Entrepreneurship

Boosting the Productivity of Latin American MSMEs

Technology tools and partnerships with large firms transform growth possibilities for small businesses and microenterprises.

July 28, 2016

Published in partnership with News Deeply

Micro, small and medium-sized enterprises (MSMEs) make up more than 90 percent of businesses in Latin America. Around half are traditional retailers like mom-and-pop shops or neighborhood bakeries. Most of these businesses have a conventional outlook – and their slowness in adopting new technology means they run the risk of being left behind.

Most commonly defined as businesses that have fewer than 250 employees, MSMEs are less efficient than large firms and that productivity gap is twice as high in developing countries, the United Nations International Trade Center (ITC) has found.

The biggest reason? Lack of connectivity, ITC executive director Arancha González told the Caribbean Community in April. Small business owners in the region tend not to have efficient links to markets and suppliers, and are slow to use financial technology tools that could help them operate more profitably.

“We started working to strengthen small businesses in Latin America with the assumption that credit was the most important barrier MSMEs faced in increasing their competitiveness,” says Elfid Torres, chief executive of FUNDES, a consultancy focused on Latin America and small and medium enterprises. “We learned that it was not just about credit, but rather about knowledge.”

“Large corporations in Latin America make up just 1 percent of all of the firms [in some countries], so they at some point have to interact with the small businesses,” says Torres, whose firm helps these small businesses catch up so they can remain relevant actors in the market, in part through partnerships with large corporations and technology training. “If large firms’ suppliers or distributors are not very competitive, this has a knock-on effect throughout the chain.”

FUNDES is a partner in the 4e Camino al Progreso Program small business development program led by beverage company SABMiller. Owners of tenderos – traditional corner stores found throughout Latin America – get industry-specific training, assistance to formalize informal operations, and technological training to increase retail sales, improve their income and take on community leadership efforts.  (The Center is currently partnering with FUNDES in Mexico for a pilot program aimed at connecting microenterprises with the skills, technology and resources to help them thrive and grow.)

“By tapping the expertise of the multinational corporations that distribute through these traditional retailers, we have been able to strengthen MSME business skills and have increased the sales of the mom-and-pop stores by more than 10 percent,” Torres says.

Through the FINPYME mobile app, released last year, small business owners in Latin America can access advisory services designed to help them analyze their competitive position, business strengths and weaknesses, marketing quality and other key data points to grow.

“A lot of the productivity gap can be explained by lower levels of adoption of new technologies, mainly in production and process systems,” says Gregory Da Re, who organized FINPYME when he was chief of the strategy and innovation division at the Inter-American Investment Corporation. “But it’s also a result of insufficient funding to allow them to invest in equipment and personnel.”

With a global $250 billion financing gap, access to capital remains one of the biggest factors inhibiting MSME growth.

“If you are a small business, especially if you are in the informal sector, it is almost impossible for you to be able to get the loans or the working capital that you need at an affordable rate,” says Nancy Widjaja, principal manager of knowledge and industry engagement at Accion Venture Lab, which invests in financial inclusion startups.

Technological tools and partnership with large firms can solve this financing gap, as well as the productivity gap.

Widjaja says that one the start-ups in their portfolio that they are most excited about is Tienda Pago, which provides short-term working capital to mom-and-pop shops to help them finance inventory purchases from partner distributors – boosting both efficiency and access to capital.

It works with large firms in Latin America like Nestle, which already distribute to a massive network of traditional retailers. These retailers have limited ability to make purchases due to their lack of access to capital: Partnering with Tienda Pago allows the shops to buy inventory and pay the distributors with the short-term loan, at an interest rate of 1–2 percent per week.

Most importantly for MSMEs, Tienda Pago shifts them from cash payments to mobile money. Borrowers pay for the inventory electronically using their own phone, and Tienda Pago captures all transactions. This enables them to build a credit score for when they need to access bigger loans from other lenders or a bank.

E-payments also enable retailers to track business cash flow, sales trends and their seasonality – key data points not just for lenders’ decision-making, but for small business owners to understand their own efficiency and productivity.

“One the most transformative technologies MSMEs can adopt is the ability to send electronic payments,” Torres says. “It has a greater impact than simply accepting e-payments: It really transforms the way they think.”

Photo caption: Traditional shopkeeper in Medellin, Colombia.

Photo credit: Creative commons license. Photo by Flickr user xmascarol: https://www.flickr.com/photos/xmascarol/2255956967/in/photolist-54SBBz-4rmnpM