Case Finland and Nokia

1. How was Finland as a nation able to move from a sleepy economy to one of
the most competitive nations in the world by the end of the 1990s?

The Finnish economy was historically driven by the wealth of the country’s
natural resource endowment, e.g. the pulp and paper cluster had emerged
based on the large forests. The cluster had achieved a leading role in the
world. Finland became an important supplier of manufactured products to the
Soviet Union, Sweden, Germany, United States.

Finland constantly developed its following the models of its Nordic neighbors
to invest highly in social welfare and public infrastructure. GDP growth rates
were stable, investment rates were high, and total factor productivity growth
outperformed many other European countries.

One of the main reasons for the country to succeed was the government
regulations. Taxes and public spending were high. Macroeconomic policy
featured a fixed nominal exchange rate, centralized wage bargaining.
Government expenditure was rising. Finland focused on quality public
education and university system.

Finland was paying a special attention to inventions and R&D, special

programs and organizations were established, R&D expenditure as a share of
GDP was increased continuously.

The country joined the European Free Trade Association (EFTA) in 60s,
European Economic Area (EEA) and European Union in 90s. Finland was
known for fiscal stability and was the only Nordic country introducing the Euro
in the first wave.

With the opening towards the west, the Finnish economy attracted significant
amounts of inward FDI. New kinds of investment syndicates were established
where the public sector invested alongside venture capitalists.

2. What allowed Finland to become a world-leading nation in the mobile

communications cluster? Why did this cluster develop in Finland rather than
other fields?

Finland’s mobile communication path began early enough compared to other

countries as in 20s several radio laboratories and establishments were
founded to strengthen national development and production of radio
technology.

Emerging demand for Finnish technology from global market would be the
greatest reason why mobile communication industry emerged in Finland and
 made Finland a world-leading nation in mobile communication. In 80s
technology research organizations were founded, which became the main
implementers of technology policy.

The Finnish telephone network was never monopolized by the state. The
threat of nationalization, had stimulated private operators to constantly
upgrade their technology. Finnish operators, who were quite advanced
technologically, engaged actively in R&D cooperation with equipment
manufacturers. Private telephone operators were up for administrative
cooperation and joint actions with each other, combining their R&D and
marketing efforts. The introduction of the Nordic Mobile Telephone (NMT)
network by Finland, Norway and Sweden in 60s made the Nordic region the
world’s largest single mobile market at the time.

Investments also played an important role as a big part of all venture capital
in Finland was directed towards telecommunications.

Lastly, Finns had been early adopters of mobile phones with a big percentage
of population owning mobile phones. The world’s first graphic-based Internet
browser was developed in Finland in 2001. Finland was recognized as a
location for highly skilled IT professionals.

3. How did the Finnish firm Nokia become the world leader in mobile handsets?
How did its home base in Finland influence Nokia’s success?

Nokia’s aggressive strategy to dominate mobile communication cluster would

be the main reason how Nokia could become a world leader in the sector
among other reasons. Nokia’s passion for mobile communication industry was
great enough to give up more than 40% of its revenue in is pre-owned
communication industry to concentrate only in mobile communications. Nokia
was also lucky enough to see the possibility of mobile communication early
enough to predominate the industry and prevent any competition.

Next, Nokia consolidated the Finnish telecommunication equipment industry

and several other companies were acquisited. Nokia allied itself and vertically
integrated with distributors and mobile operators around the world to reduce
costs and help shorten new product development cycles; the company began
to build a global consumer brand. The company was producing base stations
and switching equipment along with mobile phones.

Nokia was seen as mirroring the Finnish national character: pragmatic,

honest, quiet, and serious. The business press often referred to Nokia as
“non-political” and as an informal organization built on trust. Nokia would go
on to define a mobile phone as a fashion item and consumer good, instead of
a technology product. Nokia’s strategy was to serve distinct customer
segments with differing needs.
4. What are the most important challenges for Finland in the early 2000s? For
participants in the Finnish mobile communications cluster? For Nokia?

Overall growth rates were declining, and major export markets appeared
weak, the demand for the products fell. The telecommunications cluster
especially was experiencing a severe downturn. All mobile phone
manufacturers were facing intense competition in 2001, and one of the main
challenges facing Nokia in 2001 was the evolution of standards. Nokia had
seen its revenue and profits fall. Given the large role of Nokia and the cluster
in Finland’s economy, concerns about the level of exposure to one company
and one cluster were becoming bigger.

