LATIN AMERICAN ENTREPRENEURS

MANY FIRMS BUT LITTLE INNOVATION

Daniel Lederman, Julián Messina

Samuel Pienknagura, Jamele Rigolini

Chief Economist Office

for Latin America and the Caribbean

World Bank

2

More than half of Latin American income-earners are

employed in small firms, most of which are informal…

Uruguay Chile

Argentina Costa Rica

Mexico Brazil

LAC Dominican Rep.

Honduras Ecuador

Colombia Paraguay

Peru

0 25 50 75 100

Informal (5 employees or less)

Formal (5 employees or less)

Informal (> 5 employees)

Formal (> 5 employees)

Employment by firm size and formality status, circa 2010

3

This has understandably led to a policy focus on

supporting small firms’ growth and formalization

Uruguay

Chile

Argentina

Costa Rica

Mexico

Brazil

LAC

Dominican Rep.

Honduras

Ecuador

Colombia

Paraguay

Peru

4

Yet, contrary to popular belief, small firms are

also common in the formal sector…

Size Distribution of Formal Firms, 2011

0 25 50 75 100

ECA

EAP4

High Income

China

Caribbean

Other LAC

LAC5

India

0 employees 1 to 5 employees

6 to 50 employees 50+ employees

Formal Workers and Growth of Large firms, 2000-2010

5

…and the increase in formal jobs is associated with the

expansion of large firms (not the formalization of small ones)

-0.10

Ch

ange

in t

he

shar

e o

f fo

rmal

em

plo

yees

(in

p.p

.)

20

00

-20

10

Change in the share of employees working in large firms (>20 employees, in p.p.) 2000-2010

10

8

6

4

2

0

-2

-4

-6

-8

-10

-12

-0.08 -0.06 -0.04 -0.02 0.0 0.02 0.04 0.06 0.08 0.10

Bolivia

Peru Costa Rica Paraguay

Brazil

Argentina

Mexico

El Salvador

Chile

Source: Lederman, Maloney, and Messina (2013).

6

Shift focus from small/low-growth to high-end/high-

growth entrepreneurs that generate good jobs

Uruguay

Chile

Argentina

Costa Rica

Mexico

Brazil

LAC

Dominican Rep.

Honduras

Ecuador

Colombia

Paraguay

Peru

7

What we mean by “high-end entrepreneurs”

• The introduction of a new good or a new quality good,

• the introduction of a new method of production,

• the opening of a new market,

• the conquest of a new source of supply of raw materials or half-manufactured goods,

• the carrying out of the new organization of any industry.

We follow Schumpeter (1911):

8

What we mean by “high-end entrepreneurs”

Edge of Medium and Larger over Small Firms in LAC, 2010

Marginal effect (%)

Labor productivity

0 10 20 30 40 50

Exporter

Exports share

Invested R&D

Patent abroad

Patent, trademark, or copyright

New or significantly improved process

New products introduced

Tech. from a foreign-owned company

Cooperates on innovation

Medium firms

Large firms

95% confidence interval Patent in country

In LAC, large firms pay, on average, 60 percent higher wages than small firms

9

Message 1. Numerous small firms reflect a deeper problem:

large firms do not generate enough good jobs

East Asian MICs

Eastern Europe

LAC

33

35

33

23

High Income

Size at birth

10

Message 1. Numerous small firms reflect a deeper problem:

large firms do not generate enough good jobs

East Asian MICs

Eastern Europe

LAC

After 40 years

170

220

255

110

High Income

No

n-a

g Em

plo

yer

(%)

ln(GDP ppp per capita)

8

6

4

2

0

6 7 8 9 10 11

11

The problem is not in the number of enterprises –

LAC is indeed a region of employers …

Non Agricultural Employer vs. GDP per capita (ppp), 2010

12

The problem is not in the number of enterprises –

LAC is indeed a region of employers …

LAC-4 3.5 Hungary 4 Poland 1 Portugal 4

Share of Employers

13

…but they do not generate enough good jobs

Non Agricultural Wage and Salaried vs. GDP per capita (ppp), 2010 N

on

-ag

Wag

e an

d S

alar

ied

(%

)

ln(GDP ppp per capita)

100

80

60

40

20

0

6 7 8 9 10 11

14

…but they do not generate enough good jobs

Non Agricultural Wage and Salaried vs. GDP per capita (ppp), 2010

Share of Employees

LAC-4 55 Hungary 84 Poland 73 Portugal 81

15

Message 2. Age matters much more than size…

for job creation by firms

…hence, a need to rebalance SME programs towards younger firms with potential…

Employment growth in Colombia, 1993-2008 Continuers (abstracting from entry/exit)

