Firm Innovation and Productivity in Latin
America and the Caribbean:
The Engine of Economic Development
Matteo Grazzi and Carlo Pietrobelli, Editors

Firm, Innovation and Productivity in Latin
America and the Caribbean:
The Engine of Economic Development
Matteo Grazzi and Carlo Pietrobelli, Editors

ABOUT

Over the last half century, per capita income in Latin America has stagnated relative to advanced countries and to the fast growing East Asian economies and this has been largely due to a dismal productivity performance. This book focuses on how within-firm improvements, such as advances in management, internal organization, strategy, and technological capabilities, can generate productivity growth. It shows that in addition to macroeconomic and regulatory factors, productivity depends crucially on microeconomic aspects and on the specific strategies and decisions of individual firms.

The empirical evidence reveals the presence of remarkable heterogeneity across firms in the region. The core of the book empirically shows how factors such as training, access to information and communication technologies (ICTs), international linkages through trade and global value chains, innovation, and access to finance have been the drivers of this heterogeneity in productivity performance. The book also shows that these conclusions hold true for the Caribbean economies, traditionally understudied.

The heterogeneity across firms, and the underlying factors, suggest the urgent need to go beyond one-size-fits-all firm growth policies.

This book was prepared by prepared by a team led by Matteo Grazzi and Carlo Pietrobelli of the Competitiveness and Innovation Division of the Inter-American Development Bank, as part of the research project “Policies and Institutions for Productivity in Latin America and the Caribbean”, financed by the Institutional Capacity Strengthening Fund (ICSF).

Motivation

The macro evidence indicates that LAC countries growth has been slower than other emerging countries.This type of evidence is useful to describe aggregate phenomena; however, it can tell us little about the underlying microeconomic behavior that drives this dynamic.

The economic literature has shown that firm productivity growth is essentially driven by two factors: reallocation of resources across firms and within-firm efficiency improvements.The focus of this book is the latter: within-firm improvements that result from firm-specific characteristics, behaviors, and strategies. Here, efficiency gains can be due to improvements in management, internal organization, better strategies,and technological capabilities.

Overall, we identify huge disparities in productivity among LAC firms, with many low-productivity firms coexisting with few high-productivity firms. These gaps are much larger than in the US, China and India.

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INNOVATION AND PRODUCTIVITY IN LAC

Innovation and productivity in Latin America

There is a general consensus on the positive relationship between research and development (R&D), innovation, and productivity at the firm level. However, does this relationship

The results confirm that LAC firms are more likely to introduce product or process innovation if they invest more in innovation. More specifically,in Latin America a 10 per cent increase in R&D spending on average results in a 1.7% increase in the probability of a firm innovating, and in a 1.6% increase in innovative sales.Moreover, innovation has a significant effect on productivity performance in the LAC region, where the labor productivity of firms that are innovative is on average 50% higher than that of firms that do not engage in innovation.

Measuring the effect of innovation in productivity

Crépon, Duguet, and Mairesse (1998) were the first to empirically integrate the relationship between R&D, innovation, and productivity at the firm level. Their model is called CDM from their initials and it is structured in three stages:The first stage captures the decision making process related with innovation expenditure. In this stage the model estimates a function that reflects the decision of firms to invest in innovation. The second stage is an innovation function that relates predicted innovation expenditures (and other explanatory variables)to indicators of product and process innovation. The third and final stage of the CDM model focuses on the effects of innovation performance on labor productivity using a standard Cobb Douglas production function with constant returns to scale, predicted innovation and capital and labor inputs. In sum the CDM model allows to estimate the productivity returns to investments in innovation.

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HETEROGENEITY

Returns not the same for all LA firms

One of the main results of this book is that the returns to investments ininnovation andhuman capital are not identicalacross firms. Innovation has much larger effects on the firms that are already more productive than others. For the 10 percent most productive firms, the increase in productivity due to innovation is no less than 6.6 percent versus 3.0-3.3 percent for the other firms.Similarly, the premium of an increase of 10 percent of investment in human capital is 7.7 percent for the most productive firms, and only 1.7 percent for the least productive ones.