Finland was also facing shortages of skilled engineers and scientists,

unemployment rated were increasing.

5. What economic policy priorities would you recommend to the

government? What steps should the private sector take?

The general recommendation would be liberalizing the market while setting

the boundaries and keeping some level of government intervention, allowing
the private sector to regulate itself for the most part. Keeping interest rates
at beneficial levels, welcoming foreign investment, spending budget on R&D
and education, regulating employment policies would be beneficial for the
economy. The private sector would benefit from staying aligned with the
global trends, cooperating with other companies and industries worldwide
and constant learning and invention processes.

VOLVO CASE

1. Why has Volvo spread its value chain for heavy trucks around the
world?
  Their value chain and internal logistics should add more value to Volvo
truck because of its relatively low cost
 It allows to integration with their suppliers and used internal resources
to assembly the truck
 Volvo value chain adds more value to their whole operation system and
brand name
 the operation and manufacture factories are always located inside one
zone, which is comfortable

How can you explain why certain activities are performed in certain
locations? (You may want to begin with Exhibit 5).

Certain activities are performed in certain locations because of labor force, needed
resources of location, infrastructure development level, estimated production
volume, etc. For this reason plants for producing drive-train components, engine
factories, assembly plants are located in certain places.

2. Why have European-based truck manufacturers become the global

leaders and not American or Asian companies?

 becoming technological leaders in the market by being first who

introduces advanced technologies in heavy truck

 tendency to become a global player and entering to new markets such

as U.S.

 having operational system that integrated into all the major drive-train
components and having own distributors throughout Europe

3. Why is Volvo (as well as other European companies) so committed to

entering the U.S. market?

 attractive opportunities offered by US geography and transportation

business
 highest sales of 45% in 1980 compared to other regions
 Volvo truck decided to become a "global player"
 unwillingness to lag behind its direct competitors who began to enter
to this market and take global advantage

4. What steps has Volvo taken towards establishing itself in the United
States?

 becoming a team with Freightliner, where Freightliner assumed

responsibility for the U.S. distribution and service of Volvo Trucks.
 acquisition of White Motor Corporation
 improving dealer and customer relations by leading integration process
 introducing quite advanced White product line
 acquisition of GM’s heavy truck business
 creating a new brand WHITEGMC
 adapting their product line to the needs of U.S. customers
 Why has the company had so much difficulty?

 Product features and customer preferences are different than in

European market
 difficult to attract enough dealers
 Customer demand in U.S. is different from customer demand in
European market
 adversarial relations between manufacturers and dealers in the
U.S.
 slowly increasing of sales
 problems in meeting orders in 1987-88

5. What should Volvo do in 2000?

 entering further into global markets such as Asia and Africa

 collaboration with local business partners
 developing more fuel efficient vehicles
 coordinated for common brand name and product development
 developing customer care centers for help in case of an emergency
breakdown

6. What are the implications of the Volvo Truck case for how countries
should attract foreign investment?

 Reduce restrictions for foreign investors.

 Provide open and reliable conditions, including: ease of doing business,
relatively flexible labor markets, etc.
 Dealers must support to sale the product
 The arrangement and cohesion of companies within one industry to ensure
greater and better integration

COSTA RICA

1. Why has President Figueres embarked on a new economic development

strategy upon taking office? How does his thinking differ from past
approaches? Evaluate this new approach.

Former economy of Costa Rica was based on agriculture, textiles and tourism.
However, the country emphasized public and private investment in manufacturing
and infrastructure in order to overcome Costa Rica’s dependence on imports and
price fluctuations in its traditional commodity export products. As president Figures
mentioned that country needed a national strategy that moved beyond cheap labor
and exploitation of the natural resources. He wanted to compete based on
productivity, efficiency, and technology to become a leading Latin American
economy. The aim was to attract industries with higher value, allowing Costa Ricans
to increase their standard of living and promote the development of techological
cluster.

2. Does electronics/information technology represent a realistic potential

cluster for Costa Rica? What conditions are necessary for a viable cluster?

