Country Innovation Brief: Costa Rica

Transcription

1 Country Innovation Brief: Costa Rica Office of the Chief Economist for Latin America and the Caribbean Introduction: Why Innovation Matters for Development Roughly half of cross-country differences in per capita income and growth are driven by differences in total factor productivity, generally associated with technological progress. 1 Further, much of widening gap between rich and poor countries is due, not to differences in capital investment, but in technological progress. This fact moves to center stage an abiding question in economic development: why do developing countries, with great potential gains from adopting technologies from the industrialized countries, fail to do so? In fact, perversely, the countries generating new technologies at the frontier appear to have faster TFP growth in manufacturing and agriculture than poor countries who could, in theory, adopt existing technologies invented in the industrialized economies. 2 Recent work in innovation stresses that adopting existing technology is not without cost. Firms and countries need to develop an absorptive or national learning capacity which, in turn are hypothesized to be functions of spending on research and development (R&D). 3 Though often 1 See Hall and Jones (1999), Dollar and Wolf (1997). 2 Martin and Mitra (2001). 3 At the firm level, see Cohen and Levinthal (1990), Forbes and Wield (2000), Griffith, Redding and Van Reenen (2003), Pavitt (2001) considered relevant only for basic science dedicated to expanding the knowledge frontier, Cohen and Levinthal (1991) among others stress learning -- knowing where the frontier is and figuring out what adaptations are necessary -- as the second face of R&D. In fact, Pavitt (2001) argues that investment in pure research is also important for developing countries. First, those most familiar with the frontiers of basic science will best train the applied problem solvers in the private sector. Second, even basic research does not flow easily or costlessly across borders so developing countries cannot simply rely on what is being generated in the advanced countries. Finally, Lederman and Saenz (2003) present econometric evidence suggesting that innovation outcomes, namely patents per capita, are an important explanation of the levels of development observed around the world. This country brief aims to answer key questions related to Costa Rica s overall innovation effort and in particular its National Innovation System (NIS). The latter involves multiple actors in the public and private sectors, and in research organizations, such as universities. More broadly construed, it encompasses the extent of integration of an economy in the global marketplace of ideas through flows of goods and services, people, and capital, as well as the institutions or rules that shape at the national level see, for example, Baumol, Nelson and Wolf (1994). 1

2 incentives for productive firms to interact with the creators of ideas. Thus it covers most aspects of international economic policy and a plethora of norms and intellectual property rights. This note cannot offer a comprehensive evaluation of the breadth and functions of different elements of Costa Rica s NIS and seeks only to locate the level and efficiency of Costa Rica s innovation effort in international context. In particular it addresses four questions: Is Costa Rica under-performing in innovation outcomes, such as patents and scientific publications? Is Costa Rica under-performing in into commercial and economically meaningful ideas reflected patents? What is Costa Rica s comparative advantage in innovation? Is Costa Rica Under Performing in Innovation Outcomes? Clearly, the fundamental measure of innovation success is the rate of growth of per capita incomes and hence the well-being of Costa Rica s population. However, Costa Rica s success in intermediate innovation outcomes across time can be tracked by following two common measures: the number of patents granted by the US patenting authority, and the number of Figure 1 Percent Deviation from Expected Value Innovation Outputs Decade Patents Scientific Publications 90's 's 's 1-60's Scientific Publications Patents terms of innovation inputs, namely R&D investment and licensing payments as a share of GDP? Is Costa Rica s NIS efficient in terms of transforming these investments scientific publications. Figure 1 benchmarks performance by researchers residing in Costa Rica in each dimension, comparing them with the average of those in countries with the 2

