Mexico has long recognised the importance of research and innovation to the development of a strong and sustainable economy. To date, however, the goal of boosting research and development (R&D) spending to 1% of GDP has remained somewhat distant, with public spending across a variety of programmes having an only limited effect on encouraging the development of new technologies and innovative companies. Facing lower budgets in 2017, the government will be more selective in the projects it sponsors and is looking to incentivise further private investment in R&D. Improvements to the intellectual property framework are set to give foreigner investors additional confidence in this area.
History
Like many Latin American countries, the Mexican economy has historically focused on a strong natural resources sector – mainly oil and metals. The signing of the North American Free Trade Agreement in 1994 led to rapid expansion of the manufacturing industry, first in the north and then spreading across the country. With abundant natural resources, cheap labour and a relatively protectionist economic policy, there was little necessity to invest in R&D.
In 1960 the government’s first step towards developing local science skills was made with the creation of the Institute for Scientific Research (Instituto de Investigación Científica, IIC), which provided scholarships for undergraduate and postgraduate scientific research. In 1970, as the Mexican tertiary education system expanded and developed, the IIC was replaced by the National Council for Science and Technology (Consejo Nacional de Ciencia y Tecnología, CONACYT). The new body provided research grants and became a central pillar of the state’s science and innovation strategy, controlling around 40% of the country’s total science and technology budget today.
Between 1989 and 1994 the council’s budget more than tripled as the government focused on increasing Mexico’s capacity for scientific research. As a result, only 2% of funds were spent on technology development during that period. In the 1990s a new push to further enhance technological innovation began with the creation of the R&D Technological Innovation Trust Fund, a body that provided long-term financing for pre-commercial technologies. A number of complementary agencies and initiatives were also created to support technology incubators and private research centres. However, by the turn of the century, business contributions to R&D stood at just 20% of the total, compared to 40% in Brazil and 70% in South Korea. Very little was spent on experimental development, and few patents were filed by Mexicans.
New Push
In 2002 congress passed the Science and Technology Act, providing CONACYT with new autonomy by removing it from its position within the Ministry of Education and having it report directly to the president. The goal of increasing sector spending to 1% of GDP by the end of 2006 was agreed upon at that time, and new funding sources were introduced to focus on strategic sectors and match CONACYT contributions with those of federal agencies and individual states. However, the impact of these initiatives was limited due to relatively modest funding increases, a lack of institutional capacity, and weak planning and implementation. By 2015 Mexico was spending 0.55% of GDP on R&D, according to World Bank figures – up slightly from 0.54% in 2004. That year the incoming president, Enrique Peña Nieto, rapidly moved to establish the National Entrepreneur’s Institute (Instituto Nacional del Emprendedor, INADEM), designed to provide financing to the country’s start-up firms.
In July 2014 the government approved a Special Programme for Science, Technology and Innovation that set out some key quantitative objectives to be met by the end of the presidential term. First, it reiterated the goal of ensuring 1% of GDP reaches R&D teams, while specifying that contributions from the private sector should increase from 35.8% in 2013 to 40% by 2018. Second, the government aims to increase the number of researchers per 1000 employees from 0.94 to 1.20, and the number of scientific papers per 1m inhabitants from 94.4 to 115. Lastly, the proportion of enterprises with innovation activities should increase from 8.2% to 20% by 2018.
Performance
On a regional basis, Mexico performs relatively well. In the Global Innovation Index 2016 report from the World Intellectual Property Organisation (WIPO), the country ranks third behind Chile and Costa Rica in Latin America and the Caribbean. Its global ranking is 61st out of 128 countries, up from 83rd two years prior. Breaking down the index’s results, Mexico scored higher than its overall score in the strength of human capital and research (53rd) and market sophistication (51st), but lower in terms of the institutions (65th) and infrastructure (67th) required to foster innovation. In the Global Competitiveness Index 2016-17 report from the World Economic Forum (WEF), Mexico ranked 67th out of 138 countries for capacity for innovation, 44th for the quality of its scientific institutions, 76th for company spending on R&D and 60th for patent applications.