The role of Public Policy

In Latin America and the Caribbean a large variety of industrial and innovation policies try to adopt a microeconomic focus. However, this is not mirrored by increasing volumes, and the size and scope of these government programs across LAC remains limited. For example, Brazil invests 0.085 percent of its GDP to support small- and medium-sized enterprises, while in the United States this figure is nearly five times as high.

Approximately 10.7 percent of LAC’s firms report having received some public support over the previous three years since 2010. However,only 6.6 percent of micro firms and 9.4 percent of small firms reported having received support, in comparison with 14.4 percent of medium-sized firms and 15.8 percent of large firms. In spite of the demonstrated benefits associated to participating in multiple programs, only a small fraction of firms participate in two or more programs (2.9 percent).

In sum, while many public programs in the region are often designed to support SMEs, our results show that large firms are using them disproportionally more. The targeting capacity of the institutions delivering such programs in LAC remains limited.

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FINANCE AND TRADE

Access to finance in LA firms

Firms often mention lack of access to bank credit as one of the main constraints on growth, productivity, innovation, and export capacity. The lack of access to finance affects particularly to the small and medium-sized enterprises (SMEs).

The book shows that although access to bank credit enhances firm growth and productivity, its use is extremely limited for micro and young firms, while it is the second source of finance for large firms. More productive firms rely less on internal funding for working capital and tend to use more bank and trade credit. Access to bank credit is quite heterogeneous between countries. In Mexico, less than 30 percent of firms have an overdraft, a line of credit, or a loan, whereas in Brazil, Colombia, and Chile, the numbers are much higher and Argentinean firms are somewhere in the middle.

Larger and older firms, as well as exporters, are more likely to demand bank credit. Smaller, younger, and more domestically oriented companies are often discouraged to borrowand more likely to be financially constrained. Moreover, foreign banks in LAC improve firms’ access to finance only under special circumstances.

Global Value Chain and Exports

The book confirms that access to international markets matters for LAC firms. The participation in international trade and the presence of inward foreign direct investment positively influence labor productivity, while controlling for the heterogeneity of firms.

Moreover, the book adds an important new element to the analysis of firms’ participation in international markets: the nature of the integration of firms in Global Value Chains (GVCs). This has at least two important dimensions: the participation in GVCs, as such, and the positioning of firms along the value chain, whether more upstream (closer to primary resource processing and manufacturing) or downstream (closer to the market, in the assembly and commercial phases of the chain).

The authors focus on four large Latin American countries (Argentina, Brazil, Chile, and Mexico), and show that firms’ participation in GVCsimproves their productivity. Furthermore, the role of firms’ position along the GVC is also confirmed: firms operating “upstream” in the GVC, typically in industries that export primary goods and intermediates that are used in other countries’ exports, tend to be, ceteris paribus, more productive than those firms that operate in industries whose value added comes primarily from processing imported inputs. Being upstream in a GVC has a positive impact on firms’productivity in these four American countries.

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THE CARIBBEAN

Firms in the Caribbean at a glance

The book also contains new micro-evidence on the Caribbean where information has been scarce or non-existent.The firms in this region tend to be micro or small, concentrated in the services sector, mature, and non-exporters. Comparing firms in different Caribbean countries, various differences emerge: smaller countries typically have a higher percentage of micro and small firms, the concentration in the services sector varies from 50 percent to 84 percent, and there are considerable differences in ICT penetration rates.

Ourresults show that innovative firms tend to be more productive than non-innovative firms; innovation matters for firm productivity performance also in the Caribbean economies. Firms that export and are larger are more likely to invest in innovation, while having patent protection or foreign ownership does not significantly predict the decision to invest in innovation.

The more relevant obstacles that Caribbean firms declare to face are the scarcity of adequately educated workers – which limits the capacity to absorb external technology and knowledge–, firms’ difficulty in getting access to finance, inefficient electricity services, and high tax rates.

