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

American FirmsAmerican Firms

Presentation of Preliminary Results – April 21

DIA 2010 Chapter 3 - Productivity Dynamics: The Role of Innovation

MotivationMotivation

Underperformance in productivity growthUnderperformance in productivity growthInnovation (new products and/or processes) as the Innovation (new products and/or processes) as the engine of productivity growthengine of productivity growthInvestment in R+D+I is low, and mostly publicInvestment in R+D+I is low, and mostly publicLA Firms under-invest in R+D+i LA Firms under-invest in R+D+i Public policy has stressed public investment and Public policy has stressed public investment and basic researchbasic researchOnly recently there is an interest in innovation at the Only recently there is an interest in innovation at the firm levelfirm level

Emerging available informationEmerging available information

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

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

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

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ObjectivesObjectives

Characterization of innovative firmsCharacterization of innovative firmsDeterminants of innovationDeterminants of innovationPrivate investment in R+D+i impact in Private investment in R+D+i impact in productivity growthproductivity growthDynamic value chain and clusters impact in Dynamic value chain and clusters impact in technology up-grade and productivity growthtechnology up-grade and productivity growthBring conclusions and recommendations for Bring conclusions and recommendations for public policypublic policy

Microeconomic analysisMicroeconomic analysis

Crepon, Duguet and Mairesse model (CDM)Crepon, Duguet and Mairesse model (CDM)

Common findingsCommon findings– Less innovation than expectedLess innovation than expected

– Market failures as factor in low innovationMarket failures as factor in low innovation

– Large firms size favors innovationLarge firms size favors innovation

– Sector mattersSector matters

State of the art of the analysis of innovationState of the art of the analysis of innovation

Determinants of innovation that have received Determinants of innovation that have received limited attentionlimited attention

Data sources: Availability of Innovation Data sources: Availability of Innovation SurveysSurveys

Base model: CDM (Crepon, Duguet Base model: CDM (Crepon, Duguet and Mairesse) Modeland Mairesse) Model

Q= f(Y,I) (1)Q= f(Y,I) (1)I= g((Z,K) (2)I= g((Z,K) (2)K= h(X,C) (3)K= h(X,C) (3)

QQ denotes the firm’s performance (for example, productivity); denotes the firm’s performance (for example, productivity);YY denotes exogenous determinants of the firm performance and environmental variables; denotes exogenous determinants of the firm performance and environmental variables; II denotes the innovative outputs of the firm (number of patents, changes in firm denotes the innovative outputs of the firm (number of patents, changes in firm organization, introduction of new production processes and new products). organization, introduction of new production processes and new products).

In the second equation, which describes the determinants of innovative output:In the second equation, which describes the determinants of innovative output:ZZ denotes the exogenous determinants of the innovative output (sectoral effects…) denotes the exogenous determinants of the innovative output (sectoral effects…)KK is the firm’s investment in R&D and other innovation inputs. is the firm’s investment in R&D and other innovation inputs.

Finally, in the third equation:Finally, in the third equation:XX represents the exogenous determinants of investment in R&D and innovation (firm age, represents the exogenous determinants of investment in R&D and innovation (firm age, size, sector, and structure). size, sector, and structure). C is a set of constraints leading to an optimal level of investment.C is a set of constraints leading to an optimal level of investment.

Further evolution and fine tuning of Further evolution and fine tuning of the modelthe model

Focus on Argentina, Chile, Colombia, Peru and Focus on Argentina, Chile, Colombia, Peru and UruguayUruguay

Seeking comparability and conceptual coherence, an Seeking comparability and conceptual coherence, an effort is ongoing to run strictly comparable effort is ongoing to run strictly comparable specifications:specifications:– Griffith et.al (2006)Griffith et.al (2006)– Home-grown common specificationHome-grown common specification– OECD micro data project formatsOECD micro data project formats

Innovation SurveyInnovation Survey-based-based analysis: A analysis: A sample of preliminary findingssample of preliminary findings