Science
Mexico has multiple scientific institutions that are primarily focused around state universities and public research centres. There are currently 95 public universities in the country with R&D capabilities and the largest, the National Autonomous University of Mexico (Universidad Nacional Autónoma de Mexico, UNAM), owns 17 research centres. In January 2017 it was announced that UNAM would provide academic resources for a new research centre focused on studying the ageing process to be built by the Ministry of Science and Technology. For its part, CONACYT oversees a total of 27 investigation centres spread out across the country and focused on different areas of scientific study: pure and natural sciences (10 centres), social sciences and humanities (8), and technological development (8), as well as one specialised centre in financing post-graduate studies.
In January 2017 CONACYT opened a new research centre in the town of Texcoco following a MXN100m ($6m) investment. The new centre will focus on agricultural and forestry research; only 5% of the country’s R&D funding is currently focused on the food and agriculture industry, according to Enrique Cabrero Medoza, director of CONACYT. “CONACYT’s network of research centres undertake investigation in purely scientific studies in areas such as physics, astronomy and optics, but others focus on social areas such as migration or health,” Teresa de León Zamora, director of technology commercialisation for CONACYT, told OBG. “There are also technology research centres that are aligned to the states’ industrial policy. There are several centres that are important parts of the production chain in areas such as automotive, aerospace and pharmaceuticals, and their capacities are developing all the time.”
Grants & Diaspora
In addition to defining the science and research agenda in Mexico, CONACYT is responsible for awarding grants to Mexican students in science, technology, engineering and mathematics. Such grants typically account for 25% of CONACYT’s budget and can be awarded for graduate study in CONACYT-certified programmes, but also to students wishing to pursue their studies abroad. Previously, recipients of the grant were required to return to Mexico to work following their studies, but no such requirement is currently in place. “There are now large communities of Mexican researchers who have stayed in the US and the UK,” said De León. “This is not necessarily a bad thing. First, there are not always sufficient jobs in Mexico, but more importantly, the Mexican diaspora helps link opportunities.”
Under her department, De León’s team designs bilateral projects where Mexicans work with groups abroad to develop new technologies. Many of the most successful projects are driven by overseas partners who are Mexicans living in the US or the UK; this creates direct opportunities for Mexican researchers. The Innovate UK-CONACYT joint project in 2016 focused on the agri-business, health and energy industries, and kick-started numerous new projects, often with Mexicans working in the UK. CONACYT received far fewer proposals when it tried to launch a similar joint programme with Israel, probably because of the limited Mexican population in the country. However, international cooperation remains a strong pillar of CONACYT’s future strategy. “We have received a lot of support from the international community to help identify the sweet spots in which Mexican R&D can move forward,” De León told OBG.
For those researchers who do choose to stay in Mexico, CONACYT launched two initiatives in 2014 aimed at retaining talent. The first, known as the National System of Researchers, rewards researchers in public and private universities based on productivity. The second programme, Cátedras (“desks” in a literal English translation), created 574 industry positions for young researchers in the public sphere. “The government has not been creating new public sector posts for researchers,” said De León. “CONACYT has been innovative in funding new posts where the researcher remains an employee of CONACYT but can be allocated to new projects or research centres depending on Mexican priorities.”
Budgets
Financing and implementation plans are likely to be impacted in the coming year by recent budget cuts to the sector. In 2017 CONACYT’s budget was decreased by 28% to MXN26.9bn ($1.6bn) from MXN35.1bn ($2.1bn) in 2016. The student grant policy was the least affected. The total volume of loans for 53,000 students enrolling in masters, doctorate and specialisation programmes grew by 3.3% year-on-year. The budgetary cuts are thus forcing CONACYT to be more selective in where it allocates the rest of its funds. “There are huge opportunities in Mexico, but now we need to be very creative in how to make use of the money we have left, but there is a positive aspect to this,” said De León. “We are going to focus on measuring results. In the past we have had successful projects, but we failed to measure results accurately and failed to learn key lessons as a result.”
