How to Read Venture Capital Investing in Latin America: Policy and Flows: Journal of Legal Technology Risk Management, Volume 2, Issue 1 Kindle
“Latin America is mainly a puzzle.”2 This description adeptly summarizes economists and policymakers’ consensus understanding of the region’s economy. Latin America possesses relatively high wealth, literacy rates, and urbanization but nevertheless “does not generate lots of good jobs or good growth.”3 In fact, over the last 25 years, the Latin American economy grew at half the rate than during 1950-1980, with per capita income barely increasing and poverty persisting.4 To varying degrees, the Latin American governments have sought foreign capital as an answer to their economic woes and “unleashed just about every conceivable economic reform on their countries in this era of globalization.”5 Nevertheless, “the fruits of these reforms have been slow to arrive and small in number.”6 This Article analyzes one component of this enigma: promotion of venture capital investing. In doing so, this study advances the understanding of one of the region’s economic policy initiatives that possesses the possibility for profound implications for Latin America’s economic and societal wellbeing. Improved understanding of venture capital (VC) investing in Latin America may lead to new policies for promoting the economic health of the region. “Venture capital investments provide the needed cash for companies to develop technologies and products which, in turn, generate jobs, exports, and taxes that keep the [the region] competitive.”7 In recent years in the world’s most established venture capital market, venture-backed companies employed more than 10 million and generated over $1.8 trillion in sales per year.8 Venture capital is viewed as highly beneficial to economies because of the unique nature of its investing activity. Even during the downturn in the markets from 2000-2003, in the United States, “[e]mployment in venture backed companies jumped by 6.5 percent, while national private sector employment shrank by 2.3 percent.”9 Aside from these employment prospects within venture-backed firms, VC investing has additional positive externalities. VC-backed firms consistently breed increased productivity and technological development across the industries in which they operate.10 The governments of Latin America are eager to duplicate such successes. Indeed, “LAC countries have pursued promising legislation and targeted programs aimed at bolstering the private equity and venture capital industry.”11 Despite their efforts, however, “[n]ot all [countries] are able to allocate private equity to risky, high value-added undertakings [B]arriers act to constrain the development of a dynamic venture capital market and business environment.”12 The purpose of this study is to explore the functioning of venture capital investing in Latin America. While Latin American governments recognize the economic benefits of attracting VC financing, much of the region has struggled. “On the supply side, this may be due to a lack of funds, risk-adverse attitudes and/or the absence of an equity investment culture.”13 Focusing on Argentina, Brazil, Chile, and Mexico, this analysis pulls together existing literature to evaluate the attractiveness of each country’s legal environment with regard to foreign venture capital investment. This Article then advances current scholarship by uncovering an unintuitive lack of correlation between the literature’s determination of a country’s objective “attractiveness” and actual venture capital investment. This phenomenon is mirrored – and the enigma reinforced – by a similar lack of correlation between general foreign direct investment and venture capital investing. This study then analyzes this finding in the context of general VC investment theory.
