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Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Latin American Entrepreneurs Many Firms but Little Innovation Latin American Entrepreneurs Many Firms but Little Innovation Daniel Lederman, Julián Messina, Samuel Pienknagura, and Jamele Rigolini © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 16 15 14 13 This work is a product of the staff of The World Bank with external contributions. Note that The World Bank does not necessarily own each component of the content included in the work. The World Bank therefore does not warrant that the use of the content contained in the work will not infringe on the rights of third parties. The risk of claims resulting from such infringement rests solely with you. 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Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution—Please cite the work as follows: Lederman, Daniel, Julián Messina, Samuel Pienknagura, and Jamele Rigolini. 2014. Latin American Entrepreneurs: Many Firms but Little Innovation. Wash- ington, DC: World Bank. doi:10.1596/978-1-4648-0012-2. License: Creative Commons Attribution CC BY 3.0 Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an offi cial World Bank translation. The World Bank shall not be liable for any content or error in this translation. All queries on rights and licenses should be addressed to the World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@ worldbank.org. ISBN (paper): 978-1-4648-0012-2 ISBN (electronic): 978-1-4648-0013-9 DOI: 10.1596/978-1-4648-0012-2 Cover design: Critical Stages, Inc. Cover image: © Nicholas Wilton/Illustration Source; permission required for further reuse. Library of Congress Cataloging-in-Publication Data has been requested. Contents Foreword . xi Acknowledgments . xiii Abbreviations . xv 1. Overview . 1 Entrepreneurship is a driver of development . .1 Entrepreneurship is vibrant— but growth is weak . 4 The region has many entrepreneurs but little innovation . 7 Few companies enter export markets . 10 Even large multinational corporations in the region are insuffi ciently innovative . 13 How can policy enable innovative entrepreneurs? . 16 Structure of the report . 20 Notes . 20 References . 21 2. Entrepreneurship, Entry, and the Life Cycle of Firms in Latin America and the Caribbean: Are All Forms of Firm Creation Entrepreneurial? . 23 Low- level entrepreneurs, high- level entrepreneurs, and employees . 24 Theoretical framework . 26 Business creation in Latin America and the Caribbean . 38 Beyond entry: Firm dynamics in Latin America and the Caribbean . 42 What is hindering high- growth entrepreneurship: Culture, institutions, or the environment? . 49 Notes . 54 References . 56 3. Entrepreneurship by Incumbent Firms: What Explains the Innovation Gap? . 61 What drives innovation? A conceptual framework . 63 How innovative are fi rms in Latin America and the Caribbean? . 67 What explains the innovation gap? . 73 Notes . 89 References . 90 v vi CONTENTS 4. Export Entrepreneurship . 95 Exporting as a transformative entrepreneurial act . 96 Contribution of export entrepreneurship in the medium term . 98 Descriptive benchmarking of export entrepreneurship . 102 Econometric benchmarking of export entrepreneurship . 112 Export promotion policies . 116 Concluding remarks . 117 Notes . 118 References . 119 5. Foreign Direct Investment, Multinational Corporations, and Innovation . 121 Foreign multinational corporations in Latin America and the Caribbean . 123 Multilatinas . .131 Concluding remarks . .136 Notes . 136 References . 138 6. Toward an Enabling Environment for Innovative Entrepreneurs . 141 What are the elements of an enabling environment for innovative entrepreneurs? . 142 What explains the region’s innovation gap? The leading suspects . 149 Notes . 150 References . 151 Boxes 2.1 Main databases used in the study . 32 2.2 Do training programs for entrepreneurs work? . 43 2.3 Comparing fi rm size across age cohorts in Colombia using Enterprise Surveys and administrative data . 47 2.4 Importing entrepreneurs: Start- Up Chile . 51 3.1 Risk, laws, macroeconomics, and the innovation gap in Latin America and the Caribbean . 65 3.2 Management matters: How better practices could increase productivity in Latin America and the Caribbean . 70 3.3 Do’s and don’ts of entrepreneurship ecosystems . 88 5.1 Can a whale in a swimming pool create a splash? Intel and the upgrading of tertiary education in Costa Rica . 129 Figures 1.1 Type of employment, by GDP per capita . 2 1.2 Innovation edge of medium and large fi rms over small fi rms in Latin America and the Caribbean, 2010 . 3 1.3 Relationship between type of employment and GDP per capita, 2010 . .4 1.4 Firm dynamics: entry, age, and size . 5 1.5 Employment growth in Colombia, by fi rm size and age . 6 1.6 Percentage of fi rms in selected countries introducing a new product, 2006–10 . 8 1.7 Investment in research and development (R&D) in selected country groups, 2008– 10 . .9 1.8 Number of patents per capita granted by U.S. Patent and Trademark Offi ce, actual and benchmarked, by inventor’s country or place of residence . 9 1.9 Management practices in selected economies . 11 1.10 Average entry and one- year survival rates in selected countries (differences with respect to baseline) ..