El Reto de la Innovación en Perú, lecciones

The Innovation Challenge for Peru: Lessons from MIT and Beyond Professor Scott Stern MIT Sloan School and NBERThis presentation draws on collaboration between Scott Stern, Michael Porter, Mercedes Delgado, Christian Ketels, Fiona Murray, and workconducted at the MIT E-Center and the Harvard Institute for Strategy and Competitiveness. No part of this publication may be reproduced, stored ina retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without thepermission of Scott Stern and Michael E. Porter.

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A New Peruvian Innovation Agenda• Building Innovative Capacity and an Innovator Workforce to Move Peru to the Next Stage of Economic Development• Transitioning from Microenterprises to Innovation- Based Entrepreneurship• Harnessing the Power of a Cluster-Driven Economic Strategy 3

Over the past decade, Peru has experienced exceptional economic performance GDP per Capita(in 1990 PPP US$) CAGR: CAGR: CAGR: $6,000 +2.07% 0.73% +4.81% $5,000 $4,000 $3,000 $2,000 $1,000 $0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010–Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (June 2009) 4

Significant export growth linked to natural resources and endowments 2.5% Change In Peru’s Overall World Export Share: +0.09% Jewelry and Precious Metals 2.0%Peru’s world export market share, 2009 1.5% Metal, Mining and Manufacturing 1.0% Fishing and Agricultural Fishing Products Products 0.5% Financial Apparel Peru’s Average World Services Hospitality and Tourism Export Share: 0.22% Communications Publishing and Printing Services 0.0% -0.5% 0.0% 0.5% 1.0% 1.5% Change in Peru’s world export market share, 1997 to 2009 Exports of US$2 Billion =Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School;Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 5

With Some Emerging Strengths in Regional ClustersPiuraAgricultural Products: Mangoes,Lemons, Brown Sugar SyrupCajamarca (Bambamarca)Dairy, Processed FoodsLa Libertad (El Porvenir, Trujillo)Leather, FootwearAncash (Chimbote)Fishing and Fish ProductsLima (Infantas, Los Olivos)Metal Manufacturing, MetalFurnitureLima (La Victoria)ApparelIcaWineCuzcoTourismPuno and ArequipaApparel from Alpaca 6

Significant reduction in poverty though much work remains… 60% 50% 40% % of Population Under the 30% Poverty Line 20% 10% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009–Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e7Informatica (INEI), 2010

However Peru has not yet established itself as a global innovator Average U.S. patentsper million population, 2005 – 2009 3.5 Croatia 3.0 Estonia 2.5 South Africa 2.0 Greece Lithuania 1.5 Russia United Arab Emirates Portugal Costa Rica 1.0 Poland Argentin Chile Saudi Latvia China a Arabia Uruguay Mexico Brazil India 0.5 Ukraine Venezuela Kazakhstan Philippines Peru Egypt Kenya Colombia Ecuador Thailand Turkey 0.0 -30% -20% -10% 0% 10% 20% 30% 40% CAGR of US-registered patents, 2005 – 2009 170 patents = Source: USPTO, World Bank 8

The Peruvian Innovation Challenge• Peru has experienced exceptional economic performance over the past decade – Grounded in a shift towards sound macroeconomic policy, openness to international markets and partners, and the establishment of a higher level of basic security – Leveraging natural resources and endowments• But Peru has not yet established the foundations for an innovation-driven economy• Resource-led or cost-based growth has natural limits.• Peru must start setting the foundations – starting today -- for an innovation-driven, knowledge-based economy. 9

HOW CAN WE BUILD A PERUVIAN INNOVATION ECONOMY? 10

The Foundations of Competitiveness Microeconomic Competitiveness Sophistication of Quality of the State of ClusterNational Business Company Ops Environment Development and Strategy Macroeconomic Competitiveness Social Infrastructure Macroeconomic and Political Policies Institutions Natural Endowments 11

Peruvian Competitiveness Position Macroeconomic Microeconomic Endowments Competitiveness Competitiveness A Strong Getting the Transitioning to a New Foundation House in Order Stage• Rich endowments of • Establishment of sound • Significant improvement mineral and natural macroeconomic policy over the past decade in resources and serves as the foundation the national business astonishing biodiversity for the last decade of environment• Favorable location to economic performance • Business remains serve as a hub for • Strong benefit from focused on extracting Latin America and openness to resources and cost- Asian and N. American international trade and based strategies trade investment • Nascent clusters are• World-renowned • Continuing concerns present, but cluster historical and about basic security, strategy still at an early cultural legacy basic education, and stage political institutions 12

Building a Regional Innovation Ecosystem Regional Cluster Strength Regional RegionalInnovation Entrepreneurship Capacity Capacity 13

