Feeding an entrepreneurial appetite: Focus on small enterprises and education renewed with key policies

Over the past few years, innovation has become a popular term in the formulation of Colombia’s social and economic policies. Indeed, President Juan Manuel Santos’s administration identified the science, technology and innovation (STI) sector as one of five engines of economic growth and as an important instrument to reduce poverty and generate employment. Political discourse has been increasingly turning into economic policy, as illustrated by the creation of a state agency dedicated to sponsoring innovative business ideas, the introduction and extension of fiscal and financial incentives for investments in knowledge-based industries, and efforts to improve collaboration between government, the private sector and educational institutions.

MULTINATIONAL PRESENCE: A growing number of multinationals are setting up or expanding their research activities in the country. One example is Hewlett Packard, which established its regional base in Medellín in 2011. Software development ranks among the most prominent activities of its Colombian operations. Another case is that of Kimberly Clark, a multinational producer of consumer goods, which opened a global research and development (R&D) facility in Medellín in late 2011. Meanwhile Dupont, a US-based innovation firm, has established research centres in Bogotá and Barranquilla, primarily focused on the agricultural sector but extending into other industries, such as infrastructure and oil and gas, as well. Nevertheless, the contribution of innovation to the country’s economic growth remains small due to some challenges, including low private sector participation, a shortage of qualified labour, difficult access to funding for entrepreneurs, a legacy of short-sighted policies and regional disparities in R&D infrastructure. In 2013 Colombia ranked 60th out of 142 nations in the Global Innovation Index (GII), an annual ranking compiled by INSEAD and the World Intellectual Property Organisation, behind Costa Rica (39th), Chile (46th), Brazil (64th). The study highlighted particular areas for improvement, including education, R&D funding and qualifications, and innovation linkages between the public and private sectors, domestic and foreign companies, and businesses and consumers.

POLICY: Current policies aim to overcome these obstacles and raise Colombia’s standing among innovation leaders. This is particularly pressing as the industrial sector has lost global competitiveness recently as a result of the peso’s appreciation and a rise in imports following a number of free trade agreements (FTAs), as already seen in some segments. “Importers of pharmaceutical products will benefit from strong regulation, zero tariffs on primary materials and the establishment of free zones. This is further supported by the recent FTAs,” Francisco de Paula, president of Asociación de Laboratorios Farmacéuticos de Investigación y Desarrollo, told OBG. While foreign investment hit a record $16.68bn in 2012, according to the central bank, investments in productivity in the industrial sector are waning. Figures from the National Administrative Statistics Department (Departamento Administrativo Nacional de Estadí stica, DANE) show that manufacturing production dropped 4.1% in November 2012 year-on-year. The government’s Productive Transformation Programme (Programa de Transformación Productiva, PTP), under the purview of the Ministry of Commerce, Industry and Tourism ( Ministerio de Comercio, Industria y Turismo, MCIT), is targeting a recovery of industrial competitiveness in areas such as product R&D and innovation, among others.

EFFECTS THUS FAR: To date, 16 segments have benefitted from the programme, including business process outsourcing, information and communications technology (ICT), medical tourism, auto parts and textiles. Although progress has been made, some businesses remain at a disadvantage when it comes to competing in the open market, particularly those operating in manufacturing processes such as the automotive segment. Through increasing its focus on raising funding for innovation from both public and private sources, Colombia is striving to enhance the performance of its traditional industries in the international marketplace.

Since the Santos administration’s early days, promoting innovation activity has been extended from established productive sectors like oil, gas and mining to the public sector, entrepreneurs and research centres – all of which are considered primary catalysts of innovation. Education and improved alignment between the private sector and universities are central to current policies. The GII results show that there is a wide gap between the academic perception of innovation and the scope for industrial application – a gap that the PTP is working to close by including private sector needs in research projects that academia can efficiently address. However, Colombia currently faces a shortfall of qualified labour in areas considered drivers of innovation, such as computer science, biotechnology and nanotechnology, and many students go overseas for apprenticeships and job opportunities due to a lack of globally competitive research centres at home.

“It’s a real dilemma,” said Ricardo Laverde, programme officer at Colciencias, the government’s administrative body for STI. “Improving the students’ qualifications through apprenticeships is difficult due to the limited availability of quality work places, which is in turn related to the limited number of research institutes and commercial R&D activity,” he told OBG.

