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Abstract— Mexico is among the set of countries that look at

Science, Technology and Innovation a fundamental mechanism to support competitiveness, reach higher levels of economic growth and increase the social welfare of its citizens. This paper provides a description of the main policy initiatives to foster innovation in Mexico. Afterward, some characteristics of innovation practices in private-sector businesses and how these features have evolved over a 5-year period are presented to assess the impact of those policy initiatives. To this purpose, results of the 2001 and 2006 national innovation surveys are used.

Index Terms— Developing nations, economics, industries, technological innovation.

I. INTRODUCTION

n today’s world, nations look at Science, Technology and Innovation (S, T & I) as a fundamental mechanism to

support competitiveness, reach higher levels of economic growth and increase the social welfare of its citizens. Joseph Schumpeter [1] was the first to acknowledge that “it is not price competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization ... –competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”

However, it was not until Vannevar Bush’s manifesto, “The Endless Frontier” [2], that science was seen as the source of new knowledge that is published openly and drives the creation of new technologies that lead to economic growth. This seminal document was one of the most important motives for governments to start investing substantial resources to support science [3], [4].

Some years later, Robert Solow [5] concluded that about 87% of the United States growth between 1909 and 1949 could not be explained only by the growth in labor and capital, and that technological change is the residual of the total productivity factor that the changes in labor and capital inputs can not explain. He found that this residual is very important, and called for further research to explain the role of technology in generating economic development.

Public support for science and technology (S&T) is often justified on the basis that in this area there is “market failure”.

Manuscript submitted on January 31st, 2008 Claudia N. González-Brambila is with the Department of Business

Administration at ITAM, Mexico, D.F. 01080, Mexico, phone: + 52 55 5628 4000 ext. 3413; fax: + 52 55 5628 4049; e-mail: cgonzalez@itam.mx.

The notion is based on the assumption that a purely market relation would produce insufficient incentives for firms and individuals to invest in S&T. The reasons behind are:

The knowledge that S&T produce is a public good, and therefore non-rival and non-excludable. Non-rival because many people can use the knowledge at the same time, and non-excludable because no one can prevent the use of that knowledge. By increasing the funds dedicated to support S&T, governments enhance the creation of useful knowledge that can produce economic benefits.

This is related with the fact that firms can not appropriate all the benefits of their investment in S&T.

Moreover, the delay time between scientific publication (knowledge) and productivity growth is very long. Adams [6] estimates that there is a lag of between 20 to 30 years.

The other reason is that the results of S&T are risky and highly uncertain, so that there is not an adequate price structure that enhances the investment of S&T.

Thus, it had been seen that the government role was to support S&T as generously as possible, in the belief that the knowledge generated would produce public benefits. However, since the late 1970’s, leading nations that had invested large amounts in S&T, saw a decline in its international competitiveness [7]. At the same time, governments faced numerous other demands, such as health, education or poverty where social payoff was more evident. Moreover, there was an increased necessity for accountability of the impact that S&T programs had had, and how to improve the way in which research was being funded. As a result, those nations started devoting increasing attention and resources to the promotion of innovation distinctively [8]. Technological innovation, predominantly in “high tech” industries, proved to be one of the main driving forces behind economic growth and competitiveness [9], [10], [11]. Thus, in the last two decades, governments have expanded the support of traditional research programs to fund new programs to stimulate industrial innovation and technology transfer.

Mexico is among the set of nations trying to follow these global trends. Yet, although over the last decades its investment in S&T has grown in absolute terms, it has lagged the economic evolution of the country. While investment in research and development has equaled 2.3% of Gross Domestic Product (GDP) for the OECD as a whole [12], Mexico had a level of investment of 0.4% of the GDP in the same year, and this level has been virtually constant over the last decade.

