latin american entrepreneurs many firms but little innovation daniel lederman, julián messina...
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LATIN AMERICAN ENTREPRENEURS MANY FIRMS BUT LITTLE INNOVATION
Daniel Lederman, Julián MessinaSamuel Pienknagura, Jamele Rigolini
Office of the Chief Economistfor Latin America and the Caribbean
2
Development is intimately related to occupational change – the generation of wage employment
What is the role of entrepreneurs in this process?
3
More than half of Latin American income-earners are employed in small firms, most of which are informal…
UruguayChile
ArgentinaCosta Rica
MexicoBrazil
LACDominican Rep.
HondurasEcuador
ColombiaParaguay
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
4
…which has understandably led to a policy focus on supporting small firms’ growth and formalization
UruguayChile
ArgentinaCosta Rica
MexicoBrazil
LACDominican Rep.
HondurasEcuador
ColombiaParaguay
Peru
0 25 50 75 100
Informal (5 employees or less)
Formal (5 employees or less)
Informal (> 5 employees)
Formal (> 5 employees)
5
Yet, contrary to popular belief, small firms are also common in the formal sector…
Size Distribution of Formal Firms, 2011
Eastern Europe
East Asian MICs
High Income
China
Caribbean
Other LAC
LAC-5
India
0 25 50 75 100
0 empleados 1 a 5 empleados 6 a 50 empleados
50+ empleados
6
…and the increase in formal jobs is associated with the expansion of large firms (not the formalization of small ones)
Bolivia
PeruCosta RicaParaguay
BrazilArgentina
Mexico
El Salvador
Chile
Source: Lederman, Maloney, and Messina (2013).
Formal Workers and Growth of Large firms, 2000-2010
-0.10
Chan
ge in
the
shar
e of
form
al e
mpl
oyee
s (in
p.p
.)20
00-2
010
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
7
It is indeed the case that size matters: Innovation & wages
Medium and Large over Small (formal, manufacturing) 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
Large firms
Medium firms
95% confidence intervalPatent in country
In LAC, large firms pay, on average, 60 percent higher wages than small firms
8
Should we shift emphasis from small/low-growth to high-end/high-growth entrepreneurs that generate good jobs?
Uruguay
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
ChileArgentinaCosta Rica
MexicoBrazil
LACDominican Rep.
HondurasEcuador
ColombiaParaguay
Peru
9
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):
10
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
After 40 years
170
220
255
110
High Income
Size at birth
Non
-ag
Empl
oyer
(%)
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 a region of employers …
Non Agricultural Employers vs. GDP per capita (ppp), 2010
LAC-4 3.5Hungary 4Poland 1Portugal 4
Share of Employers
12
…but they do not generate enough good jobs
Non Agricultural Wage and Salaried vs. GDP per capita (ppp), 2010N
on-a
g W
age
and
Sala
ried
(%)
ln(GDP ppp per capita)
100
80
60
40
20
0
6 7 8 9 10 11
Share of Employees LAC-4 55Hungary 84Poland 73Portugal 81
13
Message 2. Age matters more than size … for job creation by firms
Hence, need to rebalance SME programs towards younger firms?
Employment growth in Colombia, 1993-2008 Continuers (abstracting from entry/exit)
Gro
wth
rate
s
-.05
0
.05
.1
Small Medium Large
0 to 4 years 5 to 9 years 10 to 14 years
15+ years All
14
Message 3. Formal firms have an innovation deficit in various dimensions, including low product innovation…
Percentage of Firms that Developed or Introduced a New Product, 2010
St.
