latin american entrepreneurs many firms but...
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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
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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
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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
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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
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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).
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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
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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):
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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
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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
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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
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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
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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
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…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
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…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
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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
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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%
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…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
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… 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
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…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
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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
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…“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
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…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
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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)
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..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
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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
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Thank you
The full report is available at:
http://go.worldbank.org/Z1D3AJFNP0