VII-Business Development Strategies for U.S. Firms
Understanding the Business Climate
Chile has a strong and open economy that is attractive to foreign firms. According to the U.S. Department of Commerce Country Commercial Guide, Chile is a dynamic and promising market not because of its size but for the “energy and professionalism of its entrepreneurs, the transparency of its regulations, and in the predictability of its decision-makers.”
Many U.S. companies have been actively conducting business in Chile for decades. Traditionally, Chile has had a preference for U.S. goods and has maintained strong trade ties with the United States, as evidenced by the volume of trade between the two countries and Chile’s bid to join NAFTA. The reluctance of the U.S. Congress to extend fast-track negotiating privileges to Chile has put a strain on trade relations, but should not adversely affect opportunities for U.S. companies in the long run.
Overall, there are few barriers to imports or investments in Chile. Its business customs are similar to those of the United States, many of its business professionals have studied and traveled abroad, and many speak English. The ability to conduct business in Spanish, however, is a definite advantage.
Any legally constituted foreign company can establish a fully owned local branch or subsidiary using its own name, although the earnings of this office are subject to local business law and tax provisions. Although there are no requirements for minimum participation of local ownership or staffing, technically sound, well-connected local staff can be a considerable asset in marketing products and services locally. As this may involve considerable investment, another option is to identify a local agent or distributor to represent a company’s products or services. The U.S. and Foreign Commercial Service located in the U.S. Embassy in Santiago offers various services to help companies identify appropriate representatives. The American-Chilean Chamber of Commerce also actively supports the development of trade relations between the two countries and is a good source of information. Importing Equipment: Chile imposes an 11 percent tariff on the cost, insurance, and freight value of all imported products and an 18 percent value-added tax that must be paid by the importer. In certain cases, the tax is waived if the imported machinery is for the production of a good for sale in the Chilean market, or the tax can be deferred or paid over time depending on the product. All imports require a license, but its purpose is more to collect statistical data than to restrict imports. Patent and Trademark Laws:Chile’s intellectual property regime is generally compatible with international norms. According to Property Law No. 18,935, products that are patented, copyrighted, or have royalty rights must be registered with the Ministry of Economy to avoid infringement by third parties. Foreign Investment:Chile has actively encouraged foreign investment. Although all such investment must be approved by the Government’s Foreign Investment Committee, the approval procedures are not burdensome and are usually expeditious. The Chilean Foreign Investment Act, Decree Law 600, allows investors to receive nondiscriminatory treatment, participate in any form of investment, hold assets indefinitely, remit or reinvest earnings immediately and capital after one year, opt for either national tax treatment or a guaranteed rate (currently 42 percent) for the first ten years of an investment, and acquire foreign currency at the interbank rate of exchange. Investments over $50 million may qualify for tax concessions. There is no special treatment for investments in environmental projects.
Positioning for Success
As in all countries, establishing a presence in Chile requires time and an investment of human and financial resources. It is necessary to thoroughly investigate the market, understand the customer base, and assess the competition. There are typically three ways to enter a local market:
Companies can participate in infrastructure development projects through international bidding from a U.S.-based office or from a local office. This strategy is generally most effective for bidding on large infrastructure projects backed by international funding from institutions such as the World Bank or the Inter-American Development Bank. In Chile, however, these institutions are no longer very active in providing project funding. To successfully pursue other types of projects, it is highly recommended that the firm have a local presence. Establishing a local office in Chile is fairly straightforward as there are no limitations on foreign ownership. Branch offices established in Chile are subject to local taxation and other regulations applicable to businesses.
Foreign companies can establish a joint venture or partnership with a local firm. Establishing a relationship with a company with strong contacts in a specific market will facilitate business in that area. This is particularly true for companies targeting the mining, fisheries, forestry, and agriculture sectors, which are generally dominated by a handful of powerful companies.
U.S. equipment manufacturers can establish relationships with distributors to sell their products in the local market.
