copy the linklink copied!Chapter 1. Assessment and recommendations

This chapter summarises the main findings and policy recommendations for the full report. Each section reflects the main messages of each thematic chapter: i) small- and medium-sized enterprise (SME) performance and entrepreneurial dynamics; ii) the business environment for SMEs and entrepreneurship; iii) the governance of SME and entrepreneurship policy; iv) federal programmes for SMEs and entrepreneurship; v) SME export policies; vi) the innovative start-up ecosystem; and vii) The local dimension of SME and entrepreneurship policy.

    

copy the linklink copied!Preamble

The review of SME and Entrepreneurship Policies of Brazil was undertaken between 2018 and 2019, an important transition period for Brazil. Following general elections in October 2018, in January 2019 a new government was sworn in. The new government instituted a major change in government structure, notably with the creation of a super Ministry of Economy that merged four previous ministries: the Ministry of Finance, the Ministry of Industry, Foreign Trade and Services, most of the Ministry of Labour and the Ministry of Planning, Development and Management.1

The Ministry of Economy has, therefore, become the main player in national SME and entrepreneurship policies, notably through the Special Secretariat for Productivity, Employment and Competitiveness, which works on productivity-related issues; the Special Secretariat for Federal Revenues, which follows the implementation of Simples Nacional, the preferential tax and regulatory regime that is also the main federal policy for micro and small businesses; and the Special Secretariat for Foreign Trade and International Affairs, which is responsible for policies related to business internationalisation.

Two SME definitions are mostly used throughout the report. The first, employment-based, defines SMEs as companies with less than 250 people employed. It is mostly used in Chapter 2 of the report (SME performance and entrepreneurial dynamics in Brazil), as it allows a comparison between similar-sized enterprises in Brazil and the OECD area. Within this definition, micro-enterprises are defined as companies with less than 10 people employed, small enterprises have between 10 and 49 people employed, and medium-sized companies have between 50 and 249 people employed. The second definition follows the Brazilian legislation, notably Lei Complementar 123/2006, which defines micro and small enterprises as companies with annual gross turnover respectively below BRL 360 000 and between BRL 360 000 and BRL 4.8 million. In this case, the acronym MPE (micro e pequena empresa) is used to make a distinction from the first SME definition.2 This second definition is used in most of the rest of the report.

copy the linklink copied!SME performance and entrepreneurial dynamics in Brazil

Wholesale and retail trade play a large role in the Brazilian business sector

One of the main features of Brazil’s business sector is the large proportion of companies and employment in wholesale and retail trade, i.e. 53% and 33% of the respective totals.3 By way of comparison, in the OECD area, trade-based companies account for 26% of the total stock of companies and 24% of total employment. Brazilian trade-based companies are, on average, small and feature low average labour productivity, making a large trade sector one of the causes of slow productivity growth in Brazil. Brazil’s share of industry (which includes manufacturing) in national value added is in Brazil similar to the OECD area, 36% vs. 33%, but lower than in other main emerging markets, which is a consequence, inter alia, of Brazil’s limited integration into global trade and global supply chains.

Labour productivity levels between Brazil and the OECD area have diverged in the last 15 years

Although Brazil has grown more rapidly than the OECD average in the last 15 years, labour productivity levels between Brazil and the OECD have diverged. In 2016, Brazil’s labour productivity was one-third of the OECD average (33%), similar to Colombia (34%), but lower than Costa Rica (45%), Mexico (47%) and Chile (56%). Productivity gaps between Brazil and the OECD area are largest in industry and trade, while they are smaller in services and construction.

Average labour productivity grows less linearly in Brazil than in the OECD area (from a firm-size perspective)

From a firm-size perspective, average labour productivity grows less linearly in Brazil than in the OECD area. Brazil’s micro and small companies have similar average labour productivity, with the latter that only starts to grow from mid-sized firms. In industry, labour productivity growth along the firm size distribution is even flatter: average labour productivity in micro, small- and medium-sized companies does not change considerably, but it leapfrogs in large companies (i.e. twice as large as in mid-sized firms). Thus, the gap in labour productivity between SMEs and large companies is comparatively wider in industry than in the rest of the economy.

SMEs are not much involved in innovation and exports

Business R&D (research and development) is a main source of technological innovation, but only 4% of small companies (10-49 people employed) and 18% of mid-sized companies (50-249 people employed) undertake R&D in Brazil, compared with 34% of large companies (250+ people employed). In total, SMEs only account for 21% of total innovation spending by innovative companies in Brazil. As a result, only 4.8% of Brazilian SMEs (10-249 people employed) undertake product/process innovation and only 3.7% have introduced new products to the market.

There are many reasons behind the low innovation propensity of Brazilian SMEs, but one reason at the policy level is that national R&D tax credits are only available to companies under the “real profit” (lucro real) corporate income tax regime, whereas most SMEs operate under either the preferential income tax regime, Simples Nacional, or the presumptive profit (lucro presumido) corporate income tax regime. Going forward, SMEs would benefit from more targeted innovation support, including measures aimed at enhancing collaboration with research organisations. R&D tax credits could also be reformed to make them friendlier to innovative start-ups.

With respect to export performance, data from SEBRAE (i.e. the de facto national small business agency) show that MPEs (i.e. companies with annual gross revenues below BRL 4.8 million) are nearly half of the total number of exporting companies (41%), but account for a trivial share of the total export volume. The average export value of an MPE is only USD 131 600, which is the result of many MPEs being one-off exporters.

Business ownership and business creation are common, but more growth-oriented entrepreneurship is needed

Business ownership and business creation are very common in Brazil, but they are mostly the outcome of lack of other job opportunities. Brazil’s self-employment rate (the rate of employers and own-account workers in total employment) is more than twice the OECD median value (32% vs. 15%), but the average SME size did not change over the period 2008-14, although this was a time of rapid growth at the national level. Similarly, there is a lot of business churning (i.e. the process by which new companies are created and older ones exit the market) in the Brazilian economy, but this process has not been associated with strong job creation.

Lack of growth-oriented entrepreneurship is also confirmed by business statistics on high-growth firms and survey data from the Global Entrepreneurship Monitor (GEM) research consortium. While Brazil has a high proportion of high-growth firms4, 5.4% in 2015, these are relatively old and large by international standards. The average age of a Brazilian high-growth firm is nearly 14 years, and only 0.75% of companies aged less than five years are high-growth (i.e. gazelles). Furthermore, while over half (55%) of Brazilian high-growth firms are small, 60% of the workforce in high-growth firms is in large companies.

With respect to GEM survey data, Brazil’s Total Entrepreneurial Activity (TEA) rate is high from an international perspective (18% compared with the OECD average of 11%), but only 6% of those involved in TEA in Brazil expect to create six or more jobs in the next five years (i.e. the rate of high job creation expectation), compared with 24% in the OECD area.

