The positive Network Effects of Clusters are a cornerstone of modern geographic and development economics. The concept is pretty intuitive: having a lot of companies in the same industry creates a pool of talent, buyers and suppliers that simplifies the establishment of new similar companies in the same place. Therefore, acquiring a critical mass of companies is crucial for the future development of the industry.
In IT, the main advantage of these clusters is the reduction of the acquisition costs of talent. Someone has already done 95% of what an IT company is doing; acquiring people with the right capabilities and experience lets you jump ahead of the competition. The most famous cluster in IT and innovation is, obviously, the Silicon Valley. It is not only for ideological reasons that the Valley has been pushing so hard for changes in the immigration policies and the JOBS Act.
It is very hard to know what is the minimum size required to call a place a hub: you know one when you see one. But the most important characteristic of an IT hub is the access to talent when building a new company in the sector.
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Buenos Aires has been an important software and IT services center for a long time. Almost 90% of all the Latin American start-ups of the 90s where originally from Argentina. The country still has one of the most literate populations in the continent.
Furthermore, it has picked up significantly duriing the 2000s, with sales growing a fivefold since 2003 and standing today at a staggering USD 4 Billion. Buenos Aires and its suburbs concentrate ~70% of the more than 1400 companies in the sector. A lot of them provide IT Services , but 52% of them are pure software development companies.
ICT Sales, Exports and Employment in Argentina
Source: OPSSI - Semi-annual report on the Software and IT Services Industry in Argentina. Seprtember 2013
Even if significant for a country with a USD 470 Biillion GDP like Argentina, the ~50.000 employees in the sector in Buenos Aires are very small when compared to the Silicon Valley where ~300.000 people are dedicated to the industry and 150.000 people are dedicated to innovation. Moreover, most of the firms in the SV are dedicated to software development (vs 50% in Buenos Aires) and their employees have a better education and perform more sophisticated non-standarized tasks. So, no, Buenos Aires is not the Tango Valley.
However, the city does have enough resources to be a hub in some sectors. Buenos Aires is the home town of the two biggest IT companies of Latin America and they are both in Consumer Internet: Mercado Libre is quoted at a USD 6 Billlion Market Cap on NASDAQ.and Despegar was valued at ~USD 1 Billion in recent private transactions. These companies are creating a huge pool of knowledge in the sector and it is empowering new ventures like OLX, the Craiglist of Emerging Markets with presence in over 100 countries that was founded by the owners of De Remate, a competitor bought by Mercado Libre.
The city also has some sectors that are gaining significant traction like video-games with more than 70 companies and 1000 employees, where 72% create their own IP. Another relevant sector is Business Process Outsourcing, where Globant alone has USD 120 Million in revenue.
The high level of development in some sectors and the nascent status in some others makes public policy all the more important to capture the full value of the network externalities. The most obvious thing Buenos Aires needs for this industry to develop is a stable macroeconomic environment in which to operate. Even if, as we have written in previous blogs, the VC industry can circumvent most of the red tape, most of the IT industry is not VC material and is highly sensitive to the business environment. The other main driver of the industry is education since, as we have discussed earlier, talent is the most important asset. Finally, the state could help industries export their services and connect with each other.
In conclusion, the software sector in Buenos Aires is far from the biggest international IT hubs. However, it is a world-class hub in Consumer Internet and it has the potential to be a hub in the whole industry if public policy gives a helping hand.
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Thank you to Gabriel Wallach and Marcos Amadeo from the Government of the City of Buenos Aires for their assistance with the data
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