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Empowering the 99%: Technology Upgrades by Small Businesses Can Boost Productivity and Growth in Latin America

Posted: May 3, 2017 at 7:58 pm   /   by   /   comments (0)

(William Burns, Deputy Secretary of State, and Patti Londono, Colombian Vice Foreign Minister, sign a memorandum of understanding on the Small Business Network of the Americas on the sidelines of the Pathways to Prosperity in the Americas ministerial in Cali, Colombia, October 23, 2012.)

Valentín Sierra

  1. Supporting SMEs is critical to Latin America’s economic development

Conventional economic wisdom states that trade liberalization drives unproductive firms out of the market, while resources and market share go to the most productive firms to maximize economic efficiency and consumer utility. From this perspective, government interventions that are designed to actively support small and medium-sized enterprises (SMEs)[i] – including initiatives to help uncompetitive businesses to stay afloat against natural trade dynamics – have little economic validity. Often the question is posed, if SMEs are to contribute to economic development they should be productive and competitive, correct?

The answers given by many international policymakers contradicts this wisdom. These policymakers would rather argue that publicly-funded SME support programs are, in fact, critical to a country’s economic development.  Emphasis on small business growth in many government working papers highlights their acknowledgement of the critical role played by SMEs in economic development. For instance, it is clear from the Office of Management and Budget’s Circular A-4 that the U.S. Federal Government cares about small businesses and the “impact [of rulemaking] on small businesses and other small entities.”[ii] The empowerment of SMEs is particularly important for Latin America’s economic growth: SMEs employ 67% of the workforce and account for 99% of businesses in the region.[iii] In particular, Latin America’s SMEs require support for the adoption and effective use of advanced information and communication technologies (ICT)[iv], a policy initiative which could help boost the region’s sluggish productivity and promote economic development.

  1. ICT investments by SMEs can help Latin America overcome its low productivity problem

Per The Economist, “productivity growth is the key to unlocking sustainable growth [in Latin America], as the terms of trade become less favorable and the room to expand employment and credit dwindles.”[v] At the same time, several studies have linked the adoption of ICT to productivity gains. For example, labor productivity in countries with high levels of ICT use is seven times greater on average than in countries with low levels of ICT use.[vi] Moreover, each 10% increase in the use of ICT in a country contributes between 1.6% and 3.6% to GDP growth.[vii]

The increasing accessibility and sophistication of ICT is, indeed, allowing communities around the globe to overcome the geographical barriers, financial limitations, and educational constraints preventing their socioeconomic advancement. Digital progress in Latin America remains slow, however. Accordingly, the Inter-American Development Bank asserts that “there is a digital divide between and within countries, including a digital gap in firms’ adoption of ICTs. Large and medium-sized enterprises generally have access to the Internet, but adoption of advanced ICTs is low for all firms in these economies, and small and micro enterprises lag way behind.”[viii]

Improving overall economic development by leveraging the power of ICT thus presents real promises, but also challenges for Latin America. Technological spillover effects, for example, have the potential to transcend the business sector to improve the socioeconomic condition of entire populations in Latin America, as “when a firm undertakes an investment, it generates knowledge and technological know-how that can benefit other firms.”[ix] The fulfillment of this promise, however, is contingent upon active engagement and support of SMEs by Latin American governments, given the prominent presence of these businesses in the region’s economies.

  1. Key benefits of ICT in the business context

ICT has significantly improved the growth potential of businesses everywhere.  For most companies the advanced and effective use of ICT holds the key to staying competitive in domestic and international markets. ICT improves (1) production and supply chain operations, (2) access to industry and market information, (3) communication with clients and suppliers, as well as (4) advertising and marketing efforts.