Brazil continues to have a large informal sector

Business statistics only cover the formal sector. However, Brazil’s informal economy is larger than in countries at similar levels of income, suggesting that there are specific institutional and legal barriers, such as the complex tax system, which makes informality particularly widespread in Brazil. In this respect, the main business formalisation policy of the federal government – i.e. the Micro Empreendedor Individual (MEI) tax and regulatory regime – has proved successful in bringing more own-account workers into the formal sector.

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Selected recommendations on SME performance and entrepreneurial dynamics
  • Strengthen competition in the economy by further streamlining product market regulations, including entry regulations and further promoting openness to trade.

  • In the frame of SME policies, consider reducing generic support for wholesale and retail trade and strengthening support for knowledge-intensive activities in both manufacturing and services.

  • Increase support for collaborative innovation between SMEs, on the one hand, and larger companies and research organisations, on the other.

  • Encourage SME exports through a comprehensive approach which stimulates the export culture, offers export training opportunities and provides export finance solutions.

  • Foster growth-oriented entrepreneurship through targeted programmes such as business incubators and business accelerators, making sure that the latter are open to companies of different size, age and sector.

  • Increase awareness of the MEI regime with a view to further encouraging business formalisation.

copy the linklink copied! The business environment for SMEs and entrepreneurship in Brazil

Brazil has made important strides in the levels of education, but important challenges remain

Brazil has made important strides when it comes to education; between 2007 and 2017, the proportion of the population aged 25-34 with upper secondary and tertiary education increased respectively by 17% and 7%. Nonetheless, there are still a number of challenges to address. Over half of the population aged 25-64 has less than upper secondary education; 17% within the same age groups lacks primary education; the rate of enrolment in the education system still drops considerably after the age of 14. Brazil also scores worse than most Latin American countries in the OECD Programme for International Student Assessment (PISA) (e.g. Argentine, Chile, Costa Rica, Mexico and Uruguay).

Brazil has recently introduced an important labour market reform, but active labour market policies continues to be tilted to self-employment support

In 2017, Brazil introduced a major reform to increase flexibility in the labour market by strengthening provisions related to probation periods, fixed-term contracts, intermittent work and labour outsourcing. This reform, among other things, has reduced the number of labour lawsuits.

A peculiarity of Brazil is that above half of spending on active labour market policies (ALMP) goes to self-employment support, while only 42% is spent on employment subsidies. This distribution of spending is unusual and could be adjusted, for example by reforming Abono Salarial to help employers recruit first-time job seekers and disadvantaged workers. This reform could also support the scale-up of Brazilian SMEs.

Vocational education and training policies have recently been reformed to increase their effectiveness

Until the last federal elections of October 2018, the main national policy for vocational education and training (VET) was PRONATEC (Programa Nacional de Acesso ao Ensino Técnico e Emprego), which between 2011 and 2017 reached about 8 million students through a budget of BRL 14.5 billion. Evaluations of PRONATEC have pointed to modest impacts on the employment and wages of participants, with the exception of the part of the programme run by the former Ministry of Industry, Foreign Trade and Services (MDIC), which achieved better results through a closer relationship with the private sector in the identification of local skills needs.

The new government is expected to launch in 2019 a new flagship VET policy called Emprega Mais (Employ More), which will pursue three main objectives: the re-insertion of the unemployed in the labour market; the upskilling of existing workers; and the inclusion of the youth in the labour market. Emprega Mais should learn from the experience of PRONATEC, notably about the importance of taking inputs and feedbacks from firms when designing the content and scale of skills training.

Recent reforms have aimed to strengthen Brazil’s participation in global trade

Brazil is not sufficiently integrated into global trade, which is a precondition for SME participation into global supply chains. Trade flows (i.e. the sum of imports and exports) were only 29% of national gross domestic product (GDP) in 2018, compared with 56% of the world average, while the foreign value-added content of gross exports, a proxy for backward linkages in global supply chains, amounted to 10.2%, compared with the world average of 16.5%. Different simulation exercises convene that the potential benefits of trade liberalisation would be large, including for SMEs.

Brazil has recently undertaken some important trade policy reforms, such as a reduction in the number of local content requirements and the recent free trade agreement negotiated by the EU and Mercosur (June 2019). These steps go in the right direction and should also favour SME internationalisation, although the EU-Mercosur free trade agreement will have to be ratified by national parliaments to come into effect.

Brazil’s corporate tax system is expensive and complex for businesses

Tax revenues amount to 32.2% of national GDP in Brazil, close to the OECD average (34.2%), but well above the Latin American and the Caribbean (LAC) average (22.7%). Against this backdrop, Brazil’s statutory corporate income tax (CIT) rate and non-wage labour costs are particularly high. In addition, tax compliance is made difficult by the high number of taxes and the complexity and predictability of tax rules (Brazil ranked 184th out of 190 countries in the “paying taxes” dimension of the World Bank’s 2019 Doing Business report).

Brazil has two major preferential tax regimes for micro and small businesses

Brazil operates two important preferential tax regimes for micro and small businesses: Simples Nacional and the Micro Empreendedor Individual (MEI). In different forms and with different names, Simples Nacional has been in place since 1996. It allows MPEs to lump the payment of eight different taxes into a single one and to receive preferential tax rates which change depending on the type of activity and annual revenues.

The fiscal advantage from Simples Nacional is significant, to the point that 65% of Brazilian companies operate under this regime, making Simples Nacional the main federal SME policy. In 2015, based on estimates from the Special Secretariat for Federal Revenues, Simples Nacional accounted for 25.63% of total federal tax exemptions, corresponding to BRL 69.2 billion. Like other preferential tax regimes, Simples Nacional has been reported to cause “threshold effects” by which business growth is discouraged beyond the legal revenue threshold set out in the law.

Going forward, any reform of Simples Nacional should go hand in hand with an overall reform of the Brazilian tax system to make the latter simpler and less costly for all businesses. A mere abolition of Simples Nacional could, indeed, push micro and small companies towards the informal sector, defeating any eventual purpose to increase tax revenues. A possible broad tax reform could hinge on three linchpins. First, the corporate tax system should be simplified, including by adopting some of the provisions of Simples Nacional and extending them to the whole enterprise population. Second, Brazil could gradually decrease its statutory corporate income tax from 34% to a level between 20% and 25%, in line with the average of OECD member countries. Third, the income threshold of Simples Nacional could be lowered to approach those of other countries, such as Colombia or Mexico.

A second preferential tax regime for micro and small enterprises is the Micro Empreendedor Individual (MEI), a policy introduced in 2009 to support the formalisation of micro-enterprises employing no more than one worker and with annual gross revenues below BRL 81 000. Under this regime, the micro-entrepreneur pays a single monthly amount that covers pension contributions and tax duties. MEI is a relatively inexpensive policy, accounting for 0.52% of federal tax exemptions (BRL 1.4 billion), and there are signs that it has supported the formalisation of micro-enterprises and strengthened the survival of own-account workers.

