SME Policy Index: Latin America and the Caribbean 2024

7. Dimension 5: Innovation and technology

Abstract

Innovation plays a crucial role in driving productivity and competitiveness, yet numerous businesses, especially small and young enterprises, encounter barriers hindering the adoption and development of new technologies (OECD, 2023[1]). This challenge contributes significantly to the pronounced productivity gap between SMEs and large companies, a disparity particularly noteworthy in Latin American and Caribbean (LAC) countries (OECD/CAF, 2019[2]). Promoting the innovative activity of SMEs and entrepreneurs is, therefore, a policy priority across the LAC region.

In the last four years, several LAC countries have intensified their efforts in providing support services for innovation. However, the trajectory of financial support for SME innovation exhibits a more varied pattern, with several areas identified for improvement in this critical policy area. This chapter presents national policies, programmes, and institutions aimed at aiding SMEs and entrepreneurs in conceiving and implementing innovative business ideas.

Assessment Framework

Innovation refers to the generation or introduction of ideas to address different types of challenges (OECD/CAF, 2019[2]). Businesses can innovate by adopting existing innovations that are new to the firm but have already been implemented by others (technology diffusion) or by introducing new innovations to the market (technology development). Innovation is a core driver of productivity and competitiveness, but many businesses – particularly small and young companies – face obstacles to the adoption and development of new technologies (OECD, 2023[1]). This is one of the drivers of the wide productivity gap that exists between SMEs and large companies, which is particularly large in Latin American and Caribbean (LAC) countries (OECD/CAF, 2019[2]). Promoting the innovative activity of SMEs and entrepreneurs is therefore a policy priority across the LAC region.

This dimension focuses on the presence of national policies, programmes, and institutions aimed at aiding SMEs and entrepreneurs in conceiving and implementing innovative business ideas. The assessment framework for this dimension is detailed here (see Figure 7.1):

• Institutional Framework for innovation policy: This sub-dimension focuses on the presence of innovation strategies specifically tailored for SMEs, evaluating both the precision and implementation levels of these strategies. It examines the identification of tangible actions and measurable targets/impact for SME innovation. Additionally, it investigates the coordination levels of innovation policies for SMEs, considering consultation mechanisms with the private sector and other stakeholders. Furthermore, the assessment includes the existence of indicators measuring the performance of SME innovation policies and how regularly these indicators are measured.

• Support-services: This sub-dimension specifically examines two key indicators: (a) the presence of market research to identify necessary innovation support measures in each country, and (b) whether the private sector is consulted during the design of support services. Additionally, it evaluates the diversity of innovation support services for SMEs, including institutional support services like incubators, technology transfer offices, innovation centres, science and technology parks, and accelerators. The assessment also considers the existence of innovation awareness events and the availability of online information on these schemes. It further explores the government's evaluation of the effectiveness of policies and programmes supporting innovation for SMEs and entrepreneurs.

• Financing for Innovation: This sub-dimension evaluates how well LA9 countries incorporate elements in their national innovation strategies to promote financing for SME innovation, including considerations for co-financing requirements and the presence of tax incentives for R&D. It examines the adequacy of budgets allocated to implement financing programmes for innovation and their operational status, as well as the uptake of R&D support by SMEs. Additionally, it investigates the extent to which these countries monitor the effectiveness of innovation financing programmes and whether the private sector is regularly consulted in this process.

Figure 7.1. Assessment framework - Innovation and technology

Analysis

In the Innovation and Technology policy dimension, the average score among the 9 Latin American and the Caribbean (LAC) countries is 3.98 (see Figure 5.2). Innovation strategies are common in the region, although the level of focus on SMEs varies between countries. The set of policy initiatives in place to promote SME innovation generally includes a combination of financial supports, such as tax incentives or innovation vouchers, and non-financial supports, such as training or measures to foster linkages with potential research partners.

Only seven out of the 9 LAC countries covered in the 2024 iteration of the SME Policy Index (SME PI) were also covered in the 2019 iteration. This means that a one-for-one comparison in the average country scores is not representative (OECD/CAF, 2019[2]). Focusing on the seven countries covered in both 2019 and 2024 (Argentina, Chile, Colombia, Ecuador, Mexico, Peru, and Uruguay) reveals an improvement in the Innovation and Technology dimension, with the average score increasing from 3.75 in 2019 to 4.02 in 2024. However, this overall increase belies a large degree of variation in the trends within countries.

Figure 7.2. Weighted scores for Dimension 5: Innovation and Technology

Note: Scores are on a scale of 1 to 5, with 5 being the highest. The comparison with 2019 is not exact due to changes in the methodology. Please refer to Chapter 2 for further information on the methodology. 2019 data for Brazil and Paraguay is not available as they did not participate in the 2019 assessment.

