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.

 

Economic truth vs. political fiction in presidential debates

The toxic display of rude behavior and character assassination that has become a hallmark of this presidential primary season is matched only by the disturbing manifest ignorance by some of the candidates about economic issues.

We have heard, ad nauseam, epithets such as: “We don’t make things anymore . . . We keep sending our jobs overseas . . . China and Mexico are killing us on trade deals . . . The Chinese manipulate their currencies.”

Each one of these assertions, aimed at riling up the voting public, is absolutely false.

Let’s see what the truth actually is:

▪ “We don’t make things anymore.” This one is the mother of all lies. U.S. manufacturing is strong, growing larger, and more productive and competitive than ever — especially in machinery, electronic equipment, aircraft and vehicles, America’s top four exports. However, it is less labor-intensive as technology (including robots) substitutes humans — a global trend, impacting rich and poor nations alike, including China. Nonetheless, the $2.5 trillion U.S. manufacturing economy faces a shortage of 2 million skilled jobs over the next decade. Both foreign direct investment (FDI) and exports are drivers of America’s manufacturing competitiveness. FDI in manufacturing exceeds $1 trillion, with motor vehicles most prominent (e.g., Honda in Indiana, Nissan in Tennessee, Mercedes in Alabama, BMW in South Carolina). U.S. auto exports (2 million vehicles) set a record high last year.

▪ “We keep sending all our jobs and moving our factories overseas.” Despite all the hysteria over the U.S. outsourcing more and more of our jobs, it affects less than .2 percent of employed Americans. Less than 20 percent of workers affected by outsourcing lose their jobs; the rest are repositioned within the firm. In recent years more and more companies have beenbacksourcing — bringing outsourced work back home. As for “runaway plants,” many of those overseas plants source inputs from the United States. The Mexican operations of Ford and GM, for examples, source 65 percent-75 percent of their components from U.S. plants.

▪ “China and Mexico are killing us on trade deals.” The United States has no free trade deals with China. As for Mexico, part of NAFTA along with Canada, trade has increased 632 percent since the accord was implemented 22 years ago. It now equals over $1 trillion and produces a trade surplus for the U.S., not a deficit. Here’s the math: Mexico sold $290 billion to the U.S. in 2014 — $166 billion was U.S. content, which added to the $240 billion we exported to Mexico renders a surplus for the U.S. of $162 billion. As for other trade deals, next up on the docket is the Trans-Pacific Partnership involving the U.S. and 11 signatory countries. Opposed by a number of the candidates, the agreement eliminates over 18,000 different tariffs on American exports and includes the strongest worker protections of any agreement in history.

“The Chinese are manipulating their currency.” The fact is that every central bank — including the Fed — has the legal monopoly power to fix its exchange rate to achieve price stability or full employment. The U.S. does this through the federal funds rate. It is comparative advantage that drives trade regardless of monetary policy. From 2004-2014 the dollar depreciated 25 percent against the yuan while our deficit with China more than doubled! Nevertheless, as the yuan continues to gain value, expect China to buy more goods and services from the United States; to invest more here ($36 billion currently); to purchase more government securities and to send us more tourists and students.

The xenophobic, protectionist rants of neo-populists of both the left and right prey upon the anger, fear, and limited economic knowledge of voters.

The American people deserve better from those who vie for the highest office in the land.

At the same time citizens have the responsibility to educate themselves to learn the facts and make the most sensible presidential choice for in November.

Jerry Haar is a business professor at Florida International University and a senior research fellow at Georgetown University’s McDonough School of Business.

To devalue or not to devalue?

To devalue or not to devalue? That is the question. During the last decade, Latin American central banks have effectively steered the rudder of monetary policy, avoiding major devaluations of their currencies–with the exceptions of Argentina and Venezuela.

Recognizably, there have been incremental devaluations in the region as a country may devalue its currency to combat trade imbalances. Chile and Peru are examples. Resultingly, a nation’s exports become less expensive and, therefore, more competitive in global markets; imports become more expensive, making domestic consumers less likely to purchase them. 

While currency devaluation may appear to be a wise economic policy choice, it can surely have negative consequences. The result of imports becoming more expensive has the effect of protecting inefficient domestic producers. Higher exports relative to imports can also increase consumer demand and fuel inflation. In the case of industrial buyers from emerging markets that need imported machinery and other capital goods to produce for either the domestic or export market, currency devaluations imports more drive up the prices for their customers, squeeze their profit margins and, in the aggregate, contribute to inflation.

The “perfect storm” of a drop in oil prices, a slowdown in the Chinese economy, and sluggish consumer and industrial demand in industrialized nations is whipsawing Latin American economies, especially large commodity producers such as Argentina, Brazil, Chile, Colombia, Mexico and Peru. Not surprisingly, Latin American GDP is expected to grow less than 1% in 2016 with Brazil and Venezuela continuing to post negative growth rates. There is nothing on the horizon to seriously challenge this doom-and-gloom scenario.

Rather than address the real causes of economic conditions that trigger currency devaluations and respond with viable remedies, political leaders often turn to scapegoating–usually casting the blame on other nations. For example, in September 2010, Brazil’s Finance Minister, Guido Mantega, used the term “currency war” with reference to monetary policies implemented mainly by China, Japan, Thailand, South Korea, Colombia and other countries to generate an artificial devaluation of their currency in order to achieve a cheaper, more competitive domestic economy that may be attractive to foreign investors, as well as to be able to withstand the 2008 economic crisis.

More recently the term “currency manipulation” has been bandied about, most prominently among a number of U.S. presidential candidates. These contenders assert that China, specifically, undervalues its currency to gain an unfair advantage in global trade. However, devaluation and revaluation are the prerogative of sovereign monetary authorities. The U.S., in fact, manipulates its own currency through interest rate manipulation. As economist Matthew J. Slaughter points out, in today’s globally networked economy trade competitiveness tends to vary little with the movement of any one currency.

