92278 Mapping Enterprises in Latin America and the Caribbean1 REV. 8/2014 The Enterprise Surveys (ES) provide information on Basic Definitions the characteristics of firms across various dimensions, including size, legal status, ownership characteristics, Countries surveyed in 2010 and how they are grouped trading status, and links to the informal or unregistered for analysis: sectors. In 2010, Enterprise Surveys (ES) interviewed 12,855 CARIBBEAN SERIES NOTE NO. 1 enterprises in 30 Latin American and Caribbean As is the case elsewhere in the developing world, the countries. In addition in 2009, 1,802 firms were overwhelming majority of firms in Latin American and interviewed in Brazil also following the standard the Caribbean (LAC) are small and medium enterprises ES global methodology. (SMEs—fewer than 100 employees). Indeed, 91  percent For analytical purposes, the 31 countries are of LAC firms fall into this category. The share of SMEs is categorized into 3 groups: higher in the small Caribbean countries, where 94 percent Small Caribbean countries: Antigua and Barbuda, The of enterprises are SMEs; elsewhere in the region, Bahamas, Barbados, Belize, Dominica, Grenada, 90 percent of firms are SMEs (Figure 1). Guyana, Suriname, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines The average firm in LAC employs 42 full-time workers. Large firms, those with 100 or more employees, average Medium-size countries: Bolivia, Costa Rica, Dominican over 273 full-time employees in LAC—21  percent higher Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua, Panama, Paraguay, Uruguay, and than the 225 employees in large firms elsewhere in the Trinidad and Tobago developing world. Moreover, firms in LAC rely less on AND THE temporary employment than firms in other regions: on Large countries: Argentina, Brazil, Chile, Colombia, average, firms in LAC hire 5 temporary workers per year, Mexico, Peru, and Republica Bolivariana de Venezuela. approximately a third compared to those hired by firms in Two waves of Enterprise Surveys, 2006 and 2010: SAR (18 workers) and EAP (13 workers). LATIN AMERICA Fifteen countries were surveyed in 2006 using the ES global methodology: Argentina, Bolivia, Chile, FIGURE 1 DISTRIBUTION OF FIRM SIZE ACROSS Colombia, Ecuador, El Salvador, Guatemala, Honduras, REGIONS Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, 100 and Republica Bolivariana de Venezuela. In total, 10,930 firms were interviewed in 2006, of which 80 3,535 were re-interviewed in 2010. Percentage of Firms (%) Reference periods of the survey data: 60 The information collected in the surveys refers to characteristics of the firm at the moment of the 40 survey (2006, 2010 and 2009 for Brazil) or to the last completed fiscal year (2005, 2009, and 2007, WORLD BANK GROUP 20 respectively). In addition, sales, employment, and labor productivity annual growth rates are calculated 0 comparing data from the last complete fiscal year of Sub-Saharan East Asia Eastern Latin America South Asia Africa and Pacific Europe & & the Caribbean each survey and recall data. Consequently, growth Central Asia rates refer to the period 2002-05 for the 2006 surveys, Small Medium Large 2004-07 for the 2009 Brazil survey, and 2007-09 for (5–19 employees) (20–99 employees) (100+ employees) the 2010 surveys. Source: Enterprise Surveys. 1 International engagement in the private FIGURE 2 FIRMS IN LAC ARE MORE LIKELY TO BE ENGAGED IN THE SERVICES SECTOR sector in LAC lags behind the rest of the THAN IN MANUFACTURING world 100 Compared with other regions in the developing world, foreign ownership in LAC is at median levels: foreign 80 owners have a 9  percent stake in LAC firms on average, Percentage of Firms (%) lower than the 15  percent in Sub-Saharan Africa and 60 11 percent in East Asia, but above the 6 percent stake in Eastern Europe and Central Asia and the approximately 40 2  percent stake in South Asia. As in other regions, the share of a firm that is foreign-owned is higher among large 20 firms than in small and medium firms (Figure 3). Despite regional efforts to attract foreign direct investment, the 0 Sub-Saharan East Asia and Pacific Eastern Latin America South Asia Europe & & the Caribbean data show that 87 percent of all firms in the LAC region Africa entral Asia have no foreign ownership and only 6  percent are fully Manufacturing Services foreign-owned. The level of foreign ownership in small Caribbean countries is double that of the large countries Source: Enterprise Surveys. of the region: firms in the small Caribbean countries have