Mexico’s Growth Will Come From Entrepreneurship and Small and Medium-Sized Enterprises

For a country to grow, private-sector companies have to grow. Since 1993, revenues of the companies that comprise Mexico’s Stock Market Index (Índice de Precios y Cotizaciones of the Bolsa Mexicana de Valores) have experienced a compounded annual growth rath (CAGR) in dollar terms of 14 percent. Comparatively, the CAGR over the same period in revenues of the companies that make up the Bovespa Index (Brazil’s stock exchange index) has been 2 percent.¹

Yet over the same time period, Mexico has experienced a mediocre growth in relationship to peer countries. Mexico’s nominal GDP CAGR since 1993 has been 5 percent, versus 9 percent for Brazil.² This means Brazil has growth a rate 1.8x faster than Mexico’s. It’s because of this disparity that a recent survey of the top 92 business leaders in Mexico, done in anticipation of the G20 Summit in Los Cabos, Mexico, found that “the topic at the top of the minds of most Mexican executives is economic growth.”³

Why has Brazil’s GDP grown 1.8x faster than Mexico’s if Mexico’s largest companies have grown 7x faster than Brazil’s? The answer is entrepreneurship and the growth of small and medium enterprises (SMEs).

Large companies in Mexico have in fact shown dynamic growth; however, that has not translated into a higher GDP because these companies have not increased the size of the pie; they have, rather, captured a greater piece of the existing pie. Moreover, the largest companies have achieved their growth primarily through expansion with foreign market operations, which does not contribute to the growth of Mexico’s GDP.

Given that the growth of Mexico’s largest enterprises does not raise its GDP, the country is left with two main options: to create more microenterprises, or to increase the growth of its SMEs.

Achieving one percentage point growth in the GDP by creating new microenterprises would mean adding 273,000 such companies.⁴ To achieve the same result through the growth of SMEs, 105 midsize companies would have to grow from medium to large.⁵ Therefore, from a public policy perspective, it is most efficient to focus on SMEs to raise the GDP.

I am not arguing that Mexico should abandon its programs to facilitate the creation of microenterprises. However, it is important to recognize that these efforts will primarily address issues of social inclusion, which is very necessary but will not result in the short- or medium-term growth of Mexico’s economy.

During the last 20 years, Mexico’s private sector, especially large corporations, has insisted that the way to catalyze Mexico’s growth is through structural reforms.⁶ There is no question that such reforms would result in a higher GDP. However, the country’s full political energy has been focused on achieving these structural reforms, and because of a lack of consensus, policymakers have come out empty handed and politically exhausted. Furthermore, even if Mexico were to achieve the proposed reforms, most would benefit older companies and well-established industrial groups, and few would benefit SMEs. For example, few SMEs would be able to participate in a revamped energy sector because of the size of the required investment. Another example is labor reform; most newer SMEs do not have the industrial-based labor structures that labor reforms are looking to address. Therefore, instead of focusing on structural reforms, which has proven futile, Mexico should move forward and focus its energy on changes that are achievable, including initiatives that require few legal reforms and will spur innovation from the bottom up.

Mexico continues to face important socioeconomic challenges, and solving these challenges calls for innovative solutions. Large companies and market leaders are generally not innovators, which is another reason why Mexico needs bottom-up innovation from its entrepreneurs and SMEs.

Let me share some ideas for encouraging the development of new entrepreneurs and creating more SMEs in Mexico, and for catalyzing the growth of existing SMEs.

Strategies to Catalyze Enterprise Growth in Mexico

Provide access to capital

In Mexico, loans...