Picking Winners
Key to this thriftier approach will be a tighter focus on a smaller number of projects. Speaking at the January 2017 inauguration of the Texcoco research centre, CONACYT’s Cabrero told local press that the council could no longer afford to work on small, individual projects, and that greater collaboration was required to identify larger projects with guaranteed potential. In recent years CONACYT adopted the Technology Readiness Levels (TRL) system developed by the US National Aeronautics and Space Administration. The system examines programme concepts and technological capabilities of new innovations, ranking them from one to nine in terms of the maturity of the technology utilised.
Moving forward, CONACYT will devote most of its funding to projects at stage four or higher. “In the past we were funding ideas and very early stage projects, and the rate of error was higher,” De León said. “Now we are looking to stage development from stages four to nine on the TRL, choosing those projects that have a proof of concept and that will have an impact on a specific problem.” One area with a high proportion of stage four and higher development projects, and thus most likely to benefit from this policy change, is the pharmaceutical industry (see analysis). The process of narrowing down the number of project targets is already well under way in the mixed funds the council uses with state governments. From 2012 to 2016 the number of projects financed by the mixed-fund model fell significantly from 481 to 32.
Private Sector
CONACYT’s reach extends to the private sector through its Technological Innovation Fund (Fundo de Innovación Tecnológica, FIT) which aims to invest in small and medium-sized companies developing new technologies in order to share the risk and speed up development efforts. A 2012 study showed that while only 11.27% of companies surveyed developed their own technology, 86% of those were micro-, small or medium-sized businesses. Between 2007 and 2014 the FIT dispersed MXN1.8bn ($108.5m) to 669 initiatives in the telecoms, agro-industrial, petrochemicals and automotive sectors.
A further CONACYT initiative, the Innovation Stimulus Programme, is open to companies of all sizes with plans to develop new technologies. Funding ranges from 40% to 70%, with higher proportions assigned if the proposal includes work with a local research institute. “Increased activity in the industry should be matched by increased investment from key players. Although advanced, Mexico is still a developing country and there is not sufficient capital to invest on a large scale across the board. However, certain government institutions such as CONACYT have a key role in allowing companies in the sector to build research, innovation and internal capacity over the long term,” Efren Ocampo, CEO of the pharmaceuticals manufacturer Neolfarma, told OBG. VW, Unilever and Grupo Bimbo have benefitted from the programme as well as many smaller companies. “There is no restriction in the size of company or the sectors they work in,” De León told OBG. “It has been a very successful project, especially in linking the private and public sectors, and in impacting private investment in R&D.”
Projects
Following its liberalisation from government regulation and the welcoming of private players, the Mexican energy industry seems to be a likely target for future R&D spending. Petróleos Mexicanos is regularly the Mexican entity that files the most patents on an annual basis. This process is likely to accelerate given that the promotion of technology transfer from foreign oil firms to local operators is one of the principal objectives of the energy reform.
In terms of renewable sources, Pedro Joaquín Coldwell, the minister of energy, announced in June 2016 that Mexico would quadruple R&D financing in the segment to $310m over the coming five years as part of the country’s commitments made at the COP21 UN Conference on Climate Change in Paris in 2015. The funds will be channelled to five centres focused on geothermal, solar, wind, bio-energy and wave power, as well as smart grids and carbon capture. In November 2016 a research project to identify new sources of geothermal energy in Mexico was kicked off with €20m, jointly funded by the EU, CONACYT and Mexico’s Sustainable Energy Fund.
Outside of the energy sector, 2016 also saw significant private sector investment from US companies Coca-Cola and Honeywell. The former chose Mexico City as the location for its sixth global R&D centre. The new facility employs 100 Coca-Cola associates in innovation projects focused on new ingredients, beverages, sweeteners, sustainable packaging and eco-friendly cooler technologies for the Latin America region and beyond. “From this centre, we will work to bring new products and formulas that respond to the changing needs of Mexican consumers and consumers across Latin America … through reformulation and portfolio innovation,” James Quincey, president and COO of The Coca-Cola Company, told local press at the September opening.