Improving ICT infrastructure empowers small firms to robustly develop. This relationship was exhibited, for example, in a multi-country Asia-Pacific Economic Cooperation (APEC) study which assessed the main government initiatives, benefits and challenges associated with the adoption of ICT by SMEs across the Asia-Pacific region. After interviewing nearly 200 Chilean, Mexican and Peruvian SMEs, respondents consistently noted the following benefits of improving their ICT capabilities:

  • Improving customer relations,
  • Increasing visibility and reputation,
  • Growing existing business relations,
  • Improving access to market information and business trends,
  • Improving management of supply chain and product/service delivery
  • Improving quality control

 

One business owner reported that his company, a chemical product manufacturer employing 15 workers, grew six-fold in eight years after incorporating e-commerce capabilities. The Internet also enabled this company to find new suppliers and clients worldwide and access technical information useful for R&D purposes.[x]

ICT also allows SMEs to build social capital at a low cost through social media and other business-minded online interactions. These venues may result in new business leads or viable ideas for expanding or becoming more productive.

  1. The current state of ICT adoption by businesses in Latin America

The more an SME integrates ICT across its business processes, the higher the benefits for the company’s productivity and competitiveness. Rovira and Stumpo (2013)[xi] identified four progressive stages in the use of ICT by businesses as follows:

  • Stage 1: consists primarily of informal micro and small businesses, particularly in rural areas, which lack access to basic ICT.
  • Stage 2: consists primarily of small and medium-sized businesses which make an investment in basic ICT equipment and applications (e.g. PC, Internet, e-mail, websites) to streamline administrative procedures. At this stage, businesses may also engage in relatively more sophisticated operations such as electronic transactions with government agencies and the banking sector (e-government and e-banking, respectively).
  • Stage 3: consists primarily of medium and large businesses in which ICT-based solutions support decision-making, coordination among employees (i.e. Intranet) and coordination with suppliers and clients (i.e. Extranet). At this stage, companies also engage in e-commerce.
  • Stage 4: consists mainly of transnational and large domestically-owned corporations whose intensive ICT use requires highly qualified staff and Intranet capabilities. In addition, this stage involves the use of highly specialized software such as Enterprise Resource Planning (ERP), an integrated and comprehensive business management tool, and Customer Relationship Management (CRM) systems to manage business contacts, clients, and sales leads, among other things.

Based on this ICT use continuum, we can determine which country’s SMEs are using ICT most intensively, and likely to the greatest benefit. Per the data reported by the Economic Commission for Latin America and the Caribbean (ECLAC), most SMEs in Latin America are in the first two stages of the ICT use continuum. The average number of SMEs that utilize basic ICT tools ranges between 80% and 90% for small businesses and approaches 100% for medium businesses.[xii]

While Brazil and Colombia are leading the way in Stage 2 in terms of the percentage of SMEs with computers (99.5% and 99%, respectively) and connectivity to the Internet (both at 98.5%), the percentage of SMEs with their own website is highest in Argentina (62.5%). The percentage of SMEs using e-government and e-banking services is also highest in Brazil (71% and 86%, respectively), followed by Colombia (59.5% and 85%).

In terms of Stage 3, the percentage of SMEs with an Intranet is highest in Costa Rica (46.5%), followed by Brazil (41.5%), where the percentage of SMEs with an Extranet is also among the largest (34%). Brazilian SMEs are also among the most active in e-commerce, as the percentage of these companies placing online orders is the highest in the region (61%). The percentage of SMEs receiving online orders is highest in Colombia (48%), followed by Uruguay (42%).

As for Stage 4, in which SME participation is not as significant, the percentage of SMEs using Enterprise Resource Planning (ERP) solutions is highest in Chile (45.5%) and the percentage of those using Customer Relationship Management (CRM) systems is highest in Brazil (27%).

  1. Innovative government-sponsored programs are on the rise

The aforementioned evidence shows that Brazilian SMEs currently lead in the region when it comes to incorporating both basic and advanced ICT tools into their productive and administrative processes. Government initiatives seem to be partly responsible for this success. For example, the Brazilian government offers technology consulting services for SMEs, matching SME demands with ICT solutions providers. Similarly, Mexico has established a network of entrepreneur support centers which provide consulting, training, and financing services related to the integration of ICT into business processes.

