Most Latin American and Caribbean (LAC) countries have grown richer over the last decade. Yet in terms of productivity — the main driver of long-term growth — the region is failing to keep pace. Improving productivity is key, especially in services, according to a new paper co-authored by Fernando Vargas.
Every year the service sector contributes more and more to LAC economies, but low productivity has long hindered progress. Across several fronts, the challenges and opportunities are clear. On the one hand, traditional services like transport, logistics and wholesale trade connect various stages of production across the economy – thus low productivity in these subsectors directly impacts the production of goods. On the other hand, knowledge intensive business services (KIBS), including research and development, engineering and information technology, are known to strengthen innovative capacity, while expanding long-term growth potential.
New insights on innovation
The result of a joint project between the Competitiveness and Innovation Division of the Inter-American Development Bank (IDB) and the International Development Research Centre (IDRC), this paper provides new evidence on innovation and productivity in services, comparing data from national innovation surveys in three LAC countries: Chile, Colombia and Uruguay.
Our empirical strategy is based on the work of Crépon, Duguet and Mairesse (1998), which models the relationship between innovation and productivity in terms of: firms’ decisions to engage in innovation and activities and the intensity of their investment; how much knowledge is created thanks to innovation efforts; and how created knowledge affects firm productivity. This model allows us to divide and separate firms’ decisions to invest in innovation, innovation output, and the impacts of technological innovation on labour productivity.
More support for services?
Our study finds strong evidence of a positive relationship between innovation inputs and outputs, and between innovation outputs and labour productivity in the service sector, across the three countries. These results are comparable to the results in manufacturing firms in LAC countries and in line with evidence from OECD countries.
Two more important findings emerge. First, firm size is less relevant in the decision to engage in innovation activities in services rather than in manufacturing, suggesting an opportunity to increase aggregated service productivity by supporting service SMEs. Second, cooperation for innovation seems more important for services than for manufacturing at the moment of implementing innovation projects. This is linked to the intangible nature of services and the need to foster user-producer linkages to stimulate innovation.
Cooperation is also a signal that spillovers could be more widespread in services than in manufacturing. Yet we find the service industry gets proportionately less public support to innovate than manufacturing firms. For more details, see the paper and interview below.
WORKING PAPER (38 pages)
AUTHOR INTERVIEW (3.19 minutes)
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