However, cases of misuse of MEI have also been reported under the so-called practice of pejotização. Under this practice, employers contract workers who should be hired as employees as MEI self-employed to avoid paying social contributions and other social obligations. Going forward, the federal, state and local governments should tackle this abuse to guarantee the long-term financial sustainability of this policy.

Product market regulations have been simplified and harmonised

The government has recently introduced some important reforms to make doing business easier in Brazil, including a regulatory guillotine to revoke obsolete laws that have no longer legal effect and mandatory regulatory impact analysis (RIA) on federal regulations and normative acts expected to have an impact on businesses. In the future, one of the priorities will be to continue streamlining and harmonising federal, state and municipal regulations, as currently done by the federal REDESIM initiative, as well as to expand the use of RIA across all government ministries and agencies.

Credit market conditions are tight in Brazil

Credit market conditions are generally tight in Brazil, the main reported problems being high interest rates, collateral requirements and short loan maturities. This is the consequence of a number of factors, among which high banking industry concentration, long insolvency procedures, high taxation of financial institutions and high credit default rates.

Brazil’s Central Bank has recently introduced some important reforms to ease credit conditions. Since 2017, trade receivables can be used as collaterals, which will especially help SMEs with fewer collateral assets. Still, since 2017, the Central Bank has applied proportional treatment in bank prudential regulations, taking into account the institution’s size and risk profile. This has reduced licensing requirements and entry costs for smaller financial institutions – notably peer-to-peer lending companies and platform lending companies – which has in turn increased competition in the credit market. Competition in the credit market has also been strengthened by a new regulation that allows credit co-operatives to take savings deposits and to issue trade notes (letras financeiras), which will put these institutions in a better position to compete with larger financial institutions Finally, credit bureaus have been allowed to collect and share positive information on individuals without their prior approval, which will help reduce information asymmetries in credit markets.

Equity finance is well developed by regional standards

Brazil has the largest venture capital (VC) market in Latin America, both in absolute terms and relative to national GDP. A recent reform by the Brazilian Securities Commission has increased the number of assets eligible for equity investment, divided funds in different categories, and reduced restrictions to invest abroad. Equity crowdfunding has also been formally authorised since 2017. In addition, there are a number of funds backed by public development bank BNDES (Banco Nacional de Desenvolvimento Econômico e Social) and the national innovation agency FINEP (Financiadora de Estudos e Projetos), which invest in promising start-ups and SMEs.

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Selected recommendations on the business environment for SMEs and entrepreneurship
  • Improve support for vocational training through the new Emprega Mais programme, making sure that training courses benefit from inputs and feedbacks from the private sector.

  • Consider an overall reform of corporate income taxation in which the standard system is significantly simplified (for example, adopting some of the Simples Nacional’s provisions), the statutory corporate income tax rate is reduced, and the income threshold of Simples Nacional is lowered.

  • Increase oversight of MEI to ensure that this policy is not used by employers to contract people who should be legally hired as employees as self-employed workers (i.e. the so-called practice of pejotização).

  • Expand the use of regulatory impact assessment (RIA) by establishing an independent body comparable to CONAMER (National Commission for Regulatory Improvement) in Mexico.

  • Encourage more competition in the credit market by simplifying entry procedures for foreign banks and by fostering the development of alternative domestic lenders (e.g. credit co-operatives and fin-tech organisations).

  • In line with the recent regulation of electronic trade notes and centralised registration of payment receivables, continue to improve, digitalise and centralise the registry for movable collateral assets with a view to strengthening secured business lending.

  • Reform insolvency procedures by streamlining the overall process (e.g. enforcing deadlines within the foreclosure procedure), encouraging out-of-court settlements and strengthening creditor rights (e.g. the right to have a say on re-organisation plans).

copy the linklink copied!The governance of SME and entrepreneurship policy in Brazil

Brazilian SME policy is based on the principle of preferential treatment

SME policy in Brazil is enshrined in the 1988 Federal Constitution, which granted a “favoured, differentiated and simplified treatment” (i.e. preferential treatment) to micro and small companies, to be defined based on annual gross revenues, in different policy areas such as taxation, regulations, pension contributions, labour law, access to credit and business development (Article 170 and Article 179).

Today, the main federal law that governs the activity of micro and small enterprises is Lei Complementar 123/2006, which integrates the provisions of Simples Nacional and MEI (see above) and sets out the main programmes supporting micro and small companies (MPEs). One of the main achievements of this law has been to extend Simples Nacional to all levels of government (federal, state-level and municipal), whereas it only applied to the federal level until 2016.

Most policies and programmes are, therefore, conceived in Brazil for micro and small companies, which are also the core constituency of the de-facto small business agency SEBRAE (Serviço Brasileiro de Apoio às Micro e Pequenas Empresas), whereas mid-sized companies are largely missing in the national policy debate despite their stronger export and innovation potential.

The Ministry of Economy is the main ministry responsible for SME and entrepreneurship policy

The Ministry of Economy is the main ministry responsible for SME and entrepreneurship policy. This new Ministry was created in January 2019 from the merger of four previous ministries: the Ministry of Finance, the Ministry of Industry, Foreign Trade and Services, most of the Ministry of Labour, and the Ministry of Planning, Development and Management. Seven special secretariats operate in the new Ministry of Economy, with four of them most relevant to new and small businesses: i) the Special Secretariat for Productivity, Employment and Competitiveness, which is responsible for many programmes targeted at MPEs; ii) the Special Secretariat for Federal Revenues, which is responsible for the two preferential tax regimes, Simples Nacional and MEI; iii) the Special Secretariat for Simplification and Digital Government, which follows the implementation of REDESIM, the initiative that aims to harmonise local business regulations across states and municipalities; iv) and the Special Secretariat for Foreign Trade and International Affairs, which is responsible for policies related to business internationalisation, including by SMEs.

In addition to the Ministry of Economy, two other relevant players are the Ministry of Foreign Affairs (Ministério das Relações Exteriores, MRE) and the Ministry of Science, Technology, Innovation and Communication (Ministério da Ciência, Tecnologia, Inovações e Comunicações, MCTIC), notably in their respective competency areas: business internationalisation and technology-based entrepreneurship. The Ministry of Agriculture and the Ministry of Tourism also design policies that affect the life of many small businesses, including small farmers, although the latter are not included in the analysis of this report.

Sistema S plays a key role in policy implementation

The so-called Sistema S plays a key role in the implementation of SME policies. Organisations in Sistema S are qualified as “parastatal organisations” that do not officially belong to the government but collaborate with it and work under its direction in the implementation of certain policies. Sistema S is mostly funded through wage levies, although its organisations can also collect fees through some of their activities (e.g. training courses). The most relevant organisation for SMEs in Sistema S is SEBRAE, which acts as a semi-autonomous small business agency, although SENAI (Industrial Training Organisation), SENAC (Wholesale/Retail Trade Training Organisation), ABDI (Brazilian Agency for Industrial Development) and Apex-Brasil (Trade and Investment Promotion Agency) also do relevant work for SMEs in their respective areas of work.

