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Financing the new economy
With the end of the eighties, the difficulties brought by this crisis were surpassed and a whole new set of challenges arose. Significantly, the democratization of the republic in the early nineties, accompanied by the emerging trends of globalization, forced Chile to increasingly look at ways of liberalizing its economic and investment panorama.
Even when Chile has the most open economy in Latin America and is fully engulfed in free trade, its conservative financial and corporate sectors are solid foundations for conventional business practices. Yet, nowadays, traditional economic sectors are being transformed by the convergence of knowledge and technology. To form part of the new economy and its many facades, risk capital is fundamental. This is a key challenge for Chile. The rate with which the economy of knowledge is reconstructing the world is breathtaking and the bottom line is between those who participate and those who observe how the tide absorbs them.
According to Eduardo Bitran, general manager of Fundacion Chile, “Given that Internet and intangible elements are essential for the new economy, we have to develop certain capacities and dynamics within the country that are not really structured. Normally, Chile’s financial sectors do not finance the intangible. Still, Chile’s economy is basically pushed by the traditional natural resources sectors that have not been involved in added value initiatives.” Bitran added with concern, “It is worrisome how in Chile, we have not developed capital markets that generate seed capital, venture capital and the conditions needed for developing all types of opportunities.”
However, with the massive penetration that the Internet has had in Chile and initiatives from private organizations like Fundacion Chile and from the public sector, CORFO (Chile’s Economic Development Agency), Chile is heading in that direction. In fact, President Lagos emphasized during his presidential address that his administration was committed to the development of an Internet culture and of venture capital.
“Nowadays, Internet has a problem, which is that there are too many costs and not so much income. Internet projects have negative earnings during the first years. The important aspect is going to be advertising. The other important aspect is electronic business, which confronts obstacles because of transaction security issues. We asked ourselves at Fundacion Chile, how could we be able to assist in this process? This is why we created certifica.com; to certify audiences in the Internet and to generate external audited information for Internet companies so that they can negotiate with ad agencies,” added Bitran. Fundacion Chile is a privately owned, non-profit corporation created in 1976 by a legal agreement between the Government of Chile and ITT Corp. It is one of the few seed financing funds closely linked to scientific and technological systems that identify national opportunities for developing value added and innovative businesses for agro-industrial, fishing, forestry, education technology, ecotourism and Internet sectors.
On the other hand, CORFO, which was created during 1938 for the industrialization period, dealt with the privatization of state-owned corporations and promoted the economic development of the country. “In CORFO, we foment technological innovation. Companies that present technologically innovative projects receive cofinancing from us so that they can develop them. In addition, we support research and development for sector or national benefit performed by technological institutions. Also we focus on attracting and promoting foreign high-technology investment to Chile,” stated Gonzalo Rivas executive vice president of CORFO, who is also in charge of developing small-and-medium size companies and helping them to integrate to the new economy.
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Table of Contents New president focuses on future while reconciling the past |
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Over the last 15 years, Chile’s financial sector has developed significantly, although it has seen its tough times. The 1981 to 1984 economic crisis was a wake-up call for Chileans. It denoted the need to reform and modernize the capital markets. “The debt crisis of the ’80s in Chile was in the private financial sector, and the government -quite correctly -in my view- stepped in and supported the financial sector, because if you don’t support your financial sector, everything else collapses. This was a very expensive problem. As a result, they put in place a very solid regulation to the financial sector, which will help prevent a similar crisis from happening again,” explained Kathleen Barclay, Chase Manhattan Bank’s senior country executive.
For Barclay, who is also vice president of AMCHAM, the lack of venture capital has to do with “the whole attitude toward borrowing money, which is extremely conservative. Venture Capital means risk and that doesn’t go with the culture. People here are risk skippers.”