The Causes of Success of the Micro and Small Enterprises in Brazil:

A review of the last few years of research

Cristiano Machado

Allan Costa

SEBRAE/PR

Brazilian Service of Support to Micro and Small Enterprises in Paraná

Pato Branco, PR – Brazil 85505-000

55-46-3220-1250

cmachado@pr.sebrae.com.br

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ABSTRACT

In our society, we find a growing need for entrepreneurship, particularly as economic

growth has become a necessity in many countries. When large corporations downsize and

reduce staff, the small and medium sized enterprise sector (SMEs) becomes more important

(Hills & Hultman, 2006). According to SEBRAE 2009, in Brazil there are 5.9 million formal

micro and small enterprises and over 10 million informal ones. Micro and small enterprises

represent 99% of formal establishments and account for 60% of formal jobs and for 38% of

the payroll.

The success rate of small businesses that had survived at least two years in Brazil in

2002 was 51 %, and in 2005 this rate increased to 78%. This study deals with an historical

series of events that evaluates the evolution of the survival of the Brazilian micro and small

businesses. It clearly shows that, over the past ten years, entrepreneurs have been increasingly

concerned with better evaluating their personal profile, planning their business, and seeking

information before investing their funds in a venture. The study also shows that the

entrepreneurial environment has been improving in the country, which has, in large part,

contributed to the increased rate of success of micro and small sized ventures. The

methodology used was exploratory research based on secondary data. The main objective of

this paper is to analyze and show the causes contributing to the increasing success of the

micro and small enterprises in Brazil.

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RÉSUMÉ

Il y a dans notre société un besoin grandissant d'entreprenariat, particulièrement

depuis que la croissance économique est devenue une nécessité dans beaucoup de pays.

Quand de grandes entreprises réduisent les effectifs du personnel, le secteur des petites et

moyennes entreprises (PME) prend de l'importance (Hills & Hultman, 2006). Selon SEBRAE

2OO9, il y a au Brésil 5,9 millions de petites et micro-entreprises officielles et plus de 10

millions d'officieuses.

Le taux de petites entreprises qui ont survécu au moins deux ans au Brésil en 2002

était de 51%. Ce taux a augmenté en 2005 à 78%. Cette étude traite d'une série d'évènements

historiques qui représentent l'évolution de la capacité de survie des petites et moyennes

entreprises brésiliennes. Elle montre clairement qu'au cours des dix dernières années les

entrepreneurs ont de plus en plus été concernés par l'évaluation de leur profil personnel,

l'organisation de leur entreprise et la recherche d'informations avant d'investir dans un projet.

L'étude montre également que l'environnement entreprenarial s'est amélioré dans le pays, ce

qui a pour beaucoup contribué à l'augmentation du taux de réussite des petites et micro-

entreprises. La méthodologie utilisée était la recherche exploratoire basée sur des données

secondaires. Le principal objectif de ce document est d'analyser et de montrer les causes de

l'augmentation de la réussite des petites et micro-entreprises au Brésil.

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ECONOMIC CONTEXT

Between 1997 and 2009, Brazil went through several rough patches that directly

affected small businesses. To provide a good idea of the economic context for small

businesses that were opened in this period, there were some principal factors that contributed

to MSBs sector performance, some of which include:

• The Asian crisis of 1997 and the Russian crisis of 1998, which led to dizzying

oscillation and skyrocketing basic interest rates for the Brazilian economy, the

Selic rate

• The exchange rate regime changed in February of 1999, with heavy oscillation

of the exchange rate beginning at this time and especially in 2002, as well as

the resulting pressure on prices for raw materials and imported products

• Starting in April of 2001, the rationing of electrical power, followed by crisis

in the international financial markets in late 2001 and the Argentinean crisis in

2001 and 2002, which led to marked oscillation of the dollar and a new hike in

the basic interest rate

• A new increase in the basic interest rate in the Brazilian economy, starting in

late 2004, used by the monetary authorities as the chief mechanism for

controlling the domestic rate of inflation

From September of 2005, the interest rate began to fall (figure 1) which favored the

recovery of the Brazilian economy. At the same time, the exchange rates stopped pressuring

the costs for raw materials associated with the growth of the global economy and Brazilian

exports. We have to consider that, in the last years of the period analyzed, there was evidence

of expanded availability of credit for domestic consumption, especially in credit transactions

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for private individuals (figure 2), and recuperation of real income of workers. Based on these

factors, the Brazilian economy was once again headed towards recovery, propelled mainly by

the export sector, starting in 2004 and after that starting in 2006, by the domestic market.

Figure 1 – Selic Basic Interest Rate (a.p.r.) and Exchange Rate (R$/US$)

Jan/97 to Dec/07

Source: Brazilian Central Bank

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Figure 2 – Supply of credit in the Brazilian economy

(as a percentage of the GNP)

Source: Brazilian Central Bank

INSTITUTIONAL CONTEXT

Even with all of these economic factors in the period analyzed, there were several

changes in the institutional context which, in part, cushioned the adverse effects of the

foreign crisis. Structural changes tended to create a more favorable environment for small

businesses in the long term. Among the support mechanisms for business that were instituted

in this period, the following stand out:

• Implementation of the Federal SIMPLES (Integrated System of Taxes and

Contribution of Micro businesses and Small-sized Businesses, put in place

by Federal Law 9.317 of Dec. 5, 1996), a simplified regime for collecting

taxes which had lower rates for SMEs with gross domestic income of up to

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R$ 1,200,000. Among the advantages for the MSBs, lower taxation and

reduced bureaucracy stand out.