One of the main advantages of Sistema S is that its organisations rely on a wide network of state and local offices, making it possible for federal policies to reach also remote localities. In addition, these organisations often collaborate with each other on specific interventions, thus complementing their different expertise. On the downside, Sistema S is mainly funded through wage levies, which adds to Brazil’s high non-wage labour costs. Furthermore, there is little ex post programme evaluation, making it difficult to assess which initiatives should be continued and which ones should not.

There is strong institutional co-ordination in SME policy

One of the main strengths of SME policy in Brazil is that it is highly co-ordinated within the government, across different levels of government, and between the government and the private sector. For example, the Management Committee of Simples Nacional includes representatives from the Special Secretariat for Federal Revenues and from states and municipalities to discuss the technical aspects of taxation within this preferential regime. Similarly, the MEI Working Group, which follows the evolution of this policy, is co-ordinated by the Sub-secretariat for Micro and Small Enterprises at the Ministry of Economy and includes representatives of the Special Secretariat for Federal Revenues, the National Pension Institute, public development banks and commercial banks, and small business associations.

At a broader institutional level, the Permanent Forum on Micro and Small Enterprises (Fórum Permanente das Microempresas e Empresas de Pequeno Porte, FPMPE), which was revamped in 2017 after three years of inactivity, is the official platform to formulate, monitor and evaluate policies aimed at micro and small companies (MPEs). It convenes 80 different organisations representing ministries, Sistema S, local governments, financial institutions and business representative organisations. It is organised around six technical committees, each of which has a public and private co-ordinator.

The FPMPE has been the official place to discuss the main issues and policies affecting micro and small enterprises, from the two preferential regimes Simples Nacional and MEI, through regulatory simplification, to public procurement policies for MPEs. More recently, in June 2019, the FPMPE launched the first national policy in support of micro and small enterprises (Política Nacional de Apoio e Desenvolvimento das Microempresas e Empresas de Pequeno Porte, PNADEMPE). This document gathers information on the various ongoing programmes for MPEs, sets future strategic policy directions, and establishes key monitoring and evaluation criteria for MPE programmes.

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Selected recommendations on the governance of SME and entrepreneurship policy
  • Prepare an SME Strategy and Action Plan that outlines the main policy objectives, targets and support measures and that defines roles and responsibilities of implementing ministries and agencies.

  • Undertake a more regular evaluation of main SME and entrepreneurship programmes to better understand impacts and build the evidence base for future policies.

  • Convene regularly the Permanent Forum on Micro and Small Enterprises to encourage institutional dialogue on SME policy and further promote state-level fora to foster policy dialogue also at the local level.

copy the linklink copied!Federal programmes for SMEs and entrepreneurship in Brazil

Government loan subsidies have been the main policy to support access to finance by SMEs

Government loan subsidies have been Brazil’s main public policy to help SMEs gain access to credit. BNDES (Banco Nacional de Desenvolvimento Econômico e Social) is by far the main source of SME lending nationwide through a range of credit lines and credit products such as the BNDES Card (a credit card with a pre-approved credit line), FINAME (to support the acquisition of capital assets) or BNDES Crédito Pequenas Empresas (a simplified credit line for investments up to BRL 500 000 per year).

Until recently, most BNDES business lending used to go to large companies; however, between 2016 and 2018 the proportion of BNDES business loans (volume) received by SMEs surged from 30.6% to 46.8%. This shift has made the work of BNDES closer to that of other public development banks in OECD countries and should be preserved. Furthermore, since 2018, BNDES has reduced the subsidy component of its credit by adopting the Central Bank’s newly-defined long-term interest rate, a step which is expected to reduce distortions in the credit market.

BNDES has also recently launched Canal MPME, a digital platform that provides information on BNDES credit lines and through which SMEs can apply for business loans. Loan applications are then redirected to accredited banks and financial institutions. It is also expected that Canal MPME will integrate fin-techs companies, which could help reduce banking concentration.

Going forward, the Brazilian government could also pay more attention to loan guarantees, which are relatively uncommon in Brazil. For example, in 2017 alone, there were 650 000 users of the BNDES Card, who borrowed BRL 2.7 billion (30% of BNDES lending to SMEs), while there were only 86 000 SMEs using loan guarantees nationwide (BRL 3.8 billion in guarantees). Compared to loan subsidies, loan guarantees can reach more SMEs through a lower budget and can attract more financial institutions in the SME credit market. Furthermore, there is scope for public development banks in Brazil to combine more often credit products with advice and mentoring, including to smaller financial institutions (e.g. credit co-operatives) which deliver their products to final consumers.

The federal government is actively involved in the equity finance industry

The federal government is also actively involved in the supply of risk capital, mostly through the work of BNDESPAR, a subsidiary of BNDES, and FINEP. Since 2001, BNDESPAR has invested in 23 venture capital funds. While in the early years BNDESPAR’s commitment could go up to 80% of the total fund (Criatec I), it has since then decreased to an average of 40%. FINEP is also actively involved in equity finance together with private investors, especially at the start-up stage.

Brazil’s venture capital funds are generally tilted towards seed and early-stage rounds of financing, which are indeed the moments when innovative businesses find it harder to receive risk capital. However, in a context where the private equity industry is not yet fully developed, the government could also encourage follow-on equity finance, still by investing jointly with private investors.

Most innovation government spending goes to large companies

Most of Brazil’s innovation policy spending goes to large companies through two large R&D tax credit programmes falling respectively under the Lei da Informática and Lei do Bem. By way of example, in 2012, 45 large firms (above 500 people employed) received 81% of the R&D tax credits under Lei da Informática and 346 firms (above 500 people employed) received 92% of the R&D tax credits under Lei do Bem. It should be kept in mind that tax expenditures accounted for 61% of total spending on business support policies in 2015.

Brasil Mais Produtivo is a noteworthy initiative

Against this backdrop, there are some interesting targeted programmes aimed at boosting innovation in SMEs, although some of them run on relatively thin budgets. One of the most promising initiatives is Brasil Mais Produtivo (BMP, Brazil More Productive), which aims to enhance firm-level productivity by improving energy efficiency, reducing waste in the production process and introducing lean manufacturing practices. The programme is well-designed by specifically targeting manufacturing where SME productivity needs, indeed, to be boosted and by giving priority to companies located in business clusters. Furthermore, the first phase of the programme shows positive results beyond the initial objectives.

On the downside, BMP is largely focused on a few low-tech sectors (food, textile and furniture) and on the industrial heartland of Brazil (the South and Southeast regions), whereas more attention could be given to other sectors and regions. In mid-2019, the government was planning to replace some of the on-site activities of the programme with online consulting; however, a more viable solution to preserve the intensive and interactive nature of the programme would be to increase the share of co-funding required of participants.

