Five Ways Impact Management Can Jump-Start Latin America & the Caribbean's Recovery
“Build back better” or “build forward better” — no matter how you phrase it, turning mounting investor interest in sustainable and impact investing into action is a must for any COVID-19 recovery scenario. Impact management is another key to making sure this push to action is done both effectively and with integrity.
Unleashing certainty: The catalytic effects of the Panama Canal expansion
Over two years ago citizens of the United Kingdom voted to leave the European Union, a decision which has been playing out on the global stage ever since . While the Brexit referendum unleashed a wave of uncertainty that seems to be growing as negotiations continue, other public votes such as the referendum to expand the Panama Canal, have had the opposite effect.
Development Effectiveness: Adding Value beyond Financing
A new private sector
In his recent annual letter to CEOs, Larry Fink, the founder and CEO of the investment firm BlackRock, called on companies to incorporate both profit and purpose into their business strategies. “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”
Small and medium-sized enterprises (SMEs) are an essential part of a dynamic and healthy economy. Their increase in number and growth advances competition and strengthens the entrepreneurial ecosystem, with a positive and significant impact on innovation and aggregate productivity. SMEs represent close to 90% of the companies in a typical Latin American or Caribbean country and employ most of the labor force (close to 70%). They also tend to create a substantial portion of new jobs; although many of these jobs do not survive, the net effect tends to be positive. However, the region’s SMEs show a low level of internalization (learning by doing) compared to their peers in the developed countries or other emerging economies, or even compared to large companies in the same sector and country.
Exporting: Relevance and challenge
There is abundant evidence showing that Latin American and Caribbean countries are behind developed countries, due to the productivity gap. Improving productivity is essential for the region’s economies and expanding exports can help. First, international trade produces a reallocation of resources from less productive companies and sectors to more productive ones. Second, by exporting companies learn (learning-by-exporting) and innovate, which is reflected in significant efficiency gains. Finally, international trade affects the incentives for investment in activities that promote technological dissemination and generates spillover effects in international knowledge.
However, companies face many obstacles when they try to enter external markets. They have to contact clients abroad, identify business opportunities, learn about distribution channels and administrative procedures, among other aspects. All these activities generate a wealth of information that can be used by other companies at no additional cost (or lower cost). This scenario generates a problem of free riding in the search for foreign buyers, given that the pioneer uncovers highly valuable information that can be used by other companies to imitate their behavior. In this context, where the private returns of the forerunners are less than the social returns, market incentives tend to lead to a suboptimal level of investment in the exploration of international markets. Thus, the existence of information externalities can negatively affect companies’ internalization process and provides a key rationale for encouraging companies to export.
It’s even more difficult for SMEs
In addition, SMEs in Latin America and the Caribbean tend to face restrictions in various areas of business — due to various market failures and failures in coordination — limiting their internalization. These areas are primarily access to credit, the intensity of innovation, capacities (human capital) and the organizational structure.
SMEs in the region have limited access to credit, due to information asymmetry problems — financial institutions usually do not have the information they need to evaluate and monitor SMEs’ projects, which can cause problems of moral hazard — but also because financial products are not suited to SME needs, particularly due to scale problems related to the fixed costs of the lending process and the lack of long-term financing. In addition, SMEs generally do not have (sufficient) collateral, while their access to credit is highly dependent on collateral and not so much on expected returns as in the case of large companies.
The nature of knowledge as a public good, information asymmetries and the lack of coordination particularly limit SMEs’ innovation and competitiveness both domestically and internationally. On the other hand, these companies tend to lack capacities — qualified and experienced personnel — for the export process: identifying, selecting and obtaining information on external markets, designing and implementing marketing strategies, and developing contracts overseas. SMEs have limited knowledge on exportable products and the underlying factors that determine international competitiveness (e.g., packaging, quality regulations, standards, etc.). Also, SMEs face other specific barriers specific related to export activities such as language, paperwork, billing, and sales management.
Lastly, SMEs have characteristically weak corporate governance and management and business structures even though in most cases these are companies with personalized and traditional organizational hierarchies linked to a single owner or family. All these factors profoundly limit the export capacity and competitiveness of these companies.
A model helping Argentine SMEs to export
In 2002, the Fundación Banco Credicoop, with support from the IDB Group, created the Diverpymex program. The objective of this program is to help non-exporting SMEs to successfully enter export markets and exporting SMEs to increase their exports, whether through consolidation and/or diversification.
The program consists of three stages that consider the phases in the export development process:
Evaluating the company’s export potential: Analyze its skills and competence for operating in international markets. A program coordinator and a consultant visit the company and gather information on its organization, operations and products, and hold meetings with the managers to evaluate the company’s entrepreneurial spirit in terms of export activities and potential commitment to incorporate an intern (in the absence of qualified staff) and to make the investments necessary to develop its exporter profile.
Developing an export plan: The company, with technical assistance from the consultant, researches and selects potential markets and clients, and decides which are best suited to them. It also establishes objectives, develops a budget, plans how the exports will be managed, and analyzes financial, logistical, and staffing requirements, as well as other aspects of the export process.
Implementing the plan: The company undertakes planned actions in foreign markets. At this point, training and technical assistance activities are carried out on specific subjects that arise during the process of market penetration such as shipments and insurance, quality and environmental standards, design and packaging, marketing channels, tax legislation, and others.
How do we evaluate the impact and what have we learned?
In a recent study done by IDB Invest, we evaluated the Diverpymex program’s impact on SME’s export behavior, growth and productivity. The study analyzes the dynamics and sequence of the effects, allowing for inferences regarding the mechanisms through which the program affects the companies’ performance. What were the main results?
The program has a positive and significant impact on SME’s export behavior, growth and productivity.
The positive effect on the likelihood of exporting and entering new markets is significantly greater in the short term, which confirms the importance of high costs for entering foreign markets.
The positive effect on the amount of exports, for companies that were already exporting, appears over the medium term, and it is related to the resolution of more specific information barriers to markets and products, allowing these companies to grow and consolidate their efforts in export markets.
Finally, the program increases the company’s productivity in the long term, indicating that SMEs achieve efficiency gains due to a learning-by-exporting process.
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