Committed to the continued development of the high-tech sector centered around Guadalajara (Mexico’s “Silicon Valley”) the government in the western state of Jalisco has long been investing in local start-ups and technology clusters. Now it is even branching into venture capitalism, but will such projects continue when a new administration takes power later this year?
State Government Credits
Rich in potential, thanks largely to the wide range of quality academic institutions in the Guadalajara area, Jalisco has suffered from a lack of investment. While banks are often unwilling to loan to local start-ups and private investors tend to stick to more traditional industries such as real estate, the Jalisco Fund for Business Development (FOJAL) plays a vital role in the high-tech industry by offering a wide range of credits and loans to fledgling businesses.
“We have credits ranging from 5,000 pesos to 3 million pesos ($382 to $229,000 US) and we have joint credits with the commercial bank of the federal government worth up to 10 million pesos ($764,000 US),” explains FOJAL Director General Luis Gonzalo Jimenez Sanchez.
FOJAL funds range from micro-business credits to a new capital risk fund for investment in technological innovation that will become active in September. Jimenez announced the new seed fund, which will be used to co-finance less traditional, higher-risk projects with strong potential in the technology and green energy sectors, at the monthly iTuesday meeting of investors and entrepreneurs in August.
“Now we have the ability to be associates in venture capitalism,” Jimenez says. The capital will be invested at an early stage – “the valley of death” as Jimenez calls it – when entrepreneurs normally have to raise their own funds, before they are considered ready to receive private investment. If the ventures are successful, then both parties benefit, Jimenez says. “We’ll do whatever we can do ensure these projects succeed.”
The new fund will also enable joint participation with angel investors in some projects, Jimenez says, with FOJAL making limited investments alongside private investments. The budget for 2012 is $2.5 million US, Jimenez says, while the maximum association period is seven years, guaranteeing ultimate freedom to the project owners.
“One of the most important things for entrepreneurs is financing … so we need an ally in government that runs capital funds, like FOJAL is doing,” says Jaime Reyes, executive director of the Institute of Sustainable Social Development at the Tec de Monterrey University.
President of the Guadalajara Angel Investor Network (GAIN) and former general manager of Hewlett Packard’s Guadalajara operations, Reyes has decades of experience in the local high-tech industry. Referring to the new capital risk fund, he adds, “FOJAL is amplifying its product so that the capital funds go toward supporting entrepreneurs.”
Reyes also sits on the board of directors of the National Chamber of Electronics, Telecommunications and Information Technology (CANIETI), an autonomous institution working to strengthen Mexico’s electronics industry
“Speaking from a CANIETI perspective, the state government has been a strategic ally for us,” he says. Outgoing Governor Emilio Gonzalez began working closely with CANIETI six months before taking up office and his successor Aristoteles Sandoval has already been approached regarding future plans.
“There are fortnightly and monthly meetings in order to look at new projects and support the high-tech industry,” Reyes explains. “It’s very important that the government complements the ecosystem that we’re forming.”
Media Parks and Digital Clusters
“The state government has invested more than ever in developing the [high-tech] sector,” Jimenez says, citing the construction of industrial parks, such as the Chapala Media Park and the upcoming Creative Digital City (CCD by its Spanish acronym). The government “is planting a seed in order to take advantage of the existing talent – and there is a lot here in Jalisco,” Jimenez adds.
One seed that has already born fruit is the Software Center, a Guadalajara technology cluster built six years ago by the state government. A regular iTuesday venue and home to many local businesses – including one of the city’s most notable success stories, Kaxan Games – it is “a fertile ground for entrepreneurs,” says Margarita Solis, director of the Jalisco Institute of Information Technology (IJALTI). Solis points to the Software Center as evidence of the government’s commitment to building “a strong, robust, consistent and attractive investment ecosystem” in Jalisco.
Federal Government Support
The high-tech industry in Jalisco has also benefited from the Development of Software Industry Program (PROSOFT) launched by the federal government in October 2002. With support from state governments and private enterprise, PROSOFT encourages the establishment of new companies through tax exemptions, cash grants and investment incentives. The incentives may account for up to 50 percent of the total expenses specified on a project, with the state government often providing additional incentives or supplementing those given by the federal government.
Jalisco, which contributes around 25 percent of national production in the software industry, has benefited more than any other state from PROSOFT. The state received 27 percent of funds for all of Mexico in 2006, rising to 50 percent by 2010. The national PROSOFT budget rose simultaneously, from $12.8 million US in 2004 to $51.2 million US in 2011.
Impact of Political Change?
Jalisco’s high-tech industry has flourished under the encouragement of the conservative, pro-business National Action Party (PAN) which has ruled the state for the past 18 years. Yet change is afoot as the PAN just lost Jalisco, along with the presidency, to the Institutional Revolutionary Party (PRI) in Mexico’s July 1 elections.
Lacking a conventional ideology, the PRI veered from socialism to neo-liberalism during its 71-year authoritarian rule of the country, which ended in 2000. Unsurprisingly, concern has arisen from both sides of the political spectrum over how Mexico will be governed under the PRI.
A sense of continuity is assured in Jalisco at least, because Governor-elect Aristoteles Sandoval has just finished serving a three-year term as mayor of the state capital Guadalajara. Having backed major projects such as the CCD as mayor, Sandoval has promised to continue doing so as governor.
“It’s going to be fundamental that the new government comes in with the idea of supporting [high-tech] businesses with capital funds,” says Reyes, who is optimistic about working with the new PRI government. “I have a lot of confidence in the people in the new government and I think these kinds of initiatives will really take off with the new government.”
Jimenez is also confident the change in government will not affect FOJAL’s latest initiative. “We think the project has become institutionalized because the private sector has participated in it,” he explains. “The government can change. but the private sector will remain the same so I think we will be able to continue with many of these projects.”
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