Fostering Wealth, Chances in Mexico

A $2-billion wall. Law enforcement roundups billed as Operation Return to Sender. A military presence on the Mexican border. The way Fernando Fabre sees it, these are the dalliances of politicians, not pragmatists.

Fabre, a Mexican- and American-trained economist and the chief executive of a nonprofit that fosters entrepreneurialism in Mexico, says the immigration programs being bandied about in Washington these days will have more of an effect on election-year chatter than on the border itself.

In the long run, he believes, there is only one way to stem the flow of illegal immigration from Mexico to the United States: create wealth in Mexico, shrinking the earnings gap between the two countries and diminishing the incentive for Mexicans to leave home in the first place.

“The long-term problem is only solved through opportunity,” said Fabre, who manages the Mexican arm of the New York-based nonprofit Endeavor.

Fabre, along with investors, philanthropists and economists from Claremont Graduate University, is preparing to put that theory to the test. They are launching an American-style venture capital fund in Mexico that would invest as much as $100 million in Mexican entrepreneurs and mid-size businesses and, they hope, combat illegal immigration in the process.

Economists have long agreed that creating wealth inside Mexico would be an effective -- and cost-efficient -- method of reducing immigration to the U.S.

In practice, however, many of them have questioned whether it could work amid the political and economic turmoil that has often hamstrung Mexico’s economy. Venture capital funds, in particular, are often seen as carrying too much risk to succeed in an unstable economy.

Indeed, although Mexico has more than a dozen private equity funds that tend to invest millions in large, established companies, the country is believed to have had just 50 venture capital funds in the last decade.

And according to Fabre, there are only two active venture capital funds in Mexico today -- Intel Capital and Latin Idea -- both of which are focused on technology.

Potential investors also have been frightened off by what Richard Smith, a key organizer of the fund, calls the “ ‘Man on Fire’ image.”

It’s a reference to the Denzel Washington film that portrays Mexico as a lawless den where business thrives only if it is illicit -- belying the fact that Mexico’s economy, despite many stumbles and a financial crisis in 1994, has grown at about 4% annually in recent years.

“So we took it on as a research question,” said Smith, who is also director of the Venture Finance Institute at Claremont Graduate University’s Peter F. Drucker and Masatoshi Ito Graduate School of Management. “How can we take venture capital, which has been so successful in the United States, and make it work effectively in emerging economies?”

Or, as Fabre put it: “How do we find the Bill Gates of Mexico?”

It is a question that has consumed them for five years. After a series of conferences with so-called angel investors determined to make money and philanthropists seeking social improvement, they believe they have found the right formula.

First, at least half of the money in the Mexico Opportunity Fund would come from Mexican investors. And fund managers would attempt to craft individual investments so that Mexican companies retain equity in the end.

Those strategies are designed to ensure that the fund helps create not only jobs but also ownership and wealth that would remain in Mexico. In recent years, most foreign investment in Mexico has come in the form of large export plants such as automobile manufacturing centers, which often create jobs but not wealth.

Second, the investments would be made in small and mid-size businesses. Smaller businesses don’t typically receive loans in Mexico because foreign companies own most of the banks and have placed tight controls on lending, Smith said. Many companies are well-managed in Mexico, he said, but a lack of capital hinders their growth and their ability to do any sort of planning for the future.

Third, fund organizers plan to invest in “high-impact” entrepreneurs whose business is improving Mexico’s infrastructure -- “who are solving problems while running a business,” Fabre said.

For example, fund organizers plan to invest in companies that build low-income housing or create technology that makes Mexican business transactions more secure.

That would give the fund a different focus from previous investment efforts of this sort, which have tended to focus on specific sectors of the economy, such as health or technology.

If it works, fund organizers would brush against the conventional wisdom that profit must be sacrificed to pursue a social agenda, and that these sorts of investments can’t succeed in Mexico.

That could make it a model for future investments, Smith said. And if fund managers can show one day that they are having an effect on illegal immigration the fund could serve as an argument, he said, that the United States would be better served investing in the Mexican economy than investing in programs to police the border.

“We would be easy to imitate,” Smith said. “It isn’t that complicated once someone has done it. One hundred million dollars is not the level of social impact we want to make. We want to create a blueprint.”

Though organizers hope to raise $100 million, the fund has an initial “closing” of $50 million, meaning it would not make its first investment until organizers have amassed a minimum of $50 million. At that point, the fund would make 10 to 15 investments in Mexican businesses. Each investment would be $2 million to $5 million.

Organizers believe the economies of Mexico and the United States don’t need to be equal for illegal immigration to decline. The two economies just need to be closer than they are today.

There have been hints recently that they might be right.

In Douglas, Ariz., for instance, across the border from Agua Prieta, Mexico, the nonprofit Just Trade Center said it had used a tiny investment in the Mexican coffee industry to have a real effect on illegal immigration.

The organization, funded by the Presbyterian Church in Mexico and the U.S., issued a $20,000 loan this year to Mexican coffee growers. The growers then set up a cooperative venture, allowing them to market their own coffee directly to American customers and distributors -- and eliminate the middlemen.

According to organizers of the cooperative, dozens of growers and workers who were otherwise inclined to try to sneak into the United States in search of higher wages have decided that, for now, they can afford to stay home in Mexico.

“No one has tried to build opportunity this way in Mexico, to approach economic development from the ground up in Mexico,” said Andy Horowitz, a retired businessman who lives in Newport Beach.

Horowitz helped organize the Mexico Opportunity Fund and is weighing whether to become one of its initial investors. “I’m looking to make money. And I’m looking to do good. Those things can happen at the same time.”