Trump’s Nafta Threats Push Mexico to Play Catchup on Innovation

  • With Nafta at risk, Mexican government is trying to foment R&D
  • Country lags behind world in patents, intellectual property

Trump Says He's Still Ready to Pull Out of Nafta

Mexico doesn’t have enough people like Juan Pablo Senosiain, and U.S. President Donald Trump might just be the person to help change that.

Senosiain is an innovator who helped build his family’s laboratory into one of the top five retail prescription drug companies founded in Mexico, with close to 30 patents at home and 50 abroad.

Trump’s threats to quit the North American Free Trade Agreement are giving Mexico an incentive to build more businesses like Senosiain’s that create value through research and design, as it reassesses its dependence on low-wage manufacturing.

Click here for a look at political tensions between Mexico and the U.S.

Mexico’s leaders are trying to do more to sponsor research to stimulate development of intellectual property that can help businesses develop products the world wants. The government in April said it would match 30 percent of new and expanded research and development investments in Mexico and is seeking 375 technology projects to help fund.

“While we don’t have native or original innovation in some fields, we are trying to invest in that area,” Mexico’s Economy Minister Ildefonso Guajardo said in an interview.

Still a Laggard

Compared to other nations engaged in global trade, Mexico is still a laggard in intellectual property development despite its proximity to the U.S. and its private sector’s close relationship with multi-national corporations. While Mexican residents received 172 U.S. patents in 2015, up from 44 in 1994 when Nafta took effect, that’s low compared to countries such as South Korea, where U.S. patent awards surged to 17,924 in 2015 from 943 in 1994, and China, which won 8,116 patents in 2015, up from 48 in 1994.

The patent numbers aren’t just about bragging rights on unique products the rest of the world wants. Technological and research competence correlates with wealth, and helps insulate economies from job migration to even lower wage centers of production or the replacement of those jobs by automation. Countries such as China and South Korea -- and even Germany and Japan after World War II -- have parlayed trade with the U.S. into thriving domestic industries from autos to clothing to smartphones.

Indeed, Trump’s attacks on United Technologies Corp.’s Carrier business for moving jobs to its southern neighbor raise a nagging question: Why was the country manufacturing basic products for a U.S. company and not competing against them?

Some Mexican businesses positioned themselves not as “know-how companies” that would compete head on with American firms, but rather “know-who companies” that parlay connections and influence to cut through Mexico’s thick political bureaucracies and get products to market.

Mexican firms “are very much used to the idea that the big technology inventions get made in Switzerland or New Jersey, and that they will be the local partner of Novartis or Merck,” said Jorge Goldstein, a director and patent lawyer at Sterne, Kessler, Goldstein and Fox in Washington, which focuses on intellectual property.

“Shaking up that model would be very good,” he added, because “there is no incentive for them to develop their own technology.”

Innovation Index

That lack of development shows in Bloomberg’s 2017 Innovation Index, where Mexico fails to rank among the top 50 countries that are assessed on topics including patent activity and research and development, among other benchmarks. That puts it behind Poland, Turkey, Argentina and Morocco. The U.S. is ninth, trailing countries such as South Korea, Germany, Sweden and Japan.

There are multiple ways countries climb the ladder to produce more innovative, value-added products. Investment in universities and education contributes to a skilled workforce, while clear laws on intellectual property foment research. Another big influence is how much the government supports research through incentives or investment in higher-risk projects.

Provisional estimates by the Organization for Economic Cooperation and Development show Mexican businesses, universities, governments and other organizations spent just 0.55 percent of gross domestic product on R&D in 2015, compared with 2.79 percent in the U.S. Mexican President Enrique Pena Nieto has pledged to increase the government’s funding of science to 1 percent of GDP by the end of his term in 2018.

While Mexico has government-sponsored research institutes, there’s pressure for the state to play a larger role. The government “needs to do more to invest in this field,” said the 44-year-old Senosiain. When it came to Nafta, “emphasis was placed on the short term, perhaps, and that’s why we haven’t assigned importance as a country to investment and technological development, innovating and risking capital to work toward doing things differently.”

Successful Companies

Mexico does have some successful research-based companies. Laboratorios Senosiain has invented everything from anti-obesity drugs to antibiotics advertised as gentler on the stomach. The company has about a dozen doctors of medicine among its 1,000-plus workers, where more than half are college graduates.

Another company, Laboratorios Silanes, has developed a treatment for venomous snake bites called Anavip that is scheduled to enter the U.S. market in 2018. The company is also developing drugs for diabetes and scorpion poisoning.

These are just some of the examples of Mexico’s capacity to compete. The country’s intense trading relationship with the U.S., and its proximity to American universities, should give it a distinct advantage.

But Mexico’s market structure stifles competition and stymies innovation, according to Edgardo Buscaglia, a senior research scholar in law and economics at Columbia University in New York. Mexico has a few dominant companies in telecommunications and retail, and its energy companies are state-owned. In the end, Buscaglia said, innovation reflects a policy choice. With Nafta under review, Mexico has a chance to reconsider.

“International experience shows that when private oligopolistic tycoons are created and protected by governments,” then innovation will be “absent or weak,” he said.

Senosiain agrees.

Mexico has exploited its advantages in agriculture, low wages and abundant energy such as oil. But it hasn’t moved on from there, he said.

“It’s easier to exploit low-lying fruit than develop technology,” Senosiain said. Innovation “needs long-term investment, education and a political system” that supports it, he said.

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