In recent years, Mexico has put in place a number of innovative policy initiatives that are expected to have

Claudia N. González-Brambila

Innovation in Mexico

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promising results. The purpose of this paper is to provide information about the development of S&T in Mexico, which traditionally has had the purpose of increasing the country’s capacity in scientific research. However, starting the 2000 decade, special emphasis has been put to foster innovation. A description of the main policy initiatives to this purpose is presented. Afterward, I present some characteristics of innovation practices in private-sector businesses and how these features have evolved over a 5-year period in order to assess, in an indirect way, the impact of those policy initiatives. To this purpose, results of the 2001 and 2006 national innovation surveys are used.

II. OVERVIEW OF THE MEXICAN S&T SYSTEM

The beginning of the modern S&T in Mexico started around 1930 with the creation of the National Institutes of Health. During this period, government support for S&T activities was almost exclusively dedicated to the improvement of health. In 1960, there was a first step towards broadening the S&T effort through the creation of the National Institute for Scientific Research (Instituto de Investigación Científica), which granted scholarships to fund undergraduate thesis and graduate education. By then, Mexico’s economic activity was heavily based on the exploitation of natural resources, with the production of oil accounting for an important share of the GDP. As a result, S&T had little importance in the government agenda.

The first set of important evolutions happened during the 1970’s. First, in 1970, the National Institute for Scientific Research became the National Council for Science and Technology (Conacyt) which, in addition to scholarships, also began to award research grants. During the 1970’s, there was also an important expansion of the higher education system, and a number of large public universities were established. Mexico had an economic development strategy based on imports substitution, and increasing the level of education was seen as an important condition to fulfill this development perspective. Thus, at that time, while investment in S&T did enter the policy arena, it was mainly seen as a tool to support students who wanted to finish their undergraduate studies and pursue graduate education. Yet, these policies did support the establishment of a small active scientific community.

At the beginning of the 80’s, a severe financial crisis affected the country. Inflation levels reached more than 150%, and purchasing power dropped dramatically. As a result, increasing numbers of scientists started leaving to other countries, mainly to the USA. In order to avoid a collapse of the budding scientific community, the federal government created the National System of Researchers (SNI - Sistema Nacional de Investigadores) in 1984. SNI gave pecuniary compensations as a salary complement to the most productive1 researchers. This program has remained in place ever since,

1 In SNI, it is well known that peer committees tend to reward better

publications than other results of research.

and became a distinguishing feature of the Mexican S&T system.

By the end of the 80’s, the economic policy of the country changed. The imports substitution policy was abandoned, and a path towards a deregulated and open economy was charted. The integration of Mexico to the General Agreement on Tariffs and Trade (GATT) and the signing of the North America Free Trade Agreement (NAFTA) were two clear milestones in this new path. This change in economic development policy also brought new impetus to S&T. In 1991, the first World Bank loan to promote S&T included a Mexican Program to Support Science (PACIME - Programa de Apoyo a la Ciencia en Mexico). This brought 150 million dollars [13] to support S&T activities, with a matching amount provided by the federal government. This enabled the creation of a number of important new programs to increase the country’s capacity in scientific research, to support advanced training and, to a much lesser extent, to support technological and innovation activities.

The first important initiatives in terms of advancing innovation happened only in the late nineties (1998) [14]. First, resources from the second World Bank loan (PCI - Programa de Conocimiento e Innovación) were assigned to new programs devoted to the enhancement of innovation and, second, a system of fiscal incentives for S&T was enacted in the country. However, despite this new set of resources from the World Bank supporting technological activities, not many projects ended up receiving support. It is difficult to identify all the reasons of the low demand for these programs, however, something that helps understand the slow start of these programs is the extremely low investment of the business sector in R&D. During the nineties, only between 15% - 20% of the Gross Expenditures in Research and Development (GERD) [15] was financed by firms, while in other countries the proportion goes from 40% in the case of Brazil, to more than 70% in the case of Korea [12].

In 2001, a new S&T governmental plan was done. This plan put special emphasis in applied research with the purpose of linking scientific activities to national problems, and directing scientific activities to areas of social value. This effort included a number of new programs and important changes to existing ones. The most critical among the new programs were [14]:

1) 17 Sectorial Funds (Fondos Sectoriales): These were trust funds operated in conjunction with federal agencies. Their purpose was to finance projects that addressed strategic national needs/problems (e.g. health, environment, agriculture). In principle, they operated with matching funds between Conacyt and the different agencies.

