It has been suggested that scarce investment, particularly if related to novel ac-tivities, is one likely cause explaining the meagre performance of the Uruguayan economy in terms of itsper capita growth rates along the last decades. Some recent studies have hypothesized that risk aversion, lack of financial support and inade-quate public policies may explain the gap between the state of the art in the country and the technology frontier. The evidence here summarized, however, points at a different explanation for the existence of the mentioned gap. Our explanation relates it to firms’ low internal efficiency – as partially captured in Bianchi et al.
(2008) with respect to human resources – and to the use of a sub-optimal innova-tion inputs mix. Given the latter, firms are probably disregarding the existence of complementarities among innovation inputs and hence missing the potential gains stemming from innovation diversification. Firms not taking advantage of the ex-istence of complementarities among different types of innovation output may also explain the low frequency of firms exclusively innovating on product and productive processes (TPP). Moreover, according to our results the innovation in productive processes obtained by Uruguayan firms have a negative scale effect on labor produc-tivity.
On the opposite, those firms that restrict innovation to processes do generally
gener-ate innovation on both productive and non-technological processes, generating gains in their labor productivity growth that are almost twice the size of the return to innovative products. Further, there are positive scale effects on the dynamics of productivity stemming from innovative commercialization practices. The fact that the share of innovative firms that innovate in commercialization processes is low, suggests that a likely obstacle Uruguayan firms face to achieve a better firm per-formance is the lack of optimal commercialization strategies. Data for 2006 further supports this hypothesis, as it shows that an increasing number of firms that are able to establish cooperation agreements do include the design of adequate commer-cialization practices among the issues of interest.
The relative lag shown by the innovation behavior of Uruguayan manufacturing in-dustries with respect to firms in other countries is not a consequence of Uruguayan firms rarely engaging in innovative activities, but of the low degree of relevance that Uruguayan firms generally attain with their innovation output. A partial explana-tion for this relates to that the bulk of the innovaexplana-tion output obtained is process innovation. This behavior is probably linked to the goal sought by firms through innovation. Product innovation is mostly a means of increasing market share, while innovation in processes is intended to reduce costs maintaining the scale and level of production.
An additional contribution of this paper relates to unraveling that many of the re-sults reported by the existing literature – signalling at no input-output relations and no returns to innovation in developing countries – are most likely the consequence of improperly specifying the mechanisms at work. Two major shortcomings relate to the joint treatment of processes and product innovation and to not accounting for the differences in the degree of relevance of the innovation output. In addition, given that those empirical studies lack a sample design correction – which is an omission that we demonstrated generates biases of significant size in many estimated param-eters – it is difficult to assess which of these shortcomings(if not both) are affecting these studies’ results.
Based on our descriptive analysis we find that the decreasing time trend registered in the propensity to innovate among firms surveyed from 1998 to 2006 is mainly driven by small units and by non-national firms that had formerly focused on innovative products. The share of product innovative firms in total firms diminishes in time, since large local units switch from innovation in products to innovation in processes.
Contrarily, the number of exporting and non-nationally owned firms innovating in
products increase during this period. Large enterprises, concentrated in a few in-dustries – Food, Textiles, Chemicals and Machinery & Equipment – are the core innovators in terms of obtaining internationally relevant innovation output.
Further we find that most innovative firms do get an innovation output and in addi-tion our findings shows there are significant returns to innovaaddi-tion in terms of labor productivity. The apparently counter-cyclical innovation behavior of small firms is the result of their strategy of innovating in processes during difficult times. Inno-vating in processes is used by most firms as a means of reducing costs to overcome the decline in local demand, given their inability to attain innovative products at the international level.
We find that the main firm attributes increasing the likelihood of a firm engaging in innovation activities are a high internal efficiency level, high skill and productivity levels of its workforce, a physical capital intensive technology, a large scale of pro-duction, having established links with NIS agents for information, and belonging to international networks that would ease the firm’s access to high level technologies.
