The re-election of President Santos and the resulting mandate for further peace negotiations is just another remarkable milestone in Colombia’s recent history. To lock in progress, it is now time to deliver the benefits of economic growth to a much larger part of the Colombia population—and this will require leveraging new pathways for innovation and sustainable value creation.
|At the shores of Lake Constance in Switzerland, the fourth edition of the three-day Impact Economy Symposium & Retreat drew to a close on June 15, 2014, just as the second round of the Colombian Presidential election was held. Colombia was one of four focus countries.|
The event annually convenes key influencers, thought leaders, and practitioners from the worlds of investment, business, government, and philanthropy in order to showcase the most effective solutions, innovations, and opportunities that have surfaced in the promotion of impact.
Given the magnitude of challenges and opportunity the country faces, Impact Economy included Colombia in the EMICs, a new set of key countries which present exceptional opportunities to achieve both impact and value.
The EMICs (Ethiopia, Myanmar, Iran, Colombia) are high-stakes, high-opportunity countries whose characteristics allow impact investors to make a key difference in enabling them to prosper; yet the EMICs face important infrastructural and institutional deficits, and raise the question how a responsible and forward-looking approach to investment and business innovation can drive large-scale positive impact.
In this exclusive Colombia Reports series, Impact Economy’s Dr. Maximilian Martin shares key content covered at the conference.
To get a sense how much the opportunity space has shifted in only 15 years, just recall that in the early 2000s, political turmoil and conflict with drug trafficking paramilitary and rebel forces, created a concern that Colombia might fall off the cliff and become another failed state. Instead, the country has remained a bright spot for growth in the region. Achieving sustained GDP growth of over 4 percent and a 500 percent increase in foreign investment since 2000 as well as an investment grade foreign debt rating, Colombia is beginning to be seen as a rising star.
Many arrows are pointing in the right direction, but is this enough?
Strengths include a strong legal framework and corporate governance statute, as well as robust protection of shareholders. But to deliver on the ambition to position itself as the Silicon Valley of Latin America, further nourishing the culture of entrepreneurship and establishing a high-value added skills base, there is more work to do.
An odd combination risks holding the country back: the judicial system is fair though legalistic—but it pairs with complex tax regulations and high perceived levels of corruption. The phenomenal growth of petroleum exports was enabled by Venezuelan industry talent when President Hugo Chávez started reversing foreign ownership and even purged 20,000 qualified employees from state-owned Petróleos de Venezuela (PDVSA); but the boom is now leading to overconcentration of exports in oil and gas, crowding out other sectors and risking the well-known decline in manufacturing associated with increasing exploitation of natural resources, referred to as Dutch disease.
A crucial question is: will Colombia’s policy to promote investment targeting high-value industries, boost employment and formalizing the informal economy yield sufficient results fast enough? Aided by government support for research and development, private sector investment promotion, programs for seed capital provision, a strong development bank and a culture of entrepreneurship, the Latin American Private Equity and Venture Capital Association recently ranked Colombia as having the 4th most favorable climate for investment, after Chile, Brazil and Mexico. Moreover, Colombia’s national development plan is making the needed heavy investments in infrastructure ranging from port capacity to roads, and even considering the potential of fluvial and alternative transportation networks. The road is still long though: less than 1 percent of Colombian companies are considered innovative in a strict sense.
The pace of progress needs to and can be accelerated
The question is: can progress be accelerated, and how? Colombia’s entrepreneurial culture and world-class human capital hold part of the answer—provided companies modernize their ability to create value for both shareholders and stakeholders. It’s time to think bigger. Next to delivering profits to their shareholders, around the world people increasingly expect companies to contribute to a country’s development needs. But just when stakeholder demands are rising, the main instrument to respond so far is becoming dull: corporate social responsibility (CSR)—a bolt-on methodology that is compliance driven and costs money while achieving only limited and fragile reputational benefits—is losing its usefulness.
Business innovation drives competitiveness and development
To stay competitive in a world transformed by megatrends that place higher social and environmental demands upon firms while raising competitive pressure following from globalization, the ongoing information revolution, and greater resource scarcity, companies need to find new pathways to create value. And do so in ways that are compatible with stakeholder expectations about corporate responsibility.
To clarify the transition path, Impact Economy—the global impact investment and strategy firm—recently released “Driving Innovation through Corporate Impact Venturing: A Primer on Business Transformation.” The pathway is this: corporations invest in research and development, and in the advanced economies, corporate venture capital has helped them over the past fifty years to capitalize on their profound industry expertise. This enables translating early insights into emerging trends into actual investments which later lead to the new products and services needed to stay ahead in the core business. Around the world, the pursuit of impact is now being added to this formula: sustainability is increasingly driving value creation; talents want to be social entrepreneurs or social intrapreneurs; and locating joint opportunities for financial and social returns is gradually becoming the way forward to create long-term value. The new modus operandi, Corporate Impact Venturing (CIV), builds on the proven channel of corporate venture capital so companies can source the innovations which are now needed. And if their unique assets are harnessed, companies in Colombia can similarly help the country accelerate its progression along the path toward a preferred prosperous and sustainable future while boosting their own competitiveness.
Adopting a Corporate Impact Venturing mindset can be a win-win
To achieve this, companies must look beyond technology when considering innovation and develop an interest in new business models. The advent of Corporate Impact Venturing is especially relevant for the poor: social needs as well as expectations run high in Colombia, and a stratified society persists— alongside Brazil and Bolivia, part of the three most unequal societies in Latin America. About a third of the population lives under the poverty line. In an upper middle income country that will soon accede to the OECD, and whose geography makes it hard to control any dissent, this is hardly a recipe for peace and linear progress. In spite of the considerable progress, we cannot expect governments and development agencies to do the job alone. A new suite of affordable products and services, and jobs are needed, and for companies who recognize the potential, the opportunity is massive: emerging markets companies are generally well-located to serve new customer segments in fields such as education, health and fast moving consumer goods for which there are massive markets around the world.
Closer to the core of export earnings, extractive industries can contribute as well. Mining, including oil, makes up almost 8 percent of Colombia’s GDP; yet petroleum makes up 47 percent of exports, and coal is next with 11 percent. Due to its disruptive nature, the mining industry anywhere in the world can have severe impacts on people and the environment: acid rock drainage, metal toxicity, contamination, erosion, sedimentation and tailings management, are just a few industry specific outcomes that create negative externalities. But these issues can also severely damage a company’s bottom line and risk profile, so that implementing sustainability into key business practices, across the full value chain, is good for shareholders and stakeholders alike. To innovate in their businesses, leading industry players such as BP, Shell or Total all have created dedicated corporate venture capital arms.
The logical next step is to also adopt an investment mindset in funding innovative business models in alternative energy as well as the more general provision of goods and services that are relevant for the communities which they impact, such as the case of the Shell Foundation which finances social entrepreneurs. Endowed with GBP 133 million in 2000, the Shell Foundation makes impact investments in social businesses, and establishes innovative business models. For example, its South African and Uganda initiative has created partnerships to enable small local businesses to enter the energy services market in ways that serve the needs of the poor in ways that are financially viable.
As Colombia is updating its growth model and looking for additional pathways to achieve inclusion, just imagine what could happen if companies such as Ecopetrol and Pacific Rubiales Energy in the oil industry, and other national champions in the country’s strategic industries were to adopt a similarly ambitious mindset, and leverage the power of Corporate Impact Venturing to boost their own competitiveness while increasing their contribution to national development. The time to dare for bigger impact is now.