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UNCLAS SANTIAGO 002411 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV KIPR EIND ETRD CI
SUBJECT: CHILE KNOWS IT NEEDS MORE INNOVATION 
 
¶1. SUMMARY.  Despite President Bachelet's declaration that 
innovation would be one of the pillars of her administration, 
budgets for research and development remain precariously low 
in Chile -- only seven tenths of one percent of GDP.  A 
ministerial commission tasked with identifying innovative 
sectors and ways to promote them has drafted legislation for 
tax breaks it hopes will increase private sector spending on 
innovation and bring new technology to Chile.  END SUMMARY. 
 
¶2. Soon after taking office in March, President Bachelet set 
up the Council on Competitiveness and Innovation to seek 
concrete ways to identify and incentivize knowledge-based 
sectors of the economy.  Chile's export-oriented economy 
remains dependent on primary products -- copper alone 
represented nearly 50 percent of the value of Chile's exports 
in 2005.  There is very little value added in Chile's economy 
and this presidential council was tasked with finding ways to 
change that.  It is composed of representatives from five 
ministries -- Finance, Economy, Education, Agriculture and 
Public Works -- and is headed by former Finance Minister 
Nicolas Eyzaguirre. 
 
¶3. Talk of innovation is new for Chile, it began with 
Bachelet.  She has asked the Council on Competitiveness to 
recommend nine sectors and industries (e.g. biotech), which 
the GOC will seek to foster.  Also to that end, the Council 
has drafted legislation to encourage greater private sector 
spending on research and development.  Currently, there is 
almost no private sector spending on innovation.  Part of 
that may be due to Chile's poor track record on protecting 
intellectual property rights (IPR).  GOC officials say they 
appreciate the interplay between protecting IPR and promoting 
innovation.  Some at least are aware that a lack of a clear 
GOC policy on IPR protection could be a hindrance.  A member 
of the Council told Senior EconOff he had been unaware of 
U.S. and EU concerns over IPR protection in Chile.  He agreed 
the GOC lacked a clear policy and said he would seek to have 
the Council discuss it. 
 
¶4. The Ministry of Finance has the lead in drafting tax 
legislation and recently presented two proposals to 
congressional committees.  The first is a tax reform intended 
to incentivize research.  Through a 35 percent tax credit and 
then a 65 percent deduction allowed against the corporate tax 
rate, the GOC would pick up the tab for about 50 percent of a 
private company's spending on research and development. 
Currently, there is virtually no tax incentive for spending 
on research.  The second draft would set the 
import/withholding tax on software at a uniform 15 percent. 
A number of taxes are applied against imported software now, 
with the total hit ranging up to an added 35 percent in 
costs.  The net result has been reluctance on the part of 
Chilean companies to buy the tailored software they need. 
 
¶5. Spending on innovation in Chile is abysmally low.  An 
advisor with the Ministry of Finance, who serves on the 
Council on Competitiveness and Innovation, told Senior 
EconOff that only seven tenths of one percent of Chile's GDP 
is spent on research and development.  Bachelet's goal is to 
raise that spending level to 1 percent of GDP by 2010.  Even 
at 1 percent, as Santiago's leading newspaper editorialized 
November 20, this level would lag far behind countries such 
as Ireland, Singapore and New Zealand.  Worse than current 
spending levels in the eyes of the Ministry of Finance 
advisor, of the money currently spent on research and 
development, two thirds of it is public sector money. 
Chilean private companies spent only three tenths of one 
percent of GDP on research in 2005, or about USD 350 million. 
 There is also no evidence that the public sector money spent 
on innovation led to any economic growth or job creation. 
 
¶6. If the Chilean private sector is not spending enough money 
on research and development, foreign investors are not 
spending money on it at all.  Though Chile might still be 
able to attract respectable levels of foreign direct 
investment (FDI) -- however, the total level in 2005 showed a 
big drop-off compared to 2004 -- most of the FDI goes to a 
few basic sectors.  Over 80 percent of the investment that 
has entered Chile in 2006 has gone to the mining, water, gas 
and electricity sectors.  Moreover, much of that FDI has gone 
into mergers and acquisitions, not into creating new 
infrastructure or jobs. 
 
¶7. COMMENT.  To its credit, the Bachelet administration has 
realized it must develop concrete incentives to get companies 
to spend on research and development.  Putting the onus of 
identifying promising industrial clusters on a ministerial 
commission smacks of state interventionism, but it is at 
least an effort to determine where Chile's might be able to 
develop a comparative advantage.  If Chile really wants to 
overcome its reliance on primary product exports and more 
importantly, update its conservative business culture, it 
will likely have to do more than tinker with tax rate 
margins.  It will need to articulate publicly a clear policy 
direction on innovation, including IPR, and stick to it over 
the long term. 
KELLY