Industry, Competitiveness and Technological Capabilities in Chile

International competitiveness and industrial growth are essential elements of a country’s development process. Their attainment is aided by correct macroeconomic policies to induce the exploitation of the country’s static and dynamic comparative advantages. In addition, a body of recent research has emphasized the microeconomic dimension of comparative advantage (CA) that relies also on the existence and the upgrading of local capabilities and in particular of ‘technological capabilities’ (TCs) related to technology operation and improvements.

In the last few years, classical, Ricardian and neoclassical theories of international trade have gradually been complemented with new hypotheses and assumptions, to explain a pattern of trade that has changed, often along unexpected lines. The earlier ‘conventional’ theories had difficulties in explaining the changing pattern of comparative advantage (CA) with new exporters from less developed countries (LDCs) and countries shifting their CA through different activities. In response to this, the idea that CA not only reflects the static endowment of given national resources, but is constantly changing in response to the creation of local knowledge and skills, has been explicitly considered. Similarly, the hypothesis that efforts to develop skills and capabilities can add to the country’s endowments and enhance the effective utilization of the endowments already available has been explored in the literature.

Since 1974 Chile has undergone a radical and widespread process of restructuring. Two major crises had to be faced in 1975 and 1982, in an unfavourable international context that produced a terms of trade deterioration and was characterized by the oil crisis in the 1970s, and by the debt crisis in the early 1980s. They required strong adjustment policies that were superimposed on the long-running structural reforms already being implemented under the military rule. Thus, the macroeconomic framework was modified substantially and subjected to frequent changes over the years. Firms had to adjust to a macroeconomic environment that provided them with varying incentives (for example as given by trade and exchange rate, monetary, fiscal and industrial policies) and a variable structural setting in which to operate (institutions, public administration, role of the state, ownership structure).

The tendency towards an increasing share of GDP arising from manufactured goods appears to be a typical feature of the development process (Chenery et al., 1986; Chenery and Syrquin, 1975). Comparative advantage (CA) changes over time in line with the transformation of production and leads to an increasing specialization in manufactured exports, gradually replacing primary resource-based exports.¹ However, reaching international competitiveness in manufacturing production requires the acquisition of a number of production and selling capabilities. This is a demanding task which needs time and effort, and does not arise automatically from production experience (Chapter 2).

In the seventies and eighties Chile undertook a remarkable process of export diversification away from copper, its traditional primary export item. New exports emerged, and in 1987 non-mining exports accounted for 46.2 per cent of total exports, from a low of 14.5 per cent in 1970 (Table 3.9). What accounts for such diversification? What have been the factors fostering Chile’s competitiveness and its pattern of international specialization? In this chapter I investigate the determinants of this rising competitiveness in manufacturing activities in Chile during the years of the monetarist experiment, and the evolution of these determinant factors over time. This is made with econometric evidence from cross-section estimates on 76 industrial groups (4 digit ISIC) for the years 1975-76 and 1984-85.

In the ‘pure’ neoclassical theory of international trade there is no reason for analysing the determinants of export performance at the level of the firm. Its assumption of perfectly competitive goods and factor markets ensures that all firms are identical within an industry. As a consequence, if a country enjoys a comparative advantage in the production of a good, all national firms will share the same competitive edge.

I. Chile is virtually a laboratory case of market liberalization based on neoclassical principles. Since 1974, and for almost two decades, it has also been the most thorough and continuous application of neoclassical trade strategy, supposed, by its proponents, to lead to rapid economic growth, higher economic efficiency, labour-intensive industry and export dynamism.¹ The government abstained from policy intervention and, with some differences from year to year, adhered to what the World Bank later defined a ‘market-friendly’ development strategy. This consists of a government confined to ensure macroeconomic stability, openness to international trade, a competitive climate for private enterprises, and investments in education and human capital (World Bank, 1991). This approach has been prescribed by the World Bank to most developing countries, and the concept was used to depict the successful experiences of the East Asian Tigers (World Bank, 1993). For this reason, the analysis conducted in this book may provide insightful generalizations for both theory and policy purposes.