Disruptive innovation is unequivocally a catalyst for inclusive growth. By making a product or service more accessible, disruptive innovation transforms markets and allows for a more equitable allocation of resources. This disruptive force has the power to displace established competitors and redefine an industry. Oftentimes, it brings about powerful social and economic changes by integrating the informal economy, the part of the population that has sometimes been ignored.
Latin America is about to experience that market disruption, in my opinion. Consider the region’s young population, expanding middle class, fast adoption of technology and relatively weak market competition—conditions are ripe for change. If Latin America takes more steps to encourage innovation, it could be in the driver’s rather than the passenger’s seat as things change. More inclusive growth—and ultimately stronger economies—could be on the horizon.
The wheels are already turning
The Colombian cyclist Nairo Quintana is a podium finisher at the world’s most famous bike races including the Tour de France and Giro d’Italia. But growing up in the Andes, he had to ride almost 20 miles roundtrip on a second-hand bike to a school that was 3,000 feet below in elevation because his family could not afford to pay for bus fare. Today, many Latin Americans still live in rural areas, but technology has made things easier for many. The Internet continues to lower information barriers, and rapid technology adoption is connecting remote villages and leaving fewer people out of reach. Case in point: As of 2015, smartphone user penetration for the region was at 39% and projected to reach 57% by 2019, according to eMarketer. If you drill down further, Latin America has both the highest penetration rate for Facebook (89% of Internet users) and WhatsApp (66% of mobile phone users), as Statista data shows.
But more climbs ahead
It’s nice that you can like your friend’s vacation pictures on Facebook or text your dad about Quintana’s stage win, but what’s next?
More financial inclusion. From the World Bank’s data, as of the end of 2014, about 50% of adults in Latin America didn’t have a bank account. While that is down from 61% in 2011, the fact remains that too many people have no access to banking services or financing. Geography, transaction costs and perhaps most crucially, a lack of financial education, make banking and investing difficult, but several local tech companies have started tackling this problem. One such effort is to build out the infrastructure for mobile transactions, thereby providing anyone with a mobile device access to banking services, no matter where one lives.
More competitive and productive. To different degrees, Latin American countries try to promote the growth of startups and small and medium-sized enterprises (SMEs), but more can be done to improve competitiveness and productivity. In a World Economic Forum competitiveness ranking, the five largest Latin American countries by gross domestic product—Brazil, Mexico, Argentina, Colombia, Peru—came in between 57th and 106th, out of the 140 economies measured. As a region, only sub-Saharan Africa scored lower.
Why? For one, administrative burdens for businesses in the region are high, think red tape, bureaucracy, paperwork. According to the World Bank, it takes 83 days to start a business in Brazil, Latin America’s largest economy. This compares to 29 days in India and 6 days in Italy, countries that are similar in size to Brazil in terms of gross domestic product. Likewise, regional bankcruptcy laws can be debilitating. Penalty on failed ventures discourages entrepreneurship—a primary source of innovation—and lifting that penalty could have a positive impact, for example.
Innovation enhances inclusion, inclusion encourages innovation
What has been making international headlines in the past few years? Slow growth, commodity crash and corruption, but these only tell part of the Latin American story. Many Latin American companies have taken steps to foster meaningful inclusive growth, but there are still some hurdles. It’s time to do more to embrace disruption from within, or risk being at the mercy of global forces.
This material represents an assessment of the market environment as June 2016; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
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