an average of 11.4 percent foreign ownership, compared to As elsewhere in the developing world, firms in LAC are 5.2 percent in the large countries. primarily found in service industries (Figure 2). Seven out of every ten firms in the region are in the services sector. The With respect to trade, eighteen percent of LAC firms are proportion is higher among the small Caribbean countries involved in exports, directly or indirectly, putting trade at (80  percent) than in the rest of the region (69  percent). average world levels: lower than in Eastern Europe and These averages are in line with global figures: 67 percent of Central Asia (22 percent), but higher than in South Asia firms elsewhere in the developing world are service firms. (11 percent) and Sub-Saharan Africa (10 percent). Firms in the small Caribbean countries are the most likely to export, The LAC region contains a larger share of older firms than directly or indirectly, and their exports as a proportion of any other developing region in the world. Only 26 percent firm sales are also higher than for firms in the rest of the of firms in LAC have been in operation for less than 10 years.2 The share of young firms is thus far lower than in Sub-Saharan Africa (50  percent), East Asia and the FIGURE 3 PROPORTION OF FIRM OWNERSHIP THAT IS FOREIGN-OWNED Pacific (46  percent), Eastern Europe and Central Asia 40 (36 percent), and South Asia (46 percent). The story is the 35 same looking only at SMEs in LAC, where only 27 percent Average Foreign Ownership (%) are young compared with over 45 percent in the rest of the 30 developing world. 25 Compared with firms in the rest of the world (with the 20 exception of ECA), firms in LAC are more likely to be 15 closed shareholding limited liability companies.3 Indeed, 10 46  percent of firms in LAC are closed shareholding 5 companies, while fewer than 5 percent are publicly traded shareholding companies. Thirty-one  percent of firms in 0 Sub-Saharan East Asia Eastern Latin America South Asia Africa and Pacific Europe & & the Caribbean LAC are sole proprietorships and almost all of these are Central Asia SMEs, 98 percent. Small Medium Large (5–19 employees) (20–99 employees) (100+ employees) Source: Enterprise Surveys. 2 MAPPING ENTERPRISES 1 Mapping Enterprises region. Nineteen percent of firms in the small Caribbean firms in the survey report competing with informal or countries export directly, compared to 11  percent in large unregistered firms. This is only slightly lower than in LAC countries and 10  percent in medium-size countries. Sub-Saharan Africa (66 percent) and considerably higher Even among small firms, the small Caribbean countries than in East Asia and Pacific (EAP), Eastern Europe and are more linked to foreign markets than the rest of the Central Asia (ECA), and South Asia (SAR). Excluding LAC, region, with close to 15 percent of small firms being direct the global average of firms that report competing with exporters, compared with only 6 percent for medium-size informal firms is 54 percent. countries and about 4 percent for large countries (Figure 4). Within LAC, competition with informal firms is common across all firm sizes. Small firms are the most likely to face As opposed to the trend observed in exports, firms in LAC competition from informal firms, as is the case in every are relatively more dependent on the rest of world when region of the world, except EAP. However, only in LAC it comes to inputs. Seventy-one percent of manufacturing and Sub-Saharan Africa do more than half of firms of all firms use imported inputs in LAC, higher than the average sizes experience competition from informal firms; in other of 61  percent elsewhere in the world. Within LAC, the regions of the world, at least among large firms, less than small Caribbean countries have a higher  percentage half experience this type of competition. of importing firms (74  percent in the small Caribbean countries versus 71 percent in the medium-size countries When it comes to registering a company, throughout and 65  percent in large countries). In some countries of the region, the vast majority of managers—75  percent the region, this dependency on foreign markets for inputs on average—report that the main reason for registering is almost universal: over 90  percent of manufacturers in their company was to comply with the law. Economic Grenada, Barbados, and St. Kitts and Nevis use foreign motivations for registration were reported at a distant materials and supplies. second: 9  percent of managers gave better access to