As we approach next week’s Latin American SmartCamp Regional Finals and get to know our six finalists, our understanding of these young startups might be improved if we have a broader understanding of the economic environments from which they emerged. Here we will specifically take a look at Mexico, one of the most important economies in Latin America and the home country of finalist Nuve. The essay below was written by Francisco Javier Altamirano Collado, IBM Academic Initiative & Global Entrepreneur Programs Manager.
Some say that Latin America’s combined potential will pass China’s economy in a few years, with Mexico playing a key role in that game. Mexico has embraced several international free trade and investment agreements that make the country one of the most open economies in the world. A recent article in the Economist estimates that on present trends, by 2018 the United States will import more from Mexico than from any other country.
Mexico City is the largest metropolitan area in the Western Hemisphere and with a GDP of $390 billion, it is the eighth richest city in the world. It is a bustling and modern metropolis, home to more than 21 million people and the center of the country’s intellectual and industrial pulse. The Mexican economy, overall, is valued at $1.47 trillion USD, positioning it among the top fifteen largest in the world. Goldman Sachs estimates that by 2050 it will be the sixth largest.
The young emerging middle class population is spurring demand for high-end consumer goods that creates a huge market for related service providers. Small and medium enterprises are capitalizing on these opportunities. The favorable commercial environment, the economic stability (coupled with the now depressed economies of various developed countries) and the significant progress in fiscal and regulatory laws are making Mexico a growing destination for trade and investment.
Entrepreneurship is clearly an essential contributor to this evolution, but it is not just about the emergence of new businesses. The most economic growth actually comes from high impact startups turning into big companies, and there is still a long way to go for Mexico.
In Mexico, companies under 250 employees comprise 99% of the registered companies in the country. These small and medium enterprises contribute to half of the country’s GDP while big companies provide the other half. It is amazing that only 1% of the companies contribute so much, but this is common in many nations. If only a few big companies produce half of the wealth in most countries, how can other SMEs become big companies and be more productive? Some studies indicate that for every 100 organizations that become big companies (over 250 employees), the national GDP is increased 1.28%.
To support this progress, a network of investing firms and experienced coaches is needed. In Mexico, as in all Latin America, the venture capital industry is still nascent. Fundraising is a challenging process that needs to be perfected and there are just not enough funds (investments in the range of $100,000 to $3 million are often termed the “missing middle”).
In addition, there is a need of fund managers with business track records who can lead execution and contribute strategic advice. It’s difficult to find high level executives willing to embrace the challenge and risk their current C-level wages in multinational corporations. The bets will be too high until a viable exit market is established to facilitate the return on investments.
Nevertheless, the amount and quality of entrepreneurial activity has substantially increased in recent years. The Mexican government is making a big push to encourage venture capital and investment in SMEs by sponsoring funds and venture capital projects. New rules now allow pension funds in Mexico to invest in private equity and venture capital funds, which is bringing new money to the market. Foreign funds are also arriving to Mexico and in general, financing is becoming more easily available.
Innovation is definitely critical for economic growth. Mexican universities are graduating 130,000 engineers every year and many of these institutions are now connecting the resulting investigation projects with incubation and acceleration guidance.
All the elements are available, the opportunities and success stories are more frequent. It seems now it is just a matter of Mexicans believing in their own potential. The new generations are finding novel idols in the recent successes of the National Football team, various athletes in the 2012 Olympics and many other popular heroes that exemplify that talent is present and success is within reach. Could “Made in China” give way to “Hecho en México”?