Innovation, R&D Investment and Productivity in Latin American Firms

1. Innovation, R&D Investment and Productivity in Latin American Firms Presentation of Preliminary Results – April 21 DIA 2010 Chapter 3 - Productivity Dynamics: The Role of Innovation

2. Motivation • Underperformance in productivity growth • Innovation (new products and/or processes) as the engine of productivity growth • Investment in R+D+I is low, and mostly public • LA Firms under-invest in R+D+i • Public policy has stressed public investment and basic research • Only recently there is an interest in innovation at the firm level • Emerging available information

3. R&D Expenditure as percent of GDP, 1995 (or earliest available) and 2004 (or latest available)

4. R&D Expenditure by source of financing (percent) 2004 (or latest available)

5. High technology exports (% Manufactured exports) 1995 (or earliest available) and 2005 (or latest available)

6. Objectives • Characterization of innovative firms • Determinants of innovation • Private investment in R+D+i impact in productivity growth • Dynamic value chain and clusters impact in technology up-grade and productivity growth • Bring conclusions and recommendations for public policy

7. Microeconomic analysis • Crepon, Duguet and Mairesse model (CDM) • Common findings • Less innovation than expected • Market failures as factor in low innovation • Large firms size favors innovation • Sector matters • State of the art of the analysis of innovation • Determinants of innovation that have received limited attention

8. Data sources: Availability of Innovation Surveys

9. Base model: CDM (Crepon, Duguet and Mairesse) Model Q= f(Y,I) (1) I= g((Z,K) (2) K= h(X,C) (3) • Q denotes the firm’s performance (for example, productivity); • Y denotes exogenous determinants of the firm performance and environmental variables; • I denotes the innovative outputs of the firm (number of patents, changes in firm organization, introduction of new production processes and new products). In the second equation, which describes the determinants of innovative output: • Z denotes the exogenous determinants of the innovative output (sectoral effects…) • K is the firm’s investment in R&D and other innovation inputs. Finally, in the third equation: • X represents the exogenous determinants of investment in R&D and innovation (firm age, size, sector, and structure). • C is a set of constraints leading to an optimal level of investment.

10. Further evolution and fine tuning of the model • Focus on Argentina, Chile, Colombia, Peru and Uruguay • Seeking comparability and conceptual coherence, an effort is ongoing to run strictly comparable specifications: • Griffith et.al (2006) • Home-grown common specification • OECD micro data project formats

11. Innovation Survey-based analysis: A sample of preliminary findings • Across countries, a high proportion of firms qualify as engaged in some form of innovation activity. • A small minority engages in R&D activities • Impacts of innovation on productivity seem to be clearly observable, but very likely lagged, particularly as far as product innovation is concerned • A wide array of innovation inputs is positively related to innovation output and productivity (HK, innovation intensity, equipment)… • Presence of foreign capital does not seem to be as clearly related to innovation activity as normally expected.

12. Investing in innovation means investing in capital, management and training… Arbelaez et al. (2009)

13. Size matters, foreign capital does not… Castro et al, 2009.

14. A variety of innovation outputs Arbelaez et al. (2009)

15. Access to finance, transport and enforcement of property rights rank at the bottom of the obstacles for investment on innovation Castro et al, 2009

16. Preliminary Findings: Case Studies • Chile: Copper, Pulp & Paper • Copper: Strong dynamism of industry and high productivity per employee (capital intensive industry). Sector with most attraction of FDI and exports in Chile. 10% annual productivity increase in the 1990-2000 period. • Low investment in R&D by Chilean firms in the copper sector. (May be explained by the higher potential of process innovation – not measured -, rather than investments in product innovation) • Pulp & Paper: Soaring increase in exports in 1990-2006 period. Chile is today the 10th largest producer and 5th world exporter of pulp & paper. Productivity has increased 300% in the 1990-2006 period. • Some investments in R&D in the pulp & paper sector, but still low when compared to similar sectors in other regions (Only 39.13% of firms in the sector invest in R&D) • Found the presence of a lagged positive effect of process-innovation on productivity. This effect would materialize two years after the innovation has occurred.

