SME and Entrepreneurship Policy in Brazil 2020

Executive summary

This report presents the main findings of the OECD review of SME and entrepreneurship policy of Brazil, which was undertaken between the end of 2018 and 2019. This was an important transition period for Brazil, due to the election of a new government in October 2018 and the creation of a new and enlarged Ministry of Economy in January 2019, which merged the functions of four previous ministries.

The report assesses the main strengths and weaknesses of Brazilian SME and entrepreneurship policies and offers policy recommendations to help address existing challenges. It includes chapters on SME performance and entrepreneurial dynamics, the business environment, the governance of SME and entrepreneurship policy, federal SME and entrepreneurship programmes, export support, the innovative start-up ecosystem, and the local dimension of SME and entrepreneurship policy in Brazil.

Key findings

SME productivity and growth-oriented entrepreneurship need to be strengthened

SMEs play an important role for economic growth and social inclusion in Brazil, accounting for 62% of total employment and 50% of national value added, slightly below the corresponding OECD averages (70% and 55%). The difference between Brazil and the OECD area in SME contributions to employment and value added is more marked in industry than in trade and other services. Labour productivity levels between Brazil and the OECD area have diverged in the last 15 years; from a firm size perspective, productivity gaps between SMEs and large companies are wider in Brazil than in the OECD area, and especially so in industry. Low SME productivity is, among other things, the result of little innovation and export propensity among Brazilian SMEs. Business ownership and business creation are common, but there is a lack of growth-oriented entrepreneurship, both in the form of young high-growth firms and business scale-up.

The business environment presents some challenges, many of which are being addressed

The business environment presents some challenges for SMEs. Brazil is not sufficiently integrated into global trade, which is a precondition for SME participation into global supply chains; business regulations are often cumbersome; and credit market conditions are tight, notably through high interest rates and short loan maturities. Nonetheless, the federal government has introduced some important policy reforms in each of these areas. In trade policy, local content requirements have been reduced and a major free-trade agreement has recently been signed between Mercosur and the EU. A major effort has been ongoing for many years to harmonise federal, state and municipal regulations, notably through the REDESIM initiative. In addition, the Central Bank has increased competition in the credit market by easing the entry and growth of smaller financial institutions, including credit co-operatives.

Brazil also operates two important preferential tax and regulatory regimes for SMEs: Simples Nacional and the Micro Empreendedor Individual (MEI). Simples Nacional is the main federal policy for SMEs, to the extent that 65% of Brazilian companies operate under this regime which accounts for one-quarter of federal tax exemptions. MEI, which is much smaller than Simples Nacional, is mostly aimed at own-account workers. Both policies have encouraged the formalisation and survival of micro and small enterprises. Some elements of both could be reformed within the context of a broader fiscal reform of the corporate tax system.

The Federal Constitution of Brazil grants preferential treatment to micro and small companies

SME policy in Brazil hinges on the 1988 Federal Constitution, which grants a preferential treatment in different policy areas (e.g. tax and labour law) to micro and small enterprises, to be defined based on annual gross revenues (currently BRL 4.8 million). As a result, most SME policies are aimed at this target group, whereas mid-sized enterprises are largely missing in the national policy debate. So-called Sistema S, which consists of organisations that do not officially belong to the government but that work under its direction, plays a key role in SME policy implementation. Co-ordination in SME and entrepreneurship policy is strong both at the policy formulation and policy implementation levels.

Brazil operates a large number of targeted programmes for SMEs, some of which could be scaled up

Government loan subsidies are the main direct policy instrument used by the federal government to foster SME development; between 2016 and 2018, the share of business loans by BNDES (Brazil’s largest public development bank) granted to SMEs increased from 30.6% to 46.8% of the total. On the other hand, loan guarantees are much less common. While Brazil operates some successful innovation programmes (e.g. Brasil Mais Produtivo and FINEP Conecta), most innovation policy spending goes to large companies through two large federal R&D tax credit schemes. Entrepreneurship education is widely available in Brazil, although there is scope for streamlining the offer of firm-level management and workforce training. Finally, support for women’s entrepreneurship could be enhanced, notably through more women-dedicated programmes favouring access to finance, skills development and innovation in women-owned businesses.

SME export support should be enhanced

Micro and small enterprises account for a trivial share of Brazilian exports. National SME export policies mostly focus on export-readiness (e.g. export culture and export training) and export promotion (e.g. trade missions), while export finance could be enhanced by expanding export guarantees. Supplier development programmes could also be scaled up and tweaked to include foreign multinational enterprises as possible anchor firms for local SMEs.

Brazil has a well-functioning innovative start-up ecosystem

The start-up ecosystem of Brazil consists of many public, semi-public and private organisations, which collaborate well with each other. On the upside, Brazil has a strong and effective network of business incubators and business accelerators, and there are some promising open innovation programmes that connect start-ups and small companies with large companies requiring specific technology solutions. On the downside, the patent system is affected by a severe backlog and federal R&D tax credits are virtually inaccessible to innovative start-ups. Recent reforms include a major restructuring plan at the national industrial property office (INPI) and the set-up of ad-hoc organisations tasked with the management of university intellectual property.

There is strong heterogeneity in business performance across Brazil, but also some clear regional patterns

Unsurprisingly for a country of the size of Brazil, there are some important differences in terms of business activity and business performance across its five macro-regions. Nonetheless, there are also some discernible patterns. The South and the Southeast, which are the industrial heartland of the country, show the highest business density and the largest proportion of employment in micro and small enterprises. Second, these two regions also have higher-than-average rates of SME innovation and SME export. The main local development policy at the federal level has focused on business clusters, with several studies pointing to positive effects from cluster participation on the performance of local SMEs (e.g. in terms of job creation and wages).

Selected recommendations

• Strengthen competition in the economy by further streamlining product market regulations, including entry regulations, and further promoting openness to trade.

• 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.

• 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 fintech organisations).

• 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.

• 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.

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

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

• 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).

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