Colciencias has been a key driver of bids to increase public funding for research centres, although to little avail until now. It also oversees the Generación del Bicentenario (“generation of the bicentenary”) programme, which has been sponsoring Colombian postgraduate students at domestic or foreign universities since 2009. More than 500 students are selected each year for various PhD programmes, with an emphasis on social studies, health, biodiversity and biotechnology. Besides post-graduate studies, the programme targets primary and secondary school students to start extracurricular research projects and secondary and tertiary students to undertake apprenticeships in research centres and US-based graduate programmes.

NEW TRAINING CENTRES: The National Service of Learning (Servicio Nacional de Aprendizaje, SENA), a public provider of vocational training with some programmes on entrepreneurial support, also has various educational programmes in place (see Education chapter). Among the most prominent is its network of “techno-academies” at various locations across the country. The centres, which are predominantly open to secondary school students, focus on courses in basic sciences, biotechnology, nanotechnology and engineering in line with job market shortages. SENA plans to open three new academies by the end of the year, adding to the 15 in operation. Besides fulfilling domestic needs, the centres also aim to develop Colombia’s competitive advantage in innovative disciplines.

Colciencias estimates that by 2015 a total of 8m nanotechnology degrees will be required to meet demand in the global job market, while in 2009 only 20,000 graduates were registered. Anticipating future labour demands is expected to contribute to advancing Colombia’s ambition to become a regional and, eventually, global leader in the field of innovation.

FROM THE BOTTOM UP: Current efforts also seek to realign academia, researchers and the private sector to optimise the quality and adoption rates of new technology and practices. At the same time, the strategy seeks to strengthen innovation facilitators. These include access to financing, the adoption of quality communication and information technologies, high-standard tertiary education, innovation-based clusters and links between local, regional and national stakeholders. Innovation can also bring about growth in other sectors, such as agriculture, physical infrastructure, extractive industries and housing, by addressing technical problems, reducing costs and increasing competitiveness on domestic and foreign markets.

ENTREPRENEURSHIP: Innovation is encouraged in tandem with entrepreneurship. Since the early 1990s Colombia has shifted its economic policy from protecting large players to encouraging small and medium-sized enterprises (SMEs). Over the years, various measures have been implemented to support innovative entrepreneurs in overcoming obstacles such as difficulties accessing financing, lengthy registration procedures, inefficient market access and weak institutional support. According to Global Entrepreneurship Monitor (GEM), a specialised research agency, up to 50% of Colombian entrepreneurs rely on their families for startup funding. One support initiative was the creation in 2002 of an entrepreneurial fund to provide seed capital to start-ups with high job creation potential that were formed within SENA.

LAYING DOWN THE LAW: Other measures are being implemented to address the legal framework and financial infrastructure. In 2006 Law 1014 came into effect, which was aimed at fostering an entrepreneurial culture by integrating related concepts into the educational system and establishing the ground rules for public support to entrepreneurs. This would later lead to the creation of a variety of programmes and entities, such as iNNpulsa, which is discussed below.

In 2009 Law 1286 created the National System of Science, Technology and Innovation (Sistema Nacional de Ciencia, Tecnología e Innovación, SNCTI), with a mandate to support high-tech, high-impact entrepreneurship. In addition, the same law shifted Colciencias’s responsibilities from policymaking to administering the implementation of the SNCTI and creating synergies among the research centres and the public and private sectors in an effort to align output with market needs. The World Bank and the Inter-American Development Bank have recently expressed their support for the SNCTI and have together provided a $50m loan to help strengthen its governance structure.

INNPULSA: In April 2012 iNNpulsa was established under the purview of the MCIT with a mandate to sponsor and mentor innovative start-ups and generate ventures with the potential to boost the economy. The organisation supports projects that are at the idea stage and have the potential to drive dynamic innovation and entrepreneurship in the country. It also caters to ongoing initiatives through four business lines: regional innovation, in which it works with local governments to spur regional competitiveness through innovation; large enterprises such as Ecopetrol, where it focuses on encouraging and transferring innovation to the domestic supply chain; culture and mentality, which address awareness and value perception of entrepreneurship; and SMEs that have the potential for high growth and sustainable profitability.

