This chapter analyses the position of small and medium-sized enterprises (SMEs) in Latin America in terms of their capacity for innovation and technological development. It addresses the obstacles that hinder SMEs from accessing technology and benefiting from knowledge dissemination and transfer. The chapter pays special attention to SMEs’ use of information and communication technologies (ICTs) and their reaction to the innovation policies being implemented. It looks at how these restrictions lead to productivity gaps and structural heterogeneity. The chapter concludes by presenting a series of recommendations and identifying opportunities and challenges for the design of public policy.

Introduction

The new techno-economic paradigms, which are creating a “third industrial revolution”, increase the dependency of economic growth and development on capacities to create value by incorporating knowledge, innovation and the dissemination of productive technology use (ECLAC, 2012). These are essential factors to accelerate growth and make productivity gains, create good-quality jobs, reduce structural heterogeneity and move forward in long-term processes to improve income distribution and increase equality. Technological development and innovation play a leading role in this dynamic. It is a complex social process that evolves from the interaction between individual people who create social ties and relationships.

In 2009, investment in R&D in Latin America was equal to 0.7% of GDP, way below the level of investment seen in OECD countries (2.4%). This gap and the concentration of R&D in only a few countries help explain why the region is lagging behind in this area.

This chapter focuses on the factors that determine to what extent firms, particularly SMEs, are able to innovate and incorporate new technologies into their production activities, as well as on the key policies and instruments to achieve this. In particular, increasing the intensity and changing the orientation of the innovation process requires: i) developing firms’ and institutions’ technological and organisational capacities; ii) strengthening the architectures of the networks that the companies belong to and creating “small-world networks”;1 iii) creating a more virtuous connection between the parts of existing networks (companies, universities and technology centres, and consultancies and intermediate institutions); iv) creating larger markets and a broader division of labour to bring about a cumulative causation;2 v) taking into consideration the form of competition (how salaries are set and the relative importance of “creative destruction”); and vi) analysing institutions open to innovation (if they exist) and their capacities. An innovation process is necessary both because of the characteristics of firms and because of the macroeconomic environment and the socio-economic characteristics that are defined by the national innovation system (NIS). The system of competition and the processes of structural change and creative destruction, as well as the dynamics of learning and the linkages and capacities of firms, determine business innovation (ECLAC/SEGIB, 2008).

This chapter is structured as follows. The first section analyses the state of innovation region-wide. The next section focuses in on SMEs’ capacities and what they are doing to foster innovation. The third section identifies SMEs’ strengths, weaknesses, results and main obstacles. In the fourth section, the focus shifts to the access and use of ICTs and new opportunities for the computerisation of SMEs and regional broadband connectivity. In the fifth section, we present some recommendations on the institutional structure and public policies needed to drive forward innovation and dissemination of technology in Latin American SMEs. 

Innovation in the regional context

Latin America is lagging behind the OECD economies in terms of innovation and technology adoption, but performance varies from country to country across the region (OECD/ECLAC, 2011). This is in contrast to developing countries such as China, which have narrowed their technology gaps by making their production structures more complex, more sophisticated, more knowledge-intensive and more technology-intensive. Latin America has made little progress in this area and remains well behind advanced countries (ECLAC, 2010). 

One reason the region still lags behind is because investment in research and development (R&D) is low and is concentrated in only a few countries. In 2009, OECD economies invested 2.4% of gross domestic product (GDP) in R&D, more than three times the figure for Latin America (0.7%). The gap has remained over the past few decades (Figure 4.1). There are also large differences among countries in the region. For instance, in 2009 Brazil invested 1.2% of GDP in R&D, while Bolivia spent less than 0.2%. Even within Latin American countries there are equally large differences in the nature of investment in R&D depending on the type of company and the economic sector. Moreover, Latin America is also lagging way behind in terms of the sources of investment in innovation. While in OECD countries businesses provide 60% of investment in R&D, in Latin America the business sector tends not to prioritise innovation and technological development, providing only around 40% of investment in R&D. 

