In the past decade the agenda for innovation has been given new impetus in Latin America. After the 1990s —when countries in the region prioritised growth models based on macroeconomic stability and inflation control— innovation and productive development have returned as priorities in development strategies. Innovation is a systemic process that arises from voluntary and involuntary interactions between actors operating within different frameworks and with different incentives. For example, businesses respond to competitive market-oriented strategies, while universities, research centres and laboratories perform based on different criteria, not necessarily directed toward the industrial application of advances in knowledge.1 The quality and intensity of relationships between the actors in national innovation systems are determined by businesses, institutions, incentive mechanisms, regulations and existing infrastructure. The region needs to encourage further strengthening of national innovation systems, most of which are at an early stage of development. They are often characterised by the presence of “islands of technological excellence” in contexts of low productivity and little business development. It is fundamental to strengthen domestic scientific and technological capabilities, increase the ability to transform these advances into competitive business opportunities and generate qualified employment opportunities to meet both domestic and international demand. The advances and challenges in innovation and productive development in Latin America today can be summarised in seven main points:

  • The productivity gap is a persistent problem. The region needs to invest more to close this divide. A comparison of the dynamics of manufacturing industry productivity between Latin America and the United States shows that Latin America has not caught up to the technological frontier, but in fact the divide has widened in recent years.2 Between 2003 and 2007, labour productivity grew 2% annually in Latin America. Since the mid‑1990s it has grown between 3% and 5% annually in the US, primarily due to the modernisation of productive processes resulting from the increasing incorporation of information and communication technologies in business management.3
  • The ability to close the productivity gap depends on productive specialisation and the pattern of integration into world markets.4 The Latin American lag is reflected both in quantity —given the productivity gap— as well as in quality, because of the high sectoral specialisation in natural resource–intensive activities (Figure 6.1). In fact, low productivity growth is associated with the lack of substantive structural change in the region.
    Natural resource-intensive sectors still account for 60% of total manufacturing value added, while in the United States, thanks to a strong increase in knowledge-intensive sectors these now represent 60% of total manufacturing value added. This change in the structural composition of its domestic industry almost doubled the country’s labour productivity between 1990 and 2007.5

Figure 6.1

Specialisation of Production Structure & Labour Productivity: Latin America & United States, 1990-2007 (%)

Specialisation of Production Structure & Labour Productivity: Latin America & United States, 1990-2007 (%)
  • Primary products and natural resource–based manufactures account for over 50% of the region’s exports,6 so diversifying exports and, therefore, the production structure is a priority. In recent years there has been a process of “commoditisation” of exports, mainly driven by the increase in demand for primary products and their rising prices. The export structure in Latin America contrasts with that of many OECD economies, which are characterised by product diversification and concentration in medium- and high-tech manufacturing. There are three main groups of countries in Latin America:the Southern Cone countries, concentrating in primary products and natural resource–based manufactures; Central American countries, specialised in low and medium-tech manufacturing; and a group consisting of Costa Rica,Mexico and Brazil, with the highest degree of diversification of exports in the region, including medium- and high-tech manufactures.
  • There is a mismatch between supply and demand of skilled human resources for innovation. It is necessary to increase both the quality and quantity of human resources for innovation and create incentives for labour absorption. This challenge is crucial for all countries in Latin America. For example, Argentina and Uruguay are characterised by a high level of education and need to move towards the co-ordination of educational and productive development policies in order to improve the competitiveness of their productive sectors. Brazil, on the other hand, must strengthen the technological intensity of its productive matrix and needs a training policy in line with this effort, while the smaller countries of the region that suffer from intensive “brain drain” need to attract and retain skilled human capital.
  • Latin American investment in research and development (R&D) as a percentage of GDP is less than a quarter of the level found in OECD economies. Investment in R&D as a share of GDP rose from 0.5% in 2004 to 0.6% in 2008; this percentage is much lower than in OECD economies (2.2% and 2.3% for the same years). Heterogeneity with respect to investment in R&D among countries in the region has increased in recent years; for example, Central American investment in R&D does not exceed 0.1% of GDP, while in Brazil it represents 1.2% of GDP.

Figure 6.2.

