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Innovation, Technology, and Finance to make SMEs Stronger and More Productive
An initiative driven in El Salvador by IDB Invest, IDB Lab, and Banco Cuscatlán promotes digital transformation and adopting financial and non-financial products.
Superfoods also take care of Amazonia’s health
The development of sustainable value chains for quinoa, cocoa, sesame, and other high-nutritional-value crops can foster integration into international markets, benefit the region, and contribute to sustainable development goals.
By Adopting Traceability in Its Supply Chain This Company Managed to Become More Sustainable
In a world where sustainability is part of the DNA of business, an Ecuadorian company implemented standards to guarantee socially just and ecologically respectful practices throughout the value chain.
Supporting sustainable palm oil in Latin America and the Caribbean
African palm oil accounts for the bulk of vegetable oil sales in the world, and it is estimated that demand for this oil will grow significantly in the near future. But how is palm oil used? Although many of us are unaware of all its potential uses in industry, we use palm oil daily in a great variety of products, such as processed foods (ice creams, cookies, spreads, etc.), cosmetics, and automobile fuel. Review the labels on the products you use frequently and you will be surprised.
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]
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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Water management: the key for the successful hydroelectric generation in Norway
Beyond the extraordinary Norway’s landscapes, characteristic of the planet’s cold temperate zones, decorated with a display of impressive fjords, there are two aspects of this country that particularly drew my attention: the first is that 99% of the energy consumed is hydro energy; and the second is that after oil and gas, the most important export item is precisely electrical energy. The conditions of this Nordic country to generate 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. Norway’s geology is primarily characterized by solid and impermeable rocky layers; liquid and solid precipitation is abundant throughout nearly the entire year; and a high percentage of its rivers fall sharply to the sea from their sources of origin in the mountains and plateaus. But this is not all. The key to Norway’s success in the production of hydropower is human ingenuity and creativity for managing water and making the most of it while harmonizing the demands for energy and adherence to the highest environmental and social standards at the same time. Thus, Nordic engineering found a solution for managing water resources that, while abundant, continue to be extremely valuable: pumping water between reservoirs in several hydroelectric systems, to allow “energy storing” during periods of low demand. To do this, a real labyrinth of tunnels has been constructed connecting reservoirs located at different altitudes that, during periods of low demand, take in water pumped from other reservoirs located downstream, and release it when the demand for energy requires larger flows for generation. The Nordic formulas for hydroelectric efficiency Nordic engineering has optimized the production of hydropower and water consumption. One of its innovative formulas has been the design of power stations with turbines with different power ratings, allowing operators to make the necessary arrangements and supply the power required so that each unit works at or close to optimal levels. For example, in Norway a plant with 90 megawatts (MW) of installed capacity, rather than having three 30 MW turbines, which is the standard, is designed with one 40 MW, one 30 MW and one 20 MW turbine. This configuration allows the power station operator to “play” with various combinations of generators to produce the energy required in the most efficient way. Thus, when the demand requires 70 MW, rather than having three 30 MW turbines operating at 78% or two operating at maximum capacity, and the third at 33% of its capacity (with large losses due to under-utilization), the power plant can use one 40 MW turbine and one 30 MW turbine at their maximum capacity and at peak efficiency optimizing the use of water and the production of energy. Another significant aspect is how the environmental licensing system works. The granting of environmental licenses for the construction and operation of new hydroelectric power plants has been mostly delegated by the national environmental administration to what are called Water Users’ Associations. These are made up of all individuals or legal entities that have some type of legal or common law right over the water from the rivers to be exploited. Licenses with a duration of 30 years are granted after an extensive consultation and collaboration process — very extensive that can last for several years to ensure that most people is included and heard —with the associates, and it has a 30-year period. After this period, the terms of the license can be revised, and licenses may even be completely revoked, which is why the project manager is legally required to dismantle the power station, and leave the site like how it was before the project. However, so far this has never occurred, and revisions have usually been related to minimum flows to be left downstream of the reservoirs, and with the management of aquatic fauna in the intervened rivers. Keep in mind that Norway is one of the most desirable tourism destinations for European and North American fishermen looking for trout and salmon. No doubt there is much to learn from the Nordic experience in aspects related to hydropower production and water management. Norway has made great strides in areas such as the management of geographic information to determine potential sites for new power stations; the development and application of hydro-meteorological systems to support a true energy production industry based on good water management; and how to manage the power dispatching and transmission system both within the country and toward neighboring countries, to achieve efficiencies rarely seen in other countries. Subscribe to receive more content like this! [mc4wp_form]
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.
