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Chile IT's still awaiting takeoff

Knowledge@Wharton reports on the stops and starts in the creation of a digital economy in Latin America's most wired nation.

    Chile IT's still awaiting takeoff
    From Knowledge@Wharton
    Special to CNET
    February 7, 2004, 6:00 AM PST

    Although Chile has the most advanced telecommunications infrastructure in Latin America, enjoys unequalled economic and political stability and boasts the highest personal computer and Internet usage rates in the region, investment in technology and its use as a management tool do not show the same dynamism.

    As a consequence, Chile is trying to establish a public-private national agenda that seeks to bring investment levels closer to those of more developed countries.

    Due to Chile's early deregulation and the robust development of its telecommunications sector during the 1990s, as well as recent advances in "electronic government," every Chilean company can nowadays use the Internet to pay national insurance contributions to employees, review current accounts, and apply for bank loans. It can pay taxes and process permits, participate in public auctions and exchange business information, payments and technical specifications with customers and suppliers. It can subcontract projects, interact with databases and take part in electronic marketplaces both in Chile and abroad.

    Nevertheless, according to a recent report by the Center for Study of the Digital Economy of the Santiago Chamber of Commerce, although 69 percent of Chilean companies are connected to the Net, digital technology covers mainly just the fundamentals.

    The IT sector in Chile currently represents close to 1.2 percent of the country's GDP.
    Only 25 percent of Chilean companies have their own Web site; only 11 percent use the Web as a platform for sales; and only 16 percent use it to buy online and to connect with suppliers.

    These numbers lag far behind countries such as Sweden and Germany, where almost every company is connected, more than 80 percent of companies have Web sites, and about 40 percent transact sales online. In the United States, 56 percent of all companies buy via the Net, according to data from CCS.

    IT and the creation of value
    George Lever, director of research at CCS, says one of the main reasons for the low Chilean numbers is a lack of vision among nontechnologist managers in local companies. "Information technologies are perceived as complex and expensive. Companies don't see any incentives for incorporating them in their processes, because they don't understand them as a strategic tool for business development," he says.

    Ricardo Stevenson, managing director in Chile for IDC, a consulting firm, has a similar view. Stevenson notes that despite the fact that Chile has the best infrastructure for Internet development, "this does not manifest itself in the most intelligent use of all that technology, as is the case in the neighboring countries of Argentina and Brazil. For example, a majority of businesses in Buenos Aires use Internet technology in their sales processes. This is something that we don't do here in Santiago."

    To Stevenson, the "unintelligent" use of information technologies is still most evident among small and midsize Chilean companies. "Statistics show that only 18 percent of the companies use some administrative software, while most of the remainder use computer terminals merely as word processors, along with some Excel software. They are undoubtedly far from converting that into a management tool for managing business efficiently."

    Lever suggests that there is also a cultural barrier that shows up in studies where companies indicate that technology "is not interesting to them and does not appear necessary." It is reflected in the lack of programs for training personnel in information technology and in the distrust that information technologies seem to produce.

    Analysts agree that small and midsize Chilean companies confront an additional issue when it comes to quickly incorporating new technologies into their production processes: They need to be more competitive in order to take advantage of opportunities now opening up as a result of the free-trade treaties Chile recently signed with the European Union, the United States and South Korea.

    "In Argentina or Brazil, smaller companies are more oriented toward competing in the local or regional markets, but that is a very different situation from what Chilean exporting firms are facing," says Jos? Miguel Benavente, an economics professor at the University of Chile. Benavente, however, doesn't claim that every company should incorporate sophisticated IT. "Bringing in information technologies is a complex process. Many companies don't see any tangible benefits, and there is still distrust, above all, among business-to-business companies," he says.

    One major factor affecting IT progress is a scarcity of entrepreneurs.

    Chile is "very well positioned" in its indices of economic and political stability and in its platforms of electronic commerce and "digitization," notes Jose Miguel Piquer, director of the computer sciences department at the University of Chile. "But it turns out that there are no great risk takers or investors ready to enter segments that are not the traditional ones." In Chile, traditional segments are generally associated with raw materials and natural resources.

    Investors' conservatism reflects a lack of points of reference, Piquer notes, adding that "in Chile, there are no examples of people who have invented a major technological advance" and then gone on to become millionaires.

    Chile is very well positioned in its indices of economic and political stability and in its platforms of electronic commerce and digitization, but it turns out that there are no great risk takers or investors ready to enter segments that are not the traditional ones.
    Moreover, he says, entrepreneurs and risk capital investors often fail to see eye to eye. Entrepreneurs complain that they don't have access to financial resources, while investors complain that good projects aren't emerging. "It is the dilemma of the chicken or the egg."

    The digital agenda
    Speeding up the slow-moving advance of information technologies in Chile is a priority not only for the government but for the private sector, which has produced a pact known as the Digital Agenda. This initiative officially attempts "to convert Chile into a digital country by 2010." To achieve that goal, it was decided to move into a new phase in the interoperability of public services, putting special emphasis on the needs of companies and citizens.

