Sustainable BusinessRecent posts
Sustainable Financing for Construction in Mexico: Banco Inmobiliario Mexicano’s Framework
A sustainable financing framework to strengthen Mexico’s construction sector and help reduce the country’s housing deficit.
Governance and Succession: Securing the Future of Mexico’s Nonbank Financial Institutions
IDB Invest study: key findings and a roadmap to strengthen governance and CEO and senior management succession planning in nonbank financial institutions (NBFIs).
Facing the Storm: How IDB Invest Supports Caribbean Private Sector Resilience
IDB Invest is partnering with the Green Climate Fund to help Caribbean businesses better withstand future climate shocks through blended finance and technical assistance.
Digital highways and their similarity to transportation highways
Poor bandwidth infrastructure is like traveling on a dirt road. The technological disruption we are experiencing is something unprecedented. When we compare it to the industrial revolution and the enormous impact it has on per capita gross domestic product (GDP), we can assert with total certainty that this digital revolution is changing everything, from the corporate, to the social, and even the political order. Quite rightly we call it the industrial revolution 4.0. This explosion of technology occurs in the context of the world of data, data that can only be moved with the necessary infrastructure of digital networks. Thus, just like in any traditional highway infrastructure project, without routes to permit the movement of trucks, buses, and automobiles, we could not connect destinations, trades and people. In the world of technology, data would be the means of mobility like automobiles, and networks would be the digital highways or routes available in a country, which is directly determined by the country’s regulatory framework and capital investments in the country made by mobile or satellite telephone service operators. To put the importance of the digital highway in perspective, and using the example of Jose Maria Alvarez-Pallete, CEO of Telefónica España: “It took landline phones 75 years to reach 100 million users and it’s taken Pokémon Go 23 days. Why? Because if networks are digitized, the capacity to distribute a digital product is immense.” In order for companies like YouTube, Airbnb, Netflix and Uber —to cite a few— to offer their services and connect data, information, services and products, it is vital to build and invest in an adequate digital highway. The data coming from these digital highways no doubt have the potential to improve lives and Jose Maria Alvarez-Pallete summarizes this as follows: “Analog life will merge with digital life. Buying patterns, how cars are driven, gas, water and electricity meters, microwaves, the refrigerator, the dishwasher…everything will be connected to the Internet and transmit data.” Thus, we must have digital highways so that this exponential quantity of data can be processed. To ensure the positive effects of the 21st century’s digital economy, constructing and investing in those digital highways must be the priority for economic development and social inclusion in Latin America and the Caribbean. IDB Invest has invested and will continue to invest in the region in projects that help to expand the digital highway, because we know that 10% penetration by broadband has an average economic effect of 2% to 3% on GDP and 2.6% on productivity. Subscribe to receive more content like this! [mc4wp_form]
Can innovation testing help boost private sector development in Latin America and the Caribbean?
