Services and innovation for the competitiveness of the Ecuadorian economy

Ecuador is one of the least diversified countries in Latin America and the Caribbean, depending heavily on oil and agriculture. This policy paper examines how services and innovation can play a role in transforming the Ecuadorian economy from one based on natural resources to one based on knowledge and services. The paper assesses the performance of the services sector and its contribution to other sectors. The paper shows that services make a significant contribution to the country's economic growth (albeit below the average for the region). However, the services sector in Ecuador performs poorly in productivity and trade competitiveness. Further, services do not add enough value for export providers and users over time. The deficit in the integration of business services, especially knowledge-intensive business services, is particularly high, affecting the competiveness of all sectors and their value chains. Among the drivers of productivity and competitiveness, innovation is the key quality and differentiation factor (as distinguished from price-related, regulatory, and competition factors). Innovation in Ecuadorian services firms does not significantly affect performance (for example, sales and exports), although innovation in manufacturing does improve the performance of manufacturing firms. Finally, the paper provides some conclusions and meaningful crosscutting policy recommendations for a services-related policy aimed at fostering competitiveness and innovation. Services need action in innovation policy (innovation programs could be better adapted to services innovation specificities), but also in areas such as coordination at the institutional level; internationalization and foreign direct investment; and quality, regulatory, and competition issues affecting the investment climate.