Regional Innovation Capacity • The capacity of a region to generate “new Regional to the world” ideas, products and servicesInnovation Capacity supported by:. PEOPLE -Pool of innovators -Education in tech commercialization -Networks FUNDING -Funding for research -Government programs -Corporate R&D spending INFRASTRUCTURE -Physical infrastructure -Example: hi speed internet POLICY -Clear rules around patents -Clear support for STEM education REWARDS & NORMS -Experimentation culture -Celebration of invention and innovation - Rewards to innovation – tenure process DEMAND -Nature of companies in region (relates directly to cluster analysis) 14

Peru lags neighbors in investments and Innovation resources towards basic education at the Capacity: People primary, secondary and tertiary level–Source: UNCTAD Science, Technology and Innovation Policy Review, 2011 15

Fi n 10.0 12.0 14.0 16.0 18.0 0.0 2.0 4.0 6.0 8.0 Ta lan i d Ic wa N e n Employees ew J lan Ze apad Researchers /1,000 U Swala n ni D ed n d te d en e St N ma n at o r k es r w 2009. Data 2007 except where noted. (2 ay 0 Fr A Ko 06) an us r e ce t r a C a an B (20 lia ad elg 06 a iu ) (2 m A 005 G us ) er t r m ia R an Sw L u y itz ux Slo ss er e m v e i a l n Ir e and bo ia16 la (2 urg nd 0 (2 04) 0 U S p 06) innovator workforce Sl ni o a te E va in d s ki C K to a ze ing nia ch Po do r m N Re tug et p a he ub l r l make great progress in enhancing its Peru is starting at a low level, but can H lan ic un d g s G ar re y Ita Po ece ly la ( 2 nd Tu 006 ) PeSou C rke ru th hi y (e Af na st ri i m ca at e) Innovative Source: National Science Council, R.O.C., Indicators of Science and Technology, Taiwan, 2008; OECD Science, Technology, and Industry Scoreboard Capacity: People

Innovative Capacity: People and Policy But… Higher Education remains focused on education training, law, and administration… Key STEM areas such as computer science, biotechnology, and nanotechnology register at very low levels.17

Innovation Capacity Agenda• All stakeholders– business, government, and university – must make a much higher level of commitment to the Peruvian education system at all levels and for all Peruvians 18

Peru Has a Low Level of Innovation Effort Innovative Capacity: Funding 19

While Peru investment in technology Innovative infrastructure has lagged, recent catch up… Capacity: InfrastructureJuana Kuramoto and Máximo Torero, 2004 20

Innovative“Mens et Manus” Capacity: Rewards & NormsMind and Hand…. 21

The MIT Inca Bridge ProjectResearch: John Ochsendorf and colleaguesTeaching: Heather Lechtman, Linn Hobbs and MITUndergrads! 22

Recent initiatives show promise by focusing on university-industry collaborationBut have not yetreached critical mass… 23

Peru has globally unique resources whosepotential for innovation has not yet been tapped 24

Innovation Capacity Agenda• Peru stakeholders– business, government, and university – must make a much higher level of commitment to the Peruvian education system at all levels and for all Peruvians – The next generation must be an innovator workforce• Both business and government must commit to significantly (and steadily) increase their financial investment in R&D and innovation – Not government versus industry, but government plus industry• Peru innovation investments should be focused on the unique advantages of Peru – such as biodiversity, or building fundamental science and engineering foundations in specialized agricultural and mining areas. 25

Action Item What are you going to do – before the end of CADE – to begin enhancing the Peruvian innovation environment? Commit your firm to a new innovation partnership? Fund a new generation of scientists and engineers?Convene a meeting of how your firm can leverage the incredible biodiversity of Peru and contribute to its preservation? 26

Regional Entrepreneurship Capacity • The capacity of a region to generate new Regional start-up companies supported by:Entrepreneurship Capacity PEOPLE - -Entrepreneurship Education & Training ENTREPRENEURS -Mentorship programs -Groups to share info FUNDING -Government early stage funding -Angel funding -Private & public risk capital INFRASTRUCTURE -Real estate -Voice & Data Communications -Services for start ups (legal, acctng, HR) POLICY -Bankruptcy laws -Ease of incorporation - Ease of doing business CULTURE  REWARDS -Recognition in press for success & NORMS -Rewarded for trying -Societal stigma or halo DEMAND -Procurement policies of government -Procurement policies of companies -Transportation infrastructure 27

Peru has a very large level of Entrepreneurial entrepreneurship, with a strong majority of Capacity: People all employment linked to microenterprises and small enterprisesUNCTAD, 2011 28

While microenterprises are an important Entrepreneurial source of poverty reduction and employment, Capacity: Funding these enterprises lack growth capital (and in many cases, lack access to even microfinance loans) But suggest the potential forgrowth-oriented entrepreneurship in Peru… 29

