The economic context in which firms operate

Sensitive factors that can be adjusted through public policy and that affect SMEs’ performance include the business climate and the production structure, which in turn include access to finance, technology, human resources and the existence of production linkages. Both the business climate and the production structure in the region place major limitations on the development of SMEs.

The business climate

Comparison between advanced economies and Latin America shows a sharp contrast in the cost of market entry for new firms. The experience of more developed countries shows that institutional strength, programmes to support the industrial sector, the educational system, especially in science and technology, macroeconomic conditions, market size, and the accessibility and quality of finance, among other factors, strongly impact SMEs’ characteristics and capacities (Lundvall, 1992; Nelson, 1993; Lazonick, 2008). The healthy interconnections among these factors facilitate the existence of “Schumpeterian-type” SMEs, that is, SMEs with capacities to forge radical innovations that will contribute to economic growth. Although these kinds of firms are also found in less-developed countries, they are less frequent. Instead there are firms marked by sluggishness and few incremental innovations, if any at all. For firms in less-developed countries it is harder to close the technology and competitiveness gaps.

As is seen in more developed countries, factors such as institutional strength, programmes to promote the industrial sector, the educational system, especially in science and technology, macroeconomic conditions, market size and the accessibility and quality of finance strongly impact SMEs’ characteristics and capacities.

A variety of factors make it harder for SMEs in Latin America to close these gaps. First, there are socio-economic factors such as the unequal distribution of national income, high levels of poverty, and the poor development of institutions. This context makes it harder to access knowledge and financial resources and to create dynamic, innovative businesses (Stam and van Stel, 2011). Second, there is the regulatory framework: the cost and time needed to complete the procedures required to register and start up a business in Latin America are among the main obstacles to their development (Figure 2.2). Despite the region’s progress in the three indicators shown in Figure 2.2, Latin America still lags behind other regions and the global average. These problems translate into higher business costs, which as a percentage of per capita income are almost eight times higher in Latin America than in OECD countries (ECLAC/IDB/OAS, 2011). There are similar administrative problems when closing a business. According to International Labour Organization (ILO) and World Bank data, it takes an average of four years to close a business and liquidate its assets in Latin America, while the percentage of debt recovered by creditors amounts to 17%. By contrast, in the OECD it takes an average of just 1.7 years to close a business and liquidate its assets, and the percentage of debt recovered by creditors is 68% (Tueros et al., 2009; World Bank, 2012). Latin American regulations hinder creating and liquidating businesses and encourage micro and small enterprises to operate informally (Capelleras and Kantis, 2009). There are also major differences among Latin American countries in these aspects. For instance, Chile, Colombia and Mexico present similar indicators to more developed countries in the three dimensions analysed in this chapter, while other countries lag far behind (Table 2.4). 

Figure 2.2. Cost indicators for starting a business


Table 2.4. Cost indicators for starting a businesses in 2011

Country Number of procedures Duration (days) Cost (% of per capita income)
Argentina 14 26 11.9
Bolivia (Plur. State of) 15 50 90.4
Brazil 13 119 5.4
Chile 7 7 5.1
Colombia 9 14 8
Costa Rica 12 60 11.1
Dominican Republic 7 19 18.2
Ecuador 13 56 28.8
El Salvador 8 17 45.1
Guatemala 12 37 52.5
Honduras 13 14 46.7
Mexico 6 9 11.2
Nicaragua 8 39 107.9
Paraguay 7 35 47.2
Peru 5 26 11.9
Suriname 13 694 115
Uruguay 5 7 24.9
Venezuela (Bol. Rep. of) 17 141 26.1

Integration of firms in the productive structure

Another key element that determines the performance of SMEs in Latin America is the productive structure seen in most firms in the region. The most modern SMEs in Latin America do not make the same contribution to their country’s production system as their counterparts in OECD countries (Diagrammes 2.1 and 2.2). In OECD countries, SMEs can only survive in the industrial development process if they produce specific goods and services that do not compete with products mass-produced by large industrial firms. These goods and services are normally designed specifically for their customers’ needs. They are produced in small runs for market niches or are closely related to customer service (installation, customisation, maintenance, etc.). These SMEs also produce services for large firms or to complement their catalogue of services. Economies of scale play a minor role in these areas, pushing the benefits of the flexibility and customer proximity offered by SMEs to the fore. This kind of specialisation demands greater technical and business qualifications, and one particular prerequisite is the capacity to innovate continuously. Most Latin American SMEs do not have these qualifications, and almost all of them operate in standardised forms of production that are not knowledge-intensive, thus competing directly with mass producers and/or large commercial enterprises. An example of this is the mass production of consumer goods (generic food products, footwear, clothing), in which Latin American SMEs do not have competitive advantages.

Diagram 2.1. Typical industrial organisation in developed countries


Diagram 2.2. Typical industrial organisation in developing countries


This structure of production also affects SMEs’ ability to establish linkages with other real-economy agents. Since many Latin American SMEs produce traditional consumer goods for segments of the market with low prices and use standard processes that leave very little room for innovation, they are vastly limited in their ability to forge linkages with larger firms. The larger firms rarely choose domestic suppliers, which struggle to meet the necessary quality or volume of production. This results in a vicious cycle, with the initial low productivity fuelling an absence of knowledge transfer among businesses, and vice versa (Altenburg, 2011). So, the landscape is substantially different from that seen in developed countries, where SMEs operate more as suppliers of large firms or specialise in market niches, and are less involved in mass production.