Condition of Costa Rica:

1. Largest electricity generating capacity in Latin America

2. Costa Rica enjoyed a relatively advanced telecommunications system, with
well-developed long-distance, cellular, and satellite mobile communications,
as well as access to the Internet, fiber-optic rings, ISDN nets, and multimedia
services.
3. Costa Rica had the best education system in Central America, with the
highest literacy rate (95%).
4. Costa Rican laws, regulations, and practices did not discriminate between
national and foreign companies. There were no restrictions on repatriation of
earnings, international transfers of capital, or currency exchange practices.
5. In 1981, following other developing economies, Costa Rica approved
legislation creating “Zonas Francas” - export-processing zones
6. By 1996, the Costa Rican economy was showing the initial signs of a
transition toward more sophisticated electronics exports. A number
of companies had established more advanced manufacturing
operations under the Zona Franca legislation, leading to the export
of medical equipment ($44 million), communications equipment ($36
million), and hair dryers ($45 million).
3. Why is Intel interested in a Latin American plant as part of its global
strategy?

Why would Intel choose Costa Rica?

 Intel constantly invested in the development of cutting-edge technology and

the expansion of production capacity.
 Intel seek location outside of the Southeast Asian countries, where we had
focused most of our back-end assembly and testing work.
 Intel sought countries that would balance two broad categories: cost
structure and operating environment/infrastructure.
  Intel considered general environment, generic and manufacturing
infrastructure and Costa Rica was one of the strong Latin American country
that satisfied Intel’s requirements.
 Intel’s investment of $300 million–$500 million represented the largest
foreign investment ever made in Costa Rica by a single company.

4. Given Intel’s decision, what steps should the Costa Rican government
take to further develop the cluster?

Intel mentioned minuses of Costa Rica which are bureaucracy and small size of the
country. However, Costa Rica remain corruption free country and its size allow
country to move faster and make changes more easily.

1. Intel was concerned about the availability of the midlevel technicians (labor)
that an ATP facility require. Intel would need technicians trained specifically
for the semiconductor industry. This would involve the introduction of new
technical training programs in vocational schools and universities and the
adaptation of existing programs to better fit the company’s needs.
2. Costa Rican industry had not been energy intensive, and every industrial
consumer was charged the same electricity rate, regardless of its size. The
industrial price of electricity in Costa Rica varied between $0.07 and $0.09
per kilowatt-hour, while Mexico had reportedly offered Intel a rate of $0.025.
Intel need a constant supply of high-quality electricity for its plant.

RWANDA

1. Assess Rwanda’s situation (assets and liabilities) as of the end of the

genocide in 1994/1995. What kind of economic system did the Government
of National Unity inherit?

2. Identify the steps that the Government of National Unity took between 1994
and 2000 to restore the economy? How would you evaluate the initial
economic development strategy?

3. Identify and evaluate President Kagame’s economic strategy for the country
from 2000 through 2011.

4. What is the situation facing the Rwandan economy in 2011?

 5. What recommendations would you make to the President and his team? Be
specific.

1. Assets
 mineral resources
 developed agriculture
 tea, coffee, and bananas
 Unique climate and growing conditions for a range of products
 More or less developed infrastructure

Liabilities

 Relatively small home market

• Landlocked with high logistical costs

• Skill and capacity shortages

• Limited private sector

 Poor neighbors
 Inflation
 Price instability
2. Between 1995 and 2000, the Rwandan economy recovered quickly

In 1994, the economy shrunk by 50%, inflation was 64%, and per capita income fell
to $143;

most property and infrastructure had been destroyed;

The country’s population declined to 5.1 million;

Efforts were made to stimulate private sector development through a privatization

program and the establishment of the Private Sector Federation to provide support
for businesses;

It was joined the WTO in1996;

In 1998 many tariffs were reduced or eliminated;

The personal income tax and corporate income tax rates were reduced from 50% in
1997 to 40% by 1999;

3. Vision 2020 called for the development of a knowledge-based economy,

requiring high quality human resources.

In the long term, the government aims to transform Rwanda from a low-income
agriculture-based economy to a knowledge-based, service-oriented economy
with a middle-income status by 2020.

The National Education Strategy (2007) focused on building new schools,

improving teacher standards, and increasing vocational and academic higher
education. Thousands of new classrooms were built each year, some by government
and some by private citizens, and many institutions were created to facilitate
teacher training.

Rwanda introduced a mutual health insurance system in 2007 called Mutuelles

de Santé.

In 2015, the American NGO Partners in Health established a University of Global

Health Equity to train Rwandan Health professionals.

