Government innovation drive continues in Mexico

With a more robust government strategy to support research initiatives and a private sector attuned to the benefits of investing in new product development, innovation is slowly becoming instrumental to Mexico’s economic growth. Since taking office in December 2012, the government of President Enrique Peña Nieto has taken steps to improve the environment for research and innovation in the country. A first step was the establishment of a high-level advisory committee to support the science and research sector. Resulting policies have yielded improvements for human resources training, translating into new positions for Mexican researchers. Enhanced subsidies for private research and innovation systems are also encouraging firms to allocate more funding for research and development (R&D). To improve the environment for business creation, the current administration set up the National Entrepreneur’s Institute (Instituto Nacional del Emprendedor, INADEM) in early 2013, a move which is affecting financing and training of Mexican entrepreneurs, and spurring new start-up firms.

Overall, the government expects to increase expenditure on research and experimental development from 0.4% of GDP in 2013 to about 1% of GDP by the time the current presidential term ends in 2018. This will require reorganising public resources to improve federal expenditure on science development. However, it will also depend on the mobilisation of innovation resources in a private sector long accustomed to investing in sectors generally characterised by stable and predictable returns. As new policies aim to improve the quality of research conducted in the country’s institutes and universities, and provide the environment for new ideas to transform into commercially viable businesses, the connection between these worlds is paramount.

Science Expenditure

Most of Mexico’s public research activity is based around state universities and public research centres. Mexico has 95 public universities with research and technology capabilities. The Universidad Nacional Autónoma de Mexico, the country’s largest university, has 71 research centres. The National Council for Science and Technology (Consejo Nacional de Ciencia y Tecnología, CONACYT) is the main public scientific research agency, in charge of overseeing and supporting research programmes and funding schemes. It is mostly through the financing of these two elements – CONACYT and public universities – that national expenditure on research, innovation and technological education is dispersed. The council also manages a network of 27 research centres across the country. This network is responsible for about 75% of the scientific, technological and academic research taking place outside the capital, according to the government.

“Today, more than ever, innovation is on the agenda of all companies in Mexico," Jose Luis Serrato, president and managing director of Ericsson, told OBG. " Globalisation has led to a higher degree of technological sophistication in the country, and this tendency will continue with the growth of the economy.”

Sector Startegy

CONACYT’s policy, and in a certain way Mexico’s science and research strategy, is based on the Special Programme for Science Technology and Innovation, published in June 2014. The document acts as the sector’s roadmap, which the agency is in charge of coordinating from 2014-18 and beyond. The council has become a key partner in the current administration’s science spending plans. In late 2013 the Mexican Congress approved a bill to raise the agency’s 2014 budget by 20.5%, to reach MXN31.5bn ($2.1bn). A slight increase was also implemented for CONACYT’s 2015 budget, expected to reach MXN33bn ($2.2bn), according to agency figures. The challenging fiscal position that Mexico now finds itself in, due to a reduction of hydrocarbons export earnings, will most likely make it more challenging for authorities to keep research and innovation expenditure up in the medium term. “The budget cuts have been severe in a lot of government institutions and ministries, but so far for CONACYT we have maintained, and even increased, our federal budget,” Rosa Eugenia Sandoval, adviser at CONACYT, told OBG. For 2014 the total expenditure on science and innovation is estimated to have reached 0.54% of GDP, a figure expected to increase to 0.56% in 2015, according to initial estimates by CONACYT.

As the body responsible for a large proportion of public expenditure in science and technology, CONACYT has channelled the financial support to key research areas under the government’s development priorities, including renewable energy, health and green development. CONACYT also oversees a large proportion of the most qualified human resources in fields related to science and research. The National System of Researchers ( Sistema Nacional de Investigadores, SNI), established in 1984, works as a classification scheme that ranks scientists according to their mentoring of other researchers, published work and additional academic achievements. The system has allowed standardising academic research capabilities in the country and matching them with international practice. The number of scientists in the SNI rose from 12,096 in 2006 to 23,302 by 2012, showcasing the government’s efforts to increase the number of scientists within the system.

Better Human Resources

Improving the quality and number of human resources involved in science and research has been one of CONACYT’s most ambitious goals. This will impact the country’s ability to enhance science and innovation research. According to the Special Programme for Science Technology and Innovation, in 2011 Mexico had 0.9 researchers per 1000 inhabitants; comparably less than the US, with 9.1; Canada with 8; or even Spain, with 5.6 researchers per 1000 inhabitants. Turkey had 2.6 researchers per 1000 inhabitants, Russia 5.9, and South Africa 1.08, according to OECD figures. In Latin America, Chile had 0.7 researchers per 1000 inhabitants and Argentina 2.7. It is this small number of human resources compared to total population that has been partly responsible for Mexico’s lagging behind in research and innovation performance. One important achievement of the current administration has been the funding of work positions for scientists and researchers.

