chief economist for Latin America and the Caribbean, Augusto de la Torre, said “a massive” 60 per cent regional employees work for businesses with five or fewer employees.
Often considered to be a “driver of development,” de la Torre noted that entrepreneurship creates jobs and promotes economic growth.
But he said, while business creation is high in the region, “the resulting companies grow at a much slower rate than similar enterprises in other middle-income regions and companies”.
De la Torre said the region’s landscape is such that “firms tend to start small and stay small.
“There’s nothing bad about being small, per se, but staying small forever is a problem,” he warned, adding that the reason behind “this stunted growth” is “a chronic shortage of innovation within the region”.
Over the past 10 years, de la Torre said the region has “benefited significantly from favourable economic tailwinds, enabling the region to reduce extreme poverty, increase equality and boost 50 million people into the middle class.
“However, as these tailwinds die, growth has to come from within, and innovation and dynamism are the key if the region is to build upon the social gains of recent years,” he said.
The World Bank said regional firms develop new products less frequently than their counterparts in other developing regions, stating that in Ecuador, Jamaica, Mexico and Venezuela, the rate of product development is less than half than that of Thailand or Macedonia.
“Consequently, this lack of innovation harms competitively and slows growth and rebounds on quality job creation – a significant development challenge, especially in Central America,” the bank said.
It said the possible reasons for the problem are four-fold, attributing them to human capital, intellectual property, risk-taking and logistics.
On human capital, the World Bank said science and technology graduates and engineers are at a “premium,” adding that their scarcity “has a direct effect on innovation”.
With separate laws governing copyright in every country, ensuring intellectual property rights can be a “significant bureaucratic undertaking” for the region’s entrepreneurs, the bank said.
“The complicated panorama lends less protection to the product creators, deterring much needed investment for new product research and development.”
The World Bank said “a deep cultural shame of failure” is hindering innovation in the region by dissuading entrepreneurs from taking risks.
“This is evident as much in individual reticence at a business level as in the low levels of investment in research and development, especially from the private sector,” it said.
The World Bank said modernizing ports, transport, and customs “can add a competitive edge to products from the region”.
Currently, it said poor public services, communication links and transport infrastructure are “adding to the obstacles to boosting production capacity in the region.
The World Bank said entrepreneurs are “key actors” in turning low productivity around to create quality jobs and lasting economic benefit for the region.
Consequently, the report recommends establishing an economic environment, which enables entrepreneurs to innovate and compete, thereby reducing the grip of monopolies, increasing productivity and diversifying the business environment.
“It is about building an innovative entrepreneurial class in which top-notch firms, firms that export goods, services, and even capital no longer look tepid in contrast to entrepreneurial superstars elsewhere,” the report states.