Innovation as Key to Diversify the Economy in Peru

Synopsis

This project supported the Government of Peru’s efforts to improve national research and innovation capacity and increase its impact on the economy. More specifically, it provided assistance with the design of new public policy instruments to foster research and innovation and to make use of new public resources available in the National Fund for Innovation and Technology (FOMITEC). The Ministry of Finance requested this technical assistance on behalf of the National Competitiveness Council at the Ministry of Finance and the National Council on Science, Innovation and Technology (CONCYTEC) in the Prime Minister’s Office. Jointly with CONCYTEC, the team designed five instruments to strengthen core components of the innovation system.

The ultimate objective of the technical assistance  was to help diversify the Peruvian economy beyond the primary sector, increasing both the value added in products and the share of manufacturing in the Gross Domestic Product (GDP). A second goal was to help CONCYTEC create instruments that more effectively use public resources to enhance the impact of research and innovation on economic development and productivity in Peru.

Challenge

Despite Peru’s exceptional economic growth in the last decade, the country still lags other middle-income Latin American countries in terms of per capita income, productivity and innovation. Its economy remains relatively homogeneous, with a large share in the primary sector (i.e., natural resources).

Factors hindering Peru’s growth include weak capacity in research and innovation and low spending on science and technology (S&T) and research and development (R&D) compared to other countries at similar levels of development. The total budget for S&T executed by CONCYTEC in 2013 was US$17.4 million, and in 2012 it was only US$5 million. This level of investment is extremely low compared to peers in the region: Colombia’s budget for research (COLCIENCIAS) amounted to US$210 million in 2012, while Chile spent US$546 million for S&T (CONICyT) during 2013 alone.

Peru has an insufficient human capital base for innovation and technological development, few graduates in S&T including engineering, too few researchers, and little collaboration between public research organization (universities and research institutes) and the private sector. Further, most science funding programs have long been designed to support individual, curiosity- and intellectual-driven research, emphasizing basic research. Private sector firms, in particular small- and medium-size enterprises (SMEs), invest little in innovation – technology adaptation, creation or adoption – squelching opportunities for productivity to increase and firms to grow.

The Government has decided to significantly increase investment in research and innovation to foster productive transformation of the economy (more value added and increased industrial diversification) and enhance collaboration between researchers, universities and the private sector. The aim is to generate new competitive advantages based on innovation and thereby ensure new sources of growth in the long run.

Solution

The World Bank team focused on the Government of Peru’s short-term needs for new policy instruments. We proposed the following interventions:

• Promotion of inter-institutional research collaboration (“Científicos Inc”) and creation of “Centers of Excellence” (CoEs). The two initiatives seek to promote mission-oriented research through collaboration. Cientificos Inc seek to strengthen research collaboration between scientists from different universities and technology institutions to foster a critical mass in specific research areas. CoEs are about creating public-private collaboration in applied research with mandatory diffusion of results to the private sector. They combine base financing for mission-oriented research with program financing to private sector consortia for applying the resulting knowledge to specific sector-wide problems. They also require linking with an international center of excellence.

• A new streamlined co-financing program for technological innovation in SMEs. The co-financing program is intended to promote process and product innovation (and related technology transfer) and provide financing to SMEs more quickly than the previous scheme. International experience shows that high program uptake is necessary to create a critical mass that will lead to firm change through demonstration effects. The proposed scheme will reduce process time to 10-12 weeks and will be more flexible in terms of financing.

• Support to SME upgrading through technology extension associativity. The goal of this intervention is to assist groups of SMEs with transferring technological and managerial knowledge, improving absorption capabilities and developing competences for continuous learning and productivity improvement. The innovative feature of this scheme is that it requires the structuring of proposals in which a technology center or university or anchor firm (or another institution–private or public–with proper qualifications) works in alliance with clearly identified SMEs that in many cases may be associated with formal or informal schemes or that are organized for this purpose.
• The instruments were created as a result of consultative work jointly conducted with CONCYTEC to define priority needs and a variety of other stakeholders including universities and private sector representatives (Sociedad Minera and ICT chamber, among others). Among the universities consulted are: Universidad Nacional Mayor de San Marcos (UNMSM) (El Cercado), Universidad Nacional de Ingeniería (UNI) (Rimac), Universidad del Pacifico (UP) (Jesús María), and Universidad Peruana Cayetano Heredia (UPCH).

Results

• Igniting demand and collaboration: To date 65 research groups have been formed and presented their research proposal to CONCYTEC and 10 public-private associative projects for CoEs are in the process of formation (by early April 2014). Before this new funding program, both public collaboration in research and public-private association for technology development were almost nonexistent.
• Setting foundations for change: New, more open, competitive and mission-driven models of research governance are now being promoted through these new funding schemes that will enhance public-private collaboration for innovation.

This small advisory assistance consisted in providing recommendations and design support. The Government created five instruments with our assistance and launched them just six months ago at the time of writing. The call for proposals for two of them (CoE and Científicos Inc) closed very recently and the rest of instruments will be launched in the second semester of 2014.

In the case of public-private collaboration in research (CoE) and firm innovation support, the ultimate effects of innovation in terms of productivity growth and employment usually take more than three years to manifest. It is therefore too early to provide figures on how much private R&D were leveraged or how much employment increased with CoE. For firms, the most immediate effects one would expect from a project such as CoEs would be the so-called “additionality” effects, for example, that collaborative research would help increase private R&D investment (in the case of CoEs) and thereby enhance innovation by participating firms. For inter-institutional collaboration, we expect that support to collective research will lead to more publications and higher quality published science. We will be able to track how much scientific productivity changes with inter-institutional collaboration (Científicos Inc) and how much business R&D and innovation are affected by interventions in the future. Results will be tracked by the Government of Peru and we will be able to track progress of these measures.

The instruments the Government developed with World Bank assistance (Científicos Inc and Centers of Excellence) are part of the program “Ciencia Activa,” which aims to improve the competitiveness of firms, orienting science towards developing solutions to problems that hinder business and social development within the country. The program seeks to contribute to the growth and competitiveness of the Peruvian economy by supporting structural change of the productive matrix, with an emphasis on integrating science and technology into the productive system. In the medium- and long-run, the private sector will increase innovation capacity and develop new products as well as improved production processes. These will ultimately be translated into higher quality goods and services, increased productivity, new markets and job opportunities. Creating jobs will contribute to reducing poverty.

Bank Group Contribution

US$ 72,000 for this Advisory Assistance with Bank budget.

Partners

The key partner was the National Council on Science, Innovation and Technology (CONCYTEC). Other partners that were consulted include the Ministry of Finance (MEF) and the National Competitiveness Council.

Moving Forward

CONCYTEC is implementing the new instruments during 2013-2014. Two instruments were launched in the second semester of 2013. Future planned activities include:

• Continuing advisory assistance in the area of strengthening governance of and capabilities of research and technology institutions
• Providing guidance in the creation of technology transfer offices
• Offering support to enhance the institutional capacity of CONCYTEC

CONCYTEC has expressed interest in working at a broader level with the World Bank. They have presented a request for a loan to the MEF. This loan would have a programmatic approach with a series of four loan packages.

Beneficiaries

The task had three direct beneficiary groups: the main policy agency for research and innovation (CONCYTEC), the research community (which will have new funding available with new schemes–mission-driven, competitive and more transparent) and industry (which will have new options to engage with the scientific community to conduct research, technology development and collaboration for innovation).

For society, enhanced innovation in the private sector will increase employment opportunities via expansion of markets and superior economic performance of firms, as well as the emergence of new sectors and industries.