Firm-level innovation, government policies, and the middle-income trap: lessons from five Latin American economies

Latin America needs higher productivity to escape the middle-income trap. In this paper, we analyze the factors that promote firm-level innovation, a key factor for increasing productivity. We estimate a two-stage model in which firm characteristics affect its use of innovation inputs; a use which, in turn, generates innovation outputs. Using data from the 2006, 2010, and 2017 World Bank Enterprise Surveys of five Latin American economies, we conclude that innovation deficiencies at the aggregate level are not due to a lack of linkages between inputs and innovation outputs at the firm level. However, a comparison with firms in China suggests that there may be differences in entrepreneurial behavior. The results confirm the importance of public policy in fostering firm-level innovation.