Chile has just taken a bold step to promote innovation that should be copied by all other Latin American countries.
In order to encourage entrepreneurs to start new businesses and not be paralyzed by the fear of failure, it has put into effect a new bankruptcy law that eliminates many of the burdens of insolvency.
It may seem like unexciting news, but in Latin America — where draconian bankruptcy laws often turn business people who file for bankruptcy into economic and social pariahs — the repeal of draconian bankruptcy laws could be a major step to spur innovation and economic development.
Judging from what I learned over the past four years, while I was doing research for a just-published book on innovation in Latin America, ruthless bankruptcy laws are among the biggest obstacles to entrepreneurship and innovation in the region.
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Potential entrepreneurs and investors are often deterred from starting new ventures not only because of the social stigma associated with failure, but because people who face situations of temporary distress and file for bankruptcy cannot go back into business for many years.
A new study from the World Bank and the International Finance Corporation, titled “Doing Business 2015,” contains amazing data on how long it takes for someone who goes bankrupt in Latin America to finalize bankruptcy issues, so as to reorganize their business or start a new one.
While in some of the world’s most innovative countries — such as the United States, Japan, Germany, South Korea and Singapore — it takes an average of between six months and 1.5 years to resolve bankruptcy-related issues, in most Latin American countries it takes between three and 5.3 years, the study shows.
In Argentina, it takes 2.8 years to resolve insolvency problems; in Costa Rica, three years; in Peru, 3.1 years; in Chile, 3.2 years; in Brazil and Venezuela, four years; and in Ecuador, 5.3 years, the World Bank study shows. Some of the few exceptions in the region are Colombia, where it takes 1.7 years, and Mexico and Uruguay, where it takes 1.8 years.
In addition, the court and legal fees for going through an insolvency process in Latin America is higher than in most other parts of the world, the report says.
Rita Ramalho, the lead author of the “Doing Business 2015” report, told me that years of red tape and high legal costs not only inhibit potential entrepreneurs from starting new businesses but also keeps potential investors from bankrolling new companies.
Enacting less punitive bankruptcy laws in cases where there is no fraud would make the system more dynamic. “It’s good to allow a system that allows trial and error, because trial and error are essential to innovation,” she said.
Indeed, most big inventions come after a chain of failures. As Richard Branson, the billionaire Virgin Records founder whose latest Virgin Galactic prototype space tourism rocket crashed Oct.31 in the Mojave desert, told me in an interview last year: “If you don’t fail, you can’t get anything done.”
It has always been like that. Thomas Alva Edison’s biographers say it took him more than 1,000 failed attempts before he perfected his electric bulb. Orville and Wilbur Wright, the pioneers of today’s air travel, are said to have crashed 163 times shortly after takeoff before they made their first successful flight in 1903.
Virtually all innovation gurus I have talked to agree that if these and other innovators lived in countries where failure carries big punishments, they may have never pursued their goals.
Chile’s Economy Minister Luis Felipe Céspedes told me that President Michelle Bachelet plans to move at full speed to implement the new bankruptcy law, which was passed under former President Sebastián Piñera’s government.
“The idea of the new law is not to stigmatize entrepreneurs who go bankrupt, but to allow them to get back on their feet quickly,” he said.
My opinion: Fear of failure — and of the legal consequences thereof — is one of the biggest obstacles to innovation in Latin America, alongside the absence of a culture of admiration for business entrepreneurs and innovators.
When a baby falls while trying to take his first steps, nobody calls it a failure. We all smile and applaud. Likewise, countries should be much more forgiving with those who fail in their attempts to get a business going. They should make their bankruptcy laws more tolerant with non-fraudulent failure, like Chile has just done.