17. Preliminary Findings: Case Studies • Costa Rica: ICT Sector • Preliminary results from a small sample of firms surveyed show high levels of innovation outputs in the local ICT sector • High % of companies engaged in R&D activities (84%) and other innovation-input activities, such as: patenting (63%), training of human resources (100%), receiving technical assistance (57.9%) and consulting services (95%), product or process designing (89%), organizational changes (63%), reengineering processes (42%) • Very low coordination by ICT firms in R&D activities increasing costs of producing new knowledge. Training from suppliers is one of the most intensive coordination. • “In-house innovation”: Most firms of the ICT sector say that they perform most of their R&D activities in-house (75% of firms surveyed: always in the firm). This could be explained by either the low degree of coordination existing between firms, or a desire to maintain secrecy/confidentiality. • Found significant “Knowledge Spillovers” as a result of labor mobility between MNCs operating in the country and local ICT firms.

18. Preliminary Findings: Case Studies • Costa Rica: ICT Sector

19. Preliminary Findings: Case Studies • Costa Rica: ICT Sector

20. Preliminary Findings: Case Studies • Colombia: The Cosmetics Sector • High growth rates in last decade, high value added by employee and with considerable profit margins vis-à-vis other sectors. • Very low innovation in products by national firms (92% of patents issued between 1993 and 2007 belong to Procter & Gamble, Colgate, Sanofi and Unilever) • Poor innovation in processes, but very high innovation in marketing (Direct sales systemis an example for the industry in the world). • Analysis of innovation along the value-chain: raw materials, contract manufacturer, brand owner, distributor, retail, consumer. • Innovation and governance according to: complexity of transaction, ability to codify transaction and capabilities of the supply base

21. Value Chain Governance Types and Power Asymmetry Source: Gereffi et al (2003)

22. Preliminary Findings: Case Studies • Argentina: agricultural machinery & agro-biotechnology • Seed Drills & agro-biotechnology sectors: high levels of innovation, productivity and international competitiveness (“outliers” in context of low manufacturing productivity) • Case explores the importance of collaboration/association: preliminary findings: productivity of firms in the seed drills sector linked to level of collaboration/association developed between them. • Regional Innovation Systems (RIS): the case focuses on the relation between geography and innovation. Initial findings: these “systems” are created with relative spontaneity, but are not totally consolidated until a more articulated process is institutionalized (through public and/or private agents)

23. Preliminary Findings: Case Studies • Argentina: agricultural machinery & agro-biotechnology Exportaciones de maquinaria agrícola, 1998-2008

24. Preliminary Findings: Case Studies • Peru: Pisco & Shoe Industry • Pisco sector: high articulation/cooperation between producers. Low innovation levels, but strong increases in productivity & exports. • Shoe Industry: low articulation/cooperation between producers. Very low levels of innovation. Large percentage of SMEs with bottlenecks in production due to: i) low quality of product; ii) limitations in availability of components; iii) quantity of technical norms.

25. Preliminary Findings: Case Studies

26. Addendum: Productivity and the ICT revolution in LAC • ICT is widely credited as the engine of productivity growth in the US in the late nineties and early 00’s • It is believed to be a major factor in the considerable growth of productivity in services • The different recent path of productivity growth in the US and Europe is commonly attributed the slower adoption of ICT in the EU • ICT has been shown to have a positive effect in productivity in LAC, wherever it has been introduced early and intensively (some sectors in Brazil, for instance) • Yet it is a well established fact that the ICT revolution arrived late and still remains lagging behind in LAC as a whole, when compared to the US and Asia adoption • Hence, the slow pace of the ICT revolution in LAC serves to illustrate the impact of innovation of productivity, and highlights the difficulties of taking for granted that spontaneous forces will take care of introducing new technologies in the region’s firms and economies in the absence of concomitant investments (in HK, infrastructure...). This could also be a factor behind the acute problems with productivity in the service sector in LAC.