Startups in Latin America: A new engine for growth?

Startups in Latin America: A new engine for growth?
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There is an urgent backdrop in Latin America to discuss new avenues for growth at the top of the agenda. Can entrepreneurship and start-ups provide the solution? If so, how and why?

It is no mystery that the startup, entrepreneurial community in Latin America has long endured financial, economic and political hardship. Government spending into infrastructure, research and innovation has been far from ideal in previous decades, plus the remarkable amounts of red tape and bureaucracy made private investment prospects a relatively rudimental reality. On the other hand, the global scenario currently does not offer a positive outlook for countries seeking to overcome their structural frailties in regards to technology transfer and production diversification.

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Within the last few years however, the scenario has improved at an unprecedented rate. The once-immature start-up environment is now evolving through a mixture of new public and private injections of capital, targeted infrastructure projects and savvy entrepreneurship. Indeed, the environment now looks promising and full of potential. Can this effort be capitalized on and translated into sustainable economic growth?

A brief look into the startup scene

The post-2010 regional economic agenda could be called a turning point for startups, particularly because of new government efforts targeted at strengthening the incipient entrepreneurial base of the 90s and 2000s; for instance, spending in R&D for the region increased from 0.63% to 0.74% of GDP between 2009 and 2013. This was a significant progress, yet it was smaller than that of their OECD counterparts, which spend around 2.5%.

Another innovation was the creation of incubators and specialised startup government agencies in countries such as Chile, Colombia, Mexico and Peru. In the case of Mexico, between 2012 and 2015 government spending intensified heavily to promote the culture of entrepreneurship. Amongst other measures, it strengthened the institutional base for startups via easy access to credit, funding tools and other incubator-style measures in the early stages of business growth. Startup Mexico (SUM) and the National Institute for the Entrepreneur (INADEM for its name in Spanish) have pioneered the enhancing of a startup environment that currently includes over 20 Venture Capital funds, plenty of co-working space, and frameworks for shared practices. Mexico indeed aims to become the FinTech hub of Latin America, partially aided by its proximity to the US.

The case of Chile is another success story. Startup Chile, created just six years ago, developed a supporting model that has helped more than 1000 startups from 72 different countries through equity-free financing and a six-month incubation program. Furthermore, its VC investments have reported an impressive 110% growth rate. Chile now boasts an impressive 31 ‘little ponies’, 7 ‘centaurs’ and 1 ‘unicorn’; only shortly behind startup powerhouses such as Singapore. Indeed, it is the private-public concerted effort (mixing a favourable regulatory and macroeconomic environment, a well-educated workforce and continuous investment in knowledge and innovation) that could very well make ‘Chilecon Valley’ the innovation hub of South America.

Similarly, Start-Peru and iNNpulsa Colombia have now introduced supporting policy mechanisms focused particularly on innovative enterprises, through which the start-up environment is currently transitioning from experimentation and scaling-up to consolidation, which also applies for the rest of the region.

Start-ups as an engine for growth: Why, how and who?

An important question – and criticism – that startup policies face is ‘why promote them now?’. In a regional context, where high inequality and poverty force most resources into pressing social issues, the focus has permanently circled around orthodox engines of growth – namely commodity exports, extractive industries and so on – for the benefits to then ‘trickle down’ and ameliorate these issues. This is not to say that inequality and poverty shouldn’t be absolute priorities in the agenda, but rather that this highly sought-after growth could come from a new source, vis-à-vis the middle-income trap.

Fostering a thriving startup environment signifies, first and foremost, fostering structural change. This is because it disrupts traditional production patterns and allows for goods and services diversification. Second, the arising positive externalities – such as those coming from experimentation, learning and knowledge flows – are vessels for further spill over effects. In addition, it creates synergies with new private sector trends (for instance, new forms of FDI, new open business models, etc.), which in turn make relevant government agencies more agile and innovative as well as generate societal benefits through higher employment rates, better public services and so on. By and large, it makes domestic economies more competitive in the global knowledge market; even more so in instances where high-impact solutions incur marginal costs only.

Whilst we are starting to see what a successful Latin American hub could look like – with the right resources in place – there is still plenty of room for improvement. Take for instance the relationship between startup entrepreneurship and social inclusion. Amongst other issues, three dimensions seem to encapsulate the areas to tackle: is the economic, legal, and political environment conducive? Is a startup culture being promoted? Are there enough market opportunities available to grow?

For instance in Bolivia, environment-wise education isn’t sufficiently integrated with technology to be able to foster an economy oriented towards innovation. What’s more, both education and technology are very deficient for the poorest demographic sectors. Opportunity-wise, it possesses one of the region’s lowest GDP per capita and industries marked by little competition. Having said this, its renewed pro-integration, pro-business attitude could signal better prospects in the near future.

Brazil’s Sao Paulo and Rio de Janeiro at the other end of the spectrum offer the best start-up environment, opportunities and culture. With an astonishing $78 million spent every year in local and foreign start-ups, it is definitely the strongest performer. Unfortunately, yet not coincidentally, the same cannot be said for other Brazilian regions that display much higher poverty and inequality rates such as the northern regions, where the environment is both much less developed and conducive.

As mentioned, a policy mix of public and private initiatives has proven to be a successful formula. Relevant stakeholders are: national governments, state and local agencies, the private sector, universities and research institutions, communities and individuals. These actors create dynamics that foster dialogue, knowledge and best-practice sharing. On the one hand, indirect/general measures (such as promoting a tech base, a manufacturing base, soft and hard infrastructure, as well as cluster development) work as a solid foundation for more targeted measures contingent upon the business model in case (such as financing, mentoring, other incubator- and accelerator-style mechanisms and a favourable regulatory framework).
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Source (OECD, 2015) Start-up Latin America: Building an Innovative Future, preliminary report

All in all, the outlook for the region has improved remarkably, albeit for some more than others. Economically and socially, one cannot say that the start-up engine is a pillar for growth — yet. Culture, opportunities, and environment potential need to be further exploited, but prospects are bright.

In terms of future challenges, a pressing objective is finding ways to create synergies and cooperation at the regional-international level, capitalising on the renewed pro-integration spirit across Latin America. How deep and/or broad the interconnection might be will determine the pace at which these hubs become their own “Silicon Valley,” as it were. Another area that needs more emphasis is the bridge between startups and production transformation strategies in a way that reconciles how the former navigates the market (bottom-up approach) with the macro-scale of diversifying an economy through innovation and technology. In this sense, policy tools such as fiscal incentives, agile policy management that aligns with the market will also contribute to the endeavour. Ultimately, it is this strengthening of the highly promising image of Latin America as a global innovation centre that could lead to reinvigorated growth.

About Author

Gabriela Lecaro Calle

Gabriela Lecaro specialises in Latin America, particularly in trade policy, macroeconomic and development issues. She graduated from The University of Manchester with a degree in Economics and Politics. She is currently undertaking the MSc International Public Policy at UCL, where she also serves as advertising manager for the International Public Policy Review. She has worked in various independent consulting and academia projects as well as being an active member of UNA-UK and YPFP London.