For decades, Asia grew much faster than any other part of the world while many Latin America economies struggled. While Latin America was far richer than Asia in 1960, Asia’s sustained rapid growth has greatly reduced the income gap. Innovation is a key ingredient of economic growth and development, and more innovative economies experience faster productivity growth.
Asia’s edge in innovation may help explain its faster economic growth.
As an anecdotal example, Asia is home to well-known innovative tech giants such as Alibaba, Samsung Electronics, and Infosys. Such globally known tech companies are much less common in Latin America.
Beyond anecdotes, we looked at the data. In a recently published ADB study, we analyzed and compared innovation in these two regions.
Our approach is different from most empirical analysis of the determinants of innovation, which delved into advanced economies that are at or near the global technological frontier. More formal analysis of the determinants of innovation, measured by patent flows, yield several interesting, policy-relevant results.
Overall, the broad empirical facts indicate that Asian economies innovate more than those in Latin America. Asian countries invest substantially more in innovative activity, as evident in the number of researchers and amount of spending on research and development.
Not surprisingly, given their larger investments, Asian countries produce more innovation outputs such as patents. Therefore, the data lend some support to our notion that greater innovation helps explain why Asian economies have generally outperformed Latin American economies.
However, the data also shows that innovation in Asia is heavily concentrated in relatively few economies, especially in the People’s Republic of China and the region’s newly industrialized economies. Therefore, like Latin American economies, many Asian economies such as Pakistan must invest more in innovation to accelerate and thereafter sustain economic growth.
We also found that research and development has a positive and significant effect on innovation in Asia, but not in Latin America, which suggests the need for the latter to re-orient its innovative activities toward the market.
In Latin America, there is a clear positive link between research and development and patents. This may seem surprising at first, but it makes sense given that the region files only a miniscule number of patents compared to Asia. This also suggests that patents may be a relatively minor form of intellectual property in the region.
Furthermore, infrastructure access facilitates innovative activity in Asia but not in Latin America. Whereas financial development positively affects innovative activity in Latin America and not Asia, though these factors may still be important for innovation at a country level.
Interestingly, the only variable which has a positive effect on innovation in both regions is education, although the effect is more significant in Asia. The positive effect of education in both regions is hardly surprising given that innovation is fundamentally a human endeavor based on human ingenuity. However, the link between education and innovation seems to be more robust for Asian economies than Latin American economies.
This suggests that the quality of education matters as much as quantity. An education system has the biggest effect on innovation if it produces potential innovators who have strong basic literacy and numeracy skills and can think outside the box. In addition, the US experience suggests that targeted skilled immigration in research and development sectors can facilitate innovation. Overall, the efficient allocation of human and physical capital seems to matter a lot for innovation. The last result points to the general importance of human capital in innovation.
More broadly, the first step toward becoming an innovative economy and society is to effectively absorb and utilize more advanced technology from countries which are at or near the global technology frontier. Asia and Latin American countries cannot hope to fly before they can walk. In this connection, the experience of the Republic of Korea and other newly industrialized economies offer a benchmark model for both regions.
Although Korean firms such as Samsung Electronics initially relied on foreign technology, they eventually became global innovation leaders. A sound institutional and policy environment is essential for technology absorption and adaptation, which is the gateway to innovation.
Our analysis suggests that a sound education system which turns out highly skilled workers who are potential innovators is vital to such an environment.
There is no shortcut to an innovative economy and society, in Asia, Latin American or elsewhere. The journey must begin with the inherently challenging process of improving and reforming the education system.