The finding are aligned with the increasing trend in Uruguay seeking for a profes-sionalisation of innovation activities, both in terms of sources of information and of financial aid agents. Contrarily to general belief, the exporting intensity of sales is negatively related to the propensity to innovate, possibly due to the inability of those firms to obtain an internationally relevant innovation output.
The evidence also suggests that firms are disregarding some potential key factors when investing in innovation inputs. According to our results, the financial effort needed to achieve the same type and amount of innovation output, could be reduced if firms would diversify the innovation input mix that they use, increasing the share of R&D in total innovation investment and relying less on physical capital as the main innovation input. This pattern may be also related to the degree of competi-tiveness of the market in which firms operate, the weight assigned to research and engineering and industrial design being larger the more concentrated the market.
This result is also in line with the fact that firms are less prone to innovate when the main obstacles stem from the market.
Firms related to NIS agents are mainly looking for technological assistance and in-formation, irrespective of their size or their innovative character. It is interesting to note that this behavior is increasing in time for small firms, while large enterprises have started to progressively associate with NIS agents looking also for support in
their training programmes. This is consistent with the increase in the number of large firms that switched from product to process innovation. Moreover, we find that those firms that established a link to NIS agents, particularly when seeking for collaboration in their R&D efforts, are better able to generate a more relevant innovation output. Our results hence discard a failure of the NIS in terms of the quality of the advice provided.
Financial aid is surprisingly not among the most important objectives sought through links with NIS agents, neither for large nor for small firms. The behavior of small firms, however, suggests that they are not able to fully access or take advantage of NIS agents’ assistance. In fact, although most small firms declare that the lack of financial aid is an important obstacle to innovation, they do not seek for financial aid through NIS agents.
Given the above, policy action should be focused on generating and spreading rel-evant information on the relative effects of innovative activities of different nature and on how to define an optimal input mix in order to obtain the needed type of in-novation output. The generation and publication of this type of information may be done by existing public institutions devoted to research. An alternative recommen-dation is to focus on easing the channels through which information is transmitted from public and private agents devoted to research to the relevant productive actors.
Furthermore, and given that innovative processes are the most relevant type of in-novation output to boost productivity, the evidence suggests that Uruguayan firms are below their optimum efficiency level, being unable to leverage their product in-novation. This entails the recommendation for NIS agents of aiding local firms to improve their internal procedures before pursuing other type of innovation activities.
Policy actions should therefore devote efforts to introducing incentives for improving process efficiency at the firm internal level before supporting any other innovative activities, as e.g. investing in innovative capital or R&D. One could think of devel-oping conditioned loans for firms, compelling firms to first adjust and improve their processes before granting financial aid devoted to product innovation.
A further bottleneck is related to the inability of firms to develop adequate commer-cialization strategies, an obstacle that NIS agents can help to overcome, for example by easing the linkages between national entrepreneurs and foreign potential clients through commercial representatives in foreign countries.
As a first approach to the innovative behavior of Uruguayan firms, the research here summarized has made use of a simplified theoretical frame that prevents to capture several dimensions that may be key for thoroughly understanding the mechanisms at work. A first topic refers to the need of sophisticating the rationale underlying the decision to innovate, endogenizing it by means of linking it to the overall per-formance of the firm. The issue should not be disregarded in the case of Uruguay given the goals pursued with innovation, as declared by firms.
Secondly, future empirical models should include a formalization that explains how innovative inputs are combined for obtaining each type of output by means of the so called knowledge production function. In order to gain accuracy in the quantification of the magnitude of the actual returns of innovation, it would be highly recommended to investigate the mechanisms through which the diverse innovation processes and products interact to generate the additional production factor. Finally, more work has to be done regarding the use of methodologies that fully account for the actual sampling models and other characteristics of the available information sets. The re-sults here obtained reveal that the effect of neglecting this dimension of the analysis is significant. A key facet relates to the modeling of the process as a simultaneous instead of as a recursive system, incorporating also the dynamics underlying inno-vation practices. These dynamics are linked both to analyzing the existence of an optimum time path depending on the input and output mixes observed, as well as to the eventual productivity gains in terms of the innovation output itself.
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