Latin America and the Caribbean Call for More Investment in Innovation

Innovation, in particular investment in research and development (R&D), is a key to competitiveness, increased productivity and long-term growth beyond simple accumulation of physical and human capital in a fast growing global economy.

Latin America and the Caribbean have not been investing enough in innovation in these worldwide trends and lag behind advanced economies and fast growing emerging economies such as China, India and South Korea. The success of the region is held back by underinvestment in innovation.

Regional Dialogue

“Despite the boom of recent years, Latin America and the Caribbean suffer from a chronic problem of growth. But poor growth in the region is not due to an investment problem in general, the region has a problem of low productivity. Indeed, empirical evidence shows a strong co-relationship between investments in innovation and growth,” said Santiago Levy, IDB Vice President of Sectors and Knowledge, at a recently held IDB Regional Policy Dialogue on Science, Technology and Innovation Network: Incentives for Private Investment in R&D and Business Innovation.

For countries in Latin America and the Caribbean, now more than ever innovation is pivotal in addressing challenges of low economic growth and productivity.

In this context, the IDB brought together policy makers from 19 countries and representatives of the Organization for Economic Co-operation and Development (OECD), the UN Economic Commission for Latin America and the Caribbean (ECLAC), the Ibero-American General Secretariat (SEGIB), the UN Educational Scientific and Cultural Organization (UNESCO), the World Intellectual Property Organization (WIPO) and the Organization of the American States (OAS) to discuss effective policies, tools and incentives to promote innovation in business in the region.

Deficit in R&D Investment in the Private Sector

Investment in R&D has been growing steadily in most industrialized economies, reaching 2.29% of GDP in 2007, and also substantially in China. On the other hand, Latin America still invests significantly less than these economies, according to the IDB’s 2010 Statistical Compendium of Indicators: Science, Technology, and Innovation in Latin America and the Caribbean.

In addition in OECD countries, the private sector is the main and the fastest-growing source of R&D financing representing 65 percent of total R&D expenditures. In Latin America and the Caribbean, the private sector share represents only 40% and the financing of R&D continues to be concentrated in public institutions.

The private sector can play a major role in a country’s innovation system by transforming ideas and knowledge into new economic advantages such as higher productivity growth, opening of new markets and higher market shares. This generates positive economic impact as a whole. In contrast, when R&D investment is mainly concentrated in the public sector, its impact on productivity and economic competitiveness can be less substantial.

Policies to Promote R&D and Business Innovation

Lack of private sector financing for innovation in the region is mainly caused by market failures to provide finance and effective and sufficient incentives for innovation. To address the problem of market failure, several countries in the region have implemented policies to provide financial incentives such as subsidies and tax credits to the private sector. By sharing risks, governments therefore encourage companies to invest in R&D.

For instance, Chile is developing a flexible R&D tax benefit program, which favors SMEs, encourages international cooperation and is available for up to 10 years. “We also launched a direct subsidy program in May of this year to facilitate the commercialization of R&D outcomes through technical brokers in global markets. We hope to have 95 programs with a budget of $8.5 million dollars by the end of this year. Chile enjoys the growth rate of 6 percent mainly due to a higher productivity and competitiveness, achieved by quality innovation and entrepreneurship programs,” said Conrad Von Igel, Chief of Innovation Division of the Chilean Ministry of Economy.

Panamanian National Secretariat for Science, Technology and Innovation (SENACYT) rigorously invests in the development of human capital and research centers and provides grants and technical assistances to innovative entrepreneurs of all levels under its enhanced national strategy for science, technology and innovation which was created in collaboration with leading experts in academia, business, government and civic organizations.

Uruguayan Finance Minister Fernando Lorenzo stressed the importance of role of the private sector in publicly financed innovation programs. “If there is sufficient R&D capacity in the private sector, public resources can stimulate industrial production, reduce cost and increase opportunities for innovation in businesses”. “It is also very important to place innovation agenda at the heart of national development strategy with a financial mechanism that is not affected by ups and downs of the economy,” added Lorenzo.

 Improved Innovation Data Needed

In securing financial resources, policy makers agreed on an urgent need to create reliable, timely and contextualized statistics which measure the performance of innovation. Evidence-based data would enable rigorous comparison with other sectors and help ensure a fair share of budget allocation for science and technology ministries and attract private sector investments. In addition, only through solid statistics, policy makers can design and implement effective long-term innovation strategy.

Conclusion and Next Steps

Each country’s innovation sector is at a different level of development. While some countries such as Brazil, Chile, Argentina and Mexico have advanced innovation industries that are competitive in the global market, others are still in the process of identifying their niches in the market.

Despite of their varied contexts, policy makers agree that it is necessary to incorporate innovation in their respective national economic development strategy as a key area of cooperation between policy makers, government agencies, the private sector, academia and civil society. Public policy also needs to articulate the role of each stakeholder to effectively coordinate the joint efforts to create a favorable and positive environment to promote innovation development.

The IDB will continue to support innovation dialogue between countries in collaboration with other international organizations, including the OECD, the ECLAC, and the SEGIB to collectively explore the challenges to, and opportunities for, furthering innovation development to increase productivity and spur economic growth.

IDB Catalyst for Innovation

The dialogue was organized by the IDB’s Science and Technology Division, which supports Latin American and Caribbean countries to become knowledge-based economies through increased investment in science, technology and innovation as a means to improve productivity and reduce poverty and inequality in the region. An example of a recent project includes a $200 million loan to Argentina to support science and technological innovation in the country’s strategic economic sectors, such as agribusiness, energy, health and environment. For more information, visit Science and Technology at the IDB website.