Craig DempseyChile and Ecuador have been identified as global leaders in early-stage entrepreneurship by the Global Entrepreneurship Monitor (GEM), but what makes these two Latin American nations stand out on the global stage?
When considering global hubs of innovation and entrepreneurship, countries in Latin America may not immediately spring to mind. Yet several from the region have emerged as major sources of technological innovation, with Brazil, Colombia and Mexico shining examples.
But it is Chile and Ecuador that are the leading lights in early-stage entrepreneurship, as measured by “Total early-stage Entrepreneurial Activity” (TEA), defined as the percentage of adults aged 18 to 64 “who are either a nascent entrepreneur or are owner-manager of a new business.”
That is true despite both countries displaying normal rates for the other pillar of entrepreneurialism identified by GEM, “Established Business Ownership” (EBO), defined as is the percentage of working-age adults who have been running their own business for more than 42 months.
Understanding why demands a closer look at the environments in which entrepreneurs operate in these two countries.
“Hives” of Entrepreneurial Activity
GEM identified “hives” of entrepreneurial activity where TEA was most prevalent, based on academic surveys carried out in each of the 50 participating countries. It is of some significance that the six countries with the highest levels of TEA are in Latin America.
In both Chile and Ecuador, TEA stands above 36%. To put that into context, TEA is close to 10% in the United Kingdom and less than 18% in the United States. The country that sits nearest to the two Latin American frontrunners is Guatemala, with a TEA of 25%.
That means over 3.1 million people in Chile and almost 3.4 million people in Ecuador are setting up or in the first three-and-a-half-years of running their own business, based on World Bank population data.
When analysing the status of Chile and Ecuador as entrepreneurial hives, a pattern emerges. While both countries stand out from the rest of the countries surveyed in terms of TEA, each has an EBO rate comparable to the others. Brazil and Guatemala each have much higher EBO rates than both Chile and Ecuador.
That suggests a shift towards greater entrepreneurial activity in recent years, which previous GEM reporting appears to support. Chile has witnessed a 12% increase in TEA since the 2017/2018 report, while Ecuador saw a 7% increase over the same period.
Entrepreneur-Friendly Policy
Chile approved a “30-Day Payment Law” in 2019, guaranteeing that goods and services provided by businesses will be paid for within 30 days. The policy meant greater liquidity and working capital for small-and-medium enterprises (SMEs) by regulating debit payments. It also established legal terms for fair business practices and compensation rights.
That move was bolstered by the simultaneous launch of an online platform called “the entrepreneur journey,” created by Chile’s Economic Development Agency (Corfo) and offering tools, advice and networking opportunities to entrepreneurs around the country.
Ecuador also introduced entrepreneur-friendly policies, such as a “Productive Promotion Law” passed at the end of 2018, establishing tax incentives for new business and SMEs. The following year, the Ecuadorian government launched the “Entrepreneur Service Center” (CAE) based in the capital city Quito. Several government entities with work related to business ownership are present at the CAE, where users can seek advice on business development and accessing credit. The center itself also provides financing for “necessity-driven” entrepreneurs.
Infrastructure
Chile and Ecuador are joined by Panama in displaying better than average markers for physical infrastructure among the TEA top six. That means the likes of roadways and internet speed and access are particularly well developed for business needs. According to the survey results, both Chile and Ecuador have better physical infrastructure in support of entrepreneurship than the United Kingdom.
Chile’s status as the region’s most economically-developed country, with the highest GNI per capita in Latin America, is well known, and the country has the infrastructure to show for it. Nevertheless, a number of major public works projects are in place to improve it further.
Meanwhile, Ecuador has promoted infrastructure development in recent years, with the government declaring infrastructure projects a priority in late-2019 and announcing a major infrastructure investment drive earlier this year.
Education
Education represents the “least well-developed, weakest condition,” according to GEM, with school level education a deficiency for many countries. While the Latin American countries surveyed consistently displayed below average ratings for school-level education, a number performed well in terms of “entrepreneurial education at post-school stage.”
That means Latin American countries generally perform as poorly in school-level educational markers such as introducing ideas and instilling values related to entrepreneurship at school age. However, for post-school stage education – a factor based on the availability of high-quality educational programmes and practical training related to entrepreneurship – Chile, Ecuador, Colombia and Guatemala display results that are notably above average.
As highlighted in a recent study on entrepreneurial education at university level in Chile (pdf), promoting entrepreneurship represents a “recent challenge” taken on by universities in the country. The study highlights the success of such programmes, while suggesting such efforts to bolster Chile’s entrepreneurial spirit are only set to grow.
Cultural Norms
When considering how cultural norms affect entrepreneurialism, the essential question is to what extent national culture stifles or encourages entrepreneurship and entrepreneurial values.
Factors pointing to an entrepreneur-friendly culture include the presence and standing of entrepreneurial role models, as well as overall social support for those willing to take commercial risks.
Both Chile and Ecuador have beyond average ratings for entrepreneurial cultural norms, with Ecuador’s particularly high. Again, only displays above average cultural norms among the rest of the TEA top six.
That Ecuador has a strong entrepreneurial tradition is made obvious by the extensive body of academic research and government reporting on the topic. Yet in many cases it is necessity, not opportunity, that drives people to launch a business in Ecuador.
Entrepreneurialism in Adversity
Chile and Ecuador’s performances in the GEM report point to vibrant entrepreneurial cultures that their governments have made efforts to reinforce. However, the reality is that entrepreneurialism in these countries is often borne out of necessity.
As the GEM report highlights, a major trend seen in Ecuador is that the vast majority of early-stage enterprises making up the entrepreneurial ecosystem are “low-impact, necessity driven businesses.” This could in part be fuelled by significant employment benefits enshrined in Ecuadorian law causing a paucity of formal jobs, with underemployment masking the true state of unemployment in the country over recent years.
Chile similarly faces adversity in its entrepreneurial ecosystem, with the country’s economy rocked by public protests at the end of 2019, just months prior to the Covid-19 pandemic.
Yet Chile’s greatest challenge in promoting entrepreneurialism, based on the findings of the report, appears to be the lack of financing, which is reportedly restricted to a handful of venture capitalists.
“Entrepreneurial trends in Chile therefore reflect the lack of an investment culture as well as the typical difficulties in raising funds during the more advanced phases,” states the report. In Chile, there is a ready supply of ideas and talent crying out for investors.
The Covid-19 Effect
The Covid-19 pandemic has caused economic ripples that have affected entrepreneurship around the world. In both Chile and Ecuador many SMEs have reported severe hardships, including problems paying salaries and rent.
As highlighted by GEM in a recent Covid-19 report, Ecuador experienced a severe increase in unemployment after being hit particularly hard by the pandemic, and is expected to witness an increase in necessity entrepreneurs.
Chile has also reported significant unemployment and commercial turmoil, and has responded through such measures as $2 billion in extra credit for ailing businesses, as well as promoting soft credit lines in support of digitization.
That acceleration of digitization is arguably the main positive to emerge from the pandemic in relation to business, with two out of three Ecuadorian entrepreneurs moving to online commercial activities since the onset of the pandemic.
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