WORLD BANK LATIN AMERICAN AND CARIBBEAN STUDIES Latin American Entrepreneurs Many Firms but Little Innovation Daniel Lederman, Julián Messina, Samuel Pienknagura, and Jamele Rigolini OVERVIEW SKU 32814 FM_main_ENTinLAC_i-xvi.indd 2 11/21/13 5:30 PM LATIN AMERICAN ENTREPRENEURS i OVERVIEW Latin American Entrepreneurs Many Firms but Little Innovation Daniel Lederman, Julián Messina, Samuel Pienknagura, and Jamele Rigolini This booklet contains the Overview of the forthcoming World Bank book, Latin American Entre- preneurs: Many Firms but Little Innovation. To order copies of the full-length book, published by the World Bank, use the form at the back of this booklet or order online at www.worldbank.org /publications. © 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 This work is a product of the staff of The World Bank with external contributions. 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Contents Foreword ......................................................................v Acknowledgments ..............................................................vii Contents of Latin American Entrepreneurs: Many Firms but Little Innovation ............. viii Abbreviations ................................................................. ix 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 insufficiently innovative . 13 How can policy enable innovative entrepreneurs? . 16 Notes . 19 References . 20 iii Foreword or almost a decade, emerging market rate than the United States and, more import- economies, including several countries ant, were unable to take advantage of their Fin Latin America and the Caribbean relative underdevelopment by catching up to (LAC), were regarded by analysts and inves- the United States and other developed econo- tors as new engines of growth. Their growth mies that became the sources of technologies before the global financial crisis sparked that are now commonplace around the globe. enthusiasm that, after a short pause during LAC did not need to invent, just to imitate the 2008 crisis, was cemented by vigorous and adopt technologies, as some economies recoveries in 2009 and 2010. A new story line in East Asia were able to do. seemed to dominate: thanks to deep struc- All this is not to say that the recent enthu- tural changes, both domestic and global, the siasm for LAC’s emerging markets was potential of emerging market economies had unwarranted. The enthusiasm was justified finally arrived. by the substantial and unprecedented social In the past few months, enthusiasm for progress in the region during this recent emerging markets appears to have soured. growth spurt, as documented in a previous A notable slowdown has cast doubts on the regional flagship report, Economic Mobility sustainability of their high growth rates of the and the Rise of the Latin American Mid- past decade and revived old fears of macro- dle Class. That report provided evidence of economic and financial turbulence. Phrases remarkable progress: such as “submerging economies” have become common in financial periodicals. • Nearly 70 million people were lifted The truth is that major LAC economies out of poverty in the past decade. experienced lackluster growth for decades • Approximately 50 million people before the boom of the 2000s. At the begin- entered the ranks of the middle class ning of the 20th century, a simple aver- between 2003 and 2009. age of the region’s gross domestic product • Income inequality, as measured by the per capita was about 38 percent that of the Gini coefficient, fell steadily, dropping United States. By 2012, that ratio was about from its peak of 0.58 in 1996 to the 35 percent. lowest level ever recorded in the region, The change implies that over 110 years, 0.52, in 2011, a decline of more than the large economies of LAC grew at a slower 10 percent. v vi FOREWORD • About one-third of the poverty reduc- • Improving logistics and infrastructure. tion was the result of social policies Modernizing ports, transport, and that transferred incomes to the poor, customs can add a competitive edge but labor market income during the to products from the region. The cur- boom years accounted for the remain- rent infrastructure deficit also needs to ing two-thirds. In other words, growth be addressed in order to end capacity is required to sustain poverty reduction constraints that become evident at low and middle class expansion. growth rates. • Enhancing competition. Although the What makes the productivity challenge press- region has globalized, many industries ing is precisely the fact that social progress has remain sheltered from competition. been tied to growth. Thanks to current poli- This protection has the dual negative cies, social programs can be maintained in the effects of reducing productivity growth short term. The risk is that these gains may be in those sectors and handicapping the lost if growth remains low for too long. export sector, which relies on their ser- With global tailwinds receding, the region vices and intermediate goods. will need to rely on its own devices to spur • Improving the contractual environ- growth. Those devices have only one name: ment. Although intellectual property productivity. With scant domestic sav- rights are not the only relevant aspect ings and receding external capital inflows, of domestic institutions that affect pro- income growth can be sustained only by pro- ductivity, innovation is unlikely to take ductivity gains. root without adequate protection. Leaders in the region are fully aware of the importance of boosting productivity. But what With LAC’s recent social gains, growing is this battle about? This report argues that it demands for access to good-quality services is about establishing an enabling environment have increased. Middle classes expect not in which entrepreneurs can emerge, compete, only income gains so that their children will and innovate. It is about building an innova- see even more progress in the future but also tive entrepreneurial class in which top-notch improved public services for the current gen- firms—firms that export goods, services, and eration. With increased productivity, private even capital—no longer look tepid in contrast incomes will rise, increasing public revenues to entrepreneurial superstars elsewhere. and the state’s capacity to invest in service Beyond generalities, the main elements of delivery. In time, if we win the productivity an enabling environment for entrepreneur- battle, we will enter into a virtuous cycle of ship and innovation include the following: stronger public sectors, higher growth, and opportunities for all. • Building human capital. The chal- lenge of raising the quality of education remains, but it goes well beyond test Augusto de la Torre, Chief Economist scores. For example, LAC has a historic Hasan Tuluy, Vice President deficit of engineers, dating at least to Latin America and the Caribbean Region the early 20th century. The World Bank Group Acknowledgments