Institutional support is boosting innovation in Colombia

In a bid to strengthen its competitiveness in international markets, Colombia is aiming to increase spending on research and innovation activities. Although this has been a stated priority of successive governments, expenditure levels for research and innovation are still well below other countries in the region. To change this, authorities are implementing legal measures to encourage expenditure on research and innovation activities in the private sector. An improvement in access to financing for research for small and medium-sized enterprises (SMEs) is slowly helping to change the sector. The 2015 Global Innovation Index – which is co-published by Cornell University, INSEAD business school and the World Intellectual Property Organisation – ranked Colombia 67th out of 141 countries for its innovation potential, below Chile (42nd), Costa Rica (51st) and Mexico (57th), but ahead of Brazil (70th) and Peru (71st).

Raising Standards

There are two ways of measuring investment in this sector. The first is science, technology and innovation (STI) spending, which is broader and can include the education system, along with more traditional research. The second is research and development (R&D), which is purely research and innovation. The government plans to double Colombia’s expenditure on STI from 0.5% of GDP in 2015 to 1% of GDP by 2018, as stated in the National Development Plan 2014-18. Between 2006 and 2014, the country’s expenditure on STI activities increased slightly in relative terms, rising from 0.40% to 0.46% of GDP. However, between 2006 and 2014 Colombia’s GDP more than doubled from $162.6bn to $377.7bn, according to World Bank figures. Thus, although in absolute terms investment in the research and innovation sector has risen, it has nonetheless lagged behind overall economic growth.

The low level of growth in spending points to one of the sector’s main challenges. With expenditure levels in the sector typically low, the country will have to mobilise financial and human resources to raise expenditure to 1% of GDP. As a regional comparison, Brazil spends 1.74% of GDP on STI activities, while Mexico spends 0.73%, according to the Ibero-American and Inter-American Network for Science and Technology Indicators. Even lower is the country’s annual expenditure on R&D activities, which reached 0.19% of GDP in 2014, according to the Colombian Observatory for Science and Technology ( Observatorio Colombiano de Ciencia y Tecnología, OCyT).

Between 2004 and 2014 Colombia spent some COP29.9trn ($11bn) on STI activities, according to the OCyT. In 2014 alone this figure totalled COP3.4trn ($1.3bn). In order to reach the 1% of GDP goal for the STI segment, the country’s annual expenditure will have to reach COP8.8trn ($3.2bn), according to government estimates. Of this, private investment will need to increase from an estimated COP2.5trn ($920m) in 2014 to COP4.5trn ($1.7bn) by 2018.

Oil Prices

Allocating additional resources might prove challenging in the current environment, with the decrease in oil prices negatively affecting Colombia’s national budget. This puts even more emphasis on the need to expand private investment in science and research activities. According to 2014 figures from the OCyT, expenditure on STI activities in the decade between 2004 and 2014 was driven mainly by public sector institutions. Private companies accounted for 33.55% of expenditure during that period, followed by universities (26.97%), the central government (21.91%) and research centres (12.22%), with hospitals, non-profits and professional organisation making up the rest. Although private firms provided the largest individual expenditure, they were largely outspent by a combination of public entities.

Achieving a Balance

The government is working to create the necessary incentives to boost private investment in research and innovation. “About two-thirds of financing for research activities is provided by the government, while the balance is from the private sector. In addition to increasing investment to 1% of GDP, the government also wants to improve the balance between private and public sector investment to 50:50,” Henry Mora, head of the innovation and competitiveness department at the OCyT, told OBG. This balance between private and public expenditure is critical. A 2014 OECD report on innovation policies in Colombia found that in leading OECD economies between 65% and 75% of investment in research and innovation comes from the private sector.

Sector Structure

Since the majority of research activities stem from a multitude of government bodies, the private sector’s role in research and innovation remains below expectations. Colciencias is the government administrative body for STI and the main public entity acting as a catalyst for the sector. The agency’s primary focus is to formulate and implement the goals of the National System of Science, Technology and Innovation, which is intended to support high-tech, high-impact entrepreneurship and create synergies. Colciencias also manages several financing instruments that invest in developing research activities. More importantly, it is in charge of the Fund for Science, Technology and Innovation, established in 2012 to finance the sector using 10% of the annual royalties from Colombia’s non-renewable energy production. The fund also aims to re-invest resources into other regions of the country, and is focused on specific segments, including scientific and research services, R&D, innovation and capacity building.