• Implementation of special fiscal regimes which favor MSBs at the state

level. For example, in the State of Parana, MSBs that pay into ICMS

(Value-added Sales and Service Tax) were able to benefit from the state

level SIMPLES, which had progressive rates for companies taking in up to

R$ 1.2 million/year, as set forth by state law 15.562 of July 4, 1997. Like

Federal SIMPLES, its effects were more heavily felt in the first years it

was in place.

• Implementation of special fiscal regimes which favor MSBs at levels of

various municipal governments

• Creation of the Micro business and Small-sized Business Statute (Federal

Law no. 9.841 of October 5, 1999), which deals with special and

simplified legal treatment for businesses with annual income of up to R$

1.2 million/year

• Creation of de Individual Entrepreneur (Complementary Law no. 12/08 of

July 1, 2009), which deals with special and simplified legal treatment for

micro businesses with annual income up to R$ 36.000/year

• The growth of Microcredit programs throughout the country. In the state of

Parana, the Agência de Fomento (State Law no. 11.741 of June, 17, 1997).

This Agency was aimed at offering credit to entrepreneurs who would not

have access to financing in the conventional banking system. At the

national level, the federal government, through Central Bank Resolution

no. 3.109 of July 24, 2003, created a wide-ranging microcredit program

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later transformed into National Oriented Productive Microcredit Program

(PNMPO).

• More training for entrepreneurs and entrepreneurial candidates through

specific programs available in the SEBRAE System (for example,

television programs, radio shows, corporate guidance products and free

courses available on line, entrepreneurship stimulus programs at schools

and universities, and more service posts)

• Effort to draft and pass the General Law for micro and small business,

considered to be the new national Statute for MSBs. It deals with

complementary Law no. 123 of Dec. 1, 2006, which proposes a broad

range for MSBs, in fields of: unification of Federal, state and municipal

tax regimes for SMBs; reduced taxes on MSBs exports; exemption from

some labor obligations; simplification of the process of opening and

closing business; easier accesses to credit and to technological innovation

services; preference in governmental purchases; and incentives for SMBs

to associate and form consortiums. Due to the recentness of its passage, the

General Law has not yet been totally put in place, and its benefits should

be felt in full only in the coming years, since part of the law is effective

immediately and part requires additional regulation at state and municipal

levels.

In this way, some measures aimed at supporting MSBs were only implemented

recently (for example: popularization of SEBRAE activities in the whole country and passage

of General Law for MSBs), meaning that their results are as of yet not able to be totally

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measured. Other measures, such as increased credit, should still continue to generate positive

effects for MSBs in the next years.

Apparently, the improved economic environment and increased support measures for

small business tend to contributed to reduce rates of business mortality.

CONCLUSION

The present study shows that several factors contributed to the reduced mortality of

companies in the first years, in spite of the advancements recently seen in the entrepreneurial

profile and in the business environment. The main contributing factors for MSB mortality

may be classified into six major groups: Little development of entrepreneurial behavior;

Deficiencies in planning prior to opening the business; Deficiencies in corporate

management, after the business opened; Insufficient support policies for companies;

Problems in the economic scenario; and Personal problems of owner-partners (SEBRAE

2008).

This paper showed a spectacular improvement in survival rates of the Brazilian

MSBs. The percentage of small businesses that survived at least two years increased from

51% in 2002 to 78% in 2005 (SEBRAE 2007). There are two main factors that have

contributed to the increase of the rate of success of the MSBs in Brazil. First, in the economic

environment, there occurred a reduction and control of the inflation and a gradual decrease in

the interest rate; the increase in the credit offer to the individuals promoted the increase in

consumption. As a result, there was a favorable period for the small businesses in Brazil.

But other factors, related to the improvement of business quality, made important

contributions to the improvement of the survival rate of MSBs. Entrepreneurs that had a

college level education, complete or incomplete, already represent 79% of the total, and those

with previous experience in the private sector increased from 34% to 51% (SEBRAE 2007).

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This shows that we have now entrepreneurs who are much better prepared to face the market

challenges. Therefore, the rate of the entrepreneurs that had identified one opportunity grew

as the business increase shows, from 15% to 43% (SEBRAE 2007); this shows that we have

been changing from necessity entrepreneurship to opportunity entrepreneurship. It should

also be considered that at the institutional context, implementation of laws create special

fiscal regimes which favor MSBs at federal, state and municipal levels.

The rate of MSBs survival measured in 2005 was 78% at the end of the second year of

life; this puts Brazil between those observed in a significant group of developed countries.

Statistics found show that during the period between 2000 and 2002: Australia with 87,6%,

England with 81,9%, Singapore with 75%, USA with 74% (for the fourth year), Portugal with

72,6%, Italy with 72,4% (SEBRAE 2007).

This data shows that the entrepreneurial environment has been improving in the

country, which has contributed to the increased rate of success of Micro and Small

Enterprises in Brazil.

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REFERENCES

Brazilian Institute of Geography and Statistics. Estatísticas do cadastro central de empresas

2001. Social Cmmuniqué from 22/Sep/03. Retrieved on April, 8, 2010

http://ibge.gov.br

HILLS, Gerald and HULTMAN, Claes. (2006). “Entrepreneurial marketing. Marketing

broadering the horizons”. Stefan Lagrosen and Göran Svensson.

PASSOS, Carlos Arthur Krueger et. al. (2008). Empreendedorismo no Brasil 2007.

SEBRAE. (2007). Conditioning factors of the mortality rate of micro and small business

2003 – Volume I.

SEBRAE. (2007). Conditioning factors of the mortality rate of micro and small business

2004 Volume II.

SEBRAE. (2007). Conditioning factors of the mortality rate of micro and small business

2005 Volume III.

SEBRAE. (2007). Conditioning factors of the mortality rate of micro and small business

2006 Volume IV.

SEBRAE and VOX POPULI. (2007). Survival and mortality of MSBs – Condicional factors.