Firm-level innovation, government policies and the middle-income trap: insights from five Latin American economies

Abstract

Latin American economies need higher productivity to escape from the middle-income trap. This article analyses the drivers of innovation at the firm level, which is a critical driver of productivity growth. The article estimates a two-stepmodel where firm characteristics affect firm engagement with innovation inputs, and such engagement then generates innovation outputs. We use World Bank Enterprise Survey data to analyse this two-stage process for a pooled panel of matched firms in 2006, 2010 and 2017 for five Latin American economies (Argentina, Colombia, Ecuador, Peru and Uruguay). The findings indicate that here is no missing link per se between innovation inputs and outputs in Latin American firms to explain innovation underperformance at the aggregate level. However, a comparison with China’s firms suggests possible differences in firms’ innovation behaviour. The results support the use of horizontal and vertical government policies to advance firm-level innovation.