Latin America: Entrepreneurs' lack of innovation curbs creation of quality jobs

2006 proved to be an important year for start-ups. The launch of Twitter, Facebook open to anyone over 13 and the realization of a lifelong dream for two young Argentinians: Tomás Pando and Francisco Murray.

They may not be household names like Zuckerberg or Dorsey, but they are the face of the region’s undeniable entrepreneurial spirit.  Seven years on, their modern-day reinvention of the gauchos’ traditional footwear - alpargatas - sold a quarter of a million pairs in 2012 and has stores in 23 countries worldwide, from Angola to Venezuela.

Yet, tales of innovation like that of Paez are rare, according to a new World Bank flagship report published today.

A massive 60% of Latin America employees work for businesses with five or fewer employees. Often considered to be a driver of development, entrepreneurship creates jobs and promotes economic growth. But while business creation is high in the region, the resulting companies grow at a much slower rate than similar enterprises in other middle-income regions and companies.

"The landscape of the economy in Latin America is such that firms tend to start small and stay small,” explained De la Torre at the report’s launch event. “There’s nothing bad about being small, per se, but staying small forever is a problem.”

And the reason behind this stunted growth: a chronic shortage of innovation within the region.

This should ring warning bells. Over the past ten years, Latin America has benefited significantly from favorable economic tailwinds, enabling the region to reduce extreme poverty, increase equality and boost 50 million people into the middle class. However, as these tailwinds die, growth has to come from within, and innovation and dynamism are the key if the region is to build upon the social gains of recent years.

Lack of innovation

Latin American firms develop new products less frequently than their counterparts in other developing regions. In fact, in Ecuador, Jamaica, Mexico and Venezuela this rate of product development is less than half than that of Thailand or Macedonia. Consequently, this lack of innovation harms competitivity and slows growth and rebounds on quality job creation - a significant development challenge, especially in Central America.

Possible reasons are four-fold:

• Human capital: Science and technology graduates and engineers are at a premium in Latin America and it’s a scarcity that has a direct effect on innovation. In fact, Scup co-founder Daniel Heise admitted he has been trying to fill ten positions for around a year, but with little success. Closely related to the quality of education, the report recognizes this will be a major challenge for the region.
• Intellectual property: With separate laws governing copyright in every country, ensuring intellectual property rights can be a significant bureaucratic undertaking for the region’s entrepreneurs. The complicated panorama lends less protection to the product creators, deterring much needed investment for new product research and development.
• Risk taking: No-one likes to fail, but in Latin America a deep cultural shame of failure is hindering innovation by dissuading entrepreneurs from taking risks. This is evident as much in individual reticence at a business level as in the low levels of investment in research and development, especially from the private sector.
• Logistics: Modernizing ports, transport, and customs can add a competitive edge to products from the region. Currently, poor public services, communication links and transport infrastructure are adding to the obstacles to boosting production capacity in the region.

Quality job creation

Launching the report in Miami, De la Torre proposed that size isn’t always the best marker for growth potential and quality job creation. In fact, ‘multinational’ firms based in Latin America far less dynamic than their offices outside of Latin America and the region’s ‘multilatina’ companies are also suffering from an innovation deficit.

Instead, it is more helpful to consider businesses, whether they be small, medium or large, in terms of their age. In all cases, younger firms far outshone more established ones in terms of job creation. The key, therefore, is to identify early on which startups have the most potential and the support their growth through start up programs, subsidies, business expansion support programs or policy as necessary.

Entrepreneurs are key actors in turning low productivity around to create quality jobs and lasting economic benefit for the region. Consequently the report recommends establishing an economic environment which enables them to innovate and compete, thereby reducing the grip of monopolies, increasing productivity and diversifying the business environment.

"It is about building an innovative entrepreneurial class in which top-notch firms—firms that export goods, services, and even capital—no longer look tepid in contrast to entrepreneurial superstars elsewhere,” the report concludes.