Javier Santiso (ESADE): "In the Latin world, the instruments for making companies grow fail us"

Although the proportion of entrepreneurs, employers and formal businesses is higher in Latin American and the Caribbean than in other regions with similar income levels, these groups are not creating enough high-quality jobs. At the presentation of the report Latin American Entrepreneurs at ESADE, Augusto de la Torre, Chief Economist for Latin American and the Caribbean at the World Bank, declared that this "insufficiently vigorous job creation" is due to the fact that "it is difficult for companies to grow" in the region. Javier Santiso, Vice President of ESADEgeo, echoed this sentiment and added that the same problem applies to Spanish companies: "In the Latin world, the instruments for making companies grow fail us. There is a shortage of growth capital in both Spain and Latin America." According to Mr. de la Torre, this phenomenon is partially explained by the fact that the legal systems "penalise failure excessively, quashing the urge to take risks and innovate".

The World Bank report was presented today at an ESADEgeo-organised Globalisation Lab session in Madrid. The new report underscores the fact that, although one in three Latin American workers is self-employed or a small employer, this does not translate into wealth creation. In Latin America, few business owners ever hire workers and companies tend to remain small even decades after their creation. According to the report, Latin American companies with 40 or more years of history employ around 110 people, whereas this figure is closer to 170 in East Asia, around 220 in Eastern Europe, and approximately 250 in high-income countries.

Low levels of investment in innovation and exportation

According to the World Bank, another feature of Latin American companies that urgently needs to be corrected is their low level of investment in innovation. According to the new report, the average R&D investment in Latin America is less than 0.5% of GDP – one third of the amount spent by China and barely one fourth of the figure for high-income countries. (The only exception to this rule is Brazil, which allocates 1% of its GDP to R&D.) The report notes that multilatinas in the manufacturing sector invest just $0.06 per $1,000 of revenue in R&D, compared with $2 per $1,000 of revenue in China and $2.60 per $1,000 in high-income countries. "Even subsidiaries of multinational corporations tend to be less innovative in Latin America and the Caribbean," explained Mr. de la Torre. "Formal companies in the region introduce new products at a much slower pace than companies in other developing regions."

An increase in exportation is necessary in order to change this trend. According to the World Bank report, the number of Latin American companies participating in the export market is very low. Even in the region’s main exporting countries – such as Chile, Colombia and Mexico – the percentage of companies that choose to export is much lower than in countries like Bangladesh, Pakistan and Tanzania.

More support for new companies and the importance of education

According to the World Bank report, productivity growth has lagged in Latin America, even during the recent raw materials boom. In order to reverse the current trend, the region must support dynamic business owners who are capable of preserving and expanding the economic and social advances of the past 10 years. In addition to providing assistance to small and medium-sized enterprises, the region’s public policies should also target newly created companies, which are more likely to grow. Strengthening human capital, encouraging competition and improving intellectual property rights can also help to tilt the balance.

Education is another area of opportunity, according to the new report. Emma Fernández, Director General of Indra, declared: "In Latin America, there is a lot of talent and the elites are highly prepared, but the number of people with scientific or technical qualifications is lower than in other regions." Mr. de la Torre echoed this notion, saying that Latin American universities have "immense" potential to reverse the current trend. "The degree of integration between universities and the business world is very low in Latin America, and this is an untapped opportunity," he declared.

The session was opened by Enrique Verdeguer, Director of ESADE Madrid. Aitor Grandes, founder and CEO of the start-up 24symbols, also participated.