financing as their primary reason, while 8  percent cited access to customers and suppliers who deal only with Competing with informality registered firms. The widely held view that informality is common Eighty-seven  percent of firms in LAC were registered throughout Latin America and the Caribbean is confirmed when they started operations, an average considerably by the ES data. Across the region, 63 percent of registered higher than that of Sub-Saharan Africa (82 percent), and East Asia and Pacific (84  percent), but below the ECA FIGURE 4 PERCENT OF FIRMS EXPORTING DIRECTLY region (96 percent).4 The fact that almost 9 out of 10 firms in LAC start formal and remain formal, coupled with the 40 lack of economic motivation for registration, provide some 35 indication that there may be a dual composition to the 30 private sector: formal firms start up as formal and informal Percentage of Firms (%) 25 firms start up as and remain informal. 20 Another dimension of informality is when formal firms 15 engage in informal business practices, such as selling without receipts or hiring unreported workers. Based on 10 the ES data, over half of firms report having dealings with 5 formal firms engaged in one of these practices. When it 0 Small Caribbean countries Large countries Medium countries comes to facing competition from firms that sell products without receipts, it is, again, the small enterprises that Small Medium Large report facing the greatest competition, in both the small (5–19 employees) (20–99 employees) (100+ employees) Caribbean countries and in the medium-size countries, Source: Enterprise Surveys. while in the large countries, it is the medium-size enterprises that report the highest competition from this type of firm (Figure 5).5 Competition with firms that fail IN LATIN AMERICA AND THE CARIBBEAN 3 average firm in LAC is relatively old, with a regional average FIGURE 5 PERCENT OF FIRMS THAT COMPETE WITH of 20 years). Among those firms in which the founder is FIRMS SELLING PRODUCTS WITHOUT RECEIPTS still the manager, more than one-third (38 percent) were 70 created due to lack of better employment opportunities, which also suggests the social function the family firm 60 may be playing in the LAC region. Percentage of Firms (%) 50 Looking at firms that are managed by their founders, 40 approximately two-thirds were formed by copying or 30 modifying an idea from the founder’s previous work experience (Figure 7). While entrepreneurial firms are 20 often credited with being job and growth creators, firms 10 that opened their doors to develop an original idea turn out not to be the best performers. In large countries—though 0 Large Medium-size Small Caribbean Countries Countries Countries not in medium-size or small Caribbean countries—firms that were founded to develop a new product or idea Small Medium Large (5–19 employees) (20–99 employees) (100+ employees) have significantly lower employment growth rates than those that were founded to replicate a product. Similarly, Source: Enterprise Surveys. in these large countries, firms that began operations by to report workers is consistently lower among large firms modifying an existing product or idea performed less well (Figure 6). The small Caribbean countries exhibit a lower than those that simply copied a business idea or product. incidence of both informality practices across all firm sizes. These results hold after accounting for other potential explanations for the differences, such as sector of activity, firm age, exporting status, foreign ownership, and firm size. Who are the entrepreneurs in LAC? The ES data confirms that family networks are still very strong in the private sector in Latin America and the Caribbean. For example, in 43  percent of the firms FIGURE 7 WHY DID YOU START YOUR BUSINESS? interviewed, the founder of the firm was still its manager 100 at the time of the interview (and as pointed out earlier, the 90 80 Percentage of Firms (%) FIGURE 6 PERCENT OF FIRMS THAT COMPETE WITH 70 FIRMS USING UNREPORTED WORKERS 60 70 50 60 40 30 Percentage of Firms (%) 50 20 40 10 0 30 Large Medium-size Small Caribbean Countries Countries Countries 20 Replicated a Modified a Replicated a product or idea product or idea product or idea 10 encountered in encountered in developed by previous previous other firms occupations occupations outside of 0 previous Large Medium-size Small Caribbean occupations Countries Contries Countries Modified a product or idea Developed a new Small Medium Large developed by other firms product or idea (5–19 employees) (20–99 employees) (100+ employees) outside of previous occupations Source: Enterprise Surveys. Source: Enterprise Surveys. 