Admittedly, however, the decline in China’s yuan is fueling turbulence in financial markets across the world and could well unleash a cycle of competitive devaluations of currencies. How would a series of currency devaluations impact Latin America’s private sector? Large corporations such as JBS, Cemex, Argos, Techint, and Cencosud have the wherewithal to weather economic recession and financial volatility, while small companies, especially microenterprises, that struggle for survival in even good times will find the business environment even more challenging. But what about new businesses? Given the explosive growth of new business formation (NBF) in emerging markets, particularly Latin America, and the emergence on technology-based entrepreneurial ecosystems in major metropolitan areas throughout the Hemisphere, this question is of special importance.

In a recent study, colleagues at Colombia’s EAFIT University and I examined 30 emerging markets, including a number from Latin America, during a seven-year period to determine the impact of devaluation on NBF. We found that while devaluation clearly boosts NBF, the effect is not lasting over time and loses significance after two years–even sooner if a country’s competitiveness is not strong to begin with.

Luis Videgaray, Mexico’s finance minister opined about competitive devaluations in a recent speech at the Foreign Ministry in Mexico City: “It’s frankly a perverse process, because at the end of the day if all countries engage in a competitive devaluation, no one becomes more competitive, and you generate financial dislocations.”

Should the next twelve months witness a resurgence of growth in China, a reversal in commodity prices, and faster economic growth in Europe and the U.S., currency devaluation as a monetary prescription will be relegated to the back burner of economic policy.

That will surely make 2016 a happy new year for Latin America.

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

DOING BUSINESS IN CUBA: DON’T FORGET OPPORTUNITY COSTS

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Photo: Miguel Discart

The continuing and growing chatter on doing business in Cuba is reaching epic proportions. It has become the “flavor of the month” (and will continue to be) among entrepreneurs, investors, exporters, importers, financiers and U.S. multinational companies. It is understandable. After 56 years of isolation from American commercial relations, the bilateral movement to restore diplomatic relations has created hope that normal business activity is right around the corner. Fantasies abound of a pre-revolutionary market economy where flourishing trade and investment and an explosion of tourist activity including casino gambling will rule supreme.

Time for a reality check, however. The new, the novel, the exotic, the previously forbidden fruit may appear to be the most tantalizing, but objective criteria should form the true template from which to measure all business decisions. The incremental and marginal changes in trade with Cuba are just that–they do not represent a wide open door. To date, the most profitable businesses dealing with Cuba are those that put on conferences and seminars on doing business in Cuba. And the majority of these events are seances of pure speculation, since the true experts on doing business in Cuba (those doing business in Cuba today) would not dare speak honestly and openly for fear of being harrassed (or worse) by the Cuban government.

Don’t get me wrong–I am all for doing business in and with Cuba once U.S. law is changed to permit that. I believe that the prospects for U.S.-Cuba are great, indeed. However, right now–in the here and now–American entrepreneurs and small companies, especially, need to consider what is known in economics as opportunity costs–whereby the same amount of time, energy, and money will reap a greater return elsewhere. The Dominican Republic and Panama are cases in point and solid benchmarks for comparison since they are also located in the Caribbean Basin region. In the first instance, besides agriculture similar to Cuba’s, the Dominican Republic’s non-agricultural substantial, including textiles, medical devices and footwear. The country has over 2000 manufacturing firms and hosts 112 call centers and 64 industrial parks it with 610 companies. Its tourism sector is its crown jewel, generating over $6 billion in annual income. The most-visited destination in the Caribbean, the DR attracted over 5 million tourists last year. Its first-rate tourism infrastructure comprises a welcoming and well-trained cadre of hospitality workers. Competition from Cuba will be challenging but certainly not a serious threat. A beneficiary of the DR-CAFTA trade agreement with the U.S., the nation’s $61 billion economy will expand about 6 percent this year, up from a previous forecast of 5 percent. Foreign direct investment, which will exceed $2.3 billion this year, totals over $30 billion and has grown 245% during the last decade.

As for Panama, also a signatory of a free trade agreement with the U.S., the nation is located outside the hurricane zone and poised to benefit hugely from the $5.25 billion expansion of the Panama Canal. With a currency pegged to the U.S. dollar, the country is a bustling hub for trade and logistics, real estate, finance and banking as well as business processing (outsourcing, call center operations), and sports an exciting nightlife, casinos, beaches, and ecotourism and indigenous culture. Attracting over $5 billion in U.S. FDI, Panama’s pro-business environment has lured scores to establish regional headquarters there, including Johnson & Johnson, Caterpillar Inc. and Procter & Gamble Co. Panama ranks #38 out of 189 countries by the World Bank for ease of starting and business, #17 or accessing credit, and #9 for trading across borders.

Among the key prerequisites for traders and investors are a stable environment characterized by the rule of law, a transparent and efficient legal and administrative system, access to credit, respect for contracts and property rights, dispute settlement mechanisms and customers with buying power. Cuba comes up short on all of these. The DR and Panama combined are one-third larger than Cuba; and whereas the average monthly wage in Cuba is $20, it is $363 in the DR and $541 in Panama.

Cuba is a long-term play, much like investing in an empty lot in a neighborhood in transition versus opening a luxury retail store today in a high-end shopping center. Big companies and investor groups with billions in assets can afford to invest in Cuba now for the future; for all others, there are more immediate opportunities elsewhere.

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Jerry Haar is a professor in the College of Business at Florida International University and a research affiliate at Harvard University’s David Rockefeller Center of Latin American Studies