Entering Chilean Markets Infrastructure Development: Congressional approval for the privatization of water companies will profoundly change the water and wastewater services market. During the ongoing two-year debate, many companies have been positioning themselves to enter this market. Interested U.S. firms have no time to lose in forming consortia to provide a full range of services and investment in the sanitation companies. It is likely that the Aguas Argentina consortium in Buenos Aires will be a successful model in Chile. U.S. companies may consider partnerships with companies that have experience in the operation of water concessions. Companies that also specialize in other types of infrastructure development (such as roads) may be able to dovetail development strategies into other infrastructure markets (solid and hazardous waste facilities, for example, are still in the early stages of development). In each case, having a strong local presence through a local office or a strong local partner will be extremely beneficial for establishing the linkages necessary to be successful in this market. Equipment Sales:In spite of the traditional preference for U.S. technologies in Chile, European companies have been very active in the Chilean market. European donor agencies have been supporting the development of environmental systems such as air quality monitoring networks, and this support has provided European firms a point of entry into this market. Price is very significant in the Chilean market, but for higher-end technologies, quality and durability are also important factors. Finding a well-established local partner or representative will be very important. Many environmental consulting firms also double as equipment distributors and therefore may be useful partners because of their access to potential clients. With Chile’s focus on cleaner production, equipment vendors offering clean technology and in-process solutions to reduce environmental contamination will find a growing market for their products and services. Some of the larger Chilean companies that sell environmental equipment include SK Ecología, Nahuelco, and Temac. Environmental Services: With the regulation requiring environmental impact assessments in effect and an increased focus on environmental management systems, consulting services will be in greater demand. There are a number of local consulting companies, but international expertise is highly regarded in Chile. It is relatively easy to establish a local office in Chile and staff it with expatriates as well as technically sound local professionals. Companies should also explore establishing partnerships with local firms that are already working in this market. Some of the larger organizations include Fundación Chile, Geotécnica, Ambar, and Cade-Idepe (see appendix B for a list of environmental companies). To be successful, it is important to offer a full range of services to the client, and all companies providing services to the industrial sector should be versed in environmental management systems. Companies interested in working for the government must be registered with the appropriate agencies.
Another strategy for developing relationships with potential clients is through training. Companies can offer training courses on key environmental topics (monitoring techniques, pollution prevention methods, hazardous waste management) to help educate clients and showcase their own expertise.
Accessing Financial Resources
Because of the strength of Chile’s economy and its well-capitalized finance markets, financing has not been as great an obstacle to environmental exports as in other Latin American markets. Nevertheless, as environmental services are privatized, financing will become increasingly important for U.S. companies to successfully compete in the environmental infrastructure market.
The Chilean financial sector is relatively strong. U.S. banks are also operating in Chile, including Citibank, Bank of Boston, and Chase Manhattan. There are a number of resources that U.S. companies can leverage to help them gain access to the Chilean market and support transactions with their clients. See appendix C for descriptions of these resources and contact information.
Export Credit and Insurance:The U.S. Export-Import Bank (Ex-Im) has a special program designed to assist the export of environmental technologies and services. Through this program, Ex-Im provides insurance for small environmental exporters and loan and guarantee programs for environmental projects, products, and services. The Oversees Private Investment Corporation (OPIC) also provides loan guarantees and insurance for companies doing business overseas, services that can be applied to environmental products in some cases.
Private Investment Funds:There are a number of private funds that make equity investments in environmental companies and environmental projects in emerging market countries such as Chile. These include the AIG-GE Latin American Infrastructure Fund and the Global Environmental Emerging Market Funds. Because of Chile’s strong economy, projects in Chile are particularly attractive.
Through the National Association of State Development Agencies, the U.S. Agency for International Development has also established theLatin American Fund for the Environment, which provides matching grants for small- and medium-sized firms for the transfer of environmental technologies to Latin America. The U.S. Trade and Development Agency also plans to finance several feasibility studies for infrastructure projects in Chile. This agency is currently funding a study to identify possible environmental infrastructure projects (expected completion is March 1998) and then will award contracts to U.S. companies to conduct feasibility studies for several projects. These studies provide an excellent mechanism for entering this market.