Across countries, a high proportion of firms qualify as Across countries, a high proportion of firms qualify as engaged in some form of innovation activity.engaged in some form of innovation activity.A small minority engages in R&D activitiesA small minority engages in R&D activitiesImpacts of innovation on productivity seem to be clearly Impacts of innovation on productivity seem to be clearly observable, but very likely lagged, particularly as far as observable, but very likely lagged, particularly as far as product innovation is concernedproduct innovation is concernedA wide array of innovation inputs is positively related to A wide array of innovation inputs is positively related to innovation output and productivity (HK, innovation innovation output and productivity (HK, innovation intensity, equipment)…intensity, equipment)…Presence of foreign capital does not seem to be as Presence of foreign capital does not seem to be as clearly related to innovation activity as normally clearly related to innovation activity as normally expected.expected.

Investing in innovation means investing Investing in innovation means investing in capital, management and training…in capital, management and training…

Arbelaez et al. (2009)

Size matters, foreign capital does not…Size matters, foreign capital does not…

Castro et al, 2009.

A variety of innovation outputsA variety of innovation outputs

Arbelaez et al. (2009)

Access to finance, transport and enforcement Access to finance, transport and enforcement of property rights rank at the bottom of the of property rights rank at the bottom of the

obstacles for investment on innovationobstacles for investment on innovation

Castro et al, 2009

Preliminary Findings: Case StudiesPreliminary Findings: Case Studies

Chile: Copper, Pulp & PaperChile: Copper, Pulp & Paper

CopperCopper: Strong dynamism of industry and high productivity per employee (capital : Strong dynamism of industry and high productivity per employee (capital intensive industry). Sector with most attraction of FDI and exports in Chile. 10% intensive industry). Sector with most attraction of FDI and exports in Chile. 10% annual productivity increase in the 1990-2000 period.annual productivity increase in the 1990-2000 period.

Low investment in R&D by Chilean firms in the copper sector. (May be explained by 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 the higher potential of process innovation – not measured -, rather than investments in product innovation)in product innovation)

Pulp & PaperPulp & Paper: Soaring increase in exports in 1990-2006 period. Chile is today the : Soaring increase in exports in 1990-2006 period. Chile is today the 1010thth largest producer and 5 largest producer and 5thth world exporter of pulp & paper. Productivity has world exporter of pulp & paper. Productivity has increased 300% in the 1990-2006 period.increased 300% in the 1990-2006 period.

Some investments in R&D in the pulp & paper sector, but still low when compared to 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)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. Found the presence of a lagged positive effect of process-innovation on productivity. This effect would materialize two years after the innovation has occurred.This effect would materialize two years after the innovation has occurred.

Preliminary Findings: Case StudiesPreliminary Findings: Case Studies

Costa Rica: ICT SectorCosta Rica: ICT Sector

Preliminary results from a small sample of firms surveyed show high levels Preliminary results from a small sample of firms surveyed show high levels of innovation outputs in the local ICT sector of innovation outputs in the local ICT sector High % of companies engaged in R&D activities (84%) and other High % of companies engaged in R&D activities (84%) and other innovation-input activities, such as: patenting (63%), training of human innovation-input activities, such as: patenting (63%), training of human resources (100%), receiving technical assistance (57.9%) and consulting resources (100%), receiving technical assistance (57.9%) and consulting services (95%), product or process designing (89%), organizational services (95%), product or process designing (89%), organizational changes (63%), reengineering processes (42%)changes (63%), reengineering processes (42%)

Very low coordination by ICT firms in R&D activities increasing costs of Very low coordination by ICT firms in R&D activities increasing costs of producing new knowledge. Training from suppliers is one of the most producing new knowledge. Training from suppliers is one of the most intensive coordination.intensive coordination.

““In-house innovationIn-house innovation”: Most firms of the ICT sector say that they perform ”: 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 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 firm). This could be explained by either the low degree of coordination existing between firms, or a desire to maintain secrecy/confidentiality. existing between firms, or a desire to maintain secrecy/confidentiality.

Found significant “Knowledge Spillovers” as a result of labor mobility Found significant “Knowledge Spillovers” as a result of labor mobility between MNCs operating in the country and local ICT firms.between MNCs operating in the country and local ICT firms.

