“Escaping from the Middle Income Trap: Does Nationality Matter for Innovation in Latin America?”

A sustained increase in productivity is the only way for Latin American economies to escape from the middle income trap. The achievement of this goal requires a broad-based move towards higher value added activities, within and across sectors. This, in turn, necessitates a ramping up of innovation activities, which are currently well below the level expected for Latin American countries given their income level.

This paper investigates the role of domestic and foreign producers in innovation activities in Latin America under the Washington Consensus policies of the last 2-3 decades. Using data from the World Bank’s Enterprise Survey, secondary literature, and country-specific cases, I analyze the relative role of domestic producers and TNC affiliates in innovation in Latin America. The findings show that even though TNC affiliates tend to be more innovative than domestic companies, they are much less engaged in innovation activities in Latin America than in other developing areas. I argue that the incentive structure under the Washington Consensus has been biased against the accumulation of domestic productive capabilities, and that the playing field has to be levelled to reverse Latin America’s slow productivity growth and growth-reducing structural change of the last two decades.