New regulations aim to boost start-ups and encourage research and development in Mexico

 

Mexico is considered to be at the leading edge of Latin America in terms of innovation in business modelling, with a mature tech sector installed in clusters across Mexico City, Monterrey and Guadalajara. Furthermore, it has a second tier of smaller cities housing start-ups that apply technology to a number of sectors, from automotive, aviation and banking, to renewable energy and urban mobility.

However, at just 0.5% of GDP, the country’s investment in research and development (R&D) is below the global average. In 2016 Mexico ranked 45th for investment in the sector, which was lower than many smaller economies, including Israel, South Korea and Sweden. According to UNESCO’s most recent figures, in 2017 Mexico’s total annual investment in R&D was $11.5bn. Of this, the government, private sector and universities provided $4.4bn, $3.4bn and $3bn, respectively. In addition, there are 244 researchers per million inhabitants. Unlike in North America, Western Europe and Asia, where investment in R&D has steadily increased over recent years, investment volumes in Latin America have remained flat. In Mexico the private sector looks set to take the lead in R&D investment, with the government of President Andrés Manuel López Obrador, known by his acronym AMLO, announcing a 13.6% cut to the 2019 budget for science and technology. The National Council for Science and Technology ( Consejo Nacional de Ciencia y Tecnología, CONACYT) received MXN24.6bn ($1.3bn), approximately 11.8% lower than its 2018 allocation.

Innovation

The Consumer Technology Association (CTA) released its 2019 International Innovation Scorecard, listing Mexico as an “innovation adopter”, a downgrade from its position in 2018 as an “innovation champion”, with a “D” ranking for R&D investment, a “C-” for entrepreneurial activity, and a “C+” for human capital. “Since last year’s scorecard, the proportion of graduates in Mexico earning science, technology, engineering and math degrees increased to over 40% from 31%,” the CTA said. “Continued investment in its workforce could help Mexico increase its share of high-skilled employees – which currently stands at less than 19% – and further boost the country’s human capital grade,” it added. To further improve its position on the ranking, the CTA recommends that Mexico “increase its spending on R&D and lay regulatory groundwork for the development and use of self-driving vehicles, focusing on combating corruption and boosting resilience”.

Start-Up Environment

Despite a perceived lack of government support for innovation, Mexico has a healthy environment for start-ups. Investment information portal Rankia lists Mexico as second in Latin America, behind Brazil, for the number of startups in the country, with an average of one start-up for every 100,000 inhabitants. Furthermore, six of the 11 Latin American start-ups that were chosen by Silicon Valley-based incubator 500 Startups for its second accelerator programme are Mexican: app development tool AppHive; financial technology (fintech) company Baubap; food delivery service Comebien; DB Menos, a fintech aimed at helping people reduce their debt; children’s book lending service Little Bookmates; and investment assistance agency Networth Consulting.

Among the major start-up investments that were announced in 2019 is the successful $100m funding round by Mexican payment app Clip, which included a $20m injection by Japan’s Softbank. In March 2019 Softbank announced a $5bn fund for investment in Latin American tech start-ups. This large-scale investment is evidence of interest in Latin American innovators among rising numbers of foreign financial institutions and private equity firms.

According to the Association for Private Capital Investment in Latin America, this trend was evident in 2018, with record investments in Latin American start-ups reaching $2bn – a four-fold increase from 2016. In 2018 private equity and venture capital funds targeting Latin America raised $6.7bn through 52 partial or final closings, representing a 55% increase from 2017 and a total of 610 transactions. Brazil received the largest amount of investment, followed by Mexico. Softbank is also reportedly considering investment in fintech company Konfio and used-car platform Kavak.

IT Sector

In addition to investment from abroad, Mexico’s IT sector is seeing an increase in investment interest from a growing number of local private equity and venture capital firms. In 2019 Banco de México lowered interest rates from 8.25% to 8%, marking the first rate reduction in five years. According to Arturo Herrera, minister of finance, the cut could increase the country’s overall attractiveness as a destination for foreign direct investment.

A report from market research firm Frost & Sullivan states that the number of tech start-ups in the country has tripled since 2010. Moreover, according to the report, the country’s economy has the potential to see more than $245bn in cumulative GDP growth through to 2025. The report further claims that demographic advantages, such as having a median age of 27, and growing support for startups “will lay the foundation for a robust culture of innovation.” Between 2013 and 2019 Mexico led worldwide growth of start-ups run by people between 18 and 64 years of age. “Due to steady reforms and government policies, Mexico’s performance in innovation has strengthened over the past few years,” Richard Sear, partner and senior vice-president at Frost & Sullivan, told OBG. “With continued support from the new administration, the country will be able to become a pioneer of innovation across Latin America and worldwide,” he said.