2) 30 Mixed Funds (Fondos Mixtos). These funds aimed at promoting S&T directed to regional development problems. Similarly to the sectorial funds, these operated with matching funds between Conacyt and the States of Mexico.

3) An Institutional Fund (Fondo Institucional). This fund, managed solely by Conacyt, financed its existing traditional

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programs and included provisions directed at supporting several new initiatives. One of the main new initiatives was the AVANCE program. AVANCE was created in 2003 to support the last stages of the innovation process of firms and to assist the commercialization of new discoveries.

4) Fiscal incentives to support R&D. Although fiscal incentives for S&T were first enacted in 1998, it was only in 2001, with an important simplification of regulations, that a significant number of firms started to take advantage of this initiative.

III. POLICY INITIATIVES TO FOSTER INNOVATION

The Mexican government has three specific programs to foster innovation. The most important, in terms of resources and number of beneficiaries, is the one that gives fiscal incentives to R&D. As was mentioned before, this program was first enacted in 1998, but it was only in 2001, with an important simplification of regulations that a significant number of firms started to take advantage of this initiative. The program started giving a rate of 20% of the total volume or level of the firm’s R&D investment, and a threshold of close to 50 million dollars. In 2001, the rate was changed to 30%, and in 2006 the threshold was changed to almost 400 million dollars. The program has had an incredible growth. In 2001, 41.5 million dollars were awarded to 150 firms, which developed 548 projects. By 2006, 364 million dollars were awarded to 1054 firms that developed 3317 projects [16].

The tax incentive program has benefited mainly large enterprises. From 2001 to 2005, 82% of the resources were awarded to large firms. In the same period, the automotive sector received almost 30% of the total amount of the resources of this program. The firms that received more benefits were: General Motors, Volkswagen, Ford Motor Company, Nissan, Delphy Automotive, and Daimler Chrysler. This situation has caused severe critics to the program. First, all automotive firms are transnational. And second, there are important controversies about the type of innovative activities that these firms developed.

In terms of geographic distribution, it is observed that this program has benefited mainly the richest states of Mexico, with almost 85% of the resources awarded to only 5 (out of 32) states. Furthermore, almost 45% of these resources have been awarded only to firms in Mexico City.

The resources were used mainly to pay for labor costs (34%), followed by machinery, equipment and instruments (21%). Also important were prototypes and consulting services (10% each one).

The second most important program is the Sectorial Fund with the Economy Secretariat. This is a trust fund operated by Conacyt with matching funds from Conacyt and the Economy Secretariat, which is the agency in charge of the promotion of competitiveness in the Mexican industry. Starting in 2002, this program intended to support technological innovation in micro, small and medium enterprises (SME) by enhancing the collaboration between academy and industry or by boosting

alliances among large firms and SMEs. To this purpose, if a large firm applies to the program, this has to include at least 10 SMEs in the development of the project. The program covers at the most 50% of the cost of the innovative project.

From 2001 to 2006, this program awarded 71 million dollars to 302 projects. In contrast with the tax incentive program, this program has distributed its resources to a more diverse number of industries. The most dynamic industries have been chemical and petrochemical, which have received up to 20% of the program resources, followed by manufacturing (11%) and pharmaceutical industry (9%). In terms of geographical distribution, also a more uniform distribution is observed. Mexico City has received 18% of the resources, followed by Jalisco (16%) and Nuevo Leon (15%).

The last program, AVANCE, started operating in 2003 to support the last stages of the innovation process of firms, and to assist the commercialization of new discoveries. The program has 3 modalities: the Last Mile (ultima milla) gives resources to support the last stage of the innovation process; the Entrepreneurs Fund, which is managed in conjunction with NAFIN (Mexico’s state development bank), gives complementary resources in the form of angel capital; and the Warranty Fund, which gives endorsement to firms to obtain commercial bank loans.