Investment in research and development as a percentage of GDP: Latin America and the Caribbean (selected countries), 2004-08

(In percentages)
  • The private sector invests little in innovation and R&D. Unlike in developed countries, in Latin America the private sector contributes little to innovation (Figure 6.3). The gap in R&D cannot be closed without a substantial increase in private-sector investment, along with greater support from the public sector. Therefore, it is essential to move forward in designing incentives and policies to encourage private-sector investment in innovation activities. This requires co-ordination between policies for technology and innovation and policies for productive development.

Figure 6.3

Latin America and the Caribbean, other emerging countries and the OECD: business investment in R&D as a percentage of GDP, 2007 or the most recent year for which data is available

(In percentages)

Latin American firms concentrate their scientific and technological activities in the acquisition of machinery and equipment, except for Brazilian firms that invest relatively more in R&D. This contrasts with OECD economies, where the business sector devotes a high percentage of its sales to R&D for expanding the stock of knowledge and developing new applications (see Figure 6.4). This explains the low level of density of linkages in innovation systems in the region. Innovation surveys indicate that there is little co-operation between businesses and scientific and technological research institutes. In Mexico only 4.5% of innovative firms collaborate with institutes on R&D projects, and in countries where this tendency is greater, such as Argentina and Uruguay, the percentage does not exceed 12% of firms.7 This stems mainly from sectoral specialisation (with most companies in low-knowledge-intensity sectors) and the lack of a culture and incentives for greater collaboration between research institutes and the private sector. Access to markets is also an important factor for innovation. Business development programmes to support the exports of innovative firms are also crucial for creating an environment that encourages private-sector investment in innovation. 

The innovation profile of firms in the region is mixed. There are important differences in the innovative behaviour of firms depending on size. SMEs in the region face greater barriers to innovation than large firms. According to national innovation surveys, smaller firms face higher obstacles, such as access to credit markets, reduced ability to diversify risks, problems of scale and barriers to exports. These obstacles reduce their ability to invest in innovation activities.8 Public policies that eliminate or reduce the specific bottlenecks faced by SMEs are key to stimulating innovation in those firms. 

Figure 6.4

Latin America and the Caribbean and the OECD: emphasis on innovation activities in manufacturing (% of sales), 2010

Latin America and the Caribbean and the OECD: emphasis on innovation activities in manufacturing (% of sales), 2010
  • Patenting in the region is low, but it is on the rise. Still, non-residents patent more than residents in Latin America. However, the countries of the region have increased the number of patent applications in international patent offices, but their performance falls short of the pace of Asian countries. For example, in 1995 Latin American and Caribbean countries registered 196 patents with the United States Patent and Trademark Office (USPTO), while Asian countries (excluding Japan) registered 3 545; in 2009, these numbers were 290 for Latin America and the Caribbean and 20 036 for Asia. At the same time, patent offices in Latin American countries have modernised and advanced in the provision of services and procedures. However, it is non-residents who most often apply for and obtain patents in these offices.9 If countries in the region are to move forward in designing intellectual-property management systems, they need to support innovation and business development strategies in order to foster innovation.
    This brief overview reveals a region that faces major challenges if it is to reach the level of competences and capacities necessary for success in the global knowledge economy. On the other hand, Latin America and the Caribbean is a region on the move, where important progress is being made, even though it is confined to certain sectors, regions or groups of businesses. At the same time, changes in world markets and new technological paradigms (ICTs, biotechnology, nanotechnology, new materials, etc.) are reshaping innovation and are increasing its complexity and forms.
    These new paradigms require significant investments in R&D as well as complementary activities (business and technology services, training, infrastructure, business development, etc.). Dialogue among businesses, universities, civil society and public-sector agencies is essential for designing better policy instruments and increasing financial resources to strengthen the impact of public action.
    The landscape described above poses significant challenges for the state and requires transformations in public policy and institutional capacity to support innovation. Innovation policy is also expected to have short- and medium-term impact on competitiveness in world markets and job creation, creating additional pressure to prioritise innovation in government programmes and in public- and private-sector budgets.
    Budget constraints and uncertainty in the dynamics of international markets require more effectively managed public policy, capable of responding to a constantly changing context. Greater transparency, efficiency and effectiveness can only be achieved if support is given to institutional learning in the design and implementation of public policies and investment is made in improved institutional capacities and new forms of governance to facilitate the co-ordination of public policies.