Among the factors that contribute to Mexico’s potential as a centre for innovation, Frost & Sullivan cites the increase in local venture capital activity, the young population, and the subsequent rise of the working-age population as drivers of economic prosperity. The growth of the middle class is set to rank Mexico among the top-10 contributors to global middle-class consumption by 2030, as well as drive innovation in the retail sector.

Regulatory Frameworks

Mexico’s fintech sector was the second-largest fintech centre in Latin America in 2018, with a total of 300 companies. The regulatory framework for Mexico’s fintech sector was drawn up by the National Banking and Securities Commission and promoted by former President Enrique Peña Nieto in 2018.

According to Manuel Cohen Halabe, deputy general manager at real estate crowdfunding company Inverspot, it is too restrictive. “The regulatory framework is too strict, because it treats us as if we were banks,” he told OBG. “As fintech is new and has only been around for about three years in Mexico, regulations do not give us the same benefits as banks. For example, we cannot receive cash investments,” he said. However, tech start-ups are proving vital to banks, as they contribute to innovative solutions, Hugo Nájera Alva, director-general of business development at BBVA México, told OBG. “With the fast-track programme, we are able to bring people from different business areas together with the most innovative fintech firms, so that they can work with the bank to improve the products and services we offer our clients,” Nájera told OBG.

As a result of improvements to its business, BBVA México was awarded special honours in Global Finance magazine’s annual Innovators 2019 list, which lauded the bank’s use of artificial intelligence in its chatbot. Since launching in November 2018 it has processed an average of 10,000 conversations per month. It is also integrated with Alexa, Amazon’s virtual assistant, which helps the bank improve customer experience and boosts digital sales. BBVA also developed a blockchain corporate lending platform, which has put Mexico at the forefront of the technology globally.

In recent years Mexican entrepreneurs have launched a number of innovative products, including Eva, a brassiere fitted with heat sensors that can detect breast cancer, developed by the founder of Eva Technologies, Julián Ríos; Roomie Bot, a robot that can carry out multiple functions to streamline business processes, created by Aldo Luévano; and GiGaLiFi, a system that uses light rather than radio waves as a Wi-Fi network, created by Arturo Campos. With the federal government’s closure of investment promotion agency ProMéxico, however, foreign investment into start-ups may see a slackening off in the years to come.

Regional Hubs

In Mexico innovation, entrepreneurship and R&D have grown in a decentralised manner, with Guadalajara, Monterrey and Querétaro emerging as the largest centres for IT. “With the disappearance of ProMéxico, we are looking to leverage our strengths by linking up with other regional clusters,” Luis Valtierra, president of the Jalisco Insitute of Information Technology (Instituto Jalisciense de Tecnologías de la Información, IJALTI), told OBG. IJALTI is in charge of promoting the growth of the state’s technology cluster. Currently, it has around 140 IT companies installed, including industry giants such as Cisco, IBM and Oracle, which are working together to create a technology ecosystem and successfully make Jalisco an IT centre.

Among the new arrivals is US-based shared services company Genpact, which, as part of its partnership with Walmart, will open a digital innovation hub in Guadalajara that focuses on advanced analytics. “Jalisco has positioned itself as a hotbed of technology. We are looking to give that more structure, creating an ecosystem that fosters innovation, with electronics manufacturing, creative media, data science, analytics, the internet of things and artificial intelligence,” he said. That work includes liaising with local universities to aid problem-solving in various industries. “We are opening 10 regional innovation centres across the state, which will focus on supporting start-ups and improving business processes,” he said. IJALTI is setting an example with its leadership in the IT sector by sharing best practices with other states such as Guanajuato, which is a centre for the automotive industry.

Developing Talent

Valtierra also emphasised the importance of technology having a social impact, not just affecting entrepreneurship but also training people and helping them to improve their standard of living. In addition to working with other states in the country, Jalisco is seeking to grow its international alliances. “We want IJALTI to partner with companies in other countries, ones that have technological development centres,” Valtierra told OBG. “We are working to attract more companies to Mexico, but the country lacks reliable, up-to-date information on what is happening in the sector. There is a great opportunity for new businesses in IT, but we may need to go out and find talent elsewhere,” he said. Furthermore, up to 30% of the IT talent working in Guadalajara comes from outside Jalisco, primarily from Mexico City and Monterrey. Foreign talent is particularly needed for senior staff, who are able to impart knowledge to others and accelerate growth. “Regardless of what is happening at a federal level, Jalisco must play its own role in benefitting the people of the state,” Valtierra told OBG. Regional focus is also the backbone of the Alianza Centro-Bajío-Occidente, a planning initiative launched in 2016 by the Employers Confederation of the Mexican Republic, which seeks to foster growth in Aguascalientes, Guanajuato, Jalisco, Querétaro and San Luis Potosí. Between 2012 and 2019 each of these states showed economic growth of 40% above the national average and produced one-fifth of the country’s export volume.