Brazil also operates traditional SME innovation programmes such as technology vouchers and local innovation agents

The federal government, through SEBRAE and MCTIC, also runs some traditional programmes such as innovation vouchers and local innovation agents. International experience suggests that vouchers encourage small companies to gain first exposure to innovation, but they are much less successful in prompting follow-on investments in innovation.

Brazil’s local innovation agents, who are the outcome of a partnership between SEBRAE and the National Council for Scientific and Technology Development (Conselho Nacional de Desenvolvimento Científico e Tecnológico, CNPq), have achieved relatively good results. However, the programme would likely achieve even better outcomes if staff with stronger industry experience were also recruited as local innovation agents.

Collaborative innovation programmes are important and should be further enhanced

Because of a lack of internal resources, SMEs often tend to innovate through partnerships with customers or suppliers, other businesses or research organisations. As a consequence, collaborative innovation programmes are often important channels to strengthen SME innovation. Brazil operates some interesting initiatives in this field. For example, PROCOMPI (Programa de Apoio à Competitividade das Micros e Pequenas Indústrias) supports collaboration between MPEs and local development organisations, although this programme runs on a very small budget, while FINEP Conecta aims to enhance industry-university collaboration.

There is a gap between legislation and implementation in public procurement for micro and small companies

Brazilian legislation on government contracts is generally favourable to micro and small companies (MPEs). All contracts up to BRL 80 000 are by law allocated to this target group, government ministries and agencies must allocate up to 25% of their bid invitations only for MPEs, and MPEs can also be selected when their offer is up to 10% more costly than the one of a medium/large company.

Public procurement for MPEs was first regulated through Lei Complementar 123/2006. While the volume of government contracts granted to micro and small companies increased until 2012, it declined from 25% to 15% between 2013 and 2017, pointing to a gap between legislation and implementation when it comes to public procurement for MPEs. This gap could be filled by strengthening existing training for MPEs on bidding for government contracts and by training procurement officers on how to design calls that do not discriminate against small businesses. There is also scope for Brazil to pilot an initiative that uses public procurement to stimulate innovation in SMEs and start-ups, something which has become increasingly common in OECD countries but which is missing in Brazil.

Entrepreneurship education is widely available in Brazil

Entrepreneurship education is widely available in Brazil and is mostly delivered through SEBRAE’s National Programme for Entrepreneurship Education (Programa Nacional de Educação Empreendedora, PNEE) which has reached 4 million students since 2013. PNEE courses are offered at no cost for schools or students, although enrolment is fully on a volunteer basis. PNEE courses follow a learning-by-doing and experiential methodology, which has proven the most effective in instilling entrepreneurial skills and attitudes in pupils.

Going forward, a major issue concerns the capacity of schools and universities to find space in already tight curricula to offer entrepreneurship education. As a result, the notion of introducing the teaching of entrepreneurship skills into existing courses, rather than through additional bespoke courses, has gained ground in a number of countries and could also inspire Brazil to spread further entrepreneurship education nationwide.

There is scope for streamlining the offer of firm-level training

While the Ministry of Economy is in charge of apprenticeship training mostly through Emprega Mais, Sistema S has traditionally implemented programmes upgrading managerial and workforce skills at the firm level. Many of the organisations in Sistema S directly emanate from national business associations, which give them privileged access to the business community. In this respect, it is important that training courses always reflect local industry needs, including through close consultation with local private companies.

There are also some overlaps in the existing range of training programmes, which could be streamlined to create critical mass and improve training quality. Furthermore, while there are many opportunities for management training, leadership training, which develops a different set of skills and competencies, is much less common.

Support for women’s entrepreneurship should be enhanced

Women account for 31% of the total entrepreneurial population in Brazil, but for 47% of individual micro-entrepreneurs (MEI), suggesting that women-owned businesses are on average smaller than men-owned businesses. Other studies also confirm that Brazilian businesses owned by women are less growth-oriented, export-oriented, innovative and profitable than those owned by men.

The two institutions doing the most to support women’s entrepreneurship in Brazil are SEBRAE and Rede Mulher Empreendedora (RME). The work of both is noteworthy, but not enough to strengthen women’s entrepreneurship in a country of the size of Brazil. Above all, women’s entrepreneurship has not yet been mainstreamed in the work of other organisations involved in business support policies, and there is a common perception that targeted initiatives for women are not needed because women have equal opportunities in programmes open to everyone.

However, a mere lack of exclusion is often not enough to build an inclusive culture in which women enjoy equal opportunities to those of men. In particular, international evidence suggests that gender-blind business support policies fall short of supporting women as much as men, even after controlling for the lower proportion of female entrepreneurs. Women-specific programmes in the field of access to finance, training, innovation and internationalisation can help bridge this gap by better targeting the specific needs of women entrepreneurs, which may stem from the sectors in which they are more likely to operate and/or from the possible need for more flexible working/training arrangements.

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Selected recommendations on federal programmes for SMEs and entrepreneurship
  • Continue to reduce the interest rate subsidy in government-backed loans and expand the use of government loan guarantees to further strengthen access to finance for SMEs.

  • Introduce non-financial forms of support in public development banks, based on evidence that combining financial support with technical advice improves the performance of supported companies and/or partner financial institutions.

  • Pull ahead in the ongoing trend by which BNDES lending has increasingly shifted from large companies to SMEs. Consider launching a credit line for start-ups, as done by other countries such as the UK (Start-up Loan Programme).

  • Ensure that government-backed VC funds also provide follow-on equity finance in addition to seed finance, with a view to ensuring that promising start-ups and high-growth firms receive adequate support for scale-up.

  • Increase innovation support for SMEs through targeted measures with the aim to reduce the productivity gap with larger firms, including programmes which encourage collaborative innovation.

  • Expand Brasil Mais Produtivo to narrow large the productivity gap between SMEs and large companies in industry. At the same time, increase the cost-sharing requirement of the programme to self-select stronger companies, making an exception for companies in lagging regions.

  • Strengthen the profile of local innovation agents by hiring more people with industry experience.

  • Scale up existing training programmes for micro and small companies on how to bid for government contracts and for procurement officers on how to design calls that are compliant with existing preferential legislation in public procurement.

  • Launch a pilot initiative supporting SME innovation through public procurement in which the government demands innovative products or services from small businesses going through a competitive process.

  • Consider infusing entrepreneurial skills in traditional school and university courses to further strengthen the outreach of entrepreneurship education.

  • Streamline the offer of management and workforce training at the firm level, mostly undertaken within Sistema S, with a view to creating critical mass, improving training quality and reducing non-wage costs for employers.