Peru mobilizes a medium level of overall risk Entrepreneurial capital, and is dominated by large private Capacity: Fundingequity investments rather than angel funding or venture capital Peru 30

Building on a record of economic reform, Peruhas established itself as an overall regional leader Entrepreneurial in terms of “Doing Business” Capacity: Policy Venezuela: 172 Guyana: 100 Colombia: 39 Suriname: 161 Ecuador: 130 Peru: 36 Brazil: 127 Bolivia: 149 Paraguay: 106 Chile: 43 Uruguay: 124 –Argentina: 115–Source: The World Bank, Doing Business (2011), 183 countries 31

Strength in investor protections and Entrepreneurial openness, but continued challenges in terms Capacity: Policy of contract enforcement and permitting120 –Favorable –Unfavorable –Ranking, 2011 (of 183 countries)100 –Peru’s per capita GDP rank: 81 80 60 40 20 0 Ease of Doing Getting Credit Protecting Registering Trading Starting a Paying Taxes Closing a Dealing with Enforcing Business Investors Property Across Business Business Construction Contracts Borders Permits–Source: The World Bank, Doing Business (2011), GDP rank on GDP per capita, ppp-adjusted 32

However, growth engine has been in traditional industries, often dominated by larger firms (including government spin-offs) 2.5% Change In Peru’s Overall World Export Share: +0.09% Jewelry and Precious Metals 2.0%Peru’s world export market share, 2009 1.5% Metal, Mining and Manufacturing 1.0% Fishing and Agricultural Fishing Products Products 0.5% Financial Apparel Peru’s Average World Services Hospitality and Tourism Export Share: 0.22% Communications Publishing and Printing Services 0.0% -0.5% 0.0% 0.5% 1.0% 1.5% Change in Peru’s world export market share, 1997 to 2009 Exports of US$2 Billion =Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School;Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 33

Business Growth Remains Limited by Entrepreneurial Capacity: Policy Physical Infrastructure Requirements, including roads and waterUNCTAD, 2011 34

HOW CAN PERU TRANSITION TO INNOVATION-BASED ENTREPRENEURSHIP? 35

MIT serves as the fulcrum for theCambridge biosciences cluster… 36

MIT is not simply a center for innovation but a driving force in entrepreneurship Estimated Percent of Median Median Sales Total Estimated Total Jobs Companies Employees ($Millions) Employees Sales ($Millions) More than 10,000 0.3% 15,000 1,523 1,339,361 1,389,075 1,000- 10,000 1.8% 1,927 308 1,043,932 235,532 Less than 97.9% 39 <1 900,001 226,671 1,000 Total 100.0% 155 <1 3,283,294 1,851,278 Currently Living MIT Alumni Founders are Responsible for more than 25,000 firms, more than 3 million jobs, and $3M in salesRoberts and Eesley, Entrepreneurial Impact: The role of MIT, 2011 37

Prof Yet-Ming Chiang 38

But how does MIT create this environment? 39

Entrepreneurial Capacity Agenda• Peru must develop a much higher capacity for growth- oriented entrepreneurship. – Enhancing the attractiveness of entrepreneurship for educated professionals (beyond microenterprise) – Investing in a significant expansion of risk capital – Ensuring the overall health of business environment• The public and private sector must collaborate to establish specific institutions and programs – tailored to the strengths of each region – to enhance the potential for an innovator workforce and commercializing new technologies and business processes 40

Action Item What are you going to do – before the end of CADE -- to catalyze innovation- based entrepreneurship in Peru?Mentor? Start a University Partnership? Commit your firm to be a risk capital partners in Peru moon shot fund? 41

Cluster-led economic strategy enhances the payoffs to innovation-based entrepreneurship Regional Cluster Strength Regional Regional Innovation Entrepreneurship Capacity Capacity 42

The Peru Cluster EnvironmentPiuraAgricultural Products: Mangoes,Lemons, Brown Sugar SyrupCajamarca (Bambamarca)Dairy, Processed FoodsLa Libertad (El Porvenir, Trujillo)Leather, FootwearAncash (Chimbote)Fishing and Fish ProductsLima (Infantas, Los Olivos)Metal Manufacturing, MetalFurnitureLima (La Victoria)ApparelIcaWineCuzcoTourismPuno and ArequipaApparel from Alpaca 43

Peruvian Clusters and Peruvian Universities• Peru’s current clusters are based heavily on natural endowments, and have much room for further upgrading• Even in areas with significant clusters – such as Cajamarca, Arequipa, and Moquegua in mining – there have historically been significant technological bottlenecks• Though there are some strong universities universities have historically played a limited role in supporting the development of entrepreneurial firms that catalyze local clusters.• There is a limited tradition of collaboration among actors for regional development• There is a weak institutional capacity – which could be addressed by leading Peruvian universities -- hampering the development of clusters. 44

