the mif blog

Stories of inspiring entrepreneurs and organizations, discussion and commentary of new trends in private sector development, and the latest events and publications.

In search of high-growth enterprises

By Irani Arraiz

Photo by Robert Scoble

According to the World Bank’s Enterprise Surveys, about 10.5% of formal firms in Latin America have been in operation for 5 years or less.  This is bad news for innovation and growth in the region.  In a typical year in the US, startups—or businesses that are just beginning to operate—account for about 10% of firms (in a typical year, 35% of firms have been in operation for 5 years or less).  These numbers are important because from this pool of young firms spring those that drive job creation, output, and innovation.  Although we know very little about firm dynamics in Latin America, we can draw some conclusions by looking at what we know about firms in the US:

Venture Capital: Driving Economic Growth in Latin America and the Caribbean

By Yuri Soares

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Startups and scaleups create the vast majority of jobs in the formal economy, providing, on average, 66% of the jobs worldwide, and the greatest share of jobs in low income countries. Moreover, the small and medium enterprise (SME) sector is important not just for job creation, but also for economic growth, thanks to its outstanding capacity to increase productivity through innovation. For example, approximately 85% of growth between 1900 and 1950 is attributable to innovation, rather than increased usage of inputs, and the financing of SMEs via risk capital —most notably venture capital, which is also called smart capital because it combines financing with active hands-on support— has been found to be three to four times more effective at generating innovation than other alternatives, such as corporate research or development funding.