Creating an Ecosystem of Innovation in Latin America

 

The last few years have not been kind to Latin America, economically speaking. And that is an understatement. The region has experienced two consecutive years of negative growth (-0.1% and -0.5%). 2017 will bring a slight improvement only.

Recognizably, the main culprits in the projected contraction are Argentina, Brazil, Ecuador and Venezuela–accounting for 50% of the region’s GDP. As for foreign direct investment (FDI), inflows reached $171.84 billion in 2015, down almost 12 percent from the $195 billion in 2014. This contrasts with a 36% increase in FDI around the world. Add to the mix a continuing depression in commodity prices (slowdown in China), corruption scandals, high interest rates, and urban crime and violence, and the forecast is gloomy overall.

However, among the storm clouds that will continue to hover over the economies of the region, there are indeed a number of pockets of sunshine—the brightest being the rapid proliferation of start-ups, both tech- and non-tech based, and the pace of innovation throughout the Hemisphere. Last year, start-ups in Latin American ballooned to 1,333 and accelerators to 62, with investment approaching $32 million. Chile leads the way, with 3 times the investment of Brazil. In terms of numbers of start-ups, Chile had 442, Mexico, and Brazil 297.

While start-ups pop up serendipitously, it takes the formation of an “ecosystem” to fuel the growth, interaction, and dynamism necessary to foster and expand innovation. Ecosystems of innovation, as referred to here, are communities of interacting parties–business, government, academe and non-profit organizations. They can be national and subnational (Chile, Uruguay, Costa Rica) or can be found in clusters (aerospace in Querétero, Mexico; IT in Campinas, Brazil; sugar cane, Valle de Cauca, Colombia). As Ricardo Ernst and I point out in our new book Innovation in Emerging Markets, an ecosystem’s drivers are innovation are national policies, facilitating institutions (such as Colombia’s Colciencias), and firm-level innovation. We find also that facilitating institutions, themselves, can have far greater impact than government or individual firms. Examples include Techstars, 500 Startups, Endeavor, Wayra, and NXTP Labs.

Just what are the key ingredients that comprise a successful ecosystem of innovation? Any research-based assessment and extensive conversations with entrepreneurs, other business professionals, and government officials would most likely agree that the list encompasses:

  1. Large pool of skilled talent
  2. Installed and diffuse technological base (e.g., broadband networks)
  3. Dedicated infrastructure of research universities, labs and entrepreneurship instruction
  4. Ample funding (angel investment, venture capital, convertible debt, microfinance, crowdfunding)
  5. Networks and collaboration among financiers, entrepreneurs, scientists, technologists, and designers
  6. An environment that nurtures, supports and sustains creativity
  7. Mechanisms for the fast transfer of knowledge
  8. Strong intellectual property laws and surety of enforcement
  9. Pro-market economic, tax and regulatory policies
  10. Well-functioning administrative, legal and judicial systems
  11. Federal, state and local industrial policies—especially those targeted at “clusters”

Although Latin American ranks low on the 2015 Global Innovation Index–Chile is #1 in Latin American but #42 overall–it is the second most entrepreneurial region in the world, according to the World Bank. Its Internet and mobile density is higher than the world average.

Although covered only minimally in the North American and European media, every nation in Latin America–and the Caribbeaan–is home to start-up activities. To illustrate, Dev.F (Mexico) brings software development techniques to that nation; Platzi (Colombia) provides an online learning platform for IT and programming courses; HubUnitec (Honduras), Impact Hub (Guatemala), and Atom House (Colombia) provide co-working and meeting spaces for young techies; and initiatives like Laboratoria (Peru), Epic Queen, and WomenWhoCode assist female start-up entrepreneurs to achieve success.

As for financing start-ups, here, too a myriad of resources such as Venture Club (Panama), Kaszek Ventures, Guadalajara Angel Investors, and Ideame, a crowdsourcing financing platform.

