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P R O O F I N G C O P Y

RECOMMENDATIONS FOR SUPPORTING THE DEVELOPMENT OF ENTREPRENEURS WORKING IN GUATEMALA’S LIGHT MANUFACTURING SECTORS

This research was made possible by funding from

AUTHORS Rhett Morris, Director of Endeavor Insight (rhett.morris@endeavor.org I @rhettmorris)Lili Török, Project Leader at Endeavor Insight (lili.torok@endeavor.org I @lilitorok)

ABOUT ENDEAVOR INSIGHT Endeavor Insight is the research division of Endeavor, a nonprofit organization that supports high-impact entrepreneurs across the world.

Its work seeks to answer three questions:

1. How do entrepreneurs reach scale at their companies?

2. How do entrepreneurs reach scale in local networks or ecosystems?

3. What can policymakers, philanthropic leaders, investors, support organizations, and other stakeholders do to empower more entrepreneurs to reach scale in their communities?

The methodology utilized in this study builds on previous Endeavor Insight research supported by the Omidyar Network, the Kauffman Foundation, and the Heron Foundation.

SPECIAL THANKS The authors of this report would like to thank their colleagues at Endeavor including Maha AbdelAzim, Leah D. Barto, Penmai Chongtoua, Luisa Fajardo, Paola Pillin, Sughey Ramirez, Adrián García-Aranyos, and Linda Rottenberg, as well as team members at Argidius who provided valuable feedback, especially Nicholas Colloff and Harry Devonshire.

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The purpose of this memo is to share recommendations for cultivating the development of a more productive entrepreneurship community among light manufacturing companies in Guatemala.* Light manufacturing is defined as the production of goods that are less complex and less capital intensive than heavy manufacturing.

The majority of entrepreneurial companies identified for this project came from three sectors: apparel, furniture, and plastics. The analysis draws on data from in-person interviews with approximately 80 light manufacturing entrepreneurs in the country, as well as around 20 other stakeholders involved in the sectors. Additional analyses also used secondary data on more than 300 entrepreneurial companies founded or headquartered in Guatemala’s light manufacturing industry.

The following pages outline four recommendations for local and international decision makers who wish to foster the growth of a productive entrepreneurship community in this industry. These strategies can enable more local founders to build manufacturing companies that reach scale and generate significant value for the local economy.†

* The primary research question for this project was “How can we help more manufacturing entrepreneurs reach scale?”† Goods produced in heavy manufacturing include automobiles, construction equipment, large machinery, and infrastructure components.

INTRODUCTION

INCLUDED SECTORS EXCLUDED SECTORS

Apparel and Textiles Food and Beverages

Chemicals

Computer and Electronics

Furniture

Glass

Jewelry and Silverware

Medical Equipment and Supplies

Metal Products

Plastics

Paper

Rubber Products

Wood Products

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R E C O M M E N D A T I O N 1 :

DECISION MAKERS SHOULD RECOGNIZE THAT THE INSTITUTIONAL CHALLENGES IN GUATEMALA ARE SIGNIFICANT AND MAY REMAIN SO IN THE SHORT TERM.

Guatemala faces significant challenges that can be grouped into four key areas.

Crime Rates. According to the World Bank, Guatemala’s murder rate is the 14th highest in the world. Homicides and other violent crimes in the country are driven by drug trafficking, gang-related violence, a heavily armed population, and a weak justice system.1

Political Corruption. Recent evaluations place Guatemala at 144th place out of 180 countries in terms of transparency. U.S. News ranked Guatemala as one of the ten most corrupt nations in the world.2

Infrastructure Conditions. As the Inter-American Development Bank recently noted, “Road density in per capita terms is 1.2 km/1,000 inhabitants, which is low as measured against neighboring countries and which in conjunction with logistics at the border, hinders access to foreign markets.”3

General Business Climate. Guatemala ranks 176 out of 190 countries in terms of contract enforcement, according to data from the 2019 Doing Business report from the World Bank.4 The country also scores low in international measures for general “rule of law.”5

RECOMMENDED READING

An overview of the state of politics, corruption, and crime in Guatemala can be found in a story from earlier this decade entitled “A Murder Foretold” in The New Yorker.6 More information about the election depicted in the story can be found in the article “Guatemala’s Presidential Election May Be a Blow to Anti-Corruption Effort” from the New York Times.7 Together, these two articles provide an illustration of the institutional challenges faced by the country.