Knowledge is increasingly seen as a key factor in promoting higher levels of productivity, competitiveness, and growth of firms. Despite this, innovation testing remains an untapped resource that can help boost private sector development in Latin America and the Caribbean. What is the best pricing scheme to maximize the demand for a product? Can technology increase the productivity of providers in a value chain? What type of product design can have the largest demand? What are the benefits to society or wider development impacts generated by a new product or service? These are questions that could be answered with an innovation testing exercise. What is innovation testing? We refer to innovation testing as the set of studies that include a randomized control trial in which an innovative approach is being tested. The final objective is to understand the cause and effect relationship between an innovative business practice or change (e.g. new product, new business approach, innovative marketing strategy, etc.) and the effects generated by it in an outcome of interest or a target population (e.g. increased demand, change in client behavior, etc.). Testing is conducted by empirically constructing a counterfactual or control group that tells you what would have been the situation in the absence of the proposed change. At the center of testing, there are considerations of cost-effectiveness, profit maximization, scalability, replicability, and/or development impact. For a long time, the private sector has been an important engine of knowledge generation and there are multiple examples of this. Back in 1842, entrepreneurs in the manufacturing industry were already experimentally testing the impacts of inorganic and organic fertilizers on crop yields, marking the beginnings of the chemical fertilizer industry. In the pharmaceutical sphere, private sector discoveries account for 80% to 90% of pharmaceutical products in the market and the industry is regularly conducting clinical trials of new drugs before introducing them into the market. Moreover, marketing companies are constantly relying on AB testing techniques to identify changes to web pages or advertisements to maximize an outcome of interest. For example, Google+ knew that with a full-screen ad that encouraged mobile website visitors to download the app, 69% of people left the mobile website right away, while 9% of the visitors clicked on the “Install” button. After they implemented and tested a nicer, less obtrusive app ad, the 1-day active users on mobile increased by 17%. Why consider innovation testing? For achieving best results managers are increasingly moving away from guessing when doing business towards using data-driven evidence to guide their decisions. Innovation testing can bring important benefits, both in terms of learning and accountability. For those in an expansion or starting phase, it can bring important learning lessons on what works and what doesn’t work before scaling up. For those seeking to explore new approaches to doing business, it can give them responses on how to design and select the business strategy that is the most cost-effective. For those seeking to generate evidence about the wider impacts or benefits they generate in society, testing can provide them with rigorous empirical evidence about their work. This is important, in this growing trend of impact investors seeking to generate social and environmental impacts beyond financial returns. It is also valuable for financial institutions that are increasingly seeking transparency and accountability. Despite the knowledge generation appetite coming from the private sector, the use of these methods remains widely concentrated in large companies and mostly in developed countries. The reality is that conducting innovation testing exercises requires technical expertise, time, and resources. In recent years, multiple firms have embarked in innovation testing exercises and multiple support platforms have emerge to help conduct these analyses. For example, Google Analytics offers support for online experiments to test which version of a landing page results in the greatest improvement in a metric value. Amazon Machine Learning Research has been conducting studies to scale-up AB testing techniques by proposing more efficient tools that help with multivariate testing and with learning how to implement ideas to reach the highest number of customers. The financial sector has also been very keen to use casual testing approaches to better tailor financial products and services to customer’s real behavior and to improve financial-decision making processes. How do we promote innovation testing? Development Banks working with the private sector bring new opportunities to support their clients with technical skills to conduct innovation testing while simultaneously providing financial additionality. Innovation testing is a key element in the IDB Invest Development Effectiveness agenda, as reflected in our annual Development Effectiveness Overview (DEO). Our focus when supporting causal testing is twofold: helping boost private sector growth while maximizing development impact, so that this becomes in a win-win opportunity for the region. We have exciting testing projects in progress related to the impacts of manufacturing companies promoting healthy practices; the effects of using machine learning techniques to increase farmer’s productivity in agribusiness value chains; and the use of technology to improve debt repayment and savings among clients of financial institutions, among others. There is still much work to do in Latin America and the Caribbean and the first step comes from the private sector demanding more hard evidence and business intelligence. This, coupled with continued support from experts in these techniques can only strengthen and boost private sector development in the region. We invite you to collaborate with us and learn more about our work at our recently launched Development Through the Private Sector Series. To know more download our first publication here. Subscribe to receive more content like this! [mc4wp_form]
Water Management: The Key for the Successful Hydroelectric Generation in Norway
This Nordic country's conditions for generating clean energy based on hydro sources are nearly perfect. A large part of its territory is made up of alpine plateaus, with altitudes of nearly one thousand meters above sea level.
SMEs and the Challenge to Export
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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What is a B-bond?
With a nearly $200 billion a year financing gap, it is virtually impossible for the development banks in Latin America and the Caribbean to close it alone. However, there is good news.
Mining Bitcoin in Latin America: opportunities … and dangers!