Recently, iNNpulsa has been leading governmental efforts to encourage innovation and entrepreneurship, and therefore it is responsible for finding solutions to lingering obstacles. At the top of its 2013 priorities is the need to promote an entrepreneurial mindset. As Marisol Camacho, the entity’s director of entrepreneurial mindset and culture, stated in a recent interview with local media, “Entrepreneurship is too often associated with failure or societal suspicions towards a quick rise to wealth and success.” The organisation’s efforts are aimed at making role models out of successful young entrepreneurs by increasing visibility through national entrepreneurship contests and road shows, as well as integrating entrepreneurial concepts into both government communiqués and public speeches.

ISSUES TO OVERCOME: To further overcome the social stigma of failed start-ups, iNNpulsa has recognised that bankruptcy laws and financing mechanisms must be more flexible. Other challenges identified by both iNNpulsa and third-party research organisations, such as specialised research agency GEM, include the lack of awareness or understanding of entrepreneurial support programmes, an unfavourable fiscal and financial regime, and a high level of bureaucracy when registering a new business. While results of its efforts have yet to be reported, iNNpulsa claims that early positive signs are already starting to be seen.

Juan Pablo Torres-Bonilla, a project manager at iNNpulsa, told OBG, “Partly as a result of the commitment from the government and supporting entities, entrepreneurship is being institutionalised at a growing pace, and this is creating a start-up buzz.” This view is supported by findings from GEM, which indicate that by 2011, 20.6% of respondents surveyed had started a firm within the past three years, compared to an average of 11.8% for the wider region.

“While the Colombian government, along with the private sector and academia, is committed to foster-ing entrepreneurship, many of these efforts have occurred in isolation,” Adriana Suarez, the managing director of Endeavor Colombia, a multinational initiative supporting entrepreneurs, told OBG. “So, Colombia still needs to systematically strengthen its entrepreneurial climate and institutions.” The responsibilities delegated to iNNpulsa place it at the centre of the government’s innovation policy, offering it the opportunity to fill the void in the coordination of public policy and programmes with the needs of the private sector.

INVESTMENTS: Raising public and private investments in innovation and entrepreneurship is also a priority. According to the 2010-14 development plan, Colombia spent about 0.2% of annual GDP on R&D during the first decade of the new millennium, while the Organisation for Economic Cooperation and Development (OECD) estimated this figure to be 0.16%. However, this trails regional peers such as Argentina (0.6%), Chile (0.4%) and Brazil (1.2%), and is only a fraction of the investments made by innovation leaders such as Sweden (3.4%), Switzerland (2.9%) and Singapore (2.1%).

Most investments came from the public sector, some 77% in 2009, according to the OECD, and allocations have typically been disparate. They have also been highly concentrated on the most urbanised areas, such as Bogotá and Medellín, depriving other areas of innovation and modernisation in vital sectors, like agriculture. Current policies aim to increase public investments to 0.5% of GDP by 2014, minimise regional disparities in allocations and promote private sector funding through a number of fiscal and financial incentives.

DISTRIBUTING ROYALTIES: One of the furthest reaching measures to increase public funding of STI is the Royalties Law, which was amended in May 2012. Under the new legislation, 10% of all revenues from extractive industries will go towards an STI fund designed to support innovative projects promoted by regional governments. This is a change to the previous system, which only benefitted the oil, gas and mineral producing regions. According to the Santos administration, up to 80% of the funds under the old system went to these regions, while non-producing regions received a portion of the remainder.

The new system aims to bridge this gap and distribute funds more equally. According to the government, the per capita annual benefit in non-producing regions will rise from COP35,000 ($21) to COP117,000 ($70). The MCIT further estimates that COP9.4bn ($5.64m) will be allocated by 2020 to support research and technological development across the country.

Another change is the management of the funds. Under the old system, regional governments were allocated proportionate shares, which were disbursed at their discretion. The new fund is overseen and allocated centrally by the Collegiate Bodies of Administration and Decision (Órganos Colegiados de Administración y Decisión, OCAD), which comprises representatives of local, regional and central governments.

REGIONAL DEVELOPMENT: Projects promoted through local or regional governments are evaluated by OCAD and selected for their scientific or technological value. Besides greater scrutiny of the funds’ disbursements, the new system is meant to serve as a benchmark for the private sector looking to accompany investments in beneficiary projects. When announcing the law, President Santos stated that “the funds will have a focus on regional competitiveness and development.”

