There’s little doubt that Latin American and Caribbean people are entrepreneurial. Nearly one in three workers in the region is self-employed or a small employer.
While there is no shortage of regional enterprises, the problem is that most are very small — even after decades of operation, according to “Latin American Entrepreneurs, Many Firms but Little Innovation,” a new World Bank report released Thursday in Miami.
“More than half of employees in Latin America are employed in small firms — and by small firms we mean five employees or less,” said Augusto de la Torre, the World Bank’s chief economist for Latin America and the Caribbean. “In Latin America, we tend to begin small and stay small.”
And these small employers don’t generate enough well-paying jobs, said de la Torre, who unveiled the report at a joint entrepreneurship event with the Wall Street Journal at the Four Seasons Hotel.
Many of the region’s small firms are informal, meaning they operate outside the mainstream economy, don’t pay taxes and aren’t monitored in any way by governments.
The traditional development approach in the region has been to focus on these small firms to help them grow, create jobs and join the formal economy, said de la Torre. But he noted there are many formal firms in Latin America and the Caribbean that are very small, too. Researchers also found that large firms are creating more jobs than the small firms that become formal.
“We thought it would be useful to take another view” in the study, said de la Torre, and rebalance traditional approaches of dealing with small businesses.
The glaring weakness in the entrepreneurial landscape in Latin America and the Caribbean is “the low level of innovation,” according to the report. “Firms in the region suffer from a chronic and substantial innovation gap” relative to similar countries and regions around the world.
The region falls short not only in research and development but also in patent filing, product innovation and management practices, the report found.
It is “newness,” or true entrepreneurship, that can give enterprises an edge, said de la Torre.
Another finding, he said, is that the age of an enterprise matters far more than size when it comes to job creation. Jobs are growing much faster in younger firms — whether they’re small, large or medium.
The “innovation deficit” even extends to the superstars of regional business — the exporters, multilatinas — Latin American companies that do business beyond their borders, and the subsidiaries of multinationals working in Latin America, said de la Torre. Even multinationals in Latin America, he said, are less innovative than their Asian counterparts.
And, the study adds, “The few available indicators suggest that the quality of innovation in [Latin America and the Caribbean] may be as much of an obstacle to firms’ growth and productivity as the quantity.”
Among the reasons the region may be underperforming in innovation: lack of competition, which undermines the incentive to come up with new approaches; low educational achievement; an unfriendly contractual environment; insufficient intellectual property rights, and unwieldy government regulations affecting business.
Daniel Heise, a tech entrepreneur from Brazil who is chief executive of Grupo Direct, doesn’t mince words when he talks about the regulatory environment in Brazil: “Our labor laws are so stupid.”
The government is too involved in who a company can hire or fire, and Brazil’s convoluted tax system also doesn’t encourage innovation, said Heise, a panelist at the entrepreneurship seminar.
When a company grows to about $15 million in revenue, he said, it hits a wall. “We cannot find good managers to run the business, so the founders have to get involved in day-to-day operations and then the innovation stops.”
The dearth of engineers and IT workers in the region is a common complaint.
But Brian Brackeen, chief executive of Kairos, a Miami company that has pioneered a facial-recognition service and will be making a big push into Latin America next year, said his company has alleviated that problem by being based in Miami.
“I can hire Colombian developers for Colombia in Miami; I can hire for Chile right here,” he said, “so being in Miami is great.”
Meanwhile, the World Bank study concluded that more research is necessary to understand the underpinnings of the region’s peculiar combination of many entrepreneurs and little innovation.