3 same levels of GDP, the same size labor force, and the same value of merchandise exports to the United States since the 1960s. 4 The graph shows how far Costa Rica is from the average of Is Costa Rica Under Performing in Innovation Inputs? Similar benchmarking can be done with two indicators of innovation 5.0% Figure 2: Innovation Effort and Development R&D vs GDP per capita: Observed and Predicted 4.5% 4.0% Israel Predicted & Observed R&D/GDP 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% India China Korea Finland 0.5% LAC(5) 0.0% Log GDP per Capita Source: Lederman and Maloney (2003) 11 similar economies (the zero line) while the embedded table reports Costa Rica s average absolute levels by decades. A negative number on the vertical axis is evidence of under performance. Because the predicted number of patents are relatively small (1 or 2) the patenting performance of Costa Rica appears to be erratic. However one could say that Costa Rica does not seem to systematically under perform. Conversely, the outcome of scientific publications is around 50% below average. 4 To answer this question we use data collected by Lederman and Saenz (2003) on patents granted by the U.S. Patent Office to innovators residing around the globe and the number of scientific publications provided by the U.S. National Research Foundation. The series plotted are the residuals from a regression on GDP and Population and their squares. See Bosch et al. (2003) for technical details about the methodologies and data. inputs: investments in research and development (R&D) and payments for licensing of new foreign technologies, again with respect to GDP and labor force. The former extends beyond investment in cutting edge technologies to most expenditures on adoption and adaptation of technologies. Figure 2 offers a window on the evolution of the R&D effort across the development process. Not only does the share of GDP dedicated to R&D in the average country increase with income per capita, but several high growth comparator countries- Finland, Korea and Israel- had dramatic take-offs relative to this benchmark, a path which China and India appear to be attempting to follow. Disappointingly, the average effort of five middle-income Latin American countries (Argentina, Brazil, Chile, Costa Rica and Mexico) is substantially below trend. Further, figure 3 shows that Costa Rica s R&D effort 3

4 has been weak compared to countries of similar size (0-line). On the other hand, developed than in high income countries, the puzzle is why the former invest so Figure 3 Percent Deviation from Expected Value Innovation Inputs Decade R&D/GDP Licensing/GDP 90's 0.23% 0.14% 80's 0.26% 0.09% 70's 0.23% 0.07% R&D/GDP the share of GDP Costa Rica devotes to licensing does not show deficits in investment. These low rates of investment in R&D are not due to low returns. Lederman and Maloney (2003) estimate that the economic returns to R&D and to licensing for countries of Costa Rica s level of income are high at around 65%. Using the estimated return to physical capital, and the US long run return to stocks as high and low cases for the opportunity cost of investment, simple calculations suggest that Costa Rica should be investing between 2 and 8 times more in R&D than they did in the 1990s. Similar results emerge for investments in licensing of foreign technologies. Since the average returns to R&D investment are higher in less Licensing/GDP little in R&D. Statistical analysis suggests that financial depth, protection of intellectual property rights, ability to mobilize government resources, and research institution quality appear to account for much of the shortfall. In sum, Costa Rica s under performance in the outcomes of innovation is partly due to lackluster performance in innovation investments, at least in R&D expenditures. To reiterate a central message of this note, not only is Costa Rica not experiencing a take off in innovation effort such as those seen in dynamic comparator countries such as Finland, Korea, or Israel, it is below the average performer. 4

5 Is Costa Rica s NIS Inefficient? Why? The low level of innovation outcomes may also arise from inefficiencies in the way in which For the case of LAC as a whole, econometric exercises described in Bosch et al. (2003) show that the main explanation of the region s inefficiency stems from the lack of collaboration Figure 4: Efficiency of R&D Expenditures Compared to the OECD 20% 15% 10% 5% 0% ARG BRA CHL COL CRI MEX VEN TWN KOR ISR FIN -5% -10% existing innovation-related resources are utilized through the NIS. One way of estimating the efficiency of a NIS is by examining how R&D investments translate into commercial patents and how the elasticity of patents with respect to R&D investment compares to the world average. 5 Figure 4 shows the elasticity or sensitivity of patents with respect to R&D in Costa Rica and several comparator countries. Costa Rica s positive value can be interpreted as an indication of the extent to which the country performs in patenting efficiency relative the OECD average. If fact, Costa Rica together with Venezuela, are the only two Latin America and the Caribbean (LAC) countries that perform better than the OECD average. 5 Bosch et al. (2003) discuss in detail how these elasticities are estimated and how they vary across regions of the world. between the private sector and research organizations such as universities. 6 Additional statistical exercises showed that Costa Rica privileged position compared to the rest of the LAC countries is due to higher quality of research institutions and greater collaboration with private firms. 6 This result was derived by estimating a patenting function that includes the interaction between R&D investment and a dummy variable for Latin American and Caribbean countries (LAC). In turn, the same function was estimated but including additional explanatory variables. Among these, the variables from the Global Competitiveness Report on the private sector s perception of the quality of research institutions and the extent of collaboration between private firms and universities were the ones that eliminated the statistical significance of the LAC variable interacted with R&D. See Bosch et al. (2003) for details. 5