Innovating the Economic Strategy The Old View: The New View: Sectors and Industries Clusters• Manufacturing vs. • Clusters of related services industries• High tech vs. low tech • All clusters are good• One path to prosperity • Many paths to prosperity• Critical is what you do • Critical is how you do what you do 45

What is Different about Cluster-Based Economic Policy? Cluster vs. Narrow Industries Public-Private Regional Collaboration Perspective Focus on upgrading productivity Demand- Build on driven Regional Policy Strengths Priorities 46

The Australian Wine Cluster Locations Northern Territory Queensland Western Australia South Australia New South Wales Victoria TasmaniaNote: Colored areas indicate wine growing regionsSource: Australian Wine & Brandy Corporation 48

The Australian Wine Cluster Recently founded Institutions for Collaboration Winemakers’ Federation of Australia Cooperative Centre for Viticulture  Established in 1990  Established in 1991  Focus: Public policy representation of companies  Focus: Coordination of research and education in the wine cluster policy in viticulture  Funding: Member companies  Funding: other cluster organizations Australian Wine Export Council Grape and Wine R&D Corporation  Established in 1992  Established in 1991 as statutory body  Focus: Wine export promotion through  Focus: Funding of research and development international offices in London and San Francisco activities  Funding: Government; cluster organizations  Funding: Government; statutory levy Wine Industry National Wine Industry Information Service Education and Training Council  Established in 1998  Established in 1995  Focus: Information collection, organization, and  Focus: Coordination, integration, and standard dissemination maintenance for vocational training and education  Funding: Cluster organizations  Funding: Government; other cluster organizationsSource: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002 49

The Emergence of the Australian Wine Industry is Rooted in the Evolution of Australian Competitive Advantage GoldMining and Travel and Tourism Natural Iron / Aluminum BauxiteResources Logistics / Trade Wool Beef Wine Produce Information TechnologyAbundant GrainsProductive Land Ag Research Centers Education and Knowledge Creation Medical Devices Bioscience Biotech / Pharmaceuticals Research Centers1980 1990 2002 + 50

The Australian Wine Cluster Trade Performance Australian Wine Australian Wine Exports in million US Dollars World Export Market Share $1,000 8% $900 7% $800 6% $700 $600 5% Value $500 4% Market Share $400 3% $300 2% $200 $100 1% $0 0% 1995 1996 1997 1998 1999 2000Source: UN Trade Statistics 51

Over the 1990s, growth in Australian exports was driven by improvement in Australia’s wine cluster Share of Australian Exports, 2000 35% Materials/Metals 30% 25% 20% Food/Beverages* 15% 10% Transportation 5% Textiles/Apparel Oil/Chemicals Equipment Multiple 0% Business Health Care -8% -6% -4% -2% 0% 2% 4% Change in Share of Australian Exports, 1995-2000Note: Wine export growth accounts for >45% of the increase in the export share of food/beveragesSource: UN Trade Statistics 52

And has continued to grow…Source: UN Trade Statistics 53

CITEvid – Enhancing the Pisco IndustrySource: Juana Koromoto, GRADE 54

Facilitating a rapid rise in production and exports…. 55

The Economic Case for Cluster PolicyCreate Platforms Organize Publicfor Joint Action Policy around Clusters Path dependency Local Externalities Coordination Information failures asymmetries 56

Organize Public Policy around Clusters Business Attraction Education and Workforce Training Science and Technology Infrastructure Export Promotion (e.g., centers, university departments, technology transfer) Clusters Market Information Setting standards and Disclosure Specialized Physical Environmental Stewardship Infrastructure Natural Resource Protection• Clusters provide a framework for organizing the implementation of many public policies and public investments directed at economic development 57

Clusters, Innovation and Economic Strategy Positioning • Identifies, communicates, and strengthens the specific value proposition of the location Business Cluster Environment Portfolio• Improved economic • Accelerates growth in platform for all clusters those fields where the and companies country has some• Enhances innovation strengths opportunities • New clusters emerge• Leveraging innovative from established clusters and entrepreneurial capacity 58

The Role of Government in Cluster Initiatives Government Government Government should may should not• Support all existing • Initiate/ • Pick favored and emerging Convene clusters clusters • Co-Finance • Pick favored• Participate companies• Enable data • Subsidize or collection and distort dissemination at the competition cluster level • Define cluster• Be ready to action implement priorities recommendations 59

A New Peruvian Innovation Agenda• Building Innovative Capacity and an Innovator Workforce to Move Peru to the Next Stage of Economic Development• Transitioning from Microenterprises to Innovation- Based Entrepreneurship• Harnessing the Power of a Cluster-Driven Economic Strategy 60

Action ItemWhat are you going to do? 61

How Can We Build a Bridge to a Peru Innovation Nation? 62

El Reto de la Innovación en Perú, lecciones

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