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Reprinted from Diplomatic Courier: A Global Affairs Magazine. Original article here.
By Oscar Montealegre
El Boom, as Latin Americans coin their sensational economic renaissance of the last decade or so, has been triggered by mainly commodities exports such as oil and copper to Europe, the U.S., and of course, commodity-hungry China. However, the region cannot wholly depend on their raw materials to sustain a vibrant economy for the long-term; Latin American leaders and politicians need to be cognizant that alternative courses of action need to be implemented to remain viable and diverse in the global economy. Enter entrepreneurship.
Entrepreneurship and the successful creation of enterprises is the catalyst of spreading wealth, upward social mobility, job creation, technological innovation, and improvement of living standards. There is one caveat that is attached with pursuing an entrepreneurial endeavor: the willingness to take risks. Therein lies one of many Latin American obstacles when implementing an entrepreneurial environment. Risk taking in Latin America is shunned; Latin Americans opt to seek safer routes in their careers, either in large corporations or government work, instead of taking calculated risks in the market.
Colombia’s former finance secretary, Rudolph Hommes, pinpointed the situation as such: “[Latin American countries] lack the entrepreneurial spirit that is the lifeblood of the American economy…citizens often value a steady job above the risks and rewards of owning a business.” The sentiment characterized by Mr. Rudolph Hommes is correct, but, albeit sluggishly, the Latin American psyche is changing for the better.
Entrepreneurship in Latin America is being embraced with an unprecedented fervor, from technological clusters in Brazil, to venture capitalists in Colombia, and top-down start-up programs in Chile.
In Recife, Brazil, Porto Digital harnesses the entrepreneurship drive through a technological and innovation cluster. The novelty behind Porto Digital is that it acts as a technological urban park, home to 200 businesses in the fields of gaming, cinema, video, multimedia, animation, music, and design. In 2010, Porto Digital businesses generated approximately $500 million in revenues, impressively bringing 70 percent from contracts outside of Recife. As businesses transcend borders in the digital age, market share in the global economic pie grows.
ICare Games, a development company based out of Porto Digital, specializes in games that promote social responsibility. One of their games revolves around safe driving and managing one’s behavior during stressful auto traffic. It is a niche-tailored business, but with social responsibility always being a headline in many sectors, ICare Games can market their services to schools, corporations, government agencies, and non-profits. Also ICare Games’ target market is threefold—Spanish, English, and Portuguese speaker countries, giving ICare a comparative advantage. ICare’s Sales Manager, Edmilson Rodrigues, said that there are many companies in Brazil that share the same drive, “The entrepreneurial environment here [Porto Digital] is boiling with new entrepreneurs and ideas.”
The same is happening in Colombia—one can sense the entrepreneurial buzz that is being enthused. Colombia is fertile ground for entrepreneurs due to a loosening of credit, rising consumer confidence, and most importantly, an instinct to survive under horrendous circumstances, i.e., the drug war, narco-guerilla insurrection, and paramilitary violence from the past decades. In Colombia, entrepreneurship is being stimulated by both top-down and bottom-up strategies. A bottom-up example is Endeavor Global, which has so far helped Colombian entrepreneurs create more than 6,000 jobs.
Endeavor Global’s raison d’être is to support high-impact entrepreneurs in emerging markets, such as Uruguay, Egypt, Indonesia, and South Africa. “High-impact entrepreneurs” see opportunities in these markets that have the potential to translate into large growth and long-term sustainability. In Colombia, Endeavor’s multi-tiered focus is to support entrepreneurs in breaking down barriers, thinking big, and demonstrating that Colombia’s high impact entrepreneurs are world class. Currently, Endeavor is in collaboration with twenty-seven entrepreneurs in further developing 18 business ventures.
