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Intellectual Capital

Colombia's comeback good news for small business

Professor Wesley Sine Professor Wesley Sine

Entrepreneurs in Colombia are prospering thanks to two major factors: a sharp decrease in violence and the ensuing rapid economic growth. According to a new study from Wesley Sine, assistant professor of management and organizations, and Shon Hiatt, a Cornell graduate student in organizational behavior, survival rates for small businesses have doubled since 2001.

Sine and Hiatt traveled to Colombia many times during this groundbreaking, 10-year study, "Declining Insurgencies," which investigates the welfare of Colombia's small business owners. They observed and studied almost 1,000 entrepreneurs and found that when governments are stable, the survival rate of entrepreneurial ventures dramatically improves.

According to a 2007 BusinessWeek cover story, Colombia's stock market had jumped fourteen-hundred percent since October 2001, while direct foreign investment had doubled, and real estate prices had tripled. The entrepreneurial growth that Sine and Hiatt observed can be mostly attributed to decreased violence.

"The survival rates of ventures double after 2001, after taking into consideration all of the economic variables and firm age," Sine says. "Entrepreneurs are more likely to take risks in stable environments, including social risks. The amount of time entrepreneurs spend in expanding their social network has increased by about 10 percent, new product introductions by entrepreneurs have increased by 5 percent and the likelihood that entrepreneurs enter into new markets has increased by 5 percent."

"If entrepreneurs are afraid to leave their immediate neighborhoods to meet potential customers and business partners because they fear for their personal safety, they cannot grow their businesses."

– Professor Wesley Sine

These seemingly small changes produce huge ripple effects. "In the past, the probability that most citizens were directly affected by violence was low," Sine says. "However, the collective fear was high, and small business people were afraid to take risks by expanding into new markets, trying out new products, and approaching other businesses and entrepreneurs that they didn't know.

"Entrepreneurs must network," notes Sine. "If they are afraid to leave their immediate neighborhoods to meet potential customers and business partners because they fear for their personal safety, they cannot grow their businesses." Many of the businesses surveyed were mom-and-pop endeavors, ranging from small convenience stores to auto repair shops to beauty salons and other family-run operations – the businesses most affected by neighborhood violence.

For example, an entrepreneur who manufactured uniforms for factory workers in Medellin had one small shop with three sewing machines in the late 1990s. This entrepreneur's business could not grow because it was risky to visit potential clients outside his neighborhood. Traveling to parts of the city with which he was not familiar could be dangerous due to high levels of violence, making him a target of local criminal and insurgent gangs.

Moreover, doing business with companies that might have links to the paramilitaries would make him a target to other insurgent groups. So, he stayed home and only did business with existing customers whom he knew and trusted. As the violence and political uncertainty subsided, this entrepreneur began to take more risks. He began contacting more potential customers and a greater diversity of customers. He expanded his product line to support organizations in different types of industries, such as mining and industrial chemicals. Today, this entrepreneur has six factories and sells specialized protective uniforms to companies throughout Colombia. Similar examples were noted for a bike parts manufacturer, small grocery stores, and other ventures.

By tracking the same entrepreneurs over a 10-year period, Sine and Hiatt were able to measure the effects of changing political turmoil on entrepreneurial processes from year to year and from region to region in Colombia.

On a recent trip to Colombia in early 2007, the authors observed that reduced levels of violence enabled many businesses to be more successful, thanks to government crackdowns on guerrilla and paramilitary groups, and on crime. Once the fear of political violence and crime subsided, entrepreneurs could focus on expanding their businesses. Since 2002, Colombia's president, Alvaro Uribe, has made the security of the people his priority. This dedication is translating directly into economic success.

The Cornell researchers will return to Colombia later this year to check in with the entrepreneurs in their study.

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