Colombia, Argentina, Costa Rica, and other high-performing countries offer loans and grants to SMEs for incorporating ICT into production processes. Meanwhile, Chile promotes e-commerce among SMEs through free training courses for aspiring entrepreneurs, and provides incentives for SMEs which provide ICT training to workers and leverage ICT tools in the curriculum. 

In 2017, Colombia will also launch a Ventanilla Única Empresarial (VUE), a one-stop online business registration platform. While on a research trip to Colombia to study the country’s productivity challenges, I spoke with the Minister of Commerce, Industry and Tourism about SME development.[xiii] She emphasized that VUE is an ICT-based single window system which will consolidate the currently cumbersome process to only 5 steps to start a business in Colombia. VUE is expected to substantially decrease informality, which in Latin America “tends to go hand in hand with a higher proportion of smaller, less-efficient firms, high worker turnover, a less-educated and less-trained workforce, the likelihood of illegal practices, and reduced access to credit… These features tend to reduce productivity; thus, a strategy that seeks to reduce informality could potentially have a large payoff.”[xiv]

Meanwhile, Costa Rica subsidizes cloud solutions and training on cloud technologies for SMEs. The cloud dramatically lowers upfront technology installation and maintenance costs, which SMEs have repeatedly identified as their main obstacle to ICT adoption. The cloud also has the potential to increase SME employee mobility and flexibility.

Hopefully more governments in the region will regard cloud-based solutions as enablers for moving SMEs closer to stages 3 and 4 of the ICT use continuum. Meanwhile, it is imperative to continue building an enabling environment characterized by affordable broadband accessibility, flexible financing mechanisms for technology upgrades, and adequate ICT skillsets in the workforce.

  1. The road ahead: increasing the adoption of advanced ICT by SMEs

The socioeconomic promise of ICT adoption is slowly being fulfilled in Latin America, but many obstacles lay ahead. While more than 80% of SMEs in Latin America are using basic ICT, less than 25% of them are using advanced ICT applications, according to ECLAC. Unfortunately, as reported by APEC, ECLAC, and the OECD, many Latin American SMEs still consider ICT a risky and costly investment, particularly in the context of limited ICT literacy and training, limited access to credit, lack of qualified human resources, and the high cost of broadband in the region.[xv] The digital inclusion of rural SMEs is also a major challenge.

Despite these difficulties, SMEs have begun a journey towards digital inclusion that is irreversible, and governments have an opportunity to capitalize on the technological momentum underpinning ICT adoption. Helping SMEs move toward more sophisticated ICT solutions will gradually empower them to drive growth and productivity while boosting innovation, thus improving the communities around them. Government efforts to design a progressive set of ICT-oriented programs – from early-childhood digital education to customized consulting services for startups – are therefore critical to make Latin America’s SME sector more competitive and to promote economic development in the region.

While many governments in Latin America are, in effect, implementing a variety of policies and programs to promote and facilitate the adoption of ICT by SMEs, future assessments of these initiatives should take into consideration not only the number of businesses impacted, but how government action has improved business mobility across different levels of the ICT use continuum discussed above.

Government agencies must keep in mind that these future benefits may be difficult to quantify in dollars while the costs for the government are immediately visible (e.g. subsidies, consultant fees, loans). Nevertheless, a negative Net Present Value (indicating a lower return compared to other public projects of equal risk) does not necessarily rule out proceeding with a government program: policymakers in Latin America need to take into consideration the powerful future spillover effects of technological investments by firms. With potential productivity gains on the horizon, it is time for Latin American governments to help SMEs flourish via advanced ICT-adoption initiatives.

Valentin Sierra is an aspiring Master of International Economics and Finance (MIEF) at The Johns Hopkins University School of Advanced International Studies (SAIS), class of 2017, and Master in Public Policy at Harvard University, class of 2019. He previously served as a research analyst for consulting firm Washington Core and as assistant editor of Vox.LACEA.org, the research portal of the Latin America and Caribbean Economic Association. His research focuses on the intersection between trade, productivity, and informality in Latin America. He holds a B.A. in Political Science with a minor in Economics from Saint John’s University in Minnesota. Valentin is originally from Colombia, where he hopes to pursue a career in public service. Follow Valentin on Twitter @valentinsierra.

