Innovation, the Missing Link in Latin American Countries

By Moguillansky, Graciela | Journal of Economic Issues, June 2006 | Go to article overview

Innovation, the Missing Link in Latin American Countries

Moguillansky, Graciela, Journal of Economic Issues

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. …

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