Sub-dimension 1: Institutional Framework for Innovation Policy

Many different entities from the public, private, education, and research sectors are involved in innovation policy. Institutional frameworks are therefore needed to co-ordinate the activities of these different entities, creating synergies and avoiding the duplication of efforts. This is key to the delivery of an effective package of supports for SME innovation.

In most countries in the LAC region, innovation policy is framed by an overall innovation strategy or national plan, which bring together the activities of relevant entities under a unified framework. Countries are also forming inter-ministerial councils and committees that oversee the development and implementation of the innovation strategy, facilitate the co-ordination of innovation policies, and consult with various public and non-public stakeholders to inform the design of future policies.

Table 7.1. Sub-dimension 1: Institutional Framework for Innovation Policy

	Argentina	Brazil	Paraguay	Uruguay	Chile	Colombia	Mexico	Peru	Ecuador	LA9	Mercosur	PA
Total score	4.01	4.35	3.95	4.29	4.34	4.44	4.02	4.21	3.96	4.17	4.15	4.25

Note: Scores are on a scale of 1 to 5, with 5 being the highest.

Innovation strategies are widespread in the region, but in some countries the focus on SMEs could be increased

All LA9 countries have a national innovation strategy in place, which is a key ingredient of an effective institutional framework. This marks an improvement on 4 years ago, when three out of the seven countries (Argentina, Ecuador, and Peru) were still working on the development and approval of their innovation strategies (OECD/CAF, 2019[2]). However, innovation strategies in some countries still omit important details that should be specified to facilitate an effective implementation, such as measurable targets, action plans, responsible entities, budgets, and timelines. Strategies also vary in terms of the level of emphasis that is placed on supporting SME innovation. While the national innovation strategies of Chile and Ecuador explicitly address the need to support SMEs in overcoming barriers to innovation, this is not the case in many LAC countries.

A positive finding is that all countries appear to consult the private sector to inform the design of innovation policies and strategies. Chile has a particularly strong practice in this area, with Law No. 20 500 stipulating that formal records of private sector consultations must be created. Consultation can also be facilitated through inter-sectoral councils or committees, such as the Consejo Nacional de Innovación, Ciencia y Tecnología (National Council of Innovation, Science and Technology, CONICYT) in Uruguay.

Most countries have innovation agencies, but limited resources constrain effective implementation

In many countries, support services for innovation are delivered to businesses through dedicated innovation agencies. These agencies often have a relatively high degree of autonomy, facilitating greater flexibility in the design and delivery of innovation supports and engagement with a broader range of stakeholders (Nesta, 2016[3]). All LAC countries covered in the study have dedicated innovation agencies, with most having representation of the private sector on the governance board. However, the level of resources available to innovation agencies varies widely across the region. Indeed, in Brazil, Chile, Mexico and Paraguay, the implementation of innovation policies is constrained by limited staff or funding within the innovation agencies.

There are gaps in the monitoring and evaluation of innovation policy at the strategic level

Most LAC countries monitor the progress of their innovation strategies against their targets. Beyond this, however, there are considerable gaps in the monitoring and evaluation of innovation policies at the strategic level. For example, most countries do not have national indicators to monitor the overall performance of SME innovation policies. As a result of these gaps, monitoring and evaluation is scored as the weakest of the three components of the Institutional Framework sub-dimension in Argentina, Brazil, Colombia, Ecuador, and Peru.

Sub-dimension 2: Support Services for SME Innovation

Innovation support services encompass a broad range of measures including training, information and advice on innovation, consulting services, initiatives to strengthen linkages between businesses and research institutions, and support in managing intellectual property. Business incubators and accelerators are often an important channel through which these services can be delivered.

Support services for SME innovation have improved since 2019. Indeed, all of the seven countries covered in the 2019 iteration of this study received a higher score in this sub-dimension in 2024. Despite this progress, the provision of innovation support services still varies relatively widely between countries in the LAC region. For example, while business incubators are present in most countries, the quality and quantity of incubation support provided to innovative SMEs is far from uniform. The effectiveness of innovation support services is also limited by weaknesses in monitoring and evaluation practices in many countries.

Table 7.2. Sub-dimension 5.2 scores: Support services for SME innovation

	Argentina	Brazil	Paraguay	Uruguay	Chile	Colombia	Mexico	Peru	Ecuador	LA9	Mercosur	PA
Total score	2.64	3.95	3.02	4.23	4.35	3.34	4.37	3.94	3.81	3.74	3.46	4

Note: Scores are on a scale of 1 to 5, with 5 being the highest.