Luci
aJa
mai
caN
icar
agua
Mex
ico
Trin
idad
and
Tob
ago
Ecu
ador
Mal
aysi
aE
l Sal
vado
rU
rugu
ayR
oman
iaB
oliv
iaC
osta
Ric
aP
arag
uay
Gre
ece
Tur
key
Sur
inam
eK
orea
, Rep
.G
rena
daG
erm
any
Irel
and
Hun
gary
Pol
and
Slo
vak
Rep
ublic
Tha
iland
Ser
bia
Cze
ch R
epub
licA
rmen
iaS
love
nia
Bel
arus
0%
20%
40%
60%
80%
100%
15
…low R&D investment (which in LAC is mostly public)…
R&D by Region, 2008-2010
0.00
0.50
1.00
1.50
2.00
2.50Business Enterprise Government Higher EducationPrivate Non-Profit Abroad
LAC-5 China High Income
Perc
enta
ge o
f GD
P
Other LAC Eastern Europe
Brazil might be an exception: R&D above 1% and above prediction…
16
… subpar management practices…
• Operation Management• Performance Monitoring• Target Management• Talent Management
Four Management Categories:
Management Scores Across Countries, circa 2010(manufacturing firms with 100-5000 employees)
2.6
2.8
3
3.2
3.4
Aver
age
Man
agem
ent S
core
IndiaBrazil
ChinaGreece
Chile
Argentina
Republic of Ireland
Portugal
New Zealand
Northern IrelandPoland
MexicoAustra
liaFrance
Italy
Great Britain
CanadaSweden
GermanyJapan
United States
…not just at the bottom but across the entire distribution …
0
0.2
0.4
0.6
Densi
ty
1 2 3 4 5Management
USABrazil
17
Management Scores in Brazil and USA, circa 2010
18
…and uninspiring patent production
Number of Patents per 1 Million People (Average number of patents granted between 2006-2010)
1
10
100
1000
10000
Uzb
ekist
anH
aiti
Boliv
iaPa
ragu
ayAl
bani
aEl
Sal
vado
rIn
done
siaH
ondu
ras
Kaza
khst
anBo
snia
and
Her
zego
vina
Gua
tem
ala
Peru
Azer
baija
nCo
lom
bia
Ecua
dor
Mac
edon
ia, F
YRDo
min
ican
Rep
ublic
Phili
ppin
esU
krai
neTu
rkey
Vene
zuel
a, R
BSe
rbia
Bela
rus
Geo
rgia
Om
anIn
dia
Thai
land
Arm
enia
Mex
ico
Jam
aica
Braz
ilU
rugu
ayU
nite
d Ar
ab E
mira
tes
Arge
ntina
Saud
i Ara
bia
Latv
iaPo
land
Chile
Russ
ian
Fede
ratio
nCh
ina
Trin
idad
and
Tob
ago
Port
ugal
Slov
ak R
epub
licLi
thua
nia
St. K
itts a
nd N
evis
Gre
ece
Croa
tiaCo
sta
Rica
Bulg
aria
Kuw
ait
Antig
ua a
nd B
arbu
daCz
ech
Repu
blic
Mal
aysia
Hun
gary
Spai
nSl
oven
iaIta
lyN
ew Z
eala
ndIre
land
Fran
ceN
orw
ayBe
lgiu
mU
nite
d Ki
ngdo
mAu
stra
liaAu
stria
Hon
g Ko
ng S
AR, C
hina
Sing
apor
eN
ethe
rland
sDe
nmar
kCa
nada
Ger
man
ySw
eden
Finl
and
Kore
a, R
ep.
Switz
erla
ndIs
rael
Japa
n
Pate
nts
per 1
mill
ion
peop
le
19
Message 4. Even our superstar firms innovate little, as evidenced by the low average entry into export markets...
