Breaking Down the Six Barriers to Innovation
A lack of trained talent and an absence of financing are the main obstacles to realizing innovation potential in developing countries
Most firms want to be innovative to stay one step ahead. Although innovation materializes in new products or processes, its greatest benefit is the creation of value in the long term for the company. However, this is not an easy task. Many companies heavily invest resources in becoming more innovative, but without obtaining clear results. Barriers to innovation are the main reason for this.
Identifying these barriers and their effects on innovation was the objective of a paper I recently published together with my colleagues Mónica Castañeda (Pontificia Universidad Católica de Valparaíso) and Milton M. Herrera (Universidad Militar Nueva Granada). The study focuses on manufacturing companies in Colombia, but the conclusions also apply to other firms that operate in developing countries, particularly in the Latin American context.
Barriers that discourage innovation
There are multiple studies on the obstacles to innovation, most importantly market structure, knowledge- and information-based constraints, and economic resources. In our research we identified, within these categories, six barriers that have a bearing on Latin American organizations:
Market barriers
- Demand uncertainty
- Product imitation
Knowledge barriers
- Unqualified human capital
Financial barriers
- Absence of public financing
- Lack of internal financing
- External financing constraints
How do these barriers affect the probability of innovation in the long term?
Innovation generation involves a significant effort for organizations in terms of costs, risks, and uncertainty in a constantly evolving business environment. Firms must make several decisions and design a strategy to achieve their innovation objectives, thereby increasing their competitiveness. However, since barriers to innovation can affect decision-making in the long run, it is important to take a systemic perspective to identify opportunities for improvement in the innovation process. This methodology was implemented in our study by means of a computational model.
Our study differentiates between product innovation and process innovation. The main results obtained are as follows:
Investment in I+D (innovation and development) and human capital
- A slight increase in I+D investment from external sources raises both product and process innovation.
- Investment in I+D is important, but it must also consider knowledge barriers.
- The increase in product innovation is mainly due to investments in I+D, which comprise more human investments than physical investments (machines).
- Process innovation carried out by human resources is greater than innovation originating from investment in I+D.
- The increase in human resources engaged in innovation explains the good performance of both process and product innovation.
Barriers to process innovation
- Process innovation is usually greater than product innovation.
- For process innovation, the most important barriers are internal financing and human resources. In fact, low internal financing places company survival at risk.
- Demand uncertainty also affects process innovation, since companies have greater difficulties in capturing market share or obtaining external financing.
Barriers to product innovation
- One of the main obstacles to product innovation is the lack of trained or qualified personnel. Employee skills have a fundamental influence on product innovation.
- In both cases, public financing is far scarcer than private and external financing. As shown in the case of China, government subsidies have succeeded in promoting technological innovation.
Given these results, prioritizing investments in I+D is a matter of urgency for governments if they hope to reduce barriers to financing. External financing is also extremely relevant, since it directly affects the number of process and product innovations. However, the most outstanding factor when it comes to promoting innovation is human resources. Alleviating the barrier posed by the lack of qualified or trained personnel is key to increasing the number of innovations overall.
The author is professor of the Department of Finance and Business Economics at EGADE Business School.
