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