4 MAPPING ENTERPRISES 1 Mapping Enterprises How do firms exit and enter the market in experienced during this period, the market economy of the LAC? region seems to have worked efficiently in driving the less productive firms out of the market. The Enterprise Surveys also provide an interesting perspective on the evolution of the private sector over The data also show that small and younger firms are time. Given that the ES was implemented in 2006 in 15 significantly more likely to exit the market: an expected LAC countries and that samples are representative of the outcome, as older and larger firms have learned to deal formal private sector at the time of the survey, observing with their business environment. Lack of access to credit their evolution over time can develop a picture of the also proved to be significantly associated with market exit, characteristics of firms that exit the market.6 Between access to credit being a necessity for firm survival. 2006 and 2010, one in four firms exited the market in LAC. Not surprisingly, SMEs exited the market at a higher rate Endnotes than large firms: 26  percent of small and medium firms exited the market over this period, compared to 17 percent 1. Lead authors: David C. Francis, Jorge Luis Rodriguez Meza, and of the large firms (Figure 8). Judy Yang, with the collaboration of the LAC report team. 2. This result is contingent on the “age” of the sampling frame The data show that firms with higher productivity in used to draw the sample for each country, which varies across countries. Sample frames in the LAC region are not particularly 2006, as measured by sales per worker, are more likely older than those used in other regions of the world (typically 2 or to remain in business in 2010 than less productive firms, 3 years old) and there is no reason why this should affect differen- after taking into account other potential explanations for tially the age distribution of LAC firms compared with the rest of the world. their survival, such as firm size, sector of activity, etc.7 This 3. Shareholding companies that do not trade their shares in the is an indication that despite the global economic crisis stock exchange. 4. For the Middle East and North Africa region and South Asia this FIGURE 8 SMEs ARE MORE LIKELY TO EXIT THE information is available for very few, small countries in the region. MARKET 5. Brazil is not included in this analysis of informality or in the next 30 section’s analysis of entrepreneurship, as the questions address- ing these issues were not included in the questionnaire used in SMEs: 26% this country in 2009. 25 Rate of Firm Exit 2006–2010 (%) 6. Not all firms from 2006 were selected for full ES interviews in 20 2010; in order to allow a representative sample of “fresh” firms (i.e., firms that were not previously interviewed), limits were placed on the number of panel firms interviewed in survey design. 15 In order to gather data on whether firms exited the market, all firms previously interviewed were polled to determine if they 10 were still in operation. However, due to response rates below 100 percent and issues emerging from the quality of contact 5 information, certain assumptions were used to estimate exit rates. Here, in addition to all firms confirmed to be in operations, firms 0 were assumed to be in operation if an answering machine or fax Small Medium Large line was reached, the respondent directly refused the interview, (5–19 employees) (20–99 employees) (100+ employees) or if the firm moved outside of the area covered by the survey Source: Enterprise Surveys. design. 7. Age, exporting status, the annual growth in the manufacturing and services sectors, and senior management’s time spent on regulation. Enterprise Surveys provide the world’s most comprehensive firm-level business environment data in developing economies. An Enterprise Survey is a firm-level survey of a representative sample of an economy’s private sector. The surveys cover a broad range of business environment topics including access to finance, competition, corruption, crime, gender, infrastructure, innovation, labor, performance measures, and trade. The World Bank has collected this data from face-to- face interviews with top managers and business owners in over 130,000 companies in more than 135 economies. Firm-level data and summary indicators are available on the website. www.enterprisesurveys.org IN LATIN AMERICA AND THE CARIBBEAN 5