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EDITORS

Matteo Grazzi

Science & Technology Specialist

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Matteo Grazzi is a Specialist in the Competitiveness and Innovation Division of the Inter-American Development Bank. Before joining the IDB, Matteo worked as a consultant economist at the UN Economic Commission for Latin America and the Caribbean (ECLAC) in Santiago, Chile and as a researcher at the Centre for Research on Latin American and Transition Economies Studies (ISLA) at Bocconi University in Milan. He holds a PhD in International Law and Economics from Bocconi University and an MA in Development Economics from the University of Sussex (Brighton, UK). His main research interests focus on international and development economics, economics of innovation, and ICT for development.

Carlo Pietrobelli

Lead Economist

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Carlo Pietrobelli
Carlo Pietrobelli is a Lead Economist at the Inter-American Development Bank, Adjunct Professor at Georgetown University and Professor of Economics at the University Roma Tre, Italy. He has led the preparation of development loans in Latin America and the Caribbean on cluster and value chains programs, innovation and industrial policies, small and medium-sized enterprises and local economic development. His research interests range from development economics to innovation trade and industry in developing countries. He has published widely in international journals and his last books were published by Harvard University Press, Edward Elgar, Palgrave and Routledge. He was Deputy Rector for promoting links between the University and the private sector and Head of Industrial Liaison Office of the University Roma Tre. He holds a PhD in Economics from Oxford University.

EXTERNAL ADVISOR

Adam (Eddy) Szirmai

Professorial Fellow at the UNU Maastricht Economic and Social Research Institute on Innovation and Technology (UNU-MERIT) and Professor of Development Economics at the Maastricht Graduate School of Governance of Maastricht University.

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Adam (Eddy) Szirmai is Professorial Fellow at the UNU Maastricht Economic and Social Research Institute on Innovation and Technology (UNU-MERIT) and Professor of Development Economics at the Maastricht Graduate School of Governance of Maastricht University. He holds a PhD in Economics from the University of Groningen and has published extensively throughout his career. Some of his publications include: Pathways to Industrialization in the 21st Century, New Challenges and Emerging Paradigms, Innovation in Theory and Practice, and The Industrial Experience of Tanzania. In 2011, Oxford University Press published Entrepreneurship, Innovation and Development, a book he coedited with Wim Naudé and Micheline Goedhuys. He is also currently working on a second edition of his textbook on development economics that was first published in 2005, The Dynamics of Socio-Economic Development: An Introduction. His research focuses on international comparisons of growth and productivity in manufacturing in developing countries, as well as, the relationships between innovation, technological change and economic performance at sectoral level. He has been involved in research projects in manufacturing in Indonesia, China, South Korea, Tanzania, Zambia, South Africa and Japan.

AUTHORS

Allison Cathles
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Allison Cathles is a PhD candidate in the Economics and Policy Studies of Technical Change at UNU-MERIT at Maastricht University in the Netherlands. She holds a Master of Public Administration from Cornell University. Before beginning her PhD studies, Alison worked as a consultant in the Competitiveness and Innovation Division of the IDB.

Andrea Presbitero
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Andrea Presbitero is an Economist at the International Monetary Fund. He obtained a PhD in Economics from Universita a Politecnica delle Marche in Ancona, Italy, an MA in Development Economics from the University of Sussex, and an MSc in Political Economy from the University of Ancona. His research interests include development economics, fiscal policy and debt sustainability, banking and SME financing and international economics.  

Carolina González-Velosa
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Carolina González-Velosa is an Economist in the Labor Markets and Social Security Unit of the IDB. She specializes in labor markets in developing countries, particularly in the areas of skills, training, intermediation and migration. Her work has been published in leading academic journals such as the Journal of International Economics. She obtained a PhD in Economics from the University of Maryland, an MA from New York University and a BA from the Universidad de los Andes in Colombia.

David Rosas
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David Rosas is a Lead Specialist in the Labor Markets and Social Security Unit of the Inter-American Development Bank (IDB) where he specializes in labor training and labor intermediation and in evaluating the impact of labor market interventions. He holds a PhD and an MA in Economics from the University of Paris Pantheón-Sorbonne.