President Kagame played a highly active role in pursuing potential foreign

investors

The Rwanda Development Board (RDB) was created in September of 2008,

combining government agencies involved in investment promotion, exports,
tourism, privatization, IT promotion, SME development, and human resource
development;

How they attracted FDI Government provided all conditions for foreign
investments, especially developing privatization policy

5 Recommendations

 to allocate special grants for certain specialties like engineers, IT specialists,

etc.
 move the Rwanda economy and society to the next level, while solidifying
Rwanda’s standing in the global community in a challenging region.
 Become a manufacturing country (technologies, textile)
 Develop scientific cluster and build research institutes
 Overall, the arrival of a new president will provide more new ideas and
strategies for quickly achieving goals

SINGAPORE
Asset: Production resources, Location port development, Good English, Foreign
investment
Liabilities: Poor infrastructure, Labour force not enough skilled workers, High
unemployment

History:
 In 17 century, Singapore was an important trading center and port with policy of duty
free trade
 By the fourteenth century Chinese immigrants had established a small community on the
island, and the named it Singapura, meaning “Lion City”.
 It Was earning Revenue as a center for trade.
  Singapore developed a classic entrepôt economy ( in includes shipping, communications,
banking, insurance, and infrastructure) which funneled exports and imports to a
surrounding region.
 During World War II, Singapore was Britain’s principal naval and air base in Asia
(военно-морская и авиационная база)
 1963, Singapore and Malaya formed Federation of Malaysia
 Singapore GDP declined by 4% in the next year after the Indonesia agent bombed a
Singaporean hotel
 1965 Malaysia ejected Singapore

1.
 Singapore became an independent republic in 1965.
 Lee Kuan Yew became Singapore’s first prime minister and his People’s Action Party was
winning all seats in parliament.
 New policy about creating Singaporean identity :
Chinese 62% of population, Indians 16%, Malays 14%, others 8%
5 major languages and 20 dialects

 They set high taxes for private owners of cars in order to avert air pollution
 Alarm for taxi if it is overspeeding
 Fines for littering, smoking in public places
 Long hair men was prohibited among government workers and tourists
To create jobs and provide housing, government was created two boards:
1. Housing Development Board, to build 10000 low and mid- income housing units per year
2. Economic Development Board, to support job creation by attracting investment
 With a limited base of local companies, Singapore welcomed foreign direct investment:
They decreased the taxes in order to Decrease cost position of the companies and attract
new investments
 GDP began to growth

2.-3 The “Next Lap” plan plotted long-term social and economic goals:
 improving infrastructure,
 expanding educational opportunities,
 creating an advisory body of Singaporeans living abroad,
 building research institutes to support companies expanding to world markets
Goal: achieving a U.S.-level per-capita standard of living by 2030
 The “Thinking Schools, Learning Nation” program was launched to transform the
education system to foster creativity, independent thinking, and problem solving.
 Research centers and advanced training programs were launched in a number of areas
 Government also aimed to improve the conditions for local companies
Developed clusters: Petrochemical. By 2008, Singapore was one of the top three oil refining
centers in the world. The petrochemical industry accounted for 11.2% of Singaporean industrial
output and was the third largest manufacturing sector in Singapore,
financial services industry contributed about 13% to Singapore’s GDP in 2008
In logistics, the ports of Singapore remained in a leading global position. By 2008, Singapore
remained the largest container port in the world
Information technology accounted for 3.6% of GDP while electronics manufacturing accounted
for 4.7% of GDP and employed more than 90,000 workers in 2008
Biopharmaceuticals, Tourism, education

4 Competetive advantages:
• Connected to the global economy – open to trade & investments
• Dynamic and business-friendly business environment
• World-class infrastructure
• Good and improving education system
• Efficient public services
• Trustworthy and reliable political system
• Focused cluster development efforts

Recommendations:
 Continue with policy to support the market-driven process towards tighter integration into the
Asian economy
 Revive ASEAN around a competitiveness agenda where collaboration creates direct
benefits for participants
 Focus on productivity growth in existing and emerging sectors
 Strengthening cluster linkages to enable companies to develop highly specialized skills
that have significant value-added
 ESTONIA

Case questions

1. What was the competitive position of Estonia when it regained

independence in 1991? What were its assets and liabilities?
One of the main advantages of Estonia was their location, because the country is
located near to Sweden and Finland. Estonia lacked a constitution, democratic
 institutions, and a functioning legal system, but the newly elected Estonian
government quickly took steps to transform the country into a Western market
economy.

