Colombia: Small Business Boom

November 13, 2007

Small business is booming in Colombia thanks to reduced violence and economic growth, a new report says. Other experts also point to Colombia reducing red tape and becoming more competitive. The new report comes as the International Monetary Fund praises Colombia for its strong GDP growth and macro economic stability.

“The survival rates of ventures [in Colombia] double after 2001,” Wesley Sine, an assistant professor of management and organizations at Cornell University’s Johnson School of Management, said in a statement yesterday. “Entrepreneurs are more likely to take risks in stable environments.”

MOM-AND-POP SHOPS

Along with Shon Hiatt, a Cornell graduate student in organizational behavior, Sine has written Declining Insurgencies, a study that investigates the welfare of Colombia’s small business owners and is based on a decade of research of almost 1,000 entrepreneurs. Many of the businesses surveyed were mom-and-pop endeavors ranging from small convenience stores to auto repair shops to beauty salons and other family-run operations-the businesses most affected by neighborhood violence.

The study tracked the same entrepreneurs over a 10-year period, allowing Sine and Hiatt to measure the effects of changing political turmoil on entrepreneurial processes from year to year and from region to region in Colombia.

On a recent trip to Colombia, the authors observed that many businesses were more successful due to reduced levels of violence thanks to government crackdowns on guerrilla and paramilitary groups, and crime. “Once the fear of political violence and crime subsided, the entrepreneurs could focus on expanding their businesses,” the statement says.

EXPANDING THE NETWORK

The study found that the amount of time entrepreneurs spend in expanding their social network has increased by about 10 percent, new product introductions by entrepreneurs have increased by 5 percent and the likelihood that entrepreneurs enter into new markets has increased by 5 percent. “These seemingly small changes produce huge ripple effects with survival rates for new ventures doubling in Colombia,” the university said in the statement.

Although most Colombians were not directly affected by the violence in the country, the fear levels were high, causing small businesses to avoid risks, Sine says. “The collective fear was high, and small business people were afraid to take risks by expanding into new markets, trying out new products, and approaching other businesses and entrepreneurs that they didn’t know,” he says.

Entrepreneurs must network to succeed and won’t grow if they are afraid to leave their immediate neighborhoods to meet potential customers and business partners because they fear for their personal safety, Sine points out.

CASE STUDY: MEDELLIN UNIFORM MAKER

The study cites the case of a Medellin entrepreneur who manufactured uniforms for factory workers. The entrepreneur, who had one factory with three sewing machines, could not grow his business because visiting potential clients outside his neighborhood was risky.

“Traveling to parts of the city with which he was not familiar could be dangerous due to high levels of violence, making him a target of local criminal and insurgent gangs,” the statement says. “Moreover, doing business with companies that might have links to the paramilitaries would make him a target to other insurgent groups. So, he stayed home and only did business with existing customers who he knew and trusted.”

However, as the violence and political uncertainty subsided, the entrepreneur began to take more risks. He began contacting more potential customers and a greater diversity of customers and expanded his product line to support organizations in different types of industries such as mining and industrial chemicals. “Today this entrepreneur has six factories and sells specialized protective uniforms to companies throughout Colombia,” the university says in the statement.

IMF PRAISE

Meanwhile, an IMF delegation visiting Colombia expressed strong faith in the country’s economic policies and outlook. The IMF predicts that Colombia’s economy will expand by 6.6 percent this year and another 4.8 percent next year. That follows GDP growth of 6.8 percent last year, the country’s best result in 28 years.

“Colombia’s economic performance has been impressive,” the fund said in a statement Friday. “Growth has been underpinned by the authorities’ commitment to macroeconomic stability and the rising confidence in Colombia’s long-term economic prospects.”

Despite the progress in Colombia, local and foreign investors are eagerly awaiting U.S. congressional approval of the U.S.-Colombia free trade agreement that was concluded in February 2006. The U.S. House of Representatives last week approved the U.S.-Peru FTA, but congressional Democrats say they don’t plan to approve the Colombia FTA any time soon.

CLINTON CONTROVERSY

Senator Hillary Clinton, the frontrunner among Democratic presidential hopefuls, issued a statement last week opposing the Colombia FTA. “I will oppose the pending trade agreements with South Korea, Colombia, and Panama,” she said in a statement. “I am very concerned about the history of violence against trade unionists in Colombia.”

The statement earned her a rebuke from President Alvaro Uribe. “This is an unforgivable lack of understanding of Colombia,” he told reporters during the Ibero-American summit in Chile last week.

Meanwhile, U.S. business groups continue to lobby for the Colombia FTA. “We urge Congress to continue this positive momentum by acting swiftly to approve the pending trade promotion agreements with Colombia, Panama and South Korea,” Michael Petricone, senior vice president of government affairs at the Consumer Electronics Association, said in a statement last week. “The CE industry relies upon innovation, and innovation can only flourish in a trading system free of unnecessary tariffs and obstacles.”