New findings on the Factors affecting Innovation and Productivity in the Caribbean Matteo Grazzi Competitiveness and Innovation Division

Difference is bigger than in 1960! Development Challenge in LAC Today is 13.2% PIB pc relative to the USA was 14.8% in 1960 Despite relatively strong GDP growth over the past decade, LAC has seen relative declines in productivity, especially when compared to East Asian economies. This has important implications given the importance of productivity dynamics on economic growth. Economic growth largely depends on the dynamics of productivity (e.g. Kehoe and Prescott, 2002, Solimano and Soto, 2006) The positive correlation between output and productivity growth tends to be stronger the longer is the time period considered. LAC growth can be attributed to factors of accumulation rather than increases in productivity. This begs the question: What are the sources of productivity growth contributing to the region’s weak performance? Source: World Bank Difference is bigger than in 1960!

Low Productivity Growth What is the problem? Table 1: Growth Accounting: LAC vs Comparison Countries (1960-2011) (%) Country/ Region D GDP per capita (a) D Factor Accumulation (b) D TFP (c) % Share (c) / (a) LAC 1.79 1.80 -0.01 -0.6% East Asia and Pac. 3.69 2.85 0.83 22.5% United States 1.99 1.21 0.78 39.2% China 6.04 4.21 1.83 30.3% Finland 2.74 1.44 1.30 47.4% Despite relatively strong GDP growth over the past decade, LAC has seen relative declines in productivity, especially when compared to East Asian economies. This has important implications given the importance of productivity dynamics on economic growth. Economic growth largely depends on the dynamics of productivity (e.g. Kehoe and Prescott, 2002, Solimano and Soto, 2006) The positive correlation between output and productivity growth tends to be stronger the longer is the time period considered. LAC growth can be attributed to factors of accumulation rather than increases in productivity. This begs the question: What are the sources of productivity growth contributing to the region’s weak performance? Low Productivity Growth

Low Productivity Growth What is the problem? Index of Productivity Relative to US (1960=1) Despite relatively strong GDP growth over the past decade, LAC has seen relative declines in productivity, especially when compared to East Asian economies. This has important implications given the importance of productivity dynamics on economic growth. Economic growth largely depends on the dynamics of productivity (e.g. Kehoe and Prescott, 2002, Solimano and Soto, 2006) The positive correlation between output and productivity growth tends to be stronger the longer is the time period considered. LAC growth can be attributed to factors of accumulation rather than increases in productivity. This begs the question: What are the sources of productivity growth contributing to the region’s weak performance? Source: Fernandez-Arias (2014) Low Productivity Growth

The hypothesis we explore… Two microeconomic sources of productivity growth drive aggregate efficiency over time: 1 Efficiency gains that occur within firms, due to better production methods, organization, innovation at the plant-level, learning and capability development, etc. Focusing on aggregate data, we miss the effects of resource reallocation and within firms dynamics An additional important source of productivity gains may come from reallocation of resources across sectors. When labor and other resources move from less productive to more productive activities, the economy grows even without productivity growth within sectors. “Structural change” in LAC in the “wrong” direction, with resources shifting to lower-productivity sectors (McMillan and Rodrik, 2011). We do not pursue this interesting line of research here.

The hypothesis we explore… Two microeconomic sources of productivity growth drive aggregate efficiency over time: 2 Efficiency gains derived from the reallocation of resources from less productive firms to more productive ones due to competition and the processes of (Schumpeterian) creation and destruction - entry (exit) of more (less) efficient firms. Focusing on aggregate data, miss the effects of resource reallocation and within firms dynamics An additional important source of productivity gains may come from reallocation of resources across sectors. When labor and other resources move from less productive to more productive activities, the economy grows even without productivity growth within sectors. “Structural change” in LAC in the “wrong” direction, with resources shifting to lower-productivity sectors (McMillan and Rodrik, 2011). We do not pursue this interesting line of research here. WE FOCUS ON 1 WE FOCUS ON 1

The reason to focus on 1 Heterogeneity across firms depends on several factors: market incentives and in general the macro context the intrinsic characteristics of firms, their internal organization, their internal routines and practices, their specific strategies to accumulate technological capabilities, learn and innovate, … Grazzi & Pietrobelli, 2016, Busso et al., 2012 Syverson 2011 Hsieh and Klenow 2009 Huge Heterogeneity among firms in productivity and innovation (also within sectors)

Many low productive firms Few highly productive firms The reason to focus on 1 Many low productive firms Few highly productive firms Heterogeneity across firms depends on several factors: market incentives and in general the macro context the intrinsic characteristics of firms, their internal organization, their internal routines and practices, their specific strategies to accumulate technological capabilities, learn and innovate, … Huge Heterogeneity among firms in productivity and innovation (also within sectors)

Despite relatively strong GDP growth over the past decade, LAC has seen relative declines in productivity, especially when compared to East Asian economies. This has important implications given the importance of productivity dynamics on economic growth. Economic growth largely depends on the dynamics of productivity (e.g. Kehoe and Prescott, 2002, Solimano and Soto, 2006) The positive correlation between output and productivity growth tends to be stronger the longer is the time period considered. LAC growth can be attributed to factors of accumulation rather than increases in productivity. This begs the question: What are the sources of productivity growth contributing to the region’s weak performance?

The importance of data The Compete Caribbean contribution

What do we know about innovation in the Caribbean New evidence from….

Content of the book (TBC) Determinants of Enterprise Performance in Latin America and the Caribbean: what does the micro-evidence tell us? Carlo Pietrobelli, Matteo Grazzi, Eddy Szirmai 2. Innovation Dynamics and Productivity: Evidence for Latin America Gustavo Crespi, Fernando Vargas, Ezequiel Tacsir 3. Innovative Activity in the Caribbean: Drivers, Benefits, and Obstacles Patrick K Watson, Eric Strobl, Preeya Mohan 4. ICT, Innovation and Productivity: Evidence from Latin American and the Caribbean Firms Matteo Grazzi, Juan Jung 5. On-the-Job Training in Latin America and the Caribbean: Recent Evidence David Rosas Shady, Carolina González Velosa, Roberto Flores Lima 6. Business Performance in Young Latin American Firms Hugo Kantis, Juan Federico, Pablo Angelelli, Sabrina Ibarra Garcia 7. Different Obstacles for Different Productivity Levels? An Analysis of Caribbean Firms Alison Cathles, Siobhan Pangerl 8. Credit Access in Latin American Enterprises Roberta Rabellotti, Andrea F. Presbitero 9. International Linkages, Value Added Trade and LAC Firms' Productivity Pierluigi Montalbano, Silvia Nenci, Carlo Pietrobelli 10. Innovation and Productivity in Latin America and the Caribbean Firms: Conclusions

Main results of the chapters not presented