Latin American countries are taking active steps to identify and take into account the needs of SMEs in the area of innovation

Eight out of the 9 LAC countries have carried out research and analysis into the needs of SMEs to determine which instruments are most appropriate, with this analysis having been informed by formal consultations and/or business surveys in Chile, Colombia, Ecuador, Paraguay, Peru, and Uruguay. Innovation strategies (and/or relevant laws) in all countries reflect the importance of organisations such as science and technology parks, innovation centres and technology transfer offices, which serve as a bridge between the research and business communities. Business incubators also form part of the innovation strategy in seven out of the 9 countries. However, there appears to be less of a focus on business accelerators, which are emphasised in only half of the LAC countries. This could result in support gaps for high potential scale-ups.

The provision of innovation support services lags behind strategic goals

There is often a mismatch between strategic or policy priorities and the support available to SMEs on the ground. For example, the national innovation strategies, policies, or laws of all 9 countries, make reference to the provision of innovation centres, but these facilities are available in just six of the countries at present. There are also cases where this can work the other way, with innovation support surpassing that envisioned in the strategy. For example, business accelerators are not emphasised in Chile’s national innovation strategy, but Chile is nonetheless home to a successful public business accelerator (Start-Up Chile), the graduates from which have generated global sales of more than USD 1 billion.

The level of public involvement in the innovation support system differs across the LAC region. In some countries, such Peru, innovation support infrastructures such as science parks, incubators, and innovation centres, are funded principally by the government. By contrast, in Paraguay, innovation infrastructure is mainly funded by the private sector, with some lines of funding for innovation projects from the government through the Consejo Nacional de Ciencia y Tecnología (National Council for Science and Technology, CONACYT).

Many innovation support services are not monitored or evaluated

Five LAC countries (Chile, Colombia, Ecuador, Mexico, and Peru) regularly monitor and evaluate support services for co-operation between innovative SMEs and universities or research centres. However, of these five countries, only Chile, Mexico and Peru assess the impacts of the support on SMEs’ innovation performance. This suggests that current monitoring and evaluation practices do not make sufficient use of output-based performance metrics, focusing instead on input-based measures. Monitoring and evaluation practices for public (or publicly-funded) incubators and accelerators appear slightly stronger, with five countries (Chile, Mexico, Paraguay, Peru, and Uruguay) both regularly monitoring and evaluating these activities and assessing their impacts on SMEs’ innovation performance.

Sub-dimension 5.3: Financing for Innovation

SMEs often require financing supports to enable them to invest in the development or adoption of innovative technologies. These can take the form of direct financial supports, such as innovation vouchers or grants, and indirect financial supports, such as tax credits for research and development (R&D) activities.

While there were widespread improvements in the Support Services for Innovation sub-dimension 5.2 between 2019 and 2024, the trends are more mixed for the Financing for Innovation sub-dimension (see Table 5.3). Argentina, Ecuador, and Uruguay each saw increases in their score between 2019 and 2024, while Mexico and Peru registered declines. Chile's and Colombia's scores for innovation finance remained broadly stable at 4.72 and 3.95 respectively in 2024, compared to their performance of 4.70 and 3.94 in 2019.

Table 7.3. Sub-dimension 5.3 scores: Financing for innovation

	Argentina	Brazil	Paraguay	Uruguay	Chile	Colombia	Mexico	Peru	Ecuador	LA9	Mercosur	PA
Total score	4.08	4.02	3.69	4.29	4.72	3.95	4.04	4.06	3.36	4.02	4.02	4.44

Note: Scores are on a scale of 1 to 5, with 5 being the highest.

Most countries have direct financial support instruments for SME innovation, but targeting of specific groups or businesses is less common

Almost all LA9 countries have direct financial support programmes for SMEs engaging in innovation. This support often takes the form of innovation vouchers or subsidies, which help to cover the costs of eligible expenditure. For example, in Brazil, subsidies for accessing R&D infrastructure or procuring technological services are available to SMEs. Innovation funding programmes often target high-growth enterprises, such as the Semilla Expande programme in Chile, which provides co-financing to businesses with high growth potential and innovative products or solutions with annual sales of at least USD 100 000. Indirect financial support for SME innovation are also prevalent in the LAC region. Most commonly, these take the form of R&D tax credits, which allow companies to deduct eligible expenditure from their taxable income. For example, Law 11 196 of 2005 in Brazil entitles companies to deduct 20-34% of eligible investments on R&D or innovation from the corporate income tax and social contributions payable on their net profits.