In October 2019 Guanajuato’s capital city León will host Industrial Transformation Mexico for the first time. Organised by Hannover Messe and consisting of a trade show, conference and educational programme, the exhibit focuses on smart manufacturing and digital transformation in the country.

A number of multinational companies have also chosen Mexico as the location for R&D centres, such as Honeywell, which opened a location in Mexico City earlier in 2019. Furthermore, technology and shared services firms that are already operational in the country are expanding their operations, like Infosys, and demand for IT job candidates has increased in Mexico, according to human resources provider PageGroup. However, while Mexico’s fintech sector has seen rapid growth, no new fintech companies will be registered by the government in the two years following the introduction of the regulations, slowing the creation of new companies during the current administration, according to Cohen.

Education

Mexico has a number of public and private universities and technical institutes that are crucial for nurturing new tech talent, such as stateowned National Autonomous University of Mexico, which is one of the world’s largest universities; the privately run Autonomous Technological Institute of Mexico; the Monterrey Institute of Technology and Higher Learning (Instituto Tecnológico y de Estudios Superiores de Monterrey, ITSEM), which has 26 campuses across the country; the Western Technology Higher Education Institute in Guadalajara; and Anáhuac University, which has eight campuses.

In 2019 the ITESM implemented an extension of its Tec21 program, launched in 2013, a new educational model focusing on vocational training that comprises an alliance with 15 companies that include IBM, HP and T-Systems that will function as labs to train ITESM students directly with the skills such companies require of their recruits. That same year German company Zurich Insurance announced it had signed an agreement with the National College of Professional Technical Education to give students vocational training as part of the company’s strategy to develop talent and provide young people with the professional strength to realise their potential.

At the beginning of the 2019/20 academic year, the federal government announced its decision to allocate MXN60bn($3.1bn) to education, providing grants to students at all levels to encourage young people to stay in school (see Education chapter). Sixth-form, or high school students, will each receive MXN1600 ($82) every two months. Furthermore, the free textbooks for pre-school, primary and secondary schools, which are provided by the Ministry of Public Education (Secretaría de Educación Pública, SEP) will also be made available as e-books.

Earlier in 2019 the SEP unveiled a number of changes to the education system as part of AMLO’s ongoing sector reforms. The reforms are intended to reverse parts of the education reform implemented by the previous administration in 2013, such as the performance evaluations for teachers which were heavily criticised for not including consultations with teachers themselves prior to drafting the legislation.

Budget

The government’s cuts to CONACYT’s budget do not bode well for the growth of state-sponsored R&D investment, and will affect CONACYT’s 27 research centres across the country. Going forward, R&D investment growth will increasingly depend on the private sector. However, educational initiatives, such as the Tec21 study programme and its alliance with Banco Santander to establish a data hub and educational centre, will increase the interaction between students and the private sector, increasing students’ competitiveness and chances of gaining employment within the growing tech sector. Therefore, it will help nurture a new generation of technology professionals.

Outlook

Mexico and other Latin American countries are seeing a proliferation of coding bootcamps, with courses designed to train students in programming, a skill in demand in many industries. More and more businesses are applying new technology to transform and streamline their business processes.

According to a report from the Inter-American Development Bank, while bootcamps address severe shortages of talent in digital skills, they “do not represent the magic bullet that will contrive such skills out of thin air, nor should they be touted as such… The development of a digital talent pipeline for upskilling and reskilling is critical in modern economies; however, to carry it out effectively will require an in-depth understanding on the part of public and private leaders, alike, of the technological potential and talent gaps that are specific to different industries, countries and regions.”

However, optimism for investment in and the growth of the technology sector and innovation remains strong at the local level. “The states with more digital penetration in the government are Sonora and Nuevo León, mainly in taxation services,” according to Kaleb Ávila, vice-president for Latin America at Panduit, a global network infrastructure company. “The use of analytics is more comprehensive and widespread in Mexico than in Central America or even Colombia. Mexico needs a specific incentives programme for entrepreneurs in order to boost growth in the ICT industry,” he told OBG.

Jalisco is also a regional leader in technology and innovation. The state’s Ministry of Innovation, Science and Technology awards student grants and prizes. In addition, it is participating in the drawing up of a new federal science and technology law, along with representatives from seven other Mexican states. The law is intended to replace the legislation that was last updated in 2002. It is hoped that the reform will help to usher in a complete change in the way policies in the sector are designed and implemented. It is also intended to spur investment and secure investor confidence, levels of which have somewhat declined in response to a number of the actions taken by the current administration.

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The Report: Mexico 2019

Entrepreneurship + R&D chapter from The Report: Mexico 2019

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