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GUATEMALA’S BUSINESS CLIMATE Rankings from the World Bank’s 2020 Doing Business Report

Starting a Business

Dealing with Construction

Permits

Getting Electricity

Registering Property

Getting Credit

Protecting Minority Investor

Paying Taxes

Trading Across Borders

Enforcing Contracts

Resolving Insolvency

1

100

190

#99

#118

#46

#89

#15

#153

#104

#82

#176

#157

The challenges in these areas seriously constrain local manufacturing businesses in Guatemala. In fact, crime, corruption, and infrastructure were the three factors most frequently cited as serious or very

serious obstacles to business growth by the entrepreneurs interviewed in this study.

Though these challenges are important, institutional change is difficult and takes a very long time to come about even in the best of

circumstances. Other opportunities outlined in the following sections are more likely to be addressable by local and international decision makers outside of the government and have the potential to yield faster results.

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More than 80 manufacturing entrepreneurs in Guatemala gave interviews for this project, but connectivity among them is quite low, as the network map on the opposite page illustrates. The majority of the entrepreneurs interviewed for this project had no connections to other local manufacturing founders or executives as former employers, mentors, or investors.

This is very different than what Endeavor Insight has observed in productive manufacturing entrepreneurship communities in the United States, such as medical device entrepreneurs in Minneapolis or alcoholic beverage founders in San Diego. In these highly productive communities, a much larger proportion of founders had connections to others. Even more importantly, successful entrepreneurs in these ecosystems were active as supporters of younger companies, which was associated with improved performance among the upcoming companies receiving this support.

Guatemala currently has more than 40 successful, entrepreneurial manufacturing companies with over 100 employees, most of which are family-owned businesses. The existence and continued success of these companies is important for two reasons.

• Their success indicates that the light manufacturing industry continues to have significant potential, despite the country’s institutional challenges. (Manufacturing currently represents more than 15 percent of Guatemala’s GDP.)

• The founders and executives at these successful firms could also be valuable supporters of upcoming entrepreneurs like those surveyed in this research.

Unfortunately, the interviews for this project identified almost no examples of executives

or founders from large, established local manufacturing companies supporting upcoming light manufacturing entrepreneurs. This is perhaps the single greatest barrier to the growth of upcoming light manufacturing firms identified in this research.

Endeavor Insight has never encountered an entrepreneurship community where a significant number of upcoming founders reach scale without having connections and support from leaders at previously successful local firms. While it may be possible for the entrepreneurs identified in this project to succeed without this support, having to independently overcome challenges in such a difficult environment — rather than benefit from the wisdom of those who have already done so — may be more than most founders can accomplish.

Local and international decision makers have an opportunity to work with local partners to identify the leaders of existing, successful manufacturing companies and develop a strategy to encourage those leaders to support upcoming founders like those interviewed in this study. This strategy can be based on sharing positive examples of this type of support in leading entrepreneurship communities and then highlighting the potential benefits that this support could provide to Guatemala and to the successful leaders themselves.

The successful entrepreneurs who are interested in supporting founders can be connected to each other, as well as organizations already working with founders in this industry. However, the specific efforts that these leaders engage in should be co-developed with their input and based on the specific capabilities and expertise of those who wish to participate.

R E C O M M E N D A T I O N 2 :

DECISION MAKERS SHOULD PRIORITIZE RECRUITING THE LEADERS OF SUCCESSFUL MANUFACTURING COMPANIES IN GUATEMALA TO SUPPORT UPCOMING LIGHT MANUFACTURING FOUNDERS.

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ACTORS:

ENTREPRENEURIAL COMPANIES

The size of the circle reflects the number of connections originating from the founders of each company or the leaders of each organization. Founders and leaders are represented by their most prominent company or organization.

