If Colombia wants to increase productivity in the country, then it needs policies that help high-productivity companies invest in research and development to innovate. According to research conducted by Álvaro Pinzón, a PhD candidate with the Department of Economics, there is a place for government to support innovation by removing barriers to investment in R&D, especially in high-productivity firms.
“The main finding of my paper is that in Colombia’s manufacturing industry, firms are not allocating R&D resources efficiently. There are ways to allocate those resources better, and by doing so, the aggregate productivity in the country and the aggregate output will increase by a huge percentage,” said Pinzón. “We have resources. Why are we not catching up? One answer is allocation. We need to reduce the distortions that prevent that efficient allocation from happening.”
In his job market paper Innovation in the Presence of Distortions, Pinzón examines how the failure to efficiently invest in R&D affects productivity differences between developed and developing countries. The study is focused on Colombia’s manufacturing sector and uses detailed data from firms with more than ten employees. The study finds that market distortions – barriers that impede firms from reaching their efficient size — impact how resources for research and development (R&D) are distributed, which in turn affects productivity and innovation in the sector. Economic distortions in Colombia, compared to developed countries, are marked by large financial frictions and a regulatory framework that restricts competition.
“A characterization of Colombia’s innovation is that it’s not like innovation in the U.S. It’s usually more about imitating what other developing industries are doing,” Pinzón explained. “Only 6% of the firms that innovate are doing something completely new, while the rest are imitating something that was already done by someone else, either internationally or domestically. This type of innovation is not moving the frontier but catching up with it.”
As result of its unique market distortions and innovation culture, Colombia’s manufacturing sector sees unique limits on its potential for growth.
“These distortions are making less productive firms bigger and more productive firms end up being smaller and not reaching their capacity,” Pinzón explained. “Another very important feature in Colombia’s manufacturing is that firms remain in the market even when they are not productive. This is something that we call bad selection. Using this data, I observe that more productive firms are facing stronger distortions, which lead these high-productivity firms to be smaller than their optimal size.”
The inspiration for the study comes from Pinzón’s own background and seeing how the economic systems were not functioning as well as they could.
“I’ve always been interested in studying development, coming from a developing country. I have always observed the gap in living standards. The literature has proven how reallocation is good for the economy. That’s how I became interested in this topic. I thought it was important for Colombia to grow and catch up with the big ones. Why are we not doing that? What’s making this country lag in terms of development?” he said. “It’s definitely because of what I was observing in Colombia and comparing it to what is happening in developed economies. Back then I was not thinking about innovation. I was thinking more about these distortions. I could see how there were some good ideas that people had but couldn’t get access to financial resources to fund these ideas and then make a bigger enterprise from it. While some other big firms were doing the same and not innovating at all, they stayed in the market for so long without doing anything new.”
Pinzón himself has become used to taking on new challenges. After moving to Toronto to start PhD studies in 2019, it didn’t take long for challenges requiring both personal and technological innovation to appear. The challenges of navigating the COVID-19 pandemic continue to influence both his learning and teaching.
“On the good side of that experience, we learned a lot about technological resources that we can use to reach our students and colleagues more effectively than ever before,” he explained. “Now we have surveys during class where students can interact more and send their answers. We know that we can have online office hours that may be more accessible for people who don’t come to the university often or have time restrictions. We know that we can record some lectures or create complementary material, and I think that’s great.”
At the same time, he has noticed that even four years after the pandemic, the students he leads in tutorials still require extra support.
“I feel that attention spans have been affected,” Pinzón said. “People are used to the online setting where they have a lot of things happening at the same time. It’s very common to see in classes how people pull out their phones and start looking at social media. I was used to students being more social before and after class. Now I notice that has been reduced. I feel that fewer people have their group of friends. More people are studying by themselves.”
As a result, Pinzón builds opportunities to socialize and network into his lessons to give undergraduates an opportunity to recover their social skills and learn to collaborate.
“You need social interactions to keep you motivated and losing that did a lot of harm to us all,” he said. “We had to start from zero to build connections, it will take many more years to counter the damage,” he explained. “I feel very passionately about sharing this knowledge, so I spend time preparing classes and like to have a good relationship with students. I always try to be as reachable as possible for them, it’s part of my daily life now.”
His daily life also includes meeting the expectations of those who have training him in the rigours of international development research.
“Alvaro’s research that combines elements from macro development, endogenous growth, and firm dynamics literatures is both original and timely,” said Professor Murat Celik, a member of Pinzón’s supervisory committee. “His work assesses the impact of market distortions on R&D resource allocation, and consequently, aggregate productivity, in the Colombian manufacturing sector. He skillfully combines a novel theoretical model with rich administrative data, which yields important insights on how we should think about the dynamic misallocation of resources, especially in the context of productivity growth.”
Return to the Department of Economics website.
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