Allocating funds has proved challenging. Although the funds are managed by Colciencias, the approval of grants for specific research and innovation programmes is overseen by regional authorities. The result is that the amount of financing going into each region’s research and innovation activities can depend heavily on the technical capacity of local authorities to formulate research and innovation programmes. Other entities that also play a role in developing the sector include: the Advisory Council on Science and Technology, which is tasked with enhancing innovation through better research practices; and the National Commission on Competitiveness and Innovation, which looks at innovation as a way to improve economic competitiveness.

Another strong player in the sector is the National Learning Institution (Servicio Nacional de Aprendizaje, SENA), a public institute under the Ministry of Labour in charge of professional education to promote employment. Through its network of 116 training centres and 16 technological parks across the country, SENA provides advisory and technical assistance to SMEs seeking to enhance their production processes and raise productivity levels.

It also co-finances applied research programmes that originate from businesses with the goal of improving performance. Additionally, SENA is increasingly channelling financing towards supporting entrepreneurship and new business creation. In 2015 SENA was able to support 477 new ventures with a total budget of COP50bn ($18.4m) through its Fondo Emprender, a seed capital fund supporting entrepreneurs. The fund will focus on new businesses in agriculture, ecotourism, manufacturing and education.

Additional Support

Government ministries also have a role. The Ministry of Trade, Industry and Tourism is in charge of the Productive Transformation Programme, which is responsible for prompting innovation in 20 key sectors of the economy. Additionally, the Ministry of Information Technologies and Communications (Ministerio de Tecnologías de la Información y las Comunicaciones, MINTIC) runs several programmes and services linked to innovation. It also has an innovation centre geared towards supporting government bodies in implementing e-government tools, as well as training government employees to develop a culture of innovation. MINTIC also runs programmes, in conjunction with Colciencias, to finance the development of IT-based innovation products and services among Colombian companies. Some of these co-financed programmes are geared towards the development of innovative IT applications for the tourism and agricultural sectors, for example.

Innpulsa

Perhaps one of the most important tools for promoting innovation and new business creation in Colombia has been the establishment of Innpulsa in 2012. Managed by Bancoldex, Colombia’s state-owned international commerce and business bank, Innpulsa is a government agency with support programmes for entrepreneurs and other entities, aimed at promoting innovative businesses. This is done in several ways, both by allocating co-financing grants to start-ups and other firms, and by running programmes that help strengthen the environment for credit allocation. During its first four years, Innpulsa has channelled COP439bn ($161.6m) to support entrepreneurship and innovation.

A dynamic set of tools, which includes grants, capacity building and support for entrepreneurs and financial institutions, and the development of investor networks, has thus helped to galvanise innovation in the country. “The government is increasingly encouraging different entities in the innovation environment to meet each other and exchange ideas,” Laura García, marketing director at the Centre for Research and Technological Development for the Electronics and IT Industry, told OBG.

Innovating In Class

Universities and research institutions are also an important component of the country’s research and innovation environment, and both public and private schools are aiming to improve their research capabilities.

According to the OECD’s 2014 report, six out of 288 Colombian universities were responsible for 60% of university research in the country in 2014. Putting the right financial incentives in place for university-level research is challenging. Although research groups in Colombian universities can get funding for projects from Colciencias and other public entities, traditional state financing for universities is based on scientific production and results.

“There are not sufficient incentives for innovation at universities,” Mary Luz Escobar, director of entrepreneurship and innovation at Innpulsa, told OBG. “Researchers are encouraged to publish their findings, not create businesses out of their research. Furthermore, the intellectual property policy of the universities restricts these possibilities.”

