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The Challenge of Productivity-Based Development: Innovation Gaps and Economic Structure in Latin America

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Abstract

In this paper, we analyze how firm-level capabilities and characteristics affect firm innovation activities and innovation outputs in seven Latin American countries in 2016. We include eight innovation activities in accordance with OECD/Eurostat. Using data from the World Bank Enterprise Surveys for manufacturing and services, we distinguish two steps in the innovation process: firm engagement with innovation inputs and the translation of innovation inputs into innovation outputs. The empirical results demonstrate the importance of considering the broad spectrum of innovation activities rather than only focusing on R&D for the production of innovation outputs. The estimates underscore the significance of the impact of economic structure (firm size and sector) on innovation focusing at the micro level. They also suggest a role for government policies in reducing innovation gaps.

Résumé

Dans cet article, nous analysons en quoi les capacités et les caractéristiques d’une entreprise peuvent affecter ses activités d'innovation et les résultats de cette innovation. Cette analyse est conduite dans sept pays d'Amérique latine sur l’année 2016. Nous incluons huit activités d'innovation conformément à l'OCDE/Eurostat. En utilisant les données issues des enquêtes auprès des entreprises de la Banque mondiale, dans le secteur manufacturier et des services, nous distinguons deux étapes dans le processus d'innovation: l'engagement de l'entreprise concernant les intrants de l'innovation et la traduction des intrants d'innovation en produits d'innovation. Les résultats empiriques démontrent l'importance de prendre en compte le large éventail d'activités d'innovation plutôt que de se concentrer uniquement sur la R&D pour la production de produits d'innovation. Les estimations soulignent l'importance de l'impact de la structure économique (taille de l'entreprise et secteur) sur l'innovation, en se concentrant sur le niveau micro. Elles suggèrent également un rôle pour les politiques gouvernementales dans la réduction des écarts en matière d'innovation.

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Fig. 1

Source Authors’ calculations based on World Bank. World Development Indicators

Fig. 2

Source Authors’ calculations based on DeVries et al. (2021)

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Notes

  1. Author’s calculations based on values in 2015 constant U.S. dollars from the World Development Indicators.

  2. Between 1999 and 2009, productivity in large Mexican firms (> 500 workers) increased at an annual rate of 5.8%, while it declined by 6.5% per year in small companies (< 10 workers) (Sabel and Ghezi 2020, p. 1).

  3. The Economic Transformation Database (ETD) in DeVries et al. (2021) includes the informal sector and contains data on employment and value added in constant 2015 prices for the 12 economic sectors in the national accounts. Our calculations of the coefficients of variation excludes real estate, since the data for the sector are based on an equivalent rent approach and do not have and employment equivalent.

  4. Dini and Stumpo (2019) used country-specific classifications of firm size. The firm size shares are based on data for Argentina, Brazil, Chile, Ecuador, and Mexico.

  5. “The definition does not require an innovation to be a commercial, financial or strategic success at the time of measurement. A product innovation can fail commercially or a business process innovation may require more time to meet its objectives.” (p. 69).

  6. We chose the classification of the OECD (2011), which uses R&D intensity of an economic sector to assign it to one of their four technology groupings in manufacturing.

  7. Other technology-intensive sectors (business services and financial services) are not included in the WBES.

  8. There are many empirical studies, which find a positive and statistically significant impact of innovation outputs on productivity. That is especially true for product innovation; the evidence on process innovation is a bit more mixed (Aboal and Garda 2012; Morris 2018). Analyses of the impact of innovation outputs on productivity growth in Latin American countries generally find a positive link, though there are exceptions. Arza and López (2010) show that product and process innovation are important determinants of labor productivity in Argentina. Crespi and Zuñiga (2012) find a positive impact of product innovation on productivity growth in Brazil and Mexico, but not in Argentina. Their results indicate that the introduction of a new process has a positive impact on productivity in Argentina, Chile, Colombia, Panama and Uruguay, but not in Costa Rica. For the likely existence of such a link, we point to the many empirical studies, which find a positive and statistically significant impact of innovation outputs on productivity. That is especially true for product innovation; the evidence on process innovation is a bit more mixed (Aboal and Garda 2012; Morris 2018).

  9. The informal economy, as defined by the ILO, includes the informal sector as well as informal employment in the formal sector, i.e., employment with decent employment deficiencies (ILO. Statistics on Informality). Thus, the share of employment in the informal non-agricultural sector by itself (rather than informal economy) is smaller than the percentages indicated in the text.

  10. The data are in current U.S. $ from the World Development Indicators.

  11. In a study of innovation activities of U.S. companies, Acs and Audretsch (1987) define innovations in firms with less than 500 employees as ‘small-firm innovation.’.

  12. ECLAC (2022, p. 106) estimates that productivity in the informal sector is less than six percent of that in the formal sector.

  13. Income elasticities of demand lie between one and two for high-technology manufacturing exports, but 0.2 and 0.8 for low-technology manufactured exports (Bottega and Romero 2021).

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Acknowledgement

The authors thank the external reviewer for very helpful comments.

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  1. Mount Holyoke College, South Hadley, MA, USA

    Eva Paus & Mike Robinson

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  1. Eva Paus
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Appendix 1: Distribution of firms by size/sector for sample countries (‘n’ and ‘%’)

Appendix 1: Distribution of firms by size/sector for sample countries (‘n’ and ‘%’)

 

Low & low/med technology-intensive sector

Medium/high & high technology-intensive sector

Grand total

Small

Medium

Large

Total

Small

Medium

Large

Total

Argentina

337

292

217

846

63

45

37

145

991

Bolivia

174

88

73

335

10

10

9

29

364

Colombia

347

314

192

853

63

55

22

140

993

Ecuador

112

124

101

337

7

6

14

27

364

Paraguay

433

265

215

913

38

35

17

90

1003

Peru

120

125

64

309

11

11

16

38

347

Uruguay

145

120

69

334

5

13

9

27

361

Total

1668

1328

931

3927

197

175

124

496

4423

 

Low & low/med technology-intensive sector

Medium/high & high technology-intensive sector

Grand total (%)

Small (%)

Medium (%)

Large (%)

Total (%)

Small (%)

Medium (%)

Large (%)

Total (%)

Argentina

34.0

29.5

21.9

85.4

3.5

2.5

2.1

8.1

100

Bolivia

47.8

24.2

20.1

92.0

1.4

1.4

1.3

4.2

100

Colombia

34.9

31.6

19.3

85.9

3.5

3.0

1.2

7.7

100

Ecuador

30.8

34.1

27.7

92.6

1.0

0.9

2.0

3.9

100

Paraguay

43.2

26.4

21.4

91.0

2.0

1.8

0.9

4.7

100

Peru

34.6

36.0

18.4

89.0

1.7

1.7

2.5

5.9

100

Uruguay

40.2

33.2

19.1

92.5

0.7

1.9

1.3

3.9

100

Total

37.7

30.0

21.0

88.8

2.4

2.1

1.5

6.0

100

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Paus, E., Robinson, M. The Challenge of Productivity-Based Development: Innovation Gaps and Economic Structure in Latin America. Eur J Dev Res 36, 277–305 (2024). https://doi.org/10.1057/s41287-023-00590-0

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