A Roadmap to Strengthen Mexico's Entrepreneurial LandscapeBy Jan Hogewoning | Thu, 01/14/2021 - 09:41
Q: How has the pandemic exposed the vulnerabilities of entrepreneurs?
A: For SMEs, the main challenge is lack of liquidity. Almost 75 percent of SMEs die in their first two years, primarily because of a lack of cash. The pandemic made this worse. Our economy is dominated by traditional business models, which are characterized by self-employment and low productivity. At the start of the pandemic, we did a survey with approximately 1,300 business owners in all sectors. We asked them for how long they had money to cover their expenses. Nobody answered more than two months. Another issue that affects this is the long timespans of payments from large companies. When they hire a product or service from a smaller company, they take up to 60 to 180 days to pay. In that time, SMEs can fail in trying to access more capital. Lack of access to credit or investment is an issue that further worsens liquidity. More than 90 percent of entrepreneurs in Mexico use their own resources. About 28 percent use those of family and friends.
COVID-19 has also demonstrated the strength of entrepreneurs. It is important to point out how we see entrepreneurs. Many people think of the stereotypical image of a kid who has just left university and wants to build an app. For us, entrepreneurs are people who create and run companies. During this pandemic, we have seen many people who are very resilient. They have kept their companies running, with many keeping all of their staff members. We know now that the pandemic is going to be longer than thought. Entrepreneurs will continue to need to be resilient and part of our mission is to equip them with the tools to better prepare for adversity.
Among our efforts, we have been working on the Payment Law in 30 Days. This would provide more legal tools for SMEs to pressure large company clients to pay them for their services within that time frame. They could, for example, charge interest on outstanding bills. Another tool is fines placed on a company that fails to pay. Also, there should be commissions for the resolution of payment conflicts. To this end, we have been collaborating with Tecnológico de Monterrey’s Law School.
We have also been promoting an initiative for auto-regulation. Large companies publicly accept the responsibility to pay within 30 days. More than 100 large companies have committed to this. We are planning to launch a pilot next year for a distinction that would recognize large companies that really have good practices when it comes to how they work with entrepreneurs. We are looking at a series of tools that would evaluate that.
Q: How has the government supported small businesses during the pandemic?
A: Help has focused principally on microcredits. Unfortunately, for most SMEs, microcredits of MX$5,000 (US$248.03) to MX$6,000 (US$297.62) are insufficient to remediate the lack of liquidity.
Q: One of your studies highlights the lack of market knowledge as another reason why companies fail. What do you mean by this?
A: Entrepreneurs tend to focus on their solution or their product. What they need are the tools to develop a functioning innovative business model. With the help of other allies like Facebook and Google, we train entrepreneurs on how to create a more sophisticated business model that is more productive.
Q: What is the purpose of your legal guide for entrepreneurs?
A: Legal procedures are among the largest barriers for entrepreneurs. People do not know how to formally constitute a company. This guide, which is available for free on our website, explains how to constitute a company, how to create an employee contract, how to register a brand and more. It covers the basic elements of legal procedures. We created it in collaboration with Tecnológico de Monterrey’s Law School. In addition, it also contains free downloadable formats of contracts, like an employee contract. This is important because it saves companies money they would otherwise spend on a legal affairs agency to draw up these formats.
The first law that we got passed was in 2016, the Law for Companies in One Day at Zero Cost. Before this law, to launch a company you would have to pay up to MX$40,000 (US$1,982.52) and it would take between 30 to 45 days. Now, you can simply go to the webpage of the Ministry of Economy and register a simplified stock company (SAS). Entrepreneurs do not need another partner to register. From there, they can do the rest. We have been working with banks to facilitate accounts for these entities. Santander, for example, worked very closely with us to create its SAS account. Since the passing of that law, more than 44,000 companies have been created. We estimate that it has saved entrepreneurs MX$100 million (US$4.96 million) in registration costs, allowing them to invest their money in their projects.
Q: Where does Latin America stand in terms of regulations that recognize and benefit entrepreneurs?
A: ASEM is part of the Association of Latin American Entrepreneurs (ASELA). We have witnessed more political willingness to improve the standing of entrepreneurs in the region. I think the country with the most important advances is Chile, with its SECH law. Argentina has also moved forward with SEA. We still have a big challenge before us in having governments recognize the importance of entrepreneurship. This has to do with the stereotype mentioned earlier. In Mexico, entrepreneurs generate 70 percent of all jobs and contribute 40 percent of GDP. Overall, I would say we do not have a country in the region yet, that is really an example of an entrepreneurial country, like the US or Israel. We are not there yet.
Q: How can entrepreneurs become part of the association?
A: We have only two requirements. The company should be formally constituted and billed. Also, they should have between one and 250 employees. Companies can register very easily on our website. They then receive monthly information about activities and material they can use. We have 22,000 registered companies and 35 percent of these are led by female entrepreneurs. Increasing the participation of female entrepreneurs has been one of my top objectives during my presidency. ASEM also has 46 partners who were founders. They are entrepreneurs who are part of the assembly. They participate in the decisions for planning our agenda and also elect the board. The board, in turn, elects the president.
Q: What is ASEM’s perspective on the government’s recent move to ban outsourcing?
A: In some types of businesses, a certain flexibility in contracting allows large companies to provide work to other companies. Making the rules for contracting more rigid also limits the capacity to adapt and take on services . We see cases of countries where it is almost impossible to convert people into actual employees. On the other hand, we are an organization that stands for formality and legality. I think this model of billing ghost companies, affecting the conditions of employees, is wrong. These people do not have social security but do require that service. On the other hand, when a company has to pay for healthcare for its employees, it also pays lower salaries. There is incongruency there. Ultimately, we need to find a way to ensure that resources go where they belong. The government’s objective is valid: a real fight against corruption is necessary. Workers need to have access to an equal playing field with dignified conditions. However, companies do have to be able to pay for services.
Q: What other areas have you been working on to improve the entrepreneurial environment in Mexico?
A: We are active in several other areas. We have been pushing to make the visa process for foreigners to come to Mexico and create companies more agile. We want Mexico City, and the country as a whole, to be an entrepreneurial hub in Latin America. For that, we have to be able to import talent in a faster way. Kavak, Mexico’s first unicorn startup, was created by a migrant.
Another area we are working on is an upgrade to the Federal Law for Economic Competition. The idea is for the authority that evaluates competition in the market, COFECE, to adopt a more agile process that is not endlessly delayed. We can look at the case of Cornershop. COFECE took months to reject the company’s acquisition by Walmart. Now, we have been waiting for months for a verdict on Uber’s proposed acquisition of Cornershop. This is not sending the signal that Mexico is an attractive environment for startups and companies seeking to acquire them.
Lastly, we are promoting progressive fiscal policies. We think an entrepreneur should carry less tax burden. They should have more options to receive higher tax returns. We also believe that companies of different registered types should be able to be created without cost and without the requirement of there being more than one partner.
Mexico’s Entrepreneurs’ Association (ASEM) is a nonprofit association dedicated to making Mexico a haven for entrepreneurs to thrive.