Innovation, absorptive capacity and growth heterogeneity: Development paths in Latin America 1970–2010

•An analysis of long-run development paths in Latin America in the period 1970–2010.•An extension of Verspagen's (1991) model of growth and catching up.•An application of Johansen cointegration approach to time series data for 18 countries.•Latin American countries have adopted substantially different policy strategies.•Countries combining imitation and innovation policy have had a better growth performance.

The paper carries out an analysis of long-run development paths in Latin America in the period 1970–2010. We focus on three main dimensions—openness, industrial structure and innovation—and analyze how changes in these factors, and the specific combination of them adopted by each country, have affected its income per capita growth. We apply Johansen cointegration approach to time series data for 18 Latin American countries. The analysis leads to two main results. First, we show that Latin American countries have followed different growth trajectories depending on the combination of policies they have adopted to catch up. Secondly, we find a clear correspondence between policy strategies, on the one hand, and growth performance, on the other. Countries that have managed to combine imitation and innovation policy have experienced a higher rate of growth than those economies that have only made efforts to improve their imitation capability.