Despite their potential to develop new knowledge with a social and public value, researchers in public institutions are not incentivised to transform their research findings into market-oriented innovation. This is partly due to existing laws that prevent researchers working for the state from earning any financial compensation other than their wages. Legislation also promotes the sharing of scientific discoveries with peers, not translating these discoveries into patented products. Furthermore, any economic value that can be derived from scientific discoveries legally belongs to the university or research institutions, not the researcher. Even universities are discouraged from developing discoveries into profitable ventures due to their legal status as non-profit organisations.

Tax Exemptions

Incentivising the private sector should be easier to manage. In mid-2015 the country’s National Council for Economic and Social Policy ( Consejo Nacional de Política Económica y Social, CONPES) approved new tax breaks for the private sector to allocate more resources to research and innovation. However, firms had yet to make full use of previous incentives. In 2014 Colombia had COP500bn ($184m) available in tax cuts related to private expenditure on research activities, but only COP347bn ($127.7m) were used. Furthermore, benefits were concentrated on a small number of big companies operating in a limited number of economic sectors, according to CONPES. The government wants to change this by making it easier for smaller firms to apply.

As of 2014, companies that invest in activities that qualify as research, technological development or innovation are able to deduct 175% of related expenditure from their taxes. New rules also stipulate that highly innovative companies or firms based in technological parks will be able to benefit from the tax cuts automatically, without needing to get their projects approved by the National Council for Fiscal Benefits in STI, which normally decides which projects can qualify. In addition to the new rules, authorities are also planning to promote the programme to the public in order to promote awareness.

A more accessible tax incentive scheme might also change the way innovation is perceived by Colombian firms. “The majority of investment in innovation from private companies consist of acquiring software and other IT equipment, which, of course, generates a lot of efficiencies and benefits, but cannot be considered innovation as such,” Mora told OBG.

Human Resources Development

Equipping the country with the right amount of researchers that can drive forward applied standards has become a priority. According to figures from the OCyT, there are up to 15,000 Colombian researchers either working in the country or working abroad in association with Colombian institutions.

Out of these, up to 5000 are at the doctorate level. However, it is sometimes difficult to gauge the amount of scientific production enabled by the current human research capabilities. This is because Colombia lacks up-to-date information and statistics about researchers and their output. “We do not have a national researchers system, like Mexico does, so it is difficult to understand how active many of these researchers remain,” Mora told OBG.

Between 200 and 300 doctorate students get scholarships or loans to continue their graduate education both in Colombia and abroad every year, according to the OCyT, but the tendency for Colombian universities to focus more on teaching than research has meant that 70-80% of Colombian doctorate candidates are still educated abroad. This has been changing recently, with around 100 doctoral programmes available in the country. “It is sometimes more expensive to form a doctoral student in Colombia than abroad, because of the high matriculation costs here,” Mora told OBG. Between 2004 and 2013 a total of 5555 students that benefitted from financial support to pursue doctorate studies, but only 2276 did so in Colombia, according to figures from the OCyT. This also underlines the need for Colombia to attract and retain its own scientific talent.

Bring Them Back

In March 2014 Colciencias launched the Time to Come Back (Es Tiempo de Volver) programme, aimed at encouraging Colombian scientists and researchers working abroad to return to the country. A total of 140 Colombian doctorates with experience gained abroad were chosen to be integrated into various research institutions and firms. Under the programme, each researcher receives a monthly salary of COP6m ($2200), plus an additional COP10m ($3680) for relocation costs. The government finances researchers’ salary and health coverage for three years, after which the receiving company or institution takes over the cost.

However, the initial positive reception for the programme has been dampened by the programme’s administrative shortcomings. “The results are mixed, because the resources allocated to this were not enough for the amount of people wanting to return,” Mora told OBG. “There is no clear structure of how they would be linked to companies or universities in Colombia, so it was slightly inconsistent. I think the problems arose out of the administrative preparation for this, which was not properly managed.”

While the Es Tiempo de Volver programme may have faced challenges, the goal that led to its creation remains tied to a market need. Authorities have stated that the programme will be kept in place and improved. “The truth is that a lot of Colombian researchers abroad want to return. Companies here want to create an internal environment to innovate, so it is just a question of structuring the right incentives and conditions,” Mora told OBG.