In addition, there are several national funds in Chile that support environmental improvements. CORFO, the Chilean Development Corporation, has established several credit lines through commercial banks to support industrial development. In 1996, CORFO approved a total of $41.2 million for disbursement through 11 commercial banks. Loans are made in dollars or in unidades de fometo (UFs), an economic unit based on parameters that take into account the fluctuation of the dollar and inflation. CORFO’s programs include the following:
Investment Financing for Small- and Medium-Sized Enterprises.This program finances investment projects for companies in machinery, construction, civil works, and engineering services.
Investment Financing for Small Industry.This program is funded with resources from the German Government through the Kreditanstalt für Wiederaufbau. The program helps to finance investments in small- and medium-sized private companies in the Chilean manufacturing sector. There are no restrictions on the country of origin for the products.
Investment Financing for Production Inputs and Foreign Commercialization.This is a financing program for small- and medium-sized exporters of nontraditional products. The program supports the purchase of inputs (raw materials, parts, and services) needed for the production of exportable goods or services. It also finances investments in offices, commercial space, and warehouses as well as the expenses incurred for the commercialization of the product abroad.
Investment Financing for the Sale of Chilean Durable Goods and Services Abroad.This program provides financing to Chilean companies that are exporting products or services abroad to help them meet the requirements of foreign buyers. It enables Chilean companies to offer more flexible payment options to their clients. CORFO is also currently studying the feasibility of establishing a credit line to finance investments in cleaner technology. This credit line would be available in 1998.
Taking Advantage of Information Resources
The U.S. Department of Commercehas a number of programs that provide assistance to U.S. companies interested in doing business outside the United States (see appendix D for more detail and contact information). The first point of contact should be theOffice of Environmental Technology Exports, which was established in 1993 for the purpose of helping promote the export of U.S. environmental technologies. This office offers a number of information resources on prospective markets in emerging countries, leads environmental trade missions to create linkages for U.S. businesses, and provides insight into getting established in this market.
In addition to this office, the Department of Commerce has a number of other programs to help exporters. The U.S. Commercial Service maintains an office in the U.S. Embassy in Chile and has a commercial advisor whose portfolio includes the environment. This office can conduct customized market research, provide information on trade leads, and help make contacts between U.S. companies and potential local partners. The U.S. Embassy publishes a Country Commercial Guide that provides a wealth of information on doing business in Chile. (This guide can be downloaded from the World Wide Web at http://www.state.gov/www/regions/ ara/chileccg.html.)
Another source of trade lead information is theEnvironmental Technologies Network for the Americas, which is supported by the U.S. Agency for International Development. This program maintains a network of local partners that identify possible trade leads for U.S. companies in Latin America, including Chile. Two other U.S. Government agencies that are active in Chile are the U.S. Environmental Protection Agency and the U.S. Trade and Development Agency (USTDA). While the USEPA’s mandate is not trade development, their expertise and various technology and technical assistance programs provide valuable support to U.S. exports. U.S. companies can capitalize on the networks and contacts that have been established through its international assistance program and can gain insight into the specific types of opportunities evolving in Chile. The USTDA has also targeted the Chilean market and is in the process of evaluating additional project opportunities. USTDA plans to support feasibility studies for several new projects. This activity will provide an opportunity for U.S. consulting and engineering firms, but can also provide a path for U.S. technology providers to enter this market.
In Chile, the American-Chilean Chamber of Commerce is a good source of information. Many U.S. companies doing business in Chile are members. The Chamber hosts a variety of informational meetings and networking opportunities, publishes a newsletter, maintains an information resource library, and provides market entry services (Santiago office: Tel: (56-2) 208-4140; Fax: (56-2) 206-5833. There are also many industrial chambers and trade associations that can be excellent sources of information for assessing specific technology and services needs and can provide information for getting in touch with Chilean companies. Appendix B provides a full list of these organizations with contact information.