Now herein lies the interesting fact about entrepreneurship about in Latin America; subtly, entrepreneurship has always been widely practiced. According to a study conducted by Cristian Larroulet and Juan Pablo Couyoumdjian, Latin America has the second-highest rates of entrepreneurship in the world. From 2000 to 2007, 18 percent of Latin Americans were involved in some type of entrepreneurial venture. A paradox indeed; but as the study further states, the difference between entrepreneurship in Latin America versus the U.S. or Europe is that a considerable size of Latin American entrepreneurship is based on necessity rather than opportunity. Entrepreneurship based on necessity tends not to go far, as it is pursued primarily because of the lack of opportunities—making the best of a bad situation.
Obviously, entrepreneurship moved by opportunity is the ideal situation. However, a multitude of challenges in Latin America exist that prevent entrepreneurship from reaching total optimization—the cost of failure (cultural), lack of role models or mentors, the lack of contracts and enforcement (rule of law), limited management experience (educational opportunities), limited access to financing (economic), and lack of trust. Fragile property rights, excessive regulation, high taxes—the list of challenges that impede entrepreneurial development goes on and on. On the bright side, Latin America is no longer dealing with entrepreneurship killers, such as monetary instability and shortages of the most basic items, an achievement that cannot be understated.
The political and regulatory climate in Latin America does not do any favors for new enterprises. No Latin American country is in the top 30 of the World Bank Group’s ranking of countries where it is easy to do business. Chile is the highest ranked Latin American nation (39), followed by Peru (41) and Colombia (42). It is no coincidence that these three countries are also aggressively pursuing open trade and growth, typified by the integration of all three respective stock markets (MILA), while Mercosur (Brazil, Uruguay, Argentina, Paraguay) are occupied in allowing Venezuela join their economic and political trade group. The logic behind Venezuela’s inclusion is uncertain, but it appears the trade bloc has become more political than economical.
According to a 2010 Gallup Poll, Latin Americans are the most likely to see government as a liability rather than as an asset when starting a business. Also, when asked if they can trust the government to allow their business to make a lot of money, 34 percent of Latin American respondents said yes, while 50 percent said no, once again the highest mark in a poll of the world’s regions. Of course we should not be too surprised about the results of this poll; the bureaucracy and red tape in Brazil is touted as a nightmarish labyrinth and Argentina’s President Fernandez de Kirchner is doing everything in her power to stifle entrepreneurship.
Entrepreneurs in Latin America, compared to their peers in the U.S., have limited access to capital. In most cases, Latin American entrepreneurs, faced with a scarcity of bank loans, lines of credit, venture capitalists, and private investors, begin to search for capital and outside investors through family and friends. According to the South American Business Forum, 80 percent of entrepreneurs surveyed use personal or family savings as a source of initial funding; less than 40 percemt had access to banks for startup loans; and less than 5 percent relied on venture capital or private investors.
The notion of good debt versus bad debt is not a fully mature idea in Latin America. Being liable for a debt obligation combined with the possibility of a failed business endeavor can be too daunting for many. However, there are some bright spots. From 2009 to 2010, funding for private equity and venture capital in Latin America more than doubled, reaching $8.1 billion. According to the Latin American Venture Capital Association, technology deals funded in the first half of 2011 increased by 133 percent compared to the previous year. Gradually, access to much needed capital is improving for Latin American entrepreneurs, reflecting a stable macro-business environment.
Compared to other regions, Latin America possesses concrete promise in achieving further economic growth. Collectively, the economies of Latin America boast a GDP of $5 trillion—impressive, but it pales beside the U.S.’ GDP of approximately $15 billion. This comparison can give Latin Americans incentive to achieve more progress, but politics and business must be in relative unison.
Luis Alberto Moreno, President of the Inter-American Development Bank, wrote in his book, The Latin American Decade, “The new generation of businessmen [in Latin America] is not only more educated and less dependent on the state, but also more connected to the world…” Latin America faces an incredible opportunity to diversify economies and avoid the web of the Dutch Disease. It can be accomplished in many ways, but one variable cannot be omitted—the spirit of the entrepreneur.
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