CONNECTIONS:

EXPERIENCE: Former employment or serial entrepreneurship

SUPPORT: Mentorship or program participation

INVESTMENT: Angel or venture capital

*SOURCE: ENDEAVOR INSIGHT

VISUALIZATION OF THE ENTREPRENEUR NETWORK AMONG LIGHT MANUFACTURING FIRMS IN GUATEMALA*

AN ESTIMATED 92 PERCENT OF COMPANIES IDENTIFIED IN THE GUATEMALAN LIGHT MANUFACTURING SECTOR IS NOT REPRESENTED ON THIS MAP.

AUTOSELECT

POLYPRODUCTOS

DE GUATEMALA

KALEA

NYLON TEXTILES

GRONNMADERASUNICASY MUEBLESEXCLUSIVOS

DENIMATRIX

SAXS

EVERHILL

ARTINDUSTRIA

MATA

TEXTILES

FINA

ADELANTE SHOE CO.

ALKEMY

DIGITAL PRO

MAYAPRIN

BAOBAB

COSMÉTICA NATURAL

NATURALART

LABRICA

FIBRA

PERERA SHOES

CIDAL

WAVED DESIGN

GRUPO LAMFER

ALUM

Before1968

1968-1984

1989-2006

2009-2017

YearFounded

ECOFILTRO

Research on entrepreneurship communities shows that the greatest proportion of economic impact, such as job creation and productive output, comes from a small percentage of companies that reach substantial scale.8 Though few of the upcoming companies in this study have reached scale, a number of them are growing quickly and are easily differentiated from their peers.

The entrepreneurs at these fast-growing companies report different challenges than those faced at other companies. It is important to focus attention on the obstacles identified by these founders for two reasons. First, solving the issues that impair fast-growing companies will likely have a large impact because it will contribute to speeding up their growth even more. Second, the obstacles identified by these founders are more likely to be constraints that are true for the greater entrepreneurship environment compared to those identified by slower growth founders, which are often a commentary on the skills that those lower-performing entrepreneurs lack.

The fastest-growing light manufacturing founders in Guatemala highlighted three business-related challenges as being very serious obstacles to the performance of their companies:

Access to International Customers. Only six of the more than 80 interviewees reported that they did not export their products. Those challenged by acquiring customers tended to cite two main issues: 1) the poor infrastructure, a dysfunctional postal service, and public safety concerns that make it extremely expensive to ship smaller quantities; and 2) it is costly to make trips to trade shows and difficult to build and maintain relationships with buyers.

Access to Capital. Light manufacturing companies in Guatemala are capital intensive and often require a minimum amount of scale to begin operating. This challenge is common among all manufacturing communities studied by Endeavor Insight.

Access to Managerial Talent. While the supply of qualified workers is generally quite good for manufacturing firms in Guatemala, it is difficult for entrepreneurs to train, attract, and retain middle managers and executives with the skills and expertise needed to grow a company.

Local and international decision makers have a number of opportunities to address these three issues with short-term initiatives suggested by support organizations, founders, external experts, and Endeavor Insight staff. The “quick win” ideas with the greatest potential in each area are summarized below.

ACCESS TO INTERNATIONAL CUSTOMERS

• Sponsor trade show participation for entrepreneurs based on clear and transparent performance metrics. For example, several small manufacturing companies pooled resources to share a booth at a New York City trade show and jointly covered the $10,000 fee for the space. They suggested that more support could facilitate similar opportunities in the future.

• Enlist executives from the fastest-growing Guatemalan manufacturers identified in the study to mentor other founders on pitching to U.S. purchasers and maintaining relationships with buyers over time.

• Support the development of local companies doing “first mile logistics” to assist with international shipping, such as Utz. This can assist younger companies in exporting goods to new markets.

• Hire a public relations firm to help scaling Guatemalan light manufacturing companies generate press articles for success stories in industry publications and blogs read by buyers.

ACCESS TO CAPITAL

• Develop a program to prepare founders working to raise capital based on feedback from successful fundraisers in the community and the input of investors interested in these companies. This could be similar to the Mentor Capital Program offered to Endeavor entrepreneurs in other Latin American countries.

ACCESS TO MANAGERIAL TALENT

• Organize factory tours at faster-growing manufacturing firms like Ecofiltro, Iris Textiles, and Caoba Doors for other manufacturing entrepreneurs and their senior leadership to get exposure to best practices and build relationships among executives working in similar functional areas.

