Andres Oppenheimer

Andres Oppenheimer: Latin America’s innovation drama

Now that Latin America’s economy has fallen to near zero growth, one of the biggest fears is that governments in the region will cut their already dismal spending on innovation. That’s the worst thing they could do.

Latin America, which has relied heavily on commodity exports whose prices have plummeted in recent months, is already one of the regions that invests the least in innovation. While Israel spends 4.2 of its GDP on research and development, South Korea 4.1 percent, Japan and Finland 3.5 percent, and Germany 3 percent, most Latin American countries invest an average of 0.5 percent, according to UNESCO’s Institute for Statistics figures.

Within the region, Brazil spends 1.2 percent of its GDP on research and development, Argentina 0.6 percent, Mexico 0.5 percent, Chile 0.4 percent, Colombia 0.2 percent, and Peru and Bolivia 0.16 percent, the figures show.

Not surprisingly, Latin American countries ranked pretty badly in a new world innovation ranking released last week.

The Global Innovation Index 2015, a joint study by Cornell University, the INSEAD business school and the World Intellectual Property Organization, shows that most Latin American countries rank pretty badly. Mexico and Brazil, which are among the world’s fifteen largest economies, are not even among the first fifty on the list.

The ranking of 141 countries, led by Switzerland, the United Kingdom and Sweden, places Chile in 42nd place, Costa Rica 51, Mexico 57, Colombia 67, Brazil 70, Peru 71, Argentina 72, Guatemala 101, Bolivia 104, Ecuador 119, Nicaragua 130 and Venezuela 132. Brazil, Chile, Argentina, Venezuela and Ecuador have fallen several places from their positions in the same ranking three years ago.

The big fear is that, with Latin America’s economy expected to remain flat or even report negative growth this year, many governments will feel forced to choose between cutting social subsidies and reducing their innovation and education budgets.

Soumitra Dutta, dean of Cornell University’s Graduate School of Management and co-author of the Global Innovation Index 2015, says that while spending in research and development is not the only factor that makes some nations more innovative than others, failing to invest in innovation would have dramatic consequences.

“Countries should not stop or reduce their investment in innovation in times of crisis. Innovation is the only thing that builds the future of economies. To sustain the future you have to keep on feeding the innovation engine,” he told me in an interview.

There is new evidence to support this, he said. New research that was published in the Global Innovation Index 2015 shows that some of the best-performing countries are the ones that increased their spending on research and development despite economic crises.

China, for instance, more than doubled its investment in research following the 2008 global economic crisis. Between 2008 and 2014, China increased its investment in research by 118 percent, while Poland raised it by 66 percent, and South Korea by 56 percent over the same period, the study shows.

But can governments increase innovation budgets at a time when they are short of money to fund social programs, I asked Dutta. That’s a false dilemma, he answered.

“The resources can come from the private sector,” Dutta said. “The challenge is to provide incentives for the private sector to invest in innovation.”

My opinion: I agree. Even in communist China, there is considerably more private sector investment in innovation than in Latin America, where governments provide little or no tax incentives nor a favorable business climate for private companies to invest in research and development.

Reducing their already pitiful innovation budgets in order to maintain social subsidies is not only a false dilemma, but a dangerous one. If Latin American countries want to prosper and reduce poverty, they should not only refrain from reducing their innovation funds. They should follow the steps of China, Poland and South Korea, and increase them in times of crisis!