Not due to specialization in extractive industries: the result compares entry rates in similar sectors
Rela
tive
entr
y ra
tes
with
resp
ect t
o be
nchm
ark
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
0.2
Conditional relative entry rates to export markets, 2005-2009
20
…except when against the ropes, suggesting insufficient incentives to grow and innovate in normal times
Decomposition 2005-2007 Decomposition 2008-2009
Export Growth Components in Different Countries
-.1
0.1
.2.3
.4
A.Natural Resource B.Simple Processing C.Broad Manufactures
Chile
Peru
Ecu
ador
Sou
th A
fric
aC
osta
Ric
a
Nic
ara
gua
Ban
gla
des
hC
ambod
iaG
uat
emala
Dom
inic
an R
epEl S
alva
dor
Egyp
t
Bra
zil
Mex
ico
LA
C a
vera
ge
-.2
-.1
0.1
.2.3
A.Natural Resource B.Simple Processing C.Broad Manufactures
Ecu
ador
Cos
ta R
ica
Peru
Col
ombia
Chile
Sou
th A
fric
a
Cam
bod
iaBan
gla
des
hN
icar
agua
Guat
emal
aD
omin
ican
Rep
El S
alva
dor
Egyp
tBra
zil
Mex
ico
LA
C A
vera
ge
Incumbents EntrantsExiters
Expo
rt G
row
th R
ates
High Income
China East Asian MICs
Eastern Europe
LAC-5 India0
0.5
1
1.5
2
2.5
3
21
While multilatinas perform better than other local firms, they are less innovative than MNCs from other EMs…
R&D by Multinationals Across Regions, 2010-2011
R&D
Exp
endi
ture
per
US$
1000
of R
even
ue
Management Practices Across LAC- Local firms, “Multilatinas”, and Foreign-owned firms
01
23
40
12
34
No multin
ational
Domestic Mult.
Foreign Mult.
No multin
ational
Domestic Mult.
Foreign Mult.
No multin
ational
Domestic Mult.
Foreign Mult.
No multin
ational
Domestic Mult.
Foreign Mult.
No multin
ational
Domestic Mult.
Foreign Mult.
Argentina Brazil Chile
Mexico United States
Mean M
anagem
ent
Sco
re
22
…and the main motivation for multilatinas to go abroad is not to connect to global value chains
23
And while MNCs can bring significant productivity gains to LAC via learning spillovers and technology diffusion…
High Income China ECA LAC50.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Knowledge Spillover Market Reallocation
in p
erc
en
tag
e p
oin
ts
Source: Alfaro & Chen (2013)
24
…the MNCs that operate in LAC are less innovative than similar ones operating in East Asia or Eastern Europe
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
25
Summing up: Some encouraging trends and policy developments in LAC…
Trends• LAC’s a region of entrepreneurs• The emergence of Multilatinas and high potential benefits from
MNC activity• Strong export responses under adverse circumstances
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)
26
…but the challenge is great, as the innovation gap is structural and goes beyond culture and individuals
• We seem to be barking up the wrong tree• LAC’s main problem is not one of lack of entrepreneurs…
• …and LAC’s main challenge is not to formalize micro firms
• LAC’s main problem is the low generation of good jobs, hence our main challenge is to find strategies to push LAC firms to grow and innovate
• Innovation gap is structural; goes beyond individuals & culture • Even foreign MNCs are less innovative in LAC than they are in other middle income
