How Important is Open Innovation for Latin America?

(The following article is reproduced courtesy of Exnovate and was originally published in their Newsletter on 1st March 2013).

Latin America is struggling to find ways to accelerate the development of modern innovation management strategies and practices by private firms. Available indicators of innovation activity show very low levels. For example, in a large sample innovation survey in Colombia, only 0,6% of manufacturing firms reported that developed a new product for the international markets in 2009 or 2010. Several governments in the region have earmarked substantial resources for the purpose of increasing innovation in business organizations, but the results are still far from the levels that would be necessary in order to accelerate economic growth in a sustainable way. This brief text proposes that re-setting the terms of the discussion by introducing an Open Innovation framework should reduce the distances that today separate private and public actors, lowering transaction costs and accelerating learning and knowledge absorption about innovation in private firms.

This is an urgent issue for the region. For the first time in decades, Latin America has managed to navigate successfully the turbulence associated to a major international economic crisis, so the global deceleration process that started in 2008 did not produce a downturn in the region. In general terms, this happened because of sound macroeconomic policies and because of the strength of exports of natural resources. This has allowed the region to enjoy a relative level of prosperity while surrounded by a sea of turbulence. However, these fortunate circumstances will not last forever. If Latin America does not take advantage of favourable present conditions to build the foundations of solid sustainable growth, dire consequences will be here after a few years. Sooner or later, commodity price cycles will turn against the region and this episode of prosperity will prove to be short lived. If we do not figure out how to accelerate the shift of our economies from commodities towards innovative, high value products, history will repeat itself.

This is a multi–faceted problem. Low productivity and scarce innovation have been historically endemic to the region. Here I wish to highlight one aspect of the situation, which is the low impact of innovation in the region in terms of development of innovation capabilities by private firms, despite growing resources assigned to this effect.

A brief consideration of the metrics that each side uses to address the issue illustrates the difficulties in this dialogue. While policy makers in Latin America recognize that innovation is a systemic problem, the metrics they use to gauge the advancement of innovation are still lockedin a linear paradigm, where R&D is at the root of the generation of new technologies that are later incorporated into new products. A recent review of innovation activity in Latin.

America by the Inter American Development Bank focused on the gaps between the innovation performance of Latin American countries in comparison to other regions of the world. The authors explicitly argue that this linear model is not a good expression of true innovation dynamics. However, the fact remains that the available metrics were developed out of the linear perspective. Therefore, the state of the art is an analysis where R&D is of paramount importance for examining innovation in a region where, given the key sectors in the economic structure, R&D is quite limited. The focus on this kind of metrics is also typical of the indicators on innovation used by the OECD. Although that organization has done substantial efforts recently to introduce new indicators that reflect other views on innovation, such indicators are far from mainstream use.

Business leaders who engage in innovation set their priorities using very different metrics. Managers want to talk about the composition of their innovation portfolios, the contribution to the bottom line of products launched over the previous 18 to 36 months, the number of ideas in the pipeline, and so on. Very few business leaders in Latin America, in very few sectors, have high priorities for R&D, although they may have ambitious innovation goals. In a region where services and natural resources sectors may contribute more than 70% of GDP in several countries, business people find it hard to digest the idea that in order to achieve high aspirations in innovation they need to focus on R&D.

Therefore, efforts to enhance the spread of innovation in Latin America quickly reach a situation where dialogue among key actors becomes extremely difficult. From the stand point of policy makers, whatever happens inside the innovation systems of business enterprises is a black box. From the standpoint of the majority of businesses, the policy frameworks seem foreign and lacking in relevance.

In this setting, moving the discussion towards the concepts and tools of an Open Innovation model could bring high rewards for the Latin American push towards innovation. There are several advantages to this approach.

• As Henry Chesbrough defined it, Open Innovation is “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively”. The focus is on the flows of knowledge to and from the organization. This concept can be applied to innovation as defined in different ways, so it is relevant for efforts focused on R&D and also for initiatives that deal with service innovation (and anything in between). There is no need to stall on the endless question of what is an innovation. The essence of the definition refers to the flow knowledge and the value that knowledge can create. This is an assertion that all relevant actors could easily agree with.

• In the prevalent state of the policy discussion about innovation in Latin America, phenomena occurring at the firm or team levels have been dealt with as exogenous, or beyond the scope of the analysis. However, the Open Innovation model lends itself to different levels of analysis, as Wim Vanhaverbeke has pointed out. From an Open Innovation perspective, issues such as the barriers to change stemming from group inflexibility and inertia can be examined carefully and dealt with as an integral part of the task. Inertia in teams or individuals can be analyzed with the same degree of detail as the use of policy instruments by firms. This is an extraordinary advantage. Such a framework allows all the actors to understand and follow the advancement of proposed initiatives and not just assume that important blockages will be overcome in some unspecified way.

• The Open Innovation model facilitates the dialogue among firms (and among firms and other institutions) who may be located in very different positions in a continuum of innovation capabilities. Open Innovation allows collaboration of firms with no regard to the frequency of new product announcements or the degree of R&D intensity that they manage. The framework facilitates absorption of knowledge by small firms, or by firms who are only initiating their development as innovators, without imposing great requirements on the capabilities that they should have at the outset.

• Research on Open Innovation is generating a growing inventory of tools and instruments that can be used by firms when they search for, use and share knowledge, on all aspects of operations that may be related to innovation, from user-led design to guidelines for leveraging on shared IP resources. This makes faster organizational learning possible, where newly identified problems can quickly lead to new interpretations and conceptualizations, with experimentation and testing of novel solutions following in quick sequence.

In short, Open Innovation provides a wide ranging framework that is already in use around the world for developing knowledge about innovation. Multiple perspectives are being explored using this framework. Citing the typology proposed in a recent academic article on the topic, these perspectives include the relationships between innovation management and the impact of geography; the role of industry structure; the role of users of products in the innovation process; the development of innovative processes; the possibilities that appear for a firm along the value chain when suppliers or distributors are involved in the innovation strategy; the development of tools and instruments; and the importance of culture and mindset. The adoption of an Open Innovation point of view to advance the discussion, having all key actors go through a process of engagement with its frameworks, language and tools, could be an important step in achieving effective progress in an innovation strategy for a country or a region, allowing knowledge to move rapidly from one player to the next, and applying and testing solutions with speed. This certainly would help Latin American countries to unleash their innovation potential.

Prof. Dr. Rafael Vesga

Professor, Entrepreneurship & Innovation

Universidad de los Andes

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