Successful ecosystems of innovation result from the synergy created by universities, R&D centers, talented human capital, investors (venture capitalists and angel investors), professional associations, and the private sector and government working to achieve sustainable competitiveness.

While 2017 will usher in another lackluster year for the region in terms of economic performance, with only a few countries achieving notable success, the rapidly emerging ecosystem of innovation will continue unabated and provide limitless opportunities for both technology- and non-technology entrepreneurs across the region.

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Jerry Haar is a business professor at Florida International University and a global fellow of the Woodrow Wilson International Center for Scholars in Washington, D.C. He also holds non-resident appointments at Georgetown and Harvard. His latest book is Innovation in Emerging Markets.

 

Radical Islam’s Latin American Connection

By Jerry Haar

In the aftermath of the barbarity inflicted by Islamic terrorists in France, five Syrians heading to the United States with fake Greek passports were arrested in Honduras. When queried, one of them stated they were “students.” At that point, it became alarmingly clear that Latin America could well serve as a launch pad for Islamic terrorists to attack the United States.

In his March testimony before Congress, General John Kelly, head of the U.S. Southern Command, warned lawmakers that Islamic extremists are radicalizing converts and other Muslims in Latin America, and that the Islamic State could exploit trafficking organizations in the region to infiltrate the United States.

Additionally, it has been increasingly common for Muslims from Mexico to change their Islamic surnames to Hispanic-sounding names to facilitate moving across the border.

Islamic terrorism is not new to Latin America. In 1992 Islamic Jihad bombed the Israeli Embassy in Argentina, killing 29 and injuring 250. In 1994, Iran and its proxy, Hezbollah, were responsible for bombing AMIA, a Jewish community center in Buenos Aires, killing 87 and injuring over 100 people.

Beginning in 1999 with the rise to power of Hugo Chávez, the locus of terrorist-supported activity gravitated northward from Argentina to Venezuela. The Venezuelan leader and Iran’s then president, Mahmoud Ahmadinejad, quickly forged a close relationship between their two countries and ramped up their adversarial campaign against the United States.

Venezuela became a de facto subsidiary for Iranian terrorism in the Western Hemisphere through Hezbollah’s Rabbani and Nasseredine networks and has established more than 80 “cultural centers” to promote their brand of Islam in the region.

While Iran’s Shi’a Islamists have had “first mover” advantage over Sunnis in penetrating Latin America, both are actively spreading their reach in the region, which is home to 4 million Muslims, more than half residing in Brazil and Argentina and the rest primarily in Central America, Ecuador, Chile, Mexico and Trinidad and Tobago.

Radical Islamists are especially active in the Tri-Border area (Argentina, Brazil, Paraguay), a notorious locale known for smuggling, piracy, money laundering and drug dealing. Strategic alliances abound between radical Islamists and criminal networks such as Colombia’s FARC and Mexico’s Zetas.

Unfortunately, Latin America’s horrendous prison system is a breeding ground for jihadists, via conversion to Islam among prisoners; and far too often governments take a stance of neutrality toward Islamic terrorism, thereby making the region a safe haven for them. While counterterrorism and surveillance efforts, including bilateral and multilateral cooperation, have improved in recent years, the lack of sufficient financial resources and highly trained personnel remains a critical issue.

For Islamic terrorists to target the United States, the best foreign region from which to operate is Latin America. Intelligence agencies report that there are sleeper cells in the Tri-Border area; and it is conceivable that they could link up with their counterparts in U.S. cities such as Dearborn, Michigan, and Paterson, New Jersey.

In the wake of the Paris bombings and shootings, I queried several U.S. intelligence experts about the chance of an ISIS attack on the U.S. homeland, emanating from Latin America. Their uniform response? “Highly likely.”

