Foreign investors have been interested in Latin America ever since the early 2000s, and the promising future of the region continues to pique the interest of entrepreneurs around the globe. According to an extensive report from The World Bank in 2014, Latin American countries went through a plethora of institutional and policy changes over the past several years that have led to unprecedented economic growth and stability throughout the entire region.
There are countless opportunities and advantages when it comes to starting a business in this region. The time and money it takes to launch a company are relatively low, and entrepreneurial endeavors are encouraged since most businesses are lagging behind in innovative efforts. Starting your unique company in Latin America can spark further innovation among your competitors, boost the economy, and improve the lives of locals by giving them employment options.
Craig Dempsey, an investment professional and CEO of Biz Latin Hub Group, has personally invested in Latin American business ventures, and he strongly believes the region will continue to thrive for years to come. Dempsey writes, “Thanks to the region’s growing economies ... and swelling middle class...we’re seeing an influx of new business ventures and exciting startup companies coming from Latin America to dominate markets around the world.”
Evidence recorded throughout the 2000s also reflects this positive outlook on Latin American markets. Researchers found that:
- Almost 70 million people were lifted out of poverty in the past decade.
- An estimated 50 million people entered the middle class between the years of 2003 and 2009.
- Income inequality fell more than 10%, reaching the lowest recorded level in 2011.
- Nearly two-thirds of Latin American entrepreneurs have the desire to launch businesses due to the current market opportunities instead of doing so out of necessity.
Much of this success is owed to young entrepreneurs and their desire to create their own jobs instead of searching for work. However, even though entrepreneurship is becoming a common practice across Latin America, it’s common for these companies to lack innovation and show little growth. According to research conducted by The World Bank, even larger enterprises seem to be “insufficiently innovative” when compared to other corporations in other areas around the world. This innovation gap is thought to be the result of two key issues:
- Lack of competition. When business owners don’t face much opposition, they may mistakenly believe that further innovation and invention is unnecessary. For example, major brands in the U.S. are constantly trying to out-perform their competitors, whether they’re in the tech industry or in the fashion world. Meanwhile, 13 Latin American countries are reported to have deficits in innovation, caused primarily by a lack of competition.
- Human capital gap. Despite the growing middle class and the high amount of young entrepreneurs, there is a noticeable lack of high-quality education in the region. Since the early 20th century, there have been very few engineers to be at the forefront of innovative technologies and advancements in Latin America. The lack of engineers and scientists may also be partially explained by Latin America’s heavy emphasis on the humanities, such as sociology, psychology, and political science. Students within this region could be naturally drawn to these subjects because they desire to improve the world around them and cause social change.
Factors of a thriving entrepreneurship ecosystem
Harvard Business School professor and entrepreneur Danial Isenberg has summarized his decades of experience in studying business trends in a number of publications and articles. Isenberg has launched his own business, invested in several companies around the world, traveled to dozens of countries, and attempted to determine the ideal conditions for entrepreneurs. His ultimate goal was to discover the key factors needed for an environment where entrepreneurs can succeed, which he called an “entrepreneurship ecosystem.”
The entrepreneurship ecosystem model has since become a common framework for business owners to gauge whether or not their company will thrive within a specific market. Most professionals agree that there are six main traits of a vibrant ecosystem:
- Culture. An entrepreneur needs to keep the local culture in mind when choosing a place to launch their business. A region where locals respect entrepreneurial efforts, tolerate mistakes, and are willing to think outside the box is required for long-term success.
- Markets. This component assesses the surrounding businesses, successes of other professionals, and potential customers within the region.
- Human capital. Human capital refers to the skill levels of workers and the quality of education the average person receives. For instance, starting a company near a college or university may encourage young, educated students to join your team or spread the word about your business.
- Finance. This term refers to the broad range of places where business leaders can obtain financial aid and services.
- Supports. Supports can include the natural resources of the land, the quality of the country’s infrastructure, non-profit organizations that can offer assistance to entrepreneurs, business advisors, and other elements that can help a new company succeed.
- Policy. Government rules, regulations, and supports fall into this final category. Policies may include making changes to educational systems, removing barriers, encouraging innovation, and creating new guidelines for small business owners and entrepreneurs.
Based on these factors alone, Latin America seems to be an ideal region for aspiring entrepreneurs. Most Latin American countries are encouraging further innovation, welcoming foreign investors, and creating easier ways for businesses to get started. Combined with strong government regulations and a number of financial resources, this region appears to be heading towards a bright future in the global marketplace.
