Small enterprises are often believed to play a very positive role in developing (and developed) economies: they are associated with innovation, flexibility and the ability to seize new opportunities in a way that ponderous, process-bound large organisations cannot. So it is perhaps surprising to hear that one of the conclusions of a 2013 report by the Development Bank of Latin America (CAF), is that Latin America has too many small businesses.
According to the CAF report, entitled Emprendimientos en América Latina: desde la subsistencia hacia la transformación productive (2013), about one third of Latin America’s employed labour force (28%) is currently working in a small company of some kind.
In some countries, such as Honduras, the proportion rises higher, to around 45%. Pablo Sanguinetti, head of the CAF research team that wrote the report, doesn’t mince his words. “There are too many small companies in Latin America”, he says. His basic argument is that too many people end up working in small businesses, not from a positive desire to become an entrepreneur equipped with the necessary tools to succeed, but simply for a lack of alternatives. Because of this, many of these businesses bump along a survival path, unable to spread their wings and perform any kind of economic take-off.
The numbers in part explains the problem. Proportionately, there are many more small businesses in Latin America than in developed economies. While one in three Latin Americans are running his or her own business, the proportion in the US is only one in ten. This is linked to the much greater size of the informal and non-wage earning sector in Latin America. In the US, 80.4% of those in employment are wage earners, while in Latin America the average comes down to only 54.8%. Within this regional average, the proportion of wage earners relative to the total in employment in Latin America is lowest in Bolivia (37.2%), Peru (41.5%), and Colombia (41.7%). It is highest in relatively more developed local economies such as Argentina (71.3%), Costa Rica (70.6%) and Chile (68.5%).
Self Employment Not Necessarily An Aide To Development?
Source: CAF, data compiled from various years 2005-2012
The fact that many Latin Americans form small businesses as a survival strategy also skews the structure of the sector. Sanguinetti says over 90% of small businesses in the region are very small, with less than four employees. Within this group, the vast majority have no employees at all, but are single-person enterprises or cuentapropistas. “They are there, not because they are able to run a dynamic business, but basically because they have no other employment opportunities” Sanguinetti says. Given poor initial skills, low productivity, and limited or zero access to training, most of these companies are therefore unable improve their capacity and skills base, and in consequence are poorly placed to manage a growth transition to the formal, wage paying sector. This is described as an “informality/low productivity trap”. Of the total number of small businesses in the region, CAF estimates that only 25% - one in four – have the capacity to break out and achieve dynamic growth.
The report notes that its findings have important implications for economic policy. It suggests that some governments counter-productively use the tax system to limit the growth of larger, more productive companies, while offering incentives for the “creation and survival of micro-enterprises that provide employment only for the founder and a few family members, and which offer poor value added.” Instead, it recommends a “multidimensional approach” around promoting four key factors in the small company “ecosystem”: business talent, innovation, access to finance and skills training programmes.
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