Various factors influence a firm’s capacity to innovate. A general factor is the institutional environment, which has a bearing on the firm’s innovative behaviour. A sector-specific factor is the characteristics of the business activity and its linkages with organisations involved in the national innovation system [businesses, universities, technology centres, consultancies, government institutions, non-governmental organisations (NGOs) and civil society]. A company-specific factor is the firm’s internal capacities and the efforts it makes. Innovation improves the quality of products and processes, increases productivity and competitiveness, and helps a company better position itself in national and international markets and move towards activities with a higher added value (Cimoli et al. 2011; Dini and Stumpo, 2011). As firms strive to innovate, they need good learning and knowledge-accumulation processes developed within the company and through their relations with other actors.

Companies are key stakeholders in an NIS because they use scientific and technological advances in production to develop new products and processes or improve upon existing ones, enabling greater productivity and competitiveness.

Four factors, among others, determine a firm’s innovative capacity: its ability to absorb knowledge, the size of its workforce, its sector and the context in which it operates. Given the business diversity and the importance of SMEs in the production fabric of Latin American countries, we must examine companies’ innovation capacities and limitations. Innovation by SMEs is usually a spontaneous reaction to competitive pressure from large firms, and their innovative strategies and activities are often part of informal strategies rather than the result of planning. Given their limited capacities, they usually seek to capture market niches rather than work their way into mass markets.

Figure 4.1. Latin America and the OECD: Investment in R&D and distribution by origin of finance, 1990-2009

Statlink: http://dx.doi.org/10.1787/888932732823

A company’s size directly affects its capacity to innovate. While large firms benefit from growing profits from R&D activities, SMEs are heavily restricted by their size, so their innovations are weaker and they are less likely to use technologies productively. Despite their heterogeneity, SMEs share many constraints. These notably include access to credit and qualified human resources, a lower tendency to export, a lower capacity to interact with other companies and institutions that train human resources and carry out research, and their limited membership in networks. Diversity among and within sectors influences their tendency to innovate. Latin American SMEs are usually concentrated in sectors whose characteristics in the region mean they require little knowledge (trade, informal services and basic manufacturing.

Companies are key stakeholders in an NIS because they use scientific and technological advances in production to develop new products and processes or improve existing ones, enabling greater productivity and competitiveness.

Public research centres and universities provide essential support for the development of technology and innovation for SMEs. A central theme for innovation is co-operation and linkages between public and private actors (Nelson, 1993; Dosi and Cimoli, 1994; ECLAC/SEGIB, 2010). Alongside institutions and current regulations, these actors form the national innovation system (NIS). This system sets out the processes for incorporating technology and determines the rate at which technological knowledge will be generated, adapted, acquired and disseminated in production activities (Lundvall, 1992). The linkages and interaction between NIS actors are important for a country’s scientific and technological development and the drive that knowledge can give to the production sector (Nelson, 1993; Dosi and Cimoli, 1994; ECLAC/SEGIB, 2010). 

Other key players include government bodies, higher education institutions, research centres and businesses. Businesses are essential, since in collaboration with other actors they use scientific and technological advances in production, developing new products and processes and improving existing ones to increase productivity and competitiveness (ECLAC/SEGIB, 2010). Large firms generally develop different levels of co-operation within Latin American NISs, but SMEs often have neither the resources to carry out research nor the capacity to link up with other NIS actors.

The weaknesses of the region’s NISs make it harder for companies, especially smaller ones, to have the capacities to compete when technology is moving forward so quickly and there is growing specialisation. Latin American NISs are faced with restrictions in the capacities of their members, whose diversity makes co-ordination difficult. In science, technology and innovation (STI), Latin America is lagging way behind more developed economies because demand for STI by the production sectors is low and investment in R&D is scant, especially in the private sector. SMEs can only achieve the capacities they need by working in networks, where information and technology can flow between businesses and organisations as abundantly as inputs and goods. The SMEs can thus increase their added value and markedly boost productivity (ECLAC, 2010).