Innovation, the missing link in Latin American countries.

Author:Moguillansky, Graciela

In common with the rest of the world, Latin America is immersed in the globalization process, and this has generated opportunities as well as challenges and threats. This paper develops the theses that the form of investing, producing, and trading at this stage of the globalization process is closely linked to the form in which knowledge is created and disseminated and that the global networks that link and provide feedback to each of these actions still lack an essential link, innovation.

The capacity to innovate is intimately associated with the capacity to develop new business, gain markets, find new niches in international trade, and control the effects of the price volatility of the products traded by the region. As we may note all throughout this paper, the manner in which transnational corporations became integrated into Latin America has not contributed to stimulating a virtuous circle of innovation, investment, and growth; nonetheless, the potential exists for this to happen in the future.

This paper is divided into four sections. The first describes the link between foreign investment, innovation, production, and global trade. The second analyzes how the development of these links in Latin America fails to favor international competitiveness, discussing the goals and strategies of transnational corporations and the structure and allocation of foreign investment. The third section analyzes the lack of dynamic interconnection between science, technology, and business and how this fact impacts growth in Latin American countries. The last section presents the conclusions and suggests some policy actions that may have a positive impact on international competitiveness of the countries in the region.

Foreign Investment and Its Link with Innovation, Production, and Global Trade

Foreign investment inflows represent one of the most direct expressions of the globalization phenomenon and as such are to be analyzed in association with the deep transformations that, at the present stage of the process, are taking place in the production, trade, and world financing structure. Regarding production, the internationalization of large corporations evolved gradually over the past decades. This led to the creation of internationally integrated production systems. Also new network structures between enterprises of different kinds--public and private institutions, scientific and technological firms, dealer and consumer chains--resulted in new production, distribution, and knowledge dissemination systems at the regional and global level (see Porter 1990; UNCTAD 1993; Dunning 1993; Cantwell 1999). The remarkable fact about these complex systems is that functions that were previously organized within the enterprise were broken down vertically and horizontally to be rearranged into global networks operating in different regions and continents.

As pointed out by Gary Gereffi and M. Korzeniewicz (1994) and Manuel Castells (1999), the new production system is based on a combination of strategic alliances and specific cooperation projects between large corporations, decentralized units, and interconnected networks of small and medium-sized enterprises. These links are also present between enterprises and government institutions, creating complex networks where the power structure and hierarchy are defined by the position that the entity occupies in the global value chain (see Porter 1990).

This process of decentralization and articulation brought about by technological advances has its counterpart in a new system of innovation and creation of knowledge. Transnational corporations play a leading role in the global innovation system; they are at the highest hierarchical level, receiving inputs from their interaction with institutions such as universities, centers for technological innovation, and centers for product design, among others. This is a dynamic, ever-changing system.

The trend in foreign direct investment and its main component in the 1990s--mergers and acquisitions between corporations--has been the means through which corporations have expanded their production and distribution systems in the various continents, as well as the method of pooling efforts for investing in innovation.

Table 1 shows the evolution of foreign direct investment flows worldwide and by subregions. During the 1990s, these flows grew enormously. By 2000--today a turning point in the evolution of flows--foreign investment in developed countries had increased more than six times with respect to the annual average for the period 1990-1997, while the increase in these flows toward developing countries was much lower, though still remarkable.

The revolution in information and communications technology was largely responsible for this process, not only because of the dynamism of the sector but also because of the impact on the manner in which production is organized in the remaining sectors, generating a virtuous circle around global production, commercialization, and innovation networks.

Chart 1 illustrates this: a first circle that identifies the long-term growth function, determined by capital formation on one hand and technological and scientific progress on the other. Whichever specification the model may adopt, growth is determined by the interaction of both elements. But these are in turn the result of the action of the agents involved, of the characteristics of the markets where they operate, and the regulations of the institutions in which the economic model develops. As pointed out by Richard Nelson (1998), growth relies on technological advances, the nature of the organizations involved--mainly the firms using the technology and manufacturing the goods--and the nature of economic institutions which determine the context in which the firm operates.


Unlike thirty years ago, when a monopolistic structure in the industrial organization was essential in order to reach the necessary profitability for financing R&D, today it is the contribution of oligopolistic competition, global cooperation networks of transnational enterprises, and the State--especially through innovation financing focused on defense--which drives the accelerated innovation process.

The structures set up during the postwar period gradually changed, but the revolution in information and communications technology has been attenuating institutional obstacles, both among countries and among sectors, thus strengthening production and innovation in a system that is integrated on an interdisciplinary and intersectoral basis.

The interaction among global innovation, production, and marketing and distribution networks results in new products constantly appearing, which in turn boosts world trade and the growth of countries. While each country's pace of development is intimately associated with its integration into the world market, for a company, market power depends on its position in the production value chain and its capacity for innovation.

As was pointed out by ECLAC (2002), the present stage of globalization is characterized by an extraordinary increase in transactions among nations. The main determinants of this phenomenon are associated with various factors: (1) the aforementioned fragmentation of production processes, which has resulted in increasing intra-industry trade, where...

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