Government regards the World Bank as a strategic partner due to its expertise in the
innovation area, knowledge of a wide range of international experiences such as OECD and
The strategy’s key benchmarks by the end of the 12-year period are to reduce the weight of Chile’s top 25 exports
to no more than 50 percent of total exports; to increase the participation of young adults (ages 18-24) in tertiary
education from the current 43 percent to 80 percent in 12 years; to raise R&D as percentage of GDP from the current
0.68 percent to 2.32 percent with the private sector leading the way by the end of the period; and improve Chile’s
World Competitiveness ranking in the areas of innovation, technology sophistication of enterprises, and education
and skills.
1
Asia, and the capacity to help adapt international practices and instruments to Chile’s reality and
needs.
The proposed project is fully aligned with the goals of the Country Partnership Strategy (CPS).
In particular, it will support the objective of converging with OECD income levels and living
standards by accelerating sustainable growth through increases in total factor productivity. The
proposed project would have strong synergies with other Bank interventions aimed at increasing
Chile’s innovation capacity, in particular the Tertiary Education Finance for Results APL1.
4. Objectives and Description
The project’s overall development objective would be to enhance Chile’s policy and institutional
innovation framework for competitiveness and improve the impact of priority innovation
programs. More specifically, the project’s objective is: (i) to strengthen the Ministry of
Economy’s capacity on innovation and ensure its coherence with other policies for
competitiveness; (ii) strengthen CONICYT and improve the coherence, quality and relevance of
research funding policy in Chile; and (iii) stimulate technology transfer and the creation of new
technology based enterprises through CORFO.
Description
The project would contribute to the aforementioned development objective through three
components: (i) strengthening the MoE’s capacity on innovation and ensuring its coherence with
other competitiveness policies; (ii) enhancing Chile’s science base; and (iii) fostering technology
transfer and new ventures through InnovaChile’s programs managed by CORFO.
Component one: Strengthening the MoE capacity on innovation and related competitiveness
policies. This component would enhance the MoE’s institutional capacity to formulate, monitor,
and evaluate innovation policies in accordance with the guidelines of the National Innovation
Strategy. In addition, it would support selected elements of the broader Strategic Plan to
strengthen the MoE, which is under advanced preparation, in order to foster consistency between
innovation policies and other policies seeking to enhance Chile’s competitiveness. This would
also ensure that the innovation related units of the MoE operate within a solid and adequate
institutional framework promoting sustainability of reforms. The design of this component
benefited from an extensive consultation process with internal and external stakeholders, a
process that would continue during project implementation. In addition, this component would
support the Project Coordination Unit within the MoE.
Component two: Strengthening Chile’s Science Base. This component would strengthen
CONICYT by helping the institution formulate a strategic plan with clear medium-term goals
aligned with the national innovation strategy, develop and implement a coherent research support
policy, and increase its capacity to design and evaluate programs. At the end of the project,
CONICYT would have increased capacity to design, oversee, and learn from the implementation
of its programs. The Inter-ministerial Committee on Innovation and the Ministry of Education
would guide CONICYT in the implementation of this component.
Component three: Fostering Technology Transfer and New Technology-Based Ventures. The
component would strengthen CORFO-led programs that seek to stimulate the start-up of
knowledge intensive businesses and the adoption of higher value technologies by SMEs, and its
monitoring and evaluation capacity. It would achieve the above through three subcomponents: (i)
upgrading new technology based enterprise development, (ii) strengthening technology extension
and transfer services for SMEs, and (iii) strengthening CORFO’s monitoring and evaluation
capacity of InnovaChile’s programs.
The Government of Chile has requested a Specific Investment Loan (SIL) for US$30 million to
promote innovation and competitiveness by strengthening the institutional capacity of the
Ministry of Economy, by improving the quality of research in Chile, and by stimulating
technology transfer institutions and practices. The SIL would provide a framework for constant
interaction between the Bank’s technical team and Chile’s relevant stakeholders inside the
Ministry of Economy and inside front-line institutions such as CONICYT and
InnovaChile/CORFO. The Bank has acquired extensive expertise over the years on building
institutional capacity and would be able to share its experience with similar institutional reforms
in Chile and in the region.