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[i] Although the definition of micro, small, and medium-sized businesses varies across countries, here we define them in the following terms:  Micro – 5 employees or less; Small – 5-19 employees; Medium – 20-99 employees.

[ii] Office of Management and Budget, “Circular A-4: Regulatory Analysis,” 43, accessed April 17, 2017, https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/circulars/A4/a-4.pdf

[iii] Rolando Avendaño, Niels Boehm, Elisa Calza, “Why scarce small and medium enterprise financing hinders growth in Latin America: A role for public policies,” VOXEU, last modified January 27, 2013, accessed April 17, 2017, http://voxeu.org/article/small-and-medium-enterprise-financing-and-growth-evidence-latin-america

[iv] For the purposes of this article, ICT comprises computers, internet, software, mobile & fixed telecommunications, and associated devices and networks.

[v]“Productivity in Latin America. Grist to the mill,” The Economist, last modified March 31, 2014, accessed April 17, 2017, http://www.economist.com/blogs/americasview/2014/03/productivity-latin-america

[vi] Robert Damuth, Allen Dixon, Laura Sallstrom and Angela Leung, “The Economic and Societal Benefits of ICT Use: An Assessment and Policy Road Map for Latin America and the Caribbean,” CompTIA (2007), accessed April 17, 2017, http://pannastrategies.com/ICT_benefits.pdf

[vii]Antonio Ca’Zorzi, “Las TIC en el desarrollo de las PyME. Centro Internacional de Investigaciones para el Desarrollo,” Centro Internacional de Investigaciones para el Desarrollo (2011), accessed April 17, 2017, http://pymespracticas.typepad.com/files/tic-y-pymes-en-al-final-2011.pdf

[viii] Juan M. Gallego and Luis H. Gutiérrez, “ICTs in Latin American and the Caribbean Firms: Stylized Facts, Programs and Policies,” The Inter-American Development Bank (2015), accessed April 17, 2017, https://publications.iadb.org/bitstream/handle/11319/7104/ICTs_in_Latin_American_and_the_Caribbean_Firms.pdf?sequence=1

[ix] Harvey S. Rosen and Ted Gayer, Public Finance (New York: McGraw-Hill, 2014), 158

[x]“Research Study of the Main Benefits of Investing in the use of ICT in Selected Economies,” Asia-Pacific Economic Cooperation (2011), accessed April 17, 2017, http://publications.apec.org/publication-detail.php?pub_id=1249

[xi] Sebastián Rovira and Giovanni Stumpo, “Entre mitos y realidades. TIC, políticas públicas y desarrollo productivo en América Latina,” Economic Commission for Latin America and the Caribbean (2013), 31, accessed April 17, 2017, http://repositorio.cepal.org/bitstream/handle/11362/37248/1/LCL3600_es.pdf

[xii] “Economía Digital para el cambio estructural y la igualdad,” Economic Commission for Latin America and the Caribbean (2013), accessed April 17, 2017, http://repositorio.cepal.org/bitstream/handle/11362/35408/1/S2013186_es.pdf

[xiii] See Johns Hopkins SAIS, MIEF blog, “Trade and Productivity in Latin America: Field Research in Colombia,” last modified March 31, 2017,

http://johnshopkinssais-mief.squarespace.com/home/2017/3/31/trade-and-productivity-in-latin-america-capstone-field-research-in-colombia

[xiv] “How Latin America and the Caribbean Can Escape Suppressed World Growth: 2013 Latin American and Caribbean Macroeconomic Report,” The Inter-American Development Bank (2013), 2, accessed April 17, 2017, http://www.iadb.org/document.cfm?pubDetail=1&id=37653357

[xv] “Latin American Economic Outlook 2013: SME Policies for Structural Change,” Organization for Economic Co-operation and Development & Economic Commission for Latin America and the Caribbean (2012), accessed April 17, 2017, http://repositorio.cepal.org/bitstream/handle/11362/1464/1/S2012085_es.pdf

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