A Comparative Disadvantage for Latin American Entrepreneurs

Entrepreneurship in Latin America bears no resemblance to that of other regions: beginning with size—most businesses are micro or small— and ending with motivation—entrepreneurs are what they are more “by necessity” than “by opportunity.” On top of these traits, Latin American entrepreneurs have little appetite for risk and innovation which, together with the limited availability of human capital, makes enterprises less sophisticated and innovative than their European or Asian counterparts. Based on a survey designed to study the entrepreneurial process of dynamic new companies in select Latin American countries (Argentina, Brazil, Chile, Ecuador, El Salvador, Mexico and Peru), and countries in other regions (East Asia and Mediterranean Europe), Kantis, Juan, and Trajtenberg reveal the differences between entrepreneurial initiative in these regions focusing on middle-class entrepreneurs, who account for 55% of the total. Middle-class entrepreneurs in Latin America have fewer resources and skills than their upper-class counterparts who have acquired more business experience at an early stage through their families and university education. Similarly, compared with other regions, middle-class entrepreneurs in Latin America are less exposed to the business world and to the business models to be followed. This lack of exposure results in greater reliance on a support network that is not appropriate for promoting business activities. Access to finance is one of the most important restrictions when setting up a business. The lag from the moment the business idea is conceived until the first business is set up is 4.4 years in Latin America compared with 1.5 years in Korea, 2.4 years in Taiwan and China, and 3.4 years in Italy and Spain. Middle-class entrepreneurs in other regions suffer fewer limitations with respect to financing a start-up than their counterparts in Latin America. Although personal savings remain the main source of financing in all regions of the world, access to external resources is more difficult in Latin America, providing a weaker platform for business creation. In Italy, Spain and Korea, middle-class entrepreneurs use private banks significantly more than in Latin America. Public sector support is also more accessible outside our region. With this limited access to financing, plus high transaction costs and lack of continuing training for entrepreneurs, the region’s business fabric is unable to create dynamic enterprises that contribute to growth, industrial diversification and income mobility. In Latin America, these enterprises tend to base their competitive advantage on product differentiation (56 percent). Lower prices and innovation strategies are much less frequent (27 percent and 38 percent, respectively) but the contrast is more apparent in relation to enterprises in other regions. In Taiwan and Spain, enterprises created by middle-class entrepreneurs tend to be more innovative (70 percent and 54 percent, respectively). Two-thirds (66 percent) of enterprises created by middle-class entrepreneurs in Latin America tend to operate in traditional sectors such as metallurgy, furniture, food and textiles and are less dynamic in exporting and job creation. These findings offer ideas for policies to strengthen the contribution of middle-class entrepreneurial initiative to economic growth and are aimed at improving:

• Education. The processes for developing entrepreneurial skills need to be promoted at all levels of the educational system (from primary and secondary school on up) as a way of overcoming the disadvantages associated with social origins at the start of an entrepreneur’s career. In universities, this means promoting entrepreneurship among students in public institutions, which are those most used by the middle class.
• Technical assistance. An institutional platform for technical assistance can support business projects. This platform would help all entrepreneurs but could be especially useful for counteracting the disadvantages that middle-class entrepreneurs face compared with their counterparts in a higher social class and in other regions.
• Networks. Strategies for developing networks of entrepreneurs can be a tool for overcoming the potential disadvantages faced by middle-class entrepreneurs. Contacts and closer relationships with SME owners and executives of large companies are keys to creating dynamic new enterprises.
• Finance. Access to finance is the key to any effort to provide equal opportunities for the middle-class to start up businesses. Specifically, business capital is needed along with mechanisms to connect this finance to the entrepreneurs who need it.

Francesca Castellani is a lead economist in the Andean Countries Department of the Inter-American Development Bank. Ms. Castellani recently coedited with Eduardo Lora a book on middle class entrepreneurs in Latin America entitled Entrepreneurship in Latin America: A Step up the Social Ladder?.