By Hasan Tuluy
Creative entrepreneurs are not byproducts of development. They are job creators and critical drivers of it. For Latin America, where productivity growth has remained lacklustre even during the recent commodity boom, encouraging the rise of a dynamic entrepreneur is essential to sustain and expand the economic and social gains achieved in the past decade.
The good news is that Latin America and the Caribbean is a region of entrepreneurs. Indeed, the share of entrepreneurs, employers, and formal businesses is larger than other regions at similar income levels. Nearly one of every three workers in Latin America is self-employed or a small employer and, contrary to popular belief, the share of formally registered firms is also comparably large.
But not all entrepreneurs are created equal. According to a new World Bank report, “Latin American Entrepreneurs: Many Firms but Little Innovation,” the fact that there are so many small firms may be in fact a symptom of an unhealthy imbalance — not enough quality jobs are created by “transformational” entrepreneurs.
In Latin America, few entrepreneurs ever hire workers. They remain very small even after decades of operation. Firms with 40 or more years in business employ about 110 employees in the region, whereas in East Asia they employ close to 170, in Eastern Europe around 220, and in high-income countries, 250.
Successful entrepreneurs are individuals who transform ideas into profitable commercial enterprises — a process that requires a capacity to innovate, to introduce new products, and to explore new markets.
In Latin America quality job creation is largely done by transformational entrepreneurs but with much less vigour than elsewhere. In order to thrive, these entrepreneurs require favourable economic and institutional environments that enhance the expected returns of their innovative ideas. Unfortunately, Latin America’s business reality is fraught by low innovation.
With the exception of Brazil, which invests 1 per cent of GDP in Research and Development (R&D), on average the region invests much less (below 0.5 per cent), which is one third the level of China and only one fourth the level of high income countries. Also, Latin American formal firms introduce new products less frequently than firms in other developing regions.
It should come as no surprise then that the region is behind others when it comes to patents. In Bolivia, Honduras, El Salvador, Guatemala, Paraguay and Peru, the number of patents granted by the United States Patent and Trademark Office per one million people is less than one, much lower than it should be for their level of development.
New World Bank sponsored research on management practices finds that firms that employ 100 people or more don’t use the most updated performance based talent management systems.
The survey data also reveal that the proportion of family-owned firms (which, on average, tend to be less well managed than publicly traded companies) is almost twice as large in Latin America as in the United States.
The number of companies that enter into the export market is also very low. Even in the region’s big exporters such as Chile, Colombia or Mexico, firms choose to export far less frequently than those in countries such as Bangladesh, Pakistan, or Tanzania.
Perhaps more surprising is that even Latin America’s largest firms suffer from this dearth of innovation. Multilatinas from the manufacturing sector invest on average a mere $0.06 per $1,000 of revenue on research and development. Meanwhile, multinationals invest $2 per $1,000 in China and $2.6 per $1,000 in high income countries. Even affiliates of foreign multinational corporations in Latin America and the Caribbean tend to be less innovative.
In recent years, Latin American policy has focused on assisting small and medium size enterprises. But such efforts need to be also directed at new firms. It is the young firms that tend to grow. Strengthening human capital, encouraging competition, and improving intellectual property rights can also help tip the scale. Fortunately there are some promising developments. Export promotion agencies are boosting export companies in several countries while scientific advances have positively transformed agriculture in others.
Today, policy makers in the region are far more able to focus efforts and resources to spur growth. After years of addressing macro-financial weaknesses, they can now focus on building the foundations for productivity growth.
Transformational entrepreneurs will be central to that effort and while there is no set ideal for how many a society needs, the fact is that Latin America’s future will depend on having many more.
Hasan Tuluy is Vice President for Latin America and the Caribbean at the World Bank