With porous borders, transnational criminal organizations, sophisticated smuggling networks and the dubious ability of Latin American governments to detect and intercept terrorists, it is imperative that the U.S. government double or even triple its efforts in aiding our neighbors to the south to prevent radical Islamists from conducting heinous activities in the Western Hemisphere. “Not in our backyard” should be the watchwords of the day.

This article is originally published in the Miami Herald.

Jerry Haar is a business professor at Florida International University and a Global Fellow of the Woodrow Wilson International Center for Scholars in Washington, D.C. He is also a research affiliate at Harvard University’s David Rockefeller Center for Latin American Studies.

 

Considering Labor Costs in Foreign Expansion

by Guest Blogger Nick Rojas

Ever since the National Science Foundation ended its sponsorship of the “NSFNET Backbone Service” on April 30, 1995 any remaining restrictions on using the Internet for commercial purposes were lifted. This resulted in a revolution for many industries, especially those focused on information and communication.
Nick1

All of a sudden, you did not have to go to the local library to look up information on subjects you were researching. You also no longer had to contact newspapers and magazines to issue job postings.

What was happening on a local level would soon cross international borders and connect entire workforces, industries, and populations. Outsourcing labor and expanding export and import infrastructures soon became a trending topic for an increasingly connected, global society of the 21st century.

Why Outsource?

The U.S. and large parts of Europe underwent massive economic growth in the second half of the 20th century. With all the growth, however, came the increase in local labor and energy costs.

This was one of the main reasons why many Western corporations began to invest into production facilities in foreign markets, where labor costs were comparatively low and where they could give local economies a boost.

Made in China

One of the nation’s becoming most popular during this era was China, which made a name for itself by offering high productivity at low wages – as low as 100$ a month for non-skilled labor in Chinese factories. The “Made in China” label, to this day, is synonymous with cheap manufacturing labor, as opposed to, for example, the equally famous “Made in Germany” (representing high quality engineering).

Even though China is a Communist country, it was able to build a capitalist economy integrated into the World market. This, however, combined with the increased exposure to Western standards and philosophies among the Chinese population – due to the Internet – has in recent years led to many demonstrations and a generally more pressing uprising of the Chinese labor force against corporations and the government, echoing what Europe went through during its Industrial Revolution in the 19th century.

So while China is still a cheap manufacturing market, investments into the nation’s cheap labor force are becoming increasingly risky considering the latest political developments, which are only now gaining momentum and will continue to raise awareness as the rest of the world learns more about the situation.

India – a Valuable Tech AllyNick2

If China is known for cheap manufacturing labor and Germany for first class engineering, then India is the nation that offers the highest density in talented software developers and other computer-based services.

There are two main reasons for this, the first one being that not only colleges, but Indian companies also invest into technology-related education of young adults. Secondly, since India’s industrial infrastructure is still catching up to Western standards, the chances of landing a job in the mechanical, electrical, or chemical fields are low. In addition to that, many American and European companies are increasingly outsourcing software-related labor to the Indian market, so this trend is not going to change anytime soon.

While China is struggling with an increasingly difficult political situation, an interesting synergy is starting to develop between Western and Indian people. The latest generation of entrepreneurs of companies like Facebook, Uber, and WhatsApp consists largely of Millennials, the first generation that grew up with access to the Internet.

Their exposure to global information and cultures has turned them into a tolerant, curious, and cosmopolitan generation. For Millennials, globalization is not a new development, but status quo.

As a result, they don’t see their Indian counterparts as just another source for cheap labor, but as potential partners who share the same passion and interest – technology. So while wages in India are still much lower – an experienced programmer in the U.S. makes up to $200 an hour, whereas Indian developers charge closer to $20-30 an hour – this growing “partnership” between generations and nations will have an impact on Indian labor costs, especially in the area of software development.

Other Markets

China and India have certainly become very popular for their outsource-friendly workforce, but South America and Africa are going to be interesting to watch over the next few decades as the United States is making significant investments into their local infrastructure, renewable energy, and banking system.