The discovery of the first gold nuggets in General Sutter’s sawmill became a true “gold rush” in the United States. In the mid-19th century, California attracted a generation of immigrants and adventurers looking to become wealthy in the blink of an eye, with their picks and shovels. However, to achieve this dream it was necessary capital, energy and luck. In addition, this adventure involved greater economic and physical risks. According to my family story, my great-granduncle was among those enticed by the gold fever, leaving Ireland behind with its poor potato harvests and economic policies dictated from London. Like most of immigrants, his dreams of a golden wealth soon were vanished. Nonetheless, over the following decades, California would become a vibrant state where film industry, commerce, aeronautics, and more recently, technology, would thrive. The “gold rush” and the determination of those pioneers were the initial catalysts for California’s vibrant economy that today continues to spread wealth and benefits on a global scale. Mining Bitcoin Today we live in a world where the real and the virtual are merging. In a world where data is considered the new oil it is not surprising that the mining trend is data mining, more specifically, Bitcoin mining. But, what is Bitcoin mining? Bitcoin is a cryptocurrency based on Blockchain technology. This technology is nothing more than a long chain of records; a digital, decentralized, immutable, sequential, and encrypted “ledger.” The chain is not controlled by any central authority but by an enormous computers’ network in charge to verify that the information saved in the component blocks is consistent. The key for the security of the chain of blocks is a hash, a cryptographic mathematical bit that makes the links among the blocks practically unbreakable. Returning to Bitcoin, the cryptocurrency originated from a “mining” process in which “miners” compete to solve complex mathematical problems using computers that run algorithms. Every ten minutes, whoever solves the problem and validates the chain with at least 51% confirmed by the miners is the winning miner. The new chain is then encrypted with a new block and copied in all the computers in the network. Obviously, the reward for the winning miner is paid in Bitcoin. Not a bad deal, considering that the value of a Bitcoin has increased from $700 to $16,789 in the last year alone (value at December 14th, 2017). What do we need to mine Bitcoin? Like gold miners a century and a half ago, a digital miner requires some capital, an Antminer S9, “plug and play” hardware; enough energy to run the computers day and night; and a great deal of luck to figure the solution based on computational capacity only. These days, the competition for Bitcoin mining is brutal and inefficient without economies of scale. Besides, like gold nuggets in California that became increasingly scarce, the total number of Bitcoins to be mined is fixed. American curiosities Unlike the “gold rush,” to mine Bitcoin there is no need to go to Silicon Valley. Digital technologies are geographically agnostic, which is beneficial for those who are most desperate to find solutions to their pressing issues. In Venezuela, the case of Bitcoin mining is emblematic and there are those who believe it could be the first country in the world to adopt Bitcoin as currency. The country suffers from high inflation and a weakened currency. But if you add the fact that energy is practically free in Venezuela, the country has some of the ingredients to become a paradise for miners. However, the indiscriminate use of energy has already caused significant tensions between the miners and the authorities. In addition, in the United States, the Bitcoin entrepreneur, Charlie Shrem, was arrested, accused of conspiracy for facilitating the use of cryptocurrency on the Silk Road platform. On one hand, it is evident that there is demand for a digital, credible unit of value free of interference from the central authorities. On the other hand, this logically creates tension with the traditional players (i.e. governments, central banks) and the desire to define basic game rules, in a context where reality advances at a faster than the ability to regulate it. Meanwhile, the Bitcoin fever continues, and the Blockchain ecosystem is still on the front pages. The Latin American company, Ripio, with its business model of person-to-person loans, has raised $37 million selling tokens through an ICO (“Initial Coin Offering”)! The “gold rush” drew adventurous immigrants to California’s mountains. As happened with the Irish, they were driven out by bad administrations and various misfortunes, and were willing to risk it all. As a result, California’s economy is one of the most dynamic in the world. Today, the Bitcoin fever is attracting another type of miner, a digital miner. Some will be successful and make their fortune from the valued currency. In certain countries, some of them will be imprisoned, accused of wasting electricity. But for many, cryptocurrency mining is seen as one of the gears of a new technology that over the long term may become an alternative to certain fiduciary currencies, making the digital economy even more efficient. Mind you, miners and investors, proceed with caution! Subscribe to receive more content like this! [mc4wp_form]
