Latin America and the Caribbean have never been easy places to start a new business, particularly in knowledge services. Access to funding and a limited talent pool are frequently cited as common challenges for entrepreneurs. However, times are changing, and there are new reasons for optimism.
That’s what Gerardo Funes, Integration and Trade Specialist at the Inter-American Development Bank (IDB) thinks, based on robust data from IDB’s research and other trustworthy sources. Nearshore Americas questioned Funes on core issues that influence tech-export services entrepreneurship in the region. Here are some of his perspectives:
Nearshore Americas (NSA): Service exports are increasingly relevant for many economies in Latin America and the Caribbean. From the IBD’s perspective, what is the outlook for entrepreneurship initiatives to offer Nearshore services to North America?
Gerardo Funes (GF): For us, the potential of global service exports promotion is enormous for the countries in the region. The impact on the economy is substantial. This can be seen in the quantity of “unicorns” that exist in the region -companies worth more than a billion dollars-, there are already 19.
During the last five years, service exports have grown at an average rate of 2.4%, while the goods exports have shrunk in 2.7%. So, our countries have several advantages to compete at a global level, starting with the talent and creativity of our people.
There are four sectors that we have identified as very dynamic, and which represent a more significant potential for the region, in terms of entrepreneurship:
- The first one is virtual reality, augmented reality, and mixed reality. The Latin American market in this segment will grow at an average rate of 50% until 2022.
- Secondly, animation and videogames. Latin America has become a protagonist in this industry. Just the global industry of videogames was valued in 2016 in $254 billion, while the knowledge outsourced services sector is worth $29 billion. The videogame industry in Latin America and the Caribbean is growing three times faster than in Asia-Pacific.
- The third subsector that we have identified is cloud computing. Network-based services in the region have grown at rates that equal three times the regional GDP growth.
- Lastly, fintech companies are boosting venture capital, increasing the levels of investment in the region. Many of Latin America’s unicorns are fintech companies, and this sector reached $600 million in 2017.
NSA: Despite this positive outlook, Latin America still lags in global indexes such as innovation and ease of doing business. What are the main obstacles that nearshore entrepreneurs face?
GF: I think there is a high level of heterogeneity among the countries in the region, and, indeed, Latin America and the Caribbean is constantly behind the most advanced economies, and Asia, mainly regarding financial inclusion for small businesses.
Funding continues to be a significant limitation for entrepreneurship and business expansion. In this context, the digital transformation that the economies of the region are going through, which includes financial services, might be a promising signal. Fintech companies appear to be a relevant solution, not only to increase financial inclusion, but also to increase competition, innovation, and to improve financial development.
Several factors explain the gap in funding access, such as the high levels of informality in the region, the strict documentation requirements to open bank accounts, and also the low penetration of financial services, such as leasing and factoring. Companies have a deficit of credit information, and entrepreneurs have little financial education.
On the other hand, according to an IDB’s recent study, there were 703 new fintech companies in 15 Latin American countries in 2017, and that figure rose to 1.166 in 2018. So, we are seeing that service export companies that don’t obtain funding the region’s traditional banking are now getting it from fintech companies or other financial solutions, such as crowdfunding.
We, as a bank, also have a private sector side, with IDB Invest and IDB Lab. They play a role in supporting digital transformation initiatives and deepening the collaboration with fintech companies to close the gap of financial inclusion and to promote responsible financial practices in the region.
NSA: Considering this context, do you believe that funding will be less of a problem for Nearshore entrepreneurs in the region?
GF: I believe so. Outsourcing services in Latin America started mainly with BPO and contact centers. But the evolution of this sector, particularly over the past ten years, has been dramatic. It has evolved by leaps and bounds, along with the digital transformation of 4.0 industries.
There is a challenge for call centers and back-office services. They will soon be automated, and the jobs created by this industry are at risk. It is estimated that 30 percent of the BPO traditional services workforce, such as contact centers, will be replaced by automation.
To guarantee the viability of this sector, we have to adopt new information technologies faster and focus on the outsourcing of knowledge-based processes and IT. Analysts expect the global ITO market to reach the net worth of $881 billion in 2022, while KPO will reach a value of $124 billion by 2025. Latin America is blooming in the industries of animation and videogames, for instance.
NSA: Which countries are leading in Nearshore services entrepreneurial capacity, and which ones are lagging? What can we learn from both groups?
GF: In general, Latin America and the Caribbean have had a significant growth during the last decade in the global map of service exports. While India and China keep places one and two, respectively, as BPO destinations, according to a Cushman & Wakefield report, nine countries of our region are named among the top 20 markets. Argentina, Brazil, Colombia, and Mexico are the main ones, but you also got Peru and Costa Rica, El Salvador, and Honduras.
Countries like Chile and Uruguay have invested in the early adoption of innovations and industry technologies, as well as in talent developments. For instance, Globant, the Argentinean unicorn company, has shown that offering quality services on a global scale is very profitable. Today, it employs nearly 10,000 people, and 90% of its income comes from the US and Europe, but it also has significant participation within the region.
However, even when service exports from Latin American companies have grown faster than goods exports, they continue to lag in comparison with India, China, and other Asian countries. They are our main competitors, as well as some Eastern European countries. Latin America’s participation in the global service exports is just 3.5%. But the opportunity to export digital services is vast.
Latin America has to develop an aggressive strategy to capture these opportunities. For that, investment promotion agencies need to be strengthened. Our research at the IDB shows that these agencies have a significant impact on the sales of a country, but they need to continue improving. The IDB and the OECD conducted a study that identified and summarized the characteristics of the most effective and successful promotion agencies. We found that specialization, size, and the level of independence from the government are some of the main differences among agencies and which determine how much they can support -or not- small businesses.
NSA: Latin America also has a talent challenge. From the IDB, what’s the outlook on the current situation of alliances between the private sector, universities, and public sector to achieve a bigger talent pool in Latin America, considering the low rates of graduates in STEM careers compared to what the industry requires?
GF: We see that even with the deficit in STEM graduates, the outlook is encouraging. From the IDB, we are promoting the development of the global services industry in several countries in the region, not just in investment attraction and aftercare, but also in export promotion through loan operation and technical cooperation.
In Uruguay, the IDB funded a program to promote investment, service exports, and training programs to identify talent. We have worked with Uruguay XXI to position the country among other markets. This project has had relevant benefits. Around 35 international companies have settled in the country or expanded their operations between 2013 and 2017, and Uruguay has become a hub for the industry.
Between 2012 and 2019, 202 companies have invested in training 7.000 employees through a project with Uruguay XXI and the IDB. These finishing schools have particularly benefited women. In 2018, we also approved a plan to increase the graduates with digital skills in Uruguay, in areas such as AI and data science. Even Harvard and MIT will have a presence in Uruguay to support this program.
Another example is Guatemala, a country that is emerging in the service outsourcing industry. We also have finishing schools there. In Trinidad and Tobago, we have a program of location of global services to promote the country as a global competitor in this industry. This program offers training on skills for global services and includes the creation of a center for the outsourcing of animation and videogames.
In Jamaica, we have something similar. In this country, the industry has grown exponentially over the last 20 years, and the IDB has offered support focused on skills training for global services. In Chile, we have a program that contributes to increasing the effectiveness of the government to promote the global services industry, expanding the collaboration between institutions like Corfo, ProChile, and Invest Chile.
Similarly, we have implemented such programs in Colombia, Haiti, and Paraguay.