Conclusion

It might seem like commercial Internet has been around forever, but it has really only been around for two decades. Considering the massive impact on the global marketplace it has already had, it is clear that we will see dynamics shifting between foreign markets over the course of the next century, and labor costs will be one of the most important factors to watch.

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Nick Rojas is a business consultant and writer who lives in Los Angeles and Chicago. He has consulted small and medium-sized enterprises for over twenty years. He has contributed articles to Visual.ly, Entrepreneur, and TechCrunch. You can follow him on Twitter @NickARojas,. or you can reach him at NickAndrewRojas@gmail.com.

Tell the truth about free trade

By Jerry Haar

Two of the leading contenders in the presidential race, Donald Trump and Bernie Sanders, disagree on almost every policy issue except one — trade. Both regard NAFTA and the proposed Trans-Pacific Partnership (TPP) as “disastrous.” Trump excoriates American companies for investing in Mexico and threatens hugely punitive taxes on their exports to the United States. Sanders claims TPP will benefit only big corporations and Wall Street.

South Floridians should be especially concerned about the candidates’ positions since trade is so vitally important to our economy. Any honest discussion of the impact of free-trade agreements will conclude that these accords produce mutual benefits.

Every nonpartisan assessment of NAFTA demonstrates convincingly that marginal benefits (output, employment) exceed marginal costs. The trilateral agreement (United States, Canada, Mexico) links a market of 450 million people and a collective GDP of $21 trillion.

Both Trump and Sanders cite negative employment effects, runaway plants and trade imbalances as proof of the evils of trade agreements. They’re wrong. To begin with, trade agreements are not intended as job creators or job destroyers.

They are merely liberalizing accords that strip away the barriers to cross-border commerce, finance and investment so that companies and entrepreneurs can do business efficiently and allow consumer choice at affordable prices.

Technology, not trade agreements, is the principal source of labor reduction. While it is true that this country runs a $53-billion deficit with Mexico in its $534-billion trade relationship, this pertains to merchandise trade only (which includes oil). In services and agriculture, the United States produces surpluses with Mexico.

NAFTA-bashers should also note that 80 percent of Mexico’s imports come from the United States versus 20 percent of China’s, and that those imports are overwhelmingly high value-added manufactures, often produced by AFL-CIO members.

As for lower-value goods such as apparel, shoes and produce, poor people and those on fixed incomes are grateful beneficiaries of Mexican imports.

About jobs and factories moving to Mexico: Donald Trump constantly harangues Ford Motor Co., a firm with a long history of investment in that nation, but seems unaware that global automobile companies, including Nissan, Mazda, Kia, Mercedes-Benz and BMW, are serving the fast-growing Mexican market and European markets — not just the United States — given that Mexico has 40 free-trade agreements versus 20 for the United States.

Most important, Mexican auto plants are mainly involved in assembly operations, with most inputs imported from the United States.

Let us not forget that inward bound foreign investment supports more than 6 million U.S. jobs, one-third in manufacturing; and average salaries are 33-percent higher than the national average.

Mexico’s investment of over $30 billion is led by manufacturing, banking and wholesale trade. Elektra, Alfa, Cemex, Bimbo, Gruma, Herdez, Bochoco, Mexichem and Cinépolis are among the leading Mexican multinational firms invested in the United States.

Messrs. Trump and Sanders need to be reminded that their states (New York and Vermont, respectively) continue to benefit from NAFTA. New York, the No. 4 exporter of U.S. goods to Mexico, sold nearly $3 billion of manufactured products into that market last year — a 235-percent increase since the accord was implemented.

Vermont’s exports have grown 454 percent since NAFTA, 63 percent of which consist of sophisticated manufactured goods. Florida has seen a 194-percent jump in exports to Mexico since 1994, the majority consisting of high-value manufactures.

As the tragicomedy of the 2015-2016 election season plays out, falsehoods, hyperbole and mean-spirited attacks among contenders will proliferate. The issue of trade (along with illegal immigration) will be the proverbial whipping boy in this contest.

