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OECD Secretary-General

Innovation for sustainable growth in the Americas

 

Remarks by Angel Gurría,

Secretary-General, OECD

11 November 2016

Institute of the Americas, San Diego, United States

(As prepared for delivery)

 

 

Ambassador Khokhar, Mr. José Galicot, Distinguished Guests, Ladies and Gentlemen,

 

I am delighted to be here in balmy San Diego to discuss an issue close to my heart, and one which is a strategic priority for the OECD: innovation. It’s a key driver of productivity, sustainable growth and well-being. It is central to addressing nearly every policy challenge we face, from health, and the environment, to food security, education and public sector efficiency.  Before I start, I would like to thank Amb. Khokhar and the authorities at the Institute of the Americas for their kind invitation.

 

Many people, in fact most people, are innovative individuals. But seizing innovation’s potential, actually turning it into growth, jobs, and improved well-being requires the right mix of policies and regulations. It means creating the right environment by investing in research, education and knowledge infrastructure, and addressing critical barriers to innovation.

 

This is all the more urgent not in the Americas, but across the world, because almost all of our countries are facing a challenging economic context. New sources of growth will be critical in turning the corner towards a more inclusive and sustainable future. 

 

A sluggish global economic outlook and the need for new sources of growth

 

Today, many of our countries are still experiencing sluggish growth, with global growth stabilising towards a modest 3%. What we are seeing is a self-fulfilling “low-growth” trap, where slow productivity gains and sluggish demand are feeding into each other. OECD economies are experiencing a fragile recovery, while emerging economies are slowing down.

 

Latin America, with low commodity prices, weak trade and more expensive financing, is undergoing a major slowdown. Output is expected to contract again in 2016 between -0.9% and -1%, with a modest 1.5% recovery expected in 2017. As in most OECD economies, labour productivity growth has decelerated in many emerging market economies since the financial crisis. Between 2000-07 and 2008-14, Chile’s labour productivity decreased from 3.2% annual growth to 1.8%, and Mexico from 1.9% to -0.2%.

 

Innovation is vital to escape from the low-growth trap and promote more inclusive growth in productive economies. Our work shows that investments in innovation, in digital technologies, and in intangible, knowledge-based capital (KBC), such as R&D, software, data, intellectual property, firm-specific skills and organisational know-how, and the resulting gains in multi-factor productivity often account for half of total GDP growth. So it makes sense that in the US, for example, investments in knowledge-based capital now make up almost 60% of business investment.

 

The Latin American and Caribbean (LAC) region especially needs to scale up investment. Standing at around 1% of GDP, R&D expenditure is much lower in Latin America than in OECD countries, where it stands around 2.3%. In particular there is little support from the business sector. On average Latin American businesses spent around 0.17% of GDP on R&D, significantly below the 1.47% spent in OECD countries.

 

But it’s also about investing in skills. According to the Latin American Economic Outlook 2017, jointly produced by the OECD, the Development Bank of Latin America and ECLAC, the region has the widest gap in the world between the pool of available skills and those skills that economies and businesses require.  In fact, more than 70% of youth are not sufficiently skilled to access good quality jobs. The stock of “innovation capital” – a common measure of skills, measuring the capacity to innovate and disseminate innovation – is far lower in Latin America at 13% of GDP than in OECD countries, where it’s 30% of GDP.

 

To develop the skills needed for the digital age, people need to have access to digital technologies! Yet nearly 60% of the world’s population, or four billion people, are still offline. Including around fifty per cent of Latin Americans: that’s 300 million people. And only 10% of individuals have fixed broadband subscriptions. To reignite growth, Latin America needs to work across these areas to increase investments in physical and human capital, as well as knowledge-based capital.

 

It was with this agenda in mind that in June, in Cancun, at the OECD's Ministerial Meeting on the Digital Economy, 41 countries, including Argentina, Chile, Colombia, Costa Rica, Ecuador and Mexico, adhered to a Declaration recognising the digital economy as a powerful catalyst for innovation, growth and social prosperity. They committed to stimulate digital innovation and creativity to spur growth.

