Traits and policies of Latin American SMEs

Given the right support policies, micro, small and medium-sized enterprises (MSMEs) in Latin America can help raise productivity, complement the economies of scale of large firms, contribute to creating clusters in certain sectors and reduce social inequality and poverty. Over the past decade, the attention given to small and medium-sized enterprises (SMEs), a key component of the region’s business fabric, has grown. But efforts need to be redoubled to break the vicious cycle of low productivity and lack of competition among SMEs. Public policies need to be more mature so they will last longer, but also more flexible to the changing external environments that affect SMEs. Countries need to build the institutional capacities necessary to implement programmes and initiatives. In particular, policies need to be devised and implemented in a way that takes into account the full spectrum of SMEs, from subsistence-level microenterprises to fully modernised firms that supply large companies which export to foreign markets.

Introduction

Micro, small and medium-sized enterprises (MSMEs) are an essential component of the Latin American business fabric. There are various indicators of their importance in the region: the proportion of all businesses that are MSMEs, the number of jobs they create, and in some countries even their contribution to gross domestic product (GDP). However, there are several sharp contrasts between MSMEs’ contribution to GDP in Latin America and in OECD countries. In Latin America, around 70% of GDP is produced by large firms, while in OECD countries large firms contribute only 40%, with the rest produced by SMEs. So while SMEs provide many jobs in Latin America they contribute little to production. This reflects their heterogeneous production structure, their specialisation in low value-added products and the scant contribution SMEs make to exports (less than 5% in most countries). As a result, the productivity gap between Latin America and OECD countries tends to persist over time. 

These gaps in productivity and export capacity are caused by the highly diverse economic structures in the region. Latin America’s production structure is marked by “the large productivity differences – much larger than those found in developed countries – among sectors, within sectors and among companies within a given country. This is known as structural heterogeneity, which refers to marked asymmetries among segments of enterprises and workers and the concentration of employment in strata characterised by very low relative productivity” (ECLAC, 2010). This phenomenon is also one of the causes of the deep social inequality present in Latin America. The large productivity gaps (among sectors and among businesses), meanwhile, reflect and reinforce the gaps in other areas: skills, adoption of technical developments, negotiating skills, access to social networks, and upward occupational mobility during a career.

The production structure places Latin American SMEs at a disadvantage compared to other firms, so they need specific policies to counter this. Unless SMEs can overcome these difficulties their lack of competitiveness will continue, fuelling a vicious cycle of sluggish economic growth, poverty and slow structural change. Breaking the vicious cycle will require strong policies and institutions that will tackle this crucial challenge for the region (Cimoli, 2005).

This chapter argues that despite the progress made in this area, policies to support SMEs in the region need to advance toward strategies that will form the basis for new public policies with clear objectives for SMEs. These policies should: i) incorporate long maturation periods through coherent, prolonged actions; ii) build and strengthen institutional capacities to maintain, co-ordinate and implement these policies; iii) be flexible enough to adapt to changes in production structures, the international climate and the macroeconomic context, as well as to national and sub-national specificities; and iv) take into consideration the full spectrum of SMEs. 

If they are given the right policy framework, these firms, especially those that have the greatest growth potential, can become a lever to transform Latin American economies through the following processes: 

Helping boost productivity by introducing technological and organisational changes. SMEs can thus become agents to bring about structural change, helping to create and spread innovations and develop new markets (OECD, 2010). Also, if new firms enter the market they can add to competition and open the way for new business models that will challenge traditional models. This would create healthy shocks (or “creative destruction” as Schumpeter called it), leading to a constant search for more productive uses of resources1 and helping boost the economy’s aggregate productivity (Altenburg and Eckhardt, 2006).&nb

If new firms join the market they can increase competition and open the way for new business models to come in and challenge traditional models. This would create healthy shocks that help boost an economy’s aggregate productivity.

Complementing economies of scale of large firms. Greater flexibility enables SMEs to reduce transaction costs through close contact with customers and fast decision-making. SMEs in particular would be in a position to access diversified markets (through exports or sales to large retail chains) and global value chains, and to benefit from technology transfer (Dini and Stumpo, 2004).

Developing an important role in creating production clusters, which are designed as a form of local co-operation between economic agents and institutions with the aim of creating a competitive advantage. This interaction allows firms involved to increase production, adopt technologies more easily, speed up learning processes, and thus achieve a level of collective efficiency that is beyond the reach of an individual firm (Ferraro, 2010).

Contributing to social inclusion by increasing microenterprises’ income and reducing their vulnerability. Many Latin American microenterprises were set up as a survival strategy due to the sluggishness of labour-intensive economic activity. Workers in microenterprises are usually not poor but are often among the most vulnerable sectors of society (OECD, 2011). Microenterprises are not guaranteed to be absorbed by dynamic sectors because this takes quite a long time and the staff may not have the necessary skills. Some policies to support microenterprises (such as multidimensional interventions related to microfinance) effectively and efficiently provide the tools to raise and stabilise incomes in a context of small or incomplete social safety nets. 

This chapter analyses the nature of SMEs’ involvement in the region’s production structure and the development of policies to support SMEs. The chapter is structured in seven sections. It begins by providing a regional overview of SMEs in Latin America, focusing on their huge diversity and poor productivity and on their distribution by sectors and their contribution to employment and exports. Next it analyses the regional environment in which SMEs are operating, especially the business climate and their incorporation into the production structure. The next section examines how the region’s development policies for SMEs have evolved. The text then describes the institutional environment of organisations devoted to supporting SMEs, especially their structure and regulatory aspects. The next section looks very briefly at the objectives and strategies of development policies, and the following section addresses the problems resulting from how those policies are designed and implemented. The chapter ends with a series of conclusions and recommendations, putting forward a new vision to move forward under a new public-policy agenda for the sector.