Preliminary Findings: Case StudiesPreliminary Findings: Case Studies

Costa Rica: ICT SectorCosta Rica: ICT Sector

Preliminary Findings: Case StudiesPreliminary Findings: Case Studies

Costa Rica: ICT SectorCosta Rica: ICT Sector

Preliminary Findings: Case StudiesPreliminary Findings: Case Studies

Colombia: The Cosmetics SectorColombia: The Cosmetics Sector

High growth rates in last decade, high value added by employee and High growth rates in last decade, high value added by employee and with considerable profit margins vis-à-vis other sectors. with considerable profit margins vis-à-vis other sectors.

Very low innovation in products by national firms (92% of patents Very low innovation in products by national firms (92% of patents issued between 1993 and 2007 belong to Procter & Gamble, issued between 1993 and 2007 belong to Procter & Gamble, Colgate, Sanofi and Unilever)Colgate, Sanofi and Unilever)

Poor innovation in processes, but very high innovation in marketing Poor innovation in processes, but very high innovation in marketing ((Direct sales systemDirect sales system is an example for the industry in the world). is an example for the industry in the world).

Analysis of innovation along the value-chain: raw materials, contract Analysis of innovation along the value-chain: raw materials, contract manufacturer, brand owner, distributor, retail, consumer.manufacturer, brand owner, distributor, retail, consumer.

Innovation and governance according to: complexity of transaction, Innovation and governance according to: complexity of transaction, ability to codify transaction and capabilities of the supply base ability to codify transaction and capabilities of the supply base

Value Chain Governance Types and Power Asymmetry

Source: Gereffi et al (2003)

Preliminary Findings: Case StudiesPreliminary Findings: Case Studies

Argentina: agricultural machinery & agro-biotechnology Argentina: agricultural machinery & agro-biotechnology

Seed Drills & agro-biotechnology sectors: high levels of innovation, Seed Drills & agro-biotechnology sectors: high levels of innovation, productivity and international competitiveness (“outliers” in context of productivity and international competitiveness (“outliers” in context of low manufacturing productivity)low manufacturing productivity)

Case explores the importance of collaboration/association: preliminary Case explores the importance of collaboration/association: preliminary findings: productivity of firms in the seed drills sector linked to level of findings: productivity of firms in the seed drills sector linked to level of collaboration/association developed between them. collaboration/association developed between them.

Regional Innovation Systems (RIS): the case focuses on the relation Regional Innovation Systems (RIS): the case focuses on the relation between geography and innovation. Initial findings: these “systems” are between geography and innovation. Initial findings: these “systems” are created with relative spontaneity, but are not totally consolidated until a created with relative spontaneity, but are not totally consolidated until a more articulated process is institutionalized (through public and/or more articulated process is institutionalized (through public and/or private agents)private agents)

Preliminary Findings: Case StudiesPreliminary Findings: Case Studies

Argentina: agricultural machinery & agro-biotechnologyArgentina: agricultural machinery & agro-biotechnology Exportaciones de maquinaria agrícola, 1998-2008Exportaciones de maquinaria agrícola, 1998-2008

Preliminary Findings: Case StudiesPreliminary Findings: Case Studies

Peru: Pisco & Shoe IndustryPeru: Pisco & Shoe Industry

Pisco sector: high articulation/cooperation between producers. Low Pisco sector: high articulation/cooperation between producers. Low innovation levels, but strong increases in productivity & exports.innovation levels, but strong increases in productivity & exports.

Shoe Industry: low articulation/cooperation between producers. Very Shoe Industry: low articulation/cooperation between producers. Very low levels of innovation. Large percentage of SMEs with bottlenecks in low levels of innovation. Large percentage of SMEs with bottlenecks in production due to: i) low quality of product; ii) limitations in availability of production due to: i) low quality of product; ii) limitations in availability of components; iii) quantity of technical norms.components; iii) quantity of technical norms.

Preliminary Findings: Case StudiesPreliminary Findings: Case Studies

Exports of Pisco: 2002 - 2007

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Addendum: Productivity and the ICT Addendum: Productivity and the ICT revolution in LACrevolution in LAC

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