Between 2003 and 2007, the Last Mile program has supported 135 projects with almost 40 million dollars; the Entrepreneurs Fund has funded 19 firms with 9 million dollars; the Warranty Fund has given 5 endorsements.

The Last Mile program has supported mainly information technology (IT) firms (36%), followed by new materials (13%), and design and manufacturing (10%). The Entrepreneurs Fund also has supported mainly the creation of IT firms (35%) followed by electronics and telecommunication (25%). As in the fiscal incentives for R&D program, this program has supported mainly firms in Mexico City (50%), and the five richest states of the country.

Despite its extremely modest results, in terms of the resources awarded and the number of firms that have received some benefit, this program has very interesting examples of innovations. For reasons of space, it is not possible to describe these case studies.

IV. ASSESSING THE IMPACT

Evaluation of innovation programs clearly is not straightforward and presents various limitations [17]. On one hand, the social and economic benefits that accrue, not only from innovation but also from science and technology, are difficult to identify and measure because of the complexity and the uncertainty of the innovation process. On the other side, the outcomes are widely dispersed and often occur after considerable time lag [18]. Other difficulties with impact assessment are the problems of attribution and additionality [19]. For example, inputs need to be quantified and weighted in accordance with their contribution to the production of

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outcomes, but there are multiple causes that affect the outputs. Moreover, it is almost impossible to find variables that affect the program (for example, the grant), but not the production of outputs (patents).

Besides the difficulties associated with the evaluation of innovation programs, the evaluation of the Mexican innovation programs have the additional problems that appropriate data have not been collected on which to base the evaluation, the programs are too young to really identify their actual outcomes and impact, and the programs, specially AVANCE and the Sectorial Fund with the Economy Secretariat are very small for the size of the economy of the country.

Notwithstanding, I can show some indirect or substitute measures of the programs accomplishment, by showing the results of the Innovation Surveys.

In 2001 and 2006, Conacyt and the Mexican Government Statistics Office (Instituto Nacional de Estadística, Geografía e Informática, INEGI) applied Innovation Surveys to collect information on the characteristics of innovation in private-sector business. Both questionnaires were designed in accordance with the definitions contained in the OECD Oslo Manual.

The 2001 survey collected information of firms’ innovation activities during 1999 and 2000, whereas the 2006 survey collected it for the 2004-2005 period.

Given the fact that the programs designed to foster innovation were created in 2002 and 2003, it could be assumed that some of the differences between the 2001 survey and the 2006 survey could be influenced by the policy initiatives of the government. It is acknowledged that other factors have influenced the outcomes of the surveys. However, as was mentioned before it is almost impossible to avoid the problems of attribution and additionality. Furthermore, among the most frequently used methods to evaluate innovation programs are: monitoring surveys, and before and after comparisons, along with others [20].

The results of the Surveys show that the number of companies that developed at least one innovative project increased from 25% in 2001 to 30% in 2006. This increase was the greatest in the small and medium companies. Nevertheless, this was not the case in the largest companies (more than 751 employees), since the percentage of companies involved in innovative projects diminished from a 43% to 20%. In 2001, the most dynamic industries were: food, drink and tobacco (38%), followed by machinery, equipment, instruments, and transport equipment (37%), and coal, oil, nuclear energy, rubber products, chemicals, and plastic (36%). In 2006, the most dynamic industry was again food, drink and tobacco (58%) Also a significant improvement was seen in coal, oil, nuclear energy, rubber products, chemicals, and plastic, with 54%. However, in machinery, equipment, instruments, and transport equipment, fewer firms developed innovative projects (34%). A surprising result is that in the automotive sector, which has received most of the benefits of the tax incentive for R&D program, the number of firms that

developed innovative projects was reduced from 40% to 28%. More firms developed product innovation than process

innovation. In 2001, 54% developed products, compared to 63% in 2006.

In terms of the scope of innovation, the national level is the most relevant, as it accounted for 51% in 2001, and it rose to 62% in 2006. There was also a slight increase at the firm level, from 13% to 16%, and a decrease in the worldwide level which fell from 36% to 23% in the same period.