For example, CONACYT's Catédras Programme created 574 positions in public universities in 2014. The council has aimed to establish long-term positions as opposed to short-term research grants or assignments. Although researchers are employed by CONACYT, the programme aims to adapt scientists to the specific organisations to which they are allocated. “Monitoring and evaluation of their progress is constant and as long at it is positive, they continue in those institutions. It is a very long-term programme,” Sandoval told OBG.

For 2015, CONACYT expects to add an extra 225 positions through the programme, which means that by the end of the year close to 800 new positions for young researchers will have been created. More importantly, the programme puts a strict emphasis on channelling scientists to spend time on research. “This had never been done in Mexico before, so it is a very important public-policy instrument. When starting a new job young researchers usually have a very heavy class schedule, leaving them little time to do actual research. Under the Catédras Programme they still have to teach and mentor students, but the priority is for them to focus on scientific research,” Sandoval told OBG.

Supporting Private Research

Public funding alone will be insufficient to make innovation a key component of the way businesses operate, especially in so large an economy as Mexico’s, where the majority of firms are small and medium-sized enterprises. A challenge for the government is to encourage the private sector to match at least some proportion of the state’s investment in innovation. Private sector spending still lags behind what is allocated by the federal government.

“Only 35% of expenditure on research and innovation in Mexico comes from the private sector, much lower than what happens in other countries,” Sandoval told OBG. Over the past decade there has been a shift in the way the government supports R&D efforts in the private sector. Policy has been moved away from tax incentives to direct grants and subsidies that are matched by equal private contribution.

The state’s tax breaks for R&D scheme was established by CONACYT in the early 2000s. However, the programme was abolished in 2008 because of the perception that the tax breaks were mainly helping the larger and already established companies. Although some have called for the tax cuts for R&D investment to be re-visited, CONACYT supports private innovation through direct allocation of funds.

The Subsidies for Innovation Programme was established in 2009, to substitute the tax incentives scheme. These are direct subsidies to private companies, given out by CONACYT after businesses present a specific innovation project they want to invest in. The project can be related to product innovation or process innovation, but needs to have the goal of creating business opportunities and value for the company. Supported innovation projects are selected by a panel of experts every year. The regulation stipulates, however, that the recipient company must match investment volumes with at least the same amount requested by CONACYT.

Between 2009 and 2014, the total amount invested in innovation under the programme was MXN40.4bn ($2.7bn), of which MXN18.7bn ($1.3bn) were public subsidies. For 2015 the programme is set to contribute with MXN3.6bn ($242.3m) to support innovation in Mexican companies, expected to be matched by participation from the private sector.

To establish further incentives, CONACYT is evaluating the possibility of including different tools to improve the role of private expenditure in innovation, possibly by bringing back an improved version of the scrapped tax incentives for R&D scheme. “Nothing is completely off the table, although for the moment we only have the direct subsidy programme,” Sandoval told OBG.

Regulatory Instruments

A new patent law is one of the ways that the current government expects to increase the connection between pure research and innovation, leading to new business creation. Under the current regulation, Mexican scientists employed by public institutes or universities have difficulties profiting from their inventions. This is because the law stipulates that public workers can only earn from their salaries as state employees. The current legal status makes it difficult for scientists to licence patented products or generate spin-offs from their discoveries.

The patent law is still under discussion in the Senate, but research authorities expect it to become a reality in the short term. Although the exact text is still being debated, the plan is to have researchers get a return on patents. “This would help establish the needed incentives,” Sandoval told OBG. CONACYT is currently working with lawmakers to assist on the writing of the law. Establishing the law will also help solve a battle of cultures between the academic world and the business one. Rodrigo Gallegos Toussaint, director for climate change and technology at the Mexican Institute for Competitiveness, told OBG, “Mexican researchers have traditionally focused on publishing their findings in academic papers, rather than establishing new business ventures out of their research.”

Another element that might improve incentives would be to increase the level of competition for funding. “At least a small share of public funds should be contested, given on a project-by-project basis, to level the playing field. A lot of public R&D funding has traditionally been distributed through universities, sometimes through a certain level of inertia. However, if funding could be liberalised based on innovation, growth could be triggered,” Toussaint told OBG.

Patent Pending

A better connection between private and public research, coupled with a re-examination of public funding practices, might help increase the number of Mexican patents, which has remained relatively low. All patents are managed through the Mexican Institute for Intellectual Property (Instituto Mexicano de la Propiedad Industrial, IMPI), which is part of the Ministry of Economy. On top of supervising all patent, trademark and industrial design applications, IMPI is also in charge of enforcing regulation and combating counterfeiting. According to information by the World Intellectual Property Organisation, the total number of patent applications in Mexico increased from 14,576 in 2010 to 15,444 in 2013. These figures include patents by Mexican residents and non-residents. Non-residents still account for a large majority of patent applications, at 14,234 in 2013. This reflects the fact that innovation in the country is still largely dependant on foreign participation. Patent application requests by Mexican residents rose from 951 in 2010 to 1210 in 2013. This remains lower than Brazil’s 4959 domestic patent requests, but higher than Chile’s 340 or Colombia’s 251 domestic patent requests in 2013.