  • Make sure that women’s entrepreneurship policies are not limited to ensuring that mainstream programmes are available to everyone, but also include initiatives specifically targeted at women.

copy the linklink copied!SME export policies in Brazil

The National Plan of Exporting Culture (PNCE) is an important government initiative to increase the number of SME exporters

The National Plan of Exporting Culture (Plano Nacional da Cultura Exportadora, PNCE) is an important government initiative aimed at increasing the number of exporters through the development of a network of state-level institutions involved in export promotion. The PNCE follows a logical framework based on five sequential steps to lead companies to export and encourages state-level organisations to arrange the provision of export support according to this framework.

On the whole, the PNCE is a well-designed policy which would nonetheless benefit from establishing clear results targets, including quantifiable targets on the number of new SME exporters. Following a first evaluation of the pilot initiative in the two states of Minas Gerais and Roraima and after setting appropriate performance indicators, the PNCE should be rolled out to the other states of the Federation.

There are a number of mechanisms to inform firms about exporting opportunities, but a dedicated guide for MPEs is missing

A number of mechanisms are used by the government to disseminate information on exporting, although there is no dedicated guide for micro and small enterprises as defined by Lei Complementar 123/2006 (MPEs). Because there are already specific policies meant to help these companies to internationalise (e.g. training and capacity-building programmes, simplified export and import facilitation regimes, export financing instruments, and tax incentives), it would be useful to gather such information in one single document. The document should be organised to provide a clear journey for users to go through the different stages of the export process.

There is an adequate supply of export training, but existing initiatives need to be better monitored

Brazil offers an adequate supply of export training programmes, with one of the most comprehensive initiatives being the Export Qualification Programme (Programa de Qualificação para Exportação, PEIEX) of Apex-Brasil. PEIEX targets SMEs that have never exported or with limited exporting experience and assists them with six months of export-readiness training and technical support, followed by the opportunity to participate in an international trade mission. Since 2008, 20 000 companies have completed the programme, some of which were already exporters.

Overall, PEIEX is a comprehensive programme that has reached many companies, although there are few metrics on the export performance of these companies, such as the percentage of those that have actually started exporting or that have persisted with regular exporting activity. Monitoring the conversion of learners from the training component through participation in missions to exporting will provide valuable data to assess the effectiveness and impact of the programme, although it may be difficult to detect the export evolution of those companies that export through commercial exporting companies (empresas de comércio exterior).

There is scope for enhancing export finance solutions

There are three main SME export financing instruments in Brazil: PROGER Export; BNDES’s direct export financing programmes; and export credit guarantees.

PROGER Export is operated by Banco do Brasil and is the main export financing tool for SMEs. It extends credit (of up to BRL 600 000 per transaction in national currency) to enterprises with gross annual revenues of up to BRL 10 million to finance the production of goods bound to foreign markets, as well as expenses related to export promotion.

BNDES also offers pre- and post-shipment financing in which MPEs can participate, although the outreach of these credit products is limited.

Finally, export credit guarantees (Seguro de Crédito à Exportação, SCE) are backed by the Export Guarantee Fund (Fundo de Garantia à Exportação, FGE) under the responsibility of the Ministry of Economy. They guarantee export credit transactions against commercial, political and extraordinary risks that may affect the export of Brazilian goods and services. The Brazilian Guarantees Agency (Agência Brasileira Gestora de Fundos Garantidores e Garantias, ABGF) is responsible for monitoring the operations of the SCE, based on a contract with the Ministry of Economy.

In addition to normal export credit guarantees, ABGF also runs a simplified export guarantee for SMEs (SCE/MPME), in this case, defined as enterprises with gross annual revenues of up to BRL 90 million and exports of up to USD 3 million. Export credit guarantees can be demanded by exporting SMEs or by banks financing the export of SMEs. The use of the SCE/MPME guarantee peaked in the first quarter of 2017 when it insured export transactions of USD 13.5 million, but it dropped to USD 5 million in 2018. Still in 2018, the default rate averaged 20% for the whole SCE portfolio and 15% for SCE/MPME, although it was higher for certain riskier countries.

Existing budget resources limit the number of projects that can be insured by the SCE/MPME, as premiums and fees do not cover the administrative costs and indemnifications of the programme. Going forward, to enhance the diffusion of the SCE/MPME, it would be important to improve its risk assessment and pricing methodologies as well as to increase its awareness among SMEs with export potential.

Simples Exportação, a trade facilitation regime for MPEs, could be phased out

Trade facilitation policy targeted at SMEs has mostly occurred through Simples Exportação, a simplified export regime reserved for MPEs operating under Simples Nacional. The main advantage of Simples Exportação used to be a Simplified Export Declaration for export shipments not exceeding USD 50 000 in each consecutive six-month period and the possibility for MPEs to use international logistics operators to perform export procedures. However, very few micro and small enterprises have used this trade facilitation regime, which has thus fallen short of its objective to increase the participation of MPEs in Brazilian exports. The Single Export Declaration, a further simplified customs declaration that applies to all exporting enterprises regardless of their size, has recently replaced the Simplified Export Declaration, which suggests that Simples Exportação could be phased out.

E-commerce could help boost SME exports

Policies to encourage the use of e-commerce among SMEs are relatively new in Brazil and could be enhanced. Among these are Apex-Brasil’s e-Xport programme and SEBRAE’s online training courses. In the future, the government could also introduce trading online vouchers to support the purchase of e-commerce consulting services by SMEs.

Supplier development programmes should make more efforts to integrate SMEs in global value chains

The main supplier development initiative targeting micro and small enterprises in Brazil is SEBRAE’s National Productive Chain programme. The programme helps MPEs to meet the demand requirements of large anchor firms and thereby to establish buyer-supplier relationships. Since the 1990s, the programme has supported 65 000 small businesses and 170 medium and large partner companies for a business volume of BRL 6.6 billion.

However, supply chain programmes are currently not trying to integrate domestic SMEs into the supply chains of Brazil-based multinational enterprises (MNEs). In the future, the government should seek to target MNEs among the selected anchor firms, with a view to helping SMEs to tap into the development opportunities (indirect export, technology transfer, etc.) of global supply chains.

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Selected recommendations on SME export policies
  • Produce a Guide to Exporting for MPEs that covers special programmes, provisions, and simplified regulations that apply to this business segment (e.g. export training, export finance mechanisms, etc.).

  • Implement a management information system to track SMEs participating in the National Plan of Exporting Culture (PNCE) through the exporting path laid out by the programme. In this context, set up quantifiable targets to measure how many SMEs have become active exporters after participation in the PNCE.

  • Expedite the PNCE process of mapping state-level export supports in all 26 Brazilian states and the Federal District. In the process, develop a searchable web-based system of local institutions involved in export promotion.

  • Set up a monitoring system to track the progression of participants in the Export Qualification Programme (PEIEX) of Apex-Brasil, from training through participation in trade missions to an active exporter status.

  • Improve the risk assessment and pricing methodologies of the SME export credit guarantee (SCE/MPME) and increase its awareness among SMEs.