    The Agenda also wants to strengthen existing laws and regulations and promote efficiency through means of digital processes such as electronic billing and digital signatures.

    Lever, for one, believes that it won't be hard to eliminate the cultural barrier that has impeded widespread implementation of information technologies in Chile. The challenge is to create an environment that promotes their use. He takes an optimistic view of the responsibilities that companies and the government have accepted in the Digital Agenda.

    For Lever, a key factor is the emergence of more dominant players, such as the electronic platform designed by the country's internal revenue service, SII (short for Servicio de Impuestos Internos), for the declaration and payment of taxes via the Internet. He calls that a clear boost for the growth of information technologies in Chile, "because the benefits in terms of costs and time saved are obvious; it can become a factor that overcomes the cultural barrier through its multiplier effect."

    Lever and Stevenson both emphasize that this is an area where Chilean companies are leaders in the world's digital scene. According to CCS data, 49 percent of Chilean companies use the SII tool, a higher percentage than in the country's two closest competitors: France (18 percent) and Australia (16 percent).

    Considered one of the great symbols of the digital economy by the government, electronic billing began to operate in a pilot project in the middle of 2002. By last August, SII had received 1.7 million electronic tax documents--about 1 percent of all tax documents that were transmitted every three months.

    The CCS study predicts that by the end of 2005, nearly 40 percent of Chilean tax documents will be transmitted electronically. For this to happen, the electronic billing project must grow at an annual rate of 370 percent--nearly quadrupling each year.

    Stevenson also cites the portal Chilecompras, the system for public-sector hiring and purchasing that requires all government suppliers to participate in an electronic bidding platform. "In other words, if you are not online, you don't get business. It's that simple." At the moment, Chilecompras counts 29,000 officially registered suppliers, for whom 58 percent of all purchases are reported through the Web site.

    The goals of Chile's Digital Agenda are ambitious. During a recent meeting of his group, Andres Navarro, president of Sonda--the largest software exporter in Latin America and a company in which chip giant Intel recently invested--called for "doubling Chile's production of technology until it reaches a percentage of the (gross domestic product) equivalent to that of wine and salmon," Chile's stellar exports, along with copper.

    To achieve that goal, Navarro views risk capital as playing a fundamental role. Nevertheless, he warns that such funds have not been exploited fully "for lack of ideas and proposals."

    Along those lines, new initiatives emerging from the academic sector hope to capture the interest of risk capital investors. They involve so-called "business incubators" at two Chilean universities--the University of Chile and the University of Adolfo Ibanez. The incubators, known respectively as Access Nova and Octantis, stand out among some 20 innovative projects now in incubation. On average, the initial investments are about $200,000.

    The IT sector in Chile currently represents close to 1.2 percent of the country's GDP. That percentage is in line with the level of investment in the IT sector, and it doesn't differ from numbers in markets such as Argentina and Brazil. Nevertheless, that figure is still far from the 3.5 percent of GDP invested in IT in the richest nations.

    According to ACTI, an association of Chilean IT companies, it is possible to promote the development of Chile's IT sector so that it reaches 3.8 percent of the country's GDP while also promoting the country's technology exports. The association has proposed as a goal for 2010 that IT sales outside the country total $1.5 billion.

    How will that be achieved? ACTI plans to focus on business niches where Chile could achieve competitive advantages. From the outset, it has defined four possible niches: the outsourcing of software; the development of technologies associated with "clusters" (consortia of export-focused companies); services enabled by digital systems, and IT solutions for the rest of Latin America.

    The government's goal is to confer special importance to the free-trade pacts that Chile has signed, because the country expects to receive a new wave of private, high-technology investments as a result of those pacts.

    Not only must Chile come closer to the GDP percentages of developed countries, Lever says, but it must also surpass them in order to deal with the digital divide. "It is a key factor that implies greater competitiveness. We have a divide to overcome, even more so considering that we are interconnected to the world," he notes.

    Meanwhile, Piquer is starting to perceive an increased level of dynamism. "In Chile, we have great potential, even though, in some ways, we have not exploited it. Chile's digital economy has the capability to compete on an equal basis with nations outside Latin America that are on a technological level similar to ours, such as Poland, the Czech Republic, Israel and Greece."

    This improved environment is based also on the "quite favorable" view that Chilean companies have concerning use of the Internet, according to CCS. Sixty-six percent of Chilean companies connected to the Web believe that they have derived an increase in efficiency. Fifty-seven percent have increased their productivity, thanks to the Internet, and 49 percent claim to have obtained a reduction in costs. "Even better, 40 percent of the companies (surveyed) increased their market share, and 33 percent--a figure not to be taken lightly--registered increased sales associated with their use of IT tools," the study concludes.

    Optimism about the future of the digital economy can also be observed in Chile's regional environment. IDC expects Latin America's market for IT to grow by between 6 percent and 7 percent during 2004. On average, IT investment in each Latin American country represents about 1 percent or 2 percent of the country's GDP, with Venezuela at the extreme low end and Colombia at the top.

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