• Identify the skills that are most in need among managerial talent within fast-growing companies (e.g., budgeting, leading teams, quality control, etc.) and create training courses for junior managers led by local university professors or experienced local executives at larger manufacturing companies in the country.

R E C O M M E N D A T I O N 3 :

LEADERS CAN IMPLEMENT “QUICK WIN” STRATEGIES TO ADDRESS THE CHALLENGES OF FAST-GROWING FIRMS.

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In addition to the short-term ideas listed in the previous section, Endeavor Insight collected a number of additional suggestions from local experts, founders, and support organizations. These programs require substantial financial support or would take significantly longer to develop with local partners. However, they are still worthy of consideration by local leaders. These suggestions are summarized below.

ACCESS TO INTERNATIONAL CUSTOMERS

• Subsidize a strategic partnership with DHL, the leading local ship-ping provider, to provide discounts to manufacturing entrepreneurs.

• Facilitate strategic partnerships between large exporters with reg-ular shipments out of Guatemala and the small, scaling businesses. Create incentives to entice larger firms to share capacity with upcoming entrepreneurs.

ACCESS TO CAPITAL

• Create an investment fund for scaling manufacturing companies that would involve local manufacturing entrepreneurs in leader-ship and incentivize matching funding from other local, for-profit sources.

ACCESS TO MANAGERIAL TALENT

• Establish a program in which successful Guatemalan manufacturers host managers of scaling entrepreneurs for a short period as part of an immersion/externship program to encourage the spread of best practices and build more relationships among local manufacturing firms.

• Fund scholarships for senior management at scaling companies to attend executive education courses at U.S. business schools in core business areas that are identified by fast-growing founders, such as quality control. Managers in Guatemala tend to have much longer tenures than those in the U.S. or Europe, so the benefits of these talent investments would last many years into the future.

R E C O M M E N D A T I O N 4 :

DECISION MAKERS SHOULD CONSIDER MORE SUBSTANTIAL AND LONGER-TERM STRATEGIES TO ADDRESS THE OBSTACLES OF THE FASTEST-GROWING LIGHT MANUFACTURING COMPANIES.

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ENDNOTES

1 The World Bank Indicators. UN Office on Drugs and Crime’s International Homicide Statistics database. 2016. data.worldbank.org/indicator/VC.IHR.PSRC.P5?most_recent_value_desc=true. Accessed 31 Oct. 2019.

2 Transparency International, Guatemala. transparency.org/country/GTM#. Accessed 31 Oct. 2019; Trimble, Megan. “The 10 Most Corrupt Countries, Ranked By Perception.” U.S. News & World Report.usnews.com/news/best-countries/articles/10-most-corrupt-countries-ranked-by-perceptionAccessed 31 Oct. 2019.

3 López, Arnoldo & Jorge Luis Coj Sam, et al. “Country Infrastructure Briefs: Central America, Mexico, Panama, and Dominican Republic.” Inter-American Development Bank. April 2019. publications.iadb.org/publications/english/document/Country_Infrastructure_Briefs_Central_America_Mexico_Panama_and_the_Dominican_Republic_en_en.pdf. Accessed 31 Oct. 2019.

4 World Bank Group. Doing Business 2020: Guatemala. doingbusiness.org/content/dam/doingBusiness/country/g/guatemala/GTM.pdf. Accessed 31 Oct. 2019.

5 WJP Rule of Law Index® 2017-2018. data.worldjusticeproject.org/pdf/rule-of-law-index-GTM.pdf. Accessed 31 Oct. 2019.

6 Grann, David. “A Murder Foretold: Unravelling the ultimate political conspiracy.” The New Yorker. 28 Mar. 2011. newyorker.com/maga-zine/2011/04/04/a-murder-foretold. Accessed 31 Oct. 2019.

7 Malkin, Elisabeth. 17 Jun. 2019. “Guatemala’s Presidential Election May Be a Blow to Anti-Corruption Effort.” The New York Times. nytimes.com/2019/06/17/world/americas/guatemala-election.html. Accessed 31 Oct. 2019.

8 Morris, Rhett & Lili Török. “Fostering Productive Entrepreneurship Communities.” Endeavor Insight. 30 Oct. 2018. endeavor.org/fpec. Accessed 21 Apr. 2019.

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