Mexico’s Innovation Cha-cha

Like many nations, Mexico has been making an effort to increase its investment in R&D and in scientific manpower. But although Mexico’s investment in science has grown significantly in absolute terms during the past few decades, the country still lags far behind others. In 2004, nations that are part of the Organization for Economic Cooperation and Development (OECD) on average invested 2.3% of their gross domestic product (GDP) in R&D. Mexico’s R&D investment in 2004 was less than 0.4% of GDP, a ratio that has remained essentially constant during the past decade. Why has Mexico been so slow to invest in R&D? What are the implications of this? And what can be done about it?

Historically, economic activity in Mexico was largely based on exploiting its abundant natural resources, with oil production accounting for an important share of GDP. In addition, its economy was closed and heavily regulated. As a result, until recently, Mexican companies have had little incentive to innovate and did not perceive the need to invest in R&D. Similarly, science and technology (S&T) was largely absent from the government agenda.

Mexico’s S&T system began around 1930 with the creation of the National Institutes of Health, with government support dedicated almost exclusively to improving the nation’s health. In 1960, the country took a first step toward broadening its S&T effort through creation of the National Institute for Scientific Research (Instituto de Investigación Científica), which provided scholarships to fund undergraduate college theses and graduate education.

Mexican S&T began to evolve during the 1970s. First, the Mexican higher education system expanded as a number of large public universities were established. Mexico’s economic development strategy was based on import substitution, and increasing education levels was seen as critical to making this approach work. Second, in 1970, the National Institute for Scientific Research became the National Council for Science and Technology (Conacyt) and began to award research grants. Although these early grants were minor and worked mostly as complements to the higher education expansion effort, S&T investment had finally entered the policy arena. As a result of these policies, a small, active scientific community in Mexico was established.

Then the severe financial crisis of the 1980s hit. Mexican inflation levels reached more than 150%, and purchasing power dropped dramatically. Inflation’s impact fell heavily on the middle class, which included university professors. As a result, the few scientists that the country had been able to foster started leaving, mainly for the United States.

In an attempt to avoid a total collapse of the budding scientific community, Mexico created the National System of Researchers (SNI – Sistema Nacional de Investigadores) in 1984. SNI supplemented the salaries of the most productive researchers. This program has remained active, becoming a distinguishing feature of the Mexican S&T system. The number of SNI researchers grew from fewer than 7,000 in 1992 to more than 12,000 in 2005. In 2003, about 30% of the researchers in Mexico were members of the SNI. They published about 85% of the Mexican international peer-reviewed publications in the ISI Thompson Web of Science Database. Currently, researchers receive recognition— and a significant part of their incomes—by being part of SNI.

Mexican S&T begins to stir

By the end of the 1980s, Mexican economic policy had changed. Import substitution was abandoned, and the country moved toward a deregulated and open economy. Mexico became a member of the General Agreement on Tariffs and Trade (GATT) and signed the North America Free Trade Agreement (NAFTA). These changes had an impact on science as well as trade. In 1991, the first World Bank loan for S&T in Mexico led to the creation of PACIME (Programa de Apoyo a la Ciencia Mexico). This program provided $150 million to support scientific activities, with a matching amount provided by the Mexican government. The funds enabled the creation of a number of new initiatives: programs for research but also for equipment, infrastructure, retention of scientists, and endowed chairs.

These initiatives had a significant impact on S&T investment in Mexico. Federal S&T expenditure as a percentage of GDP increased from 0.28% in 1990 to 0.33% in 1991. By 1994, it had reached 0.41%, roughly the level of today. Moreover, Conacyt, which became the primary agency responsible for defining and implementing S&T policy, saw its budget increase more than 230% in real terms from 1989 to 1994.

During the 1990s, the main objectives of S&T policy were increasing the country’s capacity in scientific research, supporting advanced training, and to a lesser extent, supporting technological development. Almost all the programs created by PACIME remained and their administration improved. Conacyt’s budget reflected these priorities, with only a small proportion dedicated to promoting innovation. In the 1993 budget, 26% went to science, 2% to technology, 29% to scholarships, 20% to SNI, and the remaining 23% for other programs. This distribution remained similar during the rest of the decade. These programs have had an impact in Mexican science, with national researchers publishing more papers. According to ISI, the participation of Mexican scientists and engineers in the global scientific production increased from 0.2% in 1993 to 0.5% in 2003.