Honeywell’s R&D centre, also in Mexico City, will focus on innovation in the automotive and aerospace sectors. The firm has been present in Mexico for over 70 years, with additional offices based in the states of Baja California, Chihuahua, Nuevo León and San Luis Potosí. The decision to establish another centre in Mexico was seen as a vote of confidence in the country’s technological workforce.
Start-Up
With strong cultural and educational ties to the US and other Latin American markets, many young Mexicans are tech-savvy and well versed in the start-up business environment. One option for these budding companies is to source financing from INADEM, the institute that aims to provide funds through its National Entrepreneurship Fund in addition to managerial training. The institute also re-defined the role of the business incubator in Mexico by initiating tougher, more selective grant allocation systems. In 2016 the institute overhauled its online platform but, with funding cut by 45% between 2016 and 2017, there will only be 14 calls for proposals in 2017 compared to 16 in the previous year.
However, a recent flood of international private venture capital has more than made up for the funding shortfall. In January 2017 one such firm, US-based Village Capital, hosted an event in Mexico City to showcase local start-ups focused on the health industry. “In Mexico, there are enormous opportunities for start-up firms, given the major flaws in the Mexican system,” Amanda Jacobson, Manager of Latin America for Village Capital, told OBG. “We see particular opportunities in the financial technology segment, where 61% of the Mexican population remains without a bank account, opening options for innovative solutions in areas like payments, lending and savings; and also in the health segment, where the high level of bureaucracy offers many opportunities to provide more efficient, effective and affordable services. In the coming years we are also exploring funding start-ups that are working to solve problems in areas like education, agriculture and energy.”
Intellectual Property
Preparing for future collaboration between the private and public sectors on research projects has been improved by significant reform to Mexican intellectual property legislation. In the past, public researchers were precluded from benefitting financially from their inventions and patents. “Researchers becoming involved with new companies is still somewhat frowned upon in Mexico,” De León told OBG. “The assumption is that they are seeking private benefit from public sources. This has been an enormous barrier to the scientific community becoming involved with private industry.” In December 2015 the law was changed to address this and explicitly allowed researchers to found companies as part of a wider reform of the intellectual property framework.
The approximate number of patent applications filed in Mexico fluctuates from 14,000 to 15,000 per year, but most are filed by foreign companies operating in the country. All patents are managed by the Mexican Institute for Intellectual Property (Instituto Mexicano de la Propiedad Industrial, IMPI), which, in addition to supervising and managing patent applications, is responsible for enforcing regulation and combatting counterfeiting.
In 2016 a number of new initiatives and changes to the law brought Mexico more in line with international standards. The reforms resulted in toughening rights protection and boosting competition, which should make foreign investors feel more comfortable about investing in Mexican R&D projects.
In August 2016 the country’s first trademark opposition system was introduced: a three-month procedure overseen by IMPI with the goal of reducing the number of costly lawsuits over trademark infringement. In 2017 IMPI will continue moving towards improving digital platforms for electronic filings in order to maximise quality standards and increase the transparency of national procedures in this area.
Outlook
Given the government’s austerity-minded policies for the coming period, and subsequent cuts to CONACYT and INADEM funding, the Mexican R&D and technological innovation segments look set to face a period of slower growth or even stagnation. The target of spending 1% of GDP on R&D by 2018 looks out of reach, and the figure could even drop below its current 0.55% level.
Nevertheless, the belt-tightening process is likely to have positive effects on the efficiency of public R&D spending in the future. The increased focus on advanced-stage projects and closer monitoring of outcomes should lead to more demonstrable results. Furthermore, the encouragement of private sector investment and opportunities that have arisen are already starting to achieve results in the country.
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