  • Support the creation and consolidation of export consortia in Brazil to help SMEs with similar products and distribution channels to reach export markets they would not have the resources or capacity to target individually.

  • Use supplier development programmes to promote business linkages between local SMEs and MNEs, with a view to increasing the participation of Brazilian SMEs in global supply chains.

copy the linklink copied!The innovative start-up ecosystem in Brazil

Most programmes for innovative start-ups are the result of multi-level collaborations

The innovative start-up ecosystem of Brazil consists of a large number of public, semi-public and private sector organisations, which actively collaborate with each other in the design and implementation of relevant programmes. Nonetheless, there is scope for engaging sectoral research and innovation agencies, notably EMBRAPA (agriculture) and EMBRAPII (industry), not only at the stage of policy implementation but also of policy design. The national industrial property office (Instituto Nacional da Propriedade Industrial, INPI) could also be more closely involved in the design and implementation of start-up policies.

A new innovation legal framework has resulted in the overhaul of different laws impacting innovative start-ups

A new innovation legal framework which came into effect in 2018 has resulted in a revision of different laws that can affect innovative start-ups. Two major changes are that government-owned companies will be allowed to invest in private sector companies and that intellectual property (IP) generated by public sector institutions, including universities, will be managed by decentralised organisations called Technological Innovation Hubs (Núcleos de Inovação Tecnológica, NITs).

The first change should be monitored closely to ensure that public equity investments do not become a form of government subsidy. The second change could help bridge the university-industry gap in IP management by increasing the supply of intellectual property and facilitating its marketability to third parties.

Innovative start-ups could benefit more from available R&D tax credits

Brazil’s two largest R&D tax credit programmes (Lei do Bem and Lei da Informática) are virtually inaccessible to innovative start-ups due to the lack of carry-forward or cash-refund provisions that penalise young companies that do not have yet sufficient tax liability against which to claim the tax credit. Accordingly, federal R&D tax credits are used by a small number of (large) companies. Going forward, these provisions, which are quite common among OECD countries (especially carry-forward arrangements) could be introduced to make R&D tax credits more attractive for innovative start-ups, at least for those operating under the real-profit corporate income tax regime.

The national patent system is affected by a severe backlog

It takes on average 10 years for a patent application to be processed in Brazil, something which is partly related to understaffing at INPI but which sets Brazil as an outlier in the international context. Delays in the patent system have negative consequences for the start-up potential of the country. For example, while the number of Brazilian scientific publications has nearly doubled over the last 10 years, the number of patent applications has stalled, pointing to a divergence between basic and applied research.

In the past, the federal government has sought to address the backlog problem mostly through the creation of special regimes for given sectors or types of company. One of these is Patentes MPE, which offers reduced patent fees and fast-track procedures to micro and small companies operating under Simples Nacional. Between 2016 and 2018, INPI granted 50 patents out of 253 initial applications under this regime. However, while fast-track regimes can help certain target groups, they do not address the underlying causes of the problem, leaving the situation unchanged for most companies, including SMEs.

To address the backlog issue, INPI, with support from the Ministry of Economy, has recently started to work on an important restructuring project which includes four main initiatives. First, the Backlog Combat Plan aims to reduce the backlog by 80% in two years through, inter alia, improving the productivity of patent examiners. Second, the IP Digital Plan aims to digitalise all services provided by INPI. Third, an agreement between INPI, ABDI and the Ministry of Economy intends to modernise the patent application process, including through the acquisition by ABDI for INPI of new network equipment, servers and storage system. Fourth, a co-operation agreement between the government of Brazil and the UK Prosperity Fund aims to redesign the whole patent examination process by introducing a quality management system. In addition, all existing fast-track regimes are expected to undergo a review process to make them more uniform and to favour the equal treatment of applicants.

InovAtiva Brasil is a highly recognised programme in Latin America

InovAtiva Brasil, which is operated by the Ministry of Economy, is one of the main government programmes that target innovative start-ups. Between 2013 and 2018, more than 800 start-ups completed the programme, at a rate of 100 companies per semester. InovAtiva Brasil is essentially a four-month acceleration programme in which selected entrepreneurs receive bespoke mentoring and training before pitching their business idea to potential investors. Selected entrepreneurs regularly feature in national rankings of “start-ups to watch”, and the programme has been praised by national and international institutions for its role in entrepreneurship development in Brazil. Given that 800 start-ups have already completed this programme, an external evaluation could help policymakers assess its actual impact and make a possible case for further enhancing start-up policies.

StartOut Brasil, aimed at born-global start-ups, could be adjusted to enhance its outreach and impact

The Ministry of Economy has also recently launched a new programme aimed at born-global start-ups, called StartOut Brasil, whose features closely resemble those of InovAtiva Brasil. The underlying principle is to bring selected start-ups to foreign markets where they have the potential to expand by exporting or building a local presence. While this programme was only launched in 2017, some of its elements could be reconsidered. In particular, selecting a cohort of promising start-ups while keeping in mind possible industry and geography targets may result in excessive latitude in the management of the programme. An alternative could be to reverse the inner workings of the programme by bringing multiple foreign companies or partners from a selected sector/technology into a local immersion camp to meet with promising Brazilian start-ups.

FINEP is a key player in the start-up ecosystem of Brazil

FINEP, Brazil’s national innovation agency, specialises in financing projects in technology-based companies, including start-ups. FINEP Centelha (Spark), its most recent programme, aims to incubate university-based start-ups through an 18-month period of training and coaching. FINEP Tecnova finances innovative projects in selected strategic sectors through the intermediation of state-level institutions and non-profit organisations. FINEP Start-up, which was established in 2017, provides seed-funding to MPEs.

FINEP Centelha’s success will largely depend on its ability to bridge the traditional gap between university and industry. As such, the programme would likely benefit from an early-on involvement of the private sector, for example by making experimental testing conducted in private companies that are part of the programme. Similarly, sound IP management will be important to ensure that university start-ups receive private investment. FINEP Tecnova seeks to address Brazil’s industrial policy priorities; as such, it could try to involve more closely specialised research agencies such as EMBRAPA (agriculture) and EMBRAPII (industry). FINEP Start-up has so far completed the investment process in 14 companies over 2 years, which points to the difficulty of finding investment-ready opportunities in the MPE business segment.

There are a number of promising open innovation programmes for start-ups in Brazil

There are a number of well-designed open innovation programmes in Brazil. First, NEXOS, a partnership between SEBRAE and ANPROTEC (Brazilian Association of Science Parks, Business Incubators and Business Accelerators), enables MPEs to apply for open innovation calls launched by larger companies, which set the technological specification of the call. To address the technology problem, selected MPEs are allowed to use the knowledge resources of larger companies and of the national network of incubators. Second, ABDI’s Industry Start-up Connection Programme operates in two stages: in the first one, medium and large industrial companies apply to the programme by specifying up to eight technological challenges they would like to address; in the second stage, start-ups apply to provide potential solutions to these challenges. Medium and large companies can then choose up to four start-ups to co-develop technology solutions. Third, a collaboration between SEBRAE and EMBRAPII enables industry-based MPEs to use the services and facilities of accredited technology institutes, thus favouring technology transfer.