By the turn of this century, Mexico’s S&T system had grown in size, output, and international impact, but its S&T investment had not keep pace with the country’s economy. According to OECD figures, gross R&D expenditures as a percentage of GDP was 2.65% in the United States, 1.58% in Canada, but remained at 0.40% in Mexico— the last place among OECD countries in terms of resources devoted to S&T. Similarly, Mexico also has a limited pool of science manpower. As recently as 2002, it had only 0.33 full-time researchers per 1,000 inhabitants. Brazil and Poland had 0.45 and 1.53 per 1,000 inhabitants respectively, and developed nations are typically much above these figures.

Still, Mexican S&T, although small, is quite efficient and effective on an individual researcher basis. The average researcher publishes more papers and is cited by other researchers more often than in most comparable nations. In 2003, Mexico was publishing 1.14 ISI papers per full-time equivalent researcher, compared to 0.74 in Brazil and 0.83 in Poland.

New policies and innovation

Because the emphasis in the 1990s was on increasing the amount and quality of Mexican scientific research, only 2% of Conacyt’s budget was spent on technology development. In the early 1990s, Conacyt designed its first programs to foster industry innovation. The R&D Technological Modernization Trust Fund (Fondo de Investigación y Desarrollo para la Modernización Tecnológica, FIDETEC) was established to provide warranties and long-term financing for precommercial R&D. Complementary initiatives were also created, including one program to promote university-industry linkages (PREAEM), another to encourage the creation of technology-base incubators (PIEBT), a third supporting private research centers (FORCCyTEC), and, finally, a program to improve technology information (RCCT). However, scarcity of resources, together with high interest rates, lack of capacity for risk evaluation, and poor program design led to very low demand for these programs. Consequently, their impact was modest at best.

A second set of initiatives for promoting innovation happened only late in the 1990s. First, resources from the second World Bank loan for S&T were assigned to new programs devoted to the enhancement of technological innovation (PCI – Programa de Conocimiento e Innovación). Second, a system of fiscal incentives for S&T was established. But despite this new set of resources from the World Bank, very few companies submitted projects to the program, and even fewer ended up receiving support.

The slow pace of these programs was due partly to the extremely low investment of the business sector in innovation activities, in particular R&D. The long history of economic protectionism in Mexico had created a social environment with very little appreciation for innovation. In 1999, only a little more than 20% of gross expenditures in Mexican R&D was financed by companies, whereas in Brazil companies contributed 40% and in Korea more than 70%. Moreover, since few Mexican scientists worked in industry, university-industry research collaborations were almost nonexistent.

As the millennium began, the Mexican innovation system displayed some progress, but also enormous gaps. This became even clearer when the new administration that began in 2000 put together its S&T plan. The administration prepared a diagnosis of the state of national S&T, which included contributions from the S&T community as well as the consulting body for the federal government, Foro Consultivo Científico y Tecnológico. It concluded that:

• S&T expenditures were very low
• The business sector contribution to R&D was particularly small
• The proportion of R&D money applied to experimental development was below the amounts that other advanced developing countries were spending
• The S&T community had a very small size
• Mexican industry had little international competitiveness
• The number of patents filed by Mexicans was extremely small

The response was the Special Program on Science and Technology 2001-2006, which had three objectives: a federal law encouraging S&T, increased national S&T capacity, and strengthened competitiveness and innovation in companies. Among the program’s goals were increasing the number of people in S&T, consolidating the scientific infrastructure, using science and technology to solve national and regional problems, increasing the quantity and quality of Mexican science, and persuading the public that innovation was essential to economic development.

Thus, one of Conacyt’s first actions in 2001 was the submission of a new S&T law. This S&T Act, approved by Congress in 2002, conferred on Conacyt responsibility for coordinating the S&T activities and budgets of all federal agencies. In addition, Conacyt was given new status and autonomy, no longer reporting to the Ministry of Education but instead directly to the president. Finally, the law specified committing 1% of GDP to S&T by the end of the administration in 2006. The law placed special emphasis on applied research with the purpose of linking scientific activities to national problems and directing science into areas of social value.