6 Costa Rica s Innovation Comparative Advantage Policymakers and analysts often are interested in knowing which sectors of the economy seem to have a dynamic innovation process. One way of phrasing the question is to ask which sectors in Costa Rica seem to produce a higher share of the country s total patents than the share observed in the world as a whole. For this purpose, with sectoral patent data, we constructed the so-called index of revealed comparative advantage. For a given sector, values of this index above one indicate that the country has a comparative advantage in innovation is that sector. Figure 5 shows the index for the top innovative industrial sectors during It also shows the corresponding index for public policies designed to stimulate R&D in these sectors could be a fruitful avenue for future policy experimentation in this area. Summary of Findings Regarding innovation outputs, Costa Rica under performs in scientific publications, but not necessarily in patents. This apparent under performance in innovation is due to insufficient R&D effort. In fact, Costa Rica is also under performing relative to the typical country with similar economic size and labor force in terms of R&D investments relative to GDP but not in licensing. Figure 5: Index of Innovation Comparative Advantage - Top Ten Sectors in 2000 versus 1980 (sorted by IRCA as of 2000, 18-year averages of the IRCAs) IRCA Index Metal Working Mach. Engines & Turbines Farm & Garden Equip. Construction & Mining Equip. General Ind. Machinery Misc. Machinery Fabricated Metal Products Special Ind. Mach. Stone, Clay, Glass Others each sector for the period , which helps to assess the extent to which the structure of innovation changed in this country in the past decades. Costa Rica has an innovative comparative advantage mainly in stone, clay and glass, special industrial machinery and fabricated metal products. Thus targeted Its under performance in R&D investment relative to GDP is perhaps even more severe than what appears in the aforementioned international comparisons, because the potential economic returns to R&D are quite high. 6

7 However, unlike other LAC countries, Costa Rica does not seem to suffer from inefficiencies in its NIS. This differential behavior is mainly due to the fact that Costa Rica seems to enjoy better collaboration between private firms and researchers at universities and private sector believes that the quality of research institutions is better than in the rest of LAC. The sectors of comparative advantage in innovation of Costa Rica seem to be related to stone, clay and glass, special industrial machinery and fabricated metal products. References Baumol, William J., Richard R. Nelson and Edward N. Wolff eds The Convergence of Productivity, Its Significance and Its Varied Connotations. Oxford and New York: Oxford University Press. Bosch, Mariano, Daniel Lederman, and William F. Maloney Patenting and Efficiency: A Global View. Mimeographed. Office of the Chief Economist for LCR, The World Bank, Washington, DC. Cohen, Wesley M., and Daniel A. Levinthal Innovation and Learning: The Two Faces of R&D. Economic Journal 99: Dollar, David, and Edward N. Wolf Convergence of Industry Labor Productivity among Advanced Economies, In Edward N. Wolff, ed., The Economics of Productivity. United Kingdom: Elgar. Forbes, Naushad, and David Wield Managing R&D in Technology- Followers Research Policy 29: Griffith, Rachel, Stephen Redding, and John Van Reenen R&D and Absorptive Capacity: From Theory to Data. Institute for Fiscal Studies, Working Paper 01/03, London. Hall, Robert, and Charles I. Jones Why do Some Countries Produce So Much More Output Per Worker Than Others? Quarterly Journal of Economics 114 (1) Lederman, Daniel, and William F. Maloney. 2003a. R&D and Development. Mimeographed. Office of the Chief Economist for LCR, The World Bank, Washington, DC. Lederman, Daniel, and William F. Maloney. 2003b. Innovation in Mexico: NAFTA Is Not Enough. Mimeographed. Office of the Chief Economist for LCR, The World Bank, Washington, DC. Lederman, Daniel, and Laura Saenz Innovation around the World: A Cross-Country Data Base of Innovation Indicators. Mimeographed. Office of the Chief Economist for LCR, The World Bank, Washington, DC. Martin, William, and Devashish Mitra Productivity Growth and Convergence in Agriculture and Manufacturing. Economic Development and Cultural Change 49(2):

8 Pavitt, Keith Public Policies to Support Basic Research: What Can the Rest of the World Learn form US Theory and Practice? (and What They Should Not Learn). Industrial and Corporate Change 10(3):