The project would be implemented over a four year period (mid-2008 to mid-2012). This would
allow adequate time to consolidate the changes in the institutional framework for innovation
supporting the long-term innovation strategy.
5. Financing
The Government of Chile has requested a Specific Investment Loan (SIL) for US$30 million to
support the project. Project costs are detailed below.
Total Project Costs
Project Cost By Component/Sub-component
1. Strengthening the MoE’s capacity on innovation
and its coherence with other competitiveness policies
1.1 Strengthening the capacity to formulate and
implement innovation and related competitiveness
policies
1.2 Establishment of a Monitoring and Evaluation Unit
1.3 Project Coordination Unit
Counterpart
US$ million
Loan
US$ million
Total
US$ million
7.0
7.3
14.3
3.3
2.9
0.8
2.7
2.3
2.3
6.0
5.2
3.1
2. Strengthening Chile’s science base
2.1 Sharpening CONICYT’s role within the NIS
2.2 Reformulating group research support and
promoting mobility of advanced human capital
2.3 Enhancing CONICYT’s M&E capacity
17.3
3.0
13.4
1.9
30.8
4.9
13.5
0.8
9.5
2.0
23.0
2.8
3. Fostering technology transfer and new ventures
3.1 Start up of knowledge enterprises
3.2 Promoting technology transfer
3.3 Strengthening CORFO’s M&E capacity of
InnovaChile’s programs
11.4
0.3
9.9
8.2
4.1
2.6
19.6
4.4
12.5
1.2
1.5
2.7
1.0
1.0
4.3
0.075
0.075
30.0
70.0
Unallocated
Financial expenditures
4.3
Front end fee
Total Project Costs
40.0
6. Implementation
The Ministry of Economy would assume responsibility for overall project coordination and
would be responsible for implementing component 1. Components 2 and 3 would be
implemented by CONICYT and CORFO, respectively. The project would be implemented over
a 5 year period (January 15, 2009-January 15, 2014).
7. Sustainability
Innovation is a top priority in Chile’s competitiveness agenda. Government ownership of the
project is strong, which is reflected in the establishment of the National Innovation Council
responsible for the formulation of the National Innovation Strategy whose first volume (White
Book) was presented in January 2007. The latter reflects a move towards the construction of a
broad national consensus on the importance of establishing a more integrated and effective
national innovation system to enhance Chile’s productivity and competitiveness. Thus, the risks
of policy or program reversal are minimal. Also, the MoE through the Inter-Ministerial
Committee on Innovation will reduce fragmentation, foster cross-collaboration and contribute to
consensus building within the national innovation system, enhancing its sustainability. At the
same time, the modernization of the MoE is based on a consultative process with the
participation of internal and external stakeholders, which ensures both ownership and promotes
sustainability.
8. Lessons Learned from Past Operations in the Country/Sector
The project design is appropriate to the borrower’s needs and targets some of the key constraints
to innovation identified in the National Innovation Strategy (volume 1 and volume 2). Project
design has drawn from international best practices, lessons from OECD innovation practices, and
lessons learned from relevant Bank projects (including the APL I on Science for the Knowledge
Economy), which have been adapted to the realities and priorities of Chile.
9. Safeguard Policies (including public consultation)
Safeguard Policies Triggered by the Project
Environmental Assessment (OP/BP/GP 4.01)
Natural Habitats (OP/BP 4.04)
Pest Management (OP 4.09)
Cultural Property (OPN 11.03, being revised as OP 4.11)
Involuntary Resettlement (OP/BP 4.12)
Indigenous Peoples (OD 4.20, being revised as OP 4.10)
Forests (OP/BP 4.36)
Safety of Dams (OP/BP 4.37)
Projects in Disputed Areas (OP/BP/GP 7.60)*
Projects on International Waterways (OP/BP/GP 7.50)
10.
Yes
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No
[x]
[x]
[x]
[x]
[x]
[x]
[x]
[x]
[x]
[x]
Contact point
Contact: Esperanza Lasagabaster
Title: Sr Financial Economist
Tel: (202) 473-2880
Fax: (202) 522-2106
Email: [email protected]
11. For more information contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-4500
Fax: (202) 522-1500
Email: [email protected]
Web: http://www.worldbank.org/infoshop
*
By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the
disputed areas