Growth Is Not Enough: The Innovation Imperative for Latin America

Despite solid growth performance in the region, Latin America continues to lag behind other regions in the world in key competitiveness indicators. According to the World Economic Forum, only one Latin American country – Chile – ranked as one of the top 50 countries in the annual Global Competitiveness Index. Without becoming more competitive, many countries are subject to the whims of commodities markets – if and when the price of oil, copper and other raw materials go down, so will economic growth. And with lowered or limited growth, it will be even harder to improve the standard of living and create prosperity that narrows the gap between Latin America’s haves and have-nots.

So how can Latin America compete not only against developing giants like India and China, but also similar developing countries in East Asia and Eastern Europe?

The answer is an innovation-based economy that is flexible and dynamic, focused on maximizing human potential, and not dependent on any particular product or export.

So, what is needed to fuel an innovation based economy? Governments must put in place enabling conditions that will create a stable and transparent business environment, while also developing human capital.

Entrepreneurs and business will invest and innovate in places where they know that their property rights, including intellectual property rights, are protected. They also need to know that they will compete on a level playing field – an environment where rule of law predominates, and regulatory systems and institutions function effectively and transparently. They will be more likely to grow their business in an open market that promotes trade and minimizes bureaucratic barriers to the free exchange of goods and services. And, as the World Economic Forum’s recent Latin America Competitiveness Review points out, many countries face an urgent need for greater investment in telecommunications, energy and transportation infrastructure.

Governments can also take steps to develop the human capital that drives innovation by promoting investment in education and health. Latin America has made progress in some areas, for example, with near universal enrollment in primary education and high levels of childhood immunization in most countries. However, the region lags behind others in advanced educational opportunities, as well as overall investment in health as a percentage of GDP. Professor Jeffrey Sachs has indicated that health should be viewed as an input or driver of economic growth rather than just the result of improved economic conditions. Improved health and educational opportunities are therefore essential to creating a workforce that contributes to an innovative economy. However, the provision of health and education services need not be monopolized by the state.

Putting in place these enabling conditions, however, requires a long term commitment– which is not always obvious to short-term politicians who need to demonstrate results to impatient constituents. Additionally, while most businesses have a stake in such change, most lobbying also focuses on short-term issues.

So what can government and business do to move the process along – and how can both achieve quick wins that demonstrate value to citizens and shareholders alike?

Two key insights are essential to answer that question.

First, while it’s important at the national level to have in place the right fiscal and monetary policy, as well as an overall environment which promotes innovation, economic development actually occurs at a regional or local level. And the sum total of what happens in any one country is the result of developments at the regional or local level.

The second insight is that the most successful regions also have the most well- established institutions that help to build and reinforce relationships among the private sector, government and the research universities.

Such collaboration often leads to “Clusters of Innovation,” defined as geographically close groups of interconnected companies and associated institutions in a particular field, linked by common technologies and skills. Innovation most readily occurs where there is a high level of cooperation and collaboration among geographically concentrated businesses, academia and government. Close ties between companies and local universities help to refine research agenda, train specialized talent, and enable faster deployment of new knowledge. Support from the local government of the cluster region provides critical financing and coordination, as well as a policy framework in which this interaction can take place most effectively.

Companies like Merck can play a role by not only forming part of a cluster – as we do by having key research facilities in well-known pharmaceutical clusters in New Jersey and the Boston area – but also by working with local government and academic institutions to create them in high potential environments, or improve them where they already exist. Indeed, this is just what we are doing in Latin America, with a particular focus on Mexico and Brazil.

For example, Merck, together with the Council on Competitiveness, undertook a comprehensive survey of the life sciences sector in Mexico, focusing on Mexico City, Monterrey, and Guadalajara. To strengthen the sector, the report recommended actions centered on the establishment of clusters of innovation that would link and better align key stakeholders in government, academia, industry, and the not for- profit sector. The report also highlighted the need for enhanced access to risk capital for early stage ventures; improved work opportunities for students with graduate- level training; and closer cross-border linkages among life sciences organizations. Such an in-depth analysis is essential to helping local policymakers understand the environment and what they can do to change it for the better.

In Brazil, nascent clusters exist in the form of tech parks. The National government recognized the need for greater collaboration between academia and the public and private sectors by passing an innovation law that encourages such alliances in 2004. However, there is room for improvement, and a comprehensive survey undertaken by Movimento Brasil Competitivo, in partnership with the Council on Competitiveness and Merck, helped identify additional steps to promote innovation. The study recommends actions that would create more favorable conditions to attract risk capital to the country, increase the budgetary basis of public and private funds to finance R & D activities, and enhance dialogue and partnership between companies and universities.

In both Mexico and Brazil, the two studies have served as a basis for dialogue with key government officials and other stakeholders in the business and academic communities, helping to create a groundswell of support for policies that promote innovation.

We are engaged in this process because we think that a healthy, prosperous and competitive region is good for the citizenry and countries in Latin America as well as for business. We also truly believe that Latin America has the potential to discover breakthrough compounds – and that this approach helps increase that possibility, while also increasing the number of potential partners we can work with in the region.

Merck and businesses in other sectors cannot alone make countries more competitive – it’s up to governments to put in place the fundamental enabling conditions that create an innovative economy. However, the private sector should play a role both by advocating for macro-level institutional improvement, and working locally to create a better business environment and increase competitiveness. The innovation imperative is clear – to thrive and prosper, Latin America must compete, and we all have a role to play.
 

Grey F. Warner is the President for Latin America for Merck & Co. Inc.’s Human Health Division since March 1993. He is responsible for all of Merck’s operations in Latin America and the Caribbean, including Puerto Rico.

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