Brazil has a strong and effective network of business incubators and business accelerators

There are about 370 incubators, 90 technology parks and 35 business accelerators in Brazil. The establishment and life-cycle of business incubators is well formalised through CERNE (Centro de Referência para Apoio a Novos Empreendimentos), a reference centre which offers capacity-building to incubator managers and is jointly run by ANPROTEC and SEBRAE. According to estimates by MCTIC, over the period 2009-16, about 5 000 companies completed or were about to complete the incubation process, with an impact on the economy of BRL 15.2 million in sales and 53 000 new jobs.

The federal government also runs an official incubator and technology park programme (Programa Nacional de Incubadoras e Parques Tecnológicos, PNI) with the involvement of a large number of institutional players (MCTIC, Ministry of Economy, SEBRAE and ANPROTEC, among others). The PNI was originally set up in 1998 and redesigned in 2009. An evaluation by MCTIC shows that companies in PNI-supported incubators and technology parks reach a larger size and larger revenues than those in other similar organisations.

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Selected recommendations on the innovative start-up ecosystem
  • Strengthen the role of research agencies operating under sectoral ministries, such as EMBRAPA and EMPRAPII, in policy design to leverage ministerial priorities and sector-specific know-how.

  • Strengthen SEBRAE’s partnerships with research and innovation institutions at the local level to combine SEBRAE’s geographical outreach with local technological knowledge and expertise.

  • Focus part of a future pilot project on public procurement for innovation on newly born companies to encourage the emergence of innovative start-ups.

  • Introduce carry-forward or cash-refund provisions in existing R&D tax credits to make them more appealing to innovative start-ups operating under the real-profit corporate income tax regime.

  • Address the patent backlog at INPI by modernising and digitalising the patent application and review process, in line with the recently launched restructuring plan. As part of this plan, consider contracting out the first stages of the patent review process to external accredited institutions (as done in Japan).

  • Monitor the effectiveness of the Technological Innovation Hubs (Núcleos de Inovação Tecnológica, NIT) in boosting university start-ups and increasing the supply and marketability of IP.

copy the linklink copied!The local dimension of SME and entrepreneurship policy in Brazil

Brazil is a large and diversified economy with some clear regional patterns

Brazil is a continent-size country only smaller in extension than Canada, China, the Russian Federation and the United States. Unsurprisingly, there are some important differences in terms of population density and economic activity across its 5 macro-regions, 26 states (plus the Federal District of Brasilia) and 5 570 municipalities, although there are also some main discernible patterns.

First, Brazil is largely an urban country, with 87% of the population living in urban areas compared with the OECD and LAC averages of 81%; nonetheless, the contribution of the 12 metropolitan areas to GDP fell from 47.3% to 44.6% between 2002 and 2016. Second, most economic activity takes place in the South and Southeast region, which are the industrial powerhouse of Brazil. Accordingly, these two regions also show the highest business density (number of enterprises per thousand people) and the highest proportions of employment in micro and small enterprises, whereas the North has comparatively higher shares of employment in larger companies. Third, Brazil’s South and Southeast also have higher-than-average rates of SME innovation and SME export, compared to a national average which is however low by international standards.

Business environment conditions vary across Brazil

Business environment conditions vary considerably by state and municipality in Brazil, although the federal programme REDESIM has made headway in harmonising business regulations nationwide.

National legislation can also affect states and regions differently. This is the case of tariffs, which are set at the national level but whose impact at the local level depends on whether states are specialised in sectors more likely to suffer from import competition. Future trade policy reforms will, therefore, have different impacts on job reallocation depending on the industry specialisation of states.

Cluster policy has been Brazil’s main local economic development policy

Industry clusters (i.e. Arranjos Produtivos Locais, APLs) have been the main federal and state-level policy to foster enterprise development at the local level. In 2015, at the time of the last census, there were 677 APLs in Brazil which included nearly 300 000 companies and over 3 million workers.

There is some heterogeneity in the profile of APLs across the country. For example, the number of APLs ranges from 83 in the South to 210 in the Northeast, suggesting that this policy has also been employed to encourage inclusive growth in lagging regions. There is also strong variation in the average number of firms in each APL, ranging from 197 in the Northeast to 877 in the Centre-West.

The APL policy has evolved over time. Currently, funding is typically transferred from state governments to local institutions such as municipalities, trade unions or business associations. Some states, especially in the South, have dedicated sizeable resources to the APL policy. Sistema S also plays an important role, especially when it comes to the development of managerial and workforce skills in the APLs.

Participation in clusters has generally had a positive impact on the performance of local SMEs

Several studies have pointed to positive effects of the APL policy on SMEs, notably with respect to job creation, wage levels and export propensity. Some studies have also shown that the introduction of new technologies has led to productivity growth in the cluster.

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Selected recommendations on the local dimension of SME and entrepreneurship policy
  • Move forward in the harmonisation of state-level regulations through the REDESIM policy, including by reaching out to municipalities which have not yet joined the programme.

  • Set up a web platform and organise a large annual event to favour the exchange of information and good practices on regulatory simplification at state and municipal levels.

  • Undertake a more rigorous and frequent evaluation of the impact of the national cluster policy (arranjos produtivos locais) on the employment and innovation performance of local SMEs.

  • Consider focusing the national cluster policy on priority sectors at the state level, to be identified through an appropriate methodology applied nationwide.

  • Give priority to export-oriented sectors in the national cluster policy with a view to supporting SME internationalisation.

Notes

← 1. The respective names in Portuguese are the following: Ministério da Fazenda; Ministério da Indústria, Comércio Exterior e Serviços (MDIC), Ministério do Trabalho and Ministério do Planejamento, Orçamento e Gestão (MPOG).

← 2. Micro e pequena empresa means micro and small business in Portuguese. The use of the Portuguese acronym is to underline that the meaning of micro and small businesses in the two definitions is different, being employment-based in the first case and turnover-based in the second case.

← 3. Data on the industry structure of Brazil are from the OECD Structural and Demographic Business Statistics (SDBS) database, which in the case of Brazil uses data from the IBGE Annual Surveys of Industry, Construction Industry, Trade and Services. The analysis of the business sector excludes agriculture and government activities. This results into different figures from those based on Brazil’s Continuous National Household Sample Survey (Pesquisa Nacional por Amostra de Domicilios Continua, PNADC).

← 4. The OECD defines high-growth firms as enterprises with average annualised growth in employment or turnover greater than 20% per year, over a 3-year period, and with ten or more employees at the beginning of the observation period.

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