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Story 2.6

Promoting Productivity

Continuously Improving Business Innovation in Argentina

One of the most important ways to improve productivity is by supporting and promoting innovative firms that not only offer new products and services to consumers and other businesses, but also create new jobs and help modernize productive structures.

In Argentina, 40 percent of manufacturing firms with 10 or more employees do not carry out any activity considered innovative, according to Argentina’s Ministry of Science, Technology and Productive Innovation (MINCYT) and only 13 percent have any type of formal research and development (R&D) unit. Internal R&D investment by Argentine firms represents only 0.25 percent of sales, while that figure is more than 2 percent for countries in the OECD. These low levels of private investment in innovation are associated with market failures caused by information asymmetries between businesses and investors, as well as with coordination problems between businesses and knowledge production centers. An additional factor is the low use of systems to protect intellectual property of local firms.

In 2009, the MINCYT and the IDB joined forces to launch a US$100 million initiative called the Technological Innovation Program to promote innovation in small and medium enterprises (SMEs). It provides financing instruments such as grants and loans to cofinance projects by businesses to develop and modernize technology.

Between 2010 and 2014, some 550 SMEs implemented projects with the support of these instruments. As a result, more than 60 percent of these firms developed new products and processes and more than 30 percent modernized their organization and marketing processes. For example, some businesses made changes in their business practices and procedures (organization) or changed the design, packaging, or positioning of their products (marketing).

Some of the achievements in innovation could be categorized by the type of financing instrument used. Grants, which financed R&D activities, focused more on developing new products (74 percent of firms) than on developing new processes (60 percent). In contrast, loan resources, which were used more for acquiring new machinery and equipment, facilitated innovation more in processes (69 percent of firms) than in products (62 percent). Overall, the results of using both financing mechanisms were associated with significant efforts in investment. Grants beneficiaries invested 4.1 percent of sales in innovative activities, while loan beneficiaries invested 2.48 percent.

These changes in the behavior of innovative companies supported by grants and loans led to improvements in their productive performance. According to the latest innovation survey prepared by the MINCYT, innovative companies are distinguished from non-innovative by creating jobs with better qualifications and have higher wage and productivity levels. For instance, differences in wages and productivity between innovative and non-innovative firms are 6 percent and 12 percent respectively.

Since 2010, new and refined instruments have been used to co-finance projects in five priority areas: agribusiness, environment, health, social development, and renewable energy. The new tool supports innovation for larger–scale projects, which are the product of associations between firms and research centers.

Although there is still an “innovation deficit” among Argentine firms, it is now possible to foresee this situation changing if institutional capacity and public policies continue to evolve as they have in recent years. The lesson from the Argentine case is the importance of combining continuity of financing with refinement. In other words, continue to improve the financing mechanisms (such as grants and loans) that are proving effective in spurring innovation among SMEs, while at the same time continuing to refine public policies through the design of tools to address new challenges.

Story by:
Pablo Angelelli, science and technology lead specialist in the Competitiveness & Innovation Division at the IDB.

This results story is based on the Project Completion Report of SG Operation AR-L1073, which closed in June 2015.

Continue reading Chapter 2 - Institutions for Growth and Social Welfare