The Floods of 2017: How can the private sector mitigate the impact of natural disasters
There are many theories to explain the current trend of increasing frequency and magnitude of extreme events, but it seems obvious that there is a correlation with increasing average temperatures. Many argue that the world is already experiencing the consequences of climate change and that even if the increase on average world temperature is kept under 2 degrees Celsius, countries will have to adapt to a wider range of natural disasters. During 2017 the world witnessed the occurrence of severe floods from China to Canada. As we wrote this article, Italy was facing its second season of severe flooding. Latin America and the Caribbean was no exception, and Peru was particularly affected by this phenomenon. The floods in the Andean country destroyed 115,000 homes, leaving almost 180,000 homeless, over 110 people were killed, more than 350 were seriously injured, and over 2,500 kilometers of roads have been devastated. The region is particularly vulnerable to the occurrence of floods as it is the most impacted by El Niño. Additionally, due to its high urbanization rate, the impact of floods to cities and urban infrastructure are often devastating. While estimates of necessary annual investments to manage floods in the region vary, given the constraints on fiscal spending, the full burden of this cannot be met by governments alone. Therefore, the private sector has a key role to play, that involves both the development of software as well as hardware. Insurance: A key software for mitigation On the soft side, alternatives to avoid or mitigate the impact of severe floods include flood insurance, payment for environmental services, better flood assessment and warning systems, ecosystems planning, and zoning, among others. All these services can be provided by the private sector through the development of policies and adequate incentive frameworks. For example, unleashing private sector insurers to offer products in Latin America is no easy task but it can bring about a stream of benefits. Insurance is a fundamental component in any strategy of adaptation to natural disasters. As illustrated in a paper by the Global Facility Disaster Reduction and Recovery, flood insurance: Increases resilience against residual risks that cannot be prevented or mitigated Incentivize engagement and investment in risk mitigation measures Reduces pressure on the fiscal budget from natural disasters Private sector participation is driven by a complete shift toward risk-based rates, and more accurate mapping which in turn provide correct economic incentives both in urban as well as in rural areas (agriculture in particular). The private sector can apply innovation and technology to improve early warning systems. The earlier we can identify where storms are likely to hit, the better we can target efforts to minimize damages. In the Netherlands, for example, Siemens has created the concept of “smart levees” by implementing a monitoring system that uses sensors to gauge water pressure, temperature and shifting water profiles. This allows the identification of stretches of levees that are at higher risk of being breached. Innovative solutions for better hardware With respect to hardware, the most obvious opportunities relate to retrofitting and developing infrastructure that is more resilient, and can better perform under extreme conditions. The vulnerability of existing infrastructure was evident during the occurrence of natural disasters in 2017, and the private sector can bring capital, innovation, management systems, and technology. Following hurricane Maria devastation in Puerto Rico, Tesla’s Elon Musk, offered to green and revamp energy generation in the island through the installation of solar systems and high-tech batteries. Bold ideas and innovation will be necessary to assist Latin America and the Caribbean in adapting to the impacts of climate change. In doing so, a vital role of governments is to develop policies and regulatory frameworks that allow the creation of new business models and provide incentives for companies to invest on climate smart infrastructure. For instance, building and financing (public/private) business models for urban drainage transformation in megacities represents a gigantic opportunity to foster investments that will significantly improve the quality of life of millions of urban residents in the region. At IDB Invest we can draw lessons from our vast experience in the region that combined with disruptive technologies, and a menu of financing instruments can offer unique value propositions to our clients. We embrace the opportunity to work with private companies all over Latin America and the Caribbean in the development of innovative models that can contribute to better management of floods and other natural disasters in our countries. Subscribe to receive more content like this! [mc4wp_form]