If we consider the most important types of innovation, the use of new materials shows a significant drop from 30% to 3%, whilst the use of radical new technologies, new production techniques and new software remain relatively stable from 2001 to 2006 (27%-21%, 15%-15% and 7%-11% respectively).

Related to the mechanism to finance innovation, it is seen that own resources is the most common means to finance innovation, in 2001, 71% of the projects used this mechanism, and in 2006, 62%. Government support is becoming a key factor; it rose from 3% to 20%. Although bank loan is an expensive mechanism to finance innovation, it is also a regular form, 13% of the firms used this mechanism in 2001 whilst 11% did that in 2006. Resources coming from international organizations represented 2% in 2001, and almost disappeared in 2006 with only 0.2%.

According to the firms that responded the survey, the most significant intentions of developing innovative project are: keep market share, improved product quality, increase market share, and decrease costs. These intentions have not changed much over time. However, the factor that shows a very relevant change is fulfill standards and regulations, which was considered a significant motive for 21% of the sample in 2001, and in 2006, 77% of the firms considered this idea as important. This very significant increase might reflect a greater attention by Mexican firms to global market norms, and greater law enforcement by the Mexican government. .

The most relevant factors that hinder innovative projects mentioned by respondents were: high cost of innovation, excessive economic risk, and lack of adequate resources of financing. Significant changes can be observed on the subject of Cost of Innovation. Labor costs jumped from 12% to 40% as a percentage of the total cost of innovation, whilst equipment fell from 64% to 34%. These changes could be explained by the fact that there has been an important increase in the number of researchers working in industry in the last years. In 1999, 16% of researchers in Mexico were working in the private sector, whilst this proportion rose to 50% in 2005 [21]. It is astonishing that much more graduate students than the system is actually graduating are incorporating to work in industry. Besides, as was seen there has not been such a visible change in the innovation activities of the private sector.

In terms of the sources of ideas for innovation, the production department and customer services have been the most significant ones, even more important than the research and development department.

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Finally, in recent years innovative projects tend to be longer (19 months) than what it used to be in 2001 (12 months); and the expected payback period has not had a variation and continues to be 25 months.

V. DISCUSSION

Although Mexico has been among the top 15 economies in the world in terms of GDP during the last 2 decades, it has held the last place in the OECD countries in terms of resources devoted to S&T. The Mexican government invests only 0.4% of the GDP to these activities, while the OECD countries as a whole invest 2.3%.

This lack of investment in S&T could be responsible, to a large extent, for the dramatic loss of competitiveness of the Mexican economy. According to the IMD World Competitiveness Yearbook, the competitiveness of the country has dropped from the 36th place (out of 60) in 2001, to the 56th in 2005.

Conversely, there has been an important increase in the proportion of the GERD financed by industry. From 1995 to 2005, it rose from 18% to 46%.

Although the programs to foster innovation are too young to really measure their direct impact, it is important to note that these new set of programs, especially AVANCE, were quite innovative and have generated a number of indirect results that are of critical importance for the future of the innovation system in Mexico. First, they have augmented the interest of investors in technologically innovative projects. Second, they have fostered the generation of technical capabilities for the identification and evaluation of innovative projects, which were inexistent in Mexico until recent years. Moreover, they have promoted the creation of angel and venture capital, which had been virtually absent in the country. Finally they also have favored a culture of management of innovation in Conacyt and other agencies, a dimension that had always been eclipsed by other more important focus on the science dimension.

Consequently, given the promising results of the governmental programs to foster innovation, which have been operating with extremely modest resources, we could expect that a more aggressive approach, with a significant increase of investment in S&T, closer to the percentage of the GDP recommended by the OECD, could energize the economy, and deliver the kind of impetus needed to increase its competitiveness and avoid sinking even further in the most relevant international indicators.

ACKNOWLEDGMENT

The author thanks the National Council for Science and Technology (Conacyt) for providing the data utilized in this paper. Support from the Asociación Mexicana de Cultura is acknowledged.

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