This effort included a number of new programs and important changes to existing ones; for example, revamping the 1998 law to simplify regulations and procedures for companies applying for innovation incentives. Most critical among the new programs was creation of two groups of funds, the Sector Funds (Fondos Sectoriales) and the Mixed Funds (Fondos Mixtos). The Sector Funds operated in conjunction with federal agencies and were supposed to finance projects that addressed the strategic needs of the nation; for example, in health, environment, and agriculture. In principle, they operated with matching funds between Conacyt and the different federal agencies. The Mixed Funds were directed to regional development and operated with matching funds between Conacyt and the states of Mexico.

Another fund, the Institutional Fund (Fondo Institucional), was managed solely by Conacyt. One of its main new programs was AVANCE, created in 2003. AVANCE includes three programs: Last Mile, which supports the last stages of innovation; the Entrepreneurs Fund (managed in conjunction with NAFIN, Mexico’s state development bank), which supplies angel capital; and the Warranty Fund, which endorses companies aiming to get commercial bank loans.

New policies, but disappointing results

The 2002 S&T Act generated strong expectations about the evolution of Mexican S&T. But these expectations were not fulfilled. First and foremost, the government did not supply the necessary actions and resources. During the administration of Vicente Fox, the government declared that it was strongly committed to S&T development, with the president personally promising to grow R&D investment until reaching 1% of GDP by 2006. But the president did not keep his promise, and the government did not support its declaration with political will or money.

From 2002 to 2006, the Mixed and Sector Funds supported only 7,122 projects. Just after the funds were established, in 2002, outlays increased, totaling $170 million and reaching a high of $180 million in 2003. But since then, support has dropped to a little over $120 million per year, an amount only slightly larger than in the pre-Fund years 1999 and 2000.

AVANCE has also had only a modest impact. By the end of 2005, only 69 proposals had been approved as part of the Last Mile initiative, with outlays totaling $14.2 million. Under the Entrepreneurs Fund program, just nine companies had received support by the end of 2005. The number of companies that have applied for and received support is extremely low for the size of the country.

Several factors help explain the disappointing results of these programs. First, despite the government promise, the federal budget for S&T increased very little, allowing only for maintenance of existing programs and not for implementation of new ones. The reason was large increases in the SNI and scholarship programs, which absorbed most of Conacyt´s budget. Thus, although the promotion of innovation in the business sector was supposed to be a key priority in the 2002 Act, few resources were in fact allocated to these new programs.

Second, Conacyt responded poorly to its new charter. The new S&T Act made Conacyt responsible for coordinating S&T efforts of all federal agencies, including the establishment of new policy instruments to foster participation of state governments. Yet no institutional change took place. Conacyt remained basically the same, with new responsibilities assigned in a fragmented way within the old structure. This led to organizational inertia and limited the visibility and preeminence of the new initiatives.

Third, implementation of the new programs encountered several problems that delayed their development substantially. The new coordinating role of Conacyt at the federal level was hindered by the Secretaria de Hacienda, the agency in charge of the federal budget. In particular, Hacienda often declined or delayed outlays for industry projects. On the one hand, Hacienda officials did not see S&T as an important priority for the country, considering instead that investment in areas such as health and education were much more critical. On the other hand, Hacienda had in place a set of detailed procedures on how to allocate and spend public money, procedures that could not be applied easily to research and innovation projects.

These new programs were also hindered by a lack of rigorous planning. Processes for establishing strategic needs for the various federal and state agencies were not very strict. In particular, there was no clear procedure for setting priorities in the research agendas and operation of the Sector and Mixed Funds. This led to requests for proposals (RFPs) that did not necessarily reflect the actual requirements of the federal agencies and state governments. Instead, RFPs were often shaped by particular views of small groups within the agencies. As a result, the original plan for setting priorities based on need was not quite achieved.

The modest results also reflected lack of appreciation for technological development and the scarcity of private sector investment in innovation. Although some progress had been achieved during the 1990s, these had remained important features of the Mexican economy.

Finally, Mexico still lacked a critical mass of people trained in managing S&T issues, both private and public. The small size of the system and the novelty of these innovation-oriented programs meant that there were few scientists or engineers who knew how to design, implement, and properly follow up on them. For example, a criticism often made of the AVANCE program is that it was structured and managed to support mainly radical innovations, with no complementary initiatives aimed at boosting incremental or process innovations. This further limited the interest of companies.