Assets:

 The creation of an effective, non-politicized civil service as outlined in the

Constitution became one of the new government’s central projects.
 free market policies.
 they introduced free market policies
 the establishment of a currency board that pegged the Estonian Kroon
 Private property and land nationalized during the Soviet period were
returned to their previous owners
 a policy of no restrictions on foreign investment or exchange controls was
adopted
 no import tariffs
 free trade agreement with the European Communities for EU members
 huge investments in telecommunications infrastructure
 new tax system with a flat tax rate of 26% (both for individual income tax
and corporate profit tax), a VAT of 18%, and no corporate tax on reinvested
profits
Liabilities:

 GDP dropped by more than a third

 industrial production dropped by more than half
 High level of inflation
 Bankruptcy of companies
 High unemployment rate
 Lack of modern government policies
2. Analyze the national diamond over time. What allowed Estonia to
upgrade competitiveness faster than many other transition countries?

3. Why was Estonia able to achieve such rapid progress?

Willingness to introduce and improve their country according to European
standards, so that the quality of life of the population and the country's
economy develops. The new government regime, which was different from
Soviet standards, played a big role. Moreover, the government encouraged
foreign companies to open business in their country. This was done through
the absence of tariffs and simplified policies.

4. Compare Estonia’s success with that of Chile. What are the

similarities? What are the differences? Which country faced greater
challenges?

Similarities:

 Successful crisis management

 High Share of foreign investment in economy
 Liberal market economy with “competition state” ideal
 Relatively good, improved since peak of crisis
 Mainly regional markets
 Could improve macroeconomic factors during crisis
 Trade Openness and the Flat Tariff Rate System
 High inflation and unemployment rate before growth in economy
 GDP raised sharply after government policies
 Implemented internationalization
Differences:

 Estonia: Diversified profile. IT and some services have on important

position/ Chile: minerals natural resources
 Estonia could become full member of EU, Chile couldn’t ( NAFTA)
 A Stronger Private Sector in Chile
 Chile introduced trade tariffs to manage it, Estonia had no tariffs
5. What are Estonia's competitiveness issues in 2007? What
recommendations would you make to Estonia’s leaders?
 During that period, Estonia took a big jump in the improvement of
living standards, increasing its GDP per capita. The economic
situation changed in spring 2007. The banks tightened the granting of
credits, consumers’ confidence diminished, and the real estate market
declined.
 The Nordic banks that had in 2005-06 provided much of the capital
inflows started to tighten lending conditions. Year-on-year credit
growth had peaked at an annual rate of 70%; the banks aimed to slow
the expansion to around 30% in 2007/08. GDP growth rate started to
drop below 10%.
 The global financial crisis in 2008 dramatically worsened Estonia’s
economic situation. Exports were hit from the global trade collapse
that affected Estonia’s main trading partners. The drop in economic
activity led to massive job losses, especially in construction. The
unemployment rate increased to 14% in 2009 and 17% in 2010.
 The Estonian government reacted with a policy of fiscal retrenchment.
While many other countries let ‘automatic stabilizers’ in the public tax
and social security system work to provide a fiscal stimulus, Estonia
cut public expenditures by 9% of GDP to limit its budget deficit to
1.7% of GDP. The majority of the fiscal tightening was achieved
through expenditure cuts; only a small part was achieved through
higher social security contributions and consumption tax hikes.
 Banks played thedominant role in Estonia’s financial institutions quite
underdeveloped. The Estonian government needs to balance the
development between bank and other financial institutions in financial
market. So, government should monitor and control not only lending
conditions, but a whole banking system through implementing of rules
and policies.
 CHILIE

Chile case

Chile PROFILE

bordered 3 countries: Peru to the north, Bolivia to the northeast, and Argentina to the east.

The capital was Santiago, located near the middle of the country Chile had long been considered the
economic star of Latin America. Medium income country

Trade:

 long-delayed membership in the NAFTA(wanted to join but USA was always postponing it)

 had signed an association agreement with Mercosur in 1996 but was not a full member.

Assets:

 world’s largest reserves of copper (about one-fifth of the world total) and the 2nd largest
reserves of lithium. mineral rich-iron ore, coal, gold,

 and silver.

 the world’s 2nd largest salmon producer

 Cereals—wheat, corn, and rice principal crops.