Another important source of finance is iNNpulsa, which provides seed capital through a fund called MiPymes for micro, small and medium-sized businesses, and non-refundable concessionary loans distributed through commercial banks. According to figures from iNNpulsa, total applications from entrepreneurs had reached COP6bn ($3.6m) by the end of 2012, while COP9bn ($5.4m) had been made available. A further COP20bn ($12m) had been allocated to micro-enterprises, while large companies received COP60bn ($36m). For 2013 the entity has been awarded funding of COP69bn ($41.4m) for project allocation, of which COP23bn ($13.8m) was earmarked for MiPymes.

During the announcement of the budget, Catalina Ortiz, iNNpulsa’s general manager, stated, “Colombia has much experience in the area of micro-enterprises, but we have to take a leap and facilitate, through the government, innovative economic enterprise.” While the entity’s 2013 budget had not yet been confirmed at the time of writing, it was set to benefit from Plan de Choque, an emergency contingency plan targeting the revitalisation of the nation’s industrial output in the wake of disappointing 2012 results, largely due to the peso’s appreciation and an ensuing loss in competitiveness in the international marketplace.

INTERNATIONAL PARTNERS: The government is striking up partnerships in a bid to attract foreign investment and increase its research capacities. In February 2013 President Santos signed a memorandum of understanding (MoU) with the US state of Massachusetts regarding collaboration on life sciences and clean energy, among other STI disciplines. The MoU will build upon the FTA that was concluded in 2012, as well as a 10-year, $1bn Life Sciences Initiative enacted in 2008 by the state governor, Deval Patrick. According to the CEO of the Massachusetts Clean Energy Centre, Alice Barton, who was present at the signing ceremony, “Colombian organisations are looking at technology solutions for environmental problems like water quality, and we have a lot of companies in Massachusetts that are focused on solving that very issue.”

Further efforts are under way to attract and increase the role of private investors at home and abroad. According to the OECD, 19% of innovation-linked investments from 2007 to 2011 were made by Colombian enterprises, while only 4% came from overseas. Moreover, investments were highly skewed to a small selection of companies in dynamic sectors, such as ICT and consumer foods, and focused on product development, rather than on research. According to Ortiz, investments in innovation doubled from 2011 to 2012, while the total remained marginal. “Therefore we are working to get private funds on board,” Ortiz told local media.

PRIVATE SECTOR: Recently some private sector initiatives have sprung up – albeit in collaboration with the state. One example is the Sidecar Fund, established by iNNpulsa and Capitalia Colombia, a financial services firm specialising in SMEs. The partnership targets angel investors worldwide and introduces them to select high-potential start-ups. Colombia Venture Nation, also overseen by iNNpulsa, is an annual acceleration programme set to run its first course in September 2013. The programme is open to Colombian and foreign entrepreneurs with ideas that can increase productivity through innovation in businesses based regionally and, eventually, globally. Through funding from iNNpulsa and the development of a global mentoring network, the programme aims to raise Colombia on the international entrepreneurial stage and has received full backing from the president’s office. Meanwhile, Endeavor Colombia set up offices in 2006 and has since accompanied 36 start-ups to national and international success, covering sectors such as technology, consumer goods, manufacturing, financial services and sports.

One of the few private sector initiatives is HubBOG, a Bogotá-based company that accommodates innovative entrepreneurs’ basic needs from workspace and an internet connection to mentoring and contact with overseas investors. According to René Rojas, HubBOG’s co-founder and CEO, “Commercial banks have not warmed to entrepreneurs just yet and Colombia lacks a critical mass of risk investors. The best way to appeal to outside financiers is by developing and mentoring a continuous supply of fresh business ideas. Eventually, one will be picked up and open the door for others.”

While expressing his appreciation for the recently established support mechanisms available to entrepreneurs, Rojas also called for more fiscal incentives to be offered. “Colombia enjoys a strategic location in Latin America, security can now be guaranteed and we are going through a period of strong economic growth, making it an ideal time for innovative start-ups to rise and flourish,” he told OBG. Existing incentives include tax deductions for investments or donations towards STI projects. As such, imported capital goods destined for STI purposes are exempt from value-added tax, and investments in technological R&D are tax deductible for 175% of their value, as long as activities are undertaken through universities or research centres.

OUTLOOK: Concerted efforts to encourage entrepreneurship and innovation have begun to attract the attention of the private sector both at home and abroad. The variety of newly established or expanded programmes and incentives is likely to raise their participation in an area that until recently was dominated by limited public funds. A specific role has been carved out for micro, small and medium-sized firms, and more state support could help them with efforts to innovate.