A small silver lining

Despite these limitations, it is important to note that these new programs, especially AVANCE, were quite innovative and have produced indirect results critical to the future of the innovation system in Mexico. First, they triggered the interest of investors in R&D projects. Second, they fostered the creation of technical capacity for identifying and evaluating R&D projects, a capacity that had previously been nonexistent in Mexico and that, as explained above, contributed to the limited impact of the programs. Moreover, they promoted the creation of angel funding and venture capital, which had been virtually absent in the country. Finally, they also favored a culture of innovation management in Conacyt and other agencies, which until then had focused chiefly on the science dimension.

Fiscal incentives to support S&T activities have been one of the few success stories of the new initiatives after the new S&T Act was passed. The program was established in 1998, providing a recovery rate of 20% for R&D expenses, with a budget of 500 million pesos (approximately $56 million). In 2001 the rate was changed to 30%, and in 2006 the threshold was changed to 4 billion pesos (approximately $364 million). Despite the 1998 enactment, tax incentives for S&T were almost nonexistent in practice until 2001. Heavy-handed reporting regulations and the shortsighted perspective of Secretaria de Hacienda effectively treated this initiative as a loss of revenues for the government. Thus, it made every effort to limit the incentives awarded. As a result, in 2000, Hacienda approved less than 2% of the $50 million available for tax incentives. In 2001, regulations were altered, and a dramatic change in perspective occurred. Incentives are now being fully used, with awards increasing from less than $50 million in 2000 to $100 million in 2004 and close to $400 million in 2006.

The positive evolution in fiscal incentives reflects another accomplishment. During the past few years, the business sector has increased investment in R&D. In 2006, 38% of Mexico’s R&D was financed by the private sector, compared to only 14% in 1993.

Perspectives for the future

As we have shown, although Mexico’s investment in S&T has grown significantly in recent decades in absolute terms, it has trailed the economic evolution of the country. Mexico has been among the first 15 nations in the world in terms of GDP during the past 20 years, but it stands in last place among the OECD countries in terms of resources devoted to S&T. This is hardly the basis for using S&T as a real anchor for development and global competitiveness.

During the past 20 years, there have been a number of serious and rigorous analyses to diagnose the structural problems and needs of the Mexican innovation system. Practically all of them agree on some key issues. First, the S&T community is active and productive, but very small. It is also mostly concentrated in universities and research institutes, not the private sector. In fact, most Mexican companies still invest little in R&D to sustain their competitiveness. The national innovation system is disintegrated, and cooperation among industry, academy, and government is almost nonexistent. In general, there is little appreciation for S&T among the public.

At this point, Mexico’s S&T doesn’t need more diagnosis, it needs action. The country seems able to create innovative mechanisms for fostering scientific capability and to integrate demand and supply of R&D. An incentive scheme directed at researchers has helped establish a small but productive scientific community. Innovation programs are beginning to change the culture of R&D commercialization. But these programs are small and far from reaching their full potential.

Thus, first and foremost, government officials and legislators deciding on the appropriation of resources need to redistribute scarce resources away from other areas so they can significantly increase the budget for S&T. It will take vision and political will to do that. Yet if Mexico is to be a player in the global economy, it has no choice but to increase its S&T investment—increase it significantly. Added resources will also help increase the number of scientists and engineers in the workforce, not only in academia but also in industry.

But the recent experience with the 2002 S&T Act suggests that, in addition to resources, other critical issues must be addressed in order to succeed in implementing new science, technology, and innovation initiatives. An initial dimension that now seems to be mostly overcome is the existence of a new cadre of people able to manage S&T programs. Despite their limited success, the early initiatives were essential in training this group of people. Another is to recognize that successful implementation of S&T programs requires active mobilization of all stakeholders, in particular those that control or influence resources. Institutions within the S&T system in charge of critical programs need to find ways to include heads of government ministries, federal agencies, and even states in the process. A third approach is to recognize that regulatory and institutional structures can be almost as important to success as resource availability. Therefore, these structures need to be carefully considered together with program development and deployment. Finally, Mexico’s entrepreneurs, academics, legislators, and government officials should at last acknowledge and embrace the social and economic relevance of science, technology and innovation.