Entrepreneurship

Combined with improvements in the country’s economy and the availability of financing for innovation, Colombia has progressed quickly in terms of its entrepreneurship environment. A 2014 report by the Inter-American Development Bank, titled “Index of Systemic Conditions for Dynamic Entrepreneurship: A Tool for Action in Latin America”, evaluated the conditions for entrepreneurship in Latin America and ranked Colombia first in the region for the quality of human resources in developing new ventures and fifth for entrepreneurial culture.

Such new found dynamism, like elsewhere in the world, can conflict with more traditional business culture, based on predictable economic returns and a high degree of risk-aversion. However, in Colombia the environment has been positively influenced by private equity firms injecting financial resources into start-ups. According to a September 2015 report from the Colombian Association of Private Equity Funds and consultancy E&Y, between 2005 and 2014 private equity funds invested $1.2bn to support the development of new businesses in Colombia.

An increasing number of investor networks are also pairing potential investors with entrepreneurs looking for capital to kick-start their businesses. Beer manufacturer Bavaria, a subsidiary of SAB-Miller, established the country’s largest network for entrepreneurship in 2010, linking angel investors and entrepreneurs. The initiative also offers training programmes, boasts a network of 140 businesses and as of January 2016 had channelled capital to support 380 new projects since its inception.

Support Instruments

Several private and public programmes are also available for entrepreneurs and SMEs wanting to expand. Innpulsa runs co-financed grants catering to Colombian firms focused on innovation. To make lending to innovative companies more attractive for financial institutions, Innpulsa is establishing a multi-step programme under which Innpulsa will grant up to $50,000 in a 50:50 scheme with two banks in Colombia for the development of financing products for high-potential start-up companies.

Once the relevant financial products have been developed, Innpulsa will establish guarantees of up to 70% of the financing allocated to eligible companies. “This will help banks move away from their normal credit evaluation of micro, small, medium or big companies, and allow them to develop a new banking segment,” Escobar told OBG.

In March 2015 Colciencias announced its plan to invest in 5000 Colombian firms over the coming four years. The goal is to incentivise innovation through increased support for companies that develop internal innovation programmes, as well as provide assistance in drafting innovation proposals to access additional funds. Based on a partnership between Colciencias and the Colombian Confederation of Chambers of Commerce (Confederación Colombiana de Cámaras de Comercio, Confecámaras), the programme plans to reach 1250 firms every year and has a budget of COP14bn ($5.2m). Around COP10bn ($3.7m) will come from Colciencias, while the remaining COP4bn ($1.5m) will be provided by Confecámaras’ coffers.

Patent Call

Linked to the country’s low level of innovation is the small number of domestic patent requests filed each year. An average of five to six patent requests per 1m inhabitants are issued in Colombia every year, compared to 21 in Chile, 60 in Spain, 600 in Japan and 700 in the US, according to figures from the Superintendence for Industry and Commerce (Superintendencia de Industria y Comercio, SIC). More informative, however, is the low number of patent requests by Colombian nationals, which represented just 271 of the 2363 patent requests filed with SIC in 2014, with the rest filed by foreign individuals or companies resident in Colombia.

Authorities aim to expand the number of annual patent requests by Colombian. In addition to its patent office in Bogotá, SIC is creating Technology and Innovation Support Centres across the country, with the aim of increasing awareness about the patent process, as well as educating firms on integrating a patent into a business strategy and accessing worldwide patent databases for a particular sector. Despite the relatively low level of patents, the quality of applications is improving. According to SIC estimates, between 2010 and 2014 six out of 10 patent requests in Colombia received a positive response, as opposed to only two out of 10 between 2000 and 2009.

Outlook

Given the country’s current budget constraints, increasing Colombia’s expenditure on STI activities will be challenging. That said, an underlying part of the current government’s strategy is to raise the amount of investment coming from the private sector. This will be key not only to improving overall expenditure levels, but also to ensuring that output from research and innovation practices can be better translated into marketable products and ideas.