While tax incentives for R&D are widespread, SME take-up is low in many countries

Direct financial supports are generally provided to SMEs on a selective basis. For example, the Argentine Technology Fund evaluates and awards funding to selected innovation projects, while the National Agency for Research and Innovation in Uruguay awards funding to qualifying companies to increase their internal innovation capabilities. Selection criteria that are often used include the quality of the innovation project, its potential commercial impact, and the capacity of the team to implement the project.

An issue that exists in some countries is that, while R&D tax credits are available, few SMEs engage with these incentives. For example, in Peru, it is reported that only a low number of SMEs have applied for the R&D tax incentives that are available under Law No. 30 309. This could be due in part to the eligibility criteria for the incentives, which include a number of administrative and accounting requirements that likely place a larger burden on SMEs than on larger companies.

There is wide variation in the quality of monitoring and evaluation of financing for innovation programmes

LAC countries generally have stronger monitoring and evaluation practices for their financial support programmes than they do for non-financial support. This is consistent with the findings from the OECD’s 2023 Framework for the Evaluation of SME and Entrepreneurship Policies and Programmes that “hard” programmes are more likely to be subject to high-quality impact evaluations than “soft” programmes (OECD, 2023[4]). While most countries regularly monitor financial support measures for innovation and many conduct independent impact evaluations, Chile, Paraguay, and Uruguay are the only countries where policy adjustments have been made on the basis of these evaluations.

Innovation and Technology for the development of women-owned or led SMEs

Most LA9 countries integrate a gender perspective into their innovation strategies

Argentina's Department of Gender Equality in Science, Technology, and Innovation aims to ensure genuine gender equality in women's participation in the scientific-technological system, while Chile's Ministry of Science has a gender and STI policy with associated guidelines and work plans. Although gender mainstreaming may not be explicitly outlined in innovation policies or strategies in some cases, it is reflected in specific programmes and projects. For instance, Brazil's “Women Innovators” programme, encourages startups led by women to enhance female representation in the national business landscape through training and recognition.

Furthermore, Argentina, Ecuador, and Mexico lack specific fund allocations for fostering innovation in women-led SMEs, contrasting with other analysed countries that have focused instruments with a gender perspective, specific contests, or funds aimed at reducing gender gaps in this topic.

In Peru, resource allocation is carried out through the "Woman, Entrepreneur, and Innovator" contest, while Uruguay provides funds or support for innovation linked to SMEs in the energy, industrial, and cooperative sectors.

The way forward

Over the past four years, many countries in the LAC region have ramped up their provision of support services for innovation. However, the trend in financial supports for SME innovation is more mixed, and there remain a number of areas for improvement in this important policy area, as outlined in Table 5.4 below.

Table 7.4. Policy recommendations for innovation and technology dimension

Policy area	Challenges and opportunities	Policy recommendations
Institutional framework for innovation policy	Many countries have adopted dedicated innovation strategies. However, these strategies often do not include adequate information to ensure an effective implementation of specific policy measures.	Ensure that innovation strategies include specific and measurable objectives, with key performance indicators and targets for each objective, along with specific policy actions, budgets, responsible entities, and implementation timelines. Strategies should also define the governance arrangements for their implementation. Ensure that strategic documents and policies include a sufficient focus on SMEs and identify and address the specific obstacles they face in engaging in innovative activities.
Support services and financing for innovation	LAC countries deploy a range of support services and financing tools for innovative SMEs. However, financing support is not always readily accessible for SMEs. There is also considerable scope to improve the monitoring and evaluation of innovation supports, in order to identify and channel resources towards the most effective policy interventions.	Monitor the uptake of innovation support (financial and non-financial) by SMEs and explore ways of increasing the accessibility of support to SMEs. Make greater use of public procurement for innovation as a tool for supporting innovative start-ups and SMEs and generating technological solutions in priority areas. Increase focus on support for high potential scale-ups, including through accelerator initiatives. Ensure that innovation agencies are staffed and funded sufficiently to fulfill their mandate. Conduct high-quality impact evaluations on major innovation programmes every three years. Further guidance on impact evaluation can be found in the OECD’s 2023 Framework for the Evaluation of SME and Entrepreneurship Policies and programmes.

References

[3] Nesta (2016), How innovation agencies work: International lessons to inspire and inform national strategies.

[4] OECD (2023), Framework for the Evaluation of SME and Entrepreneurship Policies and Programmes 2023, OECD Studies on SMEs and Entrepreneurship, OECD Publishing, Paris, https://doi.org/10.1787/a4c818d1-en.

[1] OECD (2023), OECD SME and Entrepreneurship Outlook 2023.

[2] OECD/CAF (2019), Latin America and the Caribbean 2019: Policies for Competitive SMEs in the Pacific Alliance and Participating South American countries, SME Policy Index, OECD Publishing, Paris, https://doi.org/10.1787/d9e1e5f0-en.