In discussing the region's ability to attract private equity and produce high-tech products, speakers on the panel "Can Latin America Be Competitive in Technology?" offered disparate answers. Moderator Michael Chu, HBS professor and managing director of Pegasus Capital, pointed out that, "when the world looks at technology, it thinks about the U.S., Western Europe, Ireland, India, and now China, but it doesn't think of Latin America."
The region faces challenges in attracting the mother's milk of high-tech innovation—private equity venture capital—in part because of the lack of developed capital markets in many countries.
"How can you deploy equity capital successfully in a region that has underdeveloped, or nonexistent, debt markets?" Chu continued. Tom McDermott, executive-in-residence at Babson College's Institute for Latin American Business, answered the question optimistically.
"The question is, can Latin America be competitive in technology? And the answer is, it can, and it will."
But McDermott agreed with Chu, saying, "Before you get to that, you have to be able to say that you are competitive from the standpoint of being able to attract private equity capital."
McDermott said there are signs that private equity is finding its way to Latin America. After several years of sharp declines, 2003 saw a 23 percent increase in the raising of private equity capital directed at the region, to nearly $900 million from $700 million in 2002. It is still a shadow of the $5 billion that was raised in 1998, McDermott said, but is a significant increase. So far, according to McDermott, funds are saying they will raise nearly $2 billion this year. By comparison, at this time last year they said they would raise $570 million—58 percent less than they did eventually raise.
| The counting tells us that 2004 should be a pretty good year, and things are coming back and the risk capital dedicated to Latin America is again on the rise. |
| — Tom McDermott, Institute for Latin American Business |
"The counting tells us that 2004 should be a pretty good year, and things are coming back and the risk capital dedicated to Latin America is again on the rise," he said. McDermott also said there was little reason to think that the money was flowing elsewhere and bypassing Latin America. In 2003, $451 million went to Brazil, compared to $549 million to China.
"It wasn't that someone else was eating our lunch; it was just there wasn't much lunch going around," he said. McDermott also said he understands there will be three IPOs launched on the Brazil market this year, and several others are expected in Chile and other markets.
Gabriel T. Rozman, president of Tata Consultancy Services Iberoamerica, had a less rosy view.
"The answer is no," he said, in response to the question posed by the panel. "Can we do it today? No."
He said Latin America's tech industry is dwarfed by India's $17 billion tech market. The subcontinent produces about 100,000 engineering graduates a year, and 72 venture capital firms invested $500 million, he said.
"If all of Latin America unites, we'd be about the size of India," he said. "But right now, we're very fragmented."
For example, he said, there are 622 software companies in Uruguay when a more rational number would be three or four. Rozman said labor is also cheaper in India, the country has better software protection laws than many Latin American countries, and English is more widespread. Also, he asserted, the culture encourages a hard-driving work style.
"They live to work," he said. "We tend to work to live."
But he said perhaps the largest impediment to developing a tech sector in Latin America is the instability in many of its economies.
"We need some long-term stability. The example is Argentina. Today you can get programming much cheaper than in India: You can get it for $10 an hour. The problem is when I go to do a three-year contract with you and you say, 'What are you going to charge me (over the long term)?' and I say, 'I have no idea what I'm going to charge you in thirty-six months.'"
"I think the biggest threat to Latin America is ourselves, that we don't get organized," he said.
Evolution of a software company
Another panelist, Paul Paget, CEO of Core Security Technology, runs a high-tech business based in Buenos Aires. Core Security Technology manufactures software that mimics a hacker and finds weaknesses in an organization's systems. The company has grown from fifteen customers a year ago to eighty now, including the U.S. Department of Defense, IBM, and Harvard.
"We'd like to be something that others can point to, and maybe inspire others," he said. Paget said the company has customers in Brazil and Argentina, but it really targeted the U.S. market by opening an office in Boston. The company developed as a software maker might develop anywhere in the world—by creating a superior product rather than trying to compete on price.
"What you're hearing from me is really the evolution of a typical software company," Paget said. "It's not about selling less-expensive engineering services." He said the company's decision to focus on the U.S. market for entry is atypical: "We actually ignored our local marketplace."
Some of the key strategies in entering the U.S. involved bringing on local players, including Paget, he said, and then making sure the staffs in Buenos Aires and Boston spent time in both offices to better integrate the operations.
"We picked the U.S. market for the obvious reasons, that it's 40 or 50 percent of the global technology marketplace. And if you can be successful here it's generally easier to expand from here," he said. The company's approach might be unusual, but Paget said he's convinced of Latin America's technology potential.
"Can Latin America be competitive in technology? Absolutely," he said. 