With increased investment in research, authorities expect patent requests to continue to rise. For 2014 IMPI registered 16,135 patent requests, according to information in the institute’s 2014 annual report. Of these, 13% were related to pharmaceutical products, a growing industry within Mexico’s innovation sector, taking advantage of the country’s biodiversity.

Environment For Innovation

In addition to strengthening the mechanisms for scientific research, authorities have also put a large emphasis on establishing the right conditions for private ideas to thrive. An increasing number of multinational firms moving research activities to Mexico might spur more domestic businesses to bet on extending R&D activities (see analysis). According to Jose Luis Serranto, president and managing director of Ericsson, “Today, innovation is on the agenda of all companies in Mexico. Globalisation has led to a higher degree of technological sophistication in the country, and this tendency will continue with the growth of the economy.”

Strengthening the environment for entrepreneurial innovation has also been key. An important initial step taken by the current administration was the creation of INADEM in 2013, under the purview of the Ministry of Economy. The institute aims to support the development of start-ups as well as small firms, focusing support on different stages of development. Assistance can go from direct financing through the National Entrepreneurship Fund to managerial skills improvement. INADEM also supports business incubators, which are a structural element of Mexico’s start-up environment.

The entrance of INADEM into Mexico’s entrepreneurial environment created pressure for quality over quantity among incubators and re-defined what it means to be a business incubator in Mexico. “Before, any university could have a so-called business incubator, and they would receive money from the state for each company created,” Fernando Lelo de Larrea, founding partner at All Venture Partners, a private equity firm, told OBG. “However, a lot of these were not creating businesses at all. They would register firms as coursework assignments with their students, but no real companies were being established”.

To counter this, INADEM re-evaluated existing incubators to see which ones justified government support. As a result, in just two and a half years the number of incubators dropped from over 500 to 222, according to INADEM. Furthermore, a new class of support was created: high-impact business incubators. By reducing the number of government recognised incubators, INADEM was able to increase financial support to those that qualified. Basic incubators receive up to MXN20,000 ($1346) per company assisted, at a maximum of 90% of financing and 20 companies per fiscal year, while high-impact incubators get MXN150,000 ($10,095) per incubated company, with a limit of MXN10m ($673,000) per incubator.

Although the creation of INADEM has helped to establish better financing mechanisms and to improve the quality of entrepreneurs searching for capital to kickstart their companies, measuring progress might be a needed step to help steer the following steps. “INADEM is in its third year of operation, and so I think it is time to correctly measure what have been the achievements of its policies, in terms of number of companies and employment positions created,” said Lelo de Larrea.

Funding Start-Ups

INADEM programmes get funded through the National Entrepreneurship Fund, created in 2014 through the merger of the Pyme Fund, focused on small and medium-sized enterprises (SMEs) and the Entrepreneurship Fund. The fund is one of the most important elements of state support of new businesses and small companies, with an annual budget that reached MXN9.7bn ($652.8m) in 2014 and is expected to contribute with MXN8.9bn ($599m) in 2015.

A new fund, announced by the government in early 2015, will support entrepreneurs between 18 and 30 years of age through bank guarantees, and can be used to create a new business or expand an existing one. The MXN300m ($20.2m) fund combines financing from the Ministry of Economy through its National Entrepreneurial Fund, and Nacional Financiera, a public development bank focusing on business creation.

Venture Capital

Another change galvanising start-up creation in Mexico is equity funds are more willing to invest in new ideas. INADEM launched a programme to focus on the establishment of new seed funds, and an increasing number of venture capitalists followed by focusing on start-up financing. According to Lelo de Larrea, the number of seed funds operating in the country has grown from one or two in 2012, to around 20 by 2014. Around 28 additional venture capital firms invest in later-stage development of firms.

Outlook

Investment in research and innovation can sometimes take many years to produce a visible impact. However, Mexico’s recent efforts to not only work on the scientific research level, but to improve the conditions for new businesses to succeed, is accelerating the process. The goal to reach 1% of GDP in R&D expenditure will require a constant commitment of public and private financing at a time when the Mexican government has to cut back on expenditure. Some budget constraints are already affecting public institutions, such as universities. Despite this, much can still be achieved through more efficient spending, as successful investment in innovation is traditionally more related to quality of investment than to quantity.

Nonetheless, the sector still lacks sufficient controls in some areas of public expenditure that would help analysts better understand the extent to which the money is being well spent. A closer analysis of the results achieved from investment in science, innovation and entrepreneurship development over the past several years might help determine where best to focus additional funding, or where to trim it, in coming years.