Nearshore Americas

Breakdown: What LATAM’s Low R&D Numbers Really Tell Us

R&D investment has been identified as a major factor in the success of the tech industry’s innovation ecosystems. With several Latin American cities claiming to be the region’s equivalent of Silicon Valley, one would assume that R&D investment holds an important place in their respective countries’ strategic approach. 

The numbers tell otherwise. Latin American countries spend little on tech innovation, and some of the region’s governments have garnered a reputation for being dismissive or outright hostile to their scientific community.

And yet, the region is constantly heralded as an emerging tech hotspot, with its profile rising as a marketplace for software development, digital transformation services and technological expertise. As a result, capital keeps flowing in. Why is that?

The numbers: Most Latin American countries show very low numbers when it comes to R&D spending as a portion of GDP. 

  • Mexico→0.29%
  • Chile→0.33%
  • Colombia→0.28%
  • Argentina→0.52%

Brazil is one of the few countries in the region with relatively high R&D spending (1.20% of GDP). Even then, it remains considerably below the OECD average (2.71%).  

R&D spending in the US and Canada stands around 3.45% and 1.55% of their GDPs, respectively.

Yes, but…: There’s no shortage of tech companies landing in the region to establish operations or eyeing local firms for a merger/acquisition. Latin America’s tech scene has also garnered a reputation as a major destination for VC investment.

  • Even after a considerable fall compared to 2021, VC investment in the region reached US$7.8 billion in 2022, achieving a record number of deals (1,114).
  • The fintech and ecommerce verticals accounted for the highest portion of both VC investment volumes (43% and 15%, respectively) and the number of deals (29% and 11%).
  • Latin America saw 205 M&A deals in the tech sector as of October 2022, according to data by White & Case.

High hopes: Latin America’s tech services market is expected to grow at a CAGR of 8.7% between 2022 and 2027, according to Technavio estimatesSome of the region’s top tech services providers have also underscored their high hopes for the market, making them public through their financial reports and in conversations with the press

What really matters: While high R&D numbers might be impressive, buyers of IT services tend to focus on matters that are more immediate and practical, like the availability of vendors and skills required by the market.

  • “For many North American companies [shopping for nearshore IT services], the primary question is whether the vendor has the skills, knowledge and know-how to complete the work in a timely fashion. This makes it more a question of experience and education than one of R&D spending,” explained Todd A. Jacobs, Chief Information Technology Officer at audit remediation firm CodeGnome Consulting.
  • “Investment within the tech sector of LATAM remains concentrated on nearshoring style operations,” commented Craig Dempsey, Co-Founder and Managing Director at Biz Latin Hub. “R&D investment within the region is not a pull or a push signal for these companies. What is, is the access to a pool of local tech talent with intermediate to advanced English skills. And frankly, this already exists to a sufficient level that foreign companies will keep on coming for at least a while yet”

On the M&A side, foreign companies have leveraged the growth of Latin American tech firms to break into local markets.

  • “Latin America is home to a number of fast-growing tech companies that continue to be attractive acquisition targets for larger multinationals. Investing in and acquiring local technology businesses has become a preferred method for foreign players to gain a foothold in the region,” Jean-Pierre Trouillot, Partner at KPMG US, told the Financial Times. 

A comparable case: India built itself up into a powerhouse of IT outsourcing, even though it spends around 0.6% of its GDP in R&D.  This was possible thanks to India’s monstruous tech talent pool, lower costs of labor and, lately, a push for more high-quality and innovation-oriented products and services.

A warning: A study by the Indian government warns that poor R&D investment can exacerbate brain drain. The document points to more pressing concerns (hunger, inequality, disease control), coupled with the long-term nature of R&D spending, as a main factor for the lack of innovation investment in India and other developing countries.

NSAM’s Take: While R&D figures are not definitive for the nearshore IT services market, their neglect can hamper Latin America’s global standing in the long-term.

The region already suffers a severe case of brain drain. We’ve documented the ways in which local markets feel the pressures of shopping sprees (of both businesses and talent) from global players. Loss of both potential and expertise have a high cost for Latin American countries, where the educational systems are already under a lot of stress to churn out high volumes of market-ready programmers and engineers.

There are a couple truly global players in the region, and a burgeoning startup scene, but most regional tech firms have little chance of competing with global giants for top and senior talents in a context of hot demand. The result is an ecosystem in which its brightest assets are drawn away by more attractive propositions elsewhere, with the US, Canada and Europe being the prefered destinations.

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Local tech ecosystems know this and have begun to put in the work. Members of Jalisco’s tech cluster, for example, are aware of the perils of growing complacent and are pushing for the sophistication of their executives. 

Potential buyers and investors won’t turn away from Latin America due to poor R&D figures. Yet, if the region has any hopes of elevating its profile even further in the IT services market, standing shoulder to shoulder with the likes of India or even US, it has to step-up its game and become a true innovator.

Cesar Cantu

Cesar is the Managing Editor of Nearshore Americas. He's a journalist based in Mexico City, with experience covering foreign trade policy, agribusiness and the food industry in Mexico and Latin America.

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