Liabilities:

 volcanic activity, desert

 autonomy, no democracy

 difficult access to sea

History :

 Chile had conflicts with Peru and Bolivia throughout the 19th century over nitrate deposits in
the north. These led to the War of the Pacific in 1879 during which Chile seized several mineral-
rich provinces in the north, increasing the size of the country cutting off Bolivia’s access to the
sea.

 have been no official immigration limits or targeting for more than a century.
 Health standards in Chile were among the highest in Latin America

Before Pinochet Chile had a long history of military intervention in political life.

Time President Style ,reforms result

1924 Alessandri military took power worldwide
economic collapse
1964 Eduardo Frei- Revolution in Freedom. land reform; increase
Montalva expanded education, health, and housing in government
programs; and partial nationalization of revenue, as
foreign mining interests. international
copper prices were
at their all-time
highs GDP , growth
accelerated and
inflation declined
A coalition Salvador “pacific transition to socialism.” Economic
of four Allende- price controls to control inflation, chaos,
groups— Marxist expropriated the remaining equity in characterized by
Socialists, foreign-owned copper exploding inflation,
Communists, mines, nationalized many sectors of the shortages of key
Radicals, and economy, tightened exchange controls, products, black
Christian centralized markets, and huge
Democrats— control of international trade and granted losses in
won a large nominal wage increases state enterprises
plurality in
the 1970
presidential
elections.
1973-1982 Pinochet- authoritarian political structure, no Inflation declined
LOWERED democracy. The economic reforms can be gradually,
TARIFFS, divided into 3 categories: stabilization falling from 470%
STABILIZATION policies, structural in 1973 to 84% in
reforms, and social policy reforms 1977.
Stabilization Policies reformers raised economy was much
income and consumption taxes, imposed a stronger GDP
luxury tax, and cut all categories of growth consistently
government spending by at least 15% exceeded 5%, the
Structural Reforms -trade liberalization budget was in
(Tariffs were gradually reduced) , withdrew surplus,
from the Andean Group -custom union, unemployment and
privatization, and further tax reform. inflation were
withdrew from the Andean Group. falling, and real
liberalizing the domestic capital market; wages began to
reforming the labor code to recover
reduce payroll taxes and eliminate
 restrictive practices; and introducing wage
indexation.
1982 Chicago boys Crisis- reason International investors began
to pull their money out of all Latin American
countries
Pinochet put traditionalist The government employed two tools to By 1990, the
them economic manage trade: tariffs and the exchange rate. Chilean economy
team in Tariffs were again reduced, from 35% in was again
1983-84. T 1984 to only 15% in 1988.25 In order to considered the star
Buchi achieve both currency stability and of Latin America.
competitiveness, Buchi introduced a GDP growth was
“crawling peg” exchange rate system. the
second highest in
the region
After Patricio Aylwin most of Buchi’s policies. The government
Pinochet BUT 2 legislative changes: a tax package budget remained in
1989 designed to fund new social programs and a surplus; monetary
reform of Pinochet’s labor law. Government policy, in the hands
officials were careful to position the changes of the independent
as minor adjustments to the Pinochet central bank, was
model.30 The only change in fiscal priorities aimed at a gradual
involved increased spending on public reduction in
health, which doubled in real terms inflation to 3% per
between 1990 and 1997.31 year; and the
nominal exchange
rate continued its
gradual decline.
1993 Eduardo Frei 3 international goals: continued regional
Ruiz-Tagle сын integration, continued internationalization”
чувака выше of the economy, and full assumption of
international responsibilities including
human rights, the environment, and
peacekeeping obligations.
late-1990 the strongest economies in the developing
world. traditional industries such as mining
and fishing had grown, but the country also
developed exports in several unexpected
sectors. These included forestry, processed
fruit, salmon, wines, and a variety of
services—such as tourism, financial services,
retailing, and management of public
utilities. Chile was the world’s largest
exporter of fruit and second largest of
salmon.

UNIONS:
  Latin America Free Trade Area (LAFTA) which included Argentina, Brazil, Chile, Mexico,
Paraguay, Peru, and Uruguay.

 Costa Rica, El Salvador, Honduras, Guatemala, and Nicaragua formed the Central American
Common Market (CACM)

 The Andean Group was created in 1969, made up of Bolivia, Chile (which left in 1976),
Colombia, Ecuador, and Peru; Venezuela joined in 1973.