regions
• Tailor solutions to country characteristics – no silver bullets
27
The innovation deficit and its potential correlates
Country Patenting Access tofinance
Intellectualproperty
rightsContractual
certaintyCompetitionin tradables(openness)
Competition innontradables
Human capitalfor innovation
(number ofengineers per
capita)
Bolivia 1 0 0 1 0 1 -
Brazil 1 0 1 1 1 0 1
Chile 1 0 0 0 0 1 1
Colombia 1 1 0 0 1 0 1
Dominican Republic 1 0 1 0 1 1 -
Ecuador 1 0 0 1 0 0 -
El Salvador 1 0 0 1 0 1 1
Guatemala 1 0 1 0 1 1 -
Mexico 1 1 1 0 0 1 1
Paraguay 1 0 1 0 0 1 -
Peru 1 0 1 1 0 1 -
Uruguay 1 0 1 0 1 1 1
Venezuela 1 0 1 1 1 1 -
28
Area 1: Low competition in (17) non-tradable sectors, but Brazil might be different …
0
0.2
0.4
0.6
0.8
Herf
ind
ahl in
dex
Unit
ed
Sta
tes
Bulg
ari
aR
om
ania
Pola
nd
Canad
aH
ung
ary
Russ
ian F
ed
era
tion
Lith
uania
Cze
ch R
ep
ub
licN
orw
ay
Colo
mb
iaLa
tvia
Kore
a, R
ep
.Ja
pan
Port
ug
al
Unit
ed
Kin
gd
om
Sw
itze
rland
Mace
donia
, FY
RC
hin
aIt
aly
Irela
nd
Germ
any
Cro
ati
aS
erb
iaB
ela
rus
Thaila
nd
Sp
ain
Sw
ed
en
Aust
ria
Finla
nd
Neth
erl
and
sA
rgenti
na
Gre
ece
Denm
ark
Bra
zil
Bosn
ia a
nd
Herz
eg
ovin
aS
ing
ap
ore
Aust
ralia
Belg
ium
Turk
ey
Mexic
oFr
ance
Phili
pp
ines
Mala
ysi
aM
old
ova
Isra
el
New
Zeala
nd
Kuw
ait
Hong
Kong
SA
R, C
hin
aEcu
ad
or
Kaza
khst
an
Ind
onesi
aC
hile
Peru
Alb
ania
Saud
i A
rab
iaIn
dia
Uru
guay
Dom
inic
an R
ep
ub
licO
man
Guate
mala
Boliv
iaJa
maic
aU
nit
ed
Ara
b E
mir
ate
sPa
rag
uay
Venezu
ela
, R
BTr
inid
ad
and
Tob
ag
oN
icara
gua
El S
alv
ad
or
Cost
a R
ica
Hond
ura
s
29
Area 2: Deficit in innovation-friendly human capital, where Brazil appears with a glaring gap (like U.S., Norway…)
0
10
20
30
Gra
duate
s per
one t
housa
nd
inhabit
ants
aged
15
-24
Hond
ura
sG
uyana
Uru
guay
El S
alv
ad
or
Bra
zil
Arg
enti
na
Ind
onesi
aC
olo
mb
iaM
exic
oS
erb
iaS
aud
i A
rab
iaC
hile
Turk
ey
Hung
ary
Neth
erl
and
sA
rmenia
Norw
ay
Unit
ed
Sta
tes
Latv
iaC
roati
aS
wed
en
Bulg
ari
aB
elg
ium
Gre
ece
Germ
any
Denm
ark
Jap
an
Mala
ysi
aPo
rtug
al
Aust
ria
Lith
uania
Pola
nd
Slo
venia
Sw
itze
rland
Sp
ain
Cze
ch R
ep
ub
licN
ew
Zeala
nd
Slo
vak
Rep
ub
licIr
ela
nd
Finla
nd
Ukr
ain
eThaila
nd
30
Area 3: Low competition in tradables? Brazil might be different…
31
Area 4: IPRs – A complex area where law and economics intersect (and Park’s index from 2005)
1
2
3
4
Index
32
The innovation deficit and its correlates: The biggest gap might be the one between benchmarks and policies – let’s talk!
Country Patenting Access tofinance
Intellectualproperty
rightsContractual
certaintyCompetitionin tradables(openness)
Competition innontradables
Human capitalfor innovation
(number ofengineers per
capita)
Bolivia 1 0 0 1 0 1 -
Brazil 1 0 1 1 1 0 1
Chile 1 0 0 0 0 1 1
Colombia 1 1 0 0 1 0 1
Dominican Republic 1 0 1 0 1 1 -
Ecuador 1 0 0 1 0 0 -
El Salvador 1 0 0 1 0 1 1
Guatemala 1 0 1 0 1 1 -
Mexico 1 1 1 0 0 1 1
Paraguay 1 0 1 0 0 1 -
Peru 1 0 1 1 0 1 -
Uruguay 1 0 1 0 1 1 1
Venezuela 1 0 1 1 1 1 -
Do not forget Management Practices…
Thank you, obrigado!
The full report is available at:
http://go.worldbank.org/Z1D3AJFNP0