Financial and legal information
According to a business report released in October 2018, the biggest challenges for the Latin American region include paying taxes, registering property, and protecting minority investors. Mid-sized companies in Latin America have to pay an average of 27 payments to meet tax requirements, and it takes business owners an average of 330 hours to prepare and file taxes. When compared to OECD (Organization for Economic Cooperation and Development) countries, which require approximately 11 payments and 159 hours to file taxes, the challenge of taxation in this region might cause some entrepreneurs to hesitate.
An article, written by Ana Paula Maciel, Tax Content Manager at Vertex, and Ernesto Levy, Senior Lead of Global Indirect Tax at Intuit, goes into further detail about the complex taxation process throughout Latin America. They report that, “In much of Latin America, rules around withholding taxes on B2B transactions vary so greatly it can dramatically hinder efficient business.”
That being said, the taxes in Latin America have, ironically, become more complex and time-consuming in an attempt to encourage entrepreneurs and give business owners the opportunities and tools they need to succeed. In 2018 alone, the region made 25 reforms to help small and mid-sized companies do business more efficiently. Starting a business takes an average of just 32 days, and the cost of launching a company has dropped 26% since 2003.
Each Latin American country has its own specific laws and regulations when it comes to starting a business, but there are three requirements that all countries in the region have in common:
- Every legal business must appoint a legal representative, who will be the face of the company. The representative can be local to the region, or they may be a foreigner who is legally allowed to work and live in the country.
- All businesses need a fiscal address (or local office address) in order to register for taxes.
- Companies must file taxes monthly and annually.
Best tips for success
Iris Griffiths, an experienced qualitative market researcher, cross-cultural communication specialist, translator, and conference interpreter, launched an insightful research site that is dedicated to helping international business professionals understand the markets within Latin America. Griffiths’ site, ACROSS, resulted from over 25 years spent working in market research, language, and cross-cultural communication around the globe.
Griffiths’ hope is to change the way foreign investors see, speak, and listen to Latin Americans. She states that she wants to help individuals and businesses launch successful companies while dismantling any “...preconceived ideas or stereotypes of what means to do business in this region.” On ACROSS, she lists some of the most important tips for those who are thinking about starting their company in this region:
- Remember that each Latin American country is unique. Latin America is comprised of several countries that have their own habits, customs, and culture. Therefore, a marketing or business plan may work really well in Brazil, but it may not have the same success if implemented in Chile or Colombia.
- Connect first, do business second. Latin American business professionals will want to get to know you as a person before forming a business partnership or collaboration. There is a strong emphasis on personal connections throughout Latin America, and people naturally want to spend quite a lot of time socializing. Although it may take longer to establish partnerships here, the relationships you form will be long-lasting and extremely helpful.
- Understand Latin American legal requirements. Putting together a written business contract with a lawyer is a necessary step in establishing your company, but it’s also important to note that businesses in this region focus mostly on emotions and relationships instead of rules. This isn’t to say that companies don’t value rules and regulations; instead, entrepreneurs in this region aim to please the customer rather than make a massive profit.
- Step out of your comfort zone. Instead of trying to do business in the same ways that are common in your home country, embrace the Latin American style of doing business. You may feel uncomfortable initially, but this will help you understand and connect with locals and fellow business owners.
In addition, you shouldn’t assume that your business partners will speak English. Prior to your business venture, learning basic elements of the main language within your chosen country is highly recommended. It will make the entire process go smoothly, and it’s also a sign of respect towards your business partners. Although Spanish is one of the most common languages throughout Latin America, you may benefit from learning some Portuguese if you plan on investing in a business in Brazil.
- Create a multi-channel presence. Since distribution and shopping preferences differ in each country, it’s in your best interest to sell through a number of sales channels. Setting up a brick-and-mortar store, creating a website, being active on social media, and listing your products on Amazon are just a few techniques for reaching a large audience.
- Do some research on companies similar to your own. Take note of any international companies or investors entering the Latin American market, and pay attention to what works well for them and what actions result in negative consequences. You can gain a solid understanding of how you can communicate with your target audience, promote your business, find a great marketplace, and much more by simply keeping up with these new companies throughout the region.
Any entrepreneur thinking of starting a business in a foreign country should exercise great care when choosing what type of company to launch, where to find employees, how the firm might influence the local community and a number of other economic and social factors. Doing further research is essential for those who want to have a positive transition into any Latin American country, so we have listed a few resources below:
- Latin American Entrepreneurs, a free eBook compiled by The World Bank Latin American and Caribbean Studies, offers an in-depth analysis of numerous factors that have influenced the region’s business climate over the past few decades.
- The Future of Entrepreneurship in Latin America is an excellent book that describes several case studies of successful businesses in the region, the difficulties small business owners may face, and the most important factors that can influence entrepreneurship.