Eric Strobl
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Eric Strobl is Associate Professor at Ecole Polytechnique in Paris and External Professor at the Sir Arthur Lewis Institute of Social and Economic Studies at the University of the West Indies in Trinidad and Tobago. He holds a PhD in Economics from the University of Dublin, Trinity College. His main research interests are in applied labor economics in developing countries, foreign direct investment, and economic geography.

Ezequiel Tacsir
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Ezequiel Tacsir is Coordinator of the Information, Monitoring and Evaluation Unit of the Interdisciplinary Center for Science and Technology Studies (CIECTI, Argentina) and researcher at CINVE (Uruguay). In the past he occupied positions at the Competitiveness and Innovation Division (previously Science and Technology) of the IADB, UNU-MERIT, ProsperAr, and served as consultant for the World Bank, IADB and different national governments in science, technology and innovation policies and studies. He studied economics at Universidad de Buenos Aires, and has postgraduate studies in Science, Technology and Innovation Management (UNGS) and doctorate studies at UNU-MERIT. His research interests include STI policies, impact evaluation and the interlink between human capital and innovation.

Fernando Vargas
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Fernando Vargas: is a PhD Fellow in Economics and Governance at UNU-MERIT, with a specialization in the economics and policy studies of technical change. He holds a Master of Science degree in Applied Economics from the University of Chile and a Bachelor degree in Industrial Engineering from the same university. Before joining UNU-MERIT, he worked at the Competitiveness and Innovation Division of the Inter-American Development Bank, where he held advisory and research management responsibilities for Latin American public agencies in the design and implementation of innovation surveys. His field of interest is mainly focused on understanding the determinants of innovation, innovation strategies and productivity in firms in Latin America and their implications for public policy design.

Gustavo Crespi
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Gustavo Crespi is a Principal Specialist in the Competitiveness and Innovation Division in the Inter-American Development Bank. He holds a PhD in Public Policy (with a specialization in Science and Technology Policy) from Sussex University, a Masters in Economic Development and International Trade, from the School of Economics and Business Administration of University of Chile, and a BA in Economics from the National University of Cordoba, Argentina. His interests include industrial development, technological change, industrial structure and development of the firm, and management and technology policy evaluation, especially in developing countries.

Hugo Kantis
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Hugo Kantis is Director of the Entrepreneurial Development Program at the Universidad Nacional de General Sarmiento (UNGS) in Buenos Aires, Argentina where he leads a seminar-workshop for Professionals in the Entrepreneurial Ecosystem in Latin America. He holds a PhD in Economics and Business Science and a Master of Research in Entrepreneurship and Business Strategy from the Universidad Autónoma de Barcelona. He has consulted with numerous international organizations including the World Bank, IDB, ECLAC, UNDP and JICA. His research focuses on entrepreneurship and entrepreneurial innovation, policy design, implementation and evaluation, SME development and best practices for business and institutional management.

Juan Federico
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Juan Federico is a researcher and lecturer at the Entrepreneurial Development Program at the Universidad Nacional de General Sarmiento (UNGS), where he holds a Masters in Economics and Industrial Development with a focus on SMEs. He is a PhD Candidate in Entrepreneurship and Small Business Management at the Universidad Autónoma de Barcelona. His areas of interest include: new firms, clusters, industrial policy, industrial sectors and entrepreneurship policy.

Juan Jung
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Juan Jung is the Studies and Regulation Coordinator at the Latin American Association of Research Centers and Telecom Enterprises (AHCIET). He is concurrently a PhD candidate in Economics at the University of Barcelona; he holds an MA in Economics from the same University. His area of expertise is applied economics and has been involved in a variety of consultancy projects with multilateral institutions over the past few years.

Pablo Angelelli
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Pablo Angelelli: is a Lead Specialist in the Competitiveness and Innovation Division in the Inter-American Development Bank, where he has worked since 2000. His current duties include the design and supervision of projects that support science, technology and business innovation in Argentina, Paraguay and Uruguay. He holds a degree in Economics from the Universidad Nacional de Cordoba, Argentina, and has completed two Masters degrees: one in Public Policy at George Washington University and another in Economics and Industrial Development at the National University of General Sarmiento. He is the author of numerous articles and several books on issues of SMEs, innovation and technology-based ventures.