While the contenders choose not to be fully informed of the facts, there is no excuse for individual citizens not to be.

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Jerry Haar is a business professor at Florida International University and a Global Fellow of the Woodrow Wilson International Center for Scholars in Washington, D.C. He is also a research affiliate at Harvard University’s David Rockefeller Center for Latin American Studies.

Licensing in India – Should it be restricted or promoted?

I am teaching a course on International Business here at Georgetown University. This Spring, we have concentrated on writing editorials on international business and trade issues. All my students have written and handed in one editorial dealing with an issue of their concern. I was very impressed by their work, particularly since these young tigers, as we call them here, are the ones ascending in their societal position. They will be the ones running their family’s firm, electing the next government, and deciding what their aging parents should do. So to my mind, their opinions matter.
Take a look:

By Nicole Colarusso

The two words “royalty restrictions” are not as attention-grabbing as “terrorism” or “nuclear war.” Yet they have sparked a royal debate in India. For many years, the country’s licensing rules constrained international companies. According to The Economic Times, India’s outgoing royalty payments for technology transfers were limited to 5% of domestic sales and 8% of exports. These restrictions were lifted in 2009. India’s Department of Industrial Policy and Promotion wants to re-impose the constraints. This attempt is blocked by India’s Ministry of Finance. Doing so is a prudent decision. Indian government officials should endeavor to preserve and promote free licensing in the future.

The opposition argues that an absence of royalty limits would cause a great increase in financial outflows from India. As a result, local businesses would lose money. The Indian current account deficit would grow. Tax revenue would decrease, and Indian licensees would become dependent on foreigners.

Free royalty flows are important. India already has a difficult business environment. The nation’s bureaucracy has burdened businesses with immense paperwork and petty inspections. A World Bank press release bemoans the country’s “inefficient transportation, notably roads, maritime services, and ports.” Licensing, by allowing citizens to take advantage of technology and processes that have already succeeded, provides a way for local entrepreneurs to bypass inefficient business activities. Restrictions would decrease foreign direct investment and stunt local economic growth.

Foreign businesses and entrepreneurs would benefit from free licensing as well. It enables companies to speed up market penetration, test out business environments, and become familiar with other cultures.

A decrease in investment could also negatively affect India’s trade balance. The Wall Street Journal acknowledges that annual outgoing royalty payments have almost tripled from $1.7 billion in 2009. But, the deregulation will have long-run positive effects on the balance of payments. Gains from international licensors will enable foreigners to purchase more Indian goods, thereby creating a larger demand for Indian exports.

Royalty limits could also hurt the people of India. Licensing provides Indians with the skills and knowledge to use advanced products, services, and processes. Technology transfer can substantially increase the competitiveness of local companies, particularly in industries such as pharmaceuticals where licenses can be more valuable than capital. Consumers’ exposure to high-tech, revolutionary items can substantially improve their lives. For instance, Microsoft’s presence in India has significantly increased local access to computers. If licensing becomes less attractive to investors due to restrictions, Indians would have fewer opportunities to learn about new products.

Finally, there is the matter of unemployment. According to a 2013 International Labour Organisation report, only 21.1% of Indian working men had steady, salaried jobs. Decreased licensing could intensify an already pressing issue. Also, multinationals that currently license heavily in India, such as IBM, Nestlé, and Unilever, could decide to focus their energy on other countries. Corporations looking to begin licensing abroad may be deterred from starting future large-scale projects on the subcontinent.

Free licensing is an engine for growth. Limits on outgoing royalty payments could have long-term negative consequences for India. There can be a time and a place for restrictions, but Indian officials should show that it is neither here nor now.

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Nicole Colarusso HeadshotNicole Colarusso is a sophomore studying international business and finance at Georgetown University.

This editorial was published in Ovi Magazine on 24 April 2015.
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