Gro

wth

rat

es

-.05

0

.05

.1

Small Medium Large

0 to 4 years 5 to 9 years 10 to 14 years

15+ years All

16

Message 3. Formal firms have an innovation deficit:

Low product innovation…

Percentage of Firms that Developed or Introduced a New Product, 2010

0%

20%

40%

60%

80%

100%

17

…low R&D investment (mostly public)…

R&D by Region, 2008-2010

0.00

0.50

1.00

1.50

2.00

2.50Business Enterprise Government Higher Education

Private Non-Profit Abroad

LAC-5 China High Income

Perc

enta

ge o

f G

DP

Other LAC Eastern Europe

18

… subpar management practices…

Management Scores Across Countries, circa 2010 (manufacturing firms with 100-5000 employees)

• Operation Management

• Performance Monitoring

• Target Management

• Talent Management

Four Management Categories:

2.6

2.8

3

3.2

3.4

Ave

rage

Man

agem

ent

Sco

re

19

…and uninspiring patent production

Number of Patents per 1 Million People (Average number of patents granted between 2006-2010)

1

10

100

1000

10000

Pate

nts

per

1 m

illio

n p

eop

le

20

Message 4. Even our superstars innovate little:

Low entry into export markets...

Not due to specialization in extractive industries: the result compares entry rates in similar sectors

Rel

ativ

e en

try

rate

s

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

Ch

ile

El Sal

vad

or

Co

sta

Ric

a

Co

lom

bia

Bulg

aria

Mex

ico

Guat

emal

a

Mac

edo

nia

Per

u

Ecu

ado

r

Jord

an

Mo

rocc

o

Mau

riti

us

So

uth

Afr

ica

Do

m. R

epub

lic

Mal

i

Sen

egal

Nic

arag

ua

Ban

glad

esh

Ken

ya

Burk

ina

Fas

o

Tan

zan

ia

Pak

ista

n

Cam

ero

on

Iran

Cam

bo

dia

Mal

awi

Nig

er

Uga

nda

Conditional relative entry rates to export markets, 2005-2009

21

…“Multilatinas” perform better than other local firms but

are much less innovative than MNCs from other EMs…

R&D by Multinationals Across Regions, 2010-2011

• Multilatinas have worse management practices than Multinationals from other middle income regions

• Multilatinas are less integrated to global value chains than those in comparable countries

R&

D E

xpen

dit

ure

per

US$

10

00

of

Rev

enu

e

0

0.5

1

1.5

2

2.5

3

HighIncome

China EastAsianMICs

EasternEurope

LAC-5 India

22

…and although foreign MNCs bring benefits to LAC,

they are less innovative than those in East Asia

Percent of Foreign MNCs Introducing a New Product, circa 2010

0

10

20

30

40

50

60

70

80

90

100

In p

erce

nt

Caribbean Other LAC LAC-5 East Asian MICs

Eastern Europe

High-Income

23

Summing up: Some encouraging trends and

policy developments in LAC…

Trends

• LAC’s a region of entrepreneurs

• The emergence of Multilatinas

• Dynamic trade integration

Policies

• Effective export and investment promotion agencies

• The emergence of empowered competition agencies

• Awareness and policy experimentation (Star-up Chile, policy evaluation through randomized experiments)

24

..but there are challenges: the innovation gap goes beyond

individuals, must be the “enabling environment”

• It cannot just be individual entrepreneurs: even foreign MNCs that are innovative elsewhere are less so in LAC

• While the reasons for the innovation deficit vary from country to country, three fundamental areas stand out for LAC as a whole

1. Low competition, especially in non-tradable sectors

2. Insufficient innovation-friendly human capital – low educational achievement, low number of engineers, etc.

3. Innovation-unfriendly features of the contractual environment – especially as regards intellectual property rights

• This is aggravated by LAC’s deficit in terms of infrastructure and logistics

25

Some specific bright spots in LAC (not discussed

in the report)

Mexico

Autopart global value chain

Costa Rica

Export promotion

Colombia

Fashion industry

Brazil

High-tech agriculture

Uruguay

Dairy and meat industry

Argentina

Science and technology

Chile

Upscale wine production

Thank you

The full report is available at:

http://go.worldbank.org/Z1D3AJFNP0