Patrick Watson
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Patrick Watson is Director of the Sir Arthur Lewis Institute of Social & Economic Studies (SALISES) at the University of the West Indies in Trinidad and Tobago. He holds a PhD in Mathematical Economics and Econometrics and an MSc in Economics from the Panthéon-Sorbonne in Paris. His areas of expertise include econometric modelling of Caribbean phenomena (in particular monetary and fiscal policy), economic measurement and statistical analysis. He has served on the board of directors of various state enterprises, as a government senator, and on Government Committees.

Pierluigi Montalbano
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Pierluigi Montalbano is Associate Professor of International Economic Policy at Sapienza University of Rome. His research interests include international economics and development, in particular: the nexus between trade openness, instability and vulnerability in economies, multilateral and regional trade integration in emerging economies, and the theoretical and applied nexus between culture/creativity and local development.

Preeya Mohan
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Preeya Mohan is a Post-doctoral Research Fellow at the Sir Arthur Lewis Institute of Social and Economic Studies. She obtained her PhD in Economic Development Policy from the University of the West Indies, St. Augustine. Her thesis entitled “Caribbean Development: The Role of Diversification and Hurricane Strikes” focused on Caribbean growth and development primarily through diversification strategies and policies and reducing vulnerability to climatic external shocks. Preeya has worked on a wide range of topics including Caribbean economic history, natural disasters, financial economics, firm competitiveness and innovation, value chains and clusters.

Roberta Rabellotti
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Roberta Rabellotti is Full Professor of Economics at the Universita di Pavia, Italy. She holds an MSc in Development Economics from the University of Oxford and a PhD from the Institute of Development Studies at the University of Sussex. She specializes in the analysis of the industrial sector in developing countries and has experience consulting with the IDB, EU, UNIDO, ILO, ECLAC, and UNCTAD. Her areas of interest are: industrial policies, small business promotion, international trade policies, industrial districts and clusters, global value chains.

Roberto Flores Lima
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Roberto Flores Lima is an international specialist and consultant on employment services, job training and labor competency. From September 2008 to May 2015 was Lead Specialist at the Unit Labor Markets and Social Security of the Inter-American Development Bank (IDB). At the IDB, Roberto created the Technical Support Network of Public Employment Services in Latin America and the Caribbean (RED SEALC) and collaborated with the design of projects and loans labor market in Colombia, Honduras, Mexico, Panama, Peru and Dominican Republic. He holds a BA and MA in Economics from the National Autonomous University of Mexico and has a diploma in foreign trade and international business at the Autonomous Technological Institute of Mexico.

Sabrina Ibarra
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Sabrina Ibarra is a Research Assistant and Lecturer at Prodem since she joined in 2008. She has been involved in several research projects in quantitative data processing and analysis. She has a Bachelor’s Degree in Economics from Universidad de Buenos Aires (UBA), with postgraduate studies in Industrial Economics and Development with a concentration in SMEs. Her main research interests are the determinants of dynamic new ventures (especially in Latin America), the elaboration of composite indicators of entrepreneurship and quantitative research methods.

Silvia Nenci
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Silvia Nenci is Assistant Professor in Economics at the University of Roma Tre in Rome. She holds a PhD in Economics from the University of Rome-Sapienza. Her research focuses on international economics and economic policy. She has been consultant to several national and international institutions including the Italian Ministry of Foreign Affairs, the Global Development Network and FAO.

Siobhan Pangerl
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Siobhan Pangerl: is a consultant in the Multilateral Investment Fund of the IDB where she works on youth employment and entrepreneurship projects. Prior to the MIF, Siobhan worked for two years in the IDB’s Competitiveness and Innovation Division. She has experience working in various U.S. government agencies including USAID, the State Department and spent two years as a Peace Corps volunteer in Peru. Siobhan has a Bachelor’s Degree in Communications from the University of Miami (FL) and has a Master of Public Policy and a Master of Science in Foreign Service both from Georgetown University.

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