 NAFTA - NOT FULL MEMBER

 Chile signed the Enterprise for the Americas Initiative (EAI) in October 1990. The EAI
established a goal of tariff-free trade from “Alaska to the Andes” to be called the “Free Trade
Area of the Americas” (FTAA), but no concrete steps had been taken to fulfill this
commitment.

NAFTA Free Trade Agreement between the United States, Canada, and Mexico became effective on
January 1, 1994. It was a free-trade area, meaning that goods would eventually pass tariff-free across
members’ borders, but member countries did not have a common external tariff. Instead, rules of origin
regulations specified which goods qualified for preferential treatment and denied benefits to goods
where significant value had been added in non-member countries. elimination of non-tariff barriers,
coordination of antitrust policies, and dispute resolution procedures.

Mercosur The Southern Common Market, commonly known as Mercosur, was established with the
Treaty of AsunciÛn in 1991. The agreement created a customs union, with the goal of eventually
creating a common market that would allow for the free movement of goods, capital, labor, and
services among its four member countries—Argentina, Brazil, Paraguay, and Uruguay. Mercosur was an
unbalanced group—the economies of Brazil and Argentina dwarfed those of Paraguay and Uruguay.
common external tariff (CET) to imports from countries outside the agreement

Chile’s trade policy was an important part of its development strategy. Membership in NAFTA and
association with Mercosur would allow the country to serve as a bridge that connected the two trade
blocks. Unfortunately, after five years of fruitless negotiations, NAFTA membership was still well in the
future.

Full membership in Mercosur offered an interesting alternative. Chile’s medium-income neighbors were
more likely to buy sophisticated products and services from Chilean firms than were the NAFTA
countries. But the danger was that the block would lead to trade diversion, not trade creation. If Chile
joined Mercosur as a full member, the NAFTA and Mercosur might well grow farther apart and the
opportunity for hemisphere-wide trade could disappear for decades. It would be difficult, or perhaps
impossible, to become a full member of both groups because of Mercosur’s goal of eliminating all
internal documentation requirements by subjecting goods imported from outside the block to a
common external tariff. The final option was to remain outside both blocks. Chile’s strategy of
negotiating bilateral freetrade deals with any receptive country had served it well. Joining any regional
trade block involved ceding a great deal of sovereignty over economic policy. Few countries could match
Chile’s record of unilateral liberalization, and subsequent export growth. This might continue, especially
if future global negotiations, such as the Uruguay Round, led to further worldwide tariff reductions.

QUESTION

Compare Estonia’s success with that of Chile. What are the similarities? What are the differences?
Which country faced greater challenges

Similarity:

 Successful crisis management

 High Share of foreign investment in economy
 Liberal market economy with “competition state” ideal.
 Relatively good, improved since peak of crisis
 Mainly regional markets
 Could improve macroeconomuic factors during crisis
 Trade Openness and the Flat Tariff Rate System.

Differences:

 Estonia: Diversified profile. IT and some services have on important position

Chile minerals natural resources

 Estonia could become full member of EU, Chile couldn’t ( NAFTA)

 A Stronger Private Sector IN Chile
 California Wine Cluster

Overview

Problems that California Wine Cluster faced:

 grape supply shortage due to increased demand

 vine destroying pest- phylloxera
 difficulties in entering international market
 increasing competition at home from Chile/Australia

CALIFORNIA ECONOMY

Leading industries: aerosphere, biotechnology, computer, hardware, software, agriculture, food

processing, gourmet food/restaurants, tourism.

1. What explain the emergence of California as the dominant wine cluster location in US and one of
the world’s leaders.

There are several factors that allowed California Wine Cluster to emerge from ambiguity to significant
player leaving ahead France, Italy and other European countries.

