Innovation dynamics and productivity: Evidence for Latin America

In this chapter, we make use of the World Bank Enterprise Survey to study the innovation behavior of the typical Latin American firm. Furthermore, we explore the existence of innovation spillovers and heterogeneity on the effects of innovation on the performance of firms. Based on the CDM model, we found strong evidence concerning the relationships between innovation input and output, and innovation output and productivity. We found that private returns to product innovation are larger than process innovation. Furthermore, we found evidence that spillovers are stronger in the case of product than process innovation. It was also found that innovation returns are higher for the most productive firms. This increasing relationship between innovation returns and productivity is not consistent with an interpretation in which financial constraints are causing lack of innovation activities in low-productivity firms. In contrast, alternative interpretations, such as deficiencies in complementary assets or lack of appropriability of innovation benefits in low-productivity firms, seem more plausible.