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People, not industry, power innovation in Chile

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I recently returned from a visit to Chile, which launched an ambitious effort in 2000 to become an IT outsourcing hub. It did so in an effort to break its economic dependence on its mining industry. By offering massive subsidies, the Chilean government created an outsourcing industry that generated $800 million in revenue and employed 20,000 people in 2008. The Chilean Economic Development Agency (CORFO) asked my research team at Duke University to advise them on a way to grow this to a $5 billion industry by 2015.

I told them it was impossible. Chile had a population of 16 million people, and its universities graduated only 1,400 engineers per year. That put getting 100,000 additional IT workers for its outsourcing industry out of reach. Before long, the industry would start cannibalizing other important, technical professions. Civil engineers, mining engineers and university professors would abandon their posts for higher-paying IT service jobs. And salaries would increase to a point where the industry would cease to be competitive. I recommended Chile try to be more like Israel and less like India. Israel’s smaller, entrepreneurial population makes it a better model for Chile, whereas India’s much larger population gives it an advantage in pursuing the more traditional outsourcing industry model.

Chile’s entrepreneurial ecosystem has the same disadvantages as most regions of the world: Failure is vilified, secrecy is highly valued, and mentoring and social networks are lacking. To accelerate the pace of change, I told CORFO that Chile should import entrepreneurs. These immigrants would help connect locals to global markets, bring in fresh ideas, and boost innovation — just as they do in Silicon Valley.

But how could Chile become an entrepreneurial magnet like Silicon Valley? Chile might be one of the most beautiful places in the world with an open economy and vibrant democracy, but the country is relatively remote. So it is not as easy as it sounds.

Nicolas Shea, an adviser to the Chilean Ministry of Economy, had a good idea: Pay foreigners to come to Chile. In March 2010, I helped Shea’s team design an experiment to import 1,000 foreign entrepreneurs over three years in an attempt to build a thriving tech hub with a culture of innovation and risk-taking. This program, called Start-Up Chile, was formally launched this January. Entrepreneurs who choose to move to Chile for at least six months receive a grant of $40,000. Additionally, the program provides free office space and moving assistance. It also facilitates networking and business connections. (By way of full disclosure, I served as an unpaid adviser to the Chilean Ministry of Economy until January 2011. This year, I am a paid adviser to the board of Start-Up Chile.)

Why did I believe that this experiment would succeed when, as I have written, practically all government attempts to create innovation everywhere in the world have failed? Because the other efforts have focused on building clusters — fancy tech parks, constructed near research universities that subsidize chosen industries to locate there. Billions of dollars have been poured into some of these efforts. What these governments have failed to understand is that buildings and industry don’t make innovation happen — people do.

Skeptics argued that the small amount of money that Start-Up Chile was offering would not attract entrepreneurs from anywhere but the poorest Latin American countries. They said that it would be almost impossible to recruit 1,000 global start-ups. Others argued that, without a large venture-capital fund as its foundation, a tech center could not be built. There were also concerns that the program would be politically untenable because some Chileans would regard immigrants as a competitive threat and voice the same fear that nativists in the United States do: Foreigners take jobs away.

In June 2010, during a visit to Silicon Valley, Chile’s Minister for Economy, Juan Andrés Fontaine, told me that he knew this was a politically risky venture. But he believed enough in it that he created a separate department within his ministry and budgeted $1 million for a pilot program.

For the pilot, 25 companies were selected from 103 applications; 22 of these arrived during August 2010. These start-ups were provided with office space in an old office building in downtown Santiago with just some desks and a slow Internet connection. While Start-Up Chile staff raced to remove bureaucratic obstacles in order for the foreigners to obtain national identity numbers and open bank accounts, the entrepreneurs started building their companies. They also started becoming part of the local entrepreneurial ecosystem.

The start-ups hired 40 locals (that’s nearly two people per company). They gave talks at several universities to recruit students and to get them excited about entre­pre­neur­ship. And they hosted more than 30 Silicon Valley-style meet-ups where technology professionals gathered to exchange ideas on specific topics and socialize. Each team was also visited by an average of three to five friends or relatives — a nice boost to tourism.

The program itself received 320 applications when it was officially launched in January. Of those, 110 were selected in February. In the wake of growing national interest, the government decided to open the opportunity to locals provided they compete with the foreigners for admission. Round 2 received a total of 654 applications, from 65 different countries, of which 179 applications were from the United States, 152 from Chile, 38 from Canada, and 33 from Brazil.

When I arrived in Santiago, I found that Start-Up Chile entrepreneurs were holding nightly meetings to review one another’s business plans and product ideas. They were teaching one another skills, and were building the friendships and global networks that stand to increase their chances of success. The gatherings could easily have been mistaken for ones in Silicon Valley.

As I predicted, venture capital went where the innovation is. At least two new venture funds are already being established in Chile. One is by Arnon Kohavi, an Israeli-born investor and entrepreneur who moved to Chile in May 2011 to start Yarden Venture Capital, a $40 million Silicon Valley-style early-stage venture-capital fund. Another is by Oliver Alexander Flögel, former chief executive of global telecommunications giant Telefonica. Flögel expects to create one of the largest investment funds in South America.

And, as politics go, in July, Fontaine was replaced by Pablo Longueira as Chile’s economics minister. When I met Longueira on Aug. 19, he was eager to get the world’s best entrepreneurs to come and stay permanently in Chile. “Innovation and entrepreneurship are the key to growth in any country,” said Longueira. He told me that the Start-Up Chile program had become a national priority. Longueira saw it not only as a way to “reawaken Chilean entrepreneurship” but also as a model for Latin America.

It’s too early to declare success, but one thing is certain: The magic happens when you focus on people rather than on industry.

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