1. The main factor is the Viticulture and Ecology Department at University of California at
Davis, which we established during the epidemic of phylloxera. After the establishment of this
department California reached high quality level, were invited to World’s wine Fair at France and
outperformed Ohio state, the leading wine producer at that times. This department helped to
 introduce several new technologies such as mechanical harvesting, drip irrigation, and field
grafting.
2. Science and technology played an important role in eliminating the quality gap between European
and California winemakers. European vintners had relied heavily on traditional methods, whereas
California winemakers began using quantitative analysis and new techniques to produce higher
quality, more consistent wines. Larger wineries had established in-house research staffs of their
own with state-of-the-art laboratories.
3. California had The Wine Institute lobbied state and federal agencies to cancel the ban on
alcoholic beverages.
4. The development of other industries in California that helped promote wine consumption.
 Tourism
 High end restaurants
 Wine tours
 Spectator – leading wine publication, promotion medium
 Television programs to promote health benefits of wine
5. Development of other clusters lead to high demand and increased rivalry
6. Endowments such as best combination of climate, sunlight, topography, and water for wine
grapes, cool ocean air to pass creating ideal growing temperatures.
7. For a wine to be signed as “California,” 100% of the grapes must have been sourced from within
the California. The threshold for other states was 85%.
8. Low level of taxes - California’s table wine excise tax was the lowest at the amount of only $0.04
per bottle. Bank of America, had developed specialized financing offerings for grape growers and
wine producers, including long-term loans.

2. Why have exports of France’s wine cluster stagnated relative to the U.S., Chile, and Australia?

1. Most European countries and France, suffered from over production. The EU had taken several
steps to reduce wine output in through an array of subsidies. New vineyard planting was
prohibited and re-planting of existing vineyards was allowed only every eight years. Therefore,
the overall acreage in France was declining. In addition, wine were removed from the open
market due to high alcohol consumption. EU’s tight control over yields and wine production
prevented and reduced the incentives to experiment with new varietals and wine types.
2. Labor cost in France exceeded Clifornia’s
 AUSTRALIA WINE

Early History
 After World War I - trade treatment by Britain for Australia.
 Increasing exports of Australian wine against Portugal and Spain.
 1929 - A Wine Overseas Marketing Board was created, consisting of representatives from
the government, wineries, distilleries, and winegrowers, to regulate exports between
Australia and Britain.
 1930 – opening of promotional office in London. Export growth continued until the
outbreak of World War II.
 1930s, wine and winemaking began to attract attention in the educational community. In
1936, an oenology (наука о виноделии) course was established at the Roseworthy
Agricultural College.
 1930s - the first production of white table wines

Post-World War II

 Change in habits: Australia moved from beer-drinking country and started to consume
more wines.
 Table wines became popular in homes and restaurants.
 Wine consumption shifted from fortified wines to white table wines in the 1950s and to
red table wines in the 1960s.
 Production of stainless steel tank technology from Germany.
 In 1955, the Australian Wine Research Institute was established by the government.

The 1960s and 1970s

  1965 - The first wine promotion organization, the Australian Wine Bureau was
established.
 New technologies were being adopted
 1970s - A second winemaking school at Charles Sturt University
 1970s - Heinz, Philip Morris and other large international companies acquired a number
of Australian wineries.
The 1980s and 1990s
 1980 - new wineries continued to be opened, some by skilled winemakers leaving the
larger Australian companies.
 Quality regulations were tightened with the introduction of the Label Integrity Program.
 1980 – Establishment of the Australian Wine and Brandy Corporation (AWBC) as a
regulatory body.
 Exports moved from 10% of sales in 1990 to 40% by the late 1990s.
 Australian winemakers established joint ventures abroad, and some began acquiring
foreign wine companies.

The Australian Wine Cluster in 2000

 2000 - Records in exports reaching about $900 million.
 The leading markets for Australian wine: UK (40%), USA ($30%), Canada, New
Zealand, and Germany.
 The average price of Australian wine increased. 7 of the 10 leading wine brands in the
United Kingdom were Australian.

1. What explains Australia’s emergence as leading wine exporting nation?

Through different ways of promotion Australia was aimed on exporting.
Australian wine sector is export-oriented and very well organized through clusters. Their wines
considered as qualitative and at the same time competitive on costs. Moreover, wines and
marketing strategies were very adaptable to the exporting countries, such as UK, USA.

2. How important is government to wine cluster development? In what ways does

government helps that?
Government has made many regulations:
 Creation of the Wine Overseas Marketing Board to regulate exports between Australia
and Britain
 Opening of promotional office in London
 Improving wine and winemaking educational community: From recent analysis, there are
eight Wine Institutions in Australia.
 Investments in R&D
 Establishment of the Australian Wine and Brandy Corporation (AWBC) as a regulatory
body
 Label Integrity Program to regulate quality.

3. What explains Australia’s emergence as a leading wine-exporting nation?

Relative to California, Australia had higher labor costs. However, land prices were
generally lower. Australia’s growth in the world export market had been nothing short of
remarkable.