 

Supporting SMEs and entrepreneurship to enable innovation

 

They did this in the knowledge that innovation is the driving force behind new businesses, new jobs and productivity growth. It brings the creative destruction that leads to renewal in the economy. But in today’s world, innovation is unfortunately very concentrated: not only across countries, but also at the firm level. This is mainly driven by a fraction of large, multinational corporations that experience more rapid productivity growth.

 

In contrast, SMEs, with the exception of a small group of young innovative firms bringing radical inventions to the global arena, often lag behind in the usage and uptake of technology. In a telling example, the share of SMEs collaborating on innovation with higher education or research institutions in OECD economies stands at around 14%, whereas for large firms this number is considerably higher at 37%.

 

It is therefore essential that the policy environment enables technology and knowledge uptake by SMEs, boosts openness, especially to global value chains, and enables young firms to enter the market and grow.

 

The good news is that entrepreneurship in Latin America is growing. Start-ups are emerging, with support from governments, academia and the private sector: Look at Start up Chile, Innpulsa Colombia, INADEM in Mexico and Start up Perú. An impressive one out of five young Latin Americans wants to open his or her own business. At the same time, there are signs in several countries in the Americas, including the United States and Brazil, of declining start-up rates, which is a concern for future entrepreneurship. But this is a global imperative, and we are beginning to see decisive actions.

 

Building a platform for innovation: the Americas

 

There is clearly appetite across the OECD, the Americas and beyond for new sources of growth, reflected, for example, in the G20 commitment to innovative growth, with actions in support of innovation, the next industrial revolution and the digital economy.

 

The OECD is working on all these fronts. Let me share with you a few examples of recent OECD recommendations. 
 

  • Firstly, financing is critical. Governments and the private sector can improve financing for young entrepreneurs, introducing staged financing instruments adapted to their reality. This also includes instruments for more “mature” firms, including angel investors and venture capital networks.
     
  • We can also better connect young business creators to business networks and help integrate them in global value chains. Only about 10% of young Latin American entrepreneurs report at least one quarter of revenues from international clients, compared to over 20% in OECD countries.
     
  • As well as integrating global value chains, many firms, especially SMEs, have difficulty translating research into commercial innovations. We can foster mechanisms to link business to research institutions and effectively transfer knowledge and technology.
     
  • We can also support entrepreneurial training among youth on management and financial skills, as well as business counselling and mentoring.
     
  • As well as upskilling people, we need to increase their access to markets, by addressing regulatory barriers and framework policies that favour incumbents. Barriers to entrepreneurship in Latin American countries are 59% higher than in OECD countries. Simplifying legislation for firm creation and offering incentives, such as temporary exemptions from taxes and social security contributions, can help entrepreneurs.
     
  • A key part of improving the regulatory framework is also reducing competition-hampering regulation. Moving towards best practice regulations has the potential to raise GDP by an average of 9% in the OECD and by as much as 30% in some large emerging economies. This is particularly important for Latin America, where product market regulations tend to be more restrictive than is typically the case in OECD countries.
     
  • Finally, countries should support access to broadband services to help people make the most of opportunities. Earlier this year I launched the Broadband Policy Toolkit for Latin America, a joint effort by the OECD and IDB to share good practices and spread the benefits of the digital economy, by expanding infrastructure, increasing competition and public access, and improving regulatory frameworks and regional cooperation.
     
  • To hone in on one key area, the Toolkit makes recommendations to increase accessibility and affordability for disadvantaged groups and those living in rural and remote areas. Countries should avoid sectoral over-taxation that deters broadband expansion. Public authorities can also establish incentives and finance networks when markets alone are unable to meet the demand.

 

In all these dimensions, the experience of the Institute of the Americas can be decisive, bringing together Latin America and the US experiences and providing a knowledge platform on innovation and entrepreneurship.

 

Ladies and Gentlemen, when the OECD revised its Innovation Strategy last year, we titled our study The Innovation Imperative. Imperative, because we cannot afford to be half-baked on this issue, we cannot afford to be lacklustre, or to be half-hearted. The innovation clock is ticking, and Latin America has to get on board or risk being left behind.   

 

There is no innovation silver bullet; we need to draw on a broad arsenal of policies to unleash the transformative powers of innovation. But if we get it right, we can make innovation a driver of inclusive and sustainable growth and we can make it a driver of better lives in the Americas.

 

Thank you.