In a new research article, I recently argued about the importance of promoting youth entrepreneurship in the region. The greatest weaknesses reside in human capital and training centers, despite the fact that the middle class and markets grew over the last decade. Here, we present a summary of the full analysis that was published by the Ibero-American General Secretariat.
Development of entrepreneurship from a systemic perspective
The development of entrepreneurship and entrepreneurs depends on a plethora of factors that include, although are not limited to, the correct functioning of markets. The entrepreneurial process spans various phases, from the very motivation to launch a new business, to the identification of an opportunity, to the design of the business project, to its launch, the firm’s consolidation and first years of existence. The concept of a system for the development of entrepreneurship helps underpin its systemic and long-term nature. A simplified approach would be to classify these factors into those that are linked to the supply of entrepreneurs and those that influence the demand for new ventures and business opportunities.
The systemic perspective reveals the complexity of the entrepreneurship phenomenon, in contrast to the more simplistic vision focusing on the traditional economic perspective, which assumes the existence, at each stage, of a waiting line of entrepreneurs apt to exploit every business opportunity that could yield the appropriate levels of profit.
Within this framework, there is a growing consensus on the need to develop policies to promote entrepreneurship.
Latin America opportunities and limitations
In recent years, there has been noticeable progress in the conditions for entrepreneurship across various countries in the region. The enlargement of the middle class, from where dynamic entrepreneurs traditionally originate, the spread of public sector support programs, as well as programs from the civil sector and even from corporates, are all good news. However, the region shows weaknesses resulting from market weaknesses in some cases, the absence of markets in others, and also from systemic failures.
From the Index of Systemic Conditions for Dynamic Entrepreneurship (ICSEd-Prodem) we can observe that countries in the region, for the past three consecutive years, appear towards the lower middle of the global ranking. This is far from the best international conditions shown in developed countries such as Singapore, the United States and Finland.
Demand conditions and the culture are among the region’s strengths. Nonetheless, these observations should be interpreted with some caution. Demand conditions have evolved negatively of recent. The advantage over leaders of the international ICSEd-Prodem ranking has therefore diluted, particularly due to the weakening in the demand for manufactured products and exports.
On the one hand, some countries have shown progress in terms of new tools and sources of financing thanks to efforts from governments (see the ‘public policy and regulations’ dimension in the Index), as well as from other actors in the ecosystem (corporates, entrepreneurs turned investors, among others).
On the other hand, some weaknesses in the region are related to deficits in human capital y to some dimensions that are key to creating a critical mass of entrepreneurs with the vocation, capacity and aspiration to grow. The education system, in particular, beyond improvements achieved in terms of access, does not contribute to entrepreneurship. While the number of education institutions that include courses on entrepreneurship has increased, very few of them offer innovative methodologies and the right body of trainers. Moreover, these advances focus on higher education, while lower levels continue largely neglected. This situation is crucial from the perspective of youth and equality in access to opportunities to engage in entrepreneurship.
Case of youth entrepreneurship
The young represent a demographical segment that is of strategic importance to the development of entrepreneurship, given that having entrepreneurial human capital requires forging aspirations and competencies from an early age. There is solid consensus internationally among educators and experts on fostering entrepreneurial capabilities from childhood.
Moreover, the development of entrepreneurial capabilities among the young is relevant due to the fact that in Latin America, youth entrepreneurship is higher than the average, reflecting the difficulties that many young face in joining the job market. This situation could be alleviated in the long term, at least partially, via a strategy that prioritizes the education system. Quality education that includes the early development of attitudes and aptitudes for entrepreneurship among the young could put them in the future in better conditions to start their own firms when the aspiration or the need arises. A proactive strategy for entrepreneurship could increase the employability of the young in the long term in a preventive way, contributing in this way to greater social equality.
The education system should therefore be at the center of any strategy to promote entrepreneurship. The market per se does not solve this need for entrepreneurship training from early ages. In the absence of policies towards that end, the best hope would be to wait for private institutions to address this field with a purpose towards gaining competitiveness. In that case, inequality would increase. With regards to the training market, the supply could only be adequate in a timely manner with great difficulty given the inter-temporal gap between the moment in which the training must occur and the payment condition of its beneficiaries at that time (e.g. age, the availability of information about the entrepreneurial career path, the ability to pay). In addition, the cultural context and the social structure lead to strong inequalities in the dissemination of information about entrepreneurship options among the various segments of the young population.
Beyond the education arena, neither the family nor existing firms typically forge this aspiration and training adequately.
Another set of arguments in favor of fostering youth entrepreneurship is related to the disadvantages arising from the lack of experience and reputation of the young who wish to embark on an entrepreneurial endeavor.
In addition, the young face greater limitations in accessing factor markets (not just financing markets) due to lack of credibility, experience, credit history and lower collateral, compared to those who are older in the same social condition.
Latin America must advance on a strategic path towards productive diversification and innovation, and entrepreneurship is a functional way in that direction. For there to exist a broader base of entrepreneurs with projects (in terms of quantity and social impact), it is necessary to include among policies for entrepreneurship mechanisms to support the training of entrepreneurs with potential. Promoting entrepreneurship from the very beginnings, fostering entrepreneurial aspirations and capabilities among the young would complete the pipeline that feeds entrepreneurial economies in the long term. There are many policies focused on existing projects, but they do little for future entrepreneurs.
From another perspective, taking into account the high unemployment rates, fostering entrepreneurship could be an attractive way to increase chances of the young’s employability in the future if their vocation and capabilities are forged early on.