Not enough high potential enterprises are created in Latin America

Summary of an article published in Spanish in Revista Gestión of Ecuador, Dec. 2013

By Luis Fierro Carrión

Latin America suffers from a problem of low productivity: the human and physical capital of the economies of the Region are not used adequately in the production of goods and services.  This phenomenon explains in part why the Region has not achieved more dynamic growth rates since the past century, which in turn has prevented its average income per capita to converge towards the levels observed in more advanced countries.

Among other factors, this low productivity is due to a relatively low level of creation and growth of enterprises of high productive potential.  Even the government of Ecuador has expressed its interest in promoting a “change of the productive matrix” to achieve higher levels of productivity, and, tied to this, higher income per capita.

The relative absence of high-growth companies in the Region is the main topic of the “Economic and Development Report” (RED 2013) of the Andean Development Bank (CAF) this year, with the title "Entrepreneurship in Latin America: From Subsistence to Productive Change" (http://goo.gl/QU9Z0d).

According to the report, what are the main causes of the low level of creation of enterprises with high productive potential in the Region?  

The study asserts that the small size of the companies and their poor growth dynamic is not due to the lack of individuals with entrepreneurial skills: that is, persons with a creative and innovative thought, with managerial skills, focused on results, and able to tolerate risks.

The document postulates the hypothesis that there is an “informality trap”:  “given the lack of employment opportunities in the formal productive sector, an important proportion of the individuals with relatively low entrepreneurial skills decide to open micro and small businesses, that not only generate low and unstable income, but that also prevents them from accumulating labor skills and capacities, which in turn reduces over time their potential to transition towards a formal sector employment”.

In this context, the proliferation of microenterprises becomes an obstacle for the “emergence of transformative new companies, and the expansion of the already existing ones, given that there is not the sufficient skilled labor force that would be needed in case these would grow at an elevated rate.  This situation places the region in a sort of informality and low productivity trap, in which there is no entrepreneurial growth because, among other things, there are no workers with the required skills and this, in turn, occurs because there are few companies that generate labor opportunities that would create disincentives for informal micro-entrepreneurship” (p. 5).

Another factor would be the lack of access to credit, and the absence of companies that can “spill” technological know-how in the different productive sectors.

According to the Report, some tax, credit, labor and social policies would have the effect of “limiting the growth of formal and high productivity enterprises, while incentives are generated for the creation and survival of microenterprises that only provide employment to their founder and perhaps some family members, and